ADIAL PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1 — DESCRIPTION OF BUSINESS

Adial Pharmaceuticals, Inc. (“Adial” or the “Company”) was converted, from a limited liability company formed on November 23, 2010 in the Commonwealth of Virginia under the name Adial Pharmaceuticals, LLC, to a corporation and reincorporated in Delaware on October 5, 2017. On June 11, 2026, the Company completed its previously announced acquisition of Azora Therapeutics, Inc. (“Azora”) pursuant to an Agreement and Plan of Merger, dated June 11, 2026 (the “Merger Agreement”), by and among Adial, Adial Merger Sub, Inc. (“First Merger Sub”), Adial Second Merger Sub, LLC (“Second Merger Sub”) and Azora. Pursuant to the Merger Agreement, First Merger Sub merged with and into Azora, with Azora surviving as a wholly owned subsidiary of Adial (the “First Merger”). Immediately following the First Merger, Azora merged with and into Second Merger Sub, with Second Merger Sub surviving as a wholly owned subsidiary of Adial and the Second Merger Sub changing its name to “Azora Therapeutics, LLC” (the “Second Merger” and, together with the First Merger, the “Merger”). The Merger was accounted for as the consolidation of a variable interest entity (“VIE”), as the Company was determined to be the primary beneficiary of a VIE that is not a business.

The Merger brought Azora’s lead investigational candidate, AT177, into Adial’s pipeline. Adial has historically focused on developing medications for the treatment or prevention of addictions and related disorders. Following the Merger, the Company’s focus has shifted and its lead program is now Azora’s lead asset, AT177, a proprietary, fully-synthetic, oral, colon-targeted AhR agonist in development for the treatment of ulcerative colitis.

2 — GOING CONCERN AND OTHER UNCERTAINTIES

These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern. The Company is in a development stage and has incurred losses each year since inception and expects to continue to incur losses based on the current development plans for AT177 and AD04 in both the U.S. and international markets and other operating requirements.

The Company will need additional financing to support its continuing operations and pursue its current strategy. Until such time as the Company can generate significant revenue from product sales, if ever, it expects to finance its operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. The Company may be unable to raise additional funds or enter into such other agreements when needed on favorable terms or at all. The inability to raise capital as and when needed would have a negative impact on the Company’s financial condition and its ability to pursue its business strategy

Shares of the Company’s Series A Non-Voting Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred Stock”), that were issued pursuant to the terms of the Merger Agreement are subject to automatic conversion into shares of Company common stock upon the third business day following the Company’s receipt of stockholder approval. The Certificate of Designation of Preferences, Rights and Limitations of the Series A Non-Voting Convertible Preferred Stock (the “Certificate of Designation”) provides that, at any time following the earlier of (i) such stockholder approval or (ii) December 11, 2026, if the Company fails to timely deliver shares of common stock to a converting holder in accordance with the terms of the Certificate of Designation, such holder may require the Company to pay cash in an amount equal to the fair value of the undelivered shares.

The Company’s ability to satisfy these potential cash settlement obligations is not entirely within its control, as it is contingent on, among other things, the Company’s ability to obtain stockholder approval of the conversion of the shares of Series A Preferred Stock into common stock and to deliver shares of common stock upon conversion of shares of Series A Preferred Stock within the timeframes required by the Certificate of Designation. If the Company is unable to obtain stockholder approval in a timely manner, or is otherwise unable to timely deliver shares of common stock upon conversion, holders who submit conversion notices after the applicable trigger date could require the Company to make significant cash payments that could substantially reduce the Company’s available cash resources. After evaluating the conditions described above in the aggregate, the Company has concluded that there is substantial doubt about its ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern within the twelve months after the date that these unaudited condensed consolidated financial statements are issued, which contemplates it will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

Other Uncertainties

Generally, the industry in which the Company operates subjects the Company to a number of other risks and uncertainties that can affect its operating results and financial condition. Such factors include, but are not limited to: the timing, costs and results of clinical trials and other development activities versus expectations; the ability to obtain regulatory approval to market product candidates; the ability to manufacture products successfully; competition from products sold or being developed by other companies; the price of, reimbursement of, and demand for, Company products once approved; the ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products.

3 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of these unaudited condensed consolidated financial statements in conformity with GAAP requires Company management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of these financial statements and the reported amounts of expenses during the reporting period. Actual results might differ from these estimates.

Significant items subject to such estimates and assumptions include accruals associated with third party providers supporting clinical trials, milestone warrant rights liabilities, and income tax asset realization.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP, as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and with the instructions to Form 10-Q of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited interim condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results of operations for the periods presented. The interim operating results are not necessarily indicative of results that may be expected for any subsequent period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2025, included in the Annual Report on Form 10-K for the year ended December 31, 2025, filed with the Securities and Exchange Commission on March 5, 2026 (the “2025 Form 10-K”).

The accompanying unaudited interim condensed consolidated financial statements include the consolidated accounts of the Company and its wholly-owned subsidiary, Azora Therapeutics, LLC, as of June 30, 2026. All significant intercompany transactions have been eliminated.

Reverse Stock Split

On February 5, 2026, the Company effected a reverse stock split of the outstanding shares of common stock, trading on Nasdaq under the symbol ADIL, at a ratio of 1-for-25. The number of shares of common stock authorized for issuance under the Company’s charter remained at 100,000,000 common stock and the number of shares of preferred stock authorized for issuance under the Company’s charter remained at 5,000,000 shares. The Company has retrospectively adjusted all references to common stock, stock warrants to purchase common stock, stock options to purchase common stock, share data, per share data and related information contained in the unaudited condensed consolidated financial statements.

Basic and Diluted Loss per Share

Basic and diluted loss per share are computed based on the weighted-average outstanding shares of common stock, pre-funded warrants are included in basic loss per share as the exercise price is de-minus. Diluted net loss per share is computed giving effect to all proportional shares of common stock, including stock options, restricted stock, preferred stock and warrants to the extent dilutive. Basic net loss per share was the same as diluted net loss per share for the three and six months ended June 30, 2026 and 2025, as the inclusion of all potential common shares outstanding would have an anti-dilutive effect.

The total potentially dilutive common shares that were excluded for the three months periods ended June 30, 2026 and 2025 were as follows:

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At times, the Company’s cash balances may exceed the current insured amounts under the Federal Deposit Insurance Corporation (the “FDIC”). At June 30, 2026, the Company exceeded FDIC insurance limits in its insured bank accounts by approximately $3.4 million and held approximately $24.8 million in non-FDIC insured cash equivalent accounts. Included in cash equivalents are money market investments with original maturity dates when purchased less than ninety days and are carried at fair value. Unrealized gain or loss are included in the interest income and are immaterial to the consolidated financial statements. At December 31, 2025, the Company did exceed FDIC insurance limits in its insured bank accounts by approximately $17,000 and held approximately $5.6 million in non-FDIC insured cash equivalent accounts.

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:

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 asone operating segment with a focus on drug development for developing aryl hydrocarbon receptor agonists to treat autoimmune diseases, including ulcerative colitis, and medications for the treatment or prevention of addiction and related disorders. The Company’s Chief Executive Officer, as its chief operating decision maker (“CODM”), manages and allocates resources to the operations of the Company’s on a consolidated basis. The CODM assesses performance and allocates resources based on the Company’s statements of operations and key components and processes of the Company’s operations are managed centrally. Segment asset information is not used by the CODM to allocate resources. This enables the Company’s Chief Executive Officer to assess its overall level of available resources and determine how best to deploy these resources across research and development projects in line with the Company’s long-term company-wide strategic goals.

Milestone warrant rights liability

The Company accounts for its milestone warrant rights issued in connection with its Financing and Azora Note Exchange, as defined in Note 4, based upon the characteristics and provisions of the instrument. Milestone warrant rights that have been determined to be classified as liabilities are recorded on the balance sheet as a long-term liability at their fair value on the date of issuance and remeasured to fair value at each reporting period, with the changes in fair value recognized as gain or loss in the unaudited consolidated statements of operations. The Company adjusted the liability for changes in the fair value of these milestone warrant rights until the earlier of the exercise or expiration of these rights, or until such time as the milestone warrant rights are no longer considered a liability.

Variable Interest Entities

For entities that are variable interest entities (“VIEs”), as defined in ASC 810, the Company consolidates the entity if it is the primary beneficiary. The Company is the primary beneficiary of a VIE if it has (i) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (ii) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. The Company reassesses its VIE determinations and primary beneficiary conclusions on an ongoing basis, including upon the occurrence of a reconsideration event. When the Company consolidates a VIE that does not meet the definition of a business, it recognizes a gain or loss for the difference between the sum of (1) the fair value of consideration paid, (2) the fair value of any noncontrolling interests and (3) the reported amount of any previously held interest and the net amount of the VIE’s identifiable assets and liabilities recognized and measured in accordance with ASC 805.

Convertible Preferred Stock

The Company has classified its convertible preferred stock as temporary equity in the accompanying balance sheets due to cash settlement provisions that are outside of the control of the Company. Subsequent adjustments of the carrying values to the settlement values will be made only when it becomes probable that such a change in control event will occur. The Company did not accrete the carrying values of the convertible preferred stock to the settlement values as settlement is contingent on shareholder approval which is outside of the control of the Company.

Recent Accounting Pronouncements

In November 2024, the FASB issued Accounting Standards Update ASU 2024-03,Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This update would require a public entity to disclose information about purchases of inventory, employee compensation, depreciation, intangible asset amortization, and depletion for each income statement line item that contains those expenses. The amendments in this update are effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. Early adoption of the amendments is permitted for annual financial statements that have not yet been issued. The Company is in the process of evaluating the impact of this new guidance on its unaudited condensed consolidated financial statements.

In December 2025, the FASB issued (ASU) 2025-11,Interim Reporting (Topic 270): Narrow-Scope Improvements. The update is intended to improve the organization and navigability of interim reporting guidance in Accounting Standards Codification (ASC) Topic 270, compile all required interim disclosures into a centralized list, and establish an overarching disclosure principle requiring entities to disclose any events or changes occurring since the end of the most recent annual reporting period that have a material impact on the entity. The standard is effective for the Company for interim reporting periods within fiscal years beginning after December 15, 2027, with early adoption permitted in any interim period for which financial statements have not yet been issued. The amendments should be applied on a prospective basis. The Company is in the process of evaluating the impact of this new guidance on its unaudited condensed consolidated financial statements.

4 — ACQUISITION OF AZORA AND PIPE ISSUANCE

On June 11, 2026, the Company acquired Azora, in accordance with the terms of the Merger Agreement, by and among Adial, First Merger Sub, Adial Second Merger Sub and Azora. Pursuant to the Merger Agreement, First Merger Sub merged with and into Azora, with Azora surviving as a wholly owned subsidiary of Adial (the “First Merger”).

Immediately following the First Merger, in the Second Merger, Azora merged with and into Second Merger Sub, with Second Merger Sub surviving as a wholly owned subsidiary of Adial and the Second Merger Sub changing its name to “Azora Therapeutics, LLC”. At closing of the Merger, Adial issued to former Azora stockholders 437,421 shares of Adial’s common stock and 12,930.617 shares of Series A Preferred Stock. Each share of Series A Preferred Stock is convertible into 1,000 shares of Adial’s 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 Adial’s stockholders of the conversion thereof. Azora outstanding options to purchase Azora common stock were converted into options to purchase 1,177,782 shares of Adial’s common stock. The Merger was completed on June 11, 2026.

On June 11, 2026, in connection with and as a condition to closing of the Merger, Adial entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the purchasers named therein (the “PIPE Investors”), pursuant to which Adial issued and sold to the PIPE Investors, in a private placement transaction, at the initial closing on June 12, 2026 (the “Initial PIPE Closing”) pre-funded warrants (the “Initial Closing Pre-Funded Warrants”) to purchase up to an aggregate of 9,749,345 shares of Adial’s 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, Adial agreed to issue and sell to the PIPE Investors at one or more subsequent closings (each, a “Milestone Closing”), pre-funded warrants (“Milestone Pre-Funded Warrants”) to purchase up to an aggregate of 9,749,345 shares of Adial’s common stock and incentive warrants (“Milestone Incentive Warrants” and together with the Milestone Pre-Funded Warrants, the “Milestone Warrants”) having an exercise price of $2.7489 per share to purchase up to an aggregate of 9,749,345 shares of Adial’s common stock, at a combined purchase price equal to $2.7489 per Milestone Warrants, for an aggregate purchase price of up to $26.8 million. The issuance and sale of Initial Closing Pre-Funded Warrants and Milestone Warrants pursuant to the Purchase Agreement are collectively referred to as the “Financing.”

Pursuant to the terms of the Merger Agreement, upon the closing of the Merger, Adial agreed to guarantee the payment of $5.5 million in principal amount of certain outstanding amended and restated convertible promissory notes issued by Azora (the “Azora Notes”) to certain individuals (collectively, the “Former Azora Noteholders”). On June 11, 2026, Adial 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 Adial’s 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 Adial’s common stock and Milestone Incentive Warrants having an exercise price of $2.7489 per share to purchase up to an aggregate of 2,031,603 shares of Adial’s common stock, 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. The Company accounted for the Azora Note Exchange as a debt extinguishment and an extinguishment loss of $6.1 million was recognized based upon the difference between the reacquisition price and the net carrying amount of the Azora Notes. The reacquisition price is equal to the fair value of the Initial Closing Pre-Funded Warrants to purchase an aggregate of 2,031,603 shares of Adial’s common stock and the liability classified rights to participate in Milestone Closings to purchase Milestone Pre-Funded Warrants to purchase up to an aggregate of 2,031,603 shares of Adial’s common stock and Milestone Incentive Warrants having an exercise price of $2.7489 per share to purchase up to an aggregate of 2,031,603 shares of Adial’s common stock issued upon the Azora Note Exchange and the net carrying amount is equal to the principal and accrued interest amount of the Azora Notes.

Subject to the receipt of stockholder approval of the conversion of the shares of Series A Preferred issued in the Merger into shares of Adial’s common stock, each share of Series A Preferred Stock will automatically convert into 1,000 shares of common stock, subject to certain beneficial ownership limitations established by each holder. As a result of the Merger, Financing and Azora Note Exchange (collectively, the “Transactions”), equityholders of Adial immediately prior to the Merger owned approximately 7.7% of Adial’s common stock, equityholders of Azora immediately prior to the acquisition owned approximately 51.0% of Adial’s common stock and the investors in the Financing, including the Azora Noteholders, owned approximately 41.3% of Adial’s common stock, in each case calculated on a fully-diluted, as-converted-basis (and without giving effect to any beneficial ownership limitations) using the treasury stock method and based on the implied equity values of Adial and Azora.

Upon the closing of the Merger on June 11, 2026, the Company evaluated its relationship with Azora under ASC 810, and determined that Azora is a VIE in which the Company holds a variable interest. The Company concluded it is the primary beneficiary of Azora because it has (i) the power to direct the activities of Azora that most significantly affect Azora’s economic performance and (ii) the obligation to absorb losses of, or the right to receive benefits from, Azora that could potentially be significant to Azora. Accordingly, the Company consolidates Azora in its unaudited condensed consolidated financial statements in accordance with ASC 810-10-25 as the accounting acquirer.

Because Azora does not meet the definition of a business under ASC 805, the Company measured the assets acquired and liabilities assumed upon initial consolidation as required by ASC 810-10-30-4 for the initial consolidation of a VIE that is not a business. Under this guidance, the identifiable assets acquired and liabilities assumed were recognized and measured at fair value in accordance with the recognition and measurement principles of ASC 805-20; no goodwill was recognized, as goodwill recognition is prohibited when consolidating a VIE that is not a business. Fair value of the identifiable net assets acquired, and accordingly no gain or loss was recognized under ASC 810-10-30-4. Acquired IPR&D that has no alternative future use was expensed immediately upon consolidation.

The estimated fair value of the consideration transferred of $41.5 million is summarized as follows (in thousands):

The fair value of the consideration transferred was measured using the price per pre-funded warrant the investors paid as part of the Financing. The Assumed Options reflects the portion of the acquisition date fair-value based measure that relates to the pre-combination service period.

The following table summarizes the allocation of the estimated fair value of the consideration transferred to the net assets acquired by the Company (in thousands):

5 — FAIR VALUE MEASUREMENTS

The Company issued milestone warrant rights as part of Financing and Azora Note Exchange described in Note 4. Milestone is referred as either specified clinical development milestones, including the Company’s announcement that the first patient has been dosed in a Phase 1 clinical trial of AT177 (or IND acceptance) or a specific market milestone, the achievement of a volume-weighted average stock price equal to or greater than 400% of the purchase price ($10.9956 per share) for ten consecutive trading days within any thirty-trading-day measurement period. Regardless of whether a milestone event has occurred, each investor has the right to complete a milestone closing and receive the milestone warrants at any time following the initial closing date and prior to the date that is 30 calendar days following the milestone event notice date.

Because the number of shares underlying the Milestone Warrants to be issued varies based on the number of investors who wish to participate, such that the underlying number of shares is not indexed solely to the Company’s own stock, the Milestone Warrants are classified as financial liabilities under ASC 480,Distinguishing Liabilities from Equity, and ASC 815,Derivatives and Hedging. The liability is recorded at fair value upon issuance and remeasured at fair value at each reporting date, with changes in fair value recognized in Other income (expense), net in the Unaudited Condensed Consolidated Statements of Operation

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:

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.

The following table summarizes the key quantitative inputs utilized in the Monte Carlo simulation to estimate the fair value of the Milestone warrant rights liability as of June 11, 2026, June 30, 2026 and December 31, 2025:

The following table presents the changes in the fair value of the Level 3 Milestone warrant rights liability for the six months ended June 30, 2026 and 2025*(in thousands)*:

As of December 31, 2025, there were no financial assets and liabilities measured at fair value. During the three and six months ended June 30, 2026 and 2025, there were no transfers between levels.

6 — EQUITY METHOD INVESTMENTS

The Company held a weighted average of 10.3% of Adovate’s equity during the six months ended March 31, 2026. At June 30, 2026, the Company held 10.3% of Adovate’s outstanding equity.

Activity recorded for the Company’s equity method investment in Adovate during the six months ended June 30, 2026 is summarized in the following table (in thousands):

At June 30, 2026, the Company’s maximum exposure to loss through its equity method investment is limited to the value of its equity.

Consideration for the sale of the assets of Purnovate, Inc. to Adovate also included contingent payments based on the occurrence of certain milestone events and a contingent royalty on future sales. The Company recognized $150,000 in other income for a milestone achieved and payment received during the three months ended March 31, 2025.

7 — ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

As of June 30, 2026, included in employee compensation was an accrual of approximately $1.0 million, which was related to severance and benefits for certain positions of the Company that were being eliminated as part of the Merger with Azora.

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 13,000 shares of Series A Preferred Stock, par value of $0.001 per share, and the Company filed the Certificate of Designation with the Secretary of State of the State of Delaware.

Under the terms of the Merger Agreement, the Company issued to the former stockholders of Azora an aggregate of 12,930.617 shares of Series A Preferred Stock, representing 12,930,617 shares of Company common stock on an as-converted basis and without giving effect to any beneficial ownership limitations.

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 1,000 shares of Company common stock, subject to certain beneficial ownership limitations established by each holder and the Certificate of Designation. As the Series A Preferred Stock contains a cash settlement provision that is outside the control of the Company, the Series A Preferred Stock is classified in temporary equity.

The holders of Series A Preferred Stock have the following rights, preferences and privileges:

Ranking

The Series A Preferred Stock ranks pari passu with the common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.

Voting Rights

Except as otherwise required by the General Corporation Law of the State of Delaware, holders of the Series A Preferred Stock shall have no voting rights; provided, however, as long as any shares of Series A Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the majority of outstanding shares of Series A Preferred Stock (i) alter or change adversely the powers, preferences or rights given to the Series A Preferred Stock, (ii) issue further shares of Series A Preferred Stock or increase or decrease the number of authorized shares of Series A Preferred Stock, (iii) prior to receipt of stockholder approval of the conversion of the shares of Series A Preferred Stock, consummate either a merger or consolidation or other business combination in which stockholders of the Company do not hold at least a majority of the voting power, (iv) prior to receipt of stockholder approval of the conversion of the shares of Series A Preferred Stock, authorize or issue any class or series of stock that has powers, preferences or rights that are senior to those of the Series A Preferred Stock, or (v) amend, waive or modify the Merger Agreement in any manner that would be reasonably likely to prevent, impede or materially delay the stockholder approval or conversion of Series A Preferred Stock.

Dividends

Holders of outstanding shares of Series A Preferred Stock are entitled to receive dividends on shares of Series A Preferred Stock, on an as-if-converted to common stock basis, equal to and in the same form and manner as dividends paid on shares of common stock.

Liquidation Preference

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the holders of shares of the Series A Preferred Stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the Series A Preferred Stock were fully converted to common stock and amounts shall be paid pari passu with all holders of Common Stock, plus an additional amount equal to any dividends declared on but unpaid to such shares.

Cash Settlement

The Series A Preferred Stock does not have redemption rights. However, if (i) the Company fails to obtain shareholder approval within six months of the initial issuance of Series A Preferred Stock or (ii) the Company fails to deliver to timely deliver to the holder shares of common stock upon conversion of shares of the Series A Preferred stock by such holder, shares of Series A Preferred Stock become eligible for cash settlement at the option of the holder for a fair value equal to the closing price of the Company’s common stock on the last trading day prior to the date that the notice for cash settlement is delivered from the holder to the Company.

Conversion

Each share of Series A Preferred Stock shall automatically convert at a conversion ratio of 1,000 shares of common stock for each share of Series A Preferred Stock on the third business day after stockholder approval of the conversion of the Series A Preferred Stock into shares of common stock, subject to certain beneficial ownership limitations. If any shares of Series A Preferred Stock continue to be outstanding following such automatic conversion due to a beneficial ownership limitation, such shares of Series A Preferred Stock will be convertible at the option of the holder, subject to such beneficial ownership limitations.

9 — STOCKHOLDERS’ EQUITY

On August 1, 2025, the Company’s stockholders approved, and the Company filed with the Secretary of State of the State of Delaware, an amendment to the Company’s Certificate of Incorporation to increase the authorized number of shares of the Company’s common stock, from 50,000,000 to 100,000,000.

During the six months ended June 30, 2026, the Company issued 216,960 shares of common stock from shares held in abeyance related to the exercise of warrants in November 2025.

During the six months ended June 30, 2026, the Company issued 437,421 shares of common stock to the former Azora stockholders, see Note 4.

Standby Equity Purchase Agreement

On December 13, 2024, the existing Equity Purchase Agreement that the Company entered into with Alumni Capital, LP (“Alumni”), dated May 31, 2023, was cancelled by mutual agreement. Simultaneously, the Company and Alumni entered into a new Equity Purchase Agreement (the “New SEPA”) on substantially the same terms, but with an initial right to sell Alumni up to $5,000,000 in newly issued shares and an end date of the commitment period of December 31, 2026. Upon the Company’s entry into and subject to the terms and conditions set forth in the New SEPA,2,752 shares of common stock were issued to Alumni as consideration for its irrevocable commitment to purchase shares of common stock, pursuant to the New SEPA. During the three months ended June 30, 2026, no shares were sold under the terms of the New SEPA, leaving a remaining $4.9 million to be sold under the New SEPA.

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 $4,983,000 which is based on the limitations of such offerings under SEC regulations. The ATM provides that the Company will pay AGP commissions for its services in acting as agent in the sale of shares of common stock pursuant to the ATM. AGP will be entitled to compensation at a fixed commission rate of 3.0% of the gross proceeds from the sale of shares of common stock pursuant to the ATM. During the six months ended June 30, 2026, the Company sold 725,684 shares of common stock under the ATM for net proceeds of approximately $1.2 million.

2017 Equity Incentive Plan

On October 9, 2017, the Company adopted the Adial Pharmaceuticals, Inc. 2017 Equity Incentive Plan (the “2017 Equity Incentive Plan”); which became effective on July 31, 2018. Under the 2017 Equity Incentive Plan, the Company may grant equity-based awards to individuals who are employees, officers, directors, or consultants of the Company. Options issued under the Plan will generally expire ten years from the date of grant and vest over a three-year period.

On August 1, 2025, the Company’s stockholders approved an amendment to the Company’s 2017 Equity Incentive Plan to increase the number of shares of common stock authorized for grant under the plan from 80,000 to 200,000. At June 30, 2026, the Company had 3,330 shares issuable under the 2017 Equity Incentive Plan.

Assumed Options from Acquisition of Azora

On June 11, 2026, in connection with the Acquisition of Azora, the Company assumed all outstanding and unexercised stock options to purchase Azora stock, resulting in the option holders having the right to purchase an aggregate of 1,177,782 shares of Company common stock. The Assumed Options were converted into options to purchase shares of the Company’s common stock using an exchange ratio of approximately 0.319, with exercise prices ranging from $0.53 to $1.57 per share on an as-converted basis. The Company recognized $1.7 million representing the fair value of the Assumed Options attributable to the pre-combination service period as part of the consideration transferred. The remaining unrecognized compensation expense associated with the unvested Assumed Options will be recognized over their remaining service periods, which range from approximately 0.75 to 3.9 years, provided that no portion of the Options will vest prior to the date the Company receives stockholder approval of the transaction related matters, and the Options will be subject to catch up vesting for any awards that would have otherwise vested prior to receipt of stockholder approval. These stock options were granted outside of the 2017 Plan as an inducement material to each employee’s acceptance of employment with the Company. See Note 4 for additional information regarding the Merger.

Inducement Grants

The Company granted inducement non-statutory stock options to purchase an aggregate of 557,249 shares of common stock to, the Company’s newly appointed chief development officer and executive vice president of strategy respectively, on June 12, 2026, at an exercise price of $2.98 per share, as a material inducement to entering employment with the Company. These options will vest as follows: (i) with respect to 305,136, pro rata on a monthly basis over three years commencing on the one month anniversary of the effective grant date thereof and (ii) with respect to 252,113 options, on a pro rata portion of such options will be subject to the same vesting included in (i) upon the sale and issuance by the Company of the Milestone Warrants, subject to catch up vesting for any awards that would have otherwise vested prior to issuance of such Milestone Warrants; provided that no portion of the Options will vest prior to the date the Company receives stockholder approval of the transaction related matters, and the Options will be subject to catch up vesting for any awards that would have otherwise vested prior to receipt of stockholder approval. These stock options were granted outside of the 2017 Plan as an inducement to each employee’s acceptance of employment with the Company.

Stock Options

The following table provides the stock option activity for the three and six months ended June 30, 2026:

At June 30, 2026, the total intrinsic value of the outstanding options was $1,925,371.

The Company used the Black Scholes valuation model to determine the fair value of the options issued and assumed in the acquisition of Azora, using the following key assumptions for the six months ended June 30, 2026 and 2025:

As of June 30, 2026, there was $2,980,300 of total time-based unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted average period of 3.1 years.

The components of stock-based compensation expense included in the Company’s Unaudited Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2026 and 2025 are as follows (in thousands):

Restricted Stock

The Company has granted restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) with service-based and performance vesting conditions.

The following is a summary of the RSUs which were granted outside of the 2017 Equity Incentive Plan as inducement grants, during the three and six months ended June 30, 2026:

On June 11, 2026, the Company granted 557,248 RSUs which are included in the table above to newly appointed executives of the Company. These RSUs will vest as follows: (i) with respect to 305,136 RSUs, pro rata on a monthly basis over three years commencing on the one month anniversary of the effective grant date thereof and (ii) with respect to 252,112 RSUs, on a pro rata portion of such awards will be subject to the same vesting included in (i) upon the sale and issuance by the Company of the Milestone Warrants, subject to catch up vesting for any awards that would have otherwise vested prior to issuance of such Milestone Warrants; provided that no portion of the RSUs will vest prior to the date the Company receives stockholder approval of the transaction related matters, and the RSUs will be subject to catch up vesting for any awards that would have otherwise vested prior to receipt of stockholder approval.

On April 7, 2026, the Company issued an aggregate of 134,815 RSAs to the Company’s named executive officers, employees and directors, with a weighted average grant date fair value of $1.64. The RSAs vest in full on the earlier of (i) the one-year anniversary of the grant date and (ii) upon the occurrence of a Change of Control (as defined in the 2017 Plan).

As of June 30, 2026, unrecognized stock-based compensation expense associated with the RSUs and RSAs was $1,803,600 and is expected to be recognized over a weighted-average period of 2.6 years.

Common Stock Warrants

The following table provides the activity for common stock warrants for the three and six months ended June 30, 2026:

Pre-Funded Warrants

The Following table provides the activity for pre-funded warrants for the three and six months ended June 30, 2026:

The pre-funded warrants were issued in accordance with the private placement transaction and conversion of Azora’s convertible notes, and have no expiration date, see Note 4 for further information.

10 — COMMITMENTS AND CONTINGENCIES

License with University of Virginia Patent Foundation

In January 2011, the Company entered into an exclusive, worldwide license agreement with the University of Virginia Patent Foundation, dba UVA Licensing and Ventures Group (“UVA LVG”) for rights to make, use or sell licensed products in the United States based upon the ten separate patents and patent applications made and held by UVA LVG.

As consideration for the rights granted in the UVA LVG License, the Company is obligated to pay UVA LVG yearly license fees and milestone payments, as well as a royalty based on net sales of products covered by the patent-related rights. More specifically, the Company paid UVA LVG a license issue fee and is obligated to pay UVA LVG (i) annual minimum royalties of $40,000 commencing in 2017; (ii) a $20,000 milestone payments upon dosing the first patient under a Phase 3 human clinical trial of a licensed product, $155,000 upon the earlier of the completion of a Phase 3 trial of a licensed product, partnering of a licensed product, or sale of the Company, $275,000 upon acceptance of a New Drug Application by the FDA, and $1,000,000 upon approval for sale of AD04 in the U.S., Europe or Japan; as well as (iii) royalties equal to a 2% and 1% of net sales of licensed products in countries in which a valid patent exists or does not exist, respectively, with royalties paid quarterly. In the event of a sublicense to a third party, the Company is obligated to pay royalties to UVA LVG equal to a percentage of what the Company would have been required to pay to UVA LVG had it sold the products under sublicense itself. In addition, the Company is required to pay to UVA LVG 15% of any sublicensing income. A certain percentage of these payments by the Company to UVA LVG may then be distributed to the Company’s former Chairman of the Board and former Chief Medical Officer in his capacity as inventor of the patents by the UVA LVG in accordance with their policies at the time.

The license agreement may be terminated by UVA LVG upon sixty (60) days written notice if the Company breaches its obligations thereunder, including failing to make any milestone, failure to make required payments, or the failure to exercise diligence to bring licensed products to market. In the event of a termination, the Company will be obligated to pay all amounts that accrued prior to such termination. The Company is required to use commercially reasonable efforts to achieve the goals of submitting a New Drug Application to the FDA for a licensed product by March 31, 2028 and commencing commercialization of an FDA approved product by March 31, 2029. If the Company were to fail to use commercially reasonable effort and fail to meet either goal, the licensor would have the right to terminate the license.

The term of the license continues until the expiration, abandonment or invalidation of all licensed patents and patent applications, and following any such expiration, abandonment or invalidation will continue in perpetuity on a royalty-free, fully paid basis.

During the three months ended June 30, 2026 and 2025, the Company recognized a $10,000 minimum license royalty expense under this agreement. During the six months ended June 30, 2026 and 2025, the Company recognized a $20,000 minimum license royalty expense under this agreement. At June 30, 2026 and December 31, 2025, total accrued royalties and fees due to UVA LVG were $60,000 and $40,000, respectively.

Litigation

The Company is subject, from time to time, to claims by third parties under various legal disputes. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition, and cash flows. As of June 30, 2026, the Company did not have any pending legal actions.

11 — SEGMENT REPORTING

The Company hasone reportable operating segment relating to developing aryl hydrocarbon receptor agonists to treat autoimmune diseases, including ulcerative colitis, and drug development for addiction and related disorders. When evaluating the Company’s financial performance, the CODM reviews total operating expenses for the operating segment excluding equity method investments. The CODM makes decisions using this information on a company-wide basis.

Significant segment expenses, as provided to the CODM, are presented below: