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 as one 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.