What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-03-17 compared with 2021-03-11 · 698 added, 515 removed, 99 unchanged (92% of the section changed)

1 unchanged sentence

We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required by this Item.

Interest Rate Risk

The Company’s cash and cash equivalents at December 31, 2020 consist of all cash on hand, deposits and funds invested in short-term investments with original maturities of three months or less at the time of purchase and earn interest income.

Therefore, there was minimal or no interest rate risk.

Consolidated Financial Statements and Supplementary Data.

Beginning on page 80 are the consolidated financial statements with applicable notes and the related Report of Independent Registered Public Accounting Firm.

Beginning on the following page are the consolidated financial statements with applicable notes and the related Report of Independent Registered Public Accounting Firm.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (BDO USA, LLP, San Diego, CA, PCAOB ID# 243 )

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2021 and 2020

Consolidated Statements of Stockholders’ Equity (Deficit) for the Years ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows for the Years ended December 31, 2021 and 2020

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Aerpio Pharmaceuticals, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Aerpio Pharmaceuticals, Inc.

(the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively, referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with U.S.

generally accepted accounting principles.

To the Stockholders and the Board of Directors

Aadi Bioscience, Inc.

Pacific Palisades, California

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Aadi Bioscience, Inc.

(the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit) and cash flows for the years then ended and the related notes (collectively, referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, 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.

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated 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.

1 unchanged sentence

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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.

1 unchanged sentence

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.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

/s/ BDO USA, LLP

We have served as the Company’s auditor since 2017

Cincinnati, Ohio

San Diego, California

March 17, 2022

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows for the Years ended December 31, 2020 and 2019

Notes to Consolidated Financial Statements

AERPIO PHARMACEUTICALS, INC.

AADI BIOSCIENCE, INC.

Consolidated Balance Sheets

(Amounts in thousands, except share data and par value)

Year Ended December 31,

1 unchanged sentence

Cash and cash equivalents

Prepaid research and development contracts

Other current assets

Accounts receivable

Prepaid expenses and other current assets

Total current assets

Furniture and equipment, net

Operating lease right-of-use assets, net

Liabilities and stockholders’ equity

Property and equipment, net

Operating lease right-of-use assets

Intangible asset, net

Liabilities and stockholders’ equity (deficit)

Current liabilities:

Accounts payable and accrued expenses

Current portion of operating lease liability

Accounts payable

Accrued liabilities

Payable to related party

Convertible related party promissory notes payable at fair value

Operating lease liabilities, current portion

Other current liabilities

Total current liabilities

Operating lease liability, net of current portion

Convertible promissory notes payable at fair value

Payable to related party

Operating lease liabilities, net of current portion

Other liabilities

Total liabilities

Commitments and contingencies (Note 15)

Stockholders’ equity:

Common stock, $0.0001 par value per share;

300,000,000 shares

authorized and 47,251,319 and 40,588,004 shares issued and

outstanding at December 31, 2020 and 2019.

Stockholders’ equity (deficit):

Series Seed preferred stock, $ 0.0001 par value, zero and 734,218 shares authorized, issued and outstanding as of December 31, 2021 and 2020, respectively;

aggregate liquidation preference of $ 0 and $ 1,101 as of December 31, 2021 and 2020, respectively

Series A preferred stock, $ 0.0001 par value, zero and 7,211,948 shares authorized, issued and outstanding as of December 31, 2021 and 2020, respectively;

aggregate liquidation preference of $ 0 and $ 28,433 as of December 31, 2021 and 2020, respectively

Common stock, $ 0.0001 par value, 300,000,000 and 20,000,000 shares authorized;

20,894,695 and 2,542,358 shares issued and outstanding as of December 31, 2021 and 2020, respectively

Additional paid-in capital

Accumulated deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

Total stockholders’ equity (deficit)

Total liabilities and stockholders’ equity (deficit)

The accompanying notes are an integral part of these consolidated financial statements.

AERPIO PHARMACEUTICALS, INC.

AADI BIOSCIENCE, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Amounts in thousands, except share data and earnings per share amounts)

Year Ended December 31,

License revenue

Grant revenue

Total revenue

Operating expenses

Research and development

Research and development (includes related party amounts of $ 200 and $ 2,461 , respectively)

General and administrative

Restructuring expense

Impairment of acquired contract intangible asset

Total operating expenses

Loss from operations

Other income (expense)

Change in fair value of convertible promissory notes

Gain upon extinguishment of debt

Interest income

Total other income

Interest expense (includes related party amounts of $ 600 and $ 734 , respectively)

Total other income (expense), net

Loss before income tax expense

Income tax expense

Net and comprehensive loss

Net and comprehensive loss per share

Basic and diluted

Weighted average number of common shares used in

computing net loss per share attributable to common

Cumulative dividends on convertible preferred stock

Net and comprehensive loss attributable to common stockholders

Net and comprehensive loss per share attributable to common stockholders, basic and diluted

Weighted average number of common shares outstanding used in

computing net and comprehensive loss per share attributable to common

stockholders, basic and diluted

The accompanying notes are an integral part of these consolidated financial statements.

AERPIO PHARMACEUTICALS, INC.

Consolidated Statements of Stockholders ’ Equity

Stockholders’ Equity

AADI BIOSCIENCE, INC.

Consolidated Statements of Stockholders ’ Equity (Deficit)

(Amounts in thousands, including share amounts)

Stockholders’ Equity (Deficit)

Series Seed Preferred Stock

Series A Preferred Stock

Additional Paid-In Capital

Accumulated Deficit

Balance at December 31, 2019

Issuance of warrants

Cumulative effect of change

in accounting principle

Stock-based compensation

Share-based compensation

Net and comprehensive loss

Balance at December 31, 2020

Issuance of warrants

Issuance of common stock upon

exercise of stock options

Issuance of common stock, net of

issuance costs of $402,795

Stock-based compensation

Exercise of stock options to purchase common stock

Issuance of common stock to PIPE Investors, net of issuance costs

Issuance of common stock to former stockholders of Aerpio upon Merger

Conversion of convertible promissory note into common stock upon Merger

Conversion of convertible preferred stock into common stock upon Merger

Share-based compensation

Cumulative dividends paid on Series A preferred stock

Net and comprehensive loss

1 unchanged sentence

The accompanying notes are an integral part of these consolidated financial statements.

AERPIO PHARMACEUTICALS, INC.

AADI BIOSCIENCE, INC.

Consolidated Statements of Cash Flows

(Amounts in thousands)

Year Ended December 31,

Operating activities:

Net and comprehensive loss

Adjustments to reconcile net and comprehensive loss to net cash used in

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in

operating activities:

Loss on disposal of assets

Consulting expense related to warrants

Stock-based compensation

Impairment of acquired contract intangible asset

Change in fair value of convertible promissory notes (includes related party amounts of $ 1,404 and $ 130 , respectively)

Non-cash interest expense (includes related party amounts of $ 578 and $ 734 , respectively)

Gain on forgiveness of Payroll Protection Plan loan

Share-based compensation expense

Non-cash lease expense

Depreciation and amortization expense

Changes in operating assets and liabilities:

Prepaid research and development contracts

Other current assets

Accounts payable and accrued expenses

Accounts receivable

Prepaid expenses and other current assets

Other non-current assets

Operating lease liability

Accounts payable and accrued liabilities

Payable to related party

Net cash used in operating activities

Investing activities:

Purchase of furniture and equipment

Net cash used in investing activities

Cash acquired in connection with the Merger

Transaction expenses related to the Merger

Purchase of property and equipment

Net cash provided by investing activities

Financing activities:

Proceeds from issuance of common stock

Cash paid in connection with the sale of common stock

Proceeds from issuance of common stock upon exercise of stock options

Proceeds from the exercise of stock options

Proceeds from the issuance of common stock to PIPE Investors

Costs incurred in connection with issuance of common stock

Dividends paid

Proceeds from issuance of convertible promissory notes

Proceeds from Payroll Protection Loan Program

Net cash provided by financing activities

2 unchanged sentences

Cash and cash equivalents at end of year

Supplemental disclosure of cash flow information:

Interest paid during the period

Supplemental disclosure of non-cash activities:

Issuance of common stock upon Merger

Operating lease liability arising from obtaining right-of-use asset

Conversion of convertible promissory note into common stock upon Merger

The accompanying notes are an integral part of these consolidated financial statements.

1 unchanged sentence

Nature of Organization and Operations

Aerpio Pharmaceuticals, Inc.

(“Aerpio” or the “Company”) is a biopharmaceutical company focused on developing compounds that activate Tie2 in indications in which the Company believes that activation of Tie2 may have therapeutic potential.

Our product candidates include razuprotafib (formerly known as AKB-9778), a small molecule VE-PTP inhibitor.

The Company was incorporated as Zeta Acquisition Corp.

II (“Zeta”) in the State of Delaware on November 16, 2007.

Zeta was a “shell company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended).

The Company’s pipeline includes the following programs:

Based on the preclinical proof of concept and the results of the Phase 1b trial showing a reduction in intraocular pressure (“IOP”) in patients with ocular hypertension (“OHT”) and open angle glaucoma (“OAG”), the Company initiated a Phase 2 clinical trial in June 2020 designed to evaluate the safety and efficacy of a topical formulation of razuprotafib in approximately 195 patients followed over a 28-day period.

Patients enrolled in the trial were administered a baseline of latanoprost ophthalmic solution 0.005%, and then randomized in a 1:1:1 fashion to receive adjunctive therapy consisting of placebo, 40 mg/ml razuprotafib once-daily, or 40 mg/ml razuprotafib twice-daily.

The primary endpoint of the study was mean diurnal IOP at 28 days in the razuprotafib treated groups compared to the latanoprost monotherapy group.

In December 2020, the Company reported that razuprotafib met the primary efficacy endpoint at the end of the 28-day period (“Day 28”) with the twice-daily (“BID”) dose group in its double-blind, placebo-controlled Phase 2 trial in patients with elevated IOP associated with OAG or OHT.

The change from baseline in diurnal mean IOP at Day 28 of study eyes treated with razuprotafib BID plus latanoprost showed a statistically significant improvement, or drop in IOP, (two-sided p-value 0.0130 and LS mean difference of -0.92 mm Hg) compared to those treated with latanoprost monotherapy.

The razuprotafib once-daily dose group did not show a statistically significant improvement at Day 28.

While the Phase 2 clinical trial met its primary efficacy endpoint with the BID group, the IOP decrease was not at a level deemed sufficient to move to Phase 3 development.

Acute Respiratory Distress Syndrome:

Based on results in preclinical studies and observations in patients in the TIME-2 and TIME-2b trials, the Company believes that a vascular endothelial receptor, Tie2, may play a pivotal role in the defense against microvascular breach in ARDS.

The Company hypothesizes that razuprotafib, the Company’s lead Tie2 activator, may have therapeutic potential for the treatment of COVID-19 associated ARDS and initiated two Phase 2 trials during 2020.

In May 2020, the Company was selected by Quantum Leap Healthcare Collaborative to participate in the I-SPY COVID-19 Trial (Investigation of Serial studies to Predict Your COVID Therapeutic Response with biomarker Integration and Adaptive Learning ) to evaluate subcutaneous razuprotafib for the treatment of COVID-19 related ARDS in adult patients with critical COVID-19.

The trial was initiated during the third quarter of 2020 and trial updates are anticipated in the first half of 2021, subject to potential delays in subject enrollment and study completion, including due to delays arising from the ongoing COVID-19 pandemic, and the potential for project cancellation or discontinuation by Quantum Leap Healthcare Collaborative.

In August 2020, the Company initiated a second Phase 2 clinical trial (“RESCUE”) for the treatment of COVID-19 with the U.S.

Government operating through Medical Technology Enterprise Consortium (“MTEC”).

This RESCUE trial will evaluate subcutaneous razuprotafib for the prevention and treatment of ARDS in adult patients with moderate to severe COVID-19 as part of MTEC-20-09-COVID-19 Treatment Military Infectious Disease Research Program (“MIDRP”) “Development of Treatments for COVID-19”.

Per the terms of the agreement with MTEC, MTEC will provide partial reimbursement up to $5.1 million related to qualified internal and external spending of the Company, as it relates to the clinical trial.

The Company expects to report top-line data upon study completion in the second quarter of 2021.

Diabetic Kidney Disease:

In two consecutive trials, TIME-2 and TIME-2b, subcutaneous razuprotafib showed reduction in Urine Albumin-Creatinine Ratio (“UACR”), a measure of progression of diabetic kidney disease.

The Company believes that systemic treatment with razuprotafib could have the potential to change the treatment paradigm for diabetics in the future and potentially address a major societal problem by lowering the cost of care associated generally with diabetes.

ARP-1536 and Bi-specific Antibody:

The humanized monoclonal antibody, ARP-1536, directed at the same target as subcutaneous razuprotafib, is in preclinical development.

The Company is evaluating development options for ARP-1536, including subcutaneous injection for the treatment of diabetic vascular complications, e.g., diabetic nephropathy and intravitreal injection as an adjunctive therapy for diabetic macular edema.

The Company is also developing a bispecific antibody that binds both v ascular endothelial growth factor (“VEGF”) and v ascular endothelial protein tyrosine phosphatase (“VE-PTP”) which is designed to inhibit VEGF activation and activate Tie2.

The Company believes this bispecific antibody has the potential to be an improved treatment for wet aged-related macular degeneration (“AMD”) and diabetic macular edema via intravitreal injection.

In June 2018, the Company licensed AKB-4924 (now GB004), a selective stabilizer of hypoxia-inducible factor-1 alpha (“HIF-1 alpha”) to a wholly-owned subsidiary of Gossamer Bio, Inc., GB004, Inc.

(collectively “Gossamer”), which is being developed for the treatment of inflammatory bowel disease (“IBD”).

HIF-1 alpha is involved in mucosal wound healing and the reduction of inflammation in the gastrointestinal tract.

Gossamer completed the Phase 1b clinical trial in ulcerative colitis (“UC”) patients and reported results during the second quarter of 2020.

Gossamer has announced that, subject to developments in the ongoing COVID-19 pandemic, it initiated a 12-week Phase 2 study of GB004 in patients with mild-to-moderate UC during the second half of 2020.

In May 2020, the Company received a one-time payment of $15.0 million pursuant to an amendment to its license agreement with Gossamer resulting in a reduction in future potential milestone payments and tiered royalty rates over the life of the license agreement.

Gossamer is responsible for all remaining development and commercial activities for GB004.

In February 2018, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) which was declared effective by the SEC on April 11, 2018 (the “Form S-3”).

On February 21, 2018, and pursuant to the Form S-3, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co.

(“Cantor”), pursuant to which it may issue and sell, from time to time, shares of its common stock having an aggregate offering price of up to $75.0 million through Cantor as the sales agent.

Cantor may sell the Company’s common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act, including sales made directly on or through the Nasdaq Capital Market or any other existing trade market for the Company’s common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to prevailing market prices, or any other method permitted by law.

During the year ended December 31, 2020, 6,523,655 shares of the Company’s common stock were sold under the Sales Agreement, pursuant to the Form S-3, the related prospectus, and the prospectus supplement.

The net proceeds received from this transaction were $9.3 million, after deducting expenses of approximately $403,000 (including sales agent compensation of approximately $292,000) that were direct and incremental to the sale of the Company’s common stock.

The Company’s operations to date have been limited to organizing and staffing the Company, business planning, raising capital, acquiring and developing its technology, identifying potential product candidates and undertaking preclinical and clinical studies.

The Company’s revenue has been primarily limited to license revenue from Gossamer described in Note 14.

The Company’s product candidates are subject to long development cycles and there is no assurance the Company will be able to successfully develop, obtain regulatory approval for, or market its product candidates.

The Company is subject to a number of risks similar to other life science companies in the current stage of its life cycle including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, the need to obtain marketing approval for its product candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of any of the Company’s pipeline products that are approved, and protection of proprietary technology.

If the Company does not successfully commercialize any of its pipeline products or mitigate any of these other risks, it will be unable to generate revenue or achieve profitability.

T he Company incurred losses from operations and had negative cash flows from operating activities for the year ended Dec ember 3 1 , 2020 and 2019 (and since inception).

As of December 31, 2020, the Company’s cash and cash equivalents were approximately $ 42.6 million .

The company is currently evaluating its development options for its product candidates.

Any efforts for continued program development will be time-consuming and expensive.

Based on its current operating plan, and absent any future financings or strategic partnerships, the Company believes its existing cash and cash equivalents will be sufficient to fund its current operating plan through the fourth quarter of 2022 , and as a result, through at least twelve months from the filing of the Company’s 2020 Annual Report on Form 10-K .

There can be no assurance, however, that the current operating plan will be achieved in the time frame anticipated by the Company, or that its cash resources will fund the Company’s operating plan for the period anticipated by the Company or that additional funding will be available on terms acceptable to the Company, or at all.

Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact the Company’s ability to access capital as and when needed.

If the Company is unable to raise the necessary funds when needed on a timely basis, it may be required to suspend its operations.

The Company is currently evaluating a range of strategic alternatives focused on maximizing stockholder value from its clinical assets and cash resources.

As part of this process, it is exploring strategic options for partnering its programs, as well as the potential for an acquisition, company sale, merger, business combination, asset sale, in-license, out-license or other strategic transaction.

There can be no assurance that this exploration of strategic alternatives will result in the Company entering or completing any transaction.

COVID-19 has resulted, and will likely continue to result, in significant governmental measures being implemented to control the spread of the virus through quarantines, travel restrictions, heightened border security and other measures.

While the Company cannot predict the scope and severity, these developments and measures could materially and adversely affect its business, including its clinical trials for ARDS programs, results of operations and financial condition.

In addition, in response to the continuing spread of COVID-19, the Company has kept its executive offices closed with its employees continuing their work outside of the office.

The Company is closely monitoring the impact of COVID-19 on all aspects of its business and is taking steps to minimize the impact on its business.

However, the extent to which COVID-19 ultimately impacts the Company’s business, results of operations or financial condition will depend on future developments, which remain highly uncertain and cannot be predicted with confidence, such as the duration of the COVID-19 pandemic, new information that may emerge concerning the severity of COVID-19 and the effectiveness of actions taken to contain the COVID-19 pandemic or treat its impact, among others.

While some states and jurisdictions have started to rollback stay-at-home and quarantine orders and reopened in phases, it is difficult to predict what the lasting impact of the COVID-19 pandemic will be, and if the Company or any of the third parties with whom it engages were to experience additional shutdowns or other prolonged business disruptions, the Company’s ability to conduct its business in the manner and on the timelines presently planned could have a material adverse impact on the Company’s business, results of operation and financial condition.

In addition, a recurrence of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest.

The Company will continue to monitor developments as it deals with the disruptions and uncertainties relating to the COVID-19 pandemic.

Aadi Bioscience, Inc.

(together with its subsidiaries, the “Company” or “Aadi”) is a biopharmaceutical company focused on developing and commercializing precision therapies targeted to rare mutation-driven diseases.

Aadi’s lead drug product, FYARRO (previously called ABI-009), is nab -sirolimus (sirolimus protein-bound particles for injectable suspension (albumin-bound)) for diseases driven by the mTOR pathway activation through mutations or deletions of specific genes such as Tuberous Sclerosis Complex 1 and 2 (“ TSC1 ” and “ TSC2 ”).

FYARRO is licensed to Aadi by Abraxis BioScience, LLC, a wholly owned subsidiary of Celgene Corporation, now Bristol Myers Squibb Company (“Celgene”), for all therapeutic areas including oncology, cardiovascular, and metabolic related diseases.

The Company’s historical operations have consisted principally of performing research and development activities and raising capital.

The Company’s activities are subject to significant risks and uncertainties, including failing to secure additional funding before sustainable revenues and profit from operations are achieved.

Merger with Aerpio Pharmaceuticals, Inc.

and Name Change

On May 16, 2021 , the Company, then operating as Aerpio, entered into the Agreement and Plan of Merger (“Merger Agreement”) with Aspen Merger Subsidiary, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Aerpio (“Merger Sub”) and Aadi Subsidiary, Inc.

(formerly known as Aadi Bioscience, Inc.

(“Private Aadi”)).

Pursuant to the terms set forth in the Merger Agreement and effective August 26, 2021 (the “Effective Time”):

(i) Merger Sub merged with and into Private Aadi, with Private Aadi surviving as a wholly-owned subsidiary of Aerpio (the “Merger”), (ii) Aerpio changed its name to Aadi Bioscience, Inc.

in connection with and immediately prior to the Effective Time of the Merger, and (iii) Aerpio effected a 15 :1 reverse stock split of the Aerpio common stock (“Reverse Stock Split”) immediately prior to the Effective Time of the Merger.

At the Effective Time, each share of Private Aadi common stock outstanding immediately prior to the Effective Time, including the shares of Private Aadi common stock issuable upon the conversion of all shares of preferred stock and convertible promissory notes immediately prior to the closing of the Merger, were converted into the right to receive shares of the Company’s common stock based on an exchange ratio of 0.3172 (the “Exchange Ratio”), after taking into account the Reverse Stock Split.

Pursuant to the Merger Agreement, Aerpio assumed all of the outstanding and unexercised options to purchase shares of Private Aadi capital stock under the Private Aadi Amended and Restated 2014 Equity Incentive Plan (the “Private Aadi Plan”), and, in connection with the Merger, such options were converted into options to purchase shares of the Company’s common stock based on the Exchange Ratio.

At the closing of the Merger at the Effective Time, the Company issued an aggregate of 5,776,660 shares of common stock to holders of Private Aadi common stock, including for shares of Private Aadi common stock issuable upon the conversion of all shares of preferred stock and convertible promissory notes outstanding immediately prior to the Effective Time.

In connection with the Merger, the Company entered into a Contingent Value Rights Agreement (the “CVR Agreement”) with a legacy director of Aerpio, as Holder Representative (as defined in the CVR Agreement), and American Stock Transfer & Trust Company, LLC, as Rights Agent (as defined in the CVR Agreement), in accordance with the terms of the Merger Agreement.

The CVR Agreement entitles each holder of Aerpio common stock as of immediately prior to the closing of the Merger (each, a “CVR Holder”) to receive one contingent value right (“CVR”) for each outstanding share of Aerpio common stock held by such CVR Holder as of immediately prior to the closing of the Merger, each representing the right to receive certain net proceeds, if any, derived from the CVR completed during a CVR Payment Period, which means successive six-month periods, prior to the expiration of the CVR Term (as defined in the CVR Agreement), with any potential payment obligations continuing until the earlier of (a) the 20 -year anniversary of the Effective Time and (b) the time at which the license agreement with Gossamer Bio, Inc., the underlying basis for the CVR, has expired or been terminated.

Under the terms of the Merger Agreement, as related to the CVR, the Company is entitled to 10 % of any proceeds paid from the underlying license agreement plus reimbursement of expenses.

There can be no assurances that any proceeds will result therefrom.

The Merger has been accounted for using the reverse asset acquisition method under U.S.

generally accepted accounting principles (“GAAP”).

For accounting purposes, Private Aadi is considered to have acquired Aerpio and the Merger has been accounted for as a reverse asset acquisition.

Private Aadi is considered the accounting acquirer even though Aerpio issued the common stock in the Merger based on the terms of the Merger Agreement and other factors including:

(i) following the Merger, the stockholders of Private Aadi collectively owned a substantial portion

of the voting rights of the Company;

(ii) three (3) of seven (7) members of the board of directors of the Company post-Merger were composed of directors designated by Private Aadi under the terms of the Merger Agreement, and one (1) member of the board of directors of the Company post-Merger was a director mutually designated by Private Aadi and Aerpio;

(iii) existing members of Private Aadi’s management became the management of the Company post-Merger;

(iv) the PIPE Investors (as defined below) consist of individuals and funds, and for purpose of this analysis, while they owned approximately 55.6 % on a fully-diluted basis, as of immediately following the Merger (and after giving effect to the PIPE Financing), no one individual or fund held more shares than the holders of Private Aadi collectively owned immediately following the Merger and they are not considered to be a single voting group;

and (v) following the Merger, the Company is named “Aadi Bioscience, Inc.” and headquartered in Pacific Palisades, California, and all ongoing operations of the Company are those of Private Aadi.

To determine the accounting for this transaction under GAAP, a company must assess whether an integrated set of assets and activities should be accounted for as an acquisition of a business or an asset acquisition.

Upon closing of the Merger, substantially all of the fair value is concentrated in cash, working capital and a long-lived contract intangible asset.

As such, the acquisition was treated as an asset acquisition.

The net assets of Aerpio have been recorded at their relative fair value in the consolidated financial statements of the Company and the reported operating results prior to the Merger will be those of Private Aadi.

Pursuant to the closing of the Merger, Private Aadi’s board of directors declared a 4 % cumulative dividend on its preferred stock of $ 4.4 million which was paid at the Effective Time.

PIPE Financing and Subscription Agreement

On May 16, 2021 , the Company entered into a subscription agreement (“Subscription Agreement”) with certain investors (the “PIPE Investors”), pursuant to which it would sell shares of its Common Stock concurrently with the closing of the Merger (the “PIPE Financing”).

At the closing of the PIPE Financing, the Company entered into a Registration Rights Agreement, dated August 26, 2021 (“Registration Rights Agreement”), with the PIPE Investors.

The PIPE Investors purchased an aggregate of 11,852,862 shares of common stock of the Company (the “PIPE Shares”) for an aggregate purchase price of $ 155.0 million pursuant to the Subscription Agreement (“PIPE Financing”).

The aggregate net proceeds for the issuance and sale of the of the PIPE Shares was $ 145.4 million, after deducting certain expenses incurred that were direct and incremental to the issuance of the PIPE Shares.

Immediately following the Effective Time, and after giving effect to the Reverse Stock Split and the PIPE Financing, there were approximately 20.8 million shares of common stock of the Company outstanding.

Immediately following the Effective Time and after giving effect to the Reverse Stock Split and the PIPE Financing:

(i) the Private Aadi stockholders owned approximately 29.2 % of the outstanding shares of common stock;

(ii) Aerpio’s stockholders immediately prior to the Merger, whose shares of common stock, as adjusted for the Reverse Stock Split, remain outstanding after the Merger, owned approximately 15.2 % of the outstanding shares of common stock;

and (iii) the PIPE Investors owned approximately 55.6 % of the outstanding shares of common stock, in each case as calculated on a fully-diluted basis.

Since inception, the Company has devoted substantially all of its resources to research and development activities, business planning, establishing and maintaining its intellectual property portfolio, hiring personnel, raising capital and providing general and administrative support for these operations and has not realized revenues from its planned principal operations.

The Company has experienced net losses since its inception and expects to continue to incur net losses into the foreseeable future.

The Company had an accumulated deficit of $ 142.7 million as of December 31, 2021 and net loss of $ 110.1 million and $ 3.5 million for the years ended December 31, 2021 and 2020, respectively.

To date, these operating losses have been funded primarily from outside sources of invested capital through the issuance of convertible promissory notes, grant funding, the sale of securities, and proceeds from license agreements.

During the year ended December 31, 2021, the Company raised capital through the PIPE Financing of $ 155.0 million which netted $ 145.4 million after financing expenses.

Additionally, the Company assumed $ 29.7 million of cash from Aerpio in the Merger, which netted to $ 27.7 million after $ 2.0 million of compensation related expenses for former Aerpio executives related to the Merger.

The Company had cash and cash equivalents of $ 149.0 million at December 31, 2021.

Management believes that the Company’s current cash and cash equivalents, including the aggregate net proceeds from the PIPE Financing, will provide sufficient funds to enable the Company to meet its obligations for at least twelve months from the filing date of this report.

In December 2019, a strain of coronavirus was reported in Wuhan, China and began to spread globally, including to the United States and Europe, in the following months.

The World Health Organization has declared COVID-19 to be a global pandemic.

The full impact of the COVID-19 pandemic is inherently uncertain at the time of this report.

The COVID-19 pandemic has resulted in travel restrictions and, in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses, and greater uncertainty in global financial markets.

As COVID-19 has spread, it has significantly impacted the health and economic environment around the world, and many governments have closed most public establishments, including restaurants, workplaces, and schools.

Aadi’s clinical trials have been, and may continue to be, affected by the closure of offices, or country borders, among other measures being put in place around the world.

The inability to travel and conduct face-to-face meetings, as well as constraints surrounding hospital resources, infrastructure, staff and other resources, can also make it more difficult to enroll new patients in ongoing or planned clinical trials.

Any of these circumstances will potentially have a negative impact on the Company’s financial results and the timing of its clinical trials.

The COVID-19 pandemic has caused the Company to modify business practices (including but not limited to curtailing or modifying employee travel, moving to full remote work, and cancelling physical participation in meetings, events, and conferences), and may take further actions as may be required by government authorities or that are determined to be in the best interests of the Company’s employees, patients, and business partners.

The extent of the impact of the COVID-19 pandemic on Aadi’s future liquidity and operational performance will depend on certain developments, including the duration and spread of the outbreak, the availability and effectiveness of vaccines, the impact on the Company’s clinical trials, patients, and collaboration partners, and the effect on its suppliers.

Related Party Transactions

Presented below are the details of a license agreement with Celgene, an entity which was a stockholder of Private Aadi prior to the Merger and became a stockholder of the Company as a result of the Merger.

Celgene License Agreement

On April 9, 2014, the Company entered into a license agreement (the “Celgene License Agreement”) with Celgene for exclusive rights for certain patents and a non-exclusive license for certain technology and know-how pertaining to FYARRO.

The Celgene License Agreement will remain in effect from the effective date of April 9, 2014 until expiration of all milestone and royalty payment obligations under the agreement, unless terminated by either of the parties upon giving an advance notice as specified in the Celgene License Agreement.

Under the terms of the Celgene License Agreement, Celgene agreed to supply the Company with licensed products of FYARRO necessary for clinical or non-clinical development.

Celgene had the option to terminate the Celgene License Agreement and all of the Company’s related rights and licenses upon the occurrence of each of the following:

(a) successful completion of the first Phase 2 Trial for a licensed product (“First Trigger Event”), or (b) if Celgene elects not to exercise its option upon the First Trigger Event, then upon the acceptance by the Food and Drug Administration or the European Medicines Agency, as applicable, of the first New Drug Application either in the United States or European Union, whichever occurs first, for a licensed product (“Second Trigger Event”).

On May 1, 2019, Celgene terminated its rights to elect an option to terminate the Celgene License Agreement upon the occurrence of a First Trigger Event, Second Trigger Event or Early Exercise.

As a result, the Company is free to negotiate and enter into any agreement with respect to an acquisition of all or substantially all of the business or assets of the Company whether by merger, sale of equity or assets, or otherwise and to consummate the same as it sees fit.

Celgene is entitled to receive certain development milestone payments, royalties on net sales from licensed products under the agreement and any sublicense fees.

No payments related to milestones or royalties under this agreement were paid during the years ended December 31, 2021 and December 31, 2020.

See below for discussion on sub-license fee.

On November 15, 2019, Celgene and the Company entered into an amendment to the Celgene License Agreement (the “Amended Celgene License Agreement”) to terminate certain of Celgene’s FYARRO product supply obligations and to transfer control over certain regulatory filings under the original Celgene License Agreement

from Celgene to the Company.

The Amended Celgene License Agreement also waived the obligations related to certain development milestone payments and waived the liability related to 2016 and 2017 licensed drug manufacturing costs of $ 1.2 million and $ 2.7 million, respectively.

On August 30, 2021, the Company and Celgene entered into Amendment No.

1 (the “Amendment”) to the Amended Celgene License Agreement related to certain intellectual property rights of Celgene pertaining to the compound known as FYARRO.

Under the terms of the Amendment, the Company paid Celgene $ 5.8 million representing 50 % of the previously outstanding payment obligation under the terms of the Amended Celgene License Agreement, following the Effective Time of the PIPE Financing.

Pursuant to the terms of the Amendment, the remaining previously outstanding payment obligation of $ 5.8 million, is due on the third anniversary of the Effective Time, or August 26, 2024 plus any accrued and unpaid interest due thereon (“Balloon Payment”).

The Balloon Payment shall accrue interest, beginning August 26, 2021 until paid in full, at a rate equal to 4.0 % per annum based on the weighted average amount outstanding during the applicable calendar quarter, and interest is payable quarterly in arrears.

In addition, the parties agreed to amend the royalty rates payable to Celgene based on net sales of products subject to the Amended Celgene License Agreement.

On December 8, 2020, the Company entered into a license agreement (“EOC License Agreement”) with EOC Pharma (Hong Kong) Limited (“EOC”) under which the Company received $ 14.0 million in January 2021 in non-refundable upfront consideration as partial payment for the rights and licenses granted to EOC by the Company for the further development and commercialization of FYARRO in the People’s Republic of China, Hong Kong Special Administration Region, Macao Special Administrative Region and Taiwan (the “Licensed Territory”).

In accordance with the Celgene License Agreement, the Company is required to pay 20 % of all sublicense fees to Celgene.

As such, the Company recognized $ 2.8 million of license expense in the year ended December 31, 2020 and had a corresponding $ 2.8 million sublicense payable to Celgene on the balance sheet as of December 31, 2020, which was paid in 2021.

During the year ended December 31, 2021, the Company recognized license revenue and received $ 1.0 million from EOC for achieving the FDA approval milestone on November 22, 2021.

In accordance with the Celgene License Agreement, the Company recognized $ 0.2 million of license expense in the year ended December 31, 2021 and had a corresponding $ 0.2 million sublicense payable to Celgene on the balance sheet as of December 31, 2021, which was paid in 2022.

Refer to Note 8 for additional information on the EOC License Agreement.

Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements have been prepared in accordance with SEC regulations and include all of the information and disclosures required by U.S.

generally accepted accounting principles (“U.S.

GAAP” or “GAAP”).

Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S.

GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

The consolidated financial statements, and the related disclosures, have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and U.S.

Securities and Exchange Commission (“SEC”) regulations and, in the opinion of management include all adjustments necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity and cash flows for each period presented.

Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

All adjustments are of a normal and recurring in nature.

The Company’s consolidated financial statements are stated in U.S.

On August 26, 2021, when the Company closed the Merger, all outstanding shares of common stock along with preferred stock of Private Aadi were exchanged for new shares of common stock of the Company and the approximately 8.1 million shares of Private Aadi capital stock held by stockholders of Private Aadi immediately prior to the Merger were exchanged for approximately 2.5 million shares of common stock of the Company based on the Exchange Ratio.

The authorized number of shares of common stock was not reduced and remains at 300.0 million.

The par value of the Company’s common stock remains unchanged at $ 0.0001 per share.

Also on August 26, 2021, and immediately prior to the closing of the Merger, Aerpio effected the Reverse Stock Split.

Accordingly, all share and per share amounts for the period presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the Reverse Stock Split.

No fractional shares were issued in connection with the Reverse Stock Split.

Unless otherwise noted, all references to shares of the Company’s common stock and per share amounts have also been adjusted to reflect the Exchange Ratio.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

The Company views its operations and manages its business in one

operating segment, which is the business of developing and commercializing proprietary therapeutics.

All the assets and operations of the Company ’s sole operating segment are located in the U nited S tates .

The Company views its operations and manages its business in one operating segment, which is the business of developing and commercializing proprietary therapeutics.

All the assets and operations of the Company’s sole operating segment are located in the United States.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

Actual results may differ from those estimates.

Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these consolidated financial statements.

Management must apply significant judgment in this process.

In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends.

The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates.

Estimates are used in the following areas, among others:

prepaid and accrued research and development expense, stock-based compensation expense, revenue recognition and income taxes.

The Company’s results can also be affected by economic conditions, global health concerns, such as COVID-19, and political, legislative, regulatory and legal actions.

Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies, and changes in the prices of research studies, can have a significant effect on operations.

While the Company maintains reserves for anticipated liabilities and carries various levels of insurance, the Company could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes.

In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.

The most significant estimates in the Company’s consolidated financial statements relate to fair value of the intangible asset, fair value of the convertible promissory notes, stock-based compensation expense and accrued research and development costs.

Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may materially differ from these estimates and assumptions.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents and certain investments in money market funds.

The Company maintains deposits in federally insured financial institutions in excess of federally insured limits.

Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

The Company has not experienced any losses on deposits since inception.

Cash and Cash Equivalents

Cash and cash equivalents consist of all cash on hand and $100,000 invested in short-term certificates of deposits with original maturities of three months or less at the time of purchase.

At December 31, 2020 and 2019, the Company’s cash equivalents are primarily held in money market funds.

The Company maintains balances with its banks in excess of federally insured limits.

The Company considers all highly liquid marketable securities purchased with original maturities of three months or less at the time of purchase date to be cash equivalents.

At December 31, 2021 and 2020, cash and cash equivalents included money market investments totaling $ 140.0 million and $ 3.0 million, respectively.

Fair Value Option

The Company has elected the fair value option to account for its convertible promissory notes issued.

The Company records these convertible promissory notes at fair value with changes in fair value recorded in the statements of operations and comprehensive loss.

As a result of applying the fair value option, direct costs and fees related to the convertible promissory notes were recognized in earnings as incurred and not deferred.

As of December 31, 2021, there were no Convertible Notes outstanding as they were converted to shares of Private Aadi common stock immediately prior to the closing of the Merger.

Fair Value of Financial Instruments

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis.

Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Observable inputs, such as quoted prices in active markets

Inputs, other than the quoted prices in active markets that are observable either directly or indirectly

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions which reflect those that a market participant would use.

The valuation of the Level 3 intangible asset was based on fair value measurements including discounted cash flow methodologies when valued at the time of the Merger.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

In determining the fair value of its financial instruments, the Company considers the source of observable market data inputs, liquidity of the instrument, the credit risk of the counterparty to the contract, and its risk of nonperformance.

In the case fair value is not observable, for the items subject to fair value measurements, the Company applies valuation techniques deemed the most appropriate under the GAAP guidance based on the nature of the assets and liabilities being measured.

The carrying amounts of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets and accounts payable are reasonable estimates of their fair value because of the short maturity of these items.

The following table sets forth the recurring and non-recurring fair value of the Company’s financial assets and liabilities, allocated into the Level 1, Level 2 and Level 3 hierarchy that were measured at fair value on a recurring basis (amounts in thousands):

Recurring fair value measurements:

Fair Value Measurements as of December 31, 2021

Money market funds (1)

Fair Value Measurements as of December 31, 2020

Money market funds (1)

Convertible promissory notes

Included in cash and cash equivalents in the accompanying balance sheets.

Non-Recurring fair value measurement:

Fair Value Measurements as of December 31, 2021

Intangible asset

Intangible Asset

The Company recognized an impairment of the contract intangible asset acquired in connection with the Merger and reduced the contract intangible asset to its estimated fair value which represented a Level 3 fair value measurement as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity.

The total contract intangible asset was valued at $ 3.9 million utilizing a scenario-based, risk-adjusted, discounted cash flow model with respect to the potential development milestone payments within the underlying license agreement and a Monte Carlo option-pricing model with respect to the sales-based milestone and royalty payments:

The Company determined fair value of the potential development milestone payments under the license agreement with inputs based on certain subjective assumptions, including (a) the probability of clinical success determined with reference to various academic studies reporting probabilities of approval for clinical trials;

(b) an estimate of the time to achievement of the clinical milestones;

and (c) a counterparty credit risk premium determined with reference to the borrowing costs of a benchmark group of comparable market participants.

Application of the Monte Carlo simulation model in valuing the potential sales-based milestone and royalties involves making assumptions for (a) the probability of clinical success determined with reference to various academic studies reporting probabilities of approval for clinical trials;

(b) a forecast of potential revenues, revenue uptake rate and the period of time from a prospective commercial launch to peak sales, and an estimate of peak sales for each successfully commercialized product covered under the license agreement;

(d) a counterparty credit risk premium determined with reference to the borrowing costs of a benchmark group of comparable market participants;

and (e) a revenue metric risk premium determined with reference to a long-term risk-free rate, a weighted-average cost of capital, revenue volatility and asset volatility

See Notes 4 and 5 for further discussion of the Intangible Asset acquired through the Merger.

Convertible Note

As further described in Note 9, Private Aadi issued convertible notes in October 2019 and January 2020 (collectively the “Convertible Notes”).

The Company elected the fair value option to account for the Convertible Notes.

The fair value was estimated using a scenario-based analysis based on the probability-weighted value of expected future investment returns, considering possible outcomes available to the noteholders including conversions in subsequent equity financings, change of control transactions, settlement, and dissolution.

The Company adjusts the carrying value of its Convertible Notes to their estimated fair value at each reporting date, with any related increases or decreases in the fair value recorded as a change in fair value of convertible promissory notes in the statements of operations and comprehensive loss.

As of December 31, 2021, there were no Convertible Notes outstanding as the Convertible Notes were converted to shares of Private Aadi common stock immediately prior to the closing of the Merger, which were concurrently exchanged for common stock of the Company based on the Exchange Ratio in connection with the closing of the Merger.

As of December 31, 2020, the significant unobservable inputs used in the fair value measurement of the Convertible Notes included an expected settlement date in August 2021 and June 2021, respectively, and an estimated discount rate of 25 %.

Other significant unobservable inputs include the relative weighting applied to the possible outcomes available to the noteholders including conversions in subsequent equity financings, change of control transactions, settlement, and dissolution.

There are significant judgments, assumptions and estimates inherent in the determination of the fair value of the Convertible Notes described above.

These include determination of a valuation method and selection of the possible outcomes available to the Company, including the determination of timing and expected future investment returns for such scenarios, as well as the likelihood of repayment, conversion, and dissolution.

The related judgments, assumptions and estimates are highly interrelated and changes in any one assumption could necessitate changes in another.

Any changes in the probability of a particular outcome would require a related change to the probability of another outcome.

The following table provides a reconciliation of the Convertible Notes (refer to Note 9) measured at fair value using significant unobservable inputs (Level 3) (amounts in thousands):

Convertible Notes

Balance as of December 31, 2019

Issuance of convertible promissory notes

Accrued interest

Change in fair value of convertible promissory notes

Balance as of December 31, 2020

Issuance of convertible promissory notes

Accrued interest

Change in fair value of convertible promissory notes

Converted into common stock

Balance as of December 31, 2021

There have been no transfers between levels during the reporting periods.

Accounts Receivable

Accounts receivable represents revenue recognized, but for which payment has not yet been received.

Accounts receivable at December 31, 2020 includes $ 14.0 million receivable related to the EOC upfront payment and $ 0.1 million grant revenue.

These amounts were subsequently collected in 2021.

Estimates for allowances for doubtful accounts are determined based on existing contractual obligations and historical payment patterns.

No allowance for doubtful accounts was recorded as of December 31, 2021 and 2020.

The Company capitalizes inventory costs associated with its products upon regulatory approval when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized;

otherwise, such costs are expensed.

Prior to FDA approval of FYARRO, all costs related to the manufacturing of FYARRO were charged to research and development expense in the period incurred.

Property and Equipment, Net

Property and equipment, consisting of computers, furniture and fixtures, and office equipment, are stated at cost, less accumulated depreciation.

Property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets, generally five years .

Such costs are periodically reviewed for recoverability when impairment indicators are present.

Intangible Asset

The Company’s intangible asset consists of a single asset, Aerpio’s license agreement with Gossamer Bio., Inc.

acquired in the Merger.

The intangible asset is stated at fair value and is amortized using the straight-line method over its estimated useful life of 14.3 years.

The intangible asset is reviewed for potential impairment when events or circumstances indicate that carrying amounts may not be recoverable.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property, equipment, and the intangible asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount.

The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value.

An impairment was recorded for the long-lived intangible asset during the year ended December 31, 2021 (see Note 5).

At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time.

If both criteria are met, the Company records the associated lease liability and corresponding right-of-use asset upon commencement of the lease using the implicit rate or a discount rate based on a credit-adjusted secured borrowing rate commensurate with the term of the lease.

The Company does not recognize assets or liabilities for leases with lease terms of less than 12 months.

The Company additionally evaluates leases at their inception to determine if they are to be accounted for as an operating lease or a finance lease.

A lease is accounted for as a finance lease if it meets one of the following five criteria:

(i) the lease has a purchase option that is reasonably certain of being exercised, (ii) the present value of the future cash flows is substantially all of the fair market value of the underlying asset, (iii) the lease term is for a significant portion of the remaining economic life of the underlying asset, (iv) the title to the underlying asset transfers at the end of the lease term, or (v) if the underlying asset is of such a specialized nature that it is expected to have no alternative uses to the lessor at the end of the term.

Leases that do not meet the finance lease criteria are accounted for as an operating lease.

Operating lease assets represent a right to use an underlying asset for the lease term and operating lease liabilities represent an obligation to make lease payments arising from the lease.

Operating lease liabilities with a term greater than one year and their corresponding right-of-use assets are recognized on the balance sheet at the commencement date of the lease based on the present value of lease payments over the expected lease term.

Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

As the Company’s leases do not typically provide an implicit rate, the Company utilizes the appropriate incremental borrowing rate, determined as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and in a similar economic environment.

For finance leases, depreciation expense is recognized for the leased asset acquired and interest expense is recognized related to the portion of the financing in the statements of operations.

For operating leases, lease cost is recognized on a straight-line basis over the lease term and variable lease payments are recognized as operating expense in the period in which the obligation for those payments is incurred.

Variable lease payments primarily include common area maintenance, utilities, real estate taxes, insurance, and other operating costs that are passed on from the lessor in proportion to the space leased by the Company.

The Company has elected the practical expedient to not separate between lease and non-lease components.

Commitments and Contingencies

The Company recognizes a liability with regard to loss contingencies when it believes it is probable a liability has been incurred, and the amount can be reasonably estimated.

If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, the Company accrues that amount.

When no amount within the range is a better estimate than any other amount the Company accrues the minimum amount in the range.

The Company has not recorded any such liabilities as of December 31, 2021 and 2020 .

Revenue Recognition

At the inception of an arrangement, the Company evaluates if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance and the term of the contract.

The Company recognizes revenue when its customer obtains control of promised goods or services in a contract for an amount that reflects the consideration the Company expects to receive in exchange for those goods or services.

For contracts with customers, the Company applies the following five-step model in order to determine this amount:

(i) identification of the promised goods or services in the contract;

(ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract;

(iii) measurement of the transaction price, including the constraint on variable consideration;

(iv) allocation of the transaction price to the performance obligations;

and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

As part of the accounting for contracts with customers, the Company must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract.

The Company then allocates the total transaction price to each performance obligation based on the estimated standalone selling prices of each performance obligation.

The Company recognizes the amount of the transaction price as revenue that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied.

The Company enters into collaboration arrangements, under which it licenses certain rights to its intellectual property to third parties.

The terms of these agreements may include payment to the Company of one or more of the following:

nonrefundable upfront license fees;

development, sale and commercial milestone payments and royalties on net sales of licensed products.

Each of these types of payments are classified as license revenue except for revenue from royalties on net sales of licensed products, which are classified as royalty revenue, if received.

For each collaboration agreement that results in revenues, the Company identifies all material promised goods and services, which may include a license to intellectual property, research and development activities and/or transition activities.

Promised goods or services are considered to be separate performance obligations if they are distinct.

In order to determine the transaction price to be allocated to each performance obligation, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract.

The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract.

When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue.

In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue.

These estimates are re-assessed each reporting period as required.

Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified.

The transaction price is generally allocated to each separate performance obligation on a relative standalone selling price basis.

The Company must develop assumptions that require judgment to determine the standalone selling price (“SSP”) in order to account for these agreements.

To determine the standalone selling price the Company’s assumptions may include (i) assumptions regarding the probability of obtaining marketing approval for the drug candidate;

(ii) estimates regarding the timing of and the expected costs to develop and commercialize the drug candidate;

(iii) estimates of future cash flows from potential product sales with respect to the drug candidate;

and (iv) appropriate discount and tax rates.

Standalone selling prices used to perform the initial allocation are not updated after contract inception.

The Company does not include a financing component to its estimated transaction price at contract inception unless it estimates that certain performance obligations will not be satisfied within one year.

Upfront License and Amendment License Fees:

If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, upfront (or one-time) license and amendment license fees based on the relative value prescribed to the license compared to the total value of the arrangement.

The revenue is recognized when the cash is received or when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license.

For licenses that are not distinct from other obligations identified in the arrangement, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time.

If the combined performance obligation is satisfied over time, the Company applies an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, license fees.

The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Development Milestone Payments:

Depending on facts and circumstances, the Company may conclude it is appropriate to include the milestone in the estimated transaction price using the most likely amount method or it is appropriate to fully constrain the milestone.

A milestone payment is included in the transaction price in the reporting period the Company concludes that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods.

The Company may record revenues from certain milestones in a reporting period before the milestone is achieved if the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods.

The Company records a corresponding contract asset when this conclusion is reached.

Milestone payments that have not been included in the transaction price to date are fully constrained.

These milestones remain fully constrained until the Company concludes that achievement of the milestone is probable and recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods.

The Company re-evaluates the probability of achievement of such development milestones and any related constraint each reporting period.

The Company adjusts its estimate of the overall transaction price, including the amount of collaborative revenue that it has recorded, if necessary.

Sales-based Milestone and Royalty Payments :

The Company’s collaborators may be required to pay the Company sales-based milestone payments or royalties on future sales of commercial products.

The Company recognizes revenues related to sales-based milestone and royalty payments upon the later to occur of ( i ) achievement of the collaborator’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the license to the Company’s intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.

Other income represents reimbursed internal and external qualified expenses, per the terms of the MTEC arrangement, related to the ARDS clinical trial.

Other income is recorded, and generally received, in the period the internal or external qualified clinical trial expenses are incurred, and paid, by the Company.

Grant income is recognized as earned based on contract work performed.

Grant Revenue

The Company’s grant revenues are derived from federal grants with the U.S.

Food and Drug Administration.

The Company has determined that the government agencies providing grants to the Company are not customers.

Grant revenue is recognized when there is reasonable assurance of compliance with the conditions of the grant and reasonable assurance that the grant revenue will be received.

The Company recognizes grant revenues as reimbursable grant costs are incurred.

The costs associated with these reimbursements are reflected as a component of research and development expense in the accompanying statements of operations and comprehensive loss.

With respect to grant revenue derived from reimbursement of direct out-of-pocket expenses for research costs associated with federal contracts, where the Company acts as principal with discretion to choose suppliers, bears credit risk, and performs part of the services required in the transaction, the Company records revenue for the gross amount of the reimbursement.

The costs associated with these reimbursements are reflected as a component of research and development expense in the accompanying statements of operations and comprehensive loss.

Revenue Under License Agreement

The Company generates revenues from payments received under a license agreement.

Under such license agreement, the Company recognizes revenue when it transfers promised goods or services to partners in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.

To determine revenue recognition for contracts with partners, the Company performs the following five steps:

(i) identifies the promised goods or services in the contract;

(ii) identifies the performance obligations in the contract, including whether they are distinct in the context of the contract;

(iii) determines the transaction price, including the constraint on variable consideration;

(iv) allocates the transaction price to the performance obligations in the contract;

and (v) recognizes revenue when (or as) the Company satisfies the performance obligations.

For revenue from such license agreement, the Company generally collects an upfront license payment from the license partner and is also entitled to receive event-based payments subject to the license partner’s achievement of specified development, regulatory and sales-based milestones.

In addition, the Company is generally entitled to royalties if products under the license agreement are commercialized.

Transaction price for a contract represents the amount to which the Company is entitled in exchange for providing goods and services to the partner.

Transaction price does not include amounts subject to uncertainties unless it is probable that there will be no significant reversal of revenue when the uncertainty is resolved.

Apart from the upfront license payment, all other fees the Company may earn under such license agreements are subject to significant uncertainties of product development.

Achievement of many of the event-based development and regulatory milestones may not be probable until such milestones are actually achieved.

This generally relates to milestones such as obtaining regulatory approvals and successful completion of clinical trials.

With respect to other development milestones, e.g., dosing of a first patient in a clinical trial, achievement could be considered probable

prior to its actual occurrence, based on the progress towards commencement of the trial.

The Company does not include any amounts subject to uncertainties into the transaction price until it is probable that the amount will not result in a significant reversal of revenue in the future.

At the end of each reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts the estimate of the overall transaction price.

Because such agreements generally only have one type of performance obligation, a license, which is generally all transferred at the same time as agreement inception, allocation of the transaction price among multiple performance obligations is not required.

Upfront amounts allocated to licenses are recognized as revenue when the licenses are transferred to the partners.

Development milestones and other fees are recognized in revenue when their occurrence becomes probable.

Research and Development

Research and development costs are expensed as incurred.

Research and development expense consists of (i) employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;

(ii) external research and development expenses incurred under arrangements with third parties, such as contract research organizations and consultants;

(iii) the cost of acquiring, developing and manufacturing clinical study materials;

and (iv) costs associated with clinical, preclinical and regulatory activities.

The Company enters into consulting, research, and other agreements with commercial firms, researchers, universities and others for the provision of goods and services.

Under such agreements, the Company may pay for services on a monthly, quarterly, project or other basis.

Such arrangements are generally cancellable upon reasonable notice and payment of costs incurred.

Costs are considered incurred based on an evaluation of the progress to completion of specific tasks under each contract using information and data provided to the Company by its clinical sites and vendors.

These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company.

Costs incurred in connection with the application for and issuances of patents are expensed as incurred.

Income taxes are recorded in accordance with ASC Topic 740, Income Taxes (“ASC 740”) which provides for deferred taxes using an asset and liability approach.

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns.

Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax bases of assets and liabilities and for loss and credit carryforwards using enacted tax rates anticipated to be in effect for the year in which the differences are expected to reverse.

Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740.

When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized.

The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position, as well as consideration of the available facts and circumstances.

As of December 31, 2020 and 2019, the Company does not have any uncertain tax positions.

The Company recognizes interest and penalties related to uncertain tax positions, if any exist, in income tax expense.

Net and Comprehensive Loss per Share Attributable to Common Stockholders

The Company’s basic net and comprehensive loss per share attributable to common stockholders is calculated by dividing the net and comprehensive loss by the weighted average number of shares of common stock outstanding for the period.

The diluted net and comprehensive loss per share attributable to common stockholders is computed by adjusting the weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury stock method.

Stock-Based Compensation

The Company accounts for its stock-based compensation awards in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC 718”).

ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values.

All the Company’s stock-based awards are subject only to service-based vesting conditions.

The Company estimates the fair value of its stock-based awards using the Black-Scholes option pricing model, which requires the input of assumptions, including (a) the expected stock price volatility, (b) the calculation of expected term of the award, (c) the risk-free interest rate and (d) expected dividends.

Due to the historical lack of a public market for the trading of the Company’s common stock and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded.

Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, materials and supplies, preclinical expenses, stock-based compensation expense, contract services, and other external development expenses.

The Company records research and development activities conducted by third-party service providers, which include work related to preclinical studies, clinical trials, and contract manufacturing activities, to research and development expense as incurred.

The Company is required to estimate the amount of services provided but not yet invoiced and include these expenses in accrued expenses on the balance sheet and within research and development expenses in the statements of operations and comprehensive loss.

These expenses are a significant component of the Company’s research and development expenses and require significant estimates and judgments.

The Company accrues for these expenses based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers.

As actual expenses become known, the Company adjusts its accrued expenses.

Share-Based Compensation

The Company recognizes all stock-based payments to employees, including grants of employee stock options in the consolidated statements of operations and comprehensive loss based on their fair values.

All the Company’s share-based awards, to employees, non-employees, officers, and directors, are subject only to service-based vesting conditions.

The Company estimates the fair value of its stock-based awards using the Black-Scholes option pricing model, which requires the input of assumptions, including (i) the expected stock price volatility, (ii) the calculation of expected term of the award, (iii) the risk-free interest rate and (iv) expected dividends.

Options granted during the year have a maximum contractual term of ten years.

Forfeitures are recognized and accounted for as they occur.

Due to the historical lack of a public market for the trading of the Company’s securities and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded.

The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product development and life science industry focus.

The Company believes the group selected has sufficient similar economic and industry characteristics and includes companies that are most representative of the Company.

The Company uses the simplified method as prescribed by the SEC Staff Accounting Bulletin No.

107, Share-Based Payment , to calculate the expected term, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for options granted to employees, and utilizes the contractual term for options granted to non-employees.

The Company has limited historical stock option activity and therefore estimates the expected term of stock options granted to employees, officers, and directors using the simplified method, which represents the average of the contractual term of the stock option and its weighted-average vesting period, to calculate the expected term, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for options granted to employees, and utilizes the contractual term for options granted to non-employees.

The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population.

The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options.

The risk-free interest rate is based on the U.S.

Treasury yield in effect at the time of the grant for zero-coupon U.S.

treasury notes with maturities approximately equal to the expected term of the stock options.

Compensation expense related to awards to employees is calculated on a straight-line basis by recognizing the grant date fair value over the associated service period of the award, which is generally the vesting term.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts payable and accrued expenses.

The Company values cash equivalents using quoted market prices.

The fair value of accounts payable and accrued expenses approximates its carrying value because of its short-term nature.

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values.

ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available.

Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.

Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.

The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality.

The three levels of the fair value hierarchy are described below:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date

Level 2 – Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly

Level 3 – Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable

To the extent that a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.

Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

There were no transfers within the fair value hierarchy in the years ended December 31, 2020 and 2019 .

The assets of the Company measured at fair value on a recurring basis as of December 31, 2020 and 2019 are summarized below:

Fair Value Measurements Using

December 31, 2020

Cash and cash equivalents

December 31, 2019

Income taxes have been accounted for using the asset and liability method.

Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance against deferred tax assets is recorded if, based upon the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized.

The Company recognizes interest and penalties related to uncertain tax positions, if any exist, in income tax expense.

Net and Comprehensive Loss per Share Attributable to Common Stockholders

Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period.

Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares and common share equivalents outstanding for the period.

Common stock equivalents are only included when their effect is dilutive.

The Company’s potentially dilutive securities, which include convertible promissory notes, convertible preferred stock, outstanding stock options and warrants under the Company’s equity incentive plans have been excluded from the computation of diluted net loss per share as they would be anti-dilutive.

Net loss per share is presented as the more dilutive of the treasury stock and as-converted method or the two-class method required for participating securities.

The Series A convertible preferred stock is considered a participating security and does not have a contractual obligation to share in Private Aadi’s losses.

As such, the two-class method was not required.

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because their inclusion would be anti-dilutive (amounts in thousands):

Year Ended December 31,

Options to purchase common stock

Warrants to purchase common stock

Series Seed convertible preferred stock

Series A convertible preferred stock

The table above excludes the conversion of the principal balance and accrued interest on the convertible promissory notes which converted into 698,018 shares of common stock in conjunction with the closing of the Merger.

Accounting Pronouncements Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06, “ Debt – Debt with Conversion and Other Options” (Subtopic 470-20) and “Derivatives and Hedging – Contracts in Entity’s Own Equity” (Subtopic 815-40).

This new guidance is intended to reduce the complexity of accounting for convertible instruments.

The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments.

Entities may adopt ASU 2020-06 using either a partial retrospective or fully retrospective method of transition.

This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years for smaller reporting companies.

The Company is currently evaluating the impact the adoption of ASU 2020-06 will have on the Company’s consolidated financial statements.

In April 2021, the FASB issued ASU 2021-04, which included Topic 260 “ Earnings Per Share .” This guidance clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification.

ASU 2021-04 is effective

for all entities for fiscal years beginning after December 15, 2021.

Early adoption is permitted.

The Company has evaluat ed the impact of adopting ASU 2021-04 and does not expect this will have a material impact on the Company’s consolidated financial statements.

The Merger was accounted for as a reverse asset acquisition because substantially all of the fair value was concentrated in cash, working capital, and a long-lived contract intangible asset (See Note 1).

The estimated fair value of total consideration given was $ 110.4 million as detailed below and is based on 3,208,718 shares of common stock, after taking into account the Reverse Stock Split, outstanding immediately prior to the Effective Time.

Number of common shares of the combined company to be owned by Aerpio shareholders

Multiplied by the fair value per share of Aerpio common stock on August 26, 2021

Fair value of Aerpio common stock

Aadi transaction costs

Purchase price

The allocation of the purchase price is as follows (amounts in thousands):

August 26, 2021

Cash and cash equivalents

Concentrations of Credit Risk and Off-Balance Sheet Risk

Cash and cash equivalents are the only financial instruments that potentially subject the Company to concentrations of credit risk.

At December 31, 2020 and 2019, the Company maintains its cash and cash equivalents with high-quality, accredited financial institutions and, accordingly, such funds are subject to minimal credit risk.

The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, if any.

Comprehensive loss equaled net loss for all periods presented.

Furniture and Equipment

Furniture and equipment is stated at cost, less accumulated depreciation.

Furniture and equipment is depreciated using the straight-line method over the estimated useful lives of the assets, generally three to seven years.

Such costs are periodically reviewed for recoverability when impairment indicators are present.

Such indicators include, among other factors:

operating losses, unused capacity, market value declines, and technological obsolescence.

Recorded values of asset groups of furniture and equipment that are not expected to be recovered through undiscounted future net cash flows are written down to current fair value, which generally is determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).

At the inception of an arrangement the Company determines whether the arrangement is or contains a lease based on the circumstances present.

All leases with a term greater than one year are recognized on the consolidated balance sheet as right-of-use assets, net, lease liabilities and, if applicable, long-term lease liabilities.

The Company has elected not to recognize on the consolidated balance sheet leases with terms of one-year or less if entered into.

Lease liabilities and their corresponding right-of-use assets, net are recorded based on the present value of lease payments over the expected lease term.

The interest rate implicit in lease contracts is typically not readily determinable.

As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

Certain adjustments to the right-of-use assets, net may be required for items such as initial direct costs paid or incentives received.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date.

Unless otherwise discussed, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”) .

ASU 2018-07 improves financial reporting for share-based payments issued to nonemployees under ASC 718 by expanding the scope of the employee share-based payments guidance to include share-based payments issued to nonemployees.

The amendments in ASU 2018-07 were effective for public companies for fiscal years beginning after December 31, 2018, including interim periods within that fiscal year.

The Company adopted ASU 2018-07 as of January 1, 2019 and recorded a one-time cumulative adjustment of $5,717 upon adoption.

No other new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on the Company’s consolidated financial statements.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following as of:

Accounts payable

Other current assets

Intangible asset (1)

Accounts payable and accrued liabilities

Purchase price

The long-lived intangible asset represents Aerpio’s out-licensing agreement with Gossamer Bio., Inc.

Should payment be received from the underlying license agreement, in accordance with milestones or royalties, the Company will retain 10 % of the proceeds with the balance being distributed to the CVR Holders.

In accordance with GAAP for asset acquisitions, the excess purchase price over the fair value of the acquired assets and liabilities was ascribed to the acquired contract intangible asset.

See Note 5 below for additional discussion of the subsequent impairment recognized.

Intangible Asset

In conjunction with the Merger, the Company recorded a long-lived contract intangible asset related to Aerpio’s license agreement with Gossamer Bio.

Inc., which was assumed in the Merger.

In accordance with GAAP, for asset acquisitions, the excess purchase price over the fair value of the acquired assets and liabilities was ascribed to the acquired contract intangible asset.

Due to the significant excess purchase price being allocated over the fair value of the acquired contract intangible asset, the Company determined that an indicator of impairment was present.

The contract intangible asset was assessed for recoverability using an undiscounted cash flow model, which resulted in undiscounted cash flows below the carrying amount.

The Company therefore recognized an impairment of $ 74.2 million to bring the carrying amount of the contract intangible asset down to its estimated fair value of $ 3.9 million.

The fair value estimate of the intangible asset relates to contingent cash flows expected from Aerpio’s out-licensing arrangement, of which 90 % of any future net cash proceeds will be remitted to CVR Holders and paid through the CVRs.

The fair value determination of the intangible asset was based upon a discounted cash flow valuation of the milestone payments and Monte Carlo valuation for the sales royalties.

The estimated useful life of the intangible asset is 14.3 years .

Amortization expense was $ 95,000 for the year ended December 31, 2021.

No intangible asset or amortization expense was recorded in 2020.

The estimated amortization expense related to this finite lived intangible asset for the five succeeding years is as follows (amounts in thousands):

Intangible asset

Less amortization

Intangible asset, net

Amounts thereafter

As of December 31, 2021, all development milestones, sales-based milestones and royalty payments within the license agreement are constrained.

There can be no assurance that any proceeds will be received under the license agreement.

Accrued Liabilities

Details of accrued liabilities are presented as follows (amounts in thousands):

Accrued clinical

Accrued contract manufacturing

Accrued bonus

Professional fees

Accrued project costs

Accrued vacation

Restructuring accrual (see Note 15)

Accrued retention bonus

Total accounts payable and accrued expenses

Furniture and Equipment

Furniture and equipment consist of the following as of:

Leasehold improvements

Total furniture and equipment

Accumulated depreciation

Furniture and equipment, net

As of December 31, 2020 and 2019, the Company had 300,000,000 shares of authorized common stock with par value of $0.0001 per share.

The common stock has the following characteristics:

The holders of common stock are entitled to one vote for each share of common stock held at all meetings of stockholders and written actions in lieu of meetings.

The holders of common stock are entitled to receive dividends, if and when declared by the board of directors of the Company (the “Board of Directors”).

Accrued professional fees

Accrued other

Total accrued liabilities

Operating Lease

In April 2019, the Company entered into a twenty-eight-month facility lease agreement for 2,760 square feet of office space in Pacific Palisades, California.

The lease commenced on May 1, 2019 , included four months of rent abatement and a rent escalation clause and was set to expire on August 31, 2021 .

In August 2021, the Company exercised its option to extend the term of the lease for an a dditional three-year period and entered into an amendment to the lease agreement (the “Lease Amendment”).

Pursuant to the Lease Amendment, the Company and the landlord agreed to extend the term for an additional period of three (3) years and six (6) months, until February 28, 2025 , with an option to renew for an additional three (3) years in accordance with the terms of the lease agreement.

Included in the Lease Amendment were nine months of rent abatement and a rent escalation clause.

Rent expense is being recorded on a straight-line basis.

The following table summarizes information related to the Company’s lease (amounts in thousands):

Operating lease right-of-use assets

Total right-of-use assets

Operating lease liabilities, current

Operating lease liabilities, non-current

Total operating lease liabilities

Rent expense related to this lease each of the twelve months ended December 31, 2021 and December 31, 2020 is presented on the following table (amounts in thousands):

Cash paid included in operating cash flows

Operating leases rent expense

The future minimum lease payments required under the operating lease as of December 31, 2021, are summarized below (amounts in thousands):

Future Minimum Lease Payments:

Total minimum lease payments

amount representing interest

Present value of operating lease liabilities

operating lease liabilities, current

Operating lease liabilities, non-current

Remaining lease term (in years)

Incremental borrowing rate

EOC License Agreement

In December 2020, the Company entered into the EOC License Agreement with EOC for the further development of ABI-009, now called FYARRO, and commercialization of FYARRO in Greater China, including the Republic of China, Hong Kong, Macau and Taiwan (the “Licensed Territory”).

Under the terms of the EOC License Agreement, the Company granted to EOC an exclusive, royalty-bearing license to develop and commercialize the product in the Licensed Territory.

Unless earlier terminated, the term of the EOC License Agreement continues until the expiration of the royalty obligations.

EOC has the right to terminate the agreement for any reason upon 120 days advance written notice.

Either party may terminate the EOC License Agreement in the event that the other party breaches the agreement and fails to cure the breach, becomes insolvent or challenges certain of the intellectual property rights licensed under the agreement.

The Company assessed the EOC License Agreement and concluded that EOC is a customer and identified the license of FYARRO provided to EOC as the sole performance obligation.

The $ 14.0 million upfront payment received from EOC is non-refundable and non-creditable and is considered fixed consideration.

The Company recognized revenue of $ 14.0 million in the year ended December 31, 2020 when the EOC License Agreement was signed, and the $ 14.0 million upfront payment was received in January 2021.

The potential milestone payments and royalty payments under the EOC License Agreement are considered variable consideration and are constrained with respect to revenue recognition notification from EOC that the milestone and royalty payments have been achieved.

The Company is eligible to receive an additional $ 257.0 million in the aggregate upon achievement of certain development, regulatory, and sales milestones, as well as tiered royalties on net sales in the Licensed Territory.

Under the terms of the EOC License Agreement, EOC will fund all research, development, regulatory, marketing and commercialization activities in the defined Licensed Territory.

The Company earned $ 1.0 million in milestone revenue upon achievement of the FDA approval milestone on November 22, 2021.

EOC paid the $ 1.0 million milestone payment in December 2021.

In accordance with the Company’s agreement with Celgene, 20 % of the $1.0 million payment, or $ 0.2 million was accrued at December 31, 2021, for payment to Celgene in January 2022.

Convertible Notes

Private Aadi received $ 8.1 million in October 2019 and $ 1.0 million in January 2020 for the proceeds in connection with the issuance of Convertible Notes.

The October 2019 Convertible Notes were issued to existing equity holders of Private Aadi.

The Convertible Notes issued in October 2019 and January 2020 originally had a maturity date of one year from the date of issuance and an escalating interest rate of 6 % per annum for the first four months following the effective date of the loan agreement, 8 % per annum for the fifth and sixth months, and 10 % per annum for the remaining six months of the note term until maturity at twelve months.

The Convertible Notes contain certain redemption features, including conversion to preferred stock upon the closing of Private Aadi’s next issuance of preferred stock resulting in net proceeds to the Company of at least $ 25.0 million (“Qualified Financing”).

The Convertible Notes would convert into a variable, whole number of preferred shares equal to the number obtained by dividing the principal plus accrued interest of the Convertible Notes by 80 % of the price per share paid by cash investors in the Qualifying Financing if converted in the first four months following the effective date of the loan agreement, 75 % if converted in months five or six, and 70 % if converted later than six months.

The Convertible Notes also contained a mandatory prepayment provision that required Private Aadi to pay the outstanding principal, plus accrued and unpaid interest together with a premium in the event that a qualified liquidity event occurred.

The premium was equal to 120 % of the outstanding principal amount to be prepaid in the event the liquidity event occurs within four months of the note date, 130 % between the fifth and sixth month, and 140 % if after the sixth month but prior to maturity.

In November 2020, Private Aadi entered into an amendment to the October 2019 and January 2020 Convertible Notes, whereby the term was extended from one year to two years .

The amendment was accounted for as a debt modification.

In May 2021, Private Aadi entered into an amendment to the October 2019 and January 2020 Convertible Notes, whereby upon the closing of the Merger (see Note 1), the outstanding principal amount of the Convertible Notes and all accrued and unpaid interest as of immediately prior to the closing of the Merger would automatically convert into fully paid and nonassessable shares of Private Aadi common stock at a price per share equal to $ 4.80 and would be concurrently exchanged for shares of the Company’s common stock based on the Exchange Ratio.

In conjunction with the closing of the Merger on August 26, 2021, the outstanding Convertible Notes were converted into shares of Private Aadi common stock which were concurrently exchanged for 698,018 shares of the Company’s common stock after taking into account the Exchange Ratio .

At the date of conversion, the convertible notes were marked to market .

Payroll Protection Program Loan

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

The CARES Act also appropriated funds for the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19 .

In May 2020, Aadi was approved for a $ 0.2 million SBA PPP loan, as provided for in the CARES Act (“PPP Loan”).

Under certain conditions, the PPP Loan and accrued interest are forgivable after a twenty-four-week covered period as long as the loan proceeds were used for eligible expenses, including payroll, benefits, rent and

utilities, and the company maintains certain payroll levels.

The amount of loan forgiveness is subject to reduction if the Company terminates employees or reduces salaries during the twenty-four-week covered period.

The unforgiven portion of the loan is payable over two years at an interest rate of 1 % , with a deferral of payments for the ten months following the end of the twenty-four-week covered period.

On April 29, 2021, the Company received notification from the SBA that the Company’s Forgiveness Application of the PPP Loan and accrued interest was approved in full, and the Company had no further obligations related to the PPP Loan.

Accordingly, the Company recorded a gain on the forgiveness of the PPP Loan totaling $ 0.2 million.

The SBA has stated that all PPP loans in excess of $ 2 million, and other PPP loans as appropriate, will be subject to review by the SBA for compliance with program requirements.

If the SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request or the subsequent use of loan proceeds, the SBA will seek repayment of the PPP loan, including interest and potential penalties.

While the Company believes the loan was properly obtained and forgiven, there can be no assurance regarding the outcome of an SBA review.

The Company has no t accrued any liability associated with the risk of an adverse SBA review .

Preferred Stock

As of December 31, 2021, under the Company’s certificate of incorporation, as amended and restated, the Company has 10,000,000 shares of preferred stock, par value $ 0.0001 per share, in authorized capital with no shares outstanding.

Series Seed Preferred Stock

On February 23, 2017, Private Aadi converted from a limited liability company to a corporation and at that time converted 734,218 membership units into shares of Series Seed Preferred Stock.

All outstanding shares of Series Seed Preferred Stock were converted into Private Aadi’s common stock and concurrently exchanged for the Company’s common stock based on the Exchange Ratio in connection with the closing of the Merger.

Series A Preferred Stock

In February and March 2017, Private Aadi sold and issued in a private placement 5,847,940 shares of Series A Preferred Stock at $ 3.42 per share (the “Series A Financing”).

Upon the closing of the Series A Financing, convertible notes issued in 2015 converted into 482,426 shares of Series A Preferred Stock at 85 % of the $ 3.42 price per share (the “Series A Original Issue Price”) paid by the Series A Financing investors.

Convertible notes issued in 2017 converted into 881,286 shares of Series A Preferred Stock at the Series A Original Issue Price.

All outstanding shares of Series A Preferred Stock were converted into shares of Private Aadi common stock and concurrently exchanged for the Company’s common stock based on the Exchange Ratio in connection with the closing of the Merger.

Upon the closing of the Merger, Private Aadi’s board of directors declared a 4 % cumulative dividend on its preferred stock of $ 4.4 million which was paid at the Effective Time.

As of December 31, 2021 and 2020, the Company had 300,000,000 and 20,000,000 shares of authorized common stock with par value of $ 0.0001 per share, respectively, under the Company’s certificate of incorporation, as amended and restated.

As of December 31, 2021 and 2020, the shares of common stock outstanding were 20,894,695 and 2,542,358 , respectively.

In conjunction with the closing of the Merger, the Company issued an aggregate of 2,558,218 shares of common stock to holders of Private Aadi common stock in exchange for all of the Private Aadi capital stock outstanding immediately prior to the closing of the Merger.

Concurrently with the closing of the Merger, the PIPE Investors purchased an aggregate of 11,852,862 shares of the Company’s common stock for an aggregate purchase price of $ 155.0 million pursuant to the Subscription Agreement entered into with the Company on May 16, 2021.

The aggregate net proceeds, after deducting certain expenses incurred that were direct and incremental to the issuance of the PIPE shares, was $ 145.4 million.

The holders of common stock are entitled to receive dividends, if and when declared by the board of directors of the Company (the “ b oard of d irectors”).

Since the Company’s inception, no dividends have been declared or paid to the holders of common stock.

In the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the Company, the holders of common stock are entitled to share ratably in the Company’s assets.

Warrants to Purchase Common Stock

At December 31, 2020 and 2019, the Company had warrants outstanding for the purchase of 600,000 and 917,562 shares, respectively, of the Company’s common stock.

In October 2019, the Company issued warrants for the purchase of 600,000 shares of the Company’s common stock at an exercise price of $0.486 per share in connection with the hiring of a strategic advisor consultant for a six-month period.

These warrants vested in equal monthly installments over a six-month period beginning October 14, 2019 and expire on October 24, 2024.

At the date of grant the fair value of these awards was determined using a Black-Scholes Merton pricing model.

Included at December 31, 2019, are warrants for the purchase of 317,562 shares of the Company’s common stock at an exercise price of $5.00 per share that were issued in 2017 and have a three-year term.

The 317,562 warrants expired on March 15, 2020, and none were exercised or settled as the fair value of the Company’s common stock was below the exercise price.

The number of shares and the exercise price shall be adjusted for standard anti-dilution events such as stock splits, combinations, reorganizations, or issue shares as part of a stock dividend.

Upon a change of control, the warrant holder will have the right to receive securities, cash or other properties it would have been entitled to receive had the warrant been exercised.

The warrants are equity classified instruments and do not contain contingent exercise provisions, or other features, that would preclude the Company from concluding that the warrants are indexed solely to the Company’s common stock.

Preferred Stock

As of December 31, 2020 and 2019, the Company had 10,000,000 shares of preferred stock, par value $0.0001 per share, in authorized capital.

No preferred stock was issued and outstanding at December 31, 2020 and 2019.

The holders of common stock are entitled to one vote for each share of common stock held at all meetings of stockholders and written actions in lieu of meetings.

Stock-Based Compensation

In March 2017, the Company’s Board of Directors adopted, and the stockholders approved, the 2017 Stock Option and Incentive Plan (the “2017 Plan”), that became effective in April 2017.

The 2017 Plan provides for the issuance of incentive awards up to 4,600,000 shares of common stock to officers, employees, consultants and directors, less the number of shares subject to issued and outstanding awards under the Company’s 2011 Equity Incentive Plan that were assumed in the Merger.

The 2017 Plan also provides that the number of shares reserved for issuance thereunder will be increased annually on the first day of each year beginning in 2018 by four percent (4%) of the shares of our common stock outstanding on the last day of the immediately preceding year or such smaller increase as determined by our Board of Directors.

As a result of the evergreen increase, a total of 1,623,520 shares were added to the 2017 Plan on January 1, 2020 and a total of 1,890,052 were added to the 2017 Plan on January 1, 2021.

Stock Options

The options granted generally vest over 48 months.

Under the 2017 Plan, options vest in installments of 25% at the one-year anniversary and thereafter in 36 equal monthly installments beginning on the 1 st of the month after the one-year anniversary date, subject to the employee’s continuous service with the Company.

In May 2019, the Company issued a special retention grant of options to purchase an aggregate of 2,419,050 shares of common stock which vest in installments of 50% at June 30, 2020 and 50% at June 30, 2021, subject to the employee’s continuous service with the Company.

The options generally expire ten years after the date of grant.

The fair value of the options at the date of grant is recognized as an expense over the requisite service period.

Option awards to purchase an aggregate of 962,720 and 4,666,728 shares of common stock were granted during the year ended December 31, 2020 and 2019, respectively.

All option awards granted during 2020 and 2019 were under the 2017 Equity Plan.

As of December 31, 2020 and 2019, 3,634,905 and 1,983,093 shares were reserved for issuance under the 2017 Plan, respectively.

The following table summarizes the stock option activity during the years ended December 31, 2020 and 2019 :

Outstanding, January 1, 2019

Expired/cancelled

Outstanding, December 31, 2019

Expected to vest, December 31, 2019

Options exercisable, December 31, 2019

Stock Option Plan – 2014 Plan (“Private Aadi Plan”)

In connection with the Merger, the Company assumed Private Aadi Plan, which was amended and restated in February 2017, and the issued and outstanding stock options under the Private Aadi Plan (the Private Aadi common stock underlying the awards was adjusted for shares of the Company’s common stock pursuant to the Merger Agreement).

The Private Aadi Plan allowed for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock unit awards and other stock awards.

In connection with the closing of the Merger and the adoption of the 2021 Plan (as defined below), no further awards will be issued under the Private Aadi Plan.

The options that are granted from the Private Aadi Plan are exercisable at various dates as determined upon grant and will expire no more than ten years from their date of grant.

The Private Aadi Plan s tock options generally vest over a four-year term.

Stock Option Plan – 2011 Plan and 2017 Plan

In connection with the closing of the Merger, the Company assumed the Aerpio 2011 Equity Incentive Plan (the “2011 Plan”) and the Aerpio 2017 Stock Option and Incentive Plan (the “2017 Plan,” and collectively with the 2011 Plan, the “Prior Plans”).

No new awards will be granted under the Prior Plans effective upon the closing of the Merger and adoption of the 2021 Plan (as defined below).

Stock Option Plan – 2021 Plan

At the closing of the Merger, the Company adopted the Aadi Bioscience, Inc.

2021 Equity Incentive Plan (the “2021 Plan”), which also permits stock options and restricted stock unit grants to employees, members of the board of directors, and outside consultants.

Subject to the adjustment provisions contained in the 2021 Plan and the evergreen provision described below, a total of 2,070,784 shares of common stock were initially reserved for issuance pursuant to the 2021 Plan.

In addition, the shares reserved for issuance under the 2021 Plan include any shares of common stock (i) subject to awards of stock options or other awards granted under the Prior Plans that expire or otherwise terminate without having been exercised in full and shares of common stock granted under the Prior Plans that are forfeited or repurchased by the Company, and (ii) any shares of common stock subject to stock options or similar awards granted under the Private Aadi Plan that were assumed in the Merger (provided that the maximum number of shares that may be added to the 2021 Plan pursuant to this sentence is 764,154 shares).

The number of shares available for issuance under the 2021 Plan also will include an annual increase, or the evergreen feature, on the first day of each of the Company’s fiscal years, beginning with the Company’s fiscal year 2022, equal to the least of:

2,070,784 shares of common stock;

a number of shares equal to 4 % of the outstanding shares of common stock on the last day of the immediately preceding fiscal year;

such number of shares as the Board or its designated committee may determine.

As a result of the evergreen increase, a total of 835,787 shares were added to the 2021 Plan on January 1, 2022.

Shares issuable under the 2021 Plan are authorized, but unissued, or reacquired shares of common stock.

If an award expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an exchange program, or, with respect to restricted stock, restricted stock units, performance units or performance shares, is forfeited to or repurchased by the combined company due to failure to vest, the unpurchased shares (or for awards other than stock options or stock appreciation rights, the forfeited or repurchased shares) will become available for future grant or sale under the 2021 Plan (unless the 2021 Plan has terminated).

As of December 31, 2021, zero , 432,978 , 126,267 and 1,190,631 shares were subject to awards outstanding under the 2011 Plan, Private Aadi Plan, 2017 Plan and 2021 Plan, respectively.

The following table summarizes the stock option activity during the twelve months ended December 31, 2021 and December 31, 2020:

Intrinsic Value

(in thousands)

Outstanding, January 1, 2021

Assumed through Merger

Expired/cancelled

Outstanding, December 31, 2020

Expected to vest, December 31, 2020

Options exercisable, December 31, 2020

Aggregate intrinsic value represents the estimated fair value of the Company’s common stock in excess of the weighted average exercise price multiplied by the number of options outstanding or exercisable.

The aggregate intrinsic value of the options at December 31, 2020 and 2019, was $358,209 and $2,866, respectively.

Stock options exercised during 2020 had an intrinsic value of $149,172.

No stock options were exercised during 2019.

For the years ended December 31, 2020 and 2019, the Company recognized compensation expense for stock options of $1,281,530 and $1,085,842, respectively.

During the fourth quarter of 2019 , the Company recorded a one-time stock-based compensation cumulative reversal of $1,051,735 for the forfeitures of outstanding equity awards related to the Chief Executive Officer and Chief Financial and Business Officer who departed the Company on October 15, 2019.

As of December 31, 2020, there was $1,463,227 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 1.66 years.

Outstanding as of December 31, 2021

Vested and exercisable as of December 31, 2021

Vested and expected to vest as of December 31, 2021

As of December 31, 2021, the aggregate intrinsic value of options outstanding was $ 10.0 million.

The intrinsic value for stock options is calculated based on the difference between the exercise prices of the underlying awards and the quoted stock price of the Company’s common stock as of the reporting date.

As of December 31, 2021, there was $ 22.1 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 2.9 years.

As of December 31, 2021, zero and 1,390,606 shares were reserved for issuance under the Private Aadi Plan and 2021 Plan, respectively.

Compensation Expense Summary

The Company recognized the following compensation cost related to employee and non-employee stock-based compensation activity for the periods presented (amounts in thousands):

Year Ended December 31,

Research and development

General and administrative

Included in the twelve months ended December 31, 2021 is $ 0.3 million of expense related to the acceleration of vesting associated with individual awards assumed in the Merger.

The Company uses the Black-Scholes option pricing model to determine the estimated fair value for stock-based awards.

For the years ended December 31, 2020 and 2019, there were 962,720 and 4,666,728 options granted out of the 2017 Plan, respectively.

Option pricing models require the input of various assumptions, including the option’s expected life, expected dividend yield, price volatility and risk-free interest rate of the underlying stock.

As there has not been significant public market activity of the Company’s Common Stock, the Company has determined the volatility assumption for options granted based on data from a peer group of companies that issued options with substantially similar terms.

The expected volatility of options granted has been determined using the average of the historical volatility measures of this peer group of companies for a period equal to the expected life of the option.

The risk-free interest rate is based on the rate applicable to U.S.

Treasury zero-coupon issues, with remaining maturities commensurate with the expected term of the options granted in effect on the date of grant.

The Company has not paid, and does not anticipate paying, cash dividends on shares of Common Stock;

therefore, the expected dividend yield is assumed to be zero in the option valuation model.

Accordingly, the weighted-average fair value of the options granted during the years ended December 31, 2020 and 2019, was $0.43 and $1.11, respectively.

Option pricing and models require the input of various assumptions, including the option’s expected life, expected dividend yield, price volatility and risk-free interest rate of the underlying stock.

Accordingly, the weighted-average fair value of the options granted during the twelve months ended December 31, 2021 and 2020 was $ 18.88 and $ 2.56 per share, respectively.

The calculation was based on the following assumptions:

Year Ended December 31,

Expected term (years)

Weighted average grant date fair value (per share)

Risk-free interest rate

0.84% - 1.38%

0.34% - 0.80%

Expected volatility

85.21% - 87.88%

89.57% - 92.52%

Expected term (in years)

Expected dividend yield

Compensation Expense Summary

The Company recognized the following compensation cost related to employee and non-employee stock-based compensation activity for the periods presented below.

Year Ended December 31,

Research and development

General and administrative

The increase in compensation expense during the year ended December 31, 2020, is primarily due to expense related to the May 2019 special retention grant.

The Company did not record a current or deferred income tax expense or benefit for the years ended December 31, 2020 and 2019, due to the Company’s net and comprehensive losses and increases in its deferred tax asset valuation allowance.

The Company determines the assumptions used in the option pricing model in the following manner:

Risk-Free Interest Rate – For the determination of the risk-free interest rates, the Company utilizes the U.S.

Treasury yield curve for instruments in effect at the time of measurement with a term commensurate with the expected term assumption.

Expected Volatility – Due to the Company’s limited historical stock price volatility data, the Company based its estimate of expected volatility on the estimated and expected volatilities of a guideline group of publicly traded companies.

For these analyses, the Company selected companies with comparable characteristics including enterprise value, risk profiles, and with historical share price information sufficient to meet the expected life of the stock-based awards.

The Company computes the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of its stock-based awards.

The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Expected Dividend – The expected dividend yield is assumed to be zero since the Company has never paid dividends and does not have current plans to pay any dividends on its common stock.

Expected Term – The Company estimates the expected term of its stock options granted to employees and non-employee directors using the simplified method, whereby, the expected term equals the average of the vesting term and the original contractual term of the option.

The Company utilizes this method since it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

Prior to the Company’s Merger, given the absence of a public trading market for the Company’s common stock, its board of directors exercised their judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of the Company’s common stock underlying the stock options, such as:

contemporaneous valuations performed by independent third-party specialists, its stage of development, including the status of its research and development efforts of its therapeutic candidates and the material risks related to its business and industry, its results of operations and financial condition, including its levels of capital resources, the prices at which its sold shares of its convertible preferred stock, the rights, preferences and privileges of its convertible preferred stock relative to those of its common stock, the conditions in the biotechnology industry and the economy in general, the stock price performance and volatility of comparable life sciences public companies, as well as recently completed mergers and acquisitions of peer companies, the likelihood of achieving a liquidity event for the holders of its common stock or convertible preferred stock, such as an IPO or a sale of the Company given prevailing market conditions, trends and developments in its industry, external market conditions affecting the life sciences and biotechnology sectors, and the lack of liquidity of its common stock, among other factors.

Subsequent to the Company’s Merger, the fair value of the Company’s common stock is determined based on its closing market price on the date of the grant.

The Company’s board of directors intended all options granted to be exercisable at a price per share not less than the per share fair value of its common stock underlying those options on the grant date.

Warrants to Purchase Common Stock

The Company had warrants outstanding for the purchase of 36,666 shares of the Company’s common stock at December 31, 2021.

There were no warrants outstanding as of December 31, 2020.

These warrants were assumed in the Merger and were issued by Aerpio in October 2019, for the purchase of 40,000 shares (after taking into account the Reverse Stock Split) of the Company’s common stock at an exercise price of $ 7.29 per share (after taking into account the Reverse Stock Split).

These warrants were fully vested as of the date of the Merger and expire on October 24, 2024 .

The number of shares and the exercise price shall be adjusted for standard anti-dilution events such as stock splits, combinations, reorganizations, or issue shares as part of a stock dividend.

The warrants meet the criteria to be classified within stockholders’ equity (deficit).

Employee Stock Purchase Plan

On August 17, 2021, a special meeting of the Company’s stockholders was held to approve the Merger and related matters which included, among others, an employee stock purchase plan (“Special Meeting”).

At the Special Meeting, the Company’s stockholders considered and approved the Company’s 2021 Employee Stock Purchase Plan (the “2021 ESPP”).

Upon approval of the 2021 ESPP by the stockholders, Aerpio’s Amended and Restated 2017 Employee Stock Purchase Plan terminated.

An aggregate of 310,617 shares of common stock have been reserved and are available for issuance under the 2021 ESPP.

The number of shares of common stock available for issuance under the 2021 ESPP will be increased on the first day of each fiscal year beginning with the 2022 fiscal year in an amount equal to the least of (i) 310,617 shares of common stock, (ii) one percent ( 1 %) of the outstanding shares of all classes of common stock on the last day of the immediately preceding fiscal year, or (iii) an amount to be determined by the Board or its designated committee no later than the last day of the immediately preceding fiscal year.

On January 1, 2022, 208,946 shares of common stock were added to the 2021 ESPP.

Shares of common stock issuable under the 2021 ESPP will be authorized, but unissued, or reacquired shares of common stock.

If the Company’s capital structure changes because of a stock dividend, stock split or similar event, the number of shares that can be issued under the 2021 ESPP will be appropriately adjusted .

No shares were issued under the 2021 ESPP as of December 31, 2021.

The Company did no t record a current or deferred income tax expense or benefit for the years ended December 31, 2021 and 2020, due to the Company’s net and comprehensive losses and increases in its deferred tax asset valuation allowance.

A reconciliation of the statutory federal income tax with the provision for income taxes are as follows:

1 unchanged sentence

Federal tax at statutory rate

State and local tax at statutory rates, net of

federal income tax

Research and development credits

Stock-based compensation

State income tax, net of federal benefit

Nondeductible interest

Other permanent items

Nondeductible impairment

Research credit

Change in valuation allowance

Effective tax rate

The Company’s income tax provision was computed based on the federal statutory rate and the average state statutory rates, net of the related federal benefit.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income and for tax carryforwards, recorded at the enacted federal statutory income tax rate.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

Significant components of the Company’s deferred tax assets and liabilities are as follows (amounts in thousands):

Deferred tax assets:

Net operating loss carryforwards

Accrued expenses

Stock-based compensation

Research and development credits

Operating lease right-of-use assets, net

Research and development tax credits

Total deferred tax assets

Valuation allowance

Total gross deferred tax assets, net of valuation allowance

Deferred tax liabilities:

Furniture and equipment

Operating lease liability

Total deferred tax liabilities

Net deferred tax assets before valuation

Less valuation allowance

Net deferred tax asset

When realization of the deferred tax asset is more likely than not to occur, the benefit related to the deductible temporary differences attributable to operation is recognized as a reduction of income tax expense.

Valuation allowances are provided against deferred tax assets when, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

The Company cannot be certain that future taxable income will be sufficient to realize its deferred tax assets, and accordingly, a full valuation allowance has been provided on its net deferred tax assets.

The valuation allowance increased $1,297,538 and $5,735,658 in 2020 and 2019, respectively, as a result of an increase in the net operating loss (“NOL”) and an increase of research and development credits carryforwards.

The Company continues to monitor the need for a valuation allowance based on the profitability of its future operations.

At December 31, 2020, the Company has $84,173,001 of federal NOL carryforwards with expirations between 2032 and 2038.

The Company has $33,263,905 of federal NOL carryforwards with no expiration as a result of the 2017 Tax Act.

Additionally, the Company has $64,932,119 of state and local NOL carryforwards with expiration between 2021 and 2041.

Finally, at December 31, 2020, the Company has $5,326,964 of federal research and development credit carryforwards that expire at various dates through 2041.

Under the provisions of the Internal Revenue Code, NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities until fully utilized.

NOL and tax credit carryforwards may be subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders by more than 50% over a three-year period, as defined in Sections 382 and 383 of the Internal Revenue Code and similar state provisions.

The amount of the annual limitation is determined based on the value of the Company immediately before the ownership change.

Subsequent ownership changes may further affect the limitation in future years.

The Company has not completed a study to assess whether a change of control has occurred or whether there have been multiple changes of control since the date of the Company’s formation due to the significant complexity and cost associated with such study and that there could be additional changes in control in the future.

As a result, the Company is unable to estimate the effect of these limitations, if any, on the Company’s ability to utilize NOL and tax credit carryforwards in the future.

A full valuation allowance has been provided against the Company’s NOL and tax credit carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the NOL and tax credit carryforwards and the valuation allowance.

The Company has not yet conducted a study to document whether its research activities may qualify for the research and development tax credit.

Such a study may result in an adjustment to the Company’s research and development credit carryforwards;

however, until a study is completed, and any adjustment is known, no amounts are being presented as an uncertain tax position.

A full valuation allowance has been provided against the Company’s research and development credit and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforwards and the valuation allowance.

As of December 31, 2020 and 2019, the Company had no accrued uncertain tax positions or associated interest or penalties and no amounts have been recognized in the Company’s consolidated statements of operations and comprehensive loss.

The Company files income tax returns in the U.S.

federal jurisdiction and various state jurisdictions.

All years remain open and are subject to examination by federal and state taxing authorities.

Net and Comprehensive Loss per Share Attributable to Common Stockholders

The following table sets forth the computation of the Company’s basic and diluted net and comprehensive loss per share attributable to common stockholders for the periods presented:

Year Ended December 31,

Net and comprehensive loss attributable to

common stockholders

Weighted average common shares used in

computing net and comprehensive loss per

share attributable to common stockholders,

basic and diluted

Net and comprehensive loss per share

attributable to common stockholders,

basic and diluted

The following weighted average common stock equivalents were excluded from the calculation of diluted net and comprehensive loss per share for the year ended December 31, 2020 and 2019, because including them would have had an anti-dilutive effect:

Year Ended December 31,

Options to purchase common stock

Warrants to purchase common stock

At December 31, 2020, the Company is a party to one property lease in Cincinnati, Ohio under an arrangement which provides the right to use the underlying asset and require lease payments for the lease term.

During the fourth quarter of 2019, the Company terminated its leases in Lexington, Massachusetts and Dexter, Michigan;

no penalties were incurred related to these terminations.

The Cincinnati, Ohio lease agreement obligates the Company to pay real estate taxes, insurance and certain maintenance costs (hereinafter referred to as non-lease components).

The Company’s lease arrangement contains a renewal provision of 5 years, exercisable at the Company's option.

The Company’s lease agreement does not contain any material residual value guarantees or material restrictive covenants.

The Company determines if an arrangement is an operating lease at inception.

Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet.

All other leases are recorded on the consolidated balance sheet with a corresponding operating lease asset, net, representing the right to use the underlying asset for the lease term and the operating lease liabilities representing the obligation to make lease payments arising from the lease.

Operating lease assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised.

The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date.

Lease agreements with lease and non-lease components are generally accounted for as a single lease component.

The Company’s operating lease expense is recognized on a straight-line basis over the lease term and are recorded in general and administrative expenses on the consolidated statements of operations and comprehensive loss.

The following table presents the lease cost and information related to the right-of-use assets, net and operating lease liabilities:

Year Ended December 31,

Average rent expense

Other information

Cash paid for amounts included in

the measurement of operating lease liabilities

The weighted average remaining lease

term and discount rate at December 31, 2020

Weighted-average remaining lease term - operating leases

Weighted-average discount rate - operating leases

As of December 31, 2020, future payments related to operating leases activities are presented in the table below:

Operating leases

Less interest

Present value of lease liabilities

Total gross deferred tax liabilities

Net deferred tax assets / (liabilities)

Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income.

Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized in future periods.

The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets, including the amount and timing of future taxable income and has determined it is more likely than not that the assets will not be realized.

As a result, the Company has concluded that a full valuation allowance against its deferred tax asset is necessary at this time.

As of December 31, 2021, the Company has federal and state net operating loss (“NOL”) carryforwards of $ 150.9 million and $ 55.8 million, respectively.

Of the amount of federal NOL carryforwards, $ 106.6 million can be carried forward indefinitely.

The remaining federal and state NOL carryforwards begin to expire in 2030, unless previously utilized.

The Company also has federal and state research credit carryforwards of approximately $ 3.1 million and $ 1.7 million, respectively, unless previously utilized.

The federal and New Jersey research credit carryforwards will begin to expire in 2037 and 2027, respectively, unless previously utilized.

The California research and development (“R&D”) credit will carry forward indefinitely.

The increase in the valuation allowance is $ 28.2 million and $ 1.6 million for the years ended December 31, 2021 and 2020 , respectively.

Pursuant to Section 382 and 383 of the Internal Revenue Code (“IRC”), utilization of the Company’s NOL carryforwards and R&D credits may be subject to annual limitations in the event of any significant future changes in its ownership structure.

These annual limitations may result in the expiration of NOL carryforwards and R&D credits prior to utilization.

As of December 31, 2021, the Company has completed an IRC Section 382 analysis through the date of the Merger.

Ownership changes were identified that will result in annual limitations on future utilization of NOL and R&D credit carryforwards.

To the extent such limitations will cause NOL and R&D credit carryforwards to expire unused, these tax attributes have been removed from deferred tax asset table above.

Uncertain tax positions are evaluated based upon the facts and circumstances that exist at each reporting period.

Subsequent changes in judgement based upon new information may lead to changes in recognition, derecognition, and measurement.

Adjustment may result, for example, upon resolution of an issue with the taxing authorities or expiration of a statute of limitations barring an assessment for an issue.

The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination by tax authorities.

The following table summarizes the changes to the Company’s gross unrecognized tax benefits for the years ended December 31, 2021 and 2020 (amounts in thousands):

Balance at the beginning of the year

Decrease related to prior year positions

Increase related to current year positions

Balance at the end of the year

Due to the existence of the valuation allowance, future recognition of previously unrecognized tax benefits will not impact the Company’s effective tax rate.

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense.

The Company is subject to taxation in the United States federal and certain state jurisdictions.

The Company’s tax years from inception are subject to examination by the United States federal and state authorities due to the carryforward of unutilized NOLs and R&D credits.

The Company had no accrued interest and no penalties related to income tax matters in the Company’s balance sheet as of December 31, 2021 and has not recognized interest or penalties in the Company’s statement of operations and loss for the year ended December 31, 2021.

Further, the Company is not currently under examination by any federal, state or local tax authority.

The CARES Act provides sweeping tax changes in response to the COVID-19 pandemic.

Some of the more significant provisions are removal of certain limitations on utilization of NOL’s, increasing the loss carryback period

for certain losses to five years , and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act.

As of December 31, 2021, the Company has not recorded any material adjustments to its income tax provision related to the provisions with the CARES Act.

The Company will continue to analyze the impact that the CARES Act will have, if any, on its financial positions, results of operations or cash flows.

Commitments and Contingencies

The Company is not party to any material legal proceedings.

From time to time, it may be involved in legal proceedings or subject to claims incident to the ordinary course of business.

Regardless of the outcome, such proceedings or claims can have an adverse impact on the Company because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.

Purchase Commitments

The Company has ongoing contracts with vendors for clinical trials and contract manufacturing.

These contracts are generally cancellable, with notice, at the Company’s option.

The Company recorded accrued expenses of $ 4.8 million and $ 3.3 million in its consolidated balance sheet for expenditures incurred by clinical and contract manufacturing vendors as of December 31, 2021 and 2020 , respectively.

At December 31, 2021 the Company does not have any significant contracts that contain specific activities such as non-cancellable commitments, minimum purchase commitments, or binding annual forecasts.

Employee Retirement Plan

4 unchanged sentences

No contributions were made during 2021 or 2020.

Employee Bonus Plan

The Company maintains a bonus plan for certain employees based on the achievement of certain goals and milestones.

At December 31, 2020 and 2019, the Company accrued $428,683 and $689,830, respectively, for bonuses.

Employee Stock Purchase Plan

In March 2017, the Board of Directors adopted and the stockholders approved the Employee Stock Purchase Plan that became effective in April 2017.

On June 20, 2018, the Company’s shareholders approved the Amended and Restated 2017 Employee Stock Purchase Plan (“ESPP”) at the Annual Meeting of Shareholders.

Pursuant to the terms of the ESPP, the Company will reserve for issuance 300,000 shares of the Company’s common stock in the aggregate, plus, on January 1, 2019 and each January 1 thereafter through January 1, 2028, the number of shares of the Company’s common stock reserved and available for issuance under the ESPP will be cumulatively increased by the least of (i) one percent of the number of shares of the Company’s common stock issued and outstanding on the immediately preceding December 31;

(ii) 350,000 shares;

or (iii) such lesser number of shares of the Company’s common stock as determined by the Board of Directors, in each case subject to adjustment in accordance with the terms of the ESPP.

In March 2020, the Company’s Board of Directors approved an increase of 350,000 shares to the SEPP, which increase was effective as of January 1, 2020.

No shares under the ESPP are outstanding at December 31, 2020 and 2019.

License Agreement

On June 24, 2018, the Company entered into a License Agreement (the “Gossamer License Agreement”) with Gossamer, under which the Company granted Gossamer an exclusive, sublicensable license to develop and commercialize AKB-4924 and other structurally related products worldwide, with initial development expected in the indications of induction and maintenance in ulcerative colitis and Crohn’s Disease (collectively “initial indications”).

Prior to the execution of the Gossamer License Agreement, AKB-4924 was a pipeline program for the Company that completed a Phase 1a clinical trial in healthy volunteers.

On May 12, 2020, the Company entered into Amendment No.

1 to the Gossamer License Agreement (“Amendment No.

Pursuant to Amendment No.

1, Gossamer made a payment to the Company of $15.0 million on May 12, 2020.

For the year ended December 31, 2020, the Company recognized revenue of $15.0 million based on the terms of Amendment No.

1, and no such revenue was recognized during the year ended December 31, 2019.

Gossamer is responsible for the development and commercialization of the licensed products, and a joint development committee has been formed to oversee the development and manufacturing activities related to the licensed products.

Under the terms of the Gossamer License Agreement and as amended by Amendment No.

1 (collectively, the “Amended Gossamer License Agreement”), Gossamer is obligated to use its commercially reasonable efforts to develop and commercialize licensed products in the United States, two major European countries and Japan for at least one of the initial indications.

The Amended Gossamer License Agreement includes an exclusivity provision that prohibits the Company from developing, manufacturing or commercializing, and prohibits Gossamer from clinically developing or commercializing certain HIF stabilizing compounds other than as permitted in the Amended Gossamer License Agreement.

Under the terms of the Amended Gossamer License Agreement, the Company is eligible to receive up to $40.0 million in approval milestone payments related to indications in ulcerative colitis and Crohn’s disease, and up to $50.0 million in sales milestone payments.

The Company is also eligible to receive the tiered royalties on sales of licensed products from percentages ranging from a low-single-digit to mid-single-digit, subject to certain customary reductions.

In addition, under certain circumstances, in lieu of receiving the foregoing milestone payments and royalties, the Company may elect to receive 20% of payments received by Gossamer and its stockholders (with some exclusions) in connection with Gossamer’s grant of a sublicense or other rights to the licensed products or if Gossamer undergoes a changes of control and the value of the transaction exceeds a certain value (provided that Gossamer can prevent the Company from exercising this option if the parent company of Gossamer is the entity undergoing the change of control, in which case each of the royalty rate percentages described above would automatically be increased by low single digits).

Conversely, the Company could be required to accept such 20% of those payments if Gossamer agrees to pay the Company a certain minimum upon Gossamer and its stockholders being paid.

Such amount may be reduced if the transaction includes pharmaceutical candidates or products or other named asset categories in addition to the licensed products.

The Amended Gossamer License Agreement expires on a licensed-product-by-licensed-product and country-by-country basis on the later of fifteen years from the date of first commercial sale or when there is no longer a valid patent claim covering such licensed product in such country.

Either party may terminate the Amended Gossamer License Agreement for an uncured material breach by the other party or upon the bankruptcy or insolvency of the other party.

Gossamer may terminate the Amended Gossamer License Agreement in the event Gossamer determines there is a potential safety or efficacy issue with the licensed products.

The Company may terminate the amended Gossamer License Agreement if Gossamer institutes certain actions related to the licensed patents.

Under certain termination circumstances, the Company would have worldwide rights to the terminated program.

As of December 31, 2020, all development milestones, sales-based milestones and royalty payments within the Amended Gossamer License Agreement are constrained to the point where no transaction price has been allocated to the future milestones or royalty payments.

Restructuring

In April 2019, the Company executed a realignment plan to reduce operating costs and better align its workforce with the needs of its ongoing business.

The realignment plan reduced the Company’s workforce by 11 employees, representing approximately 41% of its workforce.

Additionally, in October 2019, the Company’s Chief Executive Officer and Chief Financial Officer departed from their positions.

As a result of these reductions, the Company recorded employee severance expense of $1.9 million during the year ended December 31, 2019.

These amounts are included within restructuring expense in the consolidated statements of operations and comprehensive loss.

Total cash payments against the severance liability was approximately $0.8 million in the year ended December 31, 2020.

There is no remaining liability as of December 31, 2020.

Subsequent Events

On January 29, 2021, the Company executed a realignment plan to reduce operating costs and better align its workforce with the needs of its ongoing business.

The realignment plan reduces its current workforce by 7 employees, representing approximately 58% of the Company’s workforce.

The Company estimates it will incur one-time employee related severance expenses of approximately $1.2 million in the first quarter of 2021.

Changes in and Disagreements W ith Accou ntants on Accounting and Financial Disclosure.

On January 13, 2022, the Company entered into a Negotiated Purchase Order Terms and Conditions for Clinical and Commercial Product (the “Fresenius Agreement”) with Fresenius Kabi, LLC (“Fresenius Kabi”) pursuant to which Fresenius Kabi will manufacture FYARRO for the Company, and the Company will purchase FYARRO as a finished drug product from Fresenius Kabi, on a purchase-order basis.

Under the Agreement, which shall be effective through December 22, 2022 (or such later date as may be agreed between the parties in writing and currently being discussed), the Company may purchase FYARRO for either clinical or commercial purposes for use in the United States and Canada.

In addition to manufacturing, Fresenius Kabi will perform specified labeling, packaging and serialization activities in respect of FYARRO for the Company’s benefit.

The price of FYARRO will be fixed, subject to the ability of Fresenius Kabi to increase pricing under specified circumstances.

The Company has an obligation to purchase certain minimum quantities of FYARRO.

Failure to purchase those minimum quantities will result in an additional payment from the Company to Fresenius Kabi.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk