Azora Therapeutics flags going-concern doubt on $22M
Sentiment and the balance of points
Rhea-AI Sentiment reads the wording of the document, how positive or negative its language is on a 1 to 5 scale. The balance of points shown with the takes weighs what the document actually discloses, so the two can disagree, for example when a trial that missed its main goal is described in upbeat language.
Rhea-AI Filing Summary
Azora Therapeutics, Inc. (AZR) reported a net loss of $118.574 million for the nine months ended September 30, 2026, compared with $5.981 million in the same 2025 period. The loss included $46.185 million of acquired in-process research and development expense and a $48.828 million fair-value loss on milestone warrant rights. Cash and cash equivalents were $22.0 million at September 30, 2026. The company said it would need additional financing because its cash was insufficient for operations over the next 12 months, and concluded substantial doubt existed about its ability to continue as a going concern within one year.
The company completed its acquisition of Legacy Azora on June 11, 2026, and received $26.8 million in gross proceeds from the initial private placement of pre-funded warrants. AT177 is its lead candidate for ulcerative colitis, and the company is also developing it for Crohn’s disease. It discontinued active development of the former AD04 program absent non-dilutive funding or a partnering arrangement.
How this balance works
Rhea-AI gives every point it takes from this document a weight. Minor counts 1, Moderate 3 and Major 9, so one Major point outweighs several Minor ones. The bar adds up the weights on each side, and when neither side holds more than 65% of the total the balance reads Mixed.
It reads the document as published, with the same rules for every company, and it does not look at what the market expected or at how the stock traded, so a point can be objectively good on a day the stock falls.
Rhea-AI Sentiment measures something else, the tone of the wording.
Positive
- None.
Negative
- Major pointNine-month net loss was $118.574 million versus $5.981 million in the comparable 2025 period.
- Major pointGoing-concern doubt within one year; $22.0 million cash cannot fund 12 months.
Filing Explained
By November 9, 9,924,260 merger-related shares had converted, while preferred shares and unexercised milestone rights left further share issuance possible.
Stockholders approved the merger-related preferred-stock conversion on
By
The company reported 14,286,311 common shares outstanding as of
Key Figures
Key Terms
IND-enabling studies medical
AhR agonist medical
SAD/MAD medical
proof-of-concept medical
pre-funded warrants financial
going concern financial
FAQ
AI-generated questions and answers. How Rhea-AI works. Not financial advice.
How much cash did AZR have, and did it say that covered a year of operations?
When does AZR plan to begin clinical testing of AT177?
AI-generated analysis. How Rhea-AI works. Not financial advice.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ___________ to ___________
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
| State or Other Jurisdiction of Incorporation or Organization |
I.R.S. Employer Identification No. |
|
| Address of Principal Executive Offices | Zip Code |
Registrant’s Telephone Number, Including Area Code
Adial Pharmaceuticals, Inc., 4870 Sadler Road, Suite 300, Glen Allen, Virginia 23060
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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 November 9, 2026 was
AZORA THERAPEUTICS, 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 plans, 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, unless the context otherwise requires, the “Company,” “we,” “us” and “our” refer to Azora Therapeutics, Inc. (formerly known as Adial Pharmaceuticals, Inc.) and its consolidated subsidiary. Effective October 29, 2026, we changed our name from Adial Pharmaceuticals, Inc. to Azora Therapeutics, Inc., and our common stock, which previously traded on The Nasdaq Capital Market under the symbol “ADIL,” began trading under the symbol “AZR.” References to “Legacy Adial” refer to the Company and its business prior to the Merger, and references to “Legacy Azora” refer to the privately held Azora Therapeutics, Inc. that we acquired on June 11, 2026, now our wholly owned subsidiary, Azora Therapeutics, LLC.
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||
| PART I – FINANCIAL INFORMATION | 1 | |||
| Item l. | Condensed Consolidated Unaudited Financial Statements | 1 | ||
| Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2026 and December 31, 2025 | 1 | |||
| Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2026 and 2025 | 2 | |||
| Condensed Consolidated Statements of Temporary Equity and Stockholders’ (Deficit) Equity (Unaudited) for the three and nine months ended September 30, 2026 and 2025 | 3 | |||
| Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2026 and 2025 | 4 | |||
| Notes to the Unaudited Condensed Consolidated Financial Statements | 5 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 34 | ||
| Item 4. | Controls and Procedures | 34 | ||
| PART II – OTHER INFORMATION | 36 | |||
| Item 1. | Legal Proceedings | 36 | ||
| Item 1A. | Risk Factors | 36 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 41 | ||
| Item 3. | Defaults Upon Senior Securities | 41 | ||
| Item 4. | Mine Safety Disclosures | 41 | ||
| Item 5. | Other Information | 41 | ||
| Item 6. | Exhibits | 42 | ||
| SIGNATURES | 44 | |||
i
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Unaudited Financial Statements
AZORA THERAPEUTICS, INC. (formerly known as ADIAL PHARMACEUTICALS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
| September 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 | ||||||||
| 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
AZORA THERAPEUTICS, INC. (formerly known as ADIAL PHARMACEUTICALS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 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 allocated 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
AZORA THERAPEUTICS, INC. (formerly known as ADIAL PHARMACEUTICALS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF TEMPORARY EQUITY
AND STOCKHOLDERS’ (DEFICIT) EQUITY (UNAUDITED)
(In thousands, except share amounts)
| Temporary Equity | Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||
| Series
A Convertible Preferred Stock |
Common Stock | Additional
Paid In |
Accumulated | Total
Stockholders’ (Deficit) |
||||||||||||||||||||||||
| 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 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Equity-based compensation – stock option expense | — | — | ||||||||||||||||||||||||||
| Equity-based compensation – restricted stock | ||||||||||||||||||||||||||||
| Reclassification of milestone warrant rights from liability to equity upon amendment | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, September 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 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| 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, September 30, 2025 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
AZORA THERAPEUTICS, INC. (formerly known as ADIAL PHARMACEUTICALS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| For the Nine Months Ended September 30, |
||||||||
| 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 allocated 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 | $ | |||||||
| Extinguishment of the Azora Therapeutics convertible promissory notes to pre-funded warrants | $ | |||||||
| Reclassification of milestone warrant rights from liability to equity upon amendment | $ | |||||||
| 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
AZORA THERAPEUTICS, INC. (formerly known as ADIAL PHARMACEUTICALS, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1 — DESCRIPTION OF BUSINESS
Azora Therapeutics, Inc. (formerly known as Adial Pharmaceuticals, Inc.) (the “Company”) and, with respect to periods prior to the Merger described below, “Legacy Adial” 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 Legacy Azora’s lead investigational candidate, AT177, into the Company’s development pipeline. Prior to the Merger, Legacy Adial 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 AT177, a proprietary, fully-synthetic, oral, colon-targeted AhR agonist in development for the treatment of ulcerative colitis.
2 — GOING CONCERN AND OTHER UNCERTAINTIES
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 in both the U.S. and international markets and other operating requirements.
As of September 30, 2026, the Company had a cash and cash equivalents balance of $
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; and the ability to negotiate favorable licensing or marketing agreements for its products.
5
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 accounting principles generally accepted in the United States of America (“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 September 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
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 nominal, refer to Note 9 for the number of Pre-funded warrants. 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 nine months ended September 30, 2026 and 2025, as the inclusion of all potential common shares outstanding would have an anti-dilutive effect.
6
The total potentially dilutive common shares that were excluded for the nine month periods ended September 30, 2026 and 2025 were as follows:
| Potentially Dilutive Common Shares Outstanding September 30, | ||||||||
| 2026 | 2025 | |||||||
| Warrants to purchase common stock | ||||||||
| Common Stock issuable on exercise of options | ||||||||
| Series A Preferred Stock | ||||||||
| Unvested restricted stock | ||||||||
| Total potentially dilutive Common Stock 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 September 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.
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). |
7
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
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.
8
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 an 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 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.
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.
4 — ACQUISITION OF LEGACY AZORA AND PIPE ISSUANCE
On June 11, 2026, the Company acquired Legacy Azora, in accordance with the terms of the Merger Agreement, by and among the Company, First Merger Sub, Second Merger Sub and Legacy Azora. Pursuant to the Merger Agreement, First Merger Sub merged with and into Azora, with Legacy Azora surviving as a wholly owned subsidiary of Legacy Adial (the “First Merger”).
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Immediately following the First Merger, in the Second Merger, Legacy Azora merged with and into Second Merger Sub, with Second Merger Sub surviving as a wholly owned subsidiary of the Company and the Second Merger Sub changing its name to “Azora Therapeutics, LLC.” At closing of the Merger, the Company issued to former Azora stockholders
On June 11, 2026, in connection with and as a condition to closing of the Merger, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the purchasers named therein (the “PIPE Investors”), pursuant to which the Company 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, the Company 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 the Company’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 Stockholders 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 Legacy 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
As a result of the Merger, Financing and Azora Note Exchange (collectively, the “Transactions”), equity holders of Legacy Adial immediately prior to the Merger owned approximately
Upon the closing of the Merger on June 11, 2026, the Company evaluated its relationship with Legacy Azora under ASC 810, and determined that Legacy Azora is a VIE in which the Company holds a variable interest. This determination, and the Company’s related conclusion that it is Legacy 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 Legacy Azora was the acquiree and was determined to be a VIE, other qualitative factors under ASC 805 were not applicable to the analysis. Legacy 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 Legacy 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 Legacy 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 Legacy Azora is the primary beneficiary, the party with both (i) the power to direct the activities of Legacy 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 Legacy Azora, regardless of whether that party holds a majority of Legacy Azora’s outstanding voting equity interests. Accordingly, the Company determined that it has both the power and economics necessary to be the primary beneficiary of Legacy 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 Legacy 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. The excess of the consideration transferred over the fair value of the identifiable net assets acquired was allocated to acquired IPR&D, 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 share of the Company’s Common stock on the date of the Merger. 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 the PIPE Financing and Azora Note Exchange described in Note 4. Milestone refers either specified clinical development milestones, including the Company’s announcement that the first subject has been dosed in a Phase 1 clinical trial of AT177 (or IND acceptance) or a specific market milestone, the achievement of a volume-weighted average stock price equal to or greater than
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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 Operations.
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, September 16, 2026 and September 30, 2026:
| As of | As of | As of | As of | ||||||||||||||
| June 11, | June 30, | September 16, | September 30, | ||||||||||||||
| Valuation Input | 2026 | 2026 | 2026 | 2026 | |||||||||||||
| 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, and (3) receipt of pre-IND feedback from the FDA and the current status of GLP toxicology studies. |
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The following table presents the changes in the fair value of the Level 3 Milestone warrant rights liability for the nine months ended September 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) | ( | ) | |||||||
| Milestone warrant rights exercised / settled during the period | |||||||||
| Balance at June 30, 2026 | $ | ||||||||
| Change in fair value recognized in other income (expenses) | |||||||||
| Milestone warrant rights exercised / settled during the period | |||||||||
| Milestone warrant rights reclassified to stockholders’ equity | ( | ) | |||||||
| Balance at September 30, 2026 | $ | $ | |||||||
As of December 31, 2025, there were no financial assets and liabilities measured at fair value. During the three and nine months ended September 30, 2026 and 2025, there were no transfers between levels.
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 Exchange Agreements (the “Note Agreement Amendment” and together with the Purchase Agreement Amendment, the “Amendments”) with the Former Azora Noteholders, pursuant to which the 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 criteria for equity classification. The liability was remeasured to fair value immediately prior to the amendment, with the resulting change in fair value recognized in earnings, and the $
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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 nine months ended September 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 | ||||
| Portion of operating losses recognized | ( | ) | ||
| Equity investment carrying amount at September 30, 2026 | $ |
At September 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):
| September 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 September 30, 2026, included in employee compensation was an accrual of approximately $
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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 Legacy 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
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.
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Cash Settlement
The Series A Preferred Stock does not have redemption rights. However, if, at any time after the earlier of (i) stockholder approval of the conversion of the Series A Preferred Stock and (ii) December 11, 2026 (six months after the initial issuance of the Series A Preferred Stock), the Company fails to timely deliver shares of common stock to a holder upon conversion of shares of Series A Preferred Stock (other than as a result of such holder’s beneficial ownership limitation following stockholder approval), or is unable to effect a conversion due to insufficient authorized shares, such holder may require the Company to settle such shares in cash 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
9 — STOCKHOLDERS’ EQUITY
During the nine months ended September 30, 2026, the Company issued
During the nine months ended September 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 Standby 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 $
Equity Incentive Plans
In October 2017, the Company adopted the 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.
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In August 2025, the Company’s stockholders approved an amendment to the 2017 Equity Incentive Plan to increase the number of shares of common stock authorized for grant under the plan from
In September 2026 the Company’s stockholders approved the 2026 Equity Incentive Plan (“2026 Equity Incentive Plan”) which superseded the 2017 Equity Incentive Plan. No further awards may be granted under the 2017 Equity Incentive Plan; awards outstanding thereunder remain subject to its terms, and up to
Assumed Options from Acquisition of Legacy Azora
On June 11, 2026, in connection with the Acquisition of Legacy Azora, the Company assumed all outstanding and unexercised stock options to purchase Azora common stock (the “Assumed Options”). The Assumed Options were converted into options to purchase an aggregate of
Inducement Grants
The Company granted inducement non-statutory stock options to purchase an aggregate of
On August 19, 2026, the Company granted its newly appointed Executive Vice President of Finance (now Chief Financial Officer) an inducement option to purchase
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Stock Options
The following table provides the stock option activity for the three and nine months ended September 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 | ||||||||||||
| Forfeited | — | |||||||||||
| Granted | — | |||||||||||
| Outstanding September 30, 2026 | ||||||||||||
| Outstanding September 30, 2026, vested and exercisable | $ | |||||||||||
At September 30, 2026, the total intrinsic value of the outstanding options was approximately $
The Company used the Black Scholes valuation model to determine the fair value of the options issued and assumed in the acquisition of Legacy Azora, using the following key assumptions for the nine months ended September 30, 2026 and 2025:
| September 30, 2026 | September 30, 2025 | |||||||
| Fair Value per Share | $ | $ | ||||||
| Expected Term | ||||||||
| Expected Dividend | $ | $ | ||||||
| Expected Volatility | % | % | ||||||
| Risk free rate | % | % | ||||||
As of September 30, 2026, there was $
The components of stock-based compensation expense included in the Company’s Unaudited Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2026 and 2025 are as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Research and development options expense | $ | $ | $ | $ | ||||||||||||
| Research and development restricted stock expense | ||||||||||||||||
| Total research and development expenses | ||||||||||||||||
| General and administrative options expense | ||||||||||||||||
| Restricted stock expense | ||||||||||||||||
| Total general and administrative expenses | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
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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 nine months ended September 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 | $ | |||||||
| Vested | $ | |||||||
| Forfeited | ||||||||
| Granted | ||||||||
| Unvested at September 30, 2026 | $ | |||||||
On June 12, 2026, the Company granted
On April 7, 2026, the Company issued an aggregate of
As of September 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 nine months ended September 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 | $ | $ | ||||||||||||||
| Issued | — | — | ||||||||||||||
| Forfeited | — | — | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Outstanding September 30, 2026 | $ | $ | ||||||||||||||
Pre-Funded Warrants
The following table provides the activity for pre-funded warrants to purchase common stock for the three and nine months ended September 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 | $ | |||||||
| Issued | ||||||||
| Forfeited | ||||||||
| Exercised | ||||||||
| Outstanding September 30, 2026 | $ | |||||||
The pre-funded warrants were issued in accordance with the private placement transaction and exchange of Legacy Azora’s convertible notes, and have no expiration date, see Note 4 for further information.
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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.
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 September 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 September 30, 2026, the Company did not have any pending legal actions.
11 — SEGMENT REPORTING
The Company has
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Significant segment expenses, as provided to the CODM, are presented below:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 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 allocated 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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
12 — SUBSEQUENT EVENTS
On October 28, 2026, at the reconvened 2026 Annual Meeting of Stockholders, the Company’s stockholders approved, for purposes of complying with applicable Nasdaq Listing Rules, (i) the issuance of
Pursuant to the Certificate of Designation, each outstanding share of Series A Preferred Stock automatically converts into
As a result of the conversion of the Series A Preferred Stock on November 2, 2026, our stockholders’ equity exceeds the Nasdaq continued listing requirement of $
On September 17, 2026, the Company’s stockholders approved an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of common stock from
Effective October 28, 2026, Matthew Davidson, Ph.D. was appointed President and Chief Executive Officer, Celia Economides was appointed Chief Financial Officer and Julie Saiki, Ph.D. was appointed Chief Strategy Officer, and the employment of the Company’s former Chief Executive Officer and former Chief Financial Officer was terminated, entitling each to severance under his employment agreement. On November 3, 2026, the Board appointed three new independent directors, and on November 3, 2026, four directors resigned and the Board adopted a Non-Employee Director Compensation Policy. See Note 9 for the October 28, 2026 amendment of the inducement awards.
As of November 6, 2026, the Company has received cash of approximately $
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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 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 Form 10-Q reflect the Reverse Stock Split.
Overview
We are a biopharmaceutical company focused on developing treatments for serious immune-mediated and inflammatory diseases. On June 11, 2026, we acquired Azora Therapeutics, Inc. (“Legacy Azora”), a privately held biopharmaceutical company, and its lead product candidate, AT177 (the “Merger”), and on June 12, 2026, we completed the initial closing of a concurrent private placement for gross proceeds of approximately $26.8 million. Effective October 29, 2026, we changed our name from Adial Pharmaceuticals, Inc. to Azora Therapeutics, Inc., and our common stock began trading on The Nasdaq Capital Market under the symbol “AZR” (previously “ADIL”). Prior to the Merger, Legacy Adial was focused on the development of AD04 for the treatment of alcohol use disorder (“AUD”). See Note 4 to our unaudited condensed consolidated financial statements.
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 the most potent AhR agonist derived from indigo naturalis, a botanical extract that has been evaluated in clinical studies in patients with UC. Indigo naturalis 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 and the initiation of a Phase 1a single- and multiple-ascending-dose (“SAD/MAD”) clinical trial planned in the first half of 2027. The Phase 1a will be followed by a Phase 1b proof-of-concept study in UC patients. The initiation of each trial is subject to the appropriate regulatory agency allowing the studies to proceed.
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.
We have incurred net losses in each year since our inception, including net losses of approximately $118.6 million, inclusive of the one-time acquired in process research and development write off of $46.2 million, and $8.0 million for the nine months ended September 30, 2026 and year ended December 31, 2025, respectively. We had accumulated deficits of approximately $208.5 million and $90.0 million as of September 30, 2026 and December 31, 2025, respectively. All of our operating losses in the nine months ended September 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.
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We will not generate revenue from product sales unless and until we successfully complete development and obtain marketing approval for AT177, 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 AT177.
Recent Developments
Acquisition of Azora
On June 11, 2026, we acquired Legacy Azora in accordance with the terms of the Merger Agreement. Pursuant to the Merger Agreement, Legacy Azora became a wholly owned subsidiary of the Company.
At closing of the Merger, we issued to former Legacy 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 Legacy 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 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 Legacy 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 our 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 our 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 our 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.”
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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 Exchange Agreements (the “Note Agreement Amendment” and together with the Purchase Agreement Amendment, the “Amendments”) with the Former Azora Noteholders, pursuant to which the 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.
Stockholder Approvals; Name Change; Management Changes
At our 2026 Annual Meeting of Stockholders held on September 17, 2026, our stockholders approved, among other matters, an amendment to our certificate of incorporation to increase the number of authorized shares of our common stock from 100,000,000 to 500,000,000, our 2026 Equity Incentive Plan, our 2026 Employee Stock Purchase Plan and Amendment No. 8 to our 2017 Equity Incentive Plan. The meeting was adjourned with respect to the proposals relating to the Transaction Stockholder Matters (as defined in Note 4 to our unaudited condensed consolidated financial statements) that remained pending, and was reconvened on October 28, 2026, at which time our stockholders approved, for purposes of the Nasdaq Listing Rules, the issuance of shares of our common stock upon (i) conversion of the Series A Preferred Stock, (ii) exercise of the Assumed Options, (iii) exercise of the Initial Closing Pre-Funded Warrants and (iv) exercise of the Milestone Warrants.
Pursuant to the Certificate of Designation, each outstanding share of Series A Preferred Stock automatically converts into 1,000 shares of our common stock on the third business day following such stockholder approval, subject to the beneficial ownership limitation elected by each holder. On November 2, 2026, 9,924.260 shares of Series A Preferred Stock automatically converted into an aggregate of 9,924,260 shares of our common stock, and 3,006.341 shares of Series A Preferred Stock remain outstanding as a result of the beneficial ownership limitations and may be converted by the holders thereof, subject to such limitations. As of November 9, 2026, following the conversion, we had 14,286,311 shares of common stock outstanding. The Series A Preferred Stock was classified as temporary equity as of September 30, 2026, and the carrying value of the converted shares is reclassified to stockholders’ equity upon conversion.
On October 28, 2026, we filed a Certificate of Amendment to our certificate of incorporation with the Secretary of State of the State of Delaware to increase the number of authorized shares of our common stock to 500,000,000 and to change our name to Azora Therapeutics, Inc., each effective at 12:01 a.m. Eastern Time on October 29, 2026. Our common stock began trading on The Nasdaq Capital Market under the symbol “AZR” on October 29, 2026.
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Effective October 28, 2026, Matthew Davidson, Ph.D. succeeded Cary J. Claiborne as our President and Chief Executive Officer, Celia Economides succeeded Vinay Shah as our Chief Financial Officer, and Julie Saiki, Ph.D. was appointed as our Chief Strategy Officer. On November 3, 2026, our Board of Directors increased its size from six to nine members and appointed Aida Habtezion, M.D., Paul Hastings and Thomas Soloway as independent directors. Effective November 3, 2026, J. Kermit Anderson, Cary J. Claiborne, Robertson H. Gilliland and Kevin Schuyler resigned from the Board, and the Board fixed its size at five members. In connection with these changes, the Board appointed Dr. Davidson as Chair of the Board, reconfigured its audit, compensation and nominating and corporate governance committees, and adopted a Non-Employee Director Compensation Policy.
Our Product Candidates
We are developing colon-targeted AhR agonists for the treatment of inflammatory bowel disease (“IBD”). Legacy Azora, which was originally incorporated as Meya Pharmaceuticals, was co-founded by Matthew Davidson, Ph.D., Julie Saiki, Ph.D., and Johan Andreasson, Ph.D., and was launched out of Stanford University’s translational medicine SPARK program.
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 site of inflammation, 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 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, are conducting IND-enabling studies, and have initiated GMP manufacturing.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 initial PoC data anticipated in the first half of 2028.
We are developing AT177 in Crohn’s disease in addition to UC. AT177 has demonstrated activity in the 2,4,6-trinitrobenzene sulfonic acid (TNBS) murine colitis model, a model of transmural inflammation commonly used to evaluate product candidates for Crohn’s disease, and our nonclinical toxicology program and planned Phase 1a study may support clinical development in both indications. Other therapies, including upadacitinib (Rinvoq), mirikizumab (Omvoh) and guselkumab (Tremfya), were first approved in UC and subsequently in Crohn’s disease.
Following the Merger, we have discontinued active development of AD04, Legacy Adial’s investigational product candidate for the treatment of AUD, and do not intend to devote further resources to AD04 absent non-dilutive funding or a partnering arrangement. AD04 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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Legacy Program — AD04
Prior to the Merger, Legacy Adial was a clinical-stage pharmaceutical company focused on the treatment and prevention of addiction and related disorders. Legacy Adial’s 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. Following the Merger, we have discontinued active development of AD04 and do not intend to devote further resources to AD04 absent non-dilutive funding or a partnering arrangement. 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 the AD04 program and Legacy Adial’s business prior to the Merger.
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 Legacy Azora
On June 11, 2026, we completed the acquisition of Legacy Azora. As a result of this transaction, Legacy 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 Legacy Adial’s 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 nine months ended September 30, 2026 include (i) the operations of Legacy Adial for the full period and (ii) the results of Legacy Azora for the period from June 11, 2026 through September 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.
Results of operations for the three months ended September 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 September 30, | ||||||||||||
| 2026 | 2025 | Change | ||||||||||
| Research and development expenses | $ | 1,775 | $ | 521 | $ | 1,254 | ||||||
| General and administrative expenses | 5,756 | 1,243 | 4,513 | |||||||||
| Total Operating Expenses | 7,531 | 1,764 | 5,767 | |||||||||
| Loss From Operations | (7,531 | ) | (1,764 | ) | (5,767 | ) | ||||||
| Change in fair value of milestone warrant rights liability | (57,108 | ) | — | (57,108 | ) | |||||||
| Change in value of equity method investment | (93 | ) | (77 | ) | (16 | ) | ||||||
| Other income (expense) | — | (1 | ) | 1 | ||||||||
| Interest income | 170 | 48 | 122 | |||||||||
| Total other income (expenses) | (57,031 | ) | (30 | ) | (57,001 | ) | ||||||
| Net loss | $ | (64,562 | ) | $ | (1,794 | ) | $ | (62,768 | ) | |||
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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 | ||||||||||||
| September 30, | ||||||||||||
| 2026 | 2025 | Change | ||||||||||
| Research and development expenses | ||||||||||||
| AD04 | $ | 18 | $ | 281 | $ | (263 | ) | |||||
| AT177 | 863 | – | 863 | |||||||||
| CMC (1) | 389 | 155 | 234 | |||||||||
| Other personnel and unallocated (2) | 505 | 85 | 420 | |||||||||
| Total research and development expense | $ | 1,775 | $ | 521 | $ | 1,254 | ||||||
| (1) | Costs related to production and testing for CMC activities are not allocated on a program-by-program basis and mainly related to our AT177 product candidate and historical AD04 program. |
| (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 increased by approximately $1.3 million, or 241%, to $1.8 million during the three months ended September 30, 2026 compared to $521,000 for the three months ended September 30, 2025. The increase was mainly due to preclinical and tox work associated with AT177 and partially offset by decreased activity related to AD04 during the three months ended September 30, 2026 as compared to the same period in 2025.
General and administrative expenses (“G&A”) expenses
General and administrative expenses increased by approximately $4.5 million, or 363%, to $5.8 million during the three months ended September 30, 2026 compared to $1.2 million for the three months ended September 30, 2025. The increase was mainly due to merger related cost associated with the acquisition of Legacy Azora, integration costs during the post-Merger transition period, and equity and severance expenses incurred in the three months ended September 30, 2026 as compared to the same period in 2025.
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 $16,000 in the three months ended September 30, 2026 compared to the three months ended September 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.
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Total Other income (expenses)
Total other income (expense), was ($57.0) million for the three months ended September 30, 2026, compared to ($30,000) for the same period in 2025. The change was primarily driven by a $57.1 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, increased by approximately $123,000 in the three months ended September 30, 2026 compared to the three months ended September 30, 2025 due to additional interest income received during the quarter ended September 30, 2026.
Results of operations for the nine months ended September 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 Nine Months Ended September 30, | Change | |||||||||||
| 2026 | 2025 | (Decrease) | ||||||||||
| Research and development expenses | $ | 2,648 | $ | 2,000 | $ | 648 | ||||||
| General and administrative expenses | 12,725 | 3,914 | 8,811 | |||||||||
| Acquired in-process research and development | 46,185 | — | 46,185 | |||||||||
| Total Operating Expenses | 61,558 | 5,914 | 55,644 | |||||||||
| Loss From Operations | (61,558 | ) | (5,914 | ) | (55,644 | ) | ||||||
| Change in fair value of milestone warrant rights liability | (48,828 | ) | — | (48,828 | ) | |||||||
| Financing expense allocated 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 | (342 | ) | (339 | ) | (3 | ) | ||||||
| Other income (expenses) | — | 165 | (165 | ) | ||||||||
| Interest income | 275 | 107 | 168 | |||||||||
| Total other income (expenses) | (57,016 | ) | (67 | ) | (56,949 | ) | ||||||
| Net loss | $ | (118,574 | ) | $ | (5,981 | ) | $ | (112,593 | ) | |||
Research and development (“R&D”) expenses
The following table sets forth our research and development expenses in dollars for the periods presented (in thousands):
| Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2026 | 2025 | Change | ||||||||||
| Research and development expenses | ||||||||||||
| AD04 | $ | 233 | $ | 976 | $ | (743 | ) | |||||
| AT177 | 966 | – | 966 | |||||||||
| CMC (1) | 629 | 770 | (141 | ) | ||||||||
| Other personnel and unallocated (2) | 820 | 254 | 566 | |||||||||
| Total research and development expense | $ | 2,648 | $ | 2,000 | $ | 648 | ||||||
| (1) | Costs related to production and testing for CMC activities are not allocated on a program-by-program basis and mainly related to our AT177 product candidate and historical AD04 program. |
| (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 increased by approximately $648,000, or 32%, to $2.6 million during the nine months ended September 30, 2026 compared to $2.0 million for the nine months ended September 30, 2025. The increase was mainly due to preclinical and tox work associated with AT177 and partially offset by decreased activity related to AD04 during the nine months ended September 30, 2026 as compared to the same period in 2025.
General and administrative expenses (“G&A”) expenses
General and administrative expenses increased by approximately $8.8 million, or 225%, to $12.7 million during the nine months ended September 30, 2026 compared to $3.9 million for the nine months ended September 30, 2025. The increase was mainly due to merger related cost associated with the acquisition of Legacy Azora, integration costs during the post-Merger transition period, and equity and severance expenses incurred in the nine months ended September 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 nine months ended September 30, 2026, with no comparable expense in the prior year period. The charge was recognized in connection with the acquisition of Legacy 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”) increased by approximately $3,000 in the nine months ended September 30, 2026 compared to the nine months ended September 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 ($57.0) million for the nine months ended September 30, 2026, compared to ($67,000) 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 of Legacy Azora when we exchanged outstanding promissory notes for pre-funded warrants to purchase our common stock, ($2.1) million financing costs, and ($48.8) 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, financing costs, and loss on extinguishment of promissory notes, increased by approximately $3,000 in the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025.
Liquidity and Capital Resources at September 30, 2026
On June 11, 2026, we completed the acquisition of Legacy 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 Legacy Azora are included beginning on the acquisition date. As a result, the liquidity and capital resources information for the nine months ended September 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 $208.5 million as of September 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 some limited legacy operations of Legacy Adial in a reduced capacity.
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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 nine months ended September 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 anticipate that we will require additional financing as we continue to execute our overall business strategy, which is to complete IND-enabling studies and submit an IND in 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 data anticipated in first half of 2028. Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to fund our current operating plan, including completion of our IND-enabling studies and the Phase 1a study. However, our operating plan does not include the full costs of the Phase 1b study, and we do not intend to commence the Phase 1b study unless we obtain additional funding, whether from the purchase of Milestone Warrants or from other sources. We believe that proceeds from the purchase of Milestone Warrants by the PIPE Investors and Former Azora Noteholders would be sufficient to fund the study, even if only a portion of the eligible holders elect to purchase. As of November 6, 2026, Milestone Warrants had been purchased for aggregate proceeds of approximately $0.8 million. The right to purchase Milestone Warrants expires 30 days after we provide written notice of a milestone event, including our announcement of FDA acceptance of our IND (deemed to occur 30 days after submission of the IND absent a clinical hold) or of first subject dosing in our Phase 1a trial. The PIPE Investors and Former Azora Noteholders are not obligated to purchase any Milestone Warrants, and we have no right to require them to do so. We can provide no assurance that they will purchase Milestone Warrants in an amount sufficient to fund the Phase 1b study, or at all. If they do not, we would need to fund the study from other sources, which may not be available on acceptable terms, or at all.
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 have discontinued active development of AD04 and do not intend to devote further resources to AD04 absent non-dilutive funding or a partnering arrangement.
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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.
Cash flows
| For the Nine Months Ended September 30, | ||||||||
| (in thousands) | 2026 | 2025 | ||||||
| Provided by (used in) | ||||||||
| Operating activities | $ | (14,608 | ) | $ | (5,168 | ) | ||
| Investing activities | 5,282 | 150 | ||||||
| Financing activities | 25,489 | 5,874 | ||||||
| Net increase in cash and cash equivalents | $ | 16,163 | $ | 856 | ||||
Net cash used in operating activities
Net cash used in operating activities increased by approximately $9.4 million in the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. The primary driver was merger related cost associated with the acquisition of Legacy Azora, integration costs during the post-Merger transition period, and severance expenses, which mainly attributed to this increase for the nine months ended September 30, 2026 as compared to the nine months ended September 30, 2025.
Net cash provided by investing activities
Net cash provided by investing activities increased by approximately $5.1 million in the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. This primary driver was due to the net cash received in the acquisition of Legacy 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 $19.6 million in the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. During the nine months ended September 30, 2026, the primary driver was our Financing in conjunction with the acquisition of Legacy Azora as compared to a Warrant Inducement transaction and sales of our common stock under a best efforts offering completed during the nine months ended September 30, 2025.
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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 nine months ended September 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, however since the milestone warrants rights liability was equity classified as of September 30, 2026 a change in stock price will no longer have an impact on a go forward basis.
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.
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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.
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 has taken steps to remediate the weakness described above. Management has engaged 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 Legacy 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 Legacy 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 September 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.
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 biopharmaceutical company that is focused on developing treatments for serious inflammatory diseases. 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 September 30, 2026, we had an accumulated deficit of approximately $208.5 million and during the three months ended September 30, 2026, we incurred a net loss of $64.6 million.
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 development program. 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. 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 2032 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 September 30, 2026 have been prepared assuming we will continue as a going concern. During the nine months ended September 30, 2026, we incurred a net loss of $118.6 million and used $14.6 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 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 $25.5 million from equity issuances. However, the Company will require additional capital to continue operations and development of AT177.
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.
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 Legacy Azora, which are convertible into an aggregate of 12,930,601 shares of our common stock. Our stockholders approved such conversion on October 28, 2026, and, subject to certain beneficial ownership limitations, the outstanding shares of our Series A Preferred Stock automatically convert into shares of our common stock in accordance with the Certificate of Designation. On the same date, our stockholders approved the issuance of up to 11,780,948 shares of our common stock upon exercise of the outstanding Initial Closing Pre-Funded Warrants and up to 23,561,896 shares upon exercise of Milestone Warrants that may be issued in the future. We have filed a registration statement on Form S-3 to register for resale 25,148,970 shares of our common stock, including the shares issuable upon conversion of the Series A Preferred Stock and exercise of the Initial Closing Pre-Funded Warrants. Pursuant to our 2026 equity incentive plan, which became effective on September 17, 2026, our management is authorized to grant equity awards to our employees, officers, directors and consultants.
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At September 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 2,109,945 shares of common stock at a weighted average exercise price of $4.72 per share, (iii) 557,248 restricted stock units, (iv) pre-funded warrants to purchase 11,780,948 shares of common stock at an exercise price of $0.001 per share, and (v) 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, pre-funded warrants, restricted stock units and Series A Preferred Stock will have a dilutive effect on the percentage ownership held by holders of our common stock.
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 Legacy Azora differs from that of Legacy Adial’s AD04 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.
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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 Legacy 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 Legacy 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 AT177 and the Business Acquired from Legacy Azora
We have a limited operating history with respect to our lead product candidate, AT177, which we acquired from Legacy Azora and which 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.
Legacy Azora was founded in 2019 and was a pre-clinical stage biopharmaceutical company at the time of the Merger. Our 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 submit 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 the colon-targeted AhR program we acquired from Legacy Azora. If this program fails, we may not be able to recover the value attributed to Legacy 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 — the colon-targeted AhR program we acquired from Legacy Azora. 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 Legacy Azora in the Merger. Unlike a diversified pharmaceutical company with multiple product candidates across various stages of development, our post-Merger 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.
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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 our AhR program, and the loss of such personnel could materially harm our business.
The successful development of the AhR program is substantially dependent on the expertise and continued contributions of key scientific and management personnel, including Matthew Davidson, Ph.D., our President and Chief Executive Officer and a co-founder of Legacy Azora. 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 Legacy 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 Legacy Azora and significantly expand our 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, Legacy Adial’s development activities were focused on its AD04 program, which is at a different stage and involves a different therapeutic area than the AhR program we acquired from Legacy Azora. 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 September 30, 2026 in transactions that were not registered under the Securities Act other than as previously reported in our Current Reports on Form 8-K.
(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 September 30, 2026, no director or officer of the Company
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Item 6. Exhibits
The exhibit index set forth below is incorporated by reference in response to this Item 6.
| 2.1 | Agreement and Plan of Merger, dated June 11, 2026 by and among Adial Pharmaceuticals, Inc., Adial First Merger Sub, Inc., Adial Second Merger Sub, LLC and Azora Therapeutics, Inc. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on June 11, 2026). | |
| 3.1 | Certificate of Incorporation of Adial Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1, File No. 333-220368, filed with the Securities and Exchange Commission on October 25, 2017). | |
| 3.2 | Amended and Restated Bylaws of Adial Pharmaceuticals, Inc., dated February 22, 2022 (Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K, File No. 001-38323, filed with the Securities and Exchange Commission on March 28, 2022). | |
| 3.3 | Certificate of Amendment to Certificate of Incorporation of Adial Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on August 4, 2023). | |
| 3.4 | Certificate of Amendment to Certificate of Incorporation of Adial Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on August 1, 2025). | |
| 3.5 | Certificate of Amendment to Certificate of Incorporation of Adial Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on February 4, 2026). | |
| 3.6 | Certificate of Designation of Series A Non-Voting Convertible Preferred Stock, dated June 11, 2026. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on June 11, 2026). | |
| 3.7 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company, effective October 28, 2026 (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on October 28, 2026). | |
| 4.2 | Form of Warrant (Financing) (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on June 11, 2026). | |
| 4.3 | Form of Pre-Funded Warrant (Note Exchange) (Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on June 11, 2026). | |
| 4.4 | Form of Warrant (Note Exchange) (Incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on June 11, 2026). | |
| 10.1# | Form of Restricted Stock Award Agreement under 2017 Equity Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on April 9, 2026) | |
| 10.2+ | Form of Securities Purchase Agreement, dated as of June 11, 2026, by and among Adial Pharmaceuticals, Inc. and each investor listed on Exhibit A thereto (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on June 11, 2026). | |
| 10.3+ | Form of Exchange Agreement, dated as of June 11, 2026, by and among Adial Pharmaceuticals, Inc. and each note holder listed on Exhibit A thereto (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on June 11, 2026). | |
| 10.4 | Form of Registration Rights Agreement, by and among Adial Pharmaceuticals, Inc. and the investors signatory thereto (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on June 11, 2026). | |
| 10.5 | Amendment to Amended and Restated Employment Agreement between Adial Pharmaceuticals, Inc. and Cary J. Claiborne, effective June 11, 2026 (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on June 11, 2026). |
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| 10.6 | Amendment to Employment Agreement between Adial Pharmaceuticals, Inc. and Tony Goodman, effective June 11, 2026 (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on June 11, 2026). | |
| 10.7 | Amendment to Employment Agreement between Adial Pharmaceuticals, Inc. and Vinay Shah, effective June 11, 2026 (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K, File No. 001-38323, filed with the Securities and Exchange Commission on June 11, 2026). | |
| 10.8# | Amended and Restated Employment Agreement, dated June 11, 2026, by and between Adial Pharmaceuticals, Inc. and Matthew Davidson (Incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q, File No. 001-38323, filed with the Securities and Exchange Commission on August 14, 2026). | |
| 10.9# | Form of Stock Option Inducement Award Grant Notice and Agreement (Incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q, File No. 001-38323, filed with the Securities and Exchange Commission on August 14, 2026). | |
| 10.10# | Form of Restricted Stock Unit Inducement Award Grant Notice and Agreement (Incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q, File No. 001-38323, filed with the Securities and Exchange Commission on August 14, 2026). | |
| 10.11# | Notice of Termination and Release and Waiver, dated August 11, 2026, by and between Adial Pharmaceuticals, Inc. and Tony Goodman (Incorporated by reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q, File No. 001-38323, filed with the Securities and Exchange Commission on August 14, 2026). | |
| 10.12 | Amendment No. 1 to Securities Purchase Agreement, dated August 12, 2026, by and between Adial Pharmaceuticals, Inc. and the investor signatories thereto (Incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q, File No. 001-38323, filed with the Securities and Exchange Commission on August 14, 2026). | |
| 31.1* | Certification by principal executive officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification by principal financial officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1* | Certification by principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2* | Certification by principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the inline XBRL document) |
| * | Filed herewith |
| ** | Furnished herewith. |
| # | Indicates a management contract or compensatory plan or arrangement. |
| + | 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 report to be signed on its behalf by the undersigned thereunto duly authorized.
| AZORA THERAPEUTICS, INC. | ||
| By: | /s/ Matthew G. Davidson | |
| Name: | Matthew G. Davidson | |
| Title: | President and Chief Executive Officer (Principal Executive Officer) | |
| By: | /s/ Celia Economides | |
| Name: | Celia Economides | |
| Title: | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
Dated: November 12, 2026
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