Jade Biosciences, Inc. (JBIO)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report.

Overview

We are a biopharmaceutical company. Our initial focus was on advancing AV 101, our dry powder inhaled formulation of imatinib for the treatment of PAH a devastating disease impacting approximately 70,000 people in the United States and Europe. On June 17, 2024, we announced topline results from the Phase 2b portion of our Phase 2b/Phase 3 IMPAHCT. Topline data showed that, while AV-101 was generally well tolerated across all dose groups, the study did not meet its primary endpoint for improvement in pulmonary vascular resistance compared to placebo for any of the studied doses or show meaningful improvements in the secondary endpoint of change in six minute walk distance. We also reviewed data from several additional secondary endpoints of the Phase 2b portion of IMPAHCT, which also failed to show meaningful improvements. Based upon these results and in agreement with the independent study advisory committee, we halted enrollment and shut down the Phase 3 portion of IMPAHCT as well as the long-term extension study. AV-101 for the treatment of PAH was our only product candidate in development. We do not intend to resume development of AV-101 or any other product candidates. In July 2024, we announced the decision to conduct a comprehensive review of strategic alternatives focused on maximizing shareholder value. We also engaged Wedbush PacGrow as our exclusive strategic financial advisor to assist in the process of exploring strategic alternatives, which may include but are not limited to, an acquisition, merger, reverse merger, business combination, liquidation or other transaction.

Recent Developments

In June 2024, following our decision to halt further development of AV-101, we announced our plan to terminate nearly all of our workforce in the coming months, or the Workforce Reduction Plan. As of December 31, 2024, 47 individuals, or approximately 92% of our workforce, have been terminated. The affected individuals have been and will be provided severance benefits, including cash severance payments. Each affected individual’s eligibility for severance benefits is contingent upon entering into a separation agreement, which includes a general release of claims against our company. In connection with the Workforce Reduction Plan, we incurred costs (in consideration of releases) of approximately $6.7 million, which are primarily one-time severance benefits.

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On October 30, 2024, we entered into an Agreement and Plan of Merger, or the Merger Agreement, by and among us, Caribbean Merger Sub I, Inc., a Delaware corporation and our wholly owned subsidiary, or Merger Sub I, Caribbean Merger Sub II, LLC, a Delaware limited liability company and our wholly owned subsidiary, or Merger Sub II and together with Merger Sub I, Merger Subs, and Jade Biosciences, Inc., a Delaware corporation, or Jade, pursuant to which, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, among other things, Merger Sub I will merge with and into Jade, with Jade surviving the merger as the surviving corporation, or the First Merger, and as part of the same overall transaction, Jade will merge with and into Merger Sub II, with Merger Sub II continuing as our

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wholly owned subsidiary and the surviving corporation of the merger, or the Second Merger and together with the First Merger, the Merger. The Merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.

In addition, in connection with the closing of the Merger, or the Closing, we expect to declare a cash dividend to our pre-Merger stockholders of approximately $65.0 million in the aggregate, or the Cash Dividend, provided such amount is subject to adjustment as set forth in the Merger Agreement.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, or the Effective Time, (a) each then-outstanding share of Jade’s common stock, par value $0.0001 per share, or Jade Common Stock, will be converted into the right to receive a number of shares of our common stock, par value $0.0001 per share, or Aerovate Common Stock, based on a ratio calculated in accordance with the Merger Agreement, or the Exchange Ratio, provided that any unvested restricted shares of Jade Common Stock will be subject to the same terms and conditions (including, without limitation, vesting and repurchase provisions) that are otherwise applicable to such unvested shares as of immediately prior to the Effective Time, (b) each then-outstanding share of Jade’s preferred stock, par value $0.0001 per share, or Jade Preferred Stock, will be converted into the right to receive a number of shares of our newly authorized convertible preferred stock, par value $0.0001 per share, equal to (x) the Exchange Ratio divided by (y) 1,000, (c) each then-outstanding option to purchase Jade Common Stock will be assumed by us, subject to adjustment as set forth in the Merger Agreement and (d) each then-outstanding warrant to purchase shares of Jade Common Stock or Jade Preferred Stock will be assumed by us, subject to adjust as set forth in the Merger Agreement.

We and Jade have each agreed to customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants relating to (1) obtaining the requisite approval of our respective stockholders, (2) non-solicitation of alternative acquisition proposals and (3) the conduct of our respective businesses during the period between the date of signing the Merger Agreement and the Closing.

On October 30, 2024, Jade entered into a Securities Purchase Agreement, or the Purchase Agreement, with certain existing Jade stockholders and new investors, or the Investors. Pursuant to the Purchase Agreement, and subject to the terms and conditions thereof, Jade agreed to sell, and the Investors agreed to purchase, immediately prior to the consummation of the Merger, shares of Jade Common Stock and pre-funded warrants for an aggregate purchase price of approximately $300.0 million, or the Concurrent Investment, which reflects the conversion of the previously issued $95.0 million of convertible notes. The consummation of the Concurrent Investment is conditioned on the satisfaction or waiver of the conditions set forth in the Merger Agreement and in the Purchase Agreement. Shares of Jade Common Stock and pre-funded warrants issued pursuant to this financing transaction will be converted into shares of Aerovate Common Stock and pre-funded warrants to acquire shares of Aerovate Common Stock, in accordance with the Exchange Ratio and the Merger Agreement.

Consummation of the Merger is subject to certain closing conditions, including, among other things, (1) requisite approval by our stockholders, (2) approval by the requisite Jade stockholders of the adoption and approval of the Merger Agreement and the transactions contemplated thereby, (3) Nasdaq’s approval of the listing of the shares of Aerovate Common Stock to be issued in connection with the Merger, and (4) an executed Purchase Agreement for the Concurrent Investment in full force and effect evidencing cash proceeds of not less than $80.0 million to be received by the combined company immediately prior to or following the Closing.

The Merger Agreement contains certain termination rights of each of us and Jade. Upon termination of the Merger Agreement under specified circumstances, we may be required to pay Jade a termination fee of $2,340,000, and in certain other circumstances, Jade may be required to pay us a termination fee of $5,250,000.

Pursuant to a Certificate of Designation of Preferences, Rights and Limitations of the Series A Non-Voting Convertible Preferred Stock to be filed by us with the Secretary of State of the State of Delaware, or the Certificate of Designation in connection with the Merger Agreement and the transactions thereunder, we will establish the terms of a new series of preferred stock designated as Series A Non-Voting Convertible Preferred Stock, our Series A Preferred Stock. Holders of our Series A Preferred Stock will be entitled to receive dividends on shares of our Series A Preferred Stock equal to, on an as-if-converted-to-our common stock basis, and in the same form as dividends actually paid on shares of our common

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stock. Except as otherwise required by the Certificate of Designation or law, our Series A Preferred Stock will not have voting rights. However, as long as any shares of our Series A Preferred Stock are outstanding, we will not, without the affirmative vote of the holders of a majority of the then outstanding shares of our Series A Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to our Series A Preferred Stock, (b) alter or amend the Certificate of Designation, (c) amend our certificate of incorporation, bylaws or other charter documents in any manner that adversely affects any rights of the holders of our Series A Preferred Stock, (d) file any articles of amendment, certificate of designations, preferences, limitations and relative rights of any series of Preferred Stock (as defined in the Certificate of Designation), if such action would adversely alter or change the preferences, rights, privileges or powers of, or restrictions provided for the benefit of our Series A Preferred Stock, (e) issue further shares of our Series A Preferred Stock or increase or decrease (other than by conversion) the number of authorized shares of our Series A Preferred Stock, (f) at any time while at least 30% of the originally issued Series A Preferred Stock remains issued and outstanding, consummate either (A) a Fundamental Transaction (as defined in the Certificate of Designation) or (B) any merger or consolidation of our Company or other business combination in which our stockholders immediately before such transaction do not hold at least a majority of the capital stock of  our Company immediately after such transaction, or (f) enter into any agreement with respect to any of the foregoing. Our Series A Preferred Stock does not have a preference upon any liquidation, dissolution or winding-up of our Company.

Following the closing of the First Merger, each share of our Series A Preferred Stock then outstanding shall be convertible, at any time and from time to time, at the option of the holder of our Series A Preferred Stock, into a number of shares equal to 1,000 shares of our common stock, subject to certain limitations, including that a holder of our Series A Preferred Stock is prohibited from converting shares of our Series A Preferred Stock into shares of our common stock if, as a result of such conversion, such holder, together with its affiliates, would beneficially own more than a specified percentage (initially set at 19.99%) of the total number of shares of our common stock issued and outstanding immediately after giving effect to such conversion.

At the Effective Time, our board of directors of is expected to consist of six members, all of whom will be designated by Jade.

Concurrently and in connection with the execution of the Merger Agreement, (i) certain stockholders of Jade (solely in their respective capacities as Jade stockholders) holding approximately 99% of the outstanding shares of Jade capital stock have entered into support agreements with us and Jade to vote all of their shares of Jade capital stock in favor of the adoption and approval of the Merger Agreement and the transactions contemplated thereby and (ii) certain of our stockholders holding approximately 38.1% of the outstanding shares of Aerovate Common Stock have entered into support agreements with us and Jade to vote all of their shares of Aerovate Common Stock in favor of, among other things, the adoption and approval of the Merger Agreement and the transactions contemplated thereby.

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At-The-Market Offering

On April 5, 2023, we entered into an ATM Equity OfferingSM Sales Agreement, or the Sales Agreement, with BofA Securities, Inc., or the Agent, pursuant to which we established an “at-the-market” offering program to sell, from time to time, at our option, up to an aggregate of $75.0 million of shares of our common stock, through the Agent, as our sales agent. As of December 31, 2024, 3,462,721 shares have been sold under the Sales Agreement, generating $67.9 million of net proceeds after deducting commissions to the Agent and other offering costs. As of the date of this Annual Report on Form 10-K, up to $6.0 million of shares of our common stock remain available for sale from time to time under the Sales Agreement.

Components of Results of Operations

Revenue

We currently have no products approved for sale, and we have not generated any revenue to date. At this time, we do not intend to resume development of AV-101 or any other product candidates, and as a result, we currently do not anticipate generating revenue. Our ability to generate product revenue will depend on the successful development and eventual

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commercialization of any future drug candidates we may pursue. If we do not resume development activities or if we resume development but fail to obtain regulatory approval for any future drug candidates, our ability to generate future revenue and our results of operations and financial position would be materially adversely affected.

Operating Expenses

Research and Development

Prior to mid-June, our research and development expenses have related to the development of AV-101. Since our decision to halt further development of AV-101, we have also incurred costs related to shutting down our clinical trials and research and development operations. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

Research and development expenses include:

Our research and development expenses consist principally of direct costs, such as fees paid to CROs, investigative sites and consultants in connection with our clinical trials, preclinical and non-clinical studies, and costs related to manufacturing clinical trial materials. We deploy our personnel related resources across all of our research and development activities. We track direct expenses on a clinical and non-clinical basis.

The successful development of any future product candidates is highly uncertain. Therefore, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that would be necessary to complete the potential development and commercialization of any future product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of potential future product candidates, if approved. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:

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General and Administrative

General and administrative expenses consist primarily of personnel-related costs, including salaries, payroll taxes, employee benefits, stock-based compensation and severance charges for those individuals in executive, finance and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, and insurance costs. Our general and administrative expenses decreased for the second half of 2024 as we decreased the size of our organization in connection with the Workforce Reduction Plan. Our future general and administrative expenses will be significantly dependent on our ability to successfully consummate the Merger, related audit and legal expenses and whether we decide to pursue any future product development efforts.

Results of Operations

Comparison of the Years Ended December 31, 2024 and December 31, 2023

The following table summarizes our results of operations for the years ended December 31, 2024 and December 31, 2023 (in thousands):

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Research and Development Expenses

Research and development expenses for the year ended December 31, 2024 were $53.2 million compared to $64.2 million for the year ended December 31, 2023. The decrease of $11.0 million was primarily due to decreases of $6.6 million in clinical trial costs, $3.2 million in contract manufacturing costs, and $2.3 million in headcount related costs, partially offset by lower regulatory and other costs of $1.1 million.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2024 were $21.4 million compared to $17.2 million for the year ended December 31, 2023. The increase of $4.2 million was primarily due to a $2.4 million increase in legal and consulting costs, a $1.3 million increase in headcount related and stock based compensation expense, and a $0.9 million increase in travel and other miscellaneous costs, offset by decreases of $0.4 million in insurance costs.

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Total Other Income

Other income for the year ended December 31, 2024 was $5.0 million compared to $5.9 million of other income for the year ended December 31, 2023. The change was primarily due to interest earned on our cash and cash equivalents and short-term investments for the year ended December 31, 2024.

Liquidity and Capital Resources

From our inception through December 31, 2024, we have received aggregate net proceeds of $79.8 million from the sale of shares of our convertible preferred stock and $5.0 million from convertible promissory notes to related parties. In July 2021, we completed our IPO with aggregate net proceeds from the offering of $126.9 million, after deducting underwriting discounts, commissions and offering costs.

On October 30. 2024, we entered into the Merger Agreement pursuant to which, subject to the satisfaction or waiver of the conditions therein, Merger Sub I will merge with and into Jade, with Jade surviving the first merger as the surviving corporation and as part of the same overall transaction, Jade will merge with and into Merger Sub II, with Merger Sub II continuing as our wholly owned subsidiary and the surviving corporation of the second merger. The closing of the Merger is subject to approval by our stockholders and the stockholders of Jade and other customary closing conditions. Our future operations are highly dependent on the success of the proposed Merger with Jade.

At-the-Market Offering

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On April 5, 2023, we entered into the Sales Agreement with the Agent, pursuant to which we can sell, from time to time, up to an aggregate of $75.0 million of shares of our common stock, through the Agent, as our sales agent. As of December 31, 2024, 3,462,721 shares have been sold under the Sales Agreement, generating $67.9 million of net proceeds after deducting commissions to the Agent and other offering costs. As of the date of this Annual Report on Form 10-K, up to $6.0 million of shares of our common stock remain available for sale from time to time under the Sales Agreement.

Future Funding Requirements

We have prepared operating plans and cash flow forecasts which indicate that our existing cash and cash equivalents and short-term investments on-hand of $78.6 million will be sufficient to fund our planned operations for at least twelve months from the filing date of this Annual Report on Form 10-K. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of conducting clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.

Our future capital requirements will depend on many factors, including:

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We expect to finance our cash needs through our existing cash, cash equivalents and short-term investments. However, we may be unable to enter into arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our drug candidates even if we would otherwise prefer to develop and market such drug candidates ourselves.

Contractual Obligations and Commitments

In August 2021, we entered into the Waltham Lease. The base rent under the Waltham Lease is $43.00 per rentable square foot, or approximately $18,000 per month and is subject to scheduled annual increases of $1.00 per rentable square foot during the lease term. In January 2024, we entered into the First Amendment to the Waltham Lease resulting in the lease expiring on December 31, 2025, and an increase of $1.00 per rentable square foot during the additional lease term. In obtaining this lease extension, we no longer have the option to extend the Waltham Lease for one additional period of three years.

In April 2022, we entered into the Foster City Lease. The base rent under the Foster City Lease is $76.80 per rentable square foot, or approximately $22,600 per month and is subject to scheduled annual increases of 3% on each annual anniversary during the lease term. The term of the Foster City Lease is thirty-nine months, unless extended or earlier terminated pursuant to the terms of the Foster City Lease. We have the option to extend the Foster City Lease for one additional period of one year.

As of December 31, 2024, we do not have any other operating lease obligations, long-term debt obligations, capital lease obligations, purchase obligations or long-term liabilities.

We enter into contracts in the normal course of business for contract research services, contract manufacturing services, professional services and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts and not included above.

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Cash Flows

Comparison of the Years Ended December 31, 2024 and December 31, 2023

The following table sets forth a summary of the net cash flow activity for the years ended December 31, 2024 and December 31, 2023 (in thousands):

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Operating Activities

Net cash used in operating activities for the year ended December 31, 2024 was $71.2 million, consisting primarily of our net loss incurred during the period of $69.6 million adjusted for non-cash charges of $11.3 million for stock-based compensation expense, $2.2 million of accretion on investments, $0.5 million of depreciation and impairment expense, and $11.2 million for net changes in operating assets and liabilities. The net change in operating assets and liabilities primarily related to a $0.3 million increase in prepaid expenses, a $0.6 million decrease in other assets, and a $12.1 million decrease in accounts payable and accrued and other current liabilities.

Net cash used in operating activities for the year ended December 31, 2023 was $56.8 million, consisting primarily of our net loss incurred during the period of $75.5 million adjusted for $8.9 million of noncash charges and $9.7 million for net changes in operating assets and liabilities. Noncash charges consisted primarily of $11.9 million in stock-based compensation expense, partially offset by $3.1 million of amortization of our investments. The net change in operating assets and liabilities related to a $9.8 million increase in accounts payables and accrued liabilities, a $0.5 million increase in prepaid expenses and other current assets, partially offset by a $0.4 million decrease in liabilities and $0.1 million decrease in other long-term assets.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2024 of $56.0 million consisted of maturities of short-term investments of $75.7 million, offset by purchases of short-term investments of $19.7 million.

Net cash provided by investing activities for the year ended December 31, 2023 of $11.9 million consisted of maturities of short-term investments of $136.0 million, offset by purchases of short-term investments of $124.0 million and $0.1 million for purchases of property and equipment.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2024 of $25.4 million consisted of $23.6 million in net proceeds received from sales of common stock under the Sales Agreement, after deducting Agent commissions, $0.3 million of payments made for offering costs, and $1.8 million of proceeds from stock option exercises and issuances of common stock under our employee stock purchase plan.

Net cash provided by financing activities for the year ended December 31, 2023 consisted of $44.9 million in net proceeds received from sales of common stock under the Sales Agreement, after deducting Agent commissions, $1.3 million of proceeds from stock option exercises and issuances of common stock under our employee stock purchase plan, offset by $0.2 million of payments made for offering costs.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and the related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

See Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our consolidated financial statements.

Research and Development Expenses

We are required to estimate our expenses resulting from obligations under contracts with vendors, consultants and CROs, in connection with conducting research and development activities. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. We reflect research and development expenses in our consolidated financial statements by matching those expenses with the period in which services and efforts are expended. We account for these expenses according to the progress of the preclinical or clinical study as measured by the timing of various aspects of the study or related activities. We determine clinical trial cost estimates through review of the underlying contracts along with preparation of financial models taking into account discussions with research and other key personnel and outsider service providers as to the progress of studies or other services being conducted. During the course of a study, we adjust our rate of expense recognition if actual results differ from our estimates.

Emerging Growth Company Status

As an emerging growth company under the JOBS Act we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time public companies adopt the new or revised standard. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Recently Issued Accounting Pronouncements

See Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10 K for a summary of recently issued accounting pronouncements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report.

Overview

We are a clinical-stage biopharmaceutical company focused on developing drugs that meaningfully improve the lives of patients with rare cardiopulmonary disease. Our initial focus is on advancing AV-101, our dry powder inhaled formulation of imatinib for the treatment of pulmonary arterial hypertension, or PAH, a devastating disease impacting approximately 70,000 people in the United States and Europe. Imatinib, marketed as Gleevec tablets, was originally developed for the treatment of multiple cancers. Oral imatinib also demonstrated statistically significant improvement on the primary endpoint, six-minute walk distance, and multiple secondary hemodynamic endpoints in PAH patients in an international Phase 3 trial conducted by Novartis but was poorly tolerated due to adverse events, or AEs, and never approved for the treatment of PAH. AV-101, delivered using a dry powder inhaler, is designed to provide lung concentrations at or above those observed with the oral dose while limiting systemic levels of the drug. We have completed a Phase 1 clinical trial in healthy volunteers and AV-101 was generally well-tolerated with no serious adverse events reported. In November 2023, we completed enrollment in the Phase 2b portion and enrolled our first patient in the Phase 3 portion of Inhaled iMatinib Pulmonary Arterial Hypertension Clinical Trial (IMPAHCT), our global Phase 2b/Phase 3 trial of AV-101 in adults with PAH. We have assembled a team with deep expertise in developing innovative PAH and inhaled therapies and commercializing novel drugs. We do not have any products approved for sale and have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future.

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Recent Developments

At-The-Market Offering

On April 5, 2023, we entered into an ATM Equity OfferingSM Sales Agreement, or the Sales Agreement, with BofA Securities, Inc., or the Agent, pursuant to which we established an “at-the-market” offering program, or ATM Program, to sell, from time to time, at our option, up to an aggregate of $75.0 million of shares of our common stock, through the Agent, as our sales agent. During the year ended December 31, 2023, 2,662,721 shares were sold under the ATM Program, generating approximately $44.3 million of net proceeds after deducting Agent commissions and other offering costs. As of the date of this Annual Report on Form 10-K, approximately $30.0 million of shares remain available for sale from time to time under our ATM Program.

Components of Results of Operations

Revenue

We currently have no products approved for sale, and we have not generated any revenue to date. In the future, we may generate revenue from collaboration or license agreements we may enter into with respect to our drug candidate, as well as product sales from any approved product, which approval we do not expect to occur for at least the next several years, if ever. Our ability to generate product revenue will depend on the successful development and eventual commercialization of AV-101 and any other drug candidates we may pursue. If we fail to complete the development of AV-101 in a timely manner, or to obtain regulatory approval, our ability to generate future revenue and our results of operations and financial position would be materially adversely affected.

Operating Expenses

Research and Development

To date, our research and development expenses have related to the development of AV-101. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

Research and development expenses include:

Our research and development expenses consist principally of direct costs, such as fees paid to CROs, investigative sites and consultants in connection with our clinical trials, preclinical and non-clinical studies, and costs related to manufacturing clinical trial materials. We deploy our personnel related resources across all of our research and development activities. We track direct expenses on a clinical and non-clinical basis.

We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of AV-101. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future clinical trials and nonclinical studies of AV-101 or any future product candidates due to the inherently unpredictable nature of clinical and preclinical development. Clinical and preclinical development timelines, the

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probability of success and development costs can differ materially from expectations. We will need to raise substantial additional capital in the future.

Our future clinical development costs may vary significantly based on factors such as:

General and Administrative

General and administrative expenses consist primarily of personnel-related costs, including salaries, payroll taxes, employee benefits, and stock-based compensation charges for those individuals in executive, finance and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, and insurance costs. We anticipate that our general and administrative expenses will increase for the foreseeable future to support our continued research and development activities, pre-commercial preparation activities and commercialization activities for AV-101. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company.

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Results of Operations

Comparison of the Years Ended December 31, 2023 and December 31, 2022

The following table summarizes our results of operations for the years ended December 31, 2023 and December 31, 2022 (in thousands):

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Research and Development Expenses

Research and development expenses for the year ended December 31, 2023 were $64.2 million compared to $38.6 million for the year ended December 31, 2022. The increase of $25.6 million was primarily due to increases of $12.4 million in headcount related costs, $6.0 million in clinical trial costs, $5.6 million in manufacturing costs, and $1.9 million in other miscellaneous costs including travel and professional services, partially offset by lower pre-clinical and regulatory related costs of $0.3 million.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2023 were $17.2 million compared to $14.6 million for the year ended December 31, 2022. The increase of $2.6 million was primarily due to a $3.2 million increase in headcount related costs and a $0.6 million increase in travel and other miscellaneous costs, offset by decreases of $0.5 million in insurance costs, $0.4 million in recruiting costs, and $0.3 million in consulting costs.

Total Other Income

Other income for the year ended December 31, 2023 was $5.9 million compared to $1.8 million of other income for the year ended December 31, 2022. The change was primarily due to interest earned on the Company’s cash and cash equivalents and short-term investments for the year ended December 31, 2023.

Liquidity and Capital Resources

From our inception through December 31, 2023, we have received aggregate net proceeds of $79.8 million from the sale of shares of our convertible preferred stock and $5.0 million from convertible promissory notes to related parties. In July 2021, we completed our initial public offering, or IPO, with aggregate net proceeds from the offering of $126.9 million, after deducting underwriting discounts and commissions and offering costs.

​

​

​

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At-the-Market Offering

​

On April 5, 2023, we entered into the Sales Agreement with the Agent pursuant to which we can sell, from time to time, at our option, up to an aggregate of $75.0 million of shares of our common stock, through the Agent, as our sales agent. During the year ended December 31, 2023, 2,662,721 shares were sold under the ATM Program, generating approximately $44.3 million of net proceeds after deducting Agent commissions and other offering costs. Since establishment of our ATM Program, we have sold an aggregate of $44.3 million of shares of our common stock, and up to $30.0 million of shares of our common stock remain available for sale from time to time as of the date of this Annual Report on Form 10-K.

Future Funding Requirements

We have prepared operating plans and cash flow forecasts which indicate that our existing cash and cash equivalents and short-term investments on-hand of $122.4 million will be sufficient to fund our planned operations into 2026. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of conducting clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.

Our future capital requirements will depend on many factors, including:

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Until such time, if ever, as we can generate substantial product revenue to support our cost structure, we expect to finance our cash needs through equity offerings, debt financings, or other capital sources, potentially including collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our drug candidates even if we would otherwise prefer to develop and market such drug candidates ourselves.

Contractual Obligations and Commitments

In August 2021, we entered into a lease agreement, or the Waltham Lease, for approximately 5,000 square feet of office space in Waltham, Massachusetts. The term of the Waltham Lease is thirty-nine months, unless extended or earlier terminated pursuant to the terms of the Waltham Lease. In January 2024, we entered into the First Amendment to the Waltham Lease resulting in our lease expiring on December 31, 2025, and subject to scheduled annual increases of $1.00 per rentable square foot during this additional lease term. In obtaining this lease extension, we no longer have the option to extend the Waltham Lease for one additional period of three years.

In April 2022, we entered into a lease agreement, or the Foster City Lease, for approximately 3,500 square feet of office space in Foster City, California. The base rent under the Foster City Lease is $76.80 per rentable square foot, or approximately $22,600 per month and is subject to scheduled annual increases of 3% on each annual anniversary during the lease term. The term of the Foster City Lease is thirty-nine months, unless extended or earlier terminated pursuant to the terms of the Foster City Lease. We have the option to extend the Foster City Lease for one additional period of one year.

As of December 31, 2023, we do not have any other operating lease obligations, long-term debt obligations, capital lease obligations, purchase obligations or long-term liabilities.

We enter into contracts in the normal course of business for contract research services, contract manufacturing services, professional services and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts and not included above.

​

​

​

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Cash Flows

Comparison of the Years Ended December 31, 2023 and December 31, 2022

The following table sets forth a summary of the net cash flow activity for the years ended December 31, 2023 and December 31, 2022 (in thousands):

​

​

Operating Activities

Net cash used in operating activities for the year ended December 31, 2023 was $56.8 million, consisting primarily of our net loss incurred during the period of $75.5 million adjusted for $8.9 million of noncash charges and $9.7 million for net changes in operating assets and liabilities. Noncash charges consisted primarily of $11.9 million in stock-based compensation expense, partially offset by $3.1 million of amortization of our investments. The net change in operating assets and liabilities related to a $9.8 million increase in accounts payables and accrued liabilities, a $0.5 million increase in prepaid expenses and other current assets, partially offset by a $0.4 million decrease in liabilities and $0.1 million decrease in other long-term assets.

Net cash used in operating activities for the year ended December 31, 2022 was $39.1 million, consisting primarily of our net loss incurred during the period of $51.5 million adjusted for $4.6 million of noncash charges and $7.8 million for net changes in operating assets and liabilities. Noncash charges consisted primarily of $5.5 million in stock-based compensation expense, partially offset by $0.9 million of amortization of our investments. The net change in operating assets and liabilities related to a $5.0 million increase in accounts payables and accrued liabilities, a $4.7 million increase in prepaid expenses and other current assets, partially offset by a $1.9 million decrease in other long-term assets.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2023 of $11.9 million consisted of maturities of short-term investments of $136.0 million, offset by purchases of short-term investments of $124.0 million and $0.1 million for purchases of property and equipment.

Net cash provided by investing activities for the year ended December 31, 2022 of $6.9 million was comprised of sales and maturities of investments of $154.7 million, offset by purchase of short-term investments of $147.6 million and purchases of property and equipment of $0.2 million to support our research activities and leasehold improvements, furniture and fixtures for our office spaces in Waltham, Massachusetts and Foster City, California.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2023 consisted of $44.9 million in net proceeds received from sales of common stock under the Sales Agreement, after deducting Agent commissions, $1.3 million of proceeds from stock option exercises and issuances of common stock under our employee stock purchase plan, offset by $0.2 million of payments made for offering costs.

Net cash provided by financing activities for the year ended December 31, 2022 was $0.4 million due to $0.8 million in net proceeds received from stock option exercises and issuances of common stock under our employee stock purchase plan, which were partially offset by $0.4 million of payments made for offering costs.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and the related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

See Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our consolidated financial statements.

Research and Development Expenses

We are required to estimate our expenses resulting from obligations under contracts with vendors, consultants and CROs, in connection with conducting research and development activities. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. We reflect research and development expenses in our consolidated financial statements by matching those expenses with the period in which services and efforts are expended. We account for these expenses according to the progress of the preclinical or clinical study as measured by the timing of various aspects of the study or related activities. We determine clinical trial cost estimates through review of the underlying contracts along with preparation of financial models taking into account discussions with research and other key personnel and outsider service providers as to the progress of studies or other services being conducted. During the course of a study, we adjust our rate of expense recognition if actual results differ from our estimates.

Emerging Growth Company Status

As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time public companies adopt the new or revised standard. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Recently Issued Accounting Pronouncements

See Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10 K for a summary of recently issued accounting pronouncements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report.

Overview

We are a clinical-stage biopharmaceutical company focused on developing drugs that meaningfully improve the lives of patients with rare cardiopulmonary disease. Our initial focus is on advancing AV-101, our dry powder inhaled formulation of imatinib for the treatment of pulmonary arterial hypertension, or PAH, a devastating disease impacting approximately 70,000 people in the United States and Europe. Imatinib, marketed as Gleevec tablets, was originally developed for the treatment of multiple cancers. Oral imatinib also demonstrated statistically significant improvement on the primary endpoint, six-minute walk distance, and multiple secondary hemodynamic endpoints in PAH patients in an international Phase 3 trial conducted by Novartis but was poorly tolerated due to adverse events, or AEs, and never approved for the treatment of PAH. AV-101, delivered using a dry powder inhaler, is designed to provide lung concentrations at or above those observed with the oral dose while limiting systemic levels of the drug. We have completed a Phase 1 clinical trial in healthy volunteers and AV-101 was generally well-tolerated with no serious adverse events reported. We are enrolling patients in Inhaled iMatinib Pulmonary Arterial Hypertension Clinical Trial (IMPAHCT), our global Phase 2b/Phase 3 trial of AV-101 in adults with PAH, and we have assembled a team with deep expertise in developing innovative PAH and inhaled therapies and commercializing novel drugs. We do not have any products approved for sale and have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future.

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Recent Developments

Initial Public Offering

In July 2021, we completed our initial public offering, or IPO, of 9,984,463 shares of our common stock at a price to the public of $14.00 per share, including the exercise in full by the underwriters of their option to purchase 1,302,321 additional shares of our common stock. Including the option exercise, our aggregate net proceeds from the offering were $126.9 million after deducting underwriting discounts and commissions and other offering costs. Immediately prior to the closing of our IPO, all outstanding shares of our redeemable convertible preferred stock were converted into 14,182,854 shares of our common stock.

COVID-19 Pandemic and Future Infectious Disease Outbreaks

We continue to closely monitor the impact of the COVID-19 pandemic on our business, operations and clinical development timelines. In addition, we are actively monitoring its impact on our clinical trial enrollment, trial sites, contract research organizations, or CROs, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. The ultimate impact of the COVID-19 pandemic or any future infectious disease outbreaks is highly uncertain and subject to change.

We continue to actively monitor the impact of infectious disease outbreaks on our business operations and may take future actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. The COVID-19 pandemic or any future infectious disease outbreaks may affect our business, operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs.

Components of Results of Operations

Revenue

We currently have no products approved for sale, and we have not generated any revenue to date. In the future, we may generate revenue from collaboration or license agreements we may enter into with respect to our drug candidate, as well as product sales from any approved product, which approval we do not expect to occur for at least the next several years, if ever. Our ability to generate product revenue will depend on the successful development and eventual commercialization of AV-101 and any other drug candidates we may pursue. If we fail to complete the development of AV-101 in a timely manner, or to obtain regulatory approval, our ability to generate future revenue and our results of operations and financial position would be materially adversely affected.

Operating Expenses

Research and Development

To date, our research and development expenses have related to the development of AV-101. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

Research and development expenses include:

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Our research and development expenses consist principally of direct costs, such as fees paid to CROs, investigative sites and consultants in connection with our clinical trials, preclinical and non-clinical studies, and costs related to manufacturing clinical trial materials. We deploy our personnel related resources across all of our research and development activities. We track direct expenses on a clinical and non-clinical basis.

We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of AV-101. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future clinical trials and nonclinical studies of AV-101 or any future product candidates due to the inherently unpredictable nature of clinical and preclinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We will need to raise substantial additional capital in the future.

Our future clinical development costs may vary significantly based on factors such as:

General and Administrative

General and administrative expenses consist primarily of personnel-related costs, including salaries, payroll taxes, employee benefits, and stock-based compensation charges for those individuals in executive, finance and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, and insurance costs. We anticipate that our general and administrative expenses will increase for the foreseeable future to support our continued research and development activities, pre-commercial preparation activities and commercialization activities for AV-101. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company.

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Results of Operations

Comparison of the Years Ended December 31, 2022 and December 31, 2021

The following table summarizes our results of operations for the years ended December 31, 2022 and December 31, 2021 (in thousands):

​

Research and Development Expenses

Research and development expenses for the year ended December 31, 2022 were $38.6 million compared to $15.0 million for the year ended December 31, 2021. The increase of $23.6 million was primarily due to increases of $13.5 million in clinical trial costs, $6.8 million in headcount related costs, $3.0 million in manufacturing costs, and $0.9 million in professional fees, partially offset by lower pre-clinical and regulatory related costs of $0.7 million.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2022 were $14.6 million compared to $8.0 million for the year ended December 31, 2021. The increase of $6.6 million was primarily due to increases of $2.5 million in headcount related costs, $1.7 million in professional services related to other consulting expenses, corporate legal fees and audit and accounting services, $1.2 million in insurance expense and $1.2 million in other operating expenses.

Total Other Income (Expense)

Other income for the year ended December 31, 2022 was $1.8 million compared to $0.1 million of other income for the year ended December 31, 2021. The change was primarily due to interest earned on the Company’s cash and cash equivalents and short-term investments for the year ended December 31, 2022.

Liquidity and Capital Resources

From our inception through December 31, 2022, we have received aggregate net proceeds of $79.8 million from the sale of shares of our convertible preferred stock and $5.0 million from convertible promissory notes to related parties. In July 2021, we completed our IPO with aggregate net proceeds from the offering of $126.9 million, after deducting underwriting discounts and commissions and offering costs.

​

At-the-Market Offering

​

On August 15, 2022, we entered into an Open Market Sale AgreementSM, or the Sale Agreement, with Jefferies LLC, or the Agent, pursuant to which we can sell, from time to time, at our option, up to an aggregate of $75.0 million of shares of

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our common stock, through the Agent, as our sales agent. As of December 31, 2022, no shares were sold under the Sale Agreement.

Future Funding Requirements

We have prepared operating plans and cash flow forecasts which indicate that our existing cash and cash equivalents and short-term investments on-hand of $129.2 million will be sufficient to fund our planned operations into the second half of 2025. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of conducting clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.

Our future capital requirements will depend on many factors, including:

Until such time, if ever, as we can generate substantial product revenue to support our cost structure, we expect to finance our cash needs through equity offerings, debt financings, or other capital sources, potentially including collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms

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of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our drug candidates even if we would otherwise prefer to develop and market such drug candidates ourselves.

Contractual Obligations and Commitments

In August 2021, we entered into a lease agreement, or the Waltham Lease, for approximately 5,000 square feet of office space in Waltham, Massachusetts. The base rent under the Waltham Lease is $43.00 per rentable square foot, or approximately $18,000 per month and is subject to scheduled annual increases of $1.00 per rentable square foot during the lease term. The term of the Waltham Lease is thirty-nine months, unless extended or earlier terminated pursuant to the terms of the Waltham Lease. We have the option to extend the Waltham Lease for one additional period of three years.

In April 2022, we entered into a lease agreement, or the Foster City Lease, for approximately 3,500 square feet of office space in Foster City, California. The base rent under the Foster City Lease is $76.80 per rentable square foot, or approximately $22,600 per month and is subject to scheduled annual increases of 3% on each annual anniversary during the lease term. The term of the Foster City Lease is thirty-nine months, unless extended or earlier terminated pursuant to the terms of the Foster City Lease. We have the option to extend the Foster City Lease for one additional period of one year.

As of December 31, 2022, we do not have any other operating lease obligations, long-term debt obligations, capital lease obligations, purchase obligations or long-term liabilities.

We enter into contracts in the normal course of business for contract research services, contract manufacturing services, professional services and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts and not included above.

Cash Flows

Comparison of the Years Ended December 31, 2022 and December 31, 2021

The following table sets forth a summary of the net cash flow activity for the years ended December 31, 2022 and December 31, 2021 (in thousands):

​

​

Operating Activities

Net cash used in operating activities for the year ended December 31, 2022 was $39.1 million, consisting primarily of our net loss incurred during the period of $51.5 million adjusted for $4.6 million of noncash charges and $7.8 million for net changes in operating assets and liabilities. Noncash charges consisted primarily of $5.5 million in stock-based

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compensation expense, partially offset by $0.9 million of amortization of our investments. The net change in operating assets and liabilities related to a $5.0 million increase in accounts payables and accrued liabilities, a $4.7 million increase in prepaid expenses and other current assets, partially offset by a $1.9 million decrease in other long-term assets.

Net cash used in operating activities for the year ended December 31, 2021 was $27.4 million, consisting primarily of our net loss incurred during the period of $23.0 million adjusted for $2.1 million of noncash charges and $6.5 million for net changes in operating assets and liabilities. Noncash charges consisted primarily of $2.0 million in stock-based compensation expense. The net change in operating assets and liabilities related to a $6.8 million increase in prepaid expenses and other current assets and a $0.3 million increase in other long-term assets, partially offset by a $0.6 million increase in accounts payable.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2022 of $6.9 million was comprised of sales and maturities of investments of $154.7 million, offset by purchase of short-term investments of $147.6 million and purchases of property and equipment of $0.2 million to support our research activities and leasehold improvements, furniture and fixtures for our office spaces in Waltham, Massachusetts and Foster City, California.

Net cash used by investing activities for the year ended December 31, 2021 of $113.4 million was comprised of purchases of short-term investments of $113.2 million using the proceeds from our initial public offering in July 2021 and purchases of property and equipment of $0.2 million for purchases of property and equipment to support our research activities and leasehold improvements, furniture and fixtures for our office space in Waltham, Massachusetts.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022 was $0.4 million due to $0.8 million in net proceeds received from stock option exercises and issuances of common stock under our employee stock purchase plan, which were partially offset by $0.4 million of payments made for offering costs.

Net cash provided by financing activities for the year ended December 31, 2021 was $190.5 million due to $63.6 million in net proceeds received from the First Milestone Closing, Second Milestone Closing and Third Milestone Closing of Series A redeemable convertible preferred stock, net of issuance of costs, and $126.9 million in net proceeds from the issuance of common stock, net of issuance costs, in connection with the closing of the Company’s IPO on July 2, 2021.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and the related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

See Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our consolidated financial statements.

Research and Development Expenses

We are required to estimate our expenses resulting from obligations under contracts with vendors, consultants and CROs, in connection with conducting research and development activities. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. We reflect research and development expenses in our consolidated financial statements by matching those expenses with the period in which services and efforts are expended.

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We account for these expenses according to the progress of the preclinical or clinical study as measured by the timing of various aspects of the study or related activities. We determine clinical trial cost estimates through review of the underlying contracts along with preparation of financial models taking into account discussions with research and other key personnel and outsider service providers as to the progress of studies or other services being conducted. During the course of a study, we adjust our rate of expense recognition if actual results differ from our estimates.

Emerging Growth Company Status

As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time public companies adopt the new or revised standard. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Recently Issued Accounting Pronouncements

See Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10 K for a summary of recently issued accounting pronouncements.

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

The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements
that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing
of certain events could differ materially from those anticipated in these forward-looking statements as a result of several
factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this
Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report.

Overview

We
are a clinical stage biopharmaceutical company focused on developing drugs that meaningfully improve the lives of patients with rare
cardiopulmonary disease. Our initial focus is on advancing AV-101, our dry powder inhaled formulation of imatinib for the treatment of
pulmonary arterial hypertension, or PAH, a devastating disease impacting approximately 70,000 people in the United States and Europe.
Imatinib, marketed as Gleevec tablets, was originally developed for the treatment of multiple cancers. Oral imatinib also demonstrated
statistically significant improvement on the primary endpoint, six-minute walk distance, and multiple secondary hemodynamic endpoints
in PAH patients in an international Phase 3 trial conducted by Novartis but was poorly tolerated due to adverse events, or AEs, and never
approved for the treatment of PAH. AV-101, delivered using a dry powder inhaler, is designed to provide lung concentrations at or above
those observed with the oral dose while limiting systemic levels of the drug. We have completed a Phase 1 study in healthy volunteers
and AV-101 was generally well-tolerated with no serious adverse events reported. We announced the initiation of Inhaled iMatinib Pulmonary
Arterial Hypertension Clinical Trial (IMPAHCT), our Phase 2b/Phase 3 trial of AV-101 in PAH patients in December 2021, and we
have assembled a team with deep expertise in developing innovative PAH and inhaled therapies and commercializing novel drugs.

We
do not have any products approved for sale and have incurred significant operating losses since our inception and expect to continue
to incur significant operating losses for the foreseeable future.

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Recent
Developments

Initial
Public Offering

In
July 2021, we completed our initial public offering, or IPO, of 9,984,463 shares of our common stock at a price to the public of $14.00
per share, including the exercise in full by the underwriters of their option to purchase 1,302,321 additional shares of our common stock.
Including the option exercise, our aggregate net proceeds from the offering were $126.9 million after deducting underwriting discounts
and commissions and other offering costs. Immediately prior to the closing of our IPO, all outstanding shares of our redeemable convertible
preferred stock were converted into 14,182,854 shares of our common stock.

COVID-19
Pandemic

The
global coronavirus disease 2019, or COVID-19, pandemic continues to evolve, and we will continue to monitor the COVID-19 situation. The
extent of the impact of the ongoing COVID-19 pandemic and its variants on our business, operations and clinical development timelines,
supply chain and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak,
including the identification of new variants of the virus, and its impact on our clinical trial enrollment, trial sites, contract
research organizations, or CROs, third-party manufacturers, and other third parties with whom we do business, as well
as its impact on regulatory authorities and our key scientific and management personnel. The ultimate impact of the ongoing COVID-19
pandemic or a similar health epidemic is highly uncertain and subject to change. To the extent possible, we are conducting business as
usual, with only necessary or advisable modifications to employee travel.

We will continue
to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including
those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and
other third parties with whom we do business. At this point, the extent to which the ongoing COVID-19 pandemic may affect our business,
operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs, remains
uncertain and is subject to change.

Components
of Results of Operations

Revenue

We
currently have no products approved for sale, and we have not generated any revenue to date. In the future, we may generate revenue from
collaboration or license agreements we may enter into with respect to our drug candidate, as well as product sales from any approved
product, which approval we do not expect to occur for at least the next several years, if ever. Our ability to generate product revenue
will depend on the successful development and eventual commercialization of AV-101 and any other drug candidates we may pursue. If we
fail to complete the development of AV-101 in a timely manner, or to obtain regulatory approval, our ability to generate future revenue
and our results of operations and financial position would be materially adversely affected.

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Operating
Expenses

Research
and Development

To
date, our research and development expenses have related to the development of AV-101. Research and development expenses are recognized
as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until
the goods or services are received.

Research
and development expenses include:

Our
research and development expenses consist principally of direct costs, such as fees paid to CROs, investigative sites and consultants
in connection with our clinical trials, preclinical and non-clinical studies, and costs related to manufacturing clinical trial materials.
We deploy our personnel related resources across all of our research and development activities. We track direct expenses on a clinical
and non-clinical basis.

We
plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of AV-101.
We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future clinical trials
and nonclinical studies of AV-101 or any future product candidates due to the inherently unpredictable nature of clinical and preclinical
development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from
expectations. We will need to raise substantial additional capital in the future.

Our
future clinical development costs may vary significantly based on factors such as:

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General
and Administrative

General
and administrative expenses consist primarily of personnel-related costs, including salaries, payroll taxes, employee benefits, and stock-based
compensation charges for those individuals in executive, finance and other administrative functions. Other significant costs include
legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, and insurance
costs. We anticipate that our general and administrative expenses will increase for the foreseeable future to support our continued research
and development activities, pre-commercial preparation activities and commercialization activities for AV-101. We also anticipate increased
expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and
SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company.

Interest
Income (Expense)

Interest
income consists of interest earned on our cash and cash equivalents and short-term investments. Interest expense consisted of interest
on our convertible promissory notes at a per annum interest rate of 6%. All convertible promissory notes converted into shares of our
Series A redeemable convertible preferred stock in August 2020.

Change
in Fair Value of Convertible Promissory Notes

We
issued convertible promissory notes in 2020 and 2019 for which we elected the fair value option. We adjusted the carrying value of our
convertible promissory notes to their estimated fair value at each reporting date, with any change in fair value of the convertible promissory
notes recorded as an increase or decrease to change in fair value of convertible promissory notes in our statements of operations and
comprehensive loss. All convertible promissory notes and related accrued interest converted into shares of Series A redeemable convertible
preferred stock in August 2020.

Prior
to their conversion into our Series A redeemable convertible preferred stock issued in August 2020, the fair value of convertible promissory
notes issued through July 2020 was estimated using a scenario-based analysis that estimated the fair value of the convertible promissory
notes based on the probability-weighted present value of expected future investment returns, considering possible outcomes available
to the noteholders, including conversions in subsequent equity financings, change of control transactions, settlement and dissolution.

Results
of Operations

Comparison
of the Years Ended December 31, 2021 and December 31, 2020

The
following table summarizes our results of operations for the years ended December 31, 2021 and December 31, 2020 (in thousands):

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Research
and Development Expenses

Research
and development expenses for the year ended December 31, 2021 were $15.0 million compared to $7.9 million for the year ended December
31, 2020. The increase of $7.0 million was primarily due to increases of $4.1 million in clinical trial costs, $2.8 million in
manufacturing costs, $0.8 million in payroll, $0.4 million in stock-based compensation and $0.1 million in professional fees, partially
offset by lower pre-clinical related costs of $1.2 million.

General
and Administrative Expenses

General
and administrative expenses for the year ended December 31, 2021 were $8.0 million compared to $0.9 million for the year ended December
31, 2020. The increase of $7.1 million was primarily due to increases of $1.5 million in payroll, $1.6 million in stock-based compensation,
$2.1 million in professional services related to other consulting expenses, corporate legal fees
and audit and accounting services, $1.4 million in insurance expense and $0.5 million in other operating expenses.

Total
Other Income (Expense)

Other
income for the year ended December 31, 2021 was $0.1 million compared to $0.7 million of other expense for the year ended December 31,
2020. The change of $0.8 million was due to the change in fair value of the convertible promissory notes and interest expense on the
convertible promissory notes for the year ended December 31, 2020 and interest earned on the Company’s cash and cash equivalents
and short-term investments for the year ended December 31, 2021.

Liquidity
and Capital Resources

From
our inception through December 31, 2021, we have received aggregate net proceeds of $79.4 million from the sale of shares of our convertible
preferred stock and $5.0 million from convertible promissory notes to related parties. In July 2021, we completed our IPO with
aggregate net proceeds from the offering of $126.9 million, after deducting underwriting discounts and commissions
and offering costs.

Future
Funding Requirements

We
have prepared operating plans and cash flow forecasts which indicate that our existing cash and cash equivalents and short-term investments
on-hand of $167.4 million will be sufficient to fund our planned operations into the second half of 2025. However, our forecast of the
period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong,
and we could deplete our capital resources sooner than we expect. Additionally, the process of conducting clinical trials is costly,
and the timing of progress and expenses in these trials is uncertain.

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Our
future capital requirements will depend on many factors, including:

Until
such time, if ever, as we can generate substantial product revenue to support our cost structure, we expect to finance our cash needs
through equity offerings, debt financings, or other capital sources, potentially including collaborations, licenses and other similar
arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms
or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest
of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that
adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that
include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures
or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish
valuable rights to our technologies, future revenue streams, research programs or drug candidates or grant licenses on terms that may
not be favorable to us and/or may reduce the value of our common stock. Our failure to raise capital or enter into such other arrangements
when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If
we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or
terminate our product development or future commercialization efforts or grant rights to develop and market our drug candidates even
if we would otherwise prefer to develop and market such drug candidates ourselves.

96

Contractual Obligations and Commitments

In
August 2021, we entered into a lease agreement, or the Waltham Lease, for approximately 5,000 square feet of office space in Waltham,
Massachusetts. The base rent under the Waltham Lease is $43.00 per rentable square foot, or approximately $18,000 per month and is subject
to scheduled annual increases of $1.00 per rentable square foot during the lease term. The term of the Waltham Lease is thirty-nine months,
unless extended or earlier terminated pursuant to the terms of the Waltham Lease. We have the option to extend the Waltham Lease for
one additional period of three years.

As
of December 31, 2021, we do not have any other operating lease obligations, long-term debt obligations, capital lease obligations, purchase
obligations or long-term liabilities.

We
enter into contracts in the normal course of business for contract research services, contract manufacturing services, professional services
and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and,
therefore, are cancelable contracts and not included above.

Cash
Flows

Comparison
of the Years Ended December 31, 2021 and December 31, 2020

The
following table sets forth a summary of the net cash flow activity for the years ended December 31, 2021 and December 31, 2020 (in thousands):

Operating
Activities

Net
cash used in operating activities for the year ended December 31, 2021 was $27.4 million, consisting primarily of our net loss incurred
during the period of $23.0 million adjusted for $2.1 million of noncash charges and $6.5 million for net changes in operating
assets and liabilities. Noncash charges consisted primarily of $2.0 million in stock-based compensation expense. The net change in operating
assets and liabilities related to a $6.8 million increase in prepaid expenses and other current assets and a $0.3 million increase in
other long-term assets partially offset by a $0.6 million increase in accounts payable.

Net
cash used in operating activities for the year ended December 31, 2020 was $7.9 million, consisting primarily of our net loss incurred
during the period of $9.6 million adjusted for $0.8 million of noncash charges and $1.0 million for net changes in operating assets and
liabilities. Noncash charges consisted primarily of $0.6 million in change in fair value of convertible promissory notes to related party.
The net change in operating assets and liabilities related to a $1.0 million increase in accounts payable and accrued and other current
liabilities partially offset by a $0.1 million increase in prepaid and other current assets.

Investing
Activities

Net
cash used by investing activities for the year ended December 31, 2021 of $113.4 million was comprised of purchases of short-term investments
of $113.2 million using the proceeds from our initial public offering in July 2021 and purchases of property and equipment of $0.2 million
for purchases of property and equipment to support our research activities and leasehold improvements,
furniture and fixtures for our office space in Waltham, Massachusetts.

Financing
Activities

Net
cash provided by financing activities for the year ended December 31, 2021 was $190.5 million due to $63.6 million in net proceeds received
from the First Milestone Closing, Second Milestone Closing and Third Milestone Closing of Series A redeemable convertible preferred stock,
net of issuance of costs, and $126.9 million in net proceeds from the issuance of common stock, net of issuance costs, in connection
with the closing of the Company’s IPO on July 2, 2021.

Net
cash provided by financing activities for the year ended December 31, 2020 was $8.9 million, primarily related to $6.4 million in net
proceeds received from the sale of Series A redeemable convertible preferred stock and through the issuance and conversion of $2.5 million
of convertible promissory notes to related parties issued in July 2020.

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Critical
Accounting Policies and Estimates

Our
consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or
U.S. GAAP.
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, expenses and the related disclosures of contingent liabilities in our consolidated financial statements and accompanying
notes. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances.
We evaluate our estimates and judgments on an ongoing basis. Actual results may differ significantly from these estimates under different
assumptions, judgments or conditions.

See
Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of significant
accounting policies and the effect on our consolidated financial statements.

Research
and Development Expenses

We
are required to estimate our expenses resulting from obligations under contracts with vendors, consultants and CROs, in connection with
conducting research and development activities. The financial terms of these contracts are subject to negotiations, which vary from contract
to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts.
We reflect research and development expenses in our consolidated financial statements by matching those expenses with the period in which
services and efforts are expended. We account for these expenses according to the progress of the preclinical or clinical study as measured
by the timing of various aspects of the study or related activities. We determine clinical trial cost estimates through review of the
underlying contracts along with preparation of financial models taking into account discussions with research and other key personnel
and outsider service providers as to the progress of studies or other services being conducted. During the course of a study, we adjust
our rate of expense recognition if actual results differ from our estimates.

Emerging
Growth Company Status

As
an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we can take advantage of an extended
transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. We have elected to “opt out”
of such extended transition period, which means that when a standard is issued or revised and it has different application dates for
public or private companies, we will adopt the new or revised standard at the time public companies adopt the new or revised standard.
The decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Recently
Issued Accounting Pronouncements

We
have reviewed all recently issued accounting pronouncements by the FASB and other standard-setting bodies and have determined
that such standards that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements, if adopted, or do not otherwise apply to our operations.