ADIL 10-K & 10-Q changes, risk factors and insider trading

In November 2025, the FDA published a CDx reclassification order proposing that nucleic-acid based test systems, e.g. PCR and NGS tests should be reclassified to Class II (rather than Class III) and these tests can leverage a 510(k) regulatory pathway (less burdensome regulatory pathway than a DeNovo or PMA). The FDA has requested comments on these reclassification orders. While these orders, if approved, could streamline the regulatory burden and impact on the genetic test development, there are no guarantees that these orders will be approved or even approved as proposed and could change in the future.

Our ability to reach a definitive agreement for a collaboration with any strategic partner will depend generally, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration, and the proposed collaborator’s evaluation of our technologies, product candidates, and market opportunities. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available for collaboration and could determine that such other collaboration is more attractive than a collaboration with us for our product candidate. Similar risks exist with respect to any joint ventures we may pursue, as well as risks and uncertainties related to the costs, time, and other resources required to manage and gain the benefit of any such joint venture, and any potential liabilities we may incur in connection with a joint venture.

No assurance can be given that a definitive agreement to implement the terms set forth in the collaboration framework agreement will be executed with Molteni.

The collaboration framework agreement that we entered into with Molteni is subject to execution of a definitive agreement and Molteni has no obligation to enter into such definitive agreement to establish the proposed partnership with us. Even if such a definitive agreement is entered into, there can be no assurance given that ADO4 will successfully progress through clinical development and commercialization in Europe, that Molteni will be able to successfully commercialize ADO4 in Europe or that we will receive any royalties or milestone payments as a result of the proposed partnership. If we enter into the definitive agreement with Molteni, we will be solely dependent upon Molteni to commercialize ADO4 in Europe.

Use of our product candidate will require pre-treatment screening. Our strategy for AD04 aims to integrate pre-treatment screening into the drug label, effectively creating a patient-specific or “precision” treatment into one integrated therapeutic offering. Our ability to generate revenue will depend upon the availability of adequate coverage and reimbursement for our tests from third-party payors, including government insurance programs such as Medicare and Medicaid, private insurance plans, health maintenance organizations, managed care programs and other health care related organizations, who are increasingly challenging the price of medical products and services. Health care providers that order diagnostic services generally expect that those diagnostic services are covered and reimbursed by third-party payors for all or part of the costs and fees associated with the diagnostic tests they order. If such diagnostic tests are not covered and reimbursed then their patients may be responsible for the entire cost of the test, which can be substantial. Therefore, health care providers generally do not order tests that are not covered and reimbursed by third-party payors in order to avoid subjecting their patients to such financial liability.

Healthcare reform measures could hinder or prevent the commercial success of our product candidates.

Existing regulatory policies may change, and additional government regulations may be enacted that could affect pricing and third-party payment for our product candidates, if approved, which could negatively affect our business, financial condition and prospects. In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, several healthcare reform initiatives culminated in the enactment of the IR Act in 2022, which, among other things, requires HHS to directly negotiate the selling price of a statutorily specified number of drugs and biologics each year that CMS reimburses under Medicare Part B and Part D. The negotiated price may not exceed a statutory ceiling price. Only high-expenditure single-source biologics that have been approved for at least 11 years (seven years for single-source drugs) are eligible to be selected by CMS for negotiation, with the negotiated price taking effect two years after the selection year. For 2026, the first year in which negotiated prices become effective, CMS selected 10 high-cost Medicare Part D products in 2023, negotiations began in 2024, and the negotiated maximum fair price for each product has been announced. In addition, CMS has selected and announced the negotiated maximum fair price for 15 additional Medicare Part D drugs which will become effective in 2027. For 2028, CMS has selected an additional 15 drugs, comprised of drugs covered under Medicare Part D and, for the first time, drugs payable under Medicare Part B. For 2029 and subsequent years, 20 Part B or D drugs will be selected. The negotiated prices have represented, and will continue to represent, a significant discount from average prices to wholesalers and direct purchasers. The IR Act also imposes rebates on Medicare Part B and Part D drugs whose prices have increased at a rate greater than the rate of inflation, and in 2024, CMS finalized regulations for the Medicare Part B and Part D inflation rebates. The IR Act permits the Secretary of HHS to implement many of these provisions through guidance, as opposed to regulation, for the initial years. Manufacturers that fail to comply with the IR Act may be subject to various penalties, including civil monetary penalties.

These provisions have been, and may continue to be, subject to legal challenges. Although full economic effect of the IR Act on our business and the pharmaceutical industry in general is unknown at this time, it will likely have a significant impact on the pharmaceutical industry and the pricing of our products and product candidates. Similarly, the adoption of restrictive price controls in new jurisdictions, more restrictive controls in existing jurisdictions or the failure to obtain or maintain timely or adequate pricing could also reduce our profitability. We expect pricing pressures will continue globally.

The current administration is pursuing policies to reduce regulations and expenditures across government including at HHS, which include the FDA and CMS, and related agencies. For example, on May 12, 2025, President Trump issued an Executive Order that, among other things, required HHS, within 30 days, to establish and communicate to drug manufacturers MFN price targets designed to bring drug prices for American patients in line with those in comparably developed nations. If significant progress towards MFN pricing is not achieved, the Executive Order requires HHS to propose a rulemaking to implement MFN pricing. Recently, on December 23, 2025, CMS issued proposed regulations to establish, under the Center for Medicare and Medicaid Innovation, two mandatory MFN demonstration models under Medicare Parts B and D, respectively. If these rules or other MFN pricing rules are finalized, they are likely to reduce prices of at least some drugs in the United States, if they are also sold in comparator countries. Even if we do not market drugs in such countries, we will be indirectly affected if our drugs competed with drugs whose prices were reduced as a result of MFN pricing initiatives.

At the state level, legislatures are increasingly enacting legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates if approved or additional pricing pressures.

A shutdown of the U.S. federal government may adversely affect our business.

A prolonged or recurring shutdown of the U.S. federal government may adversely affect our business operations and regulatory compliance. During such shutdowns, while the SEC’s EDGAR system remains operational, the unavailability of SEC staff to review filings, issue comments, or declare registration statements effective may delay our ability to complete public offerings, respond to comment letters, or obtain timely regulatory approvals. These delays could impact our access to capital markets, hinder strategic transactions, and create uncertainty around our disclosure obligations. Additionally, the lack of interpretive guidance or exemptive relief during a shutdown may increase legal and compliance risks. We continue to monitor developments and adjust our regulatory strategies accordingly, but there can be no assurance that future shutdowns will not materially affect our operations or financial condition.

Inadequate funding for the FDA, the SEC and other government agencies, including from government shutdowns, or other disruptions to these agencies’ staffing and operations, could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.

Our business depends on timely interactions with the FDA, including the review of regulatory submissions, scheduling of formal meetings, and oversight of clinical trials. Disruptions at the FDA and other federal agencies, including substantial leadership departures, personnel cuts, policy changes and those related to the federal government shutdown, may result in reduced staffing or suspension of non-essential FDA operations, which could delay or cancel meetings with the FDA, hinder regulatory guidance, cause delays in the implementation or enforcement of regulatory requirements in a timely fashion or at all, and postpone the review of IND applications and New Drug Applications (NDAs). These disruptions may also affect the initiation, conduct, and monitoring of clinical trials, particularly those requiring FDA authorization or ongoing regulatory engagement. Interruptions in FDA activities could materially delay our development timelines, increase operational costs, and adversely impact our ability to complete our ongoing and planned clinical trials and to advance product candidates toward approval and commercialization. Any such delays or uncertainties may have a significant negative effect on our business, financial condition, and results of operations.

We have in the past and may in the future apply for government grants to support some of our research and development activities for our product candidates. A lapse in appropriations resulting in a government shutdown could materially disrupt the timing and availability of these funds. During such shutdowns, federal agencies may suspend the processing of new grant applications, delay reimbursements, or pause disbursements for existing awards. These interruptions could adversely affect our ability to obtain such funding. If we do not obtain the grants we applied for or other grants, we will need to obtain financing from other sources. Even if we obtain grant funding, the terms of the grant funding may be restrictive. Often government grants include provisions that reflect the government’s substantial rights and remedies, many of which are not typically found in commercial contracts, including powers of the government to potentially require repayment of all or a portion of the grant award proceeds, in certain cases with interest, in the event we violate certain covenants pertaining to various matters.

If the FDA, National Institutes of Health (“NIH”), SEC or the United States Patent and Trademark Office (“USPTO”) experiences significant decreases in funding or personnel, it could significantly impact the ability of the NIH to conduct research or provide grants, and the abilities of the FDA and the USPTO to timely review and process our regulatory submissions, which could have a material adverse effect on our business. Further, future government shutdowns could impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.

There is substantial uncertainty as to whether and how the new administration will seek to modify or revise the requirements and policies of the FDA and other regulatory agencies with jurisdiction over our product candidates and any products for which we obtain approval. Additionally, the new administration could also issue or promulgate executive orders, regulations, policies or guidance that adversely affect us or create a more challenging or costly environment to pursue the development of new therapeutic candidates.

On March 5, 2025, we received written notice from the Listing Qualifications Department of The Nasdaq Stock Market LLC (the “Staff”) notifying us that for the preceding 30 consecutive business days (January 17, 2025 through March 4, 2025), our common stock did not maintain the a minimum closing bid price of $1.00 per share as required by Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The notice had no immediate effect on the listing or trading of our common stock and the common stock continued to trade on The Nasdaq Capital Market under the symbol “ADIL.” In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we had a compliance period of 180 calendar days, or until September 1, 2025, to regain compliance with Nasdaq Listing Rule 5550(a)(2). Compliance could be achieved without further action if the closing bid price of our common stock were at or above $1.00 for a minimum of ten consecutive business days (or longer at the discretion of Nasdaq) at any time during the 180-day compliance period, in which case Nasdaq would notify us if it determines it is in compliance and the matter will be closed; however Nasdaq could require the closing bid price to equal or to exceed the Minimum Bid Price Requirement for more than 10 consecutive business days before determining that a company complies. The letter further stated that if, however, we did not achieve compliance with the Minimum Bid Price Requirement by September 1, 2025, we may be eligible for additional time to comply.

On May 23, 2025, we received a letter from The Nasdaq Stock Market stating that we were not in compliance with Nasdaq Listing Rule 5550(b)(1) ( “Rule 5550(b)(1)”) because our stockholders’ equity of $2,126,662 as of March 31, 2025, as reported in our Quarterly Report on Form 10-Q filed with the SEC on May 14, 2025, was below the minimum requirement of $2,500,000. The letter also stated that we were not in compliance with Nasdaq Listing Rule 5550(b)(2) and Rule 5550(b)(3), the alternative quantitative standards for continued listing on the Nasdaq Capital Market, because we did not have a market value of listed securities of $35 million, or net income from continued operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal year.

On July 10, 2025, we filed a Current Report on Form 8-K with the SEC that stated that as of the date of such Form 8-K, we believed that we had regained compliance with the Nasdaq stockholders’ equity requirements as a result of the closing of the June 2025 Offering and the related issuance of securities in such offering. On July 14, 2025, Nasdaq issued us a conditional compliance with Rule 5550(b)(1).

As reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2025, at September 30, 2025, our stockholders’ equity of $4.5 million was above the Nasdaq minimum requirement of $2.5 million.

On September 2, 2025, we received a letter (the “September 2025 Nasdaq Letter”) from Nasdaq stating that we are eligible for an additional 180 calendar days, or until March 2, 2026 (the “Extended Compliance Deadline”), to regain compliance with the Minimum Bid Price Requirement, following the expiration of the initial 180 calendar day period granted to the Company by Nasdaq to regain compliance by September 1, 2025 (the “Initial Compliance Date”). Nasdaq initially notified us of (i) our failure to meet the Minimum Bid Price Requirement and (ii) the Initial Compliance Date in a letter sent by Nasdaq and addressed to us, dated March 5, 2025, as discussed above.

On February 5, 2026, we effected the 1-for-25 Reverse Stock Split. On February 23, 2026, we received a letter from Nasdaq stating that the closing bid price of our common stock was at $1.00 or greater for the last 10 consecutive business days. Accordingly, we regained compliance with the Minimum Bid Price Requirement and the matter was closed.

If our common stock should again fall below $1.00 for 30 consecutive trading days, we will be limited in the action we can take to regain compliance with the Nasdaq rules. Listing Rule 5810(c)(3)(A)(iv) states that any listed company that fails to meet the Minimum Bid Price Requirement and has effected a reverse stock split over the prior one-year period, or has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 250 shares or more to one, will not be eligible for an automatic 180-day grace compliance period and the Nasdaq Listing Qualifications Department is obligated to immediately issue a delisting determination. Therefore, if we were to fall out of compliance with the Minimum Bid Price Requirement prior to February 5, 2027, we would not be able to effect a reverse stock split and would immediately be issued a delisting determination. Further, the Nasdaq rule provides that a company will not be considered to have regained compliance with the Minimum Bid Price Requirement if the company takes an action to achieve compliance (such as a reverse split) and that action results in the Company’s security falling below the numeric threshold for another listing requirement.

The Nasdaq has recently proposed a new rule change to (i) adopt Listing Rules 5450(a)(3) and 5550(a)(6) to require issuers listed on the Nasdaq Global and Capital Markets, respectively, to maintain a minimum Market Value of Listed Securities (as defined in Nasdaq Listing Rule 5005(a)(23)) of at least $5 million for a period of thirty (30) consecutive business days, and (ii) amend Rule5810 to suspend trading and immediately delist from Nasdaq securities of issuers that do not satisfy the proposed new requirements, and Rule 5815 to set forth the procedures for requesting a hearing before a Hearings Panel and the scope of the Panel’s discretion (collectively, the “Proposed $5 Million MVLS Rule”). As of the date of the filing of this Annual Report the market value of our listed securities is less than $5 million.

In the event of a de-listing, we would take actions to restore our compliance with The Nasdaq Capital Market’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below The Nasdaq Capital Market, minimum bid price requirement or prevent future non-compliance with The Nasdaq Capital Market’s listing requirements.

May 2025 Warrant Inducement Transaction

On May 2, 2025, we entered into a warrant inducement agreement (the “May 2025 Inducement Agreement”) with an existing healthcare-focused institutional investor of ours (the “Holder”) for the immediate exercise of existing Series B Warrants to purchase 56,737 shares of our common stock and Series C Warrants, and together with the Series B Warrants (the “Existing Warrants”) to purchase 92,000 shares of our common stock at a reduced exercise price of $18.50 per share for net proceeds of approximately $2.2 million. In consideration for the immediate exercise in full of the Existing Warrants, the Holder received, in a private placement, new unregistered (i) Series B-1 warrants to purchase up to 99,290 shares of common stock(the “Series B-1 Warrants”), and (ii) Series C-1 Warrants to purchase up to 161,000 shares of common stock (the “Series C-1 Warrants”), and together with the Series B-1 Warrants the “May 2025 Warrants”). Upon issuance the May 2025 Warrants had an exercise price of $18.50 per share and were exercisable upon stockholder approval, which approval was obtained on August 1, 2025. The Series B-1 Warrants expire five years from the date of such approval and the Series C-1 Warrants will expire eighteen months from the date of such approval. The warrant inducement transaction closed on May 5, 2025.

In addition, we issued to a former placement agent’s designees tail fee warrants, consisting of Placement Agent Series B-1 Common Stock Purchase Warrants and Placement Agent Series C-1 Common Stock Purchase Warrants, to purchase up to an aggregate of 8,924 shares of common stock, which tail fee warrants have the same terms as the May 2025 Warrants, except that they have an exercise price of $23.125 per share.

June 2025 Best Efforts Offering and Warrant Amendment

On June 17, 2025, we entered into an amendment agreement (the “Warrant Amendment”) with the Holder, pursuant to which we agreed (i) to amend the May 2025 Warrants to reduce the exercise price of the May 2025 Warrants to $8.75 per share, (ii) to amend the May 2025 Warrants to modify the termination date thereof to (x) June 17, 2030 for the Series B-1 Warrants and (y) December 17, 2026 for the Series C-1 Warrants, and (iii) to amend the May 2025 Inducement Agreement, to provide that we would hold a special meeting of stockholders at the earliest practicable date, but in no event later than one hundred twenty (120) days after the closing date, of the June 2025 Offering (as defined below) for the purpose of obtaining Stockholder Approval (as defined in the May 2025 Inducement Agreement).

On June 18, 2025, we consummated a best efforts offering (the “June 2025 Offering”) of (i) 213,648 shares of our common stock (the “June 2025 Shares”), (ii) pre-funded warrants (the “June 2025 Pre-Funded Warrants”) to purchase up to an aggregate of 230,352 shares of our common stock (the “the June 2025 Pre-Funded Warrant Shares”), (iii) Series D warrants (the “Series D Warrants”) to purchase up to an aggregate of 444,000 shares of our common stock (the “Series D Warrant Shares”), (iv) Series E warrants (the “Series E Warrants” and, together with the Series D Warrants, the “June 2025 Warrants”) to purchase up to an aggregate of 333,000 shares of common stock (the “Series E Warrant Shares” and, together with the Series D Warrant Shares, the “June 2025 Warrant Shares”). Each June 2025 Share or June 2025 Pre-Funded Warrant was sold together with one Series D Warrant and one Series E Warrant. The combined public offering price for each Share and accompanying June 2025 Warrants was $8.1275. The combined public offering price for each Pre-Funded Warrant and accompanying June 2025 Warrants was $8.1025. The aggregate net proceeds from the June 2025 Offering was approximately $3.0 million.

Each June 2025 Pre-Funded Warrant was immediately exercisable for one June 2025 Pre-Funded Warrant Share at an exercise price of $0.025 per share and will remain exercisable until such June 2025 Pre-Funded Warrant is exercised in full. The June 2025 Warrants have an exercise price of $8.75 per June 2025 Warrant Share and became exercisable beginning on the effective date of stockholder approval of the issuance of the June 2025 Warrant Shares, which approval was obtained on August 1, 2025. The Series D Warrants will expire on the 5-year anniversary of the date of such approval and the Series E Warrants will expire on the 18-month anniversary of the date of such approval. As of December 31, 2025, all of the June 2025 Pre-Funded Warrants have been exercised.

A.G.P. At the Market Offering

November 2025 Warrant Inducement Transaction

On November 25, 2025, we entered into a warrant inducement agreement (the “November Inducement Agreement”) with a certain holder for the immediate exercise of existing Series C-1 Warrants to purchase 161,000 shares of our common stock and Series E Warrants to purchase 207,627 shares of our common stock at a reduced exercise price of $7.75 in exchange for warrants to purchase up to 552,940 shares of common stock (the “Series F Warrants”). The Series F Warrants have an exercise price of $7.75 and will be exercisable upon stockholder approval, which approval has not yet been obtained. We were unable to hold our planned special meeting of stockholders and vote upon a proposal to allow for the full exercise of the Series F Warrants due to lack of quorum. The Series F Warrants expire (24) months from the date of such approval. The aggregate net proceeds from the transactions contemplated by the November Inducement Agreement were approximately $2.6 million. As of December 31, 2025, the issuance of 216,960 shares of common stock issuable upon exercise of existing warrants pursuant to the November Inducement Agreement was held in abeyance subject to a beneficial ownership limitation provision in such warrants

2024 Financing Developments

March 2024 Warrant Inducement Transaction

H.C. Wainwright At the Market Offering

On April 18, 2024, we entered into an At the Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC ( “Wainwright”) providing for sale of our shares of common stock, from time to time, through Wainwright, with certain limitations on the number of shares of common stock that may be offered and sold by us as set forth in the ATM Agreement. The aggregate market value of the shares of Common Stock eligible for sale under the ATM prospectus supplement filed in connection with the ATM Agreement was $4,283,650, which was based on the limitations of such offerings under SEC regulations. The ATM Agreement provided that we would pay Wainwright a fixed commission rate of 3.0% of the gross proceeds from the sale of shares of common stock pursuant to the ATM Agreement. The ATM Agreement provided that the offering of shares of common stock pursuant to the ATM Agreement would terminate upon the earlier of (i) the sale of all shares of common stock subject to the ATM Agreement; or (ii) termination of the ATM Agreement by us as permitted therein. The Wainwright ATM Agreement was terminated on July 24, 2025, effective as of July 31, 2025. During the year ended December 31, 2024, we used this ATM Agreement to sell 93,940 shares of common stock for net proceeds of approximately $4 million, after fees and expenses. During the year ended December 31, 2025, we did not sell any shares of common stock under the Wainwright ATM Agreement.

Alumni Equity Line of Credit

On December 13, 2024, we entered into a Purchase Agreement (the “ELOC Agreement”) with Alumni Capital LP (“Alumni Capital”). Pursuant to the ELOC Agreement, we have the right to sell to Alumni Capital up to the lesser of (i) $5,000,000 of newly issued shares, subject to increase to $10,000,000 at our option (the “Investment Amount”), of the shares (the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), and (ii) the Exchange Cap (as defined below) (subject to certain conditions and limitations), from time to time during the term of the ELOC Agreement. Sales of Common Stock pursuant to the ELOC Agreement, and the timing of any sales, are solely at our option and we are under no obligation to sell securities pursuant to this arrangement. Shares of Common Stock may be sold by us pursuant to this arrangement over a period ending on the earlier of December 31, 2026 or the date on which Alumni Capital shall have purchased Shares pursuant to the ELOC Agreement for an aggregate purchase price of the Investment Amount; provided, however that we can terminate the Agreement at any time upon ten days prior written notice, subject to the satisfaction of the conditions in the ELOC Agreement.

The purchase price per Share that may be sold to Alumni Capital under the ELOC Agreement in such fixed purchases equals ninety-seven percent (97%) of the lowest daily dollar volume-weighted average price for the Common Stock during the period ending on the earlier of (i) three (3) consecutive trading days period following the date we deliver a purchase notice and (ii) the date on which Alumni Capital notifies us that it is prepared to proceed with the closing, subject to a Minimum Acceptable Price (as defined in the ELOC Agreement). There is no upper limit on the price per share that Alumni Capital might be obligated to pay for the Common Stock under the ELOC Agreement; provided, however, that at no time can the purchase price be below $13.75 per share (subject to adjustment as provided in the ELOC Agreement for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring after the date of the ELOC Agreement).

During the year ended December 31, 2025, we sold 5,666 shares of common stock under the ELOC Agreement for net proceeds of approximately $93,000, after fees and expenses.

In September 2025, we announced a summary of feedback received following the FDA EOP2 meeting.

Research and development expenses decreased by approximately $609,000 (19%) during the year ended December 31, 2025 compared to the year ended December 31, 2024. The decrease was primarily driven by decreased clinical activity and lower compensation expense for the year ended December 31, 2025 as compared to the same period in 2024.

On May 2, 2025, we entered into the May 2025 Inducement Agreement with the Holder providing for the immediate exercise of existing the Series B Warrants to purchase 56,737 shares of our common stock and the Series C Warrants, and together with the Series B Warrants to purchase 92,000 shares of our common stock at a reduced exercise price of $18.50 per share for net proceeds of approximately $2.2 million.

On June 18, 2025, we consummated the June 2025 Offering as describe above in the section titled “2025 Financing Developments.” The aggregate net proceeds from the June 2025 Offering were approximately $3.0 million.

On November 25, 2025, we entered into a warrant inducement agreement as describe above in the section titled “2025 Financing Developments.” We received aggregate net proceeds of approximately $2.6 million in connection therewith.

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”). We expect to receive a deficiency notice to this effect from Nasdaq with the opportunity to present 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 take the necessary actions to obtain conditional approval of our Initial Listing Application from Nasdaq prior to our 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 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.

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 adjourn the 2026 Annual Meeting 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.

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 2026 Annual Meeting, 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 2026 Annual Meeting. 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 12,930,617 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.

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:

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.

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.

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.

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 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 (“AhR”) receptor 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 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, the most potent AhR agonist within indigo naturalis, a botanical extract with best-in-category clinical efficacy in ulcerative colitis. AT177’s colon-targeted formulation delivers therapeutic AhR engagement directly to the colonic mucosa with exquisite gut restriction, minimizing the systemic AhR exposure associated with adverse effects. In preclinical studies, AT177 demonstrated robust local colonic AhR activation with markedly limited systemic exposure and superior colon-to-systemic selectivity compared to other AhR agonists in development. AT177 is currently in IND-enabling studies, with an investigational new drug (“IND”) filing planned for the second quarter of 2027, initiation of a Phase 1a single- and multiple-ascending-dose (“SAD/MAD”) clinical trial planned to commence in the second half of 2027, followed by a Phase 1b proof-of-concept study in UC patients.

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 12,930.617 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.

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 (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. 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”). 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. 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 and the net carrying amount of the Azora Notes. The reacquisition price 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 and the liability classified rights 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.”

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 master regulator of gut immune and epithelial barrier function and restoring AhR signaling at the intestinal mucosa has been clinically validated as a mechanism for treating UC. Our core scientific thesis is that delivering potent, localized AhR agonism directly to the colon, while minimizing systemic exposure, can capture the efficacy of AhR activation demonstrated in patients while mitigating the systemic safety liabilities observed with previous generations of AhR agonists.

AT177 was inspired by indigo naturalis, a botanical extract with demonstrated clinical benefit in UC but with certain limitations inherent to an uncontrolled botanical. AT177 is a rationally designed prodrug that liberates indirubin, the most potent AhR agonist in indigo naturalis, directly in the colon in a controlled, fully-synthetic, patented oral dosage form. We believe AT177 has the potential to be a differentiated treatment for UC. As of the date of this Quarterly Report on Form10-Q, we have completed a GLP toxicology in rats evaluating AT177, received pre-IND feedback from the U.S. Food and Drug Administration (the “FDA”), and are advancing AT177 through IND-enabling studies, with an IND planned for the second quarter of 2027. 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), AT177 in Crohn’s disease, and an undisclosed platform program. Source: Company materials.

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:

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:

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.

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. By restoring barrier function locally, AT177 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. We believe that AT177 can be used in combination with existing targeted drugs for UC, given its orthogonal mechanism.

Systemic AhR agonists have demonstrated efficacy in UC and other inflammatory diseases, providing clinical validation of the target. However, 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 is a master regulator of gut immune and epithelial barrier function. Source: Company materials.

Indigo Naturalis Supports Validation of the AhR Mechanism in Ulcerative Colitis

Indigo naturalis, a botanical extract used historically in traditional medicine practices in East Asia, has demonstrated profound and durable efficacy in UC, providing clinical validation of the AhR mechanism. Our co-founder, Dr. Julie Saiki, conducted a 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. In this study, indigo naturalis drove robust colonic AhR target engagement (~12,000-fold mean increase in colonic AhR activity). This study supports validation of the AhR mechanism in UC.

The clinical benefit of indigo naturalis in UC has been demonstrated in additional studies. In a randomized, double-blind, placebo-controlled trial (Naganuma et al., Gastroenterology, 2018; n=86), indigo naturalis demonstrated up to approximately 50% placebo-adjusted clinical remission at Week 8, with benefit observed in both biologic-experienced and biologic-naïve patients. In a longer-term maintenance study (Matsuno et al., 2022; n=33), clinical remission was reported in approximately 73% of patients at one year. Despite this efficacy, 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: Indigo naturalis has demonstrated profound, durable efficacy in ulcerative colitis, validating the AhR mechanism. Source: Company materials.

Efficacy Is Driven Locally, Not Systemically

Preclinical and clinical evidence supports our thesis that the therapeutic benefit 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, has demonstrated activity in psoriasis with no quantifiable systemic exposure in a Phase 1b study conducted in Australia. Although the program is not in active development, the clinical data supports the hypothesis that only local activation alone is sufficient for efficacy in another autoimmune disease. Together, these data support our belief that local AhR activation is sufficient to drive clinical benefit.

AT177 — Our Lead Product Candidate

Composition and Mechanism of Action

AT177 is a fully-synthetic, gut-restricted, small-molecule prodrug designed to recapitulate the benefit of indigo naturalis while minimizing systemic exposure. AT177 converts in the colonic lumen to indirubin,, the most potent AhR agonist 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.

Differentiated Product Profile

We believe that AT177 has a differentiated clinical profile compared with approved therapies and other AhR candidates in development:

Preclinical Evidence

In a dextran sodium sulfate (“DSS”) murine colitis model, oral AT177 was effective and produced superior in vivo colonic AhR activity relative to 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, oral AT177 reduced disease activity and preserved colonic crypt architecture, restored epithelial integrity and reduced inflammatory infiltrate in the lamina propria on histology.

In large-animal studies, AT177 delivered indirubin at concentrations above the AhR EC50 across the entire colon and into the rectum, while maintaining dramatically lower systemic exposures than other AhR agonists, suggesting a potentially favorable therapeutic index and a gut-restricted profile.

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.

Competitive Positioning Among AhR Agonists

We believe that AT177’s profile is differentiated against other AhR agonists because it is highly potent, rapidly metabolized, and has an optimized pharmacokinetic/pharmacodynamic (“PK/PD”) profile for UC with robust gut-restriction. Its active moiety, indirubin, is unique in that it has demonstrated clinical benefit in patients as a component of indigo naturalis and is an endogenous molecule, characteristics that we believe may be relevant to its favorable safety and tolerability profile.

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.

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 established clinical validation in ulcerative colitis, 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.

Figure: AT177 was rationally designed to be a potential best-in-class AhR agonist for ulcerative colitis. Source: Company materials.