SEC Filing | Aadi Bioscience, Inc.

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aadi-20220630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

______________________________________

FORM 10-Q

______________________________________

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 001-38560

______________________________________

AADI BIOSCIENCE, INC.

(Exact Name of Registrant as Specified in its Charter)

______________________________________


Delaware			61-1547850
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
17383 Sunset Boulevard Suite A250 Pacific Palisades, California			90272
(Address of principal executive offices)			(Zip Code)
(424) 744-8055 (Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

______________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.0001 par value per share	AADI	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	x
		Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 5, 2022, the registrant had 21,016,833 shares of common stock, $0.0001 par value per share, outstanding.

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		Page
PART I.	FINANCIAL INFORMATION	2
Item 1.	Condensed Consolidated Financial Statements	2
	Condensed Consolidated Balance Sheets – June 30, 202 2 and December 31, 202 1 (U na udited)	2
	Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 202 2 and 202 1 (Unaudited)	3
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) – Three and Six Months Ended June 30, 202 2 and 202 1 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 202 2 and 202 1 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II.	OTHER INFORMATION	37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	100
Item 3.	Defaults Upon Senior Securities	100
Item 4.	Mine Safety Disclosures	100
Item 5.	Other Information	100
Item 6.	Exhibits	101
Signatures		102

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PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

AADI BIOSCIENCE, INC.

Condensed Consolidated Balance Sheets

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

(Unaudited)


	June 30, 2022		December 31, 2021

Assets
Current assets:
Cash and cash equivalents	$	118,737	$	148,989
Accounts receivable, net	2,063		—
Inventory	727		—
Prepaid expenses and other current assets	2,808		2,283
Total current assets	124,335		151,272
Property and equipment, net	357		57
Operating lease right-of-use assets	1,653		557
Intangible asset, net	—		3,811
Other assets	2,291		2,213
Total assets	$	128,636	$	157,910

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,619	$	6,439
Accrued liabilities	8,653		8,703
Operating lease liabilities, current portion	324		131
Total current liabilities	12,596		15,273
Other liabilities	109		—
Operating lease liabilities, net of current portion	1,444		474
Due to licensor (Note 6)	5,757		5,757
Total liabilities	19,906		21,504
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of June 30, 2022 and December 31, 2021	—		—
Common stock, $0.0001 par value; 300,000,000 shares authorized; 21,016,833 and 20,894,695 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively	2		2
Additional paid-in capital	283,539		279,089
Accumulated deficit	(174,811)		(142,685)
Total stockholders’ equity	108,730		136,406
Total liabilities and stockholders’ equity	$	128,636	$	157,910

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

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AADI BIOSCIENCE, INC.

Condensed Consolidated Statements of Operations

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

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021

Revenue
Product sales, net	$	3,437	$	—	$	5,744	$	—
Grant revenue	—		—		—		120
Total revenue	3,437		—		5,744		120
Operating expenses
Selling, general and administrative	10,006		830		19,154		1,393
Research and development	7,726		3,045		14,519		6,689
Cost of goods sold	341		—		520		—
Impairment of acquired contract intangible asset	3,724		—		3,724		—
Total operating expenses	21,797		3,875		37,917		8,082
Loss from operations	(18,360)		(3,875)		(32,173)		(7,962)
Other income (expense)
Change in fair value of convertible promissory notes	—		2,371		—		1,206
Gain upon extinguishment of debt	—		196		—		196
Interest income	158		1		171		1
Interest expense	(58)		(227)		(115)		(451)
Total other income, net	100		2,341		56		952
Loss before income tax expense	(18,260)		(1,534)		(32,117)		(7,010)
Income tax expense	(9)		(2)		(9)		(2)
Net loss	$	(18,269)	$	(1,536)	$	(32,126)	$	(7,012)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.87)	$	(0.60)	$	(1.53)	$	(2.76)
Weighted average number of common shares outstanding used in computing net loss per share attributable to common stockholders, basic and diluted	20,970,459		2,542,358		20,942,804		2,542,358

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

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AADI BIOSCIENCE, INC.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(Amounts in thousands, including share amounts)

(Unaudited)


	For the Three and Six Months Ended June 30, 2022
							Stockholders' Equity
	Series Seed Preferred Stock			Series A Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount		Shares	Par Value
Balance at January 1, 2022	—	$	—	—	$	—	20,895	$	2	$	279,089	$	(142,685)	$	136,406
Share-based compensation expense	—	—		—	—		—	—		1,781		—		1,781
Issuance of common stock upon exercise of warrants	—	—		—	—		7	—		54		—		54
Issuance of common stock upon exercise of stock options	—	—		—	—		40	—		244		—		244
Net loss	—	—		—	—		—	—		—		(13,857)		(13,857)
Balance at March 31, 2022	—	—		—	—		20,942	2		281,168		(156,542)		124,628
Share-based compensation expense	—	—		—	—		—	—		2,235		—		2,235
Issuance of common stock upon exercise of stock options	—	—		—	—		75	—		136		—		136
Net loss	—	—		—	—		—	—		—		(18,269)		(18,269)
Balance at June 30, 2022	—	$	—	—	$	—	21,017	$	2	$	283,539	$	(174,811)	$	108,730


	For the Three and Six Months Ended June 30, 2021
							Stockholders' Equity (Deficit)
	Series Seed Preferred Stock			Series A Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount		Shares	Par Value
Balance at January 1, 2021	734	$	—	7,212	$	1	2,542	$	1	$	20,161	$	(32,595)	$	(12,432)
Share-based compensation expense	—	—		—	—		—	—		36		—		36
Net loss	—	—		—	—		—	—		—		(5,476)		(5,476)
Balance at March 31, 2021	734	—		7,212	1		2,542	1		20,197		(38,071)		(17,872)
Share-based compensation expense	—	—		—	—		—	—		39		—		39
Net loss	—	—		—	—		—	—		—		(1,536)		(1,536)
Balance at June 30, 2021	734	$	—	7,212	$	1	2,542	$	1	$	20,236	$	(39,607)	$	(19,369)

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

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AADI BIOSCIENCE, INC.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)


	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(32,126)	$	(7,012)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Impairment of acquired contract intangible asset	3,724		—
Share-based compensation expense	4,016		75
Change in fair value of convertible promissory notes	—		(1,206)
Non-cash interest expense	115		451
Gain upon extinguishment of debt	—		(196)
Non-cash lease expense	157		89
Depreciation and amortization expense	101		4
Changes in operating assets and liabilities:
Accounts receivable	(2,063)		14,149
Inventory	(727)		—
Prepaid expenses and other current assets	(524)		(111)
Other non-current assets	284		—
Operating lease liability	(90)		(88)
Accounts payable and accrued liabilities	(3,111)		1,223
Other liabilities	109		—
Net cash (used in) provided by operating activities	(30,135)		7,378
Cash flows from investing activities:
Purchases of property and equipment	(264)		—
Deferred acquisition costs paid	—		(157)
Net cash used in investing activities	(264)		(157)
Cash flows from financing activities:
Issuance of common stock upon exercise of stock options	380		—
Issuance of common stock upon exercise of warrants	54		—
Deferred offering costs paid for financing	(223)		(1)
Net cash provided by (used in) financing activities	211		(1)
Net (decrease) increase in cash, cash equivalents and restricted cash	(30,188)		7,220
Cash, cash equivalents and restricted cash at beginning of year	148,989		4,455
Cash, cash equivalents and restricted cash, June 30, 2022 and 2021	$	118,801	$	11,675

Supplemental disclosure of cash flow information:
Interest paid during the period	$	115	$	—
Taxes paid during the period	$	9	$	—
Supplemental disclosure of non-cash activities:
Deferred transaction costs included in accounts payable and accrued liabilities	$	75	$	151
Accrued property and equipment	$	51	$	—
Operating lease liability arising from obtaining right-of-use asset	$	1,210	$	—

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Nature of Organization and Operations

Aadi Bioscience, Inc. (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, now Bristol Myers Squibb Company (“Celgene”), for all therapeutic areas including oncology, cardiovascular, and metabolic related diseases.

The Company’s historical operations have consisted principally of performing research and development activities and raising capital. The Company’s activities are subject to significant risks and uncertainties, including failing to secure additional funding before sustainable revenues and profit from operations are achieved.

Merger with Aerpio Pharmaceuticals, Inc. and Name Change

On May 16, 2021, the Company, then operating as Aerpio 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. (“Private Aadi”)).

Pursuant to the terms set forth in the Merger Agreement and effective August 26, 2021 (the “Effective Time”): (i) Merger Sub merged with and into Private Aadi, with Private Aadi surviving as a wholly owned subsidiary of Aerpio (the “Merger”), (ii) Aerpio changed its name to Aadi Bioscience, Inc. in connection with and immediately prior to the Effective Time, 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 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 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; 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

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under GAAP, a company must assess whether an integrated set of assets and activities should be accounted for as an acquisition of a business or an asset acquisition. Upon closing of the Merger, substantially all of the fair value is concentrated in cash, working capital and a long-lived contract intangible asset. As such, the acquisition was treated as an asset acquisition. The net assets of Aerpio have been recorded at their relative fair value in the consolidated financial statements of the Company and the reported operating results prior to the Merger will be those of Private Aadi.

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

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 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 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 three and six months ended June 30, 2022. In connection with the termination of the Gossamer License Agreement, the CVR Agreement, pursuant to which the CVRs were issued to legacy holders of common stock of Aerpio immediately prior to the Merger, 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.

PIPE Financing and Subscription Agreement

On May 16, 2021, the Company entered into a subscription agreement (“Subscription Agreement”) with certain investors (the “PIPE Investors”), pursuant to which it would sell shares of its Common Stock concurrently with the closing of the Merger (the “PIPE Financing”). At the closing of the PIPE Financing, the Company entered into a Registration Rights Agreement, dated August 26, 2021 (“Registration Rights Agreement”), with the PIPE Investors. The PIPE Investors purchased an aggregate of 11,852,862 shares of common stock of the Company (the “PIPE Shares”) for an aggregate purchase price of $155.0 million pursuant to the Subscription Agreement (“PIPE Financing”). The aggregate net proceeds for the issuance and sale of the of the PIPE Shares were $145.4 million, after deducting certain expenses incurred that were direct and incremental to the issuance of the PIPE Shares.

Immediately following the Effective Time, and after giving effect to the Reverse Stock Split and the PIPE Financing, there were approximately 20.8 million shares of common stock of the Company outstanding. Immediately following the Effective Time and after giving effect to the Reverse Stock Split and the PIPE Financing: (i) the Private Aadi stockholders owned approximately 29.2% of the outstanding shares of common stock; (ii) Aerpio’s stockholders immediately prior to the Merger, whose shares of common stock, as adjusted for the Reverse Stock Split, remain outstanding after the Merger, owned approximately 15.2% of the outstanding shares of common stock; and (iii) the PIPE Investors owned approximately 55.6% of the outstanding shares of common stock, in each case as calculated on a fully-diluted basis.

Liquidity

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.

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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 prices of up to $75.0 million through Cowen as its sales agent. As of June 30, 2022, no shares of common stock had been sold under this Sales Agreement.

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 $174.8 million as of June 30, 2022 and net loss of $18.3 million and $32.1 million for the three and six months ended June 30, 2022, 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.

The Company had cash, cash equivalents and restricted cash of $118.8 million at June 30, 2022. Management believes the Company’s current cash, cash equivalents and restricted cash will provide sufficient funds to enable the Company to meet its obligations for at least twelve months from the filing date of this report.

COVID-19

In late 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. 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. Restrictions on the ability 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 and participation in meetings, events, and conferences, and curtailing or modifying its clinical trials), 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 further outbreaks, the availability, acceptance and effectiveness of vaccines, the impact on the Company's clinical trials, patients, and collaboration partners, and the effect on its suppliers.

2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements, and the related disclosures, have been prepared in accordance with GAAP and Securities and Exchange Commission (“SEC”) regulations and, in the opinion of management include all adjustments necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity and cash flows for each period presented. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). All adjustments are of a normal recurring nature. The Company’s condensed consolidated financial statements are stated in U.S. dollars.

Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, the accompanying unaudited interim financial statements should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2021, which are included in the Company’s Annual Report on Form 10-K filed with the SEC filed on March 17, 2022.

On August 26, 2021, when the Company closed the Merger, all outstanding shares of common stock along with preferred stock of Private Aadi were exchanged for new shares of common stock of the Company and the approximately 8.1 million shares of Private Aadi capital stock held by stockholders of Private Aadi immediately prior to the Merger were exchanged for approximately 2.5 million shares of common stock of the Company based on the Exchange Ratio. The authorized number of shares of common stock was not reduced and remains at 300.0 million. The par value of the Company’s common stock remains unchanged at $0.0001 per share.

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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 condensed 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.

Other Comprehensive Income

The Company has no material components of other comprehensive loss and accordingly, net loss is equal to comprehensive loss in 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 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 condensed consolidated financial statements and accompanying notes. 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 condensed consolidated financial statements relate to fair value of the intangible asset, fair value of the convertible promissory notes, gross-to-net accruals, stock-based compensation expense and accrued research and development costs. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may materially differ from these estimates and assumptions.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents and certain investments in money market funds. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. The Company has not experienced any losses on deposits since inception.

Cash, 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. As of June 30, 2022 and December 31, 2021, cash and cash equivalents included money market investments totaling $111.0 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 5, and is included in other assets on the condensed consolidated balance sheet. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated statement of cash flows (amounts in thousands):


	June 30, 2022		December 31, 2021
Cash and cash equivalents	$	118,737	$	148,989
Restricted cash, non-current	64		—
Total cash, cash equivalents and restricted cash	$	118,801	$	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. As of June 30, 2022, 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.

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Fair Value of Financial Instruments

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs, such as quoted prices in active markets

Level 2: Inputs, other than the quoted prices in active markets that are observable either directly or indirectly

Level 3: 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

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

In determining the fair value of its financial instruments, the Company considers the source of observable market data inputs, liquidity of the instrument, the credit risk of the counterparty to the contract, and its risk of nonperformance. In the case fair value is not observable, for the items subject to fair value measurements, the Company applies valuation techniques deemed the most appropriate under the GAAP guidance based on the nature of the assets and liabilities being measured.

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

The following table sets forth the recurring 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 June 30, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds (1)	$	111,023	$	—	$	—	$	111,023


	Fair Value Measurements as of December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds (1)	$	140,032	$	—	$	—	$	140,032

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

Intangible Asset Impairment

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.

Upon receipt of the Notice of Termination, during the three and six months ended June 30, 2022, the Company impaired the contract intangible asset 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.

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 June 30, 2022, $0.1 million of customer allowances for chargebacks was recorded. No allowances were recorded as of December 31, 2021.

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Inventory

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, therefore the inventory balance was zero at December 31, 2021. Details of inventory are presented as follows (amounts in thousands).


	June 30, 2022		December 31, 2021
Raw materials	$	13	$	—
Work in process	144		—
Finished goods	570		—
Total	$	727	$	—

Property and Equipment, Net

Property and equipment, consisting of computers, furniture and fixtures, office equipment and construction in process 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, Net

The Company’s intangible asset consists of a single asset, the Gossamer License Agreement, assumed 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. During the three and six months ended June 30, 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 3).

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property, equipment, and the intangible asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. An impairment was recorded for the long-lived intangible asset during three and six months ended June 30, 2022 based on the termination of the Gossamer License Agreement effective July 24, 2022 (see Note 3).

Leases

At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, the Company records the associated lease liability and corresponding right-of-use asset upon commencement of the lease using the implicit rate or a discount rate based on a credit-adjusted secured borrowing rate commensurate with the term of the lease. The Company does not recognize assets or liabilities for leases with lease terms of less than 12 months.

The Company additionally evaluates leases at their inception to determine if they are to be accounted for as an operating lease or a finance lease. A lease is accounted for as a finance lease if it meets one of the following five criteria: (i) the lease has a purchase option that is reasonably certain of being exercised, (ii) the present value of the future cash flows is substantially all of the fair market value of the underlying asset, (iii) the lease term is for a significant portion of the remaining economic life of the underlying asset, (iv) the title to the underlying asset transfers at the end of the lease term, or (v) if the underlying asset is of such a specialized nature that it is expected to have no alternative uses to the lessor at the end of the term. Leases that do not meet the finance lease criteria are accounted for as an operating lease. Operating lease assets represent a right to use an underlying asset for the lease term and operating lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease liabilities with a term greater than one year and their corresponding right-of-use assets are recognized on the balance sheet at the commencement date of the lease based on the present value of lease payments over the expected lease term.

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Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. As the Company’s leases do not typically provide an implicit rate, the Company utilizes the appropriate incremental borrowing rate, determined as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and in a similar economic environment. For finance leases, depreciation expense is recognized for the leased asset acquired and interest expense is recognized related to the portion of the financing in the statements of operations. For operating leases, lease cost is recognized on a straight-line basis over the lease term and variable lease payments are recognized as operating expense in the period in which the obligation for those payments is incurred. Variable lease payments primarily include common area maintenance, utilities, real estate taxes, insurance, and other operating costs that are passed on from the lessor in proportion to the space leased by the Company. The Company has elected the practical expedient to not separate between lease and non-lease components.

Commitments and Contingencies

The Company recognizes a liability with regard to loss contingencies when it believes it is probable a liability has been incurred, and the amount can be reasonably estimated. If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, the Company accrues that amount. When no amount within the range is a better estimate than any other amount the Company accrues the minimum amount in the range. The Company has not recorded any such liabilities as of June 30, 2022 and December 31, 2021.

Revenue Recognition

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 Customer (“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 (“SD”s) 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.

Rebates: 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: 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

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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 three and six months ended June 30, 2022 was $0.6 million and $1.0 million, respectively.

Grant Revenue

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. Grant revenue is recognized when there is reasonable assurance of compliance with the conditions of the grant and reasonable assurance that the grant revenue will be received. The Company recognizes grant revenues as reimbursable grant costs are incurred. The costs associated with these reimbursements are reflected as a component of research and development expense in the accompanying statements of operations.

With respect to grant revenue derived from reimbursement of direct out-of-pocket expenses for research costs associated with federal contracts, where the Company acts as principal with discretion to choose suppliers, bears credit risk, and performs part of the services required in the transaction, the Company records revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the accompanying statements of operations.

Revenue Under License Agreement

The Company generates revenues from payments received under a license agreement. Under such license agreement, the Company recognizes revenue when it transfers promised goods or services to partners in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with partners, the Company performs the following five steps: (i) identifies the promised goods or services in the contract; (ii) identifies the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) determines the transaction price, including the constraint on variable consideration; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the Company satisfies the performance obligations.

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

Transaction price for a contract represents the amount to which the Company is entitled in exchange for providing goods and services to the partner. Transaction price does not include amounts subject to uncertainties unless it is probable that there will be no significant reversal of revenue when the uncertainty is resolved. Apart from the upfront license payment, all other fees the Company may earn under such license agreements are subject to significant uncertainties of product development. Achievement of many of the event-based development and regulatory milestones may not be probable until such milestones are actually achieved. This generally relates to milestones such as obtaining regulatory approvals and successful completion of clinical trials. With respect to other development milestones, e.g. dosing of a first patient in a clinical trial, achievement could be considered probable prior to its actual occurrence, based on the progress towards commencement of the trial. The Company does not include any amounts subject to uncertainties 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.

Because such agreements generally only have one type of performance obligation, a license, which is generally all transferred at the same time as agreement inception, allocation of the transaction price among multiple performance

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obligations is not required. Upfront amounts allocated to licenses are recognized as revenue when the licenses are transferred to the partners. Development milestones and other fees are recognized in revenue when their occurrence becomes probable.

Research and Development

Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, materials and supplies, preclinical expenses, stock-based compensation expense, contract services, and other external development expenses. The Company records research and development activities conducted by third-party service providers, which include work related to preclinical studies, clinical trials, and contract manufacturing activities, to research and development expense as incurred. The Company is required to estimate the amount of services provided but not yet invoiced and include these expenses in accrued expenses on the balance sheet and within research and development expenses in the statements of operations. These expenses are a significant component of the Company’s research and development expenses and require significant estimates and judgments. The Company accrues for these expenses based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers. As actual expenses become known, the Company adjusts its accrued expenses.

Share-Based Compensation

The Company recognizes all stock-based payments to employees, including grants of employee stock options in the condensed consolidated statements of operations 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 stock-based awards using the Black-Scholes option pricing model, which requires the input of assumptions, including (i) the expected stock price volatility, (ii) the calculation of expected term of the award, (iii) the risk-free interest rate and (iv) expected dividends. Options granted during the year have a maximum contractual term of ten years. Forfeitures are recognized and accounted for as they occur.

Due to the historical lack of a public market for the trading of the Company’s securities and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product development and life science industry focus. The Company believes the group selected has sufficient similar economic and industry characteristics and includes companies that are most representative of the Company.

The Company has limited historical stock option activity and therefore estimates the expected term of stock options granted to employees, officers, and directors using the simplified method, which represents the average of the contractual term of the stock option and its weighted-average vesting period, to calculate the expected term, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for options granted to employees, and utilizes the contractual term for options granted to non-employees. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for zero-coupon U.S. treasury notes with maturities approximately equal to the expected term of the stock options. Compensation expense related to awards to employees is calculated on a straight-line basis by recognizing the grant date fair value over the associated service period of the award, which is generally the vesting term.

Income Taxes

Income taxes have been accounted for using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if, based upon the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized

When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position, as well as consideration of the available facts and circumstances. The Company recognizes interest and penalties related to uncertain tax positions, if any exist, in income tax expense.

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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. 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 have been excluded from the computation of diluted net loss per share as they would be anti-dilutive.

Net loss per share is presented as the more dilutive of the treasury stock and as-converted method or the two-class method required for participating securities. The Series A convertible preferred stock is considered a participating security and does not have a contractual obligation to share in Private Aadi’s losses. As such, the two-class method was not required.

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


	Six Months Ended June 30,
	2022	2021
Options to purchase common stock	2,737	449
Warrants to purchase common stock	29	—
Series Seed convertible preferred stock	—	734
Series A convertible preferred stock	—	7,212

Accounting Pronouncements Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options” (Subtopic 470-20) and “Derivatives and Hedging – Contracts in Entity’s Own Equity” (Subtopic 815-40). This new guidance is intended to reduce the complexity of accounting for convertible instruments. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments. Entities may adopt ASU 2020-06 using either a partial retrospective or fully retrospective method of transition. This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years for smaller reporting companies. The Company is currently evaluating the impact the adoption of ASU 2020-06 will have on the Company’s 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.

3. Intangible Asset

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. Due to the significant excess purchase price being allocated over the fair value of the acquired contract intangible asset, the Company determined that an indicator of impairment was present. The contract intangible asset was assessed for recoverability using an undiscounted cash flow model, which resulted in undiscounted cash flows below the carrying amount. 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 estimated useful life of the intangible asset is approximately 14.3 years.

On April 25, 2022, the Company received a formal notice of termination from Gossamer for the Gossamer License Agreement, that was 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

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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 three and six months ended June 30, 2022.

Amortization expense was $19,000 and $87,000 for the three and six months ended June 30, 2022, respectively.

The following table shows the amortization expense and impairment of the finite lived intangible asset for the six months ended June 30, 2022 (amounts in thousands):


	June 30, 2022
Intangible asset	$	3,811
Less amortization	(87)
Impairment of contract intangible	(3,724)
Intangible asset, net	$	—

4. Accrued Liabilities

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


	June 30, 2022		December 31, 2021
Accrued bonus	$	2,172	$	1,465
Accrued clinical	1,597		2,507
Accrued salaries and payroll	1,682		152
Accrued contract manufacturing	1,099		2,287
Accrued professional fees	930		1,948
Accrued other - sales related	771		—
Accrued other	402		344
Total accrued liabilities	$	8,653	$	8,703

5. 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 “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 agreement. 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 10,615 square feet of 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 agreement are fixed rent escalations of approximately 2% on each anniversary year of the lease term.

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


	June 30, 2022		December 31, 2021
Assets:
Operating lease right-of-use assets	$	1,653	$	557

Liabilities:
Operating lease liabilities, current	$	324	$	131
Operating lease liabilities, non-current	1,444		474
Total operating lease liabilities	$	1,768	$	605

Rent expense is being recorded on a straight-line basis. Rent expense for the three and six months ended June 30, 2022 and 2021 is presented on the following table (amounts in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Operating leases rent expense	$	107	$	46	$	157	$	91

Cash paid for leases and included in operating cash flows for the six months ended June 30, 2022 and 2021 is presented on the following table (amounts in thousands):


	Six Months Ended June 30,
	2022		2021
Cash paid included in operating cash flows	$	90	$	91

The future minimum lease payments required under the operating lease as of June 30, 2022, are summarized below (amounts in thousands):


Future Minimum Lease Payments:
2022	$	201
2023	489
2024	502
2025	310
2026	230
Thereafter	388
Total minimum lease payments	$	2,120
Less: amount representing interest	$	(352)
Present value of operating lease liabilities	$	1,768
Less: operating lease liabilities, current	$	(324)
Operating lease liabilities, non-current	$	1,444
Remaining lease term (in years)	4.99
Incremental borrowing rate	7.44		%

6. License Agreements

Celgene License Agreement

On April 9, 2014, the Company entered into a license agreement (as amended 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,

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Celgene agreed to supply the Company with licensed products of FYARRO necessary for clinical or non-clinical development.

Under the terms of the Celgene License Agreement, Celgene is entitled to receive certain development milestone payments, royalties on net sales from licensed products under the agreement and any sublicense fees. During three and six months ended June 30, 2022, $0.2 million and $0.4 million in royalties were accrued on net product sales recognized during the three and six months ended June 30, 2022, respectively. However, no payments related to milestones were paid during the three and six months ended June 30, 2022 or 2021.

On August 30, 2021, the Company and Celgene entered into Amendment No. 1 (the “Amendment”) to the 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 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 4.00% 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 Celgene based on net sales of products subject to the 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 during the six months ended June 30, 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 the six months ended June 30, 2022.

EOC License Agreement

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, and continues to dispute, 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.

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 December 2021 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 were considered variable consideration and were constrained with respect to revenue recognition notification from EOC that the milestone and royalty payments had been achieved.

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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. 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 Celgene License Agreement, 20% of the $1.0 million payment, or $0.2 million was accrued at December 31, 2021, and paid in January 2022.

7. 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 promissory 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.

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

In May 2021, Private Aadi entered into an amendment to the October 2019 and January 2020 Convertible Notes, whereby upon the closing of the Merger (see Note 1), the outstanding principal amount of the Convertible Notes and all accrued and unpaid interest as of immediately prior to the closing of the Merger would automatically convert into fully paid and nonassessable shares of Private Aadi common stock at a price per share equal to $4.80 and would be concurrently exchanged for shares of the Company’s common stock based on the Exchange Ratio. In conjunction with the closing of the Merger on August 26, 2021, the outstanding Convertible Notes were converted into shares of Private Aadi common stock which were concurrently exchanged for 698,018 shares of the Company’s common stock 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.

8. Payroll Protection Program Loan

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also appropriated funds for the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.

In May 2020, Aadi was approved for a $0.2 million SBA PPP loan, as provided for in the CARES Act (“PPP Loan”). Under certain conditions, the PPP Loan and accrued interest are forgivable after a twenty-four-week covered period as long as the loan proceeds were used for eligible expenses, including payroll, benefits, rent and utilities, and the company maintains certain payroll levels. The amount of loan forgiveness is subject to reduction if the Company terminates employees or reduces salaries during the twenty-four-week covered period. The unforgiven portion of the loan is payable over two years at an interest rate of 1%, with a deferral of payments for the ten months following the end of the twenty-four-week covered period. On April 29, 2021, the Company received notification from the SBA that the Company’s Forgiveness Application of the PPP Loan and accrued interest was approved in full, and the Company had no further obligations related to the PPP Loan. Accordingly, the Company recorded a gain on the forgiveness of the PPP Loan totaling $0.2 million.

9. Stockholders’ Equity (Deficit)

Preferred Stock

As of June 30, 2022 and December 31, 2021, under the Company’s certificate of incorporation, as amended and restated, the Company has 10,000,000 shares of preferred stock, par value $0.0001 per share, in authorized capital with no shares outstanding.

Series Seed Preferred Stock

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

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

Series A Preferred Stock

In February and March 2017, Private Aadi sold and issued in a private placement 5,847,940 shares of Series A Preferred Stock at $3.42 per share (the “Series A Financing”). Upon the closing of the Series A Financing, convertible notes issued in 2015 converted into 482,426 shares of Series A Preferred Stock at 85% of the $3.42 price per share (the “Series A Original Issue Price”) paid by the Series A Financing investors. Convertible notes issued in 2017 converted into 881,286 shares of Series A Preferred Stock at the Series A Original Issue Price. All outstanding shares of Series A Preferred Stock were converted into shares of Private Aadi common stock and concurrently exchanged for the Company’s common stock based on the Exchange Ratio in connection with the closing of the Merger.

Common Stock

As of June 30, 2022 and December 31, 2021, the Company had 300,000,000 shares of authorized common stock, par value of $0.0001 per share under the Company's certificate of incorporation, as amended and restated. As of June 30, 2022 and December 31, 2021, the shares of common stock outstanding were 21,016,833 and 20,894,695, respectively.

In conjunction with the closing of the Merger, the Company issued an aggregate of 2,558,218 shares of common stock to holders of Private Aadi common stock in exchange for all of the Private Aadi capital stock outstanding immediately prior to the closing of the Merger. Concurrently with the closing of the Merger, the PIPE Investors purchased an aggregate of 11,852,862 shares of the Company’s common stock for an aggregate purchase price of $155.0 million pursuant to the Subscription Agreement entered into with the Company on May 16, 2021. The aggregate net proceeds, after deducting certain expenses incurred that were direct and incremental to the issuance of the PIPE shares, was $145.4 million.

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 June 30, 2022, no shares of common stock had been sold pursuant to the Sales Agreement.

Dividends

The holders of common stock are entitled to receive dividends, if and when declared by the board of directors of the Company (the “board of directors”). Since the Company’s inception, no dividends have been declared or paid to the holders of common stock.

Liquidation

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.

Voting

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.

10. Stock-Based Compensation

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

The options that are granted from the Private Aadi Plan are exercisable at various dates as determined upon grant and will expire no more than ten years from their date of grant. The Private Aadi Plan stock 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 together with the 2011 Plan, the “Prior

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Plans”). 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).

Stock Option Plan – 2021 Plan

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

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

•2,070,784 shares of common stock;

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

•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 835,787 shares were added to the 2021 Plan on January 1, 2022.

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

As of June 30, 2022, zero, 319,260, 101,024 and 2,317,069 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 six months ended June 30, 2022:


	Stock Option Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in thousands)
Outstanding, January 1, 2022	1,749,876	$	20.71	8.48	$	10,007
Granted	1,209,638	17.11
Exercised	(114,638)	3.31
Expired/cancelled	(107,523)	25.03
Outstanding, June 30, 2022	2,737,353	$	19.84	8.93	$	2,781
Options exercisable, June 30, 2022	363,851	$	9.22	5.21	$	2,291

As of June 30, 2022, the aggregate intrinsic value of options outstanding was $2.8 million.

As of June 30, 2022, there was $31.8 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 3.02 years.

As of June 30, 2022, zero and 1,041,078 shares were reserved for issuance under the Private Aadi Plan and 2021 Plan, respectively.

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Option Awards

During the three months ended June 30, 2022 and 2021, option awards to purchase an aggregate of 862,938 and 57,889 shares of common stock were granted, respectively.

During the six months ended June 30, 2022 and 2021, option awards to purchase an aggregate of 1,209,638 and 57,889 shares of common stock were granted, respectively.

Compensation Expense Summary

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Selling, general and administrative	$	1,551	$	8	$	2,652	$	19
Research and development	684		31		1,364		56
Total	$	2,235	$	39	$	4,016	$	75

The Company uses the Black-Scholes option pricing model to determine the estimated fair value for stock-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 six months ended June 30, 2022 and 2021 was $12.08 and $1.96 per share, respectively.

The calculation was based on the following assumptions.


	Three Months Ended June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
Expected term (years)	5.50 - 6.08	5.08 - 6.25	5.50 - 6.08	5.08 - 6.25
Risk-free interest rate	2.53% - 3.38%	0.90% - 1.08%	1.46% - 3.38%	0.90% - 1.08%
Expected volatility	85.91% - 87.06%	85.21% - 87.88%	85.91% - 87.06%	85.21% - 87.88%
Expected dividend yield	—	—	—	—

In connection with the retirement of an employee of the Company, the Company has modified its previously granted equity awards to continue vesting of 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 stock-based compensation expense was not material for the three and six months ended June 30, 2022.

Warrants to Purchase Common Stock

The Company had warrants outstanding for the purchase of 29,166 and 36,666 shares of the Company’s common stock at June 30, 2022 and December 31, 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 three and six months ended June 30, 2022, zero and 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.

11. 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, at which the Company's stockholders considered and approved the Company’s 2021 Employee Stock Purchase Plan (the “2021 ESPP”). Upon approval of the 2021 ESPP by the stockholders, Aerpio’s Amended and Restated 2017 Employee Stock Purchase Plan terminated. An aggregate of 310,617 shares of common stock (after taking into account the Reverse Stock Split) 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 (after taking into account the Reverse Stock Split), (ii) one percent (1%) of the outstanding shares of all classes of common stock on the last day of the

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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. Shares of common stock issuable under the 2021 ESPP will be authorized, but unissued, or reacquired shares of common stock. If the Company’s capital structure changes because of a stock dividend, stock split or similar event, the number of shares that can be issued under the 2021 ESPP will be appropriately adjusted. The Company opened enrollment into the ESPP in May 2022.

No shares under the 2021 ESPP are outstanding at June 30, 2022. As a result of the evergreen increase described above, a total of 208,946 shares were added to the 2021 ESPP on January 1, 2022.

12. Income Taxes

The Company recorded income tax expense of $9,000 and $2,000 for the three and six months ended June 30, 2022 and 2021, respectively. The Company’s continues to maintain a full valuation allowance.

13. Commitments and Contingencies

Legal Proceedings

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 June 30, 2022.

Purchase Commitments

The Company has ongoing contracts with vendors for clinical trials and contract manufacturing. These contracts are generally cancellable, with notice, at the Company’s option. The Company recorded accrued expenses of $2.7 million and $4.8 million in its condensed consolidated balance sheet for expenditures incurred by clinical and contract manufacturing vendors as of June 30, 2022 and December 31, 2021, respectively.

At June 30, 2022, the Company had one significant contract with Fresenius Kabi that contains specific activities such as non-cancellable commitments, minimum purchase commitments, or binding annual forecasts.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains express or implied forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements in this Quarterly Report include, but are not limited to, statements about:

•our ability to maintain regulatory approval for FYARRO® in advanced malignant perivascular epithelioid cell tumors (“PEComa”), or to obtain and maintain regulatory approval for FYARRO in additional indications, or any other product candidates we may develop in the future, and any related restrictions, limitations or warnings in the label of an approved product candidate;

•our plans and potential for success relating to commercializing FYARRO, or any other product candidate that we may develop, if approved;

•our plans related to the further development and manufacturing of FYARRO;

•the timing, scope or likelihood of regulatory filings and approvals for FYARRO for advanced malignant PEComa in foreign jurisdictions and any additional indications we may pursue and any other product candidates we may develop in the future;

•our commercialization, marketing and manufacturing capabilities and strategy;

•the pricing and reimbursement of FYARRO and any other product candidates we may develop in the future, if approved;

•the rate and degree of market acceptance of FYARRO and any other product candidates we may develop in the future, if approved;

•the timing, progress and results of preclinical studies and clinical trials for our programs and product candidates, including the anticipated impact of the COVID-19 pandemic, the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available and our research and development programs;

•our ability to recruit and enroll suitable patients in our clinical trials;

•the expectations regarding the beneficial characteristics, safety, efficacy and therapeutic effects of FYARRO and any other product candidates that we may develop in the future;

•our ability to develop and advance product candidates into, and successfully complete, clinical studies;

•the implementation of our business model and our strategic plans for our business;

•our ability to establish or maintain collaborations or strategic relationships or obtain additional funding;

•our ability to contract with and rely on third parties to assist in conducting our clinical trials and manufacturing FYARRO and any other product candidates we may develop in the future;

•the size and growth potential of the markets for FYARRO and any other product candidates we may develop in the future, if approved, and our ability to serve those markets, either alone or in partnership with others;

•our ability to obtain funding for our operations, including funding necessary to commercialize FYARRO and to complete further development, approval and, if approved, commercialization of FYARRO in additional indications and any other product candidates we may develop in the future;

•the period over which we anticipate our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements;

•the potential for our business development efforts to maximize the potential value of our portfolio;

•our ability to compete with other companies currently marketing or engaged in the development of treatments for the indications that we are pursuing for FYARRO and any other product candidates we may develop in the future;

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•our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates;

•our financial performance;

•statements regarding the legal proceedings related to the termination of the EOC License Agreement;

•our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals; and

•our estimates regarding expenses, future revenue, capital requirements and needs for additional financing.

Forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions, and projections about the business and future financial results of the pharmaceutical industry, and other legal, regulatory and economic developments. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “intend,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” “continue,” “likely,” and similar expressions (including their use in the negative) intended to identify forward-looking statements although not all forward-looking statements contain these identifying words. Actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including, but not limited to, those described in Part II, Item 1A, (Risk Factors) of this Quarterly Report.

You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Quarterly Report and the documents that we reference in this Quarterly Report and have filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

The forward-looking statements in this Quarterly Report represent our views as of the date of this Quarterly Report. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should therefore not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report.

References in the following discussion to “we,” “our,” “us,” or “Aadi” refer to Aadi Bioscience, Inc. and its subsidiaries.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes to those statements thereto appearing elsewhere in this Quarterly Report and our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 17, 2022. Some of the information contained in this discussion and analysis including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risk, uncertainties and assumptions. Our actual results could differ materially from those discussed in our forward-looking statements for many reasons, including those risks. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report. You should read this Quarterly Report completely, including the “Risk Factors” section under Part II, Item 1A of this Quarterly Report and the “Cautionary Statement Regarding Forward-Looking Statements” sections of this Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by our forward-looking statements contained in the following discussion and analysis. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Overview

We are a biopharmaceutical company focused on developing and commercializing precision therapies for genetically defined cancers with alterations in mTOR pathway genes. Our 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, we launched FYARRO in the United States for treatment of advanced malignant PEComa and recognized net product sales of $3.4 million and $5.7 million for the three and six months ended June 30, 2022, respectively.

In addition to advanced malignant PEComa, based on data from our completed Phase 2 registrational study, Advanced Malignant PEComa Trial (“AMPECT”) and our expanded access program, we have initiated a registration-directed tumor-agnostic Phase 2 study (“PRECISION 1”) of FYARRO in patients with Tuberous Sclerosis Complex 1 and 2 (“TSC1 & TSC2”) alterations. We have completed a Type B meeting with the FDA in which we discussed the initial trial design and the PRECISION 1 trial was opened for enrollment in the United States during the first quarter of 2022. Our first patient was dosed in March 2022.

Recent Developments

•In April 2022, we received notification of a product-specific, permanent J-code for FYARRO. Under the Healthcare Common Procedure Coding System (“HCPCS”), the J-code (J9331) became effective on July 1, 2022. J-codes are permanent, product-specific reimbursement codes assigned to outpatient and physician-administered “buy and bill” products under Medicare Part B and are used by commercial insurers and government payers to facilitate and standardize claims submissions and reimbursements for medications like FYARRO. With the permanent J-code now in effect, all hospital outpatient departments, ambulatory surgery centers and physician offices in the United States will have one consistent HCPCS code to standardize the submission and payment of FYARRO insurance claims across Medicare, Medicare Advantage, Medicaid and commercial plans.

•On April 25, 2022, we received a formal notice of termination from Gossamer Bio, Inc. (“Gossamer”) of the license agreement dated June 24, 2018, as amended (the “Gossamer License Agreement”), that was related to Gossamer’s GB004 product candidate, a legacy product candidate of our predecessor, Aerpio Pharmaceuticals, Inc. (“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 will terminate, effective July 24, 2022. We fully impaired the intangible asset, $3.7 million, of which the Gossamer License Agreement for GB004 is the sole underlying asset, during the three and six months ended June 30, 2022. In connection with the termination of the Gossamer License Agreement, the Contingent Value Rights Agreement, dated as of August 26, 2021 (the “CVR Agreement”), pursuant to which the Contingent Value Rights (“CVRs”) were issued to legacy holders of common stock of Aerpio immediately prior to the Merger, 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.

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•In May 2022, we announced partnerships with prominent next generation sequencing (“NGS”) providers and leaders in genomic testing and profiling to facilitate trial enrollment for our ongoing PRECISION 1 trial. We believe these collaborations will expedite identification of advanced cancer patients with TSC1 & TSC2 alterations.

•On June 27, 2022, we received written notice from EOC Pharma (Hong Kong) Limited (“EOC”) that EOC has elected to terminate our license agreement, dated December 8, 2020 (the “EOC License Agreement”), effective immediately. EOC alleged certain material breaches by us under the EOC License Agreement. We disagree with, and continue to dispute, EOC’s allegations of material breach and do not believe that EOC had a right to terminate the EOC License Agreement for material breach, and accordingly believe that the termination of the EOC License Agreement is a termination for convenience.

Celgene License Agreement

In April 2014, Private Aadi entered into a license agreement (the “Celgene License Agreement”) with Abraxis BioScience, LLC, a wholly owned subsidiary of Celgene Corporation, now Bristol-Myers Squibb Company (“Celgene”), for exclusive rights for certain patents and a non-exclusive license for certain technology and know-how pertaining to ABI-009 (which we refer to as FYARRO). Under the Celgene License Agreement, as amended, Celgene is entitled to receive certain development milestone payments, royalties on net sales from licensed products under the agreement and any sublicense fees. During the three and six months ended June 30, 2022, we recorded royalties of $0.2 million and $0.4 million, under the terms of this agreement. No payments related to milestones or royalties under this agreement were paid during the three and six months ended June 30, 2021. See Note 6 to the condensed consolidated financial statements for more information about the Celgene License Agreement.

Under the terms of an August 2021 amendment to the Celgene License Agreement, we paid Celgene $5.8 million, representing 50% of the previously outstanding payment obligation under the terms of the Celgene License Agreement, following the effective time of the PIPE Financing. Pursuant to the terms of the amendment, the remaining portion of the previously outstanding payment obligation ($5.8 million), which is recorded on our balance sheet as due to licensor, is due on the third anniversary of the effective time of the PIPE Financing plus any accrued and unpaid interest due thereon.

EOC License Agreement

In December 2020, we entered into the EOC License Agreement with EOC under which we received $14.0 million in January 2021 in non-refundable upfront consideration as partial payment for the rights and licenses granted to EOC by us 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”). On June 27, 2022, we received written notice from EOC that EOC has elected to terminate the EOC License Agreement, effective immediately. See Note 6 to the condensed consolidated financial statements for more information about the EOC License Agreement and its termination.

In accordance with the Celgene License Agreement, we are required to pay 20% of all sublicense fees to Celgene. As such, we recognized $2.8 million of license expense in the fourth quarter of 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 fourth quarter of 2021, we recognized license revenue and received $1.0 million from EOC for achieving the FDA approval milestone in November 2021. In accordance with the Celgene License Agreement, we recognized $0.2 million of license expense in the fourth quarter of 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.

Key Trends and Factors Affecting Comparability Between Periods

•Commercial sale of FYARRO was launched on February 22, 2022, for the treatment of patients with advanced malignant PEComa. We recorded net product sales of $3.4 million and $5.7 million during the three and six months ended June 30, 2022, respectively.

•We have built a cross-functional commercial team consisting of marketing, market access and commercial operations and will continue to strategically build our sales and our commercial infrastructure with capabilities designed to scale when necessary to support future commercial launches. Expenses related to our commercial launch including personnel expenses, sales support, and marketing are included in selling, general and administrative expenses for the three and six months ended June 30, 2022. We expect these expenses will continue to increase, as compared to the prior year, with the launch of FYARRO and preparation for potential future launches.

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•We continue to build out our research and development team and we expect our research and development costs will increase in 2022, relative to 2021, as a result of significant expenses related to the PRECISION 1 trial which was open to enrollment during the six months ended June 30, 2022, with the first patient dosed in March 2022.

•As a public company our expenses have increased from prior year as a privately held company, including (i) costs to comply with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and those of the Nasdaq Capital Market (“Nasdaq”), (ii) legal, accounting and other professional services, (iii) insurance, (iv) investor relations activities, and (v) other administrative and professional services.

•The COVID-19 pandemic has resulted, and is likely to continue to result in, significant national and global economic disruption and may adversely affect our operations. Our clinical trials have been, and may continue to be, affected by the closure of offices, lack of resources or closure of 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 infrastructure and staff, can also make it more difficult to enroll and maintain patients in ongoing or planned clinical trials. We are actively monitoring the impact of COVID-19 and the possible effects on our financial condition, liquidity, operations, suppliers, industry and workforce. However, the full extent, consequences and duration of the COVID-19 pandemic and the resulting impact on us cannot currently be predicted. We will continue to evaluate the impact that these events could have on our operations, financial position, results of operations and cash flows in fiscal year 2022.

Liquidity and Capital Resources

As of June 30, 2022, we had $118.7 million of cash and cash equivalents. Based on our current plans, we believe our existing cash and cash equivalents will enable us to conduct our planned operations into 2024. We have incurred net losses in each year since inception and as of June 30, 2022 we had an accumulated deficit of $174.8 million. These losses have resulted principally from costs incurred in connection with research and development activities, selling, general and administrative costs associated with our operations, and costs associated with the Merger. We expect to continue to incur significant expenses and operating losses for the foreseeable future due to the cost of research and development, including conducting preclinical and clinical trials and identifying and designing product candidates, the regulatory approval process for FYARRO outside the United States and in additional indications and any other product candidates we may develop in the future and the commercial launch of FYARRO.

Basis of Presentation

The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the condensed consolidated balance sheets and statemen