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, FYARROTM, nab-sirolimus, (sirolimus protein-bound particles for injectable suspension), 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 intravenous use for the treatment of adult patients with locally advanced malignant perivascular epithelioid cell tumors ("PEComa"). On February 22, 2022, we launched FYARRO in the United States for treatment of advanced malignant PEComa and recognized net product sales of $2.3 million for the three months ended March 31, 2022.

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


   •  On January 13, 2022, we entered into a Negotiated Purchase Order Terms and
      Conditions for Clinical and Commercial Product (the "FK Agreement") with
      Fresenius Kabi, LLC ("Fresenius Kabi"), pursuant to which Fresenius Kabi
      will manufacture FYARRO for us, and we will purchase FYARRO as a finished
      drug from Fresenius Kabi, on a purchase order basis. Under the FK
      Agreement, which shall be effective through December 31, 2022 (or such
      later date as may be agreed between the parties in writing), we may
      purchase FYARRO for either clinical or commercial purposes for use in the
      United States and Canada. The price of FYARRO will be fixed, subject to the
      ability of Fresenius Kabi to increase pricing under specified
      circumstances. We have an obligation to purchase certain minimum quantities
      of FYARRO, and failure to purchase those minimum quantities will result in
      an additional payment from us to Fresenius Kabi.


   •  On February 22, 2022, we launched the sale of FYARRO in the United States
      and recorded net product sales of $2.3 million.


   •  In February 2022, we opened PRECISION 1 trial for enrollment in the United
      States and the first patient was dosed in March 2022.


   •  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) will become 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,


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      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") for 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., after announcing 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
      expect to fully impair the intangible asset, $3.7 million, of which the
      Gossamer License Agreement for GB004 is the underlying asset, in the second
      quarter of 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 Pharmaceuticals, Inc.
      immediately prior to the Merger (as defined in Note 1 to the condensed
      consolidated financial statements), will automatically terminate in
      accordance with its terms and the CVRs will no longer be eligible for
      payment under the CVR Agreement and will automatically be cancelled and
      forfeited without any consideration or payment, in each case effective July
      24, 2022.


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 months ended March 31, 2022, we recorded royalties of $0.2 million, under the terms of this agreement. No payments related to milestones or royalties under this agreement were paid during the three months ended March 31, 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 plus any accrued and unpaid interest due thereon.

EOC License Agreement

In December 2020, we entered into a license agreement ("EOC License Agreement") with EOC Pharma (Hong Kong) Limited ("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"). See Note 6 to the condensed consolidated financial statements for more information about the EOC License Agreement.

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 $2.3 million during the three months ended March 31, 2022.


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   •  We have built a cross-functional commercial team consisting of marketing,
      market access, commercial operations and continue to build our sales and
      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 months ended March 31, 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.


   •  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 three months ended March 31, 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 March 31, 2022, we had $129.8 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 March 31, 2022 we had an accumulated deficit of $156.5 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 identifying and designing product candidates and conducting preclinical and clinical trials, the regulatory approval process for our product candidates 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 statements of operations presented herein. The following discussion and analysis are based on our condensed consolidated financial statements contained in this Quarterly Report, which we have prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). You should read the discussion and analysis together with such condensed consolidated financial statements and the related notes thereto.

Components of Statements of Operations

Revenue

Product Sales, Net

FYARRO was approved by the FDA in November 2021. On February 22, 2022, we launched sales of FYARRO to specialty distributors ("SD"s) and a specialty pharmacy ("SP"). We recognize product sales when the SDs and SP obtain control of the product, which occurs upon delivery. 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:



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   •  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 the sale is
      recognized.


   •  Rebates: Allowance for rebates include 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. Our 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, we 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 us 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, we may need to adjust prior period accruals, which would
      affect product sales in the period of adjustment.


   •  Co-Payment Assistance: We offer co-payment assistance to commercially
      insured patients meeting certain eligibility requirement. Co-payment
      assistance is accrued at the time of product sale to the SDs and SP based
      on estimated patient participation and average co-pay benefit to be paid
      per a claim. Our 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, we offer 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. We do not allow product returns for product that
      has been dispensed to a patient. As we receive inventory reports from the
      SDs and SP and have the ability to control the amount of product that is
      sold to the SDs and SP, we estimate future potential product returns based
      on the this on-hand channel inventory data and sell-through data obtained
      from the SDs and SP. In arriving at its estimate, we also consider
      historical product returns, the underlying product demand, and industry
      data specific to the specialty pharmaceutical distribution industry.

Grant Revenue

Grant revenue is derived from federal grants, primarily with the FDA. We have determined that the government agencies providing grants to us 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. We recognize grant revenue 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 we act as principal with discretion to choose suppliers, bear credit risk and perform part of the services required in the transaction, we record 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.



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Operating Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, business development, sales and marketing, and other corporate functions. Other general and administrative expenses include professional fees for legal, auditing, tax and business consulting services, insurance costs, intellectual property and patent costs, facility costs and travel costs. We expect that selling, general and administrative expenses will increase in the future as we expand our operating activities. Additionally, we have incurred, and expect to continue to incur, significant additional expenses associated with being a public company that we did not incur as a privately-held company, including (i) costs to comply with the rules and regulations of the SEC and those of Nasdaq, (ii) legal, accounting and other professional services, (iii) insurance, (iv) investor relations activities and (v) other administrative and professional services.

Research and Development Expenses

Research and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed as incurred. Research and development expenses consist primarily of: (i) employee related costs, including salaries, benefits and stock-based compensation expense for employees engaged in scientific research and development functions; (ii) third-party contract costs relating to research, formulation, manufacturing, nonclinical studies and clinical trial activities; (iii) external costs of outside consultants who assist with technology development, regulatory affairs, clinical development and quality assurance; (iv) payments made under our third-party licensing agreements; and (v) allocated facility-related costs.

Costs for certain activities, such as manufacturing, nonclinical studies and clinical trials are generally recognized based on the evaluation of the progress of completion of specific tasks using information and data provided by our vendors and collaborators. Research and development activities are central to our business. We expect to increase our investment in research and development in order to advance our product candidates through clinical trials. As a result, we expect that our research and development expenses will increase substantially in the foreseeable future as we continue to invest in research and development activities, pursue clinical development of our product candidates and expand our product candidate pipeline.

The process of commercialization and conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. Accordingly, to the extent that our product candidates continue to advance into clinical trials, including larger and later-stage clinical trials, our expenses will increase substantially and may become more variable.

Cost of Goods Sold

Cost of goods sold consist primarily of royalties paid to Celgene, costs incurred on sales of FYARRO and costs to manufacture and prepare the product for sales subsequent to the FDA approval in November 2021. Costs incurred prior to the FDA approval were expensed when incurred.

Other Expense, Net

Other expense, net consists of the change in fair value of convertible promissory notes and interest expense related to such notes. These expenses are partially offset by interest income earned on cash and cash equivalents and gain on extinguishment of debt.

Income Tax Expense

During the three months ended March 31, 2022 and 2021, we did not recognize income tax expense on the statement of operations. Since our formation in 2011, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned tax credits, due to our uncertainty of realizing a benefit from those items.



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