Connect Biopharma Holdings Ltd 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 199 ) 109 Consolidated Balance Sheets as of December 31, 2024 and 2023 110 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2024 and 2023 111 Consolidated Statements of Shareholders ’ Equity for the Years Ended December 31, 2024 and 2023 112 Consolidated Statements of Cash Flows for the Years Ended December 31, 2024 and 2023 113 Notes to Consolidated Financial Statements 114 108 TABLE OF CONTENTS Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Connect Biopharma Holdings Limited Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Connect Biopharma Holdings Limited (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ CBIZ CPAs P.C. CBIZ CPAs P.C . We have served as the Company’s auditor since 2024. New York, NY March 31, 2025 109 TABLE OF CONTENTS CONNECT BIOPHARMA HOLDINGS LIMITED CONSOLIDATED BALANCE SHEETS (In thousands, except par value and share amounts) December 31, 2024 2023 ASSETS Current assets: Cash and cash equivalents $ 78,232 $ 105,663 Short-term investments 15,476 12,640 Accounts receivable, net 789 — Prepaid expenses and other current assets 2,464 4,250 Total current assets 96,961 122,553 Property and equipment, net 4,048 4,274 Right-of-use lease assets, net 189 462 Intangible assets, net 53 62 Other assets 33 24 Total assets $ 101,284 $ 127,375 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 342 $ 2,209 Accrued liabilities 7,802 9,479 Contract liabilities 164 13,320 Current lease liabilities 154 285 Total current liabilities 8,462 25,293 Non-current lease liabilities 24 180 Other non-current liabilities 632 405 Total liabilities 9,118 25,878 Commitments and contingencies (see Note 6) Shareholders' equity: Preferred shares, $ 0.000174 par value: 40,000,000 shares authorized; no shares issued or outstanding at December 31, 2024 and 2023 — — Ordinary shares, $ 0.000174 par value; 400,000,000 shares authorized; 55,349,208 shares issued and outstanding at December 31, 2024 and 55,102,954 shares issued and outstanding at December 31, 2023 10 10 Additional paid-in capital 439,357 432,402 Accumulated other comprehensive loss ( 1,666 ) ( 1,008 ) Treasury shares ( 180 ) ( 180 ) Accumulated deficit ( 345,355 ) ( 329,727 ) Total shareholders' equity 92,166 101,497 Total liabilities and shareholders' equity $ 101,284 $ 127,375 See accompanying Notes to Consolidated Financial Statements. 110 TABLE OF CONTENTS CONNECT BIOPHARMA HOLDINGS LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except per share amounts) Years Ended December 31, 2024 2023 Revenue: License and collaboration revenues $ 26,033 $ — Total revenue 26,033 — Operating expenses: Research and development expense 29,256 53,002 General and administrative expense 19,229 16,054 Total operating expenses 48,485 69,056 Loss from operations ( 22,452 ) ( 69,056 ) Other income, net: Interest income 4,453 5,223 Other income (expense) 2,594 1,847 Total other income, net 7,047 7,070 Net loss before income tax ( 15,405 ) ( 61,986 ) Income tax expense 223 120 Net loss $ ( 15,628 ) $ ( 62,106 ) Other comprehensive loss: Foreign currency translation adjustments ( 670 ) ( 614 ) Unrealized gains on available-for-sale investments 12 354 Comprehensive loss $ ( 16,286 ) $ ( 62,366 ) Basic and diluted net loss per ordinary share $ ( 0.28 ) $ ( 1.13 ) Weighted-average ordinary shares outstanding, basic and diluted 55,213 55,067 See accompanying Notes to Consolidated Financial Statements. 111 TABLE OF CONTENTS CONNECT BIOPHARMA HOLDINGS LIMITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Ordinary Shares Additional Paid-In Capital Accumulated Other Comprehensive Loss Treasury Accumulated Deficit Total Shareholders' Equity Shares Amount Shares Balance, December 31, 2022 55,041 $ 10 $ 426,961 $ ( 748 ) $ ( 180 ) $ ( 267,621 ) $ 158,422 Issuance of ordinary shares under Employee Stock Purchase Plan 60 — 44 — — — 44 Issuance of ordinary shares upon exercise of stock options 2 — 1 — — — 1 Share-based compensation expense — — 5,396 — — — 5,396 Net loss — — — — — ( 62,106 ) ( 62,106 ) Net unrealized gains on available-for-sale investments — — — 354 — — 354 Foreign currency translation adjustments — — — ( 614 ) — — ( 614 ) Balance, December 31, 2023 55,103 10 432,402 ( 1,008 ) ( 180 ) ( 329,727 ) 101,497 Issuance of ordinary shares under Employee Stock Purchase Plan 45 — 33 — — — 33 Issuance of ordinary shares upon exercise of stock options 201 — 194 — — — 194 Share-based compensation expense — — 6,728 — — — 6,728 Net loss — — — — — ( 15,628 ) ( 15,628 ) Net unrealized gains on available-for-sale investments — — — 12 — — 12 Foreign currency translation adjustments — — — ( 670 ) — — ( 670 ) Balance, December 31, 2024 55,349 $ 10 $ 439,357 $ ( 1,666 ) $ ( 180 ) $ ( 345,355 ) $ 92,166 See accompanying Notes to Consolidated Financial Statements. 112 TABLE OF CONTENTS CONNECT BIOPHARMA HOLDINGS LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, 2024 2023 Operating activities: Net loss $ ( 15,628 ) $ ( 62,106 ) Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation expense 6,728 5,396 Depreciation and amortization 660 720 Realized gain on available-for-sale investments — ( 1 ) Accretion of discounts on available-for-sale investments ( 123 ) ( 1,703 ) Impairment of property and equipment 232 — Loss on disposal of property and equipment 9 — Loss on disposal of land use rights — 102 Change in operating assets and liabilities: Accounts receivable, net ( 789 ) — Prepaid expenses and other assets 1,786 3,694 Other non-current assets — 238 Accounts payable ( 1,867 ) ( 1,136 ) Accrued liabilities ( 1,677 ) ( 6,078 ) Contract liabilities ( 13,156 ) 13,320 Operating leases ( 14 ) ( 5 ) Other non-current liabilities 227 ( 182 ) Net cash used in operating activities ( 23,612 ) ( 47,741 ) Investing activities: Purchases of short-term investments ( 15,451 ) ( 31,027 ) Proceeds from maturities and sales of short-term investments 12,750 103,145 Purchases of property and equipment ( 750 ) ( 81 ) Proceeds from sale of land use rights — 2,941 Proceeds from sale of property and equipment — 2 Net cash (used in) provided by investing activities ( 3,451 ) 74,980 Financing activities: Proceeds from shares issued under the Employee Share Purchase Plan 33 44 Proceeds from exercise of stock options 194 1 Net cash provided by financing activities 227 45 Effect of exchange rate changes on cash and cash equivalents ( 595 ) ( 568 ) Net (decrease) increase in cash and cash equivalents ( 27,431 ) 26,716 Cash and cash equivalents at beginning of year 105,663 78,947 Cash and cash equivalents at end of year $ 78,232 $ 105,663 Supplemental disclosure of cash flow information: Income taxes paid $ 111 $ 120 See accompanying Notes to Consolidated Financial Statements. 113 TABLE OF CONTENTS CONNECT BIOPHARMA HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Business Connect Biopharma Holdings Limited (the “Company,” “Connect,” or “Connect Biopharma”) was incorporated in November 2015 in the Cayman Islands as an exempted company with limited liability. The Company completed its initial public offering in March 2021 and the Company’s American Depositary Shares (“ADSs”) have been listed on the Nasdaq Global Market since then. Each ADS represents one ordinary share, par value United States (“U.S.”) Dollar (“USD”) $ 0.000174 per share. Connect Biopharma, headquartered in San Diego, California, is a clinical-stage biopharmaceutical company focused on advancing rademikibart, a potentially best-in-class next generation IL-4Rα antibody, to transform care in asthma and chronic obstructive pulmonary disease. As of December 31, 2024, we had cash, cash equivalents, and short-term investments of $ 93.7 million. Based on our current operating plan and projections, management believes that the Company’s cash, cash equivalents and short-term investments will be sufficient to meet the Company’s anticipated cash requirements for a period of at least one year from the date this Annual Report on Form 10-K is filed with the U.S. Securities and Exchange Commission (“SEC”). 2. Summary of Significant Accounting Policies Basis of Presentation The Company continues to qualify as a Foreign Private Issuer under SEC rules, however, the Company has voluntarily elected to become a domestic filer, beginning with this Annual Report on Form 10-K for the year ended December 31, 2024. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and applicable rules and regulations of the SEC. Previously, the Company prepared its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. The transition from IFRS to U.S. GAAP was made retrospectively for all periods presented. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The following are the Company’s subsidiaries: Directly Held • Connect Biopharma HongKong Limited (“Connect HK”) Indirectly Held • Connect Biopharm LLC • Connect Biopharma Australia PTY LTD • Suzhou Connect Biopharma Co., Ltd. (“Connect SZ”) • Connect Biopharma (Beijing) Co., Ltd • Connect Biopharma (Shanghai) Co., Ltd. • Connect Biopharma (Shenzhen) Co., Ltd Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Our significant accounting policies that involve significant judgment and estimates include revenue recognition, investments, accrued research and development expenses, income taxes and share-based compensation. Actual results could differ materially from those estimates. 114 TABLE OF CONTENTS Foreign Currencies The reporting currency of the Company is USD. The functional currency of the Company’s ultimate parent and each subsidiary is based on the currency of the economic environment in which they operate. For subsidiaries whose local currency is their functional currency, their assets and liabilities are translated into USD at exchange rates at the balance sheet date, and revenues and expenses are translated using the average exchange rates in effect during the period. Gains or losses from foreign currency translation are included in accumulated other comprehensive loss within shareholders equity in the consolidated balance sheets. For all non-functional currency monetary account balances, the re-measurement of such balances to the functional currency results in either a foreign exchange gain or loss, which is recorded to other income (expense) in the consolidated statements of operations and comprehensive loss in the same accounting period that the re-measurement occurred. Cash, Cash Equivalents and Short-term Investments Cash and cash equivalents consist of cash and highly liquid investments with contractual maturities of three months or less from the original purchase date. Short-term investments consist of securities with contractual maturities of greater than three months from the original purchase date. Securities with contractual maturities greater than one year are classified as short-term investments on the consolidated balance sheets, as we have the ability, if necessary, to liquidate these securities to meet our liquidity needs in the next 12 months. We have classified our short-term investments as available-for-sale securities in the accompanying consolidated financial statements. Investment securities are stated at fair market value, with net changes in unrealized gains and losses reported in other comprehensive loss and realized gains and losses included in other income (expense). The cost of investment securities sold is based on the specific identification method. Interest and dividends on investment securities classified as available-for-sale are included in interest income. Fair Value of Financial Instruments A company may elect to use fair value to measure financial instruments. If the use of fair value is elected, any upfront costs and fees related to the item such as debt issuance costs must be recognized in earnings and cannot be deferred. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. Unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings and any changes in fair value are recognized in earnings. We have elected to not apply the fair value option to our financial assets and liabilities. Cash and cash equivalents, receivables, prepaid expenses, other assets, accounts payable and accrued expenses, are carried at cost, which is considered to be representative of their respective fair values because of the short-term maturity of these instruments. Available-for-sale investment securities are carried at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements & Disclosures, establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: • Level 1—Observable inputs such as quoted prices in active markets for identical assets or liabilities. • Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Concentration of Credit Risk Cash, cash equivalents and short-term investments are financial instruments that potentially subject us to concentrations of credit risk. We deposit our cash in financial institutions located in the Cayman Islands, mainland China, 115 TABLE OF CONTENTS the U.S., Australia and Hong Kong. At times, such deposits may be in excess of the insured limits provided by each jurisdiction. All account are unrestricted and will be available to fund our operations. We may also invest our excess cash in money market funds, U.S. government and agency obligations, corporate debt securities and commercial paper. We have established guidelines relative to our diversification of our cash investments and their maturities in an effort to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Accounts Receivable, Net Accounts receivable are recorded at the invoice amount, net of an allowance for credit losses. The allowance for credit losses reflects accounts receivable balances that are believed to be uncollectible. In estimating the allowance for credit losses, we consider: (1) our historical experience with collections and write-offs; (2) the credit quality of our customers and any recent or anticipated changes thereto; (3) the outstanding balances and past due amounts from our customers; and (4) reasonable and supportable forecast of economic conditions expected to exist throughout the contractual term of the receivable. As of December 31, 2024 and 2023, we determined that an allowance for credit losses was not required. For the years ended December 31, 2024 and 2023, we did not have any material write-offs of accounts receivable balances. Property and Equipment, Net Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets (generally 5 to 10 years for machinery and equipment and 3 to 5 years for computer equipment, furniture and office equipment). Leasehold improvements are stated at cost and amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. Intangible Assets, Net The Company’s finite-lived intangible assets includes purchased software. Intangible assets are stated at cost less accumulated amortization. Amortization is calculated on a straight-line basis over the asset’s estimated useful life. Connect SZ acquired long-term land use rights in Taicang, Jiangsu Province, PRC. In 2022, Connect SZ terminated its construction project in Taicang. In 2023, Connect SZ completed the cancellation and sale of the land use rights to the Taicang government resulting in proceeds from the sale of $ 2.9 million. Impairment of Long-Lived Assets If indicators of impairment exist, we assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, we measure the amount of such impairment by comparing the carrying value of the asset to the fair value of the asset and record the impairment as a reduction in the carrying value of the related asset with a corresponding charge to operating expenses. Estimating the undiscounted future operating cash flows associated with long-lived assets requires judgment and assumptions that could differ materially from actual results. Leases We determine if an arrangement is a lease or contains lease components at inception. Operating leases with an initial term greater than 12 months are recorded as lease liabilities with corresponding right-of-use (“ROU”) lease assets on the consolidated balance sheets. ROU lease assets represent our right to use the underlying assets over the lease term, and lease liabilities represent the present value of our obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. When calculating our estimated incremental borrowing rates, we consider our credit risk, the lease term, the total lease payments and the impact of collateral, as necessary. We use the implicit rate when readily determinable. The ROU lease assets equal the lease liabilities, less unamortized lease incentives, unamortized initial direct costs and the cumulative difference between rent expense and amounts paid under the lease. The lease term includes any option to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have elected the practical expedient to not separate lease and non-lease components. 116 TABLE OF CONTENTS Revenue Recognition - License and Collaboration Agreements The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, an entity recognizes revenue when its customer obtains control of goods and services, in an amount that reflects the consideration that the entity expects to be entitled to exchange for those goods and services. The Company performs the following five steps to recognize revenue under Topic 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize the revenue when (or as) the entity satisfies a performance obligation. The Company only recognizes revenue to which it is probable that it will collect the consideration to which it is entitled to exchange for the goods or services that will be transferred to the customer. When the Company enters into any arrangement involving the sale or license of intellectual property rights and other services, the Company determines whether the arrangement is subject to accounting guidance in Topic 606 and ASC 808, Collaboration Arrangements (“Topic 808”). If the Company determines that an arrangement includes goods or services that are central to the Company’s business operations for consideration, the Company will then identify the performance obligations in the contract using the unit of account guidance in Topic 606. For a distinct unit of account that is within the scope of Topic 606, the Company applies all of the accounting requirements in Topic 606 to that unit of account, including the recognition, measurement, presentation and disclosure requirements. For a distinct unit of account that is not within the scope of Topic 606, the Company will recognize and measure the distinct unit of account based on other authoritative ASC Topics or on a reasonable, rational, and consistently applied policy election. Analyzing the license arrangements to identify performance obligations requires the use of judgment. In arrangements that include the sale or license of intellectual property and other promised services, the Company first identifies if the licenses are distinct from the other promises in the arrangement. For the license of intellectual property that is distinct, the Company recognizes revenue from consideration allocated to the license when the license is transferred and the customer is able to benefit from the license. If the license is not distinct, the license is combined with other services into a single performance obligation. Factors that are considered in evaluating whether a license is distinct from other promised services include, for example, whether the counterparty can benefit from the license without the promised service on its own or with other readily available resources and whether the promised service is expected to significantly modify or customize the intellectual property. At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being reached. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. At the end of each reporting period, the Company re-evaluates the probability of achievement of milestones and any related constraint, and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which will affect revenue in the period of adjustment. In an arrangement contains multiple performance obligations, the Company develops estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation, which determines how the transaction price is allocated among the performance obligations. The estimation of the stand-alone selling price(s) include estimates regarding forecasted cash flows, discount rates, market price, development timelines, probability of success, and estimates of costs to be incurred to fulfill its obligations associated with the performance of the research and development activities. The Company evaluates each performance obligation to determine if it can be satisfied at a point in time or over time. Any change made to estimated progress towards completion of a performance obligation and, therefore, license agreement revenue recognized will be recorded as a change in estimate. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price. The Company constrains variable consideration to the extent that it is probable that it will not result in a significant revenue reversal when the uncertainty associated with the variable consideration is subsequently resolved. The Company will recognize consideration related to sales-based milestone and royalties when the subsequent sales occur pursuant to the royalty exception under ASC 606 because the license is the predominant item to which the royalties or sales-based milestone relate. If the Company receives a payment in advance of satisfying the related performance obligation, this payment is recorded as a contract liability. Contract liabilities are classified as either current or non-current in the consolidated balance sheets based on the timing of when the Company expects to satisfy the performance obligation and recognize the revenue. 117 TABLE OF CONTENTS Research and Development Expense All research and development costs are expensed in the period incurred. Research and development expense primarily consists of personnel and related costs, share-based compensation expense, fees paid to outside service providers and consultants, facilities costs and materials used in clinical and preclinical trials and research and development. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial or services provided and the invoices received from its external service providers. When the Company makes payments in advance of services being provided, it records those amounts as prepaid expenses on its consolidated balance sheets and expense them as the services are rendered. In the case of clinical trials, a portion of the estimated cost normally relates to the projected cost to treat a patient in the trials, and this cost is recognized based on the number of patients enrolled in the trial. Other indirect costs are generally recognized on a straight-line basis over the estimated period of the study. As actual costs become known, the Company adjusts its accruals accordingly. Patent Costs We incur outside legal fees in connection with filing and maintaining our various patent applications and issued patents. All patent costs are expensed as incurred and are included in general and administrative expense in the consolidated statements of operations and comprehensive loss. Share-Based Compensation Expense We estimate the fair value of each option grant using the binomial option pricing model. This fair value is then amortized using the straight-line single-option method of attributing the value of share-based compensation to expense over the requisite service periods of the awards. Forfeitures are accounted for, as incurred, as a reversal of share-based compensation expense related to awards that will not vest. The fair value of each employee share purchase right is estimated on the grant date using the Black-Scholes option pricing model. The estimated fair value of each purchase right is then expensed on a straight-line basis over the requisite service period, which is generally the purchase period. The binomial option pricing model and the Black-Scholes option pricing model require inputs of complex and subjective assumptions, including each option’s expected life and price volatility of the underlying shares. Government Grants The Company has received research grants under which it is reimbursed for specific research and development activities. We recognize government grants when there is reasonable assurance of compliance with grant conditions and receipt of the credits or funds. Government grants received in advance of costs being incurred are deferred until the associated costs are recognized. Payments received are recognized as other income in the statements of operations and comprehensive loss over the period in which the Company recognizes the related costs. For the years ended December 31, 2024 and 2023, the Company received government grants of $ 2.6 million and $ 1.5 million, respectively, primarily related to incentives to support research and development activities. Income Taxes Income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred tax assets and liabilities are recognized when temporary differences exist between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Net operating loss carryforwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. The total amount of unrecognized tax benefits, if recognized, would affect other tax accounts, primarily deferred taxes in future periods, and would not affect our effective tax rate, since we maintain a full valuation allowance against our deferred tax assets (see Note 11). We recognize interest and penalties related to income tax matters in income tax expense. Segment Reporting The Company operates as one reportable segment. The Company’s Chief Operating Decision-Maker (“CODM”), its Chief Executive Officer, manages the Company’s operations on a consolidated basis for purposes of allocating resources and assessing performance (see Note 12). Comprehensive Loss Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net changes in foreign currency translation adjustments and unrealized gains and 118 TABLE OF CONTENTS losses on available-for-sale securities are included in other comprehensive loss and represent the difference between our net loss and comprehensive loss for both periods presented. Net Loss per Share Basic net loss per share is calculated by dividing the net loss by the weighted-average number of ordinary shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of ordinary shares and ordinary share equivalents outstanding for the period determined using the treasury share method. For purposes of this calculation, stock options and employee share purchase rights are considered to be ordinary share equivalents and are included in the calculation of diluted net loss per share only when their effect is dilutive. Because we have incurred a net loss for both periods presented in the consolidated statements of operations and comprehensive loss, the following ordinary share equivalents were not included in the computation of net loss per share because their effect would be anti-dilutive (in thousands): December 31, 2024 2023 Stock options outstanding 14,263 6,515 Employee share purchase rights 467 20 14,730 6,535 Recent Accounting Pronouncements Adopted In November 2023, FASB issued Accounting Standards Update No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which enhances segment disclosures primarily by requiring disclosure of significant segment expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods beginning after December 15, 2024. Retrospective application is required. The requirements of ASU 2023-07 are disclosure-related and did not have an impact on the Company’s consolidated financial position and results of operations. See Note 12, Segment Information , for our segment disclosures. Not Yet Adopted In December 2023, FASB issued Accounting Standards Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), to enhance income tax reporting disclosures and require disclosure of specific categories in the tabular rate reconciliation. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, on a prospective basis. Early adoption and retrospective application are permitted. We are currently evaluating the impact on our disclosures. In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40) (“ASU 2024-03”). ASU 2024-03 requires that public business entities disclose additional information about specific expense categories in the notes to financial statements at interim and annual reporting periods. The prescribed categories include purchases of inventory, employee compensation, depreciation, intangible asset amortization, and depletion. ASU 2024-03 may be applied either prospectively or retrospectively and is effective for annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027. Early adoption is permitted. We are currently evaluating the impact on our disclosures. 3. Fair Value Measurements We measure cash, cash equivalents and short-term investments at fair value on a recurring basis. The fair values of such assets were as follows (in thousands): Fair Value Measurements at Reporting Date Using Balance at December 31, 2024 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) 119 TABLE OF CONTENTS Money market funds $ 43,090 $ 43,090 $ — $ — U.S. treasury bills 5,936 5,936 — — U.S. government agency obligations 8,325 — 8,325 — U.S. corporate debt securities 1,387 — 1,387 — U.S. commercial paper 1,831 — 1,831 — Foreign commercial paper 980 — 980 — Total $ 61,549 $ 49,026 $ 12,523 $ — Fair Value Measurements at Reporting Date Using Balance at December 31, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money market funds $ 77,972 $ 77,972 $ — $ — U.S. treasury bills 1,744 1,744 — — U.S. government agency obligations 3,953 — 3,953 — U.S. commercial paper 1,991 — 1,991 — Foreign commercial paper 4,952 — 4,952 — Total $ 90,612 $ 79,716 $ 10,896 $ — We have not transferred any investment securities between the three levels of the fair value hierarchy. As of December 31, 2024, cash equivalents included $ 3.0 million of available-for-sale securities with contractual maturities of three months or less and short-term investments included $ 15.5 million of available-for-sale securities with contractual maturities of three months to one year. As of December 31, 2023, short-term investments included $ 12.6 million of available-for-sale securities with contractual maturities of three months to one year. The money market funds as of December 31, 2024 and 2023 are included in cash and cash equivalents on the consolidated balance sheets. The Company’s cash equivalents and short-term investment securities are classified within the fair value hierarchy as defined by authoritative guidance. The Company’s investment securities classified as Level 1 are valued using quoted market prices. The Company obtains the fair value of its Level 2 financial instruments from third-party pricing services. The pricing services utilize industry standard valuation models whereby all significant inputs, including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, bids, offers, or other market-related data, are observable. The Company validates the prices provided by the third-party pricing services by reviewing their pricing methods and matrices and obtaining market values from other pricing sources. After completing the validation procedures, the Company did not adjust or override any fair value measurements provided by these pricing services as of December 31, 2024 and 2023. The Company does not have any investments classified as Level 3. 4. Balance Sheet Details Available-for-Sale Investments The following is a summary of our available-for-sale investments (in thousands): December 31, 2024 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. treasury bills $ 5,934 $ 2 $ — $ 5,936 U.S. government agency obligations 8,326 — ( 1 ) 8,325 U.S. corporate debt securities 1,387 — — 1,387 U.S. commercial paper 1,831 — — 1,831 Foreign commercial paper 980 — — 980 Total $ 18,458 $ 2 $ ( 1 ) $ 18,459 120 TABLE OF CONTENTS December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. treasury bills $ 1,747 $ — $ ( 3 ) $ 1,744 U.S. government agency obligations 3,958 $ — ( 5 ) 3,953 U.S. commercial paper 1,991 $ — $ — 1,991 Foreign commercial paper 4,955 $ — ( 3 ) 4,952 Total $ 12,651 $ — $ ( 11 ) $ 12,640 At each reporting date, the Company performs an evaluation of impairment to determine if any unrealized losses are the result of credit losses. Impairment is assessed at the individual security level. Factors considered in determining whether a loss resulted from a credit loss or other factors include the Company’s intent and ability to hold the investment until the recovery of its amortized cost basis, the extent to which the fair value is less than the amortized cost basis, the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer, any historical failure of the issuer to make scheduled interest or principal payments, any changes to the rating of the security by a rating agency, any adverse legal or regulatory events affecting the issuer or issuer’s industry, and any significant deterioration in economic conditions. The Company does not intend to sell the investment in unrealized loss position and it is unlikely that the Company will be required to sell the investment before the recovery of its amortized cost basis. Based on its evaluation, the Company determined its year-to-date credit losses related to its available-for-sale securities were immaterial at December 31, 2024. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. We regularly monitor and evaluate the realizable value of our available-for-sale investment securities. We did not recognize any impairment losses for the years ended December 31, 2024 and 2023. Unrealized gains and losses associated with our investments are reported in accumulated other comprehensive loss. For the year ended December 31, 2024 and 2023, we recorded $ 12,000 and $ 354,000 , respectively, in net unrealized gains associated with our available-for-sale investments. Realized gains and losses associated with our investments, if any, are reported in the statements of operations and comprehensive loss. We did not recognize any realized gains or losses during the year ended December 31, 2024. We recognized $ 1,000 in realized gains during the year ended December 31, 2023. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): December 31, 2024 2023 Prepaid expenses $ 2,149 $ 3,845 Interest receivables 262 351 Other assets 53 54 Total prepaid expenses and other current assets $ 2,464 $ 4,250 121 TABLE OF CONTENTS Property and Equipment Property and equipment, net consists of the following (in thousands): December 31, 2024 2023 Machinery and equipment $ 5,453 $ 5,282 Leasehold improvements 830 626 Computer equipment 180 182 Furniture, fixtures, office equipment and other 213 215 Property and equipment, gross 6,676 6,305 Less: accumulated depreciation and amortization ( 2,628 ) ( 2,031 ) Property and equipment, net $ 4,048 $ 4,274 Depreciation and amortization expense for the years ended December 31, 2024 and 2023 was $ 0.7 million for both periods. The Company recorded an impairment loss of $ 0.2 million for the year ended December 31, 2024. No impairment loss was recorded during the year ended December 31, 2023. Accrued Liabilities Accrued liabilities consists of the following (in thousands): December 31, 2024 2023 Accrued clinical, manufacturing and professional expense $ 4,211 $ 7,346 Accrued compensation and benefits 3,342 2,051 Other accrued expenses 249 82 Total accrued liabilities $ 7,802 $ 9,479 5. License and Collaboration Revenues Simcere License Agreement On November 21, 2023 (the “Effective Date”), Connect HK and Connect SZ (“Licensor”) entered into an exclusive license and collaboration agreement (the “License Agreement”) with Simcere Pharmaceutical Co., Ltd. (“Simcere” or “Licensee”), a subsidiary of Simcere Pharmaceutical Group Ltd., to develop and commercialize rademikibart in Greater China. Simcere has been granted exclusive rights to develop, manufacture, and commercialize rademikibart for all indications in Greater China, including mainland China, Hong Kong, Macau, and Taiwan (the “Territory”), while Connect retains rights in all other markets. Under the License Agreement, Connect was required to complete all of rademikibart’s ongoing clinical trials and related analysis in the Territory in atopic dermatitis (“AD”), while the Licensee will be responsible for rademikibart’s new drug application for AD in China and will also conduct and be responsible for the costs of all future clinical studies in all additional disease indications for rademikibart in Greater China. As consideration for the rights granted to Simcere under the License Agreement, Simcere paid Licensor a non-refundable, non-creditable up-front fee of approximately $ 21 million. Simcere is required to make milestone payments to the Licensor up to an aggregate amount of $ 123 million upon the achievement of certain development, regulatory and commercial milestones. The achievement of certain milestones is dependent upon the timing and success of future development activities to be completed by Simcere. Simcere is also required to make payments for cost reimbursements related to certain development activities, including supply of material for clinical development. The License Agreement additionally provides that Simcere is obligated to pay Licensor royalties at tiered percentage rates up to low double-digit percentages on net sales of the licensed product in the Territory. 122 TABLE OF CONTENTS The term of the License Agreement is coterminous with the period up to which sales-based royalty payments shall be made, which is approximately 12 years after commercialization of the licensed compound. After this period, the license is considered fully paid and Simcere can continue to exploit the rights in the license in the Territory. Revenue Recognition The Company evaluated the License Agreement which provides Simcere with the right to use the Company’s intellectual property in the Territory. The Company concluded that the License Agreement was subject to Topic 606 as the Company viewed the License Agreement as a contract with a customer as the activities were central to its business operations. As such, the Company assessed the terms of the License Agreement and identified four performance obligations for the license to research, develop, manufacture and commercialize rademikibart in the Territory. The four performance obligations include: (i) transfer of the intellectual property and know-how; (ii) transfer of the current manufacturing process; (iii) development and transfer of a new manufacturing process; and (iv) completion of certain rademikibart development services. At inception of each arrangement that includes milestone payments, the Company evaluates where the milestones are considered probable of being reached. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. At the Effective Date, the Company determined the transaction price to be $ 25 million, which is comprised of (i) a $ 21 million upfront payment for the grant of license to the Licensee and (ii) $ 4 million of cost reimbursement upon delivery of certain clinical trial reports. All other milestones are considered to be constrained at the Effective Date because these milestones are not within the control of the Company and therefore these milestones are not included in the transaction price. When an intellectual property license is determined to be a predominant promise in the arrangement, sales-based milestone payments and royalties are recognized at the later of when the associated performance obligation has been satisfied or when the sales occur. For cost reimbursements related to the supply of material for clinical development, the Company recognizes revenue when Simcere obtains control of the goods. For the year ended December 31, 2024, the Company recognized $ 26.0 million as license and collaboration revenues. Of the $ 26.0 million, $ 24.4 million related to the upfront license fee and achievement of certain development milestones and $ 1.6 million related to cost reimbursements for clinical materials. For the year ended December 31, 2023, the Company did not recognize any revenue under the License Agreement. Allocation of the Transaction Price The transaction price is generally allocated to the identified performance obligations based on the relative stand-alone selling price estimated for each distinct performance obligation. However the Company has allocated certain regulatory and development milestone payments only to certain specific performance obligation(s) where the terms of such payments relate specifically to the Company’s efforts to satisfy the respective performance obligation, and provided that such allocation is consistent with the objective that transaction price is allocated to each performance obligation in order to reflect the consideration to which the Company expects to be entitled to receive in exchange for satisfying those performance obligations. The Company allocated the $ 25.0 million transaction price based on relative stand-alone selling prices of each performance obligation as $ 23.8 million for the license, $ 0.1 million for the transfer of the current manufacturing process, $ 0.2 million for development and transfer of a new manufacturing process, and $ 0.9 million for completion of certain rademikibart development services. The Company developed the estimated stand-alone selling price for the license using a discounted cash flows model, which is an income approach. In estimating the stand-alone selling price for each performance obligation, the Company developed assumptions that require judgment and included forecasted revenues, expected development timelines, discount rates, probabilities of technical and regulatory success and costs for manufacturing clinical supplies. The Company utilizes judgment to assess when control of the goods and services transfers to Simcere, to determine whether the performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. When recognizing revenue over time, the Company evaluates the measure of progress each reporting period and, if necessary, adjusts the progress of performance and related revenue recognition. The Company expects to recognize the transaction price, at a point in time or over the expected performance period of each respective performance obligation. The Company began recognizing revenue from the License Agreement once the Company had substantially completed the transfer of the intellectual property and know-how to Simcere. The revenue associated with the transfer of the intellectual property and know-how and transfer of the current manufacturing process were recognized at a point in time upon successful completion of each obligation during 2024. The Company will 123 TABLE OF CONTENTS recognize the revenue associated with the transfer of a new manufacturing process at a point in time upon successful completion of the obligation. For the performance obligation to complete certain development services, the Company recognized the transaction price over the expected performance period using an input method. To measure the progress of this obligation, the Company used the cost-to-cost basis approach to estimate the percentage of completion as this method provides the most faithful depiction of the Company’s performance in transferring control of the services promised to Simcere and represents the Company’s best estimate of the period of the obligation. The performance obligation related to certain rademikibart development services was completed in 2024. Milestone Payments The Licensor is entitled to development milestones under the License Agreement and certain regulatory milestone payments which are paid upon receipt of regulatory approvals within the Territory. At the end of each reporting period, the Company will re-evaluate the probability of achievement of each milestone and any related constraint, and if necessary, adjust its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect the reported amount of license and collaboration revenues in the period of adjustment. Royalties As the license is deemed to be the predominant item to which sales-based royalties relate, the Company will recognize revenue when the related sales occur. Contract Assets and Liabilities As of December 31, 2024 and 2023, the Company had no contract assets related to the License Agreement. As of December 31, 2024 and 2023, the Company had $ 0.2 million and $ 13.3 million, respectively, in contract liabilities related to the upfront fee received under the License Agreement. During the year ended December 31, 2024, $ 13.1 million of the contract liability was recognized as revenue which was included in the contract liability balance at the beginning of the year. 6. Commitments and Contingencies Legal Proceedings From time to time, the Company may be a party to litigation or subject to claims in the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company was not a party to any material litigation and did not have contingency reserves established for any liabilities as of December 31, 2024 or 2023. Leases As of December 31, 2024, we had an operating lease for 3,628 square feet of office space in San Diego, California, with a lease term that expires on April 30, 2025. We also have an operating lease for 25,476 square feet of laboratory and office space in Taicang, China, with a lease term that expires on April 30, 2026. As of December 31, 2024 and 2023, the weighted average remaining lease term was 1.0 year and 1.8 years, respectively, and the weighted average discount rate used to determine the operating lease liability was 4.8 % and 4.9 %, respectively. Annual future minimum lease payments as of December 31, 2024 are as follows (in thousands): Year ended December 31: 2025 $ 166 2026 33 Thereafter — Total future minimum lease payments 199 Less: amount representing interest ( 21 ) Total lease liabilities $ 178 124 TABLE OF CONTENTS Rent expense under all operating leases totaled $ 0.3 million for both the years ended December 31, 2024 and 2023. During both the years ended December 31, 2024 and 2023, we paid $ 0.3 million for our operating leases. Development Agreements We enter into agreements with clinical sites and clinical research organizations for the conduct of our clinical trials and contract manufacturing organizations for the manufacture and supply of preclinical, clinical and, eventually, commercial materials and drug product. We make payments to these clinical sites and clinical research organizations based in part on the number of eligible patients enrolled and the length of their participation in the clinical trials. Under certain of these agreements, we may be subject to penalties in the event that we prematurely terminate these agreements. At this time, due to the variability associated with clinical site agreements, contract research organization agreements and contract manufacturing agreements, we are unable to estimate with certainty the future costs we will incur. We intend to use our current financial resources to fund our obligations under these commitments. Purchase Obligations At December 31, 2024, purchase obligations primarily consisted of non-cancellable commitments with third-party manufacturers primarily including costs related to the development and technology transfer of a new high-yield cell-line for rademikibart, as well as ongoing stability studies for our product candidates. Total purchase obligations of $ 3.4 million were not included in our consolidated financial statements for the year ended December 31, 2024, and are due within one year. 7. Reorganization Executive Officer Departures During the second and third quarters of 2024, we implemented changes to our executive leadership structure. In connection with these changes, we provided three executive officers with one-time severance payments upon termination, continued benefits for a specified period of time, and certain stock option modifications. The total expense for these activities was $ 3.2 million, $ 2.0 million of which was primarily for cash severance and $ 1.2 million of which was for non-cash, share-based compensation expense. During the year ended December 31, 2024, we recognized $ 3.2 million of the total expense, $ 1.8 million of which was included in general and administrative expense , and $ 1.4 million of which was included in research and development expense . As of December 31, 2024, we have paid $ 0.4 million of the cash severance charges. The remaining cash severance charges are expected to be substantially paid in the first quarter of 2025. We have accounted for these expenses in accordance with the FASB ASC Topic 420, Exit or Disposal Cost Obligation. 8. Shareholders’ Equity Ordinary Shares Reserved for Future Issuance As of December 31, 2024, we reserved ordinary shares as follows: Number of Shares Stock options outstanding 14,263,242 Ordinary shares reserved for future grants under the equity incentive plans 4,442,951 Ordinary shares reserved for future purchases under the Employee Share Purchase Plan 1,020,251 Total ordinary shares reserved for future issuance 19,726,444 Treasury Shares Ordinary shares previously issued were repurchased by the Company for the purpose of issuing shares under the 2019 Stock Incentive Plan (“2019 Plan”) in 2019 and 2020. In 2021 the Company repurchased 12,705 shares for a total price of $ 180,000 . The remaining ordinary shares were repurchased by the Company at no cost. As of December 31, 2024 and 2023, there were 2,513,495 and 2,405,591 treasury shares, respectively. Statutory Reserves In accordance with the People’s Republic of China (“PRC”) regulations and the articles of association of the companies registered in the PRC, companies are required to set aside 10% of their net profit for the year, offsetting any prior year losses, to the statutory surplus reserve fund as determined under the relevant PRC accounting standards. When the balance of such reserve reaches 50% of the entity’s registered capital, any further appropriation is optional. During the 125 TABLE OF CONTENTS years ended December 31, 2024 and 2023, we did not make any profit appropriations to the reserve fund, as all of our subsidiaries in the PRC were in an accumulated loss position. Under PRC laws and regulations, there are restrictions on the Company’s PRC subsidiaries with respect to transferring certain of their net assets to the Company either in the form of dividends, loans, or advances. As of December 31, 2024 and 2023, restricted net assets including paid-in capital and statutory reserve funds of the Company’s PRC subsidiaries was $ 29.6 million and $ 11.9 million, respectively. 9. Equity Incentive Plans Employee Share Purchase Plan In 2021, our Board approved our Employee Share Purchase Plan (“ESPP”) at which time a maximum of 600,000 ordinary shares were available for issuance. On the first day of each calendar year beginning on January 1, 2022 and ending on and including January 1, 2031, the number of shares available for issuance under the ESPP shall be increased by that number of shares equal to the lesser of 1 % of the aggregate number of ordinary shares outstanding on the final day of the immediately preceding calendar year or such smaller number of shares as determined by the Board. In January 2022, the number of shares reserved for issuance under the ESPP increased by 550,763 shares. Our Board did not approve any increases to the authorized shares for fiscal years 2023 and 2024. At December 31, 2024, a total of 1,150,763 shares were authorized under the ESPP. Under the terms of the ESPP, employees can elect to have up to a maximum of 10 % of their base earnings withheld to purchase ordinary shares. The purchase price of the share is 85 % of the lower of the closing prices for our ordinary shares on either: (i) the first trading day in the enrollment period, as defined in the ESPP, in which the purchase is made, or (ii) the purchase date. The length of the enrollment period is 24 months, with purchases every six months . Enrollment dates are the first business day of May and November. Under the ESPP, we issued 44,837 and 60,207 shares in 2024 and 2023, respectively. The weighted-average exercise price per share of the purchase rights exercised during 2024 and 2023 was $ 0.74 and $ 0.73 , respectively. As of December 31, 2024, 130,512 ordinary shares have been issued under the ESPP and 1,020,251 ordinary shares are available for future issuance. Stock Option Plans 2019 Plan The Board approved the 2019 Plan in November 2019, under which the Company granted stock options to employees, non-employee directors, and consultants. Stock option grants under the 2019 Plan generally vest over a four-year period and have a maximum term of 10 years from the date of grant. The 2019 Plan was replaced by the 2021 Stock Incentive Plan (“2021 Plan”) in March 2021. 2021 Plan In March 2021, the Board approved the 2021 Plan under which the Company may grant stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards and other stock-related awards to employees, non-employee directors and consultants. Stock option grants under the 2021 Plan generally vest over a four-year period and have a maximum term of 10 years from the date of grant. The 2021 Plan initially had a maximum of 6,000,000 ordinary shares available for grant. The number of ordinary shares initially available for issuance will be increased on the first day of each of our fiscal years during the term of the 2021 Plan commencing with the fiscal year beginning January 1, 2021, by an amount equal to the least of (i) 5.0 % of the total number of ordinary shares issued and outstanding on the last day of the immediately preceding fiscal year; or (ii) such lesser number of shares as may be determined by the Board. Our Board determined that the increase under the 2021 Plan for the fiscal years beginning January 1, 2022, 2023 and 2024, to be 5.0 % 2.5 % and 5.0 %, respectively, of our outstanding shares as determined on December 31, 2022, 2023 and 2024, respectively. In no event will more than 60,000,000 shares be issuable upon the exercise of incentive share options (within the meaning of Section 422 of the U.S. Internal Revenue Code) under the 2021 Plan. In January 2022, January 2023, and January 2024, the maximum number of ordinary share available for grant increased by 2,753,815 , 1,376,031 , and 2,755,000 ordinary shares, respectively, resulting in an aggregate of 12,884,846 ordinary shares authorized for issuance as of December 31, 2024. At December 31, 2024, there were 4,374,174 shares available for future grant under the 2021 Plan. Any shares that are issuable on exercise of options granted that expire, are cancelled or that we receive pursuant to a net exercise of options are available for future grant and issuance. 126 TABLE OF CONTENTS 2024 Employment Inducement Incentive Award Plan The Board adopted the Company’s 2024 Employment Inducement Incentive Award Plan (“Inducement Plan”) in June 2024. The Inducement Plan permits the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards and other stock-related awards. Stock awards granted under the Inducement Plan may only be made to individuals who did not previously serve as employees or non-employee directors of the Company or an affiliate of the Company. In addition, stock awards must be approved by either a majority of the Company’s independent directors or the Compensation Committee. The terms of the Inducement Plan are otherwise substantially similar to the Company’s 2021 Plan. The maximum number of ordinary shares that may be issued under the Inducement Plan is 4,500,000 shares. At December 31, 2024, there were 68,777 shares available for future grants. All stock option grants issued under the Inducement Plan were approved by our Board and will be registered on Form S-8 with the SEC. The following summarizes all stock option plan activity: Outstanding Options Number of Options Weighted-Average Exercise Price Outstanding at December 31, 2023 6,514,909 $ 5.10 Granted 10,528,819 $ 1.39 Exercised ( 201,417 ) $ 0.84 Cancelled ( 2,579,069 ) $ 2.30 Outstanding at December 31, 2024 14,263,242 $ 2.93 For the year ended December 31, 2024, options cancelled consisted of 2,253,388 options forfeited with a weighted-average exercise price of $ 2.01 and 325,681 options expired with a weighted-average exercise price of $ 4.32 . The total intrinsic value of stock option exercises, which is the difference between the exercise price and closing price of our ordinary shares on the date of exercise, during the year ended December 31, 2024 and 2023 was $ 128,000 and $ 2,000 , respectively. As of December 31, 2024 and 2023, the total intrinsic value of options outstanding and exercisable was $ 0.5 million and $ 0.2 million, respectively. Years Ended December 31, 2024 2023 Options Weighted- Average Exercise Price Options Weighted- Average Exercise Price Exercisable at end of year 4,252,615 $ 6.29 2,998,933 $ 6.94 Options vested or expected to vest 14,263,242 $ 2.93 6,514,909 $ 5.10 127 TABLE OF CONTENTS Exercise prices and weighted-average remaining contractual lives for the options outstanding as of December 31, 2024 were: Outstanding Options Range of Exercises Prices Weighted- Average Remaining Contractual Life (in years) Weighted- Average Exercise Price Options Exercisable Weighted- Average Exercise Price of Options Exercisable 3,245,976 $ 0.75 - $ 1.13 8.94 $ 0.93 657,080 $ 0.82 3,489,825 $ 1.15 - $ 1.73 8.22 $ 1.22 709,996 $ 1.26 4,532,973 $ 1.77 - $ 2.66 9.38 $ 1.77 73,749 $ 1.97 732,504 $ 3.05 - $ 4.58 2.60 $ 4.17 697,625 $ 4.17 589,829 $ 4.70 - $ 7.05 5.46 $ 4.70 469,911 $ 4.70 1,344,385 $ 8.16 - $ 12.24 1.78 $ 10.05 1,341,089 $ 10.05 327,750 $ 16.41 - $ 24.62 4.50 $ 21.75 303,165 $ 21.70 14,263,242 $ 0.75 - $ 24.62 7.66 $ 2.93 4,252,615 $ 6.29 On December 31, 2024, we had reserved 14,263,242 ordinary shares for future issuance on exercise of outstanding options granted under the 2019, 2021 and Inducement Plans. Share-Based Compensation The following summarizes share-based compensation expense related to share-based payment awards pursuant to our equity compensation arrangements (in thousands): December 31, 2024 2023 Research and development $ 2,951 $ 2,492 General and administrative 3,777 2,904 Total share-based compensation expense $ 6,728 $ 5,396 As of December 31, 2024, there was $ 10.3 million of total unrecognized compensation cost related to non-vested, share-based payment awards granted under all of our equity compensation plans. Total unrecognized compensation cost will be adjusted for future forfeitures. We expect to recognize this compensation cost over a weighted-average period of 3.3 years. The fair value of each option grant is estimated on the grant date using the binomial option pricing model with the following weighted-average assumptions: Options: December 31, 2024 2023 Risk-free interest rate 4.4 % 4.2 % Dividend yield 0.0 % 0.0 % Volatility 104.5 % 59.9 % Option life (years) 10 10 Early exercise multiple (years) 2.2 - 2.8 2.2 - 2.8 The fair value of each employee share purchase right granted is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions: 128 TABLE OF CONTENTS ESPP: December 31, 2024 2023 Risk-free interest rate 4.2 % - 4.4 % 4.1 % - 5.1 % Dividend yield 0.0 % 0.0 % Volatility 111.9 % - 128.5 % 47.0 % - 52.3 % Expected life (years) 0.5 - 2 0.5 - 2 The weighted-average fair value of options granted was $ 1.08 and $ 0.70 for the years ended December 31, 2024 and 2023, respectively. The weighted-average fair value of purchase rights granted under the ESPP was $ 0.38 and $ 0.30 for the years ended December 31, 2024 and 2023, respectively. Risk-Free Interest Rate: The risk-free interest rate assumption is based on the U.S. Treasury yield for obligations with contractual terms similar to the expected term of the stock option or purchase right being valued. Dividend Yield: The Company has never paid any dividends and currently has no plans to do so. Volatility: The expected volatility assumption was determined by examining the average volatility of comparable companies. The volatility of each comparable company was based on the historical daily share prices for a period commensurate to the expected life of the stock option. The expected volatility for employee share purchase rights was determined by examining the historical volatility of the Company’s ordinary shares for a period commensurate to the expected life of the ESPP purchase rights. Expected Life: The expected life represents the weighted-average period the stock options are expected to be outstanding. The expected life for the employee share purchase rights is based upon the terms of each offering period. Early Exercise Multiple: The average ratio of the stock price to the exercise price of when employees would decide to voluntarily exercise their vested stock options. 10. Employee Benefit Plans We have a defined contribution 401(k) plan (the “Plan”) covering all of our employees in the U.S. We make matching cash contributions equal to 50 % of each participant’s contribution during the Plan year up to a maximum amount equal to the lesser of 3 % of each participant’s annual compensation or $ 345,000 and $ 330,000 for the years ended December 31, 2024 and 2023, respectively. Such amounts were recorded as expense in the corresponding years. We may also contribute additional discretionary amounts to the Plan as we determine. For the years ended December 31, 2024 and 2023, we contributed $ 0.1 million and $ 0.2 million, respectively, to the Plan. No discretionary contributions have been made to the Plan since its inception. We also have a defined contribution benefit plan covering all of our employees in the PRC which is organized by the relevant government authorities in the PRC. The government authorities undertake to assume the retirement benefit obligations payable to all existing and further retired employees under these plans and the Company has no further obligation for post-retirement benefits beyond the contributions made. Contributions to these plans are expensed as incurred. Assets of the plans are held and managed by the government authorities and are separate from those of the Company. 129 TABLE OF CONTENTS 11. Income Taxes The components of net loss before income taxes for the years ended December 31, 2024 and 2023 are as follows (in thousands): December 31, 2024 2023 U.S. net income before income taxes $ 644 $ 481 Foreign net loss before income taxes ( 16,049 ) ( 62,467 ) Net loss before income taxes $ ( 15,405 ) $ ( 61,986 ) A reconciliation of the statutory tax rates for the years ended December 31, 2024 and 2023 is as follows: December 31, 2024 2023 Tax at statutory federal rate 21.0 % 21.0 % State tax, net of federal benefit — % — % Stock options ( 6.1 ) % 1.3 % Foreign rate differential ( 32.6 ) % ( 5.3 ) % Unrecognized tax benefits ( 7.9 ) % — % Valuation allowance ( 20.9 ) % ( 31.1 ) % General business credits 22.7 % 11.7 % Change of estimates and other 22.3 % 2.2 % Effective tax rate ( 1.5 ) % ( 0.2 ) % The Company’s federal income taxes from continuing operations for the years ended December 31, 2024 and 2023 was $ 0.2 million and $ 0.1 million, respectively. The Company was not subject to any state incomes taxes for the years ended December 31, 2024 and 2023. Significant components of the Company’s deferred tax assets and liabilities from continued operations as of December 31, 2024 and 2023 are as follows: December 31, 2024 2023 Deferred tax assets: Net operating loss carryforward $ 67,822 $ 61,016 Research and development credits 4,853 5,572 Intangible assets 192 3,543 Other 2,105 1,677 Total gross deferred tax assets 74,972 71,808 Deferred tax liabilities: Right-of-use lease assets ( 37 ) ( 96 ) Total gross deferred tax liabilities ( 37 ) ( 96 ) Valuation allowance (U.S.) ( 7,114 ) ( 7,347 ) Valuation allowance (China, Hong Kong and Australia) ( 67,821 ) ( 64,365 ) Net deferred tax assets $ — $ — The Company has gross U.S. federal research and development tax credit carryforwards, before consideration of unrecognized tax benefits, of $ 5.3 million, which begin to expire in 2042. The Company also has U.S. state research credit carryforwards, before consideration of unrecognized tax benefits, of $ 1.0 million, which will carry forward indefinitely. The change in the U.S. valuation allowance was a decrease of $ 0.2 million for the year ended December 31, 2024. As of 130 TABLE OF CONTENTS December 31, 2024, the Company has net operating losses of $ 205.0 million in China, which begin to expire in 2025. The Company has NOLs of $ 182.2 million in Hong Kong and NOLs of $ 5.1 million in Australia, which all carryforward indefinitely. The change in the China, Hong Kong and Australia valuation allowances was an increase of $ 3.5 million for the year ended December 31, 2024. The following table summarizes the activity related to our unrecognized tax benefit reserves (in thousands): December 31, 2024 2023 Balance at beginning of year $ — $ — Decrease for tax positions of prior years — — Increase based on tax positions related to current year 1,213 — Balance at end of year $ 1,213 $ — The Company does not expect the unrecognized tax benefit reserves to change within the next 12 months from the date this Annual Report on Form 10-K is filed with the SEC. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefit reserves will not impact the Company’s effective tax rate. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. For the years ended December 31, 2024 and 2023, the Company has not recognized any interest or penalties related to income taxes. At December 31, 2024, the Company’s U.S. federal 2021 through 2023 tax years were open and subject to potential examination in one or more jurisdictions. In addition, the U.S., any NOLs or credits that were generated in prior years but not utilized in a year that is closed under the statute of limitations may also be subject to examination. As of December 31, 2024, the Company’s China returns for 2019 through 2023 tax years were open and subject to potential examination in one or more jurisdictions. The Company is currently not under any examinations in the jurisdictions it operates in. 12. Segment Information The Company operates in one operating segment: treatment of respiratory diseases. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the CODM, our Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The CODM utilizes the Company’s consolidated financial forecast, which includes product development roadmaps, as a key input to resource allocation. The CODM makes decisions on resource allocation, assesses performance of the business, and monitors budget versus actual results using our operating expenses, cash burn and cash runway. The following table provides segment revenues, significant segment expenses, other segment items, reported segment net loss and a reconciliation of segment net loss to the Company’s total consolidated net loss for the years ended December 31, 2024 and 2023: Years Ended December 31, 2024 2023 License and collaboration revenues $ 26,033 $ — Less: Research and development expense 29,256 53,002 General and administrative expense 19,229 16,054 Other income, net ( 7,047 ) ( 7,070 ) Income tax expense 223 120 Segment net loss ( 15,628 ) ( 62,106 ) Reconciliation of loss: Adjustments and reconciling items — — Consolidated net loss $ ( 15,628 ) $ ( 62,106 ) The Company’s long-lived tangible assets, as well as the Company’s ROU lease assets recognized on the Consolidated Balance Sheets for the years ended December 31, 2024 and 2023 were located as follows: $ 0.1 million and $ 0.3 million, respectively, in the U.S. and $ 4.1 million and $ 4.4 million, respectively, in the PRC. 131 TABLE OF CONTENTS 13. Subsequent Event In February 2025, we relocated our corporate headquarters to a new location in San Diego, California. This operating lease for the new corporate headquarters is for 6,942 square feet of office space and expires on January 31, 2028. We have agreed to pay a basic annual rent for the additional office space that increases incrementally over the term of the lease from $ 0.3 million for the first 12 months of the lease (inclusive of certain rent abatements) to $ 0.4 million for the last 12 months of the lease, and such other amounts as set forth in the lease. 14. Condensed Financial Information of Parent Certain foreign subsidiaries of the Company have restrictions on their ability to transfer certain of their net assets to the Company either in the form of dividends, loans, or advances. The Company performed a test on the restricted net assets of combined subsidiaries in accordance with SEC Regulation S-X Rule 4-08 (e) and concluded that it was applicable for the Company to disclose the financial statements of the parent company. The condensed parent company only financial statements have been derived from the Company’s consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto. Condensed Balance Sheet (in thousands) December 31, 2024 2023 ASSETS Cash and cash equivalents $ 47,065 $ 79,253 Short-term investments 15,476 12,640 Prepaid expenses and other current assets 555 706 Amounts due from subsidiaries 13,078 12,997 Investments in subsidiaries 27,484 4,604 Total assets $ 103,658 $ 110,200 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities $ 117 $ 586 Amounts due to subsidiaries 10,875 7,867 Other non-current liabilities 500 250 Total liabilities 11,492 8,703 Total shareholders' equity 92,166 101,497 Total liabilities and shareholders' equity $ 103,658 $ 110,200 Condensed Statement of Operations and Comprehensive Loss (in thousands) 132 TABLE OF CONTENTS Years Ended December 31, 2024 2023 General and administrative expense $ ( 6,010 ) $ ( 5,412 ) Interest income 3,893 4,608 Equity losses of subsidiaries ( 13,511 ) ( 61,302 ) Net Loss attributable to Connect Biopharma Holdings Limited shareholders ( 15,628 ) ( 62,106 ) Other comprehensive loss: Foreign currency translation adjustments ( 670 ) ( 614 ) Unrealized gains on available-for-sale investments 12 354 Comprehensive loss attributable to Connect Biopharma Holdings Limited shareholders $ ( 16,286 ) $ ( 62,366 ) Condensed Statement of Cash Flows (in thousands) Years Ended December 31, 2024 2023 Net cash used in operating activities $ ( 2,110 ) $ ( 771 ) Net cash (used in) provided by investing activities ( 30,305 ) 32,070 Net cash provided by financing activities 227 45 Net (decrease) increase in cash and cash equivalents ( 32,188 ) 31,344 Cash and cash equivalents at beginning of year 79,253 47,909 Cash and cash equivalents at end of year $ 47,065 $ 79,253 During the years ended December 31, 2024 and 2023, no cash dividend was declared and paid by the parent company. As of December 31, 2024, there were no material contingencies, significant provisions of long-term obligations, and mandatory dividend or redemption requirements of redeemable shares or guarantees of the parent company, except for those which have been separately disclosed in the Consolidated Financial Statement, if any. Basis of preparation The condensed financial information of the parent company has been prepared using the same accounting policies as set out in its consolidated financial statements, except that the parent company has used the equity method to account for its investment in its subsidiaries. Accordingly, the condensed financial information presented herein represents the financial information of the parent company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The footnote discloses certain supplemental information relating to the operations of the Company and, as such, these statements should be read in conjunction with the notes to the accompanying Consolidated Financial Statements. 133 TABLE OF CONTENTS ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. As previously disclosed in our Current Report on Form 6-K filed with the SEC on December 23, 2024, the Audit Committee of the Board appointed CBIZ CPAs P.C. (“CBIZ”) as its independent registered public accounting firm on December 17, 2024. PricewaterhouseCoopers Zhong Tian LLP (“PwC China”), the Company’s former independent registered public accounting firm, was dismissed by the Company on December 10, 2024. The appointment of CBIZ was made after careful consideration and a thorough evaluation process by the Company and was approved by the Audit Committee. During the Company’s fiscal years ended December 31, 2023 and 2022, and the subsequent interim period through December 10, 2024, there were no disagreements (as that term is described in Item 16F (a)(1)(iv) of Form 20-F and the related instructions) between the Company and PwC China on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of PwC China, would have caused PwC China to make reference to the subject matter of the disagreement in connection with its reports on the Company's consolidated financial statements for such years, nor were there any “reportable events”, as that term is described in Item 16F(a)(1)(v)(A) through (D) of Form 20-F. During the Company’s fiscal years ended December 31, 2023 and 2022, and the subsequent interim period through December 17, 2024, neither the Company, nor anyone on its behalf, consulted CBIZ regarding either (a) the application of accounting principles to a specified transaction, either completed or proposed; or (b) the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the Company or oral advice was provided that CBIZ concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (c) any matter that was the subject of a disagreement, as defined in Item 16F(a)(1)(iv) of Form 20-F (and the related instructions thereto), or any “reportable events” as that term is described in Item 16F(a)(1)(v)(A) through (D) of Form 20-F.