What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-03-29 compared with 2022-03-17 · 514 added, 350 removed, 447 unchanged (66% of the section changed)

6 unchanged sentences

Consolidated Balance Sheets as of December 31, 2022 and 2021

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

Consolidated Statements of Operations for the Years ended December 31, 2022 and 2021

Consol idated Statements of Comprehensive Loss for the Years ended December 31, 2022 and 2021

Consolidated Statements of Stockholders’ Equity (Deficit) for the Years ended December 31, 2022 and 2021

7 unchanged sentences

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”).

(the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, 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, 2022 and 2021, 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.

13 unchanged sentences

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

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Product Revenue Allowances for Chargebacks and Government Rebates

As described in Note 2 to the consolidated financial statements, revenue from product sales is recognized net of estimates for variable consideration consisting of chargebacks, government rebates, distribution fees, co-payment assistance, and product returns.

This variable consideration is recorded in the same period that the related revenue is recognized and creates variability for the consideration that the Company expects to receive.

Liabilities related to government rebates and chargebacks involve the use of assumptions and judgments that include consideration of historical claims experience, channel mix, unbilled claims, claims submission time lags, and inventory levels in the distribution channel.

We identified management's estimated allowance for government rebates and chargebacks as a critical audit matter.

The principal consideration that led to our determination is the judgement required to evaluate the estimated government rebates and chargebacks that will be processed based upon the limited period of time for which the company has been processing rebates and chargebacks.

Auditing these elements involved subjective auditor judgement due to the nature and extent of audit effort to address these matters.

The primary procedures we performed to address this critical audit matter included:

• Evaluating the significant accounting policies relating to government rebates and chargebacks as well as the Company's application of the policies, for appropriateness and reasonableness.

• Evaluating historical sales subsequent to product launch eligible for government rebates and chargebacks to assess the reasonableness of the estimate for government rebates and chargebacks unprocessed as of year-end.

/s/ BDO USA, LLP

8 unchanged sentences

Cash and cash equivalents $ 39,019 $ 148,989

Accounts receivable

Short-term investments 133,541 —

Accounts receivable, net 1,862 —

Inventory 1,861 —

Prepaid expenses and other current assets 3,746 2,283

3 unchanged sentences

Intangible asset, net — 3,811

Liabilities and stockholders’ equity (deficit)

Other assets 2,178 2,213

Total assets $ 184,237 $ 157,910

Liabilities and stockholders’ equity

Current liabilities:

1 unchanged sentence

Accrued liabilities 14,922 8,703

Payable to related party

Convertible related party promissory notes payable at fair value

Operating lease liabilities, current portion 394 131

Other current liabilities

Total current liabilities 18,835 15,273

Convertible promissory notes payable at fair value

Payable to related party

Operating lease liabilities, net of current portion 1,267 474

Other liabilities

Due to licensor (Note 9) 5,757 5,757

Total liabilities 25,859 21,504

Commitments and contingencies (Note 16)

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;

Stockholders’ equity:

Preferred stock, $ 0.0001 par value, 10,000,000 shares authorized;

no shares issued and outstanding as of December 31, 2022 and 2021

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

24,435,007 and 20,894,695 shares issued and outstanding as of December 31, 2022 and 2021, respectively

Additional paid-in capital 361,689 279,089

Accumulated other comprehensive loss ( 115 ) —

Accumulated deficit ( 203,198 ) ( 142,685 )

Total stockholders’ equity (deficit)

Total liabilities and stockholders’ equity (deficit)

Total stockholders’ equity 158,378 136,406

Total liabilities and stockholders’ equity $ 184,237 $ 157,910

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

AADI BIOSCIENCE, INC.

Consolidated Statements of Operations and Comprehensive Loss

Consolidated Statements of Operations

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

Year Ended December 31,

Product sales, net $ 15,216 $ —

License revenue — 1,000

2 unchanged sentences

Operating expenses

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

General and administrative

Selling, general and administrative 40,176 18,511

Research and development 32,662 19,670

Cost of goods sold 1,335 —

Impairment of acquired contract intangible asset 3,724 74,156

5 unchanged sentences

Interest income 2,398 13

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

Total other income (expense), net

Interest expense ( 230 ) ( 665 )

Total other income, net 2,168 1,129

Loss before income tax expense ( 60,513 ) ( 110,088 )

Income tax expense — ( 2 )

Net and comprehensive loss

Net loss ( 60,513 ) ( 110,090 )

Cumulative dividends on convertible preferred stock — ( 647 )

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

Net loss attributable to common stockholders $ ( 60,513 ) $ ( 110,737 )

Net loss per share attributable to common stockholders, basic and diluted $ ( 2.69 ) $ ( 12.41 )

Weighted average number of common shares outstanding used in computing net loss per share attributable to common stockholders, basic and diluted 22,511,237 8,923,369

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

AADI BIOSCIENCE, INC.

Consolidated Statements of Comprehensive Loss

(Amounts in thousands)

Year Ended December 31,

Net loss $ ( 60,513 ) $ ( 110,090 )

Change in unrealized loss on short-term investments ( 115 ) —

Comprehensive loss $ ( 60,628 ) $ ( 110,090 )

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

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

Share-based compensation

Net and comprehensive loss

Stockholders’ Equity

Series Seed Preferred Stock Series A Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity (Deficit)

Shares Par Value Shares Par Value Shares Par Value

Balance at December 31, 2020 734 $ — 7,212 $ 1 2,542 $ 1 $ 20,161 $ — $ ( 32,595 ) $ ( 12,432 )

Exercise of stock options to purchase common stock

Issuance of common stock upon exercise of stock options — — — — 73 — 833 — — 833

Issuance of common stock to PIPE Investors, net of issuance costs — — — — 11,853 1 145,383 — — 145,384

2 unchanged sentences

Conversion of convertible preferred stock into common stock upon Merger ( 734 ) — ( 7,212 ) ( 1 ) 2,520 — — — — ( 1 )

Share-based compensation

Share-based compensation expense — — — — — — 2,106 — — 2,106

Cumulative dividends paid on Series A preferred stock — — — — — — ( 4,412 ) — — ( 4,412 )

Net and comprehensive loss

Net loss — — — — — — — — ( 110,090 ) ( 110,090 )

Balance at December 31, 2021 — $ — — $ — 20,895 $ 2 $ 279,089 $ — $ ( 142,685 ) $ 136,406

Issuance of common stock upon exercise of stock options — — — — 132 — 401 — — 401

Issuance of common stock upon exercise of warrants — — — — 7 — 55 — — 55

Share-based compensation expense — — — — — — 9,643 — — 9,643

Issuance of shares under the employee stock purchase plan — — — — 27 — 323 — — 323

Issuance of common stock to PIPE Investors, net of issuance costs — — — — 3,374 — 72,178 — — 72,178

Other comprehensive loss — — — — — — — ( 115 ) — ( 115 )

Net loss — — — — — — — — ( 60,513 ) ( 60,513 )

Balance at December 31, 2022 — $ — — $ — 24,435 $ 2 $ 361,689 $ ( 115 ) $ ( 203,198 ) $ 158,378

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

4 unchanged sentences

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in

operating activities:

Net loss $ ( 60,513 ) $ ( 110,090 )

Adjustments to reconcile net loss to net cash used in operating activities:

Impairment of acquired contract intangible asset 3,724 74,156

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 9,643 2,106

Amortization of premiums and discounts on short-term investments, net ( 1,215 ) —

Change in fair value of convertible promissory notes — ( 1,585 )

Non-cash interest expense — 665

Gain upon extinguishment of debt — ( 196 )

Non-cash lease expense 382 171

2 unchanged sentences

Accounts receivable ( 1,862 ) 14,149

Inventory ( 1,861 ) —

Prepaid expenses and other current assets ( 1,463 ) ( 2,166 )

Other non-current assets 437 481

Operating lease liability

Operating lease liabilities, net ( 291 ) ( 129 )

Accounts payable and accrued liabilities 3,220 8,290

Payable to related party

Other liabilities — ( 8,380 )

Net cash used in operating activities ( 49,640 ) ( 22,423 )

Investing activities:

Purchases of property and equipment ( 444 ) ( 46 )

Purchases of short-term investments ( 145,192 ) —

Maturities of short-term investments 12,750 —

Cash acquired in connection with the Merger — 29,700

Transaction expenses related to the Merger — ( 4,501 )

Purchase of property and equipment

Net cash provided by investing activities

Net cash (used in) provided by investing activities ( 132,886 ) 25,153

Financing activities:

Proceeds from the exercise of stock options

Proceeds from the issuance of common stock to PIPE Investors

Proceeds from issuance of common stock and prefunded warrants to PIPE Investors 72,500 —

Issuance of common stock upon exercise of stock options 401 833

Proceeds from issuance under employee stock purchase plan 323 —

Issuance of common stock upon exercise of warrants 55 —

Deferred offering costs paid for financing ( 337 ) —

Costs incurred in connection with issuance of common stock ( 322 ) ( 9,617 )

Proceeds from the issuance of common stock to PIPE Investors — 155,000

Dividends paid — ( 4,412 )

Proceeds from issuance of convertible promissory notes

Proceeds from Payroll Protection Loan Program

Net cash provided by financing activities 72,620 141,804

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Net (decrease) increase in cash, cash equivalents and restricted cash ( 109,906 ) 144,534

Cash, cash equivalents and restricted cash at beginning of year 148,989 4,455

Cash, cash equivalents and restricted cash at end of year $ 39,083 $ 148,989

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

AADI BIOSCIENCE, INC.

Consolidated Statements of Cash Flows (continued)

(Amounts in thousands)

Year Ended December 31,

Supplemental disclosure of cash flow information:

Interest paid during the period $ 230 $ 22

Costs incurred in connection with issuance of common stock paid during the period $ 322 $ —

Supplemental disclosure of non-cash activities:

Issuance of common stock upon Merger $ — $ 105,888

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

Conversion of convertible promissory note into common stock upon Merger $ — $ 9,130

Amounts accrued for purchases of property and equipment $ 80 $ —

Right-of-use assets obtained in exchange for operating lease liabilities $ 1,241 $ 610

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

2 unchanged sentences

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.

(together with its subsidiaries, the “Company” or “Aadi”) is a biopharmaceutical company focused on developing and commercializing precision therapies for genetically defined cancers with alterations in mTOR pathway genes.

Aadi’s lead drug product, FYARRO ® , is a form of sirolimus bound to albumin.

Sirolimus is a potent inhibitor of the mTOR biological pathway, the activation of which pathway can promote tumor growth, and inhibits downstream signaling from mTOR.

In November 2021, the U.S.

Food and Drug Administration (the “FDA”) approved FYARRO sirolimus protein-bound particles for injectable suspension (albumin-bound) for the treatment of adult patients with locally advanced unresectable or metastatic malignant perivascular epithelioid cell tumor (“PEComa”).

On February 22, 2022, Aadi launched FYARRO in the United States for treatment of advanced malignant PEComa.

FYARRO is licensed to Aadi by Abraxis BioScience, LLC, a wholly owned subsidiary of Celgene Corporation.

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

2 unchanged sentences

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.

On May 16, 2021, the Company, then operating as Aerpio Pharmaceuticals, Inc.

(“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.

2 unchanged sentences

(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.

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

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.

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 in respect of shares of Private Aadi common stock issued upon the conversion of all shares of preferred stock and convertible promissory notes outstanding immediately prior to the Effective Time.

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;

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

The estimated fair value of total consideration given was $ 110.4 million based on 3,208,718 shares of common stock at $ 33.00 per share, after taking into account the Reverse Stock Split, outstanding immediately prior to the Effective Time, plus Private Aadi’s transaction costs.

Private Aadi is considered the accounting acquirer even though the Company 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;

(iv) the 2021 Private Investment in Public Equity (PIPE) Investors (as defined below) consist of individuals and funds, and for purpose of this analysis, as of immediately following the Merger (and after giving effect to the 2021 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.

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

In connection with 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.

Contingent Value Rights and Contingent Value Rights Agreement

In connection with the Merger, the Company entered into a Contingent Value Rights Agreement, dated as of August 26, 2021 (the “CVR Agreement”), with a legacy director of the Company, 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 entitled 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 the Company 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 dated June 24, 2018, as amended (the “Gossamer License Agreement”) with Gossamer Bio, Inc.

(“Gossamer”), the underlying basis for the CVR, has expired or been terminated.

On April 25, 2022, the Company received a formal notice of termination from Gossamer for the Gossamer License Agreement (the “Notice of Termination”), that related to Gossamer’s GB004 product candidate, a legacy product candidate of the Company's predecessor, Aerpio, after Gossamer announced that its Phase 2 SHIFT-UC clinical trial studying GB004 in patients with mild-to-moderate active ulcerative colitis did not meet the primary or secondary endpoints at week 12 and the study was being terminated for lack of treatment benefit.

The Gossamer License Agreement terminated effective July 24, 2022.

Based on the Notice of Termination, the Company fully impaired the Gossamer License Agreement intangible asset during the year ended December 31, 2022.

In connection with the termination of the Gossamer License Agreement, the CVR Agreement automatically terminated in accordance with its terms and the CVRs were automatically cancelled and forfeited without any consideration or payment, in each case effective July 24, 2022.

2021 Private Investment in Public Equity (PIPE) Financing and Subscription Agreement

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

The 2021 PIPE Investors purchased an aggregate of 11,852,862 shares of common stock of the Company (the “2021 PIPE Shares”) for an aggregate purchase price of $ 155.0 million pursuant to the Subscription Agreement.

The aggregate net proceeds for the issuance and sale of the 2021 PIPE Shares were $ 145.4 million, after deducting certain expenses incurred that were direct and incremental to the issuance of the 2021 PIPE Shares.

At the closing of the 2021 PIPE Financing, the Company entered into a Registration Rights Agreement, dated August 26, 2021 (“Registration Rights Agreement”), with the 2021 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 2021 PIPE Financing, there were approximately 20.8 million shares of common stock of the Company outstanding.

3 unchanged sentences

and (iii) the 2021 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.

2022 Private Investment in Public Equity (PIPE) Financing

On September 22, 2022, the Company entered into a securities purchase agreement (“Purchase Agreement”) with certain investors (“2022 PIPE Investors”) for a private placement of shares of common stock and pre-funded warrants to purchase shares of common stock (the “2022 PIPE Financing”).

Upon the closing of the 2022 PIPE Financing on September 26, 2022, the Company sold (i) 3,373,526 shares of its common stock at a purchase price of $ 12.50 per share, and (ii) 2,426,493 pre-funded warrants (the “Pre-Funded Warrants”) to purchase shares of common stock at a purchase price of $ 12.4999 per pre-funded warrant.

The Pre-Funded Warrants have an exercise price of $ 0.0001 per share of common stock, are immediately exercisable and remain exercisable until exercised in full.

The holders of Pre-Funded Warrants may not

exercise a Pre-Funded Warrant if the holder, together with its affiliates, would beneficially own more than 4.99 % of the number of shares of the Company's common stock outstanding immediately after giving effect to such exercise;

provided, that the holders of Pre-Funded Warrants may increase or decrease such percentages not in excess of 19.99 % by providing at least 61 days’ prior notice to the Company.

The aggregate net proceeds for the 2022 PIPE Financing were $ 72.2 million after deducting certain expenses incurred that were direct and incremental to the issuance of the shares of $ 0.3 million.

On September 26, 2022, the Company and the 2022 PIPE Investors entered into a Registration Rights Agreement, (the “2022 PIPE Registration Rights Agreement”), providing for the registration for resale of the securities sold under the Purchase Agreement, including the shares issuable upon the exercise of the Pre-Funded Warrants, that are not then registered on an effective registration statement, pursuant to a registration statement filed with the Securities and Exchange Commission (the “SEC”).

The Company has granted the 2022 PIPE Investors customary indemnification rights in connection with the 2022 PIPE Registration Rights Agreement.

The Purchasers have also granted the Company customary indemnification rights in connection with the 2022 PIPE Registration Rights Agreement.

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 only recently begun to realize revenues from its planned principal operations commencing with the commercial sale of FYARRO.

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.

The Company had an accumulated deficit of $ 203.2 million as of December 31, 2022 and a net loss of $ 60.5 million and $ 110.1 million for the years ended December 31, 2022 and 2021, respectively.

T o 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.

The Company had cash, cash equivalents and short term investments of $ 172.6 million at December 31, 2022.

Management believes the Company’s current cash, cash equivalents and short-term investments will provide sufficient funds to enable the Company to meet its obligations for at least twelve months from the filing date of this report.

If the Company is unable to achieve and maintain profitability, it will need additional financing to support its continuing operations and pursue its strategic objectives.

Additional financing may be achieved through a combination of equity offerings, and debt financings.

The Company may be unable to raise additional funds or enter into such other agreements when needed on favorable terms or at all.

On March 17, 2022, the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”), pursuant to which the Company may offer and sell, from time to time at the Company’s sole discretion, shares of its common stock having an aggregate offering price of up to $ 75.0 million through Cowen as its sales agent for an at-the-marketing-offering.

As of December 31, 2022, no shares of common stock had been sold under the Sales Agreement.

Summary of Significant Accounting Policies

Basis of Presentation

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.

The consolidated financial statements, and the related disclosures, have been prepared in accordance with GAAP and 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.

All adjustments are of a normal recurring nature.

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

Certain prior year amounts have been reclassified to conform to the current year presentation.

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.

1 unchanged sentence

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.

Also on August 26, 2021, and immediately prior to the closing of the Merger, the Company 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.

Comprehensive Loss

Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on short-term investments.

Comprehensive loss has been reflected in the statements of operations and comprehensive loss for all periods presented.

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 United States.

The Company has identified its Chief Executive Officer as the chief operating decision maker and 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 and reportable segment are located in the United States.

Use of Estimates

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.

In the opinion of management, all adjustments that are considered necessary for 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, gross-to-net accruals, share-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.

Concentrat ion of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents, and investments in money market funds, United States government treasury bills, commercial paper, corporate bonds, and government agency debt securities.

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.

While the Company has not experienced any losses in such deposits, the recent failure of Silicon Valley Bank, at which the Company holds cash and cash equivalents in multiple accounts, exposed the Company to credit risk prior to the resolution by the Federal Deposit Insurance Corporation in a manner that fully protected all depositors.

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

Cash and Cash Equivalents

The Company’s accounts receivable is derived from customers located principally in the United States.

The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses on customers’ accounts when deemed necessary.

The Company does not typically require collateral from its customers.

Credit losses historically have not been material.

The Company continuously monitors customer payments and maintains an allowance for doubtful accounts based on its assessment of various factors including historical experience, age of the receivable balances, and other current economic conditions or other factors that may affect customers’ ability to pay.

Customer Concentration

The majority of the Company's revenue for the year ended December 31, 2022 was from two companies at 58 % and 41 % of the Company’s revenue, respectively.

Additionally, one customer accounted for 100 % of the net accounts receivable as of December 31, 2022 .

Cash, Cash Equivalents and Restricted Cash

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.

As of December 31, 2022 and 2021, cash and cash equivalents included money market investments totaling $ 32.0 million and $ 140.0 million, respectively.

Restricted cash consists of a letter of credit secured by restricted cash in connection with one of the Company's office leases described in Note 8, and is included in other assets on the consolidated balance sheet.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated statements of cash flows (amounts in thousands):

As of December 31,

Cash and cash equivalents $ 39,019 $ 148,989

Restricted cash, non-current 64 —

Total cash, cash equivalents and restricted cash $ 39,083 $ 148,989

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.

The Company elected the fair value option to account for its convertible promissory notes which were issued in 2019 and 2020.

The Company recorded the convertible promissory notes at fair value with changes in fair value recorded in the statements of operations.

As of December 31, 2022 and 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

6 unchanged sentences

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.

3 unchanged sentences

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;

Short-term investments

The Company invests in various types of securities, including United States government and commercial paper and corporate debt securities.

The Company classifies its investments as available-for-sale and records them at fair value based upon market prices at period end.

Unrealized gains and losses that are deemed temporary in nature are recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity.

Dividend and interest income are recognized when earned.

Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of investments sold.

The Company classifies short-term investments wi th remaining maturities greater than one year as current assets because such short-term investments are available to fund the Company’s current operations.

At each balance sheet date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether the unrealized loss is other-than-temporary.

When the Company determines that a decline in the fair value below its cost basis is other-than-temporary, the Company recognizes an impairment loss in the period in which the other-than-temporary decline occurred.

There have been no other-than-temporary impairments recognized during any of the periods presented.

See Note 4 for further informatio n.

Accounts Receivable, Net

Accounts receivable are recorded net of customer allowances for chargebacks and allowance for doubtful accounts.

Allowance for chargebacks is based on contractual terms.

The Company estimates the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns of its customers and individual customer circumstances.

As of December 31, 2022, $ 0.1 million of customer allowances for chargebacks was recorded.

No allowances were recorded as of December 31, 2021.

No receivables were written off for the years ended December 31, 2022 and 2021.

Inventory is stated at the lower of cost or estimated net realizable value.

The Company uses actual costing methodology determined on a first-in, first-out method.

The Company capitalizes inventory costs associated with its products based 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.

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, therefore the inventory balance was zero at December 31, 2021.

Details of inventory are presented as follows (amounts in thousands).

As of December 31, 2022

Raw materials $ 944

Work in process —

Finished goods 917

Total $ 1,861

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 .

Property and equipment, consisting of computers, furniture and fixtures, office equipment, construction in process and leasehold improvements 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 three to 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.

Details of property and equipment are presented as follows (amounts in thousands).

As of December 31,

Computers and software $ 338 $ 51

Construction in process 77 —

Furniture and fixtures 65 36

Leasehold improvements 129 —

Total $ 609 $ 87

Accumulated depreciation ( 101 ) ( 30 )

Property and equipment, net $ 508 $ 57

Intangible Asset, Net

The Company’s intangible asset consisted of a single asset, the Gossamer License Agreement, assumed in the Merger.

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

During the year ended December 31, 2021, the acquired intangible asset was reduced to its estimated fair value of $ 3.9 million at the Effective Time.

During the year ended December 31, 2022, the intangible asset's fair value was reduced to zero based on the termination of the Gossamer License Agreement effective July 24, 2022 (see Note 6).

Impairment of Long-Lived Assets

2 unchanged sentences

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).

An impairment was recorded for the long-lived

intangible asset during the year ended December 31, 2022 based on the termination of the Gossamer License Agreement effective July 24, 2022 (see Note 6).

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.

9 unchanged sentences

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 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 and comprehensive loss.

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.

6 unchanged sentences

The Company has not recorded any such liabilities as of December 31, 2022 and 2021 .

Revenue Recognition

Revenue Recognition and Related Allowances

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

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”), the Company performs the following five steps:

(i) identify the contract(s) with a customer;

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

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

and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

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

At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct.

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

Product Net Sales

FYARRO was approved by the FDA in November 2021.

On February 22, 2022, the Company launched sales of FYARRO to specialty distributors (“SDs”) and a specialty pharmacy (“SP”).

The Company recognizes product sales when the SDs and SP obtain control of the product.

Product sales are recorded at the net sales price, which includes provisions for the

following allowances which are reflected either as a reduction to the related account receivable or as an accrued liability, depending on how the allowance is settled:

Distribution Fees :

Distribution fees include distribution service fees paid to the SDs and SP based on a contractually fixed percentage of the wholesale acquisition cost (“WAC”).

Distribution fees are recorded as an offset to product sales based on contractual terms at the time revenue from the sale is recognized.

Allowance for rebates includes mandated discounts under the Medicaid Drug Rebate Program and TRICARE program.

Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or statutory requirements.

The allowance for rebates is based on contracted or statutory discount rates and expected utilization by benefit plan participants.

The Company’s estimates for expected utilization of rebates are based on utilization data received from the SDs and SP since product launch.

Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity.

If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect product sales in the period of adjustment.

Chargebacks are discounts and fees that relate to contracts with government and other entities purchasing from the SDs and SP at a discounted price.

The SDs and SP charge back to the Company the difference between the price initially paid by the SDs and SP and the discounted price paid to the SDs and SP by these entities.

If actual future chargebacks vary from these estimates, the Company may need to adjust prior period accruals, which would affect product sales in the period of adjustment.

Co-Payment Assistance:

The Company offers co-payment assistance to commercially insured patients meeting certain eligibility requirement.

Co-payment assistance is accrued at the time of product sale to SDs and SP based on estimated patient participation and average co-pay benefit to be paid per a claim.

The Company estimated amounts are compared to actual program participation and co-pay amounts paid using data provided by third-party administrators.

If actual amounts differ from the original estimates the assumptions being applied are updated and adjustment for prior period accruals will be adjusted in the current period.

Product Returns:

Consistent with industry practice, the Company offers the SDs and SP limited product return rights for damages, shipment errors, and expiring product, provided that the return is within a specified period around the product expiration date as set forth in the applicable individual distribution agreement.

The Company does not allow product returns for product that has been dispensed to a patient.

As the Company receives inventory reports from the SDs and SP and has the ability to control the amount of product that is sold to the SDs and SP the Company’s estimate of future potential product returns is based on the on-hand channel inventory data and sell-through data obtained from the SDs and SP.

In arriving at its estimate, the Company also considers historical product returns, the underlying product demand, and industry data specific to the specialty pharmaceutical distribution industry.

The total amount deducted from gross product sales for the allowances described above for the year ended December 31, 2022 was $ 2.4 million.

The following table summarizes the consolidated activities and ending balance of all of the Company's gross-to-net sales adjustments (amounts in thousands):

Balance at Beginning of Year Provision for Current Period Sales Payments Balance at End of Year

Year ended December 31, 2022 $ — $ 2,438 $ ( 1,004 ) $ 1,434

Grant Revenue

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

Food and Drug Administration.

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

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

20 unchanged sentences

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.

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 in 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.

3 unchanged sentences

Research and Development

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.

Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, materials and supplies, preclinical expenses, share-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.

4 unchanged sentences

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.

The Company recognizes all share-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 of 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 share-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 .

1 unchanged sentence

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 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.

5 unchanged sentences

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.

Employee Stock Purchase Plan

Stock-based compensation expense for employee stock purchases under the Company’s 2021 Employee Stock Purchase Plan (the “2021 ESPP”) is recorded at the estimated fair value of the purchase as of the plan enrollment date and is recognized as expense on a straight-line basis over the applicable six-month ESPP offering period.

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

6 unchanged sentences

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

Net 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.

Basic and diluted weighted average shares of common stock outstanding for the year ended December 31, 2022, includes the weighted average effect of 2,426,493 Pre-Funded Warrants, which were issued in September 2022, for the purchase of shares of common stock, for which the remaining unfunded exercise price is $ 0.0001 per share.

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.

The Company’s potentially dilutive securities, which include convertible promissory notes, convertible preferred stock, outstanding stock options and warrants 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.

1 unchanged sentence

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,

1 unchanged sentence

Warrants to purchase common stock 29,167 36,667

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.

6 unchanged sentences

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.

In 2016, the FASB issued ASU 2016-13 “ Financial Instruments - Credit Losses” which (i) significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model which will be based on an estimate of current expected credit loss;

and (ii) provides for recording credit losses on available-for-sale debt securities through an allowance account.

The standard also requires certain incremental disclosures.

Subsequently, the FASB issued several ASUs to clarify, improve, or defer the adoption of ASU 2016-13.

This ASU is effective for fiscal years beginning January 2023.

The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's financial statements.

Fair Value Measurement

The following table sets forth the 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):

Fair Value Measurements as of December 31, 2022

Level 1 Level 2 Level 3 Total

Money market funds (1) $ 32,035 $ — $ — $ 32,035

government treasury bills 70,708 — — 70,708

Commercial paper — 53,296 — 53,296

Corporate bonds — 4,250 — 4,250

Government agency — 5,287 — 5,287

Total financial assets $ 102,743 $ 62,833 $ — $ 165,576

Fair Value Measurements as of December 31, 2021

Level 1 Level 2 Level 3 Total

Money market funds (1) $ 140,032 $ — $ — $ 140,032

(1) Included in cash and cash equivalents in the accompanying balance sheets.

As of December 31, 2022 gross unrealized losses for cash equivalents and investments was $ 0.1 million.

As of December 31, 2022, all marketable securities had a contractual maturity of less than one year.

Intangible Asset Impairment

During the year ended December 31, 2021, the Company recognized an impairment of $ 74.2 million of the contract intangible asset acquired in connection with the Merger and reduced the contract intangible asset to its estimated fair value of $ 3.9 million at the Effective Time.

This 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.

During the year ended December 31, 2022, upon receipt of the Notice of Termination, the Company impaired the contract intangible asset by $ 3.7 million to its estimated fair value of zero (which represented a Level 3 fair value measurement) based on receipt of the formal notice of termination from Gossamer for the Gossamer License Agreement.

Short-Term Investments and Cash and Cash Equivalents

The Company's short-term investments, which consist of highly liquid securities, are classified as available-for-sale and are stated at fair value.

The following table summarizes the Company's short-term investments (in thousands):

Maturity (In Years) Amortized Cost Unrealized Gains Unrealized Losses Fair Value

Money market funds $ 32,035 $ — $ — $ 32,035

government treasury bills Less than 1 70,812 4 ( 108 ) 70,708

Commercial paper Less than 1 53,296 — — 53,296

Corporate bonds Less than 1 4,276 — ( 26 ) 4,250

Government agency Less than 1 5,272 15 — 5,287

Total $ 165,691 $ 19 $ ( 134 ) $ 165,576

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).

12 unchanged sentences

Purchase price $ 110,388

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.

(1) The long-lived intangible asset represented Aerpio’s out-licensing agreement with Gossamer Bio., Inc.

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.

Subsequently, the Company recorded an impairment and the licensing agreement was terminated.

See Note 6 for additional information.

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.

The Company recorded a long-lived contract intangible asset as a result of the Merger, related to the Gossamer License Agreement, 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.

1 unchanged sentence

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.

At the Effective Time, the Company 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 the out-licensing arrangement, of which 90 % of any future net cash proceeds will be remitted to CVR Holders and paid through the CVRs.

The useful life of the intangible asset was estimated to be approximately 14.3 years.

On April 25, 2022, the Company received a formal notice of termination from Gossamer for the Gossamer License Agreement, relating to Gossamer’s GB004 product candidate, a legacy product candidate of the Company's predecessor,

Aerpio, after Gossamer announced that its Phase 2 SHIFT-UC clinical trial studying GB004 in patients with mild-to-moderate active ulcerative colitis did not meet the primary or secondary endpoints at week 12 and the study was being terminated for lack of treatment benefit.

The Gossamer License Agreement terminated effective July 24, 2022.

Based on the termination of the Gossamer License Agreement, the Company fully impaired the intangible asset, $ 3.7 million, of which the Gossamer License Agreement is the underlying asset, during the year ended December 31, 2022.

Amortization expense was $ 87,000 and $ 95,000 for the years ended December 31, 2022 and 2021, respectively.

The following table presents a roll forward of the finite-lived intangible asset for the years ended December 31, (amounts in thousands):

Year Ended December 31,

Intangible asset, net, beginning of year $ 3,811 $ —

Additions — 78,062

Amortization ( 87 ) ( 95 )

Impairment of contract intangible ( 3,724 ) ( 74,156 )

Intangible asset, net, end of year $ — $ 3,811

Accrued Liabilities

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

Accrued clinical

Accrued contract manufacturing

As of December 31,

Accrued bonus $ 5,463 $ 1,465

Accrued clinical 2,399 2,507

Accrued professional fees 1,814 1,948

Advanced customer payments 1,571 —

Accrued salaries and payroll 1,299 152

Accrued contract manufacturing 405 2,287

Accrued other - sales related 1,435 —

Accrued other 536 344

1 unchanged sentence

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.

In April 2019, the Company entered into a twenty-eight month facility lease agreement for office space in Pacific Palisades, California (the “Pacific Palisades Lease”).

The Pacific Palisades 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 Pacific Palisades Lease for an additional three-year period and entered into an amendment to the lease agreement (the “Pacific Palisades Lease Amendment”).

Pursuant to the Pacific Palisades 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 Pacific Palisades Lease.

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

In April 2022, the Company entered into a lease agreement for office space in Morristown, New Jersey (the “Morristown Lease”).

The Morristown Lease has a term of seventy-three months , unless terminated sooner, and includes rent abatement for the first three months and the forty-seventh and forty-eighth calendar months after lease commencement.

Included in the Morristown Lease are fixed rent escalations of approximately 2 % on each anniversary year of the lease term.

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

As of December 31,

Operating lease right-of-use assets $ 1,522 $ 557

Total right-of-use assets

Operating lease liabilities, current $ 394 $ 131

1 unchanged sentence

Total operating lease liabilities $ 1,661 $ 605

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):

Rent expense for the years ended December 31, is presented on the following table (amounts in thousands):

Year Ended December 31,

Operating lease rent expense $ 382 $ 188

Cash paid for leases and included in operating cash flows for the years ended December 31, is presented on the following table (amounts in thousands):

Year Ended December 31,

Cash paid included in operating cash flows $ 291 $ 129

Operating leases rent expense

The future minimum lease payments required under the operating lease as of December 31, 2022, are summarized below (amounts in thousands):

Future Minimum Lease Payments:

Thereafter 110

Total minimum lease payments $ 1,953

3 unchanged sentences

Operating lease liabilities, non-current $ 1,267

Remaining lease term (in years)

Incremental borrowing rate

Weighted average remaining lease term (in years) 4.53

Weighted average incremental borrowing rate 7.5 %

License Agreements

Bristol-Meyers Squibb Company License Agreement

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

The BMS 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 BMS License Agreement.

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

Under the terms of the BMS License Agreement, BMS is entitled to receive certain development milestone payments, royalties on net sales from licensed products under the agreement and any sublicense fees.

During the year ended December 31, 2022, royalties on net product sales were $ 1.1 million, of which $ 0.4 million in royalties were accrued as of December 31, 2022.

No payments related to milestones were paid during the years ended December 31, 2022 and 2021.

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

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

Under the terms of the Amendment, the Company paid BMS $ 5.8 million representing 50 % of the previously outstanding payment obligation under the terms of the BMS License Agreement, following the Effective Time of the 2021 PIPE Financing.

The Balloon Payment shall accrue interest, beginning August 26, 2021 until paid in full, at a rate equal to 4.00 % 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 BMS based on net sales of products subject to the BMS License Agreement.

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

As such, the Company recognized $ 2.8 million of license expense in the year ended December 31, 2021 and had a corresponding $ 2.8 million sublicense payable to BMS on the balance sheet as of December 31, 2021, which was paid in 2022.

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 BMS 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 BMS on the balance sheet as of December 31, 2021, which was paid in 2022.

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.

In December 2021, 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 the Licensed Territory.

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

The term of the EOC License Agreement was set to continue until the expiration of the royalty obligations under the agreement.

On June 27, 2022, the Company received written notice from EOC that EOC elected to terminate the EOC License Agreement, effective immediately, due to alleged material breaches by the Company under such agreement.

The Company disagrees with EOC’s allegations of material breach and does not believe that EOC had a right to terminate the EOC License Agreement for material breach, and accordingly believes that the termination of the EOC License Agreement is a termination for convenience.

EOC had the right to terminate the agreement for convenience upon 120 days advance written notice.

The Company waived such notice period in connection with EOC's termination notice and, as a result, the EOC License Agreement was terminated effective June 27, 2022.

Either party had the right to 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.

On June 27, 2022, EOC filed a Request for Arbitration with the International Chamber of Commerce’s International Court of Arbitration against the Company.

The arbitration process is ongoing.

The Company assessed the EOC License Agreement and concluded that EOC is a customer and identified the license of ABI-009 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.

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

The Company was 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 was obligated to fund all research, development, regulatory, marketing and

commercialization activities in the defined Licensed Territory.

See Note 16 to these audited financial statements for more information about the arbitration process regarding the EOC License Agreement.

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.

Private Aadi received $ 8.1 million in October 2019 (“October 2019 Convertible Notes”) and $ 1.0 million in January 2020 for the proceeds in connection with the issuance of convertible promissory notes (“January 2020 Convertible Notes,” and together with October 2019 Convertible Notes “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 Convertible Notes 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.

In November 2020, Private Aadi entered into an amendment to the 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 .

In May 2021, Private Aadi entered into an amendment to the 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.

At the date of conversion, the Convertible Notes were marked to market and valued at $ 9.5 million, resulting in a gain on conversion of $ 0.4 million in the year ended December 31, 2021 .

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.

In May 2020, Private Aadi was approved for a $ 0.2 million Small Business Administration Paycheck Protection Program loan, as provided for in the Coronavirus Aid, Relief and Economic Security Act (“PPP Loan”).

Under certain conditions, the PPP Loan and accrued interest were 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 was subject to reduction if the Company terminates employees or reduces salaries during the twenty-four-week covered period.

The unforgiven portion of the loan was 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 .

Stockholders' Equity (Deficit)

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.

As of December 31, 2022 and 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

6 unchanged sentences

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.

Common Stock and Pre-Funded Warrants

As of December 31, 2022 and 2021, the Company had 300,000,000 shares of authorized common stock with par value of $ 0.0001 per share under the Company’s certificate of incorporation, as amended and restated.

As of December 31, 2022 and 2021, the shares of common stock outstanding were 24,435,007 and 20,894,695 , respectively.

2 unchanged sentences

The aggregate net proceeds, after deducting certain expenses incurred that were direct and incremental to the issuance of the 2021 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 March 2022, the Company entered into the Sales Agreement with Cowen , with respect to an “at the market offering” program pursuant to which the Company may offer and sell, from time to time at its sole discretion, shares of common stock having aggregate gross proceeds of up to $ 75.0 million through Cowen as its sales agent .

As of December 31, 2022 , no shares of common stock had been sold pursuant to the Sales Agreement.

On September 22, 2022, the Company entered into the Purchase Agreement for the 2022 PIPE Financing with the 2022 PIPE Investors for the sale by the Company of 3,373,526 shares of the Company’s common stock for a price of $ 12.50 per share and Pre-Funded Warrants to purchase an aggregate of 2,426,493 shares of the Company's common stock at a purchase price of $ 12.4999 per Pre-Funded Warrant.

The Pre-Funded Warrants are exercisable at an exercise price of $ 0.0001 and will be exercisable until exercised in full.

The 2022 PIPE Financing closed on September 26, 2022.

Aggregated net proceeds, after deducting certain expenses incurred of $ 0.3 million related to the issuance of the shares were $ 72.2 million.

On September 22, 2022, the Company and the Purchasers entered into the 2022 PIPE Registration Rights Agreement providing for the registration for resale of the securities sold under the Purchase Agreement, including the shares issuable upon the exercise of the Pre-Funded Warrants, that are not then registered on an effective registration statement, pursuant to a registration statement filed with the SEC.

The Pre-Funded Warrants meet the criteria to be classified within stockholders’ equity.

As of December 31, 2022, all Pre-Funded Warrants are still outstanding.

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

Since the Company’s inception, no cash 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.

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

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).

Share-Based Compensation

2014 Plan (as amended and restated in February 2017, the “Private Aadi Plan”)

In connection with the Merger, the Company assumed the 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.

1 unchanged sentence

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

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

2011 Plan and 2017 Plan

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

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.

2021 Equity Incentive Plan (the “2021 Plan”), which permits the award of stock options stock appreciation rights, restricted stock, restricted stock units, performance units and performance 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.

3 unchanged sentences

• 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.

• such number of shares as the board of directors or its designated committee may determine.

As a result of the evergreen increase, a total of 977,400 shares were added to the 2021 Plan on January 1, 2023.

1 unchanged sentence

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:

As of December 31, 2022, zero , 299,039 , 101,024 and 2,590,360 shares were outstanding under the 2011 Plan, Private Aadi Plan, 2017 Plan and 2021 Plan, respectively.

The following table summarizes the stock option activity during the year ended December 31, 2022:

Shares Weighted Average

Exercise Price Weighted Average

Remaining Contractual Term

(in Years) Aggregate

Intrinsic Value

1 unchanged sentence

Outstanding, January 1, 2022 1,749,876 $ 20.71 8.48 $ 10,007

Assumed through Merger

Granted 1,583,038 15.28

Exercised ( 132,084 ) 3.04

Expired/cancelled ( 210,407 ) 20.61

Outstanding as of December 31, 2022 2,990,423 $ 19.28 8.59 $ 2,849

Vested and exercisable as of December 31, 2021

Options exercisable as of December 31, 2022 722,198 $ 18.53 6.84 $ 2,251

Vested and expected to vest as of December 31, 2022 2,990,423 $ 19.28 8.59 $ 2,849

As of December 31, 2022, the aggregate intrinsic value of options outstanding was $ 2.8 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.

For the years ended December 31, 2022 and 2021, the weighted-average grant-date fair value of options granted was $ 12.20 and $ 18.88 per share, respectively.

As of December 31, 2022, there was $ 28.8 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 2.7 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.

The total intrinsic value of the options exercised during the years ended December 31, 2022 and 2021 was $ 1.3 million and $ 1.0 million, respectively.

As of December 31, 2022, and 2021, 853,760 and 1,390,606 shares were reserved for issuance under the 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):

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

Year Ended December 31,

Selling, general and administrative $ 6,333 $ 1,449

Research and development 3,310 657

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.

Total $ 9,643 $ 2,106

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

In connection with the retirement of an employee, the Company has modified its previously granted equity awards to continue vesting 64,436 shares, which would have otherwise been forfeited in May 2022 as a result of such retirement and extended the exercise ability of the former employee’s vested and outstanding options.

The incremental share-based compensation expense as a result of the modification was $ 0.3 million for the year ended December 31, 2022.

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

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:

3 unchanged sentences

0.84 % - 1.38 %

0.34% - 0.80%

Expected volatility 85.91 % - 89.35 %

85.21 % - 87.88 %

89.57% - 92.52%

Expected term (in years) 5.5 - 6.1

4 unchanged sentences

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.

3 unchanged sentences

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.

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.

1 unchanged sentence

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.

The Company had warrants outstanding for the purchase of 29,167 and 36,666 shares of the Company’s common stock at December 31, 2022 and 2021, respectively.

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.

During the year ended December 31, 2022, 7,500 warrants were exercised.

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

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).

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

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”).

On August 17, 2021, a special meeting of the Company’s stockholders was held to approve the Merger and related matters, at which the Company's stockholders considered and approved the Company’s 2021 ESPP which permits participants to contribute up to 15 % of their eligible compensation during defined rolling six-month offering periods to purchase the Company’s common stock.

The purchase price of the shares will be 85 % of the lower of the fair market value of the Company’s common stock on the first day of trading of the offering period or on the applicable purchase date.

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.

An aggregate of 519,563 shares of common stock have been reserved 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 of directors or its designated committee no later than the last day of the immediately preceding fiscal year.

On January 1, 2023, 244,350 shares of common stock were added to the 2021 ESPP.

1 unchanged sentence

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.

The Company opened enrollment into the ESPP in May 2022.

The Company uses the Black-Scholes model to determine the estimated fair value for purchases under the 2021 ESPP.

Black-Scholes models require the input of various assumptions, including the expected life, expected dividend yield, price volatility and risk-free interest rate of the underlying stock.

The calculation was based on the following assumptions:

December 31, 2022

Strike price (per share) $ 11.40 - $ 11.66

Risk-free interest rate 1.54 % - 4.40 %

Expected volatility 92.59 % - 105.68 %

Expected term (in years) 0.5

Expected dividend yield —

As of December 31, 2022 and 2021, 492,361 and 310,617 shares of common stock were available for issuance under the 2021 ESPP, respectively.

The Company had an outstanding liability of $ 76,000 at December 31, 2022, which will be recognized over six months .

No liability was outstanding as of December 31, 2021.

During the years ended December 31, 2022 and 2021 , 27,202 and zero shares were issued under the 2021 ESPP, respectively.

The Company recorded income tax expense of zero and $ 2,000 for the years ended December 31, 2022 and 2021, respectively.

The Company continues to maintain a full valuation allowance.

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

4 unchanged sentences

Other permanent items ( 0.1 ) 0.4

Officers Compensation ( 1.7 ) —

Nondeductible impairment — ( 13.8 )

3 unchanged sentences

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

As of December 31,

Deferred tax assets:

1 unchanged sentence

Research and development tax credits 5,168 3,732

Section 174 capitalized research expense 5,417 —

Other 4,219 1,214

Total deferred tax assets 53,352 39,174

2 unchanged sentences

Deferred tax liabilities:

Other ( 586 ) ( 764 )

Total gross deferred tax liabilities ( 586 ) ( 764 )

5 unchanged sentences

As of December 31, 2022, the Company has federal and state net operating loss (“NOL”) carryforwards of $ 167.5 million and $ 72.0 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.

Of the amount of federal and state NOL carryforwards, $ 123.4 million and $ 16.5 million, respectively, can be carried forward indefinitely.

The remaining federal and state NOL carryforwards begin to expire in 2030 and 2037 , unless previously utilized.

The Company also has federal and state research credit carryforwards of approximately $ 5.0 million and $ 2.3 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 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.

10 unchanged sentences

The following table summarizes the changes to the Company’s gross unrecognized tax benefits for the years ended December 31, 2022 and 2021 (amounts in thousands):

Balance at the beginning of the year

As of December 31,

Balance at the beginning of year $ 2,674 $ 2,404

Decrease related to prior year positions 2 ( 24 )

Increase related to current year positions 704 294

Balance at the end of the year

Balance at the end of year $ 3,380 $ 2,674

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

2 unchanged sentences

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 does not anticipate the unrecognized tax benefits to change materially within the next twelve months.

The Company had no accrued interest and no penalties related to income tax matters in the Company’s balance sheet as of December 31, 2022 and has not recognized interest or penalties in the Company’s statement of operations and loss for the year ended December 31, 2022.

1 unchanged sentence

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.

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, 2022, the Company has not recorded any material adjustments to its income tax provision related to the provisions with the CARES Act.

1 unchanged sentence

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.

From time to time, the Company could be subject to various legal proceedings and claims that arise in the ordinary course of its business activities.

Regardless of the outcome, legal proceedings can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

On June 27, 2022, EOC filed a Request for Arbitration with the International Chamber of Commerce’s International Court of Arbitration against the Company.

In the Request for Arbitration, EOC claims that the Company breached certain provisions of the EOC License Agreement, including failing to provide certain manufacturing and clinical development information to EOC.

As a result, EOC is seeking monetary damages.

The arbitration process is ongoing.

The Company intends to defend itself vigorously in this matter and pursue all relief to which the Company is entitled.

The Company is

unable to estimate the possible loss or range of loss, therefore no amounts have been accrued as of December 31, 2022.

See Note 9 to these audited financial statements for more information about the EOC License Agreement and its termination.

Purchase Commitments

2 unchanged sentences

The Company recorded accrued expenses of $ 2.8 million and $ 4.8 million in its consolidated balance sheet for expenditures incurred by clinical and contract manufacturing vendors as of December 31, 2022 and 2021, 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.

At December 31, 2022 the Company had one significant contract with Fresenius Kabi that contains specific activities including non-cancellable commitments, minimum purchase commitments, and binding annual forecasts.

As of December 31, 2022, there were non-cancellable purchase commitments related to the purchase of inventory for $ 1.9 million to be paid in 2023.

Mirati Collaboration.

In October 2022, the Company entered into a collaboration and supply agreement with Mirati Therapeutics, Inc.

(“Mirati”) to evaluate the combination of Mirati’s adagrasib, a KRASG12C selective inhibitor, and FYARRO in KRAS G12C mutant non-small cell lung cancer (NSCLC) and other solid tumors.

Under the terms of the agreement, Mirati will be responsible for sponsoring and operating the Phase 1/2 study and the Company will supply study drug and jointly share the cost of the study.

The primary objective of this multi-center, single-arm, open-label Phase 1/2 trial is to determine the optimal dose and recommended Phase 2 dose for the combination of adagrasib and FYARRO in patients with KRASG12C-mutant solid tumors.

In addition, the study will investigate the safety, tolerability and efficacy of adagrasib and FYARRO in combination in patients both with and without prior exposure to a KRASG12C inhibitor.

The trial will build on preclinical data showing enhanced anti-tumor efficacy with the combination of adagrasib and FYARRO relative to either agent alone.

For the year ended December 31, 2022 the Company incurred no expenses related to the Mirati collaboration.

Employee Retirement Plan

3 unchanged sentences

Company contributions are discretionary.

No contributions were made during 2021 or 2020.

Subsequent Events

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.

Contributions of $ 0.5 million and zero were made during the years ended December 31, 2022 and 2021.

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