Oruka Therapeutics, Inc. (ORKA)

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

You
should read the following discussion and analysis of our financial condition and results of operations together with our consolidated
financial statements and the related notes included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2024
(this “Annual Report”). This discussion contains forward-looking statements that involve risks and uncertainties, such as
statements regarding our plans, objectives, expectations, intentions, hopes, beliefs, strategies or projections regarding the future
of its pipeline and business and words such as “may,” “will,”, “should,” “could,” “would,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,”
“potential,” “seek,” “target,” “goal,” “intend” and variations of such words
and any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying
assumptions, and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on these
forward-looking statements. These forward-looking statements are based on current expectations and beliefs concerning future developments
and their potential effects. There can be no assurance that future developments affecting us will be those that have been anticipated.
These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions
that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Annual
Report entitled “Risk Factors” and elsewhere in this Annual Report. These and many other factors could affect our future
financial and operating results. We undertake no obligation to update any forward-looking statement to reflect events after the date
of this Annual Report. As used in this Annual Report, unless the context suggests otherwise, “we,” “us,” “our,”
“the Company,” “Oruka Therapeutics, Inc.,” “Oruka,” “ARCA biopharma, Inc.,” “ARCA,”
refers to Oruka Therapeutics, Inc. and its consolidated subsidiaries, including Oruka Therapeutics Operating Company LLC, taken as a
whole.

Overview

We
are a clinical-stage biotechnology company focused on developing novel monoclonal antibody therapeutics for psoriasis (“PsO”)
and other inflammatory and immunology (“I&I”) indications. Our name is derived from or, for “skin,”
and arukah, for “restoration,” and reflects our mission to deliver therapies for chronic skin diseases that provide
patients the most possible freedom from their condition. Our strategy is to apply antibody engineering and format innovations to validated
modes of action, which we believe will enable us to improve meaningfully upon the efficacy and dosing regimens of standard-of-care medicines
while significantly reducing technical and biological risk. Our programs aim to treat and potentially modify disease by targeting mechanisms
with proven efficacy and safety involved in disease pathology and the activity of pathogenic tissue-resident memory T cells (“TRMs”).

Our
lead program, ORKA-001, is designed to target the p19 subunit of interleukin-23 (“IL-23p19”) for the treatment of PsO. Our
co-lead program, ORKA-002, is designed to target interleukin-17A and interleukin-17F (“IL-17A/F”) for the treatment of PsO,
psoriatic arthritis (“PsA”), and other conditions. These programs each bind their respective targets at high affinity and
incorporate half-life extension technology with the aim to increase exposure and decrease dosing frequency. We believe that our focused
strategy, differentiated portfolio, and deep expertise position us to set a new treatment standard in large I&I markets with
continued unmet need.

Since
our inception in February 2024, we have devoted substantially all of our resources to raising capital, organizing and staffing the
company, business and scientific planning, conducting discovery and research activities, establishing arrangements with third parties
for the manufacture of our programs and component materials, and providing general and administrative support for these operations. We
do not have any programs approved for sale and have not generated any revenue from product sales. To date, we have funded our operations
primarily with proceeds from the issuance of convertible preferred stock, common stock, a convertible note, pre-funded warrants, and
the proceeds from the reverse recapitalization and merger with ARCA biopharma, Inc., our Pre-Closing Financing and subsequent PIPE Financing
(as defined and further described in “Recent developments” below).

Since
our inception, we have incurred significant losses and negative cash flows from our operations. Our ability to generate product revenue
sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of any programs
we may develop. We generated net losses of $83.7 million for the period from February 6, 2024 (inception) to December 31, 2024.
For the period from February 6 (inception) to December 31, 2024, we have used net cash of $57.8 million for our operating activities.

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We
had cash, cash equivalents, and marketable securities of $393.7 million as of December 31, 2024. We expect that our existing cash, cash
equivalents, and marketable securities will be sufficient to fund our operating plans for at least twelve months from the date of filing
of this Annual Report. We expect to continue to incur substantial losses for the foreseeable future, and our transition to profitability
will depend upon successful development, approval and commercialization of our product candidates and upon achievement of sufficient
revenues to support our cost structure.

ORKA-001

ORKA-001
is a high affinity, extended half-life monoclonal antibody (“mAb”) designed to target IL-23p19. IL-23 is a pro-inflammatory
cytokine that plays a critical role in the proliferation and development of T helper 17 (“Th17”) cells, which are the primary
drivers of several autoimmune and inflammatory disorders, including PsO. IL-23 is composed of two subunits: a p40 subunit that is
shared with IL-12 and a p19 subunit that is specific to IL-23. First-generation IL-23 antibodies bound p40 and inhibited both IL-12 and
IL-23 signaling, while more recent IL-23 antibodies targeting the p19 subunit have shown improved efficacy and safety. Based on preclinical
evidence, we believe that ORKA-001 could achieve higher response rates than established therapies in PsO while requiring less frequent
dosing and maintaining the favorable safety profile of therapies targeting IL-23p19.

ORKA-001
is engineered with YTE half-life extension technology, a specific three amino acid change in the fragment crystallizable (“Fc”)
domain to modify the pH-dependent binding to the neonatal Fc receptor. As a result, it has a pharmacokinetic profile designed to support
a subcutaneous (“SQ”) injection as infrequently as once or twice a year. In addition, emerging evidence suggests that IL-23
blockade can modify the disease biology of PsO, possibly leading to durable remissions and preventing the development of PsA. We
believe that the expected characteristics of ORKA-001 increase its potential to deliver these disease-modifying benefits.

We
initiated the dosing of healthy volunteers in a Phase 1 trial of ORKA-001 in the fourth quarter of 2024. We expect to share interim data
from the first-in-human trial in healthy volunteers, including initial pharmacokinetic data, in the second half of 2025 and initial efficacy
data in PsO patients in the second half of 2026. Based on recent precedent for PsO, we anticipate that the entire development program
from first-in-human to biologics license application (“BLA”) filing could take as little as six to seven years based
on the averages for recently approved medicines. However, we have no control over the length of time needed for United States Food and
Drug Administration (“FDA”) review, and this timeline could vary.

ORKA-002

ORKA-002
is a high affinity, extended half-life mAb designed to target IL-17A and IL-17F (“IL-17A/F”). IL-17 inhibition has become
central to the treatment of psoriatic diseases, including PsO and PsA, and has also shown efficacy in other I&I indications,
such as hidradenitis suppurativa and axial spondyloarthritis. More recently, the importance of inhibiting the IL-17F isoform along
with IL-17A has become appreciated, and dual blockade with the recently approved therapy Bimzelx (bimekizumab) has led to higher response
rates in patients than blockade of IL-17A alone. ORKA-002 is designed to bind IL-17A/F at similar epitopes, or binding sites, and affinity
ranges as bimekizumab, but incorporates half-life extension technology that could enable more convenient dosing intervals. We plan to
initiate the dosing of healthy volunteers in a Phase 1 trial of ORKA-002 in the third quarter of 2025. We expect to share interim
data from the first-in-human trial in healthy volunteers, including initial pharmacokinetic data, in the first half of 2026.

We
view ORKA-002 and ORKA-001 as highly complementary. Patients with moderate-to-severe PsO that have purely skin manifestations are most
often treated with IL-23 inhibitors due to the high efficacy and tolerability of this mechanism. However, for patients who also have
joint involvement, or signs and symptoms of PsA, an IL-17 inhibitor is typically used due to its efficacy in addressing both skin and
joint symptoms. In addition, IL-17 inhibitors are often used in patients with highly resistant skin symptoms that do not adequately resolve
through treatment with an IL-23 inhibitor. Furthermore, we have the potential opportunity to administer ORKA-002 and ORKA-001 sequentially,
called ORKA-021, to combine two features of each program: the rapid response of an IL-17 inhibitor with the ideal maintenance profile
of an IL-23 inhibitor. We believe that ORKA-001 and ORKA-002 provide the potential to offer a highly compelling product profile for most
patients with PsO and/or PsA, as well as the opportunity to address additional I&I indications.

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Additional
Pipeline Program

We
have a third mAb program, ORKA-003, designed to target an undisclosed pathway. Our strategy as a company is to remain highly focused
on I&I diseases, and specifically on inflammatory dermatology conditions. Our third program provides the potential for indication
expansion beyond PsO and may create combination opportunities with our more advanced programs.

Recent
Developments

Acquisition
of Pre-Merger Oruka

On
August 29, 2024 (the “Merger Closing”), we completed our acquisition (the “Merger”) of Oruka Therapeutics, Inc.
(“Pre-Merger Oruka”) pursuant to an Agreement and Plan of Merger and Reorganization, dated as of April 3, 2024 (the “Merger
Agreement”). Following the transactions contemplated by the Merger Agreement, Pre-Merger Oruka merged with and into Atlas Merger
Sub Corp., a wholly owned subsidiary of ARCA biopharma, Inc. (“ARCA”) and following that, Pre-Merger Oruka then merged with
and into Atlas Merger Sub II, LLC (“Second Merger Sub”), with Second Merger Sub being the surviving entity. Second Merger
Sub changed its corporate name to “Oruka Therapeutics Operating Company, LLC.” Pre-Merger Oruka was a pre-clinical stage
biotechnology company that was incorporated on February 6, 2024 under the direction of Peter Harwin, a Managing Member of Fairmount Funds
Management LLC (“Fairmount”), for the purposes of holding rights to certain intellectual property being developed by Paragon
Therapeutics, Inc. (“Paragon”). On August 29, 2024, we changed our name from “ARCA biopharma, Inc.” (“ARCA”)
to “Oruka Therapeutics, Inc.” and our Nasdaq ticker symbol from “ABIO” to “ORKA”.

Pre-Closing
Financing

Immediately
prior to the execution and delivery of the Merger Agreement on April 3, 2024, certain new and existing investors of Pre-Merger Oruka
entered into a subscription agreement with Pre-Merger Oruka (the “Subscription Agreement”), pursuant to which, and on the
terms and subject to the conditions of which, immediately prior to the Closing, those investors purchased shares of common stock of Pre-Merger
Oruka (“Pre-Merger Oruka Common Stock”) and Pre-Merger Oruka pre-funded warrants for gross proceeds of approximately $275.0
million (which includes $25.0 million of proceeds previously received from the issuance of the Convertible Note (refer to Note 7 in our
consolidated financial statements included in Part II – Item 8 of this Annual Report for additional details) and accrued interest
on such note which converted to shares of Pre-Merger Oruka Common Stock) (the “Pre-Closing Financing”). We incurred transaction
costs of $20.5 million, which was recorded as a reduction to additional paid-in capital in the consolidated financial statements. At
the Closing, the shares of Pre-Merger Oruka Common Stock and Pre-Merger Oruka pre-funded warrants issued pursuant to the Subscription
Agreement were converted into shares of Company Common Stock and pre-funded warrants of Company Common Stock in accordance with the Exchange
Ratio (defined below).

In
accordance with an Exchange Ratio determined by terms of the Merger Agreement and upon the effective time of the First Merger (the “First
Effective Time”), (i) each then-issued and outstanding share of Pre-Merger Oruka Common Stock including outstanding and unvested
Pre-Merger Oruka restricted stock and shares of Pre-Merger Oruka Common Stock issued in connection with the Subscription Agreement, were
converted into the right to receive a number of shares of Company Common Stock, equal to the exchange ratio of 6.8569 shares of Company
Common Stock (the “Exchange Ratio”), which were subject to the same vesting provisions as those immediately prior to the
Merger, (ii) each share of Pre-Merger Oruka Series A convertible preferred stock, par value $0.0001 (“Pre-Merger Oruka Series A
Preferred Stock”), outstanding immediately prior to the First Effective Time was converted into the right to receive a number of
shares of ARCA Series B non-voting convertible preferred stock, par value $0.001 per share, which are convertible into shares of Company
Common Stock at a conversion ratio of approximately 83.3332:1 after the reverse stock split discussed below, (iii) each outstanding option
to purchase Pre-Merger Oruka Common Stock was converted into an option to purchase shares of Company Common Stock, (iv) each outstanding
warrant to purchase shares of Pre-Merger Oruka Common Stock was converted into a warrant to purchase shares of Company Common Stock,
and (v) each share of Company Common Stock issued and outstanding at the First Effective Time remain issued and outstanding in accordance
with its terms and such shares. Subsequent to the close of the merger, the common stock shares were then, subject to a reverse stock
split of 1-for-12 effected on September 3, 2024 (“Reverse Stock Split”).

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As
part of the Pre-Closing Financing and the Closing, the investors in the Pre-Closing Financing received 22,784,139 shares of Company Common
Stock in exchange for 39,873,706 shares of Pre-Merger Oruka Common Stock (which includes the issuance of 2,722,207 shares of Company
Common Stock in exchange for 4,764,032 shares of Pre-Merger Oruka Common Stock on the conversion of Convertible Note along with the accrued
interest through the conversion date) and 5,522,207 Company pre-funded warrants in exchange for 9,664,208 Pre-Merger pre-funded warrants.

The
Merger was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Pre-Merger Oruka
was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the fact that, immediately
following the Merger: (i) Pre-Merger Oruka stockholders own a substantial majority of the voting rights in the combined company; (ii)
Pre-Merger Oruka’s largest stockholders retain the largest interest in the combined company; (iii) Pre-Merger Oruka designated
a majority of the initial members of the board of directors of the combined company; and (iv) Pre-Merger Oruka’s executive management
team became the management team of the combined company. Accordingly, for accounting purposes: (i) the Merger was treated as the equivalent
of Pre-Merger Oruka issuing stock to acquire the net assets of ARCA; (ii) the reported historical operating results of the combined company
prior to the Merger are those of Pre-Merger Oruka; and (iii) Pre-Merger Oruka was not a variable interest entity as it had sufficient
equity at risk in order to fund its next development milestones at the time of the reverse recapitalization. Additional information regarding
the Merger is included in Note 3 to the consolidated financial statements included in Part II – Item 8 of this Annual Report.

Reverse
Stock Split

On
September 3, 2024, we effected the Reverse Stock Split, a 1-for-12 reverse stock split of Company Common Stock. The par value per share
and the number of authorized shares were not adjusted as a result of the Reverse Stock Split. The shares of Company Common Stock underlying
outstanding stock options, common stock warrants and other equity instruments were proportionately reduced and the respective exercise
prices, if applicable, were proportionately increased in accordance with the terms of the agreements governing such securities. All references
to common stock, options to purchase common stock, outstanding common stock warrants, common stock share data, per share data, and related
information contained in the consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse
Stock Split for all periods presented, unless otherwise specifically indicated or the context otherwise requires.

PIPE
Financing

On
September 11, 2024, we entered into a Securities Purchase Agreement for a private placement (the “PIPE Financing”) with certain
institutional and accredited investors. The closing of the PIPE Financing occurred on September 13, 2024.

Pursuant
to the Securities Purchase Agreement, the investors purchased an aggregate of 5,600,000 shares of Company Common Stock at a purchase
price of $23.00 per share, an aggregate of 2,439 shares of the Company’s Series A non-voting convertible preferred stock, par value
$0.001 per share (“Company Series A Preferred Stock”), at a purchase price of $23,000.00 per share (each Company Series A
Preferred Stock is convertible into 1,000 shares of Company Common Stock), and pre-funded warrants to purchase an aggregate of 680,000
shares of Company Common Stock at a purchase price of $22.999 per pre-funded warrant, for aggregate net proceeds of approximately $188.7
million (net of issuance costs of $11.9 million).

Components
of Results of Operations

Revenue

To
date, we have not generated revenue from any sources, including product sales, and do not expect to generate any revenue from the sale
of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory
approval, we may generate revenue in the future from product sales or payments from future collaboration or license agreements that we
may enter into with third parties, or any combination thereof. We cannot predict if, when, or to what extent we will generate revenue
from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product
candidates.

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Operating
Expenses

Research
and Development

Research
and development expenses consist primarily of costs incurred in connection with the development and research of our programs. These expenses
include:

We
expense research and development costs as incurred. Non-refundable advance payments that we make for goods or services to be received
in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the
related goods are delivered or the services are performed, or when it is no longer expected that the goods will be delivered or the services
rendered. Our primary focus since inception has been the identification and development of our pipeline programs. Our research and development
expenses primarily consist of external costs, such as fees paid to Paragon under the Option Agreements. See “—Contractual
Obligations and Commitments” below for further details on the Option Agreements.

We
expect our research and development expenses will increase substantially for the foreseeable future as we continue to invest in research
and development activities related to the continued development of our programs, developing any future programs, including investments
in manufacturing, as we advance any program we may identify and continue to conduct clinical trials. The success of programs we may identify
and develop will depend on many factors, including the following:

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Any
changes in the outcome of any of these variables with respect to the development of programs that we may identify could mean a significant
change in the costs and possible delays in timing associated with the development of such programs. For example, if the FDA or another
regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the
completion of clinical development of a program, or if we experience significant delays in our clinical trials due to patient enrollment
or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development.
We may never obtain regulatory approval for any of our programs.

General
and Administrative

General
and administrative expenses consist primarily of personnel-related expenses, including salaries, bonuses, employee benefits, travel,
and stock-based compensation, for our executive and other administrative personnel. Other significant general and administrative expenses
include legal services, including intellectual property and corporate matters; professional fees for accounting, auditing, tax, insurance,
and allocated human resource costs, information technology costs, and facility-related costs, including rent, utilities, maintenance,
and depreciation for our leased office space.

We
expect our general and administrative expenses will increase substantially for the foreseeable future as we anticipate an increase in
our personnel headcount to support the expansion of research and development activities, as well as to support our operations generally.
We also expect to continue to incur significant expenses associated with being a public company, including costs related to accounting,
audit, legal, regulatory, and tax-related services associated with maintaining compliance with applicable Nasdaq and SEC requirements;
director and officer insurance costs; and investor and public relations costs. We also expect to incur additional intellectual property-related
expenses as we file patent applications to protect innovations arising from our research and development activities.

Other
Income, Net

Other
income, net consists of interest earned on our cash, cash equivalents, and marketable securities; interest expense on the convertible
note from a related party (see discussion herein); and foreign currency transactions gains and losses. Interest expense relates to a
convertible note (the “Convertible Note”) issued to Fairmount Healthcare Fund II, L.P. (“Fairmount”), a
related party, in March 2024. At the effective time of the Merger, the Convertible Note, along with the accrued interest, was automatically
converted into Company Common Stock.

Income
Taxes

No
provision for income taxes was recorded for the period from February 6, 2024 (inception) through December 31, 2024. Deferred tax
assets generated from our net operating losses have been fully offset by the valuation allowance as we believe it is not more likely
than not that the benefit will be realized due to our cumulative losses generated to date.

Results
of Operations for the Period from February 6, 2024 (inception) to December 31, 2024

The
following table summarizes our results of operations for the period presented (in thousands):

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Research
and Development Expenses

The
following table summarizes our research and development expenses for the period presented (in thousands):

Research
and development expenses were $75.1 million for the period from February 6, 2024 (inception) to December 31, 2024 and consisted
primarily of the following:

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General
and Administrative Expenses

The
following table summarizes our general and administrative expenses for the period presented (in thousands):

General
and administrative expenses were $13.1 million for the period from February 6, 2024 (inception) to December 31, 2024 and consisted
primarily of the following:

Total
Other Income, Net

Interest
income from cash equivalents and marketable securities was $5.9 million for the period from February 6, 2024 (inception) to December
31, 2024.

Interest
expense was $1.5 million for the period from February 6, 2024 (inception) to December 31, 2024 relating to the Convertible Note from
Fairmount.

Liquidity
and Capital Resources

As
of December 31, 2024, we had $393.7 million of cash, cash equivalents, and marketable securities.

Since
our inception, we have incurred significant operating losses and negative cash flow from operations. We expect to incur significant expenses
and operating losses for the foreseeable future as we continue the pre-clinical and clinical development of our programs and our early-stage
research activities. We have not yet commercialized any products, and we do not expect to generate revenue from sales of products for
several years, if at all. Through December 31, 2024, we had funded our operations primarily with proceeds from issuances of convertible
preferred stock, common stock, a convertible note, and pre-funded warrants. In March 2024, we received $2.9 million in net
proceeds from the issuance of Pre-Merger Oruka Series A Preferred Stock and $25.0 million in gross proceeds from the issuance
of the Convertible Note, both of which were related party transactions. In August 2024, we raised approximately $228.0 million in net
proceeds from Pre-Closing Financing and received $4.9 million in cash from ARCA upon consummation of the Merger. In September 2024, we
received approximately $188.7 million in net proceeds from the issuance of common stock, Company Series A Preferred Stock, and pre-funded
warrants in connection with the PIPE Financing.

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Our
primary use of cash is to fund the development of our product candidates and advance our pipeline. This includes both the research and
development costs and the general and administrative expenses required to support those operations. Since we are a clinical stage biotechnology
company, we have incurred significant operating losses since our inception and we anticipate such losses, in absolute dollar terms, to
increase as we continue to pursue clinical development of our product candidates, prepare for the potential commercialization of our
product candidates, and expand our development efforts in our pipeline of nonclinical candidates. We expect that our existing cash, cash
equivalents, and marketable securities will be sufficient to fund our operating plans for at least twelve months from the date of filing
of this Annual Report. We will need to secure additional financing in the future to fund additional research and development, and before
a commercial drug can be produced, marketed, and sold. If we are unable to obtain additional financing or generate license or product
revenue, the lack of liquidity could have a material adverse effect on our company.

Cash
Flows

The
following table summarizes our cash flows for the period presented (in thousands):

Operating
Activities

From
February 6, 2024 (inception) to December 31, 2024, net cash used in operating activities was $57.8 million, which was primarily
attributable to a net loss of $83.7 million, offset by net non-cash charges of $14.3 million and net changes in operating activities
of $11.6 million. Non-cash charges primarily consisted of $14.9 million in stock-based compensation expense (including $10.4 million
related to the Paruka warrant) and $1.5 million of non-cash interest expense, partially offset by net accretion of premiums and discounts
on marketable securities of $2.2 million. Net changes in our operating activities primarily consisted of a $3.5 million increase in accounts
payable, a $3.3 million increase in accrued expenses and other current liabilities, a $6.0 million increase in related parties accounts
payable and other current liabilities, partially offset by a $1.1 million increase in prepaid expenses and other current assets. The
increase in amounts due to related parties, accounts payable, and accrued expenses and other current liabilities was primarily due to
an increase in our business activity, as well as vendor invoicing and payments. The increase in prepaid expenses and other current assets
was primarily due to prepaid research and development expenses with our contract research organization.

Investing
Activities

From
February 6, 2024 (inception) to December 31, 2024, net cash used in investing activities was $330.1 million, which was primarily
attributable to purchases of marketable securities.

Financing
Activities

From
February 6, 2024 (inception) to December 31, 2024, net cash provided by financing activities was $449.5 million, consisting of $228.0
million of net proceeds from the Pre-Closing Financing, $188.7 million of net proceeds from the PIPE Financing, $25.0 million of net
proceeds from the issuance of notes payable to related parties, $4.9 million of cash acquired in connection with the reverse recapitalization
and $2.9 million of net proceeds from issuance of the Pre-Merger Oruka Series A Preferred Stock.

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Contractual
Obligations and Commitments

We
enter into contracts in the normal course of business with CROs, CMOs and with other vendors for preclinical research studies, clinical
trials, manufacturing, and other services and products for operating purposes. These contracts generally provide for termination on notice
or may have a potential termination fee if a purchase order is cancelled within a specified time, and therefore, are cancelable contracts.
We do not expect any such contract terminations and did not have any non-cancellable obligations under these agreements as of December
31, 2024.

Paragon
Therapeutics - Option Agreements

In
March 2024, we entered into two antibody discovery and option agreements (“Option
Agreements”) with Paragon and Paruka Holding, LLC (“Paruka”). Under the
terms of each agreement, Paragon identifies, evaluates, and develops antibodies directed
against certain mutually agreed therapeutic targets of interest to us. From time to time,
we can choose to add additional targets to the collaboration upon agreement with Paragon
and Paruka. Under the Option Agreements, we have the exclusive option to, on a research program-by-research
program basis, be granted an exclusive, worldwide license to all of Paragon’s right,
title, and interest in and to the intellectual property resulting from the applicable research
program to develop, manufacture, and commercialize the antibodies and products directed to
the selected target(s) (each, an “Option”). We have initiated certain research
programs with Paragon that generally focus on discovering, generating, identifying and/or
characterizing antibodies directed to a particular target (each, a “Research Program”),
including for IL-23 and IL-17A/F for ORKA-001 and ORKA-002, respectively. Our exclusive option
with respect to each Research Program is exercisable at our sole discretion at such time
as specified in the Option Agreements (the “Option Period”). There is no payment
due upon exercise of an Option pursuant to the Option Agreements. For each of these agreements,
once we enter into the corresponding license agreements, we will be required to make non-refundable
milestone payments to Paragon of up to $12.0 million under each respective agreement upon
the achievement of certain clinical development milestones, up to $10.0 million under each
respective agreement upon the achievement of certain regulatory milestones, as well as a
low single-digit percentage royalty for antibody products beginning on the first commercial
sale in each program.

We
may terminate any Option Agreement or any Research Program at any time for any or no reason upon 30 days’ prior written notice
to Paragon, provided that we must pay certain unpaid fees due to Paragon upon such termination, as well as any non-cancellable obligations
reasonably incurred by Paragon in connection with its activities under any terminated Research Program. Paragon may terminate any Option
Agreement or a Research Program immediately upon written notice to us if, as a result of any action or failure to act by us or our affiliates,
such Research Program or all material activities under the applicable Research Plan are suspended, discontinued or otherwise delayed
for a certain consecutive number of months. Each party has the right to terminate the Option Agreements or any Research Program
upon material breach that remains uncured or the other party’s bankruptcy.

Additionally,
as part of the Option Agreements, on December 31, 2024 and December 31, 2025, we granted and will grant, respectively, Paruka a
warrant to purchase a number of shares equal to 1.00% of outstanding shares as of the date of the grant on a fully-diluted basis, with
an exercise price equal to the fair market value of the underlying shares on the grant date.

The
warrant is liability-classified and after the initial recognition, the liability is adjusted to fair value at the end of each reporting
period, with changes in fair value recorded in the consolidated statement of operations and comprehensive loss as stock-based compensation
expenses under research and development expenses. On issuance of the December 31, 2024 warrant to Paruka, the change in fair value of
the warrant immediately prior to issuance was recorded in the consolidated statement of operations and comprehensive loss and the resultant
carrying value of the liability was reclassified to equity on the consolidated balance sheet as of December 31, 2024.

Pursuant
to the Option Agreements, on a research program-by-research program basis following the finalization of the research plan for each respective
research program, we were required to pay Paragon a one-time, nonrefundable research initiation fee of $0.8 million related to the
ORKA-001 program. This amount was recognized as a research and development expense during the period from February 6, 2024 (inception)
to December 31, 2024. In June 2024, pursuant to the Option Agreements with Paragon, we completed the selection process of our development
candidate for IL-23 antibody for ORKA-001 program. We were responsible for 50% of the development costs incurred through the completion
of the IL-23 selection process. We received the rights to at least one selected IL-23 antibody in June 2024. During the period from February
6, 2024 (inception) to December 31, 2024, we exercised our option for ORKA-001 and recorded a $1.5 million milestone payment related
to the achievement of development candidate as research and development expense in our consolidated statement of operations and comprehensive
loss. In addition, during the period from February 6, 2024 (inception) to December 31, 2024, we recorded a $2.5 million milestone payment
related to the first dosing of a human subject in a Phase 1 trial of ORKA-001 in December 2024 as research and development expense in
our consolidated statement of operations and comprehensive loss. Our share of development costs incurred for the period from February
6, 2024 (inception) to December 31, 2024 was $13.5 million, which was recorded as research and development expenses. An amount of $2.8
million related to ORKA-001 is included in related party accounts payable and other current liabilities as of December 31, 2024.

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We
were also required to reimburse Paragon $3.3 million for development costs related to ORKA-002 incurred by Paragon through December 31,
2023 and certain other development costs incurred by Paragon between January 1, 2024 and March 6, 2024 as stipulated by the
Option Agreements. This amount was recognized as a research and development expense during the period from February 6, 2024 (inception)
to December 31, 2024. We are also responsible for the development costs incurred by Paragon from January 1, 2024 through the completion
of the IL-17 selection process. We recognized an amount of $0.8 million payable to Paragon for the research initiation fee related
to ORKA-002 following the finalization of the ORKA-002 research plan. This was recognized as research and development expenses in the
period from February 6, 2024 (inception) to December 31, 2024. During the period from February 6, 2024 (inception) to December 31, 2024,
we exercised our option for ORKA-002 and recorded a $1.5 million milestone payment related to the achievement of development candidate
as research and development expense in our consolidated statement of operations and comprehensive loss. We accounted for development
costs of $7.8 million for the period from February 6, 2024 (inception) to December 31, 2024 as research and development expenses. An
amount of $2.7 million related to ORKA-002 is included in related party accounts payable and other current liabilities as of December
31, 2024.

We
expense the service fees as the associated costs are incurred when the underlying services
are rendered. Such amounts are classified within research and development expenses in the
accompanying consolidated statement of operations and comprehensive loss.

We
concluded that the rights obtained under the Option Agreements represent an asset acquisition whereby the underlying assets comprise
in-process research and development assets with no alternative future use. The Option Agreements did not qualify as a business combination
because substantially all of the fair value of the assets acquired was concentrated in the exclusive license options, which represent
a group of similar identifiable assets. The research initiation fee represents a one-time cost on a research program-by-research program
basis for accessing research services or resources with benefits that are expected to be consumed in the near term, therefore the amounts
paid are expensed as part of research and development costs immediately. Amounts paid as reimbursements of on-going development cost,
monthly development cost fee and additional development expenses incurred by Paragon due to work completed for selected targets prior
to the effective date of the Option Agreements that is associated with services being rendered under the related Research Programs are
recognized as research and development expense when incurred.

For
the period from February 6, 2024 (inception) to December 31, 2024, we recognized $42.0 million of expenses in connection with services
provided by Paragon and Paruka under the Option Agreements.

Paragon
Therapeutics – License Agreements

In
September 2024, we exercised the Option to acquire certain rights to ORKA-001, and in December 2024, we entered into the corresponding
license agreement with Paragon (the “ORKA-001 License Agreement”), pursuant to which Paragon granted us a royalty-bearing,
world-wide, exclusive license to develop, manufacture, commercialize or otherwise exploit certain antibodies and products targeting IL-23
in all fields other than the field of inflammatory bowel disease (“ORKA-001 Field”). In December 2024, we exercised the Option
with respect to ORKA-002 for the IL-17A/F program, and in February 2025, we entered into the corresponding license agreement with Paragon
(the “ORKA-002 License Agreement” and together with the ORKA-001 License Agreement, the “License Agreements”),
pursuant to which Paragon granted us a royalty-bearing, world-wide, exclusive license to develop, manufacture, commercialize or otherwise
exploit certain antibodies and products targeting IL-17A/F in all fields (“ORKA-002 Field” and together with the ORKA-001
Field, the “Fields”).

The
License Agreements provide us with exclusive licenses in the Fields to Paragon’s patent applications covering the related antibodies,
their method of use and their method of manufacture and Paragon has agreed not to conduct any new campaigns that generate anti-IL-23
monospecific antibodies or anti-IL-17A/F monospecific antibodies for the ORKA-001 Field or the ORKA-002 Field, respectively, for at least
five years. Each of the ORKA-001 and ORKA-002 License Agreements may be terminated on 60 days’ notice to Paragon, on material breach
without cure, and on a party’s insolvency or bankruptcy to the extent permitted by law.

Pursuant
to the terms of each of the ORKA-001 and ORKA-002 License Agreements, we are obligated to
pay Paragon non-refundable milestone payments of up to $12.0 million under each respective
agreement upon the achievement of certain clinical development milestones and up to $10.0
million under each respective agreement upon the achievement of certain regulatory milestones,
including a $1.5 million fee for nomination of a development candidate (or initiation of
an IND-enabling toxicology study) and a further milestone payment of $2.5 million upon the
first dosing of a human patient in a Phase 1 trial for each of ORKA-001 and ORKA-002. In
addition, we are obligated to pay Paragon a low single-digit percentage royalty for antibody
products for each of ORKA-001 and ORKA-002. For each of the License Agreements, the royalty
term ends on the later of (i) the last-to-expire licensed patent or our patent directed to
the manufacture, use or sale of a licensed antibody in the country at issue or (ii) 12 years
from the date of first sale of a Company product. There is also a royalty step-down if there
is no Paragon patent in effect during the royalty term for each program.

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Cell
Line License Agreement

In March 2024, we entered
into the Cell Line License Agreement (the “Cell Line License Agreement”) with WuXi Biologics Ireland Limited (“WuXi
Biologics”). Under the Cell Line License Agreement, we received a non-exclusive, worldwide, sublicensable license to certain of
WuXi Biologics’ know-how, cell line, biological materials (the “WuXi Biologics Licensed Technology”) and media and feeds
to make, have made, use, sell and import certain therapeutic products produced through the use of the cell line licensed by WuXi Biologics
under the Cell Line License Agreement (the “WuXi Biologics Licensed Products”). Specifically, the WuXi Biologics Licensed
Technology is used in certain manufacturing activities in support of the ORKA-001 and ORKA-002 programs.

In
consideration for the license, we agreed to pay WuXi Biologics a non-refundable license fee of $150,000, which was recognized as a research
and development expense during the period from February 6, 2024 (inception) to December 31, 2024. Additionally, to the extent that
we manufacture our commercial supplies of bulk drug product with a manufacturer other than WuXi Biologics or its affiliates, we are required
to make royalty payments to WuXi Biologics at a rate of less than one percent of net sales of WuXi Biologics Licensed Products manufactured
by the third-party manufacturer. Pursuant to an amendment to the Cell Line License Agreement effective in November 2024, a provision
was added that permits the royalties owed under the agreement to be bought out on a product-by-product basis for a lump-sum payment.

The
Cell Line License Agreement will continue indefinitely unless terminated (i) by us upon six months’ prior written notice and our
payment of all undisputed amounts due to WuXi Biologics through the effective date of termination, (ii) by WuXi Biologics for a material
breach by us that remains uncured for 60 days after written notice, (iii) by WuXi Biologics if we fail to make a payment and such failure
continues for 30 days after receiving notice of such failure, or (iv) by either party upon the other party’s bankruptcy.

Note Payable
with Related Party

In
March 2024, we entered into a Series A Preferred Stock and Convertible Note Purchase Agreement (the “Purchase Agreement”)
with Fairmount, whereby we issued the Convertible Note, with an initial principal amount of $25.0 million that, at the time of issuance,
could be converted into Pre-Merger Oruka Series A Preferred Stock (or a series of preferred shares that is identical in respect
to the shares of preferred shares issued in its next equity financing) or shares of Pre-Merger Oruka Common Stock in exchange for aggregate
proceeds of $25.0 million. The Convertible Note accrued interest at a rate of 12.0% per annum. At issuance, the Convertible Note
required all unpaid interest and principal to mature on December 31, 2025 (the “Maturity Date”) and prepayment was not
permitted without prior written consent of Fairmount. At issuance, the principal payment along with the accrued interest on the Convertible
Note was due in full on the Maturity Date. Pursuant to the Purchase Agreement, we had the right to sell and issue additional convertible
notes up to an aggregate principal amount equal to $30.0 million, in addition to the $25.0 million initial principal amount of the Convertible
Note.

Immediately
prior to the completion of the Merger, the Convertible Note was converted into shares of Pre-Merger Oruka Common Stock based on the aggregate
principal amount of $25.0 million, plus unpaid accrued interest of $1.5 million divided by the conversion price, which was determined
based upon the Company’s fully-diluted capitalization immediately prior to the Merger. At the effective time of the Merger, the
Pre-Merger Oruka Common Stock issued upon the conversion of the Convertible Note (including accrued interest) automatically converted
into shares of Company Common Stock. 2,722,207 shares of Company Common Stock were issued on conversion of the Convertible Note and accrued
interest. As of December 31, 2024, there is no note payable to a related party.

83

Lease
Agreement

Our
contractual obligations include minimum lease payments under our operating lease obligation for our headquarters in Menlo Park, California.
See Note 13 to the consolidated financial statements elsewhere in this report for additional information.

Critical
Accounting Policies and Significant Judgments and Estimates

Our
management’s discussion and analysis of its financial condition and results of operations is based on its financial statements,
which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported revenues recognized and expenses incurred during the reporting
periods. Our estimates are based on its historical experience and on various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While
our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing elsewhere
in this Annual Report, we believe the following accounting policies used in the preparation of our financial statements require the most
significant judgments and estimates.

Research
and Development Expenses

Research
and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and
development activities, including salaries and bonuses, overhead costs, contract services and other related costs. The value of goods
and services received from contract research organizations and contract manufacturing organizations in the reporting period are estimated
based on the level of services performed, and progress in the period in cases when we have not received an invoice from the supplier.
In circumstances where amounts have been paid in excess of costs incurred, we record a prepaid expense. When billing terms under these
contracts do not coincide with the timing of when the work is performed, we are required to make estimates of outstanding obligations
to those third parties as of period end. Any accrual estimates are based on a number of factors, including our knowledge of the progress
towards completion of the specific tasks to be performed, invoicing to date under the contracts, communication from the vendors of any
actual costs incurred during the period that have not yet been invoiced and the costs included in the contracts. Significant judgments
and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the
estimates made by us.

Stock-Based
Compensation

We
measure stock options granted to employees and non-employees based on the estimated fair values of the awards as of the grant date using
the Black-Scholes option-pricing model. The model requires management to make a number of assumptions, including common stock fair value,
expected volatility, expected term, risk-free interest rate and expected dividend yield. For restricted stock awards and restricted stock
units, the estimated fair value is the fair market value of the underlying stock on the grant date. We expense the fair value of our
equity-based compensation awards on a straight-line basis over the requisite service period, which is the period in which the related
services are received. We account for award forfeitures as they occur. The expense for stock-based awards with performance conditions
is recognized when it is probable that a performance condition is met during the vesting period.

Determination
of Fair Value of Common Stock

A
public trading market for Company Common Stock has been established in connection with the completion of the Merger. As such, it is no
longer necessary for our board of directors to estimate the fair value of our stock-based awards in connection with its accounting for
granted stock-based awards or other such awards we may grant, as the fair value of Company Common Stock and share-based awards is determined
based on the quoted market price of Company Common Stock.

84

Prior
to the merger, Pre-Merger Oruka’s common stock valuations were prepared using a hybrid method, including an option pricing method
(“OPM”). The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise
prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under
this method, the common stock has value only if the funds available for distribution to stockholders exceed the value of the preferred
stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. The hybrid method is a probability-weighted
expected return method (“PWERM”), where the equity value in one or more of the scenarios is calculated using an OPM. The
PWERM is a scenario-based methodology that estimates the fair value of common stock based upon an analysis of future values for the Company,
assuming various outcomes. The common stock value is based on the probability-weighted present value of expected future investment returns
considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the common stock
under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to
arrive at an indication of value for the common stock. A discount for lack of marketability of the common stock is then applied to arrive
at an indication of value for the common stock.

The
assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application
of management’s judgment. As a result, if Pre-Merger Oruka had used significantly different assumptions or estimates, the fair
value of Pre-Merger Oruka’s incentive shares and its stock-based compensation expense could have been materially different.

Recently
Issued Accounting Pronouncements

See
Note 2 to the consolidated financial statements included in Part II - Item 8 of this Annual Report for more information regarding recently
issued accounting pronouncements.

Off-Balance
Sheet Arrangements

As
of December 31, 2024, we did not have any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

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

We have included or incorporated by reference into this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report on Form 10-K, and from time to time our management may make, statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements may be identified by words including “anticipate,” “plan,” “believe,” “intend,” “estimate,” “expect,” “should,” “may,” “potential” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our website.

Overview

We are a clinical-stage biopharmaceutical company applying a precision medicine approach to the development and commercialization of targeted therapies for cardiovascular diseases. Precision medicine refers to the tailoring of medical treatment to the individual characteristics of patients, using genomic, non-genomic biomarker and other information that extends beyond routine diagnostic categorization. We believe that when implemented correctly precision medicine can enhance therapeutic response, improve patient outcomes, and reduce healthcare costs.

In April 2022, the Board of Directors established a Special Committee (Special Committee) and, in May 2022, retained Ladenburg Thalmann & Co. Inc. (Ladenburg) to evaluate strategic options, including transactions involving a merger, sale of all or part of our assets, or other alternatives with the goal of maximizing stockholder value (Strategic Review). We and Ladenburg have reviewed several potential strategic transactions and continue to evaluate further potential development of our existing assets, in order to maximize stockholder value. We do not have a defined timeline for the strategic review process and the review may not result in any specific action or transaction.

Our lead product candidate is Gencaro™ (bucindolol hydrochloride) for the treatment of atrial fibrillation, or AF, in patients with chronic heart failure, or HF. Gencaro is being developed for patients who have a genotype that identifies a drug target associated with heightened efficacy.

Gencaro™ (bucindolol hydrochloride) for Atrial Fibrillation

Gencaro™ (bucindolol hydrochloride) is a pharmacogenetically-targeted beta-adrenergic receptor antagonist with mild vasodilator properties that we are developing for the treatment of atrial fibrillation in patients with heart failure. We believe the pharmacology of Gencaro is unique and its efficacy can be enhanced by prescribing it to patients with a common genotypic variant that is present in approximately 50% of the North American and European general populations. This gene can be detected with a simple genetic test.

We are developing Gencaro to treat atrial fibrillation, or AF, in patients with chronic heart failure, or HF. AF is the most common form of cardiac arrhythmia, a disruption of the heart’s normal rhythm or rate. HF is a chronic condition in which the heart is unable to pump enough blood to meet the body’s needs. AF and HF commonly occur together. In HF patients, the development of AF leads to worsening symptoms, and increased risk of hospitalization and death. Current treatment options for AF in HF patients are limited, and can be invasive, costly and dangerous.

Our development plan for Gencaro focuses on the treatment of AF in patients with higher ejection fraction HF, those who have an ejection fraction, or EF, of 40% and higher who also have the genotype we believe is optimal for Gencaro efficacy. This population of HF encompasses more than half of all HF patients in the United States and Europe. There are currently few approved or effective drug therapies to treat AF or HF in this patient population.

Our development plan for Gencaro is based on our published analysis of the Phase 2b clinical trial of Gencaro for the prevention of AF in HF patients, known as GENETIC-AF. This analysis showed novel results for Gencaro in patients in the clinical trial with EF’s of 40% and higher. We currently have an agreement with the FDA, known as a Special Protocol Assessment, or SPA, for the requirements of a Gencaro Phase 3 clinical trial that would support approval of Gencaro if successful. The Phase 3 pivotal clinical trial of Gencaro conducted under an SPA will include secondary endpoints that are intended to capture some of this information, such as a reduction in the need to deploy rhythm control interventions including electrical cardioversion, catheter ablation and use of anti-arrhythmic drugs and avoidance of drug-related complications such as bradycardia. We were issued a United States patent in February 2021 for the use of Gencaro in a patient population identified as part of the clinical trial. We believe this patent will substantially extend the patent protection for our planned development of Gencaro into 2039. We have sought or are seeking similar patent protection in other countries.

42

We believe that patients with HF and AF represent a major unmet medical need, and this need is most pronounced in patients with EF values of 40% and above. This EF range constitutes more than half of all chronic HF in the United States and Europe, as well as in Japan and China, and there are currently few approved, effective or guideline-recommended therapies for these patients to treat either their AF or HF. AF is a very common complication in these patients, with estimates of AF incidence ranging from 40% to 60%. Beta-blockers approved for HF are commonly used off-label to control heart rate in these patients, but they are not considered effective in preventing AF and none are approved for patients with EF ≥ 40%. Other anti-arrhythmic drugs approved for the treatment of AF have adverse side effects and in HF patients are either contraindicated or have label warnings for use due to an increased risk of mortality. Interventional procedures for AF, such as catheter ablation and electrical cardioversion, are invasive, expensive, and often temporary; these interventions also typically require the continued use of beta blockers and other anti-arrhythmic drugs post-intervention.

We believe that Gencaro, if approved, may be a safe and more effective therapy for the treatment of higher ejection fraction HF patients with AF. We believe there are several potentially important attributes that would differentiate Gencaro from existing therapies, including:

•
More effective rhythm control compared to the current standard of care;

•
Reduction in the need for catheter ablation, electrical cardioversion, or toxic anti-arrhythmic drugs;

•
Maintenance of rhythm control after a successful AF catheter ablation;

•
Effective rate control with lower risk of treatment-limiting, adverse event producing bradycardia;

•
Reduction in symptoms and improvement in quality of life;

•
Reduced health care burden;

•
Foundational beta-blocker benefits for HF and unique evidence of efficacy in HF patients with AF;

•
One of the only drug therapies approved and shown effective for AF in HF patients with EF ≥ 40%, and the only one in its drug class.

We have an international patent portfolio for Gencaro in the United States, the EU, and other major markets, as well as new chemical entity status, including a new patent that we believe will give us a strong intellectual property position to at least approximately 2039 in the United States; we have filed applications similar to this new patent in international territories. We have developed a laboratory platform for the diagnostic test that would be used to prescribe Gencaro; this platform was approved by FDA for use in the Phase 2B clinical trial. We retain all rights to this test platform; we expect to use it in future clinical trials, and we believe it could be one of multiple diagnostic platforms used for commercialization.

rNAPc2 (AB201) for treatment of COVID-19

Recombinant Nematode Anticoagulant Protein c2, or rNAPc2 (AB201), is a protein therapeutic in clinical development as a potential treatment for patients with COVID-19. Based on its unique mechanism of action, development history and the clinical evidence from the SARS-CoV-2 pandemic, we believe rNAPc2 has potential to be a beneficial therapy for patients with this serious viral disease. We initiated a Phase 2b clinical trial of rNAPc2 as a potential treatment for patients hospitalized with COVID-19 in the fourth quarter of 2020 and completed patient enrollment in the fourth quarter 2021. In the clinical trial, both doses of rNAPc2 demonstrated a treatment benefit for patients, however, neither dose achieved statistical significance for the primary efficacy endpoint of change in D-dimer level from Baseline to Day 8 compared to standard of care heparin.

On the secondary endpoints measuring thrombotic events and time-to-recovery, there was a numerical imbalance in favor of rNAPc2 that was non-significant. rNAPc2 was well-tolerated at both doses. There were no serious treatment-related adverse events and no dose dependent increase in adverse events was observed. There was no difference between rNAPc2 and standard-of-care heparin in major or non-major clinically relevant bleeding.

To support the continued development of Gencaro and rNAPc2, we will need additional financing to fully fund any clinical trials, and our general and administrative costs through the clinical trials’ projected completion and potential commercialization. Considering the substantial time and costs associated with the development of Gencaro and rNAPc2 and the risk that we may be unable to raise a significant amount of capital on acceptable terms, we are also pursuing co-development and commercialization partnering opportunities with large pharmaceutical and/or specialty pharmaceutical companies and may pursue a strategic combination or other strategic transactions. If we are unable to obtain sufficient financing or are unable to complete a strategic transaction, we may discontinue our development activities on Gencaro or rNAPc2 or discontinue our operations.

43

We believe our cash and cash equivalents as of December 31, 2023 will be sufficient to fund our operations through the middle of fiscal year 2025. Our review of our strategic options may impact this projection. Conducting a Phase 3 PRECISION-AF trial would likely require additional financing. However, changing circumstances may cause us to consume capital significantly faster or slower than currently anticipated. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate; therefore, we may have to raise additional capital for other clinical trials. Initiating any Phase 3 clinical trial of Gencaro will require additional financing.

In April 2022, the Board of Directors established a Special Committee (Special Committee) and, in May 2022, retained Ladenburg Thalmann & Co. Inc. (Ladenburg) to evaluate strategic options, including transactions involving a merger, sale of all or part of our assets, or other alternatives with the goal of maximizing stockholder value (Strategic Review). We and Ladenburg have reviewed several potential strategic transactions and continue to evaluate further potential development of our existing assets, in order to maximize stockholder value. We do not have a defined timeline for the strategic review process and the review may not result in any specific action or transaction.

In July 2020, we entered into a new sales agreement with a placement agent to sell, from time to time, our common stock having an aggregate offering price of up to $54.0 million, in an “at the market offering.” As of February 2021, we had sold an aggregate of 9,928,272 shares of our common stock pursuant to the terms of such sales agreement for aggregate gross proceeds of approximately $54.0 million. Net proceeds received in this offering were approximately $52.2 million, after deducting expenses for executing the “at the market offering” and commissions paid to the placement agent.

In April 2021, we amended the new sales agreement and the amount available for the offering under our prospectus to our registration statement on Form S-3 (No. 333-254585). As of January 31, 2024, the amount available for the offering under the prospectus supplement is subject to the limitation of not selling a total value amount of shares exceeding more than one-third of our public float in any 12-month period, which as of January 31, 2024 would have been approximately $6.3 million.

In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. We do not expect a material financial effect as a result of the pandemic. However, if the pandemic continues to be a severe worldwide crisis, it could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Results of Operations

General and Administrative Expenses

General and administrative, or G&A, expenses primarily consist of personnel costs, consulting and professional fees, insurance, facilities and depreciation expenses, and various other administrative costs.

G&A expenses were $6.3 million for the year ended December 31, 2023, compared to $5.8 million for 2022, an increase of approximately $0.4 million. During the year ended December 31, 2023, we recorded $159,000 for one-time termination benefits related to the mutually-agreed to conclusion of Christopher D. Ozeroff's employment, the former Secretary, Senior Vice President and General Counsel of ARCA, effective March 31, 2023. During the year ended December 31, 2022, we recorded total restructuring charges of approximately $755,000, of which $470,000 and $285,000 were recognized in research and development and general and administrative expenses, respectively, in connection with the restructuring, all in the form of one-time termination benefits. The increase in expenses during 2023 was primarily a result of increases in professional fees and fees to the Special Committee in connection with the Strategic Review, offset by lower one-time termination benefits and lower personnel costs from the reductions discussed above.

G&A expenses in 2024 are expected to be consistent with those in 2023 as we maintain administrative activities to support our ongoing operations.

Research and Development Expenses

Research and development, or R&D, expense is comprised primarily of personnel costs, clinical development, manufacturing process development, and regulatory activities and costs.

Our research and development expenses were $1.0 million for the year ended December 31, 2023 as compared to $4.7 million for 2022, a decrease of $3.7 million.

R&D personnel costs decreased approximately $1.2 million for the year ended December 31, 2023, as compared to the corresponding periods of 2022, due to one-time termination benefits incurred in 2022 and decreased headcount from the July 2022 personnel reduction discussed above.

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Clinical expense decreased approximately $1.0 million for the year ended December 31, 2023, as compared to the corresponding period of 2022. Manufacturing process development costs decreased approximately $1.1 million for the year ended December 31, 2023, as compared to the corresponding period of 2022. The majority of clinical and manufacturing close out costs related to our rNAPc2 (AB201) international Phase 2b clinical trial were incurred in the first half of 2022, with no comparable costs for the corresponding periods of 2023.

R&D expense in 2024 is expected to be lower than 2023, as we completed our rNAPc2 (AB201) international Phase 2b clinical trial.

Interest and Other Income

Interest and other income was $2.0 million of interest income for the year ended December 31, 2023 as compared to $0.7 million for 2022, resulting in an increase of $1.3 million. Interest income was higher due to higher interest rates in 2023 compared to the corresponding periods of 2022. We expect interest income in 2024 to be lower than 2023, as we continue to use our cash and cash equivalents to fund our operations, assuming interest rates remain consistent with 2023.

Other Expense

There was no other expense for the year ended December 31, 2023. Other expense was $5,000 for the year ended December 31, 2022. The amounts were nominal to our overall operations. Based on our current capital structure, other expense is expected to be negligible in 2024.

Liquidity and Capital Resources

Cash and Cash Equivalents

As of December 31, 2023, we had total cash and cash equivalents of approximately $37.4 million, as compared to $42.4 million as of December 31, 2022. The net decrease of $5.0 million during the year primarily reflects cash used in operating activities during the year ended December 31, 2023.

Cash Flows from Operating, Investing and Financing Activities

Net cash used in operating activities for the year ended December 31, 2023 decreased approximately $5.9 million compared with 2022. This was primarily due to lower outflows related to changes in operating assets and liabilities and a lower net loss in 2022, as discussed in Results of Operations above.

There were no investing activities in the year ended December 31, 2023. Net cash used in investing activities for the year ended December 31, 2022 was $2,000 for the purchase of property and equipment.

There were no financing activities in the years ended December 31, 2023 or 2022.

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Sources and Uses of Capital

Our primary sources of liquidity to date have been capital raised from issuances of shares of our preferred and common stock. The primary uses of our capital resources to date have been to fund operating activities, including research, clinical development and drug manufacturing expenses, license payments, and spending on capital items.

In July 2020, we entered into a sales agreement with a placement agent to sell, from time to time, our common stock having an aggregate offering price of up to $54.0 million, in an “at the market offering.” As of February 2021, we had sold an aggregate of 9,928,272 shares of our common stock pursuant to the terms of such sales agreement for aggregate gross proceeds of approximately $54.0 million. Net proceeds received in this offering were approximately $52.2 million, after deducting expenses for executing the “at the market offering” and commissions paid to the placement agent.

In April 2021, we amended the new sales agreement and the amount available for the offering under our prospectus to our registration statement on Form S-3 (No. 333-254585). As of January 31, 2024, the amount available for the offering under the prospectus supplement is subject to the limitation of not selling a total value amount of shares exceeding more than one-third of our public float in any 12-month period, which as of January 31, 2024 would have been approximately $6.3 million.

Our ability to execute our development programs in accordance with our projected timeline depends on a number of factors, including, but not limited to, the following:

•
the costs and timing for the potential additional clinical trials in order to gain possible regulatory approval for Gencaro, rNAPc2 or any other product candidate;

•
the market price of our stock and the availability and cost of additional equity capital from existing and potential new investors;

•
our ability to retain the listing of our common stock on the Nasdaq Capital Market;

•
our ability to control costs associated with our operations;

•
general economic and industry conditions affecting the availability and cost of capital, including as a result of deteriorating market conditions due to investor concerns regarding inflation, adverse developments affecting the financial services industry, continued hostilities between Russia and Ukraine and Hamas’ attack against Israel and the ensuing conflict;

•
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

•
the terms and conditions of our existing collaborative and licensing agreements.

We believe our cash and cash equivalents as of December 31, 2023 will be sufficient to fund our operations through the middle of fiscal year 2025. Our review of our strategic options may impact this projection. Conducting a Phase 3 PRECISION-AF trial would likely require additional financing. However, changing circumstances may cause us to consume capital significantly faster or slower than currently anticipated. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate; therefore, we may have to raise additional capital for other clinical trials. Initiating any Phase 3 clinical trial of Gencaro will require additional financing. We may not be able to raise sufficient capital on acceptable terms, or at all, to continue development and potential commercialization Gencaro or to otherwise continue operations and may not be able to execute any strategic transaction.

In April 2022, the Board of Directors established a Special Committee (Special Committee) and, in May 2022, retained Ladenburg Thalmann & Co. Inc. (Ladenburg) to evaluate strategic options, including transactions involving a merger, sale of all or part of our assets, or other alternatives with the goal of maximizing stockholder value (Strategic Review). We and Ladenburg have reviewed several potential strategic transactions and continue to evaluate further potential development of our existing assets, in order to maximize stockholder value. We do not have a defined timeline for the strategic review process and the review may not result in any specific action or transaction.

Contractual Obligation and Commitments

In December 2022, the Board of Directors approved retention bonuses for certain employees, subject to continued employment with us through the earlier of a change in control of our company or certain clinical development decisions totaling $265,000. In November 2023, the retention bonuses were amended to increase the aggregate amount of the retention bonus by 50% and in order to assist with tax obligations associated with the vesting of certain Company restricted stock unit awards in December 2023, a total of $86,000 was paid in December 2023. As of December 31, 2023, the unpaid retention bonuses totaled $311,000, none of which was accrued as of December 31, 2023, since there had not been a change in control or clinical development decision.

On August 29, 2020 the Company entered into a lease agreement for approximately 5,200 square feet of office facilities in Westminster, Colorado which serves as the Company’s primary business office effective October 1, 2020 (October 2020 Lease). The

46

lease term is 42 months beginning October 1, 2020 and includes an option to renew for an additional 36 month term at the then prevailing rental rate. The exercise of the lease renewal option is at the Company’s sole discretion. The amounts recorded assume the Company will exercise its renewal option. In June 2021, the Company entered into a sublease agreement for approximately 3,000 square feet of additional office facilities in the Company’s primary business office (2021 Lease). The sublease term expired in October 2023. The leases include real estate taxes and insurance, which is not a lease component and is not included in the lease obligation. In addition, common area maintenance charges are based on actual costs incurred and are a non-lease component that is not included in the lease obligation. Rent expense, which is included in general and administrative expense, under these leases for the years ended December 31, 2023 and 2022 was $119,000 and $125,000, respectively.

We have licensed worldwide rights to all preclinical and clinical data through the BEST trial for development of bucindolol. The patents that were the subject of this license are expired. If the license agreement is deemed enforceable, we would incur milestone and royalty obligations upon the occurrence of certain events, including if the FDA grants marketing approval for Gencaro, upon regulatory marketing approval in Europe and Japan and based on achievement of specified product sales levels.

Critical Accounting Policies and Estimates

A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are described in Note 1 of “Notes to Financial Statements” included within Item 8 in this report, we believe the following critical accounting policy affected our most significant judgments, assumptions, and estimates used in the preparation of our financial statements and, therefore, is important in understanding our financial condition and results of operations. We had no significant outsourcing expense activity in 2023 or 2022.

Accrued Outsourcing Expenses

As part of the process of preparing our financial statements, we may be required to estimate accrued outsourcing expenses. This process involves identifying services that third parties have performed on our behalf and estimating the level of service performed and the associated cost incurred for these services as of the balance sheet date. Examples of estimated accrued outsourcing expenses include contract service fees, such as fees payable to contract manufacturers in connection with the production of materials related to our drug product, and service fees from clinical research organizations. We develop estimates of liabilities using our judgment based upon the facts and circumstances known at the time.

Indemnifications

In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify certain parties from any losses incurred relating to the services they perform on our behalf or for losses arising from certain events as defined within the particular contract. Such indemnification obligations may not be subject to maximum loss clauses. We have entered into indemnity agreements with each of our directors, officers and certain employees. Such indemnity agreements contain provisions, which are in some respects broader than the specific indemnification provisions contained in Delaware law. We also maintain an insurance policy for our directors and executive officers insuring against certain liabilities arising in their capacities as such.

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

We have included or incorporated by reference into this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report on Form 10-K, and from time to time our management may make, statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements may be identified by words including “anticipate,” “plan,” “believe,” “intend,” “estimate,” “expect,” “should,” “may,” “potential” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our website.

Overview

We are a clinical-stage biopharmaceutical company applying a precision medicine approach to the development and commercialization of targeted therapies for cardiovascular diseases. Precision medicine refers to the tailoring of medical treatment to the individual characteristics of patients, using genomic, non-genomic biomarker and other information that extends beyond routine diagnostic categorization. We believe that when implemented correctly precision medicine can enhance therapeutic response, improve patient outcomes, and reduce healthcare costs.

In April 2022, the Board of Directors established a Special Committee and, in May 2022, retained Ladenburg Thalmann & Co. Inc. to evaluate strategic options, including transactions involving a merger, sale of all or part of our assets, or other alternatives with the goal of maximizing stockholder value. We believe there are multiple potential opportunities to enhance value for our shareholders. We do not have a defined timeline for the strategic review process and the review may not result in any specific action or transaction.

Our lead product candidate is Gencaro™ (bucindolol hydrochloride) for the treatment of atrial fibrillation, or AF, in patients with chronic heart failure, or HF. Gencaro is being developed for patients who have a genotype that identifies a drug target associated with heightened efficacy.

Gencaro™ (bucindolol hydrochloride) for Atrial Fibrillation

Gencaro™ (bucindolol hydrochloride) is a pharmacogenetically-targeted beta-adrenergic receptor antagonist with mild vasodilator properties that we are developing for the treatment of atrial fibrillation in patients with heart failure. We believe the pharmacology of Gencaro is unique and its efficacy can be enhanced by prescribing it to patients with a common genotypic variant that is present in approximately 50% of the North American and European general populations. This gene can be detected with a simple genetic test.

We are developing Gencaro to treat atrial fibrillation, or AF, in patients with chronic heart failure, or HF. AF is the most common form of cardiac arrhythmia, a disruption of the heart’s normal rhythm or rate. HF is a chronic condition in which the heart is unable to pump enough blood to meet the body’s needs. AF and HF commonly occur together. In HF patients, the development of AF leads to worsening symptoms, and increased risk of hospitalization and death. Current treatment options for AF in HF patients are limited, and can be invasive, costly and dangerous.

Our development plan for Gencaro focuses on the treatment of AF in patients with higher ejection fraction HF, those who have an ejection fraction, or EF, of 40% and higher who also have the genotype we believe is optimal for Gencaro efficacy. This population of HF encompasses more than half of all HF patients in the United States and Europe. There are currently few approved or effective drug therapies to treat AF or HF in this patient population.

Our development plan for Gencaro is based on our recently published analysis of the Phase 2b clinical trial of Gencaro for the prevention of AF in HF patients, known as GENETIC-AF. This analysis showed novel results for Gencaro in patients in the clinical trial with EF’s of 40% and higher. We currently have an agreement with the FDA, known as a Special Protocol Assessment, or SPA, for the requirements of a Gencaro Phase 3 clinical trial that would support approval of Gencaro if successful. The Phase 3 pivotal clinical trial of Gencaro conducted under an SPA will include secondary endpoints that are intended to capture some of this new information, such as a reduction in the need to deploy rhythm control interventions including electrical cardioversion, catheter ablation and use of anti-arrhythmic drugs and avoidance of drug-related complications such as bradycardia. Based on these analyses, we were issued a United States patent in February 2021 for the use of Gencaro in this patient population. We believe this patent will substantially extend the patent protection for our planned development of Gencaro into 2039. We are seeking similar patent protection in other countries.

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We believe that patients with HF and AF represent a major unmet medical need, and this need is most pronounced in patients with EF values of 40% and above. This EF range constitutes more than half of all chronic HF in the United States and Europe, as well as in Japan and China, and there are currently few approved, effective or guideline-recommended therapies for these patients to treat either their AF or HF. AF is a very common complication in these patients, with estimates of AF incidence ranging from 40% to 60%. Beta-blockers approved for HF are commonly used off-label to control heart rate in these patients, but they are not considered effective in preventing AF and none are approved for patients with EF ≥ 40%. Other anti-arrhythmic drugs approved for the treatment of AF have adverse side effects and in HF patients are either contraindicated or have label warnings for use due to an increased risk of mortality. Interventional procedures for AF, such as catheter ablation and electrical cardioversion, are invasive, expensive, and often temporary; these interventions also typically require the continued use of beta blockers and other anti-arrhythmic drugs post-intervention.

We believe that Gencaro, if approved, may be a safe and more effective therapy for the treatment of higher ejection fraction HF patients with AF. We believe there are several potentially important attributes that would differentiate Gencaro from existing therapies, including:

•
More effective rhythm control compared to the current standard of care;

•
Reduction in the need for catheter ablation, electrical cardioversion, or toxic anti-arrhythmic drugs;

•
Maintenance of rhythm control after a successful AF catheter ablation;

•
Effective rate control with lower risk of treatment-limiting, adverse event producing bradycardia;

•
Reduction in symptoms and improvement in quality of life;

•
Reduced health care burden;

•
Foundational beta-blocker benefits for HF and unique evidence of efficacy in HF patients with AF;

•
One of the only drug therapies approved and shown effective for AF in HF patients with EF ≥ 40%, and the only one in its drug class.

We have an international patent portfolio for Gencaro in the United States, the EU, and other major markets, as well as new chemical entity status, including a new patent that we believe will give us a strong intellectual property position to at least approximately 2039 in the United States; we have filed applications similar to this new patent in international territories. We have developed a laboratory platform for the diagnostic test that would be used to prescribe Gencaro; this platform was approved by FDA for use in the Phase 2B clinical trial. We retain all rights to this test platform; we expect to use it in future clinical trials, and we believe it could be one of multiple diagnostic platforms used for commercialization.

rNAPc2 (AB201) for treatment of COVID-19

Recombinant Nematode Anticoagulant Protein c2, or rNAPc2 (AB201), is a protein therapeutic in clinical development as a potential treatment for patients with COVID-19. Based on its unique mechanism of action, development history and the clinical evidence from the SARS-CoV-2 pandemic, we believe rNAPc2 has potential to be a beneficial therapy for patients with this serious viral disease. We initiated a Phase 2b clinical trial of rNAPc2 as a potential treatment for patients hospitalized with COVID-19 in the fourth quarter of 2020 and completed patient enrollment in the fourth quarter 2021. In the clinical trial, both doses of rNAPc2 demonstrated a treatment benefit for patients, however, neither dose achieved statistical significance for the primary efficacy endpoint of change in D-dimer level from Baseline to Day 8 compared to standard of care heparin.

On the secondary endpoints measuring thrombotic events and time-to-recovery, there was a numerical imbalance in favor of rNAPc2 that was non-significant. rNAPc2 was well-tolerated at both doses. There were no serious treatment-related adverse events and no dose dependent increase in adverse events was observed. There was no difference between rNAPc2 and standard-of-care heparin in major or non-major clinically relevant bleeding.

To support the continued development of Gencaro and rNAPc2, we will need additional financing to fully fund any clinical trials, and our general and administrative costs through the clinical trials’ projected completion and potential commercialization. Considering the substantial time and costs associated with the development of Gencaro and rNAPc2 and the risk that we may be unable to raise a significant amount of capital on acceptable terms, we are also pursuing co-development and commercialization partnering opportunities with large pharmaceutical and/or specialty pharmaceutical companies and may pursue a strategic combination or other strategic transactions. If we are unable to obtain sufficient financing or are unable to complete a strategic transaction, we may discontinue our development activities on Gencaro or rNAPc2 or discontinue our operations.

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We believe our cash and cash equivalents as of December 31, 2022 will be sufficient to fund our operations through the middle of fiscal year 2024. Our review of our strategic options may impact this projection. Conducting a Phase 3 PRECISION-AF trial would likely require additional financing. However, changing circumstances may cause us to consume capital significantly faster or slower than currently anticipated. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate; therefore, we may have to raise additional capital for other clinical trials. Initiating any Phase 3 clinical trial of Gencaro will require additional financing.

In April 2022, the Board of Directors established a Special Committee and, in May 2022, retained Ladenburg Thalmann & Co. Inc. to evaluate strategic options, including transactions involving a merger, sale of all or part of our assets, or other alternatives with the goal of maximizing stockholder value. We believe there are multiple potential opportunities to enhance value for our shareholders. We do not have a defined timeline for the strategic review process and the review may not result in any specific action or transaction.

In July 2020, we entered into a new sales agreement with a placement agent to sell, from time to time, our common stock having an aggregate offering price of up to $54.0 million, in an “at the market offering.” As of February 2021, we had sold an aggregate of 9,928,272 shares of our common stock pursuant to the terms of such sales agreement for aggregate gross proceeds of approximately $54.0 million. Net proceeds received in this offering were approximately $52.2 million, after deducting expenses for executing the “at the market offering” and commissions paid to the placement agent.

In April 2021, we amended the new sales agreement and the amount available for the offering under our prospectus to our registration statement on Form S-3 (No. 333-254585). As of February 22, 2023, the amount available for the offering under the prospectus supplement is subject to the limitation of not selling a total value amount of shares exceeding more than one-third of our public float in any 12-month period, which as of February 22, 2023 would have been approximately $8.8 million.

In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. We do not expect a material financial effect as a result of the pandemic. However, if the pandemic continues to be a severe worldwide crisis, it could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Results of Operations

Research and Development Expenses

Research and development, or R&D, expense is comprised primarily of personnel costs, clinical development, manufacturing process development, and regulatory activities and costs.

Our research and development expenses were $4.7 million for the year ended December 31, 2022 as compared to $13.8 million for 2021. The $9.1 million decrease in research and development expenses in 2022 as compared to 2021 was primarily related to the completion of enrollment in our rNAPc2 (AB201) international Phase 2b clinical trial in the fourth quarter of 2021.

Clinical expense decreased approximately $5.7 million for the year ended December 31, 2022. The decrease was related to the completion of enrollment in our rNAPc2 (AB201) international Phase 2b clinical trial in the fourth quarter of 2021.

Manufacturing process development costs decreased approximately $2.5 million year ended December 31, 2022 compared to 2021. The decrease was related to the completion of enrollment in our rNAPc2 (AB201) international Phase 2b clinical trial in the fourth quarter of 2021.

R&D personnel costs decreased approximately $0.7 million for the year ended December 31, 2022, as compared to 2021. In July 2022, we implemented a strategic reduction of our workforce by approximately 67%, or 12 employees. Personnel reductions were primarily focused in research and development and general and administrative functions. The restructuring was a result of our decision to manage our operating costs and expenses. During the year ended December 31, 2022, we recorded total restructuring charges of approximately $755,000, of which $470,000 and $285,000 were recognized in research and development and general and administrative expenses, respectively, in connection with the restructuring, all in the form of one-time termination benefits.

R&D expense in 2023 is expected to be lower than 2022, as we completed our rNAPc2 (AB201) international Phase 2b clinical trial in the fourth quarter of 2021.

General and Administrative Expenses

General and administrative, or G&A, expenses primarily consist of personnel costs, consulting and professional fees, insurance, facilities and depreciation expenses, and various other administrative costs.

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G&A expenses were $5.8 million for the year ended December 31, 2022, compared to $5.5 million for 2021, an increase of approximately $0.3 million. The increase in expenses during 2022 was primarily a result of increases in professional fees and consulting costs and one-time termination benefits discussed above in 2022.

G&A expenses in 2023 are expected to be consistent with those in 2022 as we maintain administrative activities to support our ongoing operations.

Interest and Other Income

Interest and other income was $675,000 of interest income for the year ended December 31, 2022 as compared to $13,000 for 2021, resulting in an increase of $662,000. We expect interest income in 2023 to be consistent with 2022, as we continue to use our cash and cash equivalents to fund our operations, offset by higher interest rates.

Other Expense

Other expense was $5,000 for the year ended December 31, 2022. There was no other expense for the year eneded December 31, 2021. The amounts were nominal to our overall operations. Based on our current capital structure, other expense is expected to be negligible in 2023.

Liquidity and Capital Resources

Cash and Cash Equivalents

As of December 31, 2022, we had total cash and cash equivalents of approximately $42.4 million, as compared to $53.4 million as of December 31, 2021. The net decrease of $10.9 million during the year primarily reflects cash used in operating activities during the year ended December 31, 2022.

Cash Flows from Operating, Investing and Financing Activities

Net cash used in operating activities for the year ended December 31, 2022 decreased approximately $7.8 million compared with 2021. This was primarily due to lower outflows related to changes in operating assets and liabilities and a lower net loss in 2022, as discussed in Results of Operations above.

Net cash used in investing activities for the years ended December 31, 2022 and 2021 was $2,000 and $43,000, respectively, for the purchase of property and equipment.

There were no financing activities in the year ended December 31, 2022. Net cash provided by financing activities was $23.1 million for the year ended December 31, 2021 related to net proceeds from sales of our common stock in our “at the market” equity offering.

Sources and Uses of Capital

Our primary sources of liquidity to date have been capital raised from issuances of shares of our preferred and common stock. The primary uses of our capital resources to date have been to fund operating activities, including research, clinical development and drug manufacturing expenses, license payments, and spending on capital items.

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In July 2020, we entered into a sales agreement with a placement agent to sell, from time to time, our common stock having an aggregate offering price of up to $54.0 million, in an “at the market offering.” As of February 2021, we had sold an aggregate of 9,928,272 shares of our common stock pursuant to the terms of such sales agreement for aggregate gross proceeds of approximately $54.0 million. Net proceeds received in this offering were approximately $52.2 million, after deducting expenses for executing the “at the market offering” and commissions paid to the placement agent.

In April 2021, we amended the new sales agreement and the amount available for the offering under our prospectus to our registration statement on Form S-3 (No. 333-254585). As of February 22, 2023, the amount available for the offering under the prospectus supplement is subject to the limitation of not selling a total value amount of shares exceeding more than one-third of our public float in any 12-month period, which as of February 22, 2023 would have been approximately $8.8 million.

Our ability to execute our development programs in accordance with our projected time line depends on a number of factors, including, but not limited to, the following:

•
the costs and timing for the potential additional clinical trials in order to gain possible regulatory approval for Gencaro, rNAPc2 or any other product candidate;

•
the market price of our stock and the availability and cost of additional equity capital from existing and potential new investors;

•
our ability to retain the listing of our common stock on the Nasdaq Capital Market;

•
our ability to control costs associated with our operations;

•
general economic and industry conditions affecting the availability and cost of capital, including as a result of deteriorating market conditions due to investor concerns regarding inflation and continued hostilities between Russia and Ukraine;

•
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

•
the terms and conditions of our existing collaborative and licensing agreements.

We believe our cash and cash equivalents as of December 31, 2022 will be sufficient to fund our operations through the middle of fiscal year 2024. Our review of our strategic options may impact this projection. Conducting a Phase 3 PRECISION-AF trial would likely require additional financing. However, changing circumstances may cause us to consume capital significantly faster or slower than currently anticipated. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate; therefore, we may have to raise additional capital for other clinical trials. Initiating any Phase 3 clinical trial of Gencaro will require additional financing. We may not be able to raise sufficient capital on acceptable terms, or at all, to continue development and potential commercialization Gencaro or to otherwise continue operations and may not be able to execute any strategic transaction.

In April 2022, the Board of Directors established a Special Committee and, in May 2022, retained Ladenburg Thalmann & Co. Inc. to evaluate strategic options, including transactions involving a merger, sale of all or part of our assets, or other alternatives with the goal of maximizing stockholder value. We believe there are multiple potential opportunities to enhance value for our shareholders. We do not have a defined timeline for the strategic review process and the review may not result in any specific action or transaction.

Contractual Obligation and Commitments

In December 2022, the Board of Directors approved retention bonuses for certain employees, subject to continued employment with us through the earlier of a change in control of our company or certain clinical development decisions totaling $265,000, none of which was accrued as of December 31, 2022.

On August 29, 2020 the Company entered into a lease agreement for approximately 5,200 square feet of office facilities in Westminster, Colorado which serves as the Company’s primary business office effective October 1, 2020 (October 2020 Lease). The lease term is 42 months beginning October 1, 2020 and includes an option to renew for an additional 36 month term at the then prevailing rental rate. The exercise of the lease renewal option is at the Company’s sole discretion. The amounts recorded assume the Company will exercise its renewal option. In June 2021, the Company entered into a sublease agreement for approximately 3,000 square feet of additional office facilities in the Company’s primary business office (2021 Lease). The sublease term is 29 months beginning June 2021, with no renewal option. The leases include real estate taxes and insurance, which is not a lease component and is not included in the lease obligation. In addition, common area maintenance charges are based on actual costs incurred and are a non-lease component that is not included in the lease obligation. Rent expense, which is included in general and administrative expense, under these leases for the years ended December 31, 2022 and 2021 was $125,000 and $109,000, respectively.

We have licensed worldwide rights to all preclinical and clinical data through the BEST trial for development of bucindolol. The patents that were the subject of this license are expired. If the license agreement is deemed enforceable, we would incur milestone and

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royalty obligations upon the occurrence of certain events, including if the FDA grants marketing approval for Gencaro, upon regulatory marketing approval in Europe and Japan and based on achievement of specified product sales levels.

Critical Accounting Policies and Estimates

A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are described in Note 1 of “Notes to Financial Statements” included within Item 8 in this report, we believe the following critical accounting policy affected our most significant judgments, assumptions, and estimates used in the preparation of our financial statements and, therefore, is important in understanding our financial condition and results of operations.

Accrued Outsourcing Expenses

As part of the process of preparing our financial statements, we are required to estimate accrued outsourcing expenses. This process involves identifying services that third parties have performed on our behalf and estimating the level of service performed and the associated cost incurred for these services as of the balance sheet date. Examples of estimated accrued outsourcing expenses include contract service fees, such as fees payable to contract manufacturers in connection with the production of materials related to our drug product, and service fees from clinical research organizations. We develop estimates of liabilities using our judgment based upon the facts and circumstances known at the time.

Indemnifications

In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify certain parties from any losses incurred relating to the services they perform on our behalf or for losses arising from certain events as defined within the particular contract. Such indemnification obligations may not be subject to maximum loss clauses. We have entered into indemnity agreements with each of our directors, officers and certain employees. Such indemnity agreements contain provisions, which are in some respects broader than the specific indemnification provisions contained in Delaware law. We also maintain an insurance policy for our directors and executive officers insuring against certain liabilities arising in their capacities as such.

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

We have included or incorporated by reference into this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report on Form 10-K, and from time to time our management may make, statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements may be identified by words including “anticipate,” “plan,” “believe,” “intend,” “estimate,” “expect,” “should,” “may,” “potential” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our website.

Overview

We are a clinical-stage biopharmaceutical company applying a precision medicine approach to the development and commercialization of targeted therapies for cardiovascular diseases. Precision medicine refers to the tailoring of medical treatment to the individual characteristics of patients, using genomic, non-genomic biomarker and other information that extends beyond routine diagnostic categorization. We believe that when implemented correctly precision medicine can enhance therapeutic response, improve patient outcomes, and reduce healthcare costs.

Our lead product candidates are rNAPc2 (AB201) as a potential treatment for COVID-19, the disease syndrome caused by the SARS-CoV-2 virus, and potentially other viral diseases and Gencaro™ (bucindolol hydrochloride) for the treatment of atrial fibrillation, or

45

AF, in patients with chronic heart failure, or HF. rNAPc2 targets COVID-19 patients with biomarker evidence of coagulopathy, while Gencaro is being developed for patients who have a genotype that identifies a drug target associated with heightened efficacy.

rNAPc2 (AB201) for treatment of COVID-19

Recombinant Nematode Anticoagulant Protein c2, or rNAPc2 (AB201), is a protein therapeutic in clinical development as a potential treatment for patients with COVID-19. Based on its unique mechanism of action, development history and the clinical evidence from the SARS-CoV-2 pandemic, we believe rNAPc2 has potential to be a beneficial therapy for patients with this serious viral disease. We initiated a Phase 2 clinical trial of rNAPc2 as a potential treatment for patients hospitalized with COVID-19 in the fourth quarter of 2020 and completed patient enrollment in the fourth quarter 2021.

Certain patients with severe COVID-19 disease exhibit thrombotic complications and other inflammatory responses suggesting potential dysregulation of the coagulation and immune systems. rNAPc2 is a potent inhibitor of tissue factor, a cellular receptor responsible for initiation of the primary coagulation pathway and appears to be the major activator of the coagulation cascade during viral infection. Tissue factor is also implicated in the immune system inflammatory response to viral infections and in the process of viral dissemination during infection. We believe that evidence from the pandemic implicates tissue factor pathways as an important part of the COVID-19 disease process, and provides a rationale to test rNAPc2 as a potential therapeutic for COVID‑19 for its anticoagulant and potential anti-inflammatory properties.

rNAPc2 was originally developed for potential use as an anticoagulant due to its inhibition of the TF-initiated coagulation process. It was evaluated for the prevention of thrombosis in Phase 1 and Phase 2 clinical studies involving over 800 subjects and demonstrated both safety and efficacy in these studies. rNAPc2 has also been investigated as a potential therapeutic for severe viral infections other than COVID-19. Research has shown that viral infections can provoke dysregulated activation of the TF pathway, resulting in abnormal systemic coagulation and related inflammation, leading to potential organ failure and mortality. For this reason, rNAPc2 was tested as a therapeutic in non-human primates, or NHPs, in studies against lethal doses of the Ebola and Marburg viruses, where it showed evidence of efficacy in the form of mortality reduction, decreases in inflammatory biomarkers and, evidence of reduced disseminated intravascular coagulation, or DIC. DIC is a serious condition that causes abnormal blood clotting throughout the body's blood vessels.

SARS-CoV-2 is a new coronavirus identified in late 2019 that belongs to a family of enveloped RNA viruses that include Middle East Respiratory Syndrome, or MERS, and Severe Acute Respiratory Syndrome (SARS-CoV-1), both of which caused serious human infections of the respiratory system. The disease caused by the SARS-CoV-2 virus has been designated COVID-19. Since this outbreak was first reported in late 2019, there have been over 435 million confirmed cases of COVID-19 and over 5.9 million deaths worldwide attributed to the virus (as of March 2022).

COVID-19 is associated with a high incidence of both arterial and venous coagulation-related adverse events in large and small blood vessels. These include, stroke, myocardial infarction, or MI, (i.e., heart attack) and pulmonary emboli; as well as, blockage of the smaller peripheral blood vessels in the fingers/toes (COVID-digit). This syndrome is so frequently observed in COVID-19 that it has received the name of COVID-19 Associated Coagulopathy, or CAC. The underlying pathology of CAC is believed to result from thrombo-inflammatory processes triggered by the viral infection. A commonly used biomarker for assessing the presence of abnormal coagulation is a D-dimer test, which is elevated (greater than 0.5) in approximately 40% to 75% of hospitalized COVID-19 patients and is associated with adverse clinical outcomes. Some researchers believe that this and other evidence points to dysregulation of TF pathways in COVID-19 patients that result in the development of thrombotic complications.

As a result of the observed role of coagulation disorders in COVID-19, patients who are hospitalized with the disease are commonly giving anti-coagulant therapy, in particular heparin. We believe that there is a medical need for a COVID-19 therapy that provides anticoagulation therapy and directly inhibits the TF pathway and the inflammatory and viral dissemination processes that may be initiated by TF.

rNAPc2 has shown potential in addressing the coagulation disorder caused by severe viral infections. In preliminary, non-human studies in NHPs against lethal doses of the Ebola and Marburg virus, rNAPc2 lowered D-dimer levels, reduced mortality and exhibited anti-inflammatory effects. We believe more recent research supports our belief that rNAPc2 has the ability to inhibit the activity of TF in multiple processes that contribute to severe viral disease. Taken together, we believe this evidence suggests that rNAPc2 may have therapeutic benefits for patients with serious COVID-19 infections and the accompanying high risk of thrombosis. To our knowledge, rNAPc2 is the only NME anticoagulant, and the only tissue factor inhibitor, currently under evaluation for COVID-19.

As a therapeutic aimed at a host response to a disease syndrome, we believe rNAPc2 potentially could be used in combination with other antiviral drugs. We believe its potential efficacy is not linked to a specific viral genome and may not be diminished by genetic drift or the development of new strains of the SARS-CoV-2 virus. As a therapeutic addressing a disease, we believe rNAPc2 may have broad spectrum potential against multiple pathogens that have disease elements in common with COVID‑19, such as other coronaviruses and other RNA viruses. Therefore, we believe that rNAPc2 has therapeutic potential for future viral outbreaks beyond the current pandemic.

rNAPc2 is a single-chain, 85 amino acid, recombinant protein administered subcutaneously, that has previously been evaluated under three FDA Investigational New Drug, or IND, applications in six Phase 1 and three Phase 2 clinical studies in the United States and

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Europe. These clinical trials primarily examined the safety, dosing and anticoagulation effects of rNAPc2 in patients with acute coronary syndromes, in patients undergoing knee replacement surgery and in patients undergoing percutaneous coronary interventions. In these trials, involving more than 800 human patients with over 700 exposed to drug, rNAPc2 was generally well-tolerated with a safety profile comparable to commercially available anticoagulants. rNAPc2 is manufactured in an engineered yeast strain by an established methodology following current Good Manufacturing Practices, or cGMP, and we believe this process can be readily scaled to commercial quantities. FDA granted rNAPc2 Orphan Drug Designation status in 2014 for the treatment of viral hemorrhagic fever post-exposure to Ebola virus, but human clinical trials were not conducted.

In October 2020, FDA approved the IND application for rNAPc2 as a potential treatment for patients hospitalized with COVID-19 and it received a Fast-Track designation in November 2020. We initiated the Phase 2b clinical trial of rNAPc2 (AB201), ASPEN-COVID-19, in patients hospitalized with COVID-19 in the fourth quarter of 2020. In July 2021, we increased the ASPEN-COVID-19 clinical trial target enrollment from 100 to 160 patients in an effort to increase the sample size for determining if there are differences in the two rNAPc2 dose regimens being investigated, to decrease variance in the standard of care heparin control arm, in recognition of the study being conducted in different geographic regions and to potentially account for evolving changes in the clinical course of COVID-19. In October 2021, the Data and Safety Monitoring Committee, or DSMC, completed a pre-specified interim analysis and, based on the DSMC’s review of approximately 75% of the projected final efficacy and safety data, recommended completion of the clinical trial with no modifications to the clinical trial design. We anticipate announcing topline data from this approximately 160 patient international Phase 2b clinical trial in the last week of March 2022.

We are evaluating rNAPc2 as a treatment for patients hospitalized with COVID-19 who are at high risk for thrombotic complications, as indicated by elevated D-dimer levels. The Phase 2b clinical trial is designed to be a randomized comparison of two-dose regimens of rNAPc2 versus heparin prescribed per local standard of care. The primary endpoint of the clinical trial is the change in D-dimer level from baseline to Day 8 relative to standard of care heparin. Secondary endpoints include time to recovery for eligibility of hospital discharge, and the clinical composite of all-cause mortality, thrombosis, need for organ support or re-hospitalization within 30 days from randomization. We plan to meet with the FDA to review the Phase 2b clinical study data.

The clinical trial is being managed in collaboration with the Colorado Prevention Center, or CPC, the University of Colorado's Academic Research Organization with extensive experience in managing vascular and anticoagulation clinical trials.

We have financed the development of rNAPc2 through public equity sales. Our rNAPc2 development plans, including the timeline, depend on our ability to enroll patients during the COVID-19 pandemic, the results of our Phase 2b clinical trial, FDA guidance, and availability of drug product, all of which are currently uncertain.

We own the clinical development program of rNAPc2, including the Phase 2b clinical development. If rNAPc2 is successfully developed, we believe it will have intellectual property protection, including 12 years of market exclusivity as an innovative biologic product under FDA regulation in the United States, 10 years data protection exclusivity in the European Union, or EU, and potentially patent protection in addition to this. We have filed an international patent application for the use of rNAPc2 in COVID-19 and plan to prosecute this patent in the United States and other markets. If this patent issues in the United States, we believe it could provide intellectual property protection into approximately 2040. We plan to pursue strategic co-development and partnering opportunities for rNAPc2 development and commercialization.

In July 2021, we entered into a patent assignment agreement, or the Agreement, with the University Medical Center of Johannes Gutenberg University Mainz, Germany. Under the terms of the Agreement, we received exclusive world-wide patent rights relating to the use of rNAPc2 as a potential treatment for COVID-19, and other indications, based on the research and discoveries from Univ.-Prof. Dr. Wolfram Ruf, the Scientific Director and Alexander von Humboldt Professor at the Center for Thrombosis and Hemostasis (CTH) of the University Medical Center Mainz, and his collaborators. We have upfront and potential milestone obligations to the University Medical Center Mainz that could total approximately €1.6 million and royalty obligations in the low single digit range, if rNAPc2 receives regulatory approval and is commercialized. The term of the Agreement extends to the date of expiration of the last to expire of any of the assigned patent.

Gencaro™ (bucindolol hydrochloride) for Atrial Fibrillation

Gencaro™ (bucindolol hydrochloride) is a pharmacogenetically-targeted beta-adrenergic receptor antagonist with mild vasodilator properties that we are developing for the treatment of atrial fibrillation in patients with heart failure. We believe the pharmacology of Gencaro is unique and its efficacy can be enhanced by prescribing it to patients with a common genotypic variant that is present in approximately 50% of the North American and European general populations. This gene can be detected with a simple genetic test.

We are developing Gencaro to treat atrial fibrillation, or AF, in patients with chronic heart failure, or HF. AF is the most common form of cardiac arrhythmia, a disruption of the heart’s normal rhythm or rate. HF is a chronic condition in which the heart is unable to pump enough blood to meet the body’s needs. AF and HF commonly occur together. In HF patients, the development of AF leads to worsening symptoms, and increased risk of hospitalization and death. Current treatment options for AF in HF patients are limited, and can be invasive, costly and dangerous.

Our development plan for Gencaro focuses on the treatment of AF in patients with higher ejection fraction HF, those who have an ejection fraction, or EF, of 40% and higher who also have the genotype we believe is optimal for Gencaro efficacy. This population of

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HF encompasses more than half of all HF patients in the United States and Europe. There are currently few approved or effective drug therapies to treat AF or HF in this patient population.

Our development plan for Gencaro is based on our recently published analysis of the Phase 2b clinical trial of Gencaro for the prevention of AF in HF patients, known as GENETIC-AF. This analysis showed novel results for Gencaro in patients in the clinical trial with EF’s of 40% and higher. The Phase 3 pivotal clinical trial of Gencaro conducted under an SPA will include secondary endpoints that are intended to capture some of this new information, such as a reduction in the need to deploy rhythm control interventions including electrical cardioversion, catheter ablation and use of anti-arrhythmic drugs and avoidance of drug-related complications such as bradycardia. Based on these analyses, we were issued a United States patent in February 2021 for the use of Gencaro in this patient population. We believe this patent will substantially extend the patent protection for our planned development of Gencaro into 2039. We are seeking similar patent protection in other countries.

We currently have an agreement with the FDA, known as a Special Protocol Assessment, or SPA, for the requirements of a Gencaro Phase 3 clinical trial, PRECISION-AF, that would support approval of Gencaro if successful.

We believe that patients with HF and AF represent a major unmet medical need, and this need is most pronounced in patients with EF values of 40% and above. This EF range constitutes more than half of all chronic HF in the United States and Europe, as well as in Japan and China, and there are currently few approved, effective or guideline-recommended therapies for these patients to treat either their AF or HF. AF is a very common complication in these patients, with estimates of AF incidence ranging from 40% to 60%. Beta-blockers approved for HF are commonly used off-label to control heart rate in these patients, but they are not considered effective in preventing AF and none are approved for patients with EF ≥ 40%. Other anti-arrhythmic drugs approved for the treatment of AF have adverse side effects and in HF patients are either contraindicated or have label warnings for use due to an increased risk of mortality. Interventional procedures for AF, such as catheter ablation and electrical cardioversion, are invasive, expensive, and often temporary; these interventions also typically require the continued use of beta blockers and other anti-arrhythmic drugs post-intervention.

We believe that Gencaro, if approved, may be a safe and more effective therapy for the treatment of higher ejection fraction HF patients with AF. We believe there are several potentially important attributes that would differentiate Gencaro from existing therapies, including:

We have an international patent portfolio for Gencaro in the United States, the EU, and other major markets, as well as new chemical entity status, including a new patent that we believe will give us a strong intellectual property position to at least approximately 2039 in the United States; we have filed applications similar to this new patent in international territories. We have developed a laboratory platform for the diagnostic test that would be used to prescribe Gencaro; this platform was approved by FDA for use in the Phase 2B clinical trial. We retain all rights to this test platform; we expect to use it in future clinical trials, and we believe it could be one of multiple diagnostic platforms used for commercialization.

To support the continued development of rNAPc2 and Gencaro, we will need additional financing to fully fund the planned clinical trials, and our general and administrative costs through the clinical trials’ projected completion and potential commercialization. Considering the substantial time and costs associated with the development of rNAPc2 and Gencaro and the risk that we may be unable to raise a significant amount of capital on acceptable terms, we are also pursuing co-development and commercialization partnering opportunities with large pharmaceutical and/or specialty pharmaceutical companies and may pursue a strategic combination or other strategic transactions. If we are unable to obtain sufficient financing or are unable to complete a strategic transaction, we may discontinue our development activities on rNAPc2 or Gencaro or discontinue our operations.

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We believe our cash and cash equivalents as of December 31, 2021 will be sufficient to fund our operations through the middle of fiscal year 2023. Conducting a Phase 3 rNAPc2 clinical trial or the Phase 3 PRECISION-AF trial would likely require additional financing. However, changing circumstances may cause us to consume capital significantly faster or slower than currently anticipated. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate; therefore, we may have to raise additional capital for other clinical trials of rNAPc2. Initiating any Phase 3 clinical trial of Gencaro is dependent on sustained improvement in the COVID-19 pandemic and will require additional financing.

In July 2020, we entered into a sales agreement with a placement agent to sell, from time to time, our common stock having an aggregate offering price of up to $54.0 million, in an “at the market offering.” As of February 2021, we had sold an aggregate of 9,928,272 shares of our common stock pursuant to the terms of such sales agreement for aggregate gross proceeds of approximately $54.0 million. Net proceeds received in this offering were approximately $52.2 million, after deducting expenses for executing the “at the market offering” and commissions paid to the placement agent.

In April 2021, we amended the new sales agreement and the amount available for the offering under our prospectus to our registration statement on Form S-3 (No. 333-254585). As of March 14, 2022, the amount available for the offering under the prospectus supplement is subject to the limitation of not selling a total value amount of shares exceeding more than one-third of our public float in any 12-month period, which as of March 11, 2022 would have been approximately $10.5 million.

In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. We do not expect a material financial effect as a result of the pandemic. However, if the pandemic continues to be a severe worldwide crisis, it could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Results of Operations

Research and Development Expenses

Research and development, or R&D, expense is comprised primarily of personnel costs, clinical development, manufacturing process development, and regulatory activities and costs. Our R&D expense continues to be almost entirely generated by our activities relating to the development of rNAPc2 (AB201).

Our research and development expenses were $13.8 million for the year ended December 31, 2021 as compared to $5.0 million for 2020. The $8.8 million increase in research and development expenses in 2021 as compared to 2020 was primarily related to the initiation of our rNAPc2 (AB201) clinical trial in the second half of 2020.

Clinical expense increased approximately $4.9 million for the year ended December 31, 2021. The increase was related to the initiation of our rNAPc2 (AB201) clinical trial in the second half of 2020.

Manufacturing process development costs increased approximately $2.4 million year ended December 31, 2021 compared to 2020. The increase was a result of production of clinical trial materials used in our rNAPc2 (AB201) clinical trial that was initiated in the second half of 2020.

R&D personnel costs increased approximately $1.1 million for the year ended December 31, 2021, as compared to 2020. The remaining increase was primarily a result of higher outside services and consulting costs related to initiation of our rNAPc2 (AB201) clinical trial.

R&D expense in 2022 is expected to be consistent with 2021.

General and Administrative Expenses

General and administrative, or G&A, expenses primarily consist of personnel costs, consulting and professional fees, insurance, facilities and depreciation expenses, and various other administrative costs.

G&A expenses were $5.5 million for the year ended December 31, 2021, compared to $4.8 million for 2020, an increase of approximately $0.7 million. The increase in expenses during 2021 comprised primarily of increased personnel and insurance costs, offset by lower legal costs in 2021, as compared to 2020.

G&A expenses in 2022 are expected to be consistent with those in 2021 as we maintain administrative activities to support our ongoing operations.

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Interest and Other Income

Interest and other income was $13,000 for the year ended December 31, 2021 as compared to $28,000 for 2020, resulting in an decrease of $15,000. We expect interest income to be lower in 2022 than in 2021, as we continue to use our cash and cash equivalents to fund our operations.

Interest Expense

There was no interest expense in 2021. Interest expense was $9,000 for the year ended December 31, 2020. The amounts were nominal to our overall operations. Based on our current capital structure, interest expense is expected to be negligible in 2022.

Income Tax Benefit

Income tax benefit for the year ended December 31, 2020 was $9,000. The income tax benefit in 2020 was primarily related to the reduction in the recorded valuation allowance as a result of the realization of certain credit carryforwards under the Protecting Americans from Tax Hikes Act of 2015, or PATH Act. In 2020, the benefit was fully monetized and we do not expect additional significant income tax benefit in 2022.

Liquidity and Capital Resources

Cash and Cash Equivalents

As of December 31, 2021, we had total cash and cash equivalents of approximately $53.4 million, as compared to $49.1 million as of December 31, 2020. The net increase of $4.3 million during the year primarily reflects net proceeds of approximately $23.1 million from the issuance of common stock, offset by $18.8 million of cash used to fund operating activities.

Cash Flows from Operating, Investing and Financing Activities

Net cash used in operating activities for the year ended December 31, 2021 increased approximately $11.0 million compared with 2020. This was primarily due to a higher net loss in 2021, as discussed in more detail above, offset by changes in operating assets and liabilities.

Net cash used in investing activities for the years ended December 31, 2021 and 2020 was $43,000 and $19,000, respectively, for the purchase of property and equipment.

Net cash provided by financing activities was $23.1 million for the year ended December 31, 2021 related to net proceeds from sales of our common stock in our “at the market” equity offering. Net cash provided by financing activities was $48.5 million for year ended December 31, 2020 representing $48.9 million in net proceeds from sales of our common stock in our registered direct equity offering and our “at the market” equity offering in the period, less $0.4 million of payments on a vendor finance arrangement.

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Sources and Uses of Capital

Our primary sources of liquidity to date have been capital raised from issuances of shares of our preferred and common stock. The primary uses of our capital resources to date have been to fund operating activities, including research, clinical development and drug manufacturing expenses, license payments, and spending on capital items.

In July 2020, we entered into a sales agreement with a placement agent to sell, from time to time, our common stock having an aggregate offering price of up to $54.0 million, in an “at the market offering.” As of February 2021, we had sold an aggregate of 9,928,272 shares of our common stock pursuant to the terms of such sales agreement for aggregate gross proceeds of approximately $54.0 million. Net proceeds received in this offering were approximately $52.2 million, after deducting expenses for executing the “at the market offering” and commissions paid to the placement agent.

In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. We do not expect a material financial effect as a result of the pandemic. However, if the pandemic continues to be a severe worldwide crisis, it could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our ability to execute our development programs in accordance with our projected time line depends on a number of factors, including, but not limited to, the following:

We believe our cash and cash equivalents as of December 31, 2021 will be sufficient to fund our operations through the middle of fiscal year 2023. Conducting a Phase 3 rNAPc2 clinical trial or the Phase 3 PRECISION-AF trial would likely require additional financing. However, changing circumstances may cause us to consume capital significantly faster or slower than currently anticipated. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate; therefore, we may have to raise additional capital for clinical trials of rNAPc2. Initiating any Phase 3 clinical trial of Gencaro is dependent on our obtaining additional financing. We may not be able to raise sufficient capital on acceptable terms, or at all, to continue development and potential commercialization of rNAPc2 or Gencaro or to otherwise continue operations and may not be able to execute any strategic transaction.

Critical Accounting Policies and Estimates

A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are described in Note 1 of “Notes to Financial Statements” included within Item 8 in this report, we believe the following critical accounting policy affected our most significant judgments, assumptions, and estimates used in the preparation of our financial statements and, therefore, is important in understanding our financial condition and results of operations.

Accrued Outsourcing Expenses

As part of the process of preparing our financial statements, we are required to estimate accrued outsourcing expenses. This process involves identifying services that third parties have performed on our behalf and estimating the level of service performed and the associated cost incurred for these services as of the balance sheet date. Examples of estimated accrued outsourcing expenses include contract service fees, such as fees payable to contract manufacturers in connection with the production of materials related to our drug product, and service fees from clinical research organizations. We develop estimates of liabilities using our judgment based upon the facts and circumstances known at the time.

Indemnifications

In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify certain parties from any losses incurred relating to the services they perform on our behalf or for losses arising from certain events as defined within

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the particular contract. Such indemnification obligations may not be subject to maximum loss clauses. We have entered into indemnity agreements with each of our directors, officers and certain employees. Such indemnity agreements contain provisions, which are in some respects broader than the specific indemnification provisions contained in Delaware law. We also maintain an insurance policy for our directors and executive officers insuring against certain liabilities arising in their capacities as such.