DEFM14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  ☒                             Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material under §240.14a-12

AERPIO PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

  No fee required.
  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)  

Title of each class of securities to which transaction applies

 

  (2)  

Aggregate number of securities to which transaction applies:

 

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

  (4)  

Proposed maximum aggregate value of transaction:

 

  (5)  

Total fee paid:

 

  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

Amount Previously Paid:

 

     

  (2)  

Form, Schedule or Registration Statement No.:

 

     

  (3)  

Filing Party:

 

     

  (4)  

Date Filed:

 

     

 

 

 


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LOGO

Dear Aerpio Stockholders:

You are cordially invited to attend the special meeting of the stockholders of Aerpio Pharmaceuticals, Inc. a Delaware corporation (referred to as “Aerpio”) which will be held at 10:00 A.M., Eastern Time, on August 17, 2021 (referred to as the “special meeting”). The special meeting will be a virtual stockholder meeting, conducted solely through remote audio access via a webcast at www.virtualshareholdermeeting.com/ARPO2021SM. In order to attend the virtual special meeting and vote online, you will need the 16-digit control number included on your proxy card or on the instructions that accompanied your proxy materials. This is an important special meeting that affects your investment in Aerpio.

On May 16, 2021, Aerpio and Aadi Bioscience, Inc. (referred to as “Aadi”) entered into an Agreement and Plan of Merger (referred to as the “merger agreement”), pursuant to which a wholly-owned subsidiary of Aerpio will merge with and into Aadi with Aadi surviving as a wholly-owned subsidiary of Aerpio (referred to as the “merger”). At the effective time of the merger, each share of Aadi’s common stock, par value $0.0001 per share, (referred to as “Aadi common stock”), outstanding immediately prior to the effective time of the merger will be converted into the right to receive approximately 4.9152 shares of Aerpio’s common stock, par value $0.0001 per share (referred to as “Aerpio common stock”), subject to adjustment to account for the effect of a reverse stock split of Aerpio’s common stock, at a ratio mutually agreed to by Aerpio and Aadi in the range of one new share for every five to 15 shares outstanding (or any whole number in between), to be implemented immediately prior to and contingent upon the consummation of the merger as discussed in this proxy statement, and further adjusted based on Aerpio’s net cash immediately prior to the closing of the merger. In addition, as more fully discussed in this proxy statement, each holder of Aerpio common stock as of immediately prior to the effective time of the merger shall be entitled to one contractual contingent value right issued by Aerpio, subject to and in accordance with the terms and conditions of the contingent value rights agreement to be entered into at or prior to the effective time of the merger, for each share of Aerpio common stock held by such holder. Following the merger, Aerpio will change its name to “Aadi Bioscience, Inc.” (referred to as the “combined company”).

Under the terms of the merger agreement, the number of shares of Aerpio common stock to be issued to Aadi’s stockholders, at the closing of the merger will be determined based on an exchange ratio, which will be calculated based on the total number of outstanding shares of Aerpio common stock and Aadi common stock, each on a fully-diluted basis, and the respective valuations of Aadi and Aerpio, as of immediately prior to the closing of the merger. As of the effective date of the merger agreement, the closing date valuation of Aadi (referred to as the “Aadi valuation”) is anticipated to be $82,500,000, and the closing date valuation of Aerpio (referred to as the “Aerpio valuation”) is anticipated to be $41,000,000 but is subject to adjustment as described below. Accordingly, if the closing of the merger occurs on or prior to July 26, 2021 and there is no adjustment to the Aerpio valuation as described below, then immediately following the effective time of the merger, Aadi’s stockholders will own or hold rights to acquire 66.8% of the combined company, on a fully-diluted basis, and Aerpio’s stockholders will own or hold rights to acquire 33.2% of the combined company, on a fully-diluted basis. Without giving effect to the proposed reverse stock split of Aerpio common stock or the PIPE financing described elsewhere in this proxy statement, and based on the foregoing percentages as of a July 26, 2021 closing and Aerpio’s and Aadi’s capitalization as of June 14, 2021, the exchange ratio for the Aadi common stock would be approximately 4.9152 shares of Aerpio common stock for each share of Aadi common stock (approximately 96,118,961 total shares of Aerpio common stock would be issued to Aadi’s stockholders, on a fully diluted basis). There will be no adjustment to the number of shares of Aerpio common stock to be issued to Aadi’s stockholders based on the market value of Aerpio common stock, and the market value of Aerpio’s common stock as of the date of the closing of the merger may vary significantly from the market value as of the date of this proxy statement.


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The Aerpio target net cash and lower target net cash and upper target net cash amounts will be reduced by $21,667 per day beginning on July 26, 2021 through the closing date of the merger, potentially resulting in a corresponding adjustment to the exchange ratio and to the ownership percentage of Aadi’s current stockholders in the combined company. For a complete description of how the ownership percentages and exchange ratio will be determined at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration and Exchange Ratio” beginning on page 146 of this proxy statement.

In addition, on May 16, 2021, Aerpio entered into subscription agreements (referred to as the “subscription agreements”) with the purchasers named therein (referred to as the “PIPE investors”), pursuant to which Aerpio agreed to sell shares of Aerpio common stock and pre-funded warrants to acquire Aerpio common stock (referred to as “Aerpio pre-funded warrants”) for an aggregate purchase price of approximately $155,000,000 (collectively, referred to as the “PIPE financing”). The closing of the PIPE financing is expected to occur concurrently with, and is conditioned upon, the closing of the merger. Following the closing of the PIPE financing, the former Aadi stockholders are expected to own approximately 29.6% of the outstanding shares of Aerpio common stock on a fully-diluted basis, the stockholders of Aerpio as of immediately prior to the effective time of the merger are expected to own approximately 14.7% of the outstanding shares of Aerpio common stock on a fully-diluted basis, and the PIPE investors are expected to own approximately 55.7% of the outstanding shares of Aerpio common stock on a fully-diluted basis.

At the special meeting:

 

   

Aerpio will ask its stockholders to approve the issuance of Aerpio common stock pursuant to the merger agreement, which approval is necessary to complete the transactions contemplated by the merger agreement and to approve the issuance of Aerpio common stock and Aerpio pre-funded warrants in connection with the PIPE financing, which approval is necessary to complete the transactions contemplated by the merger agreement. The issuance of these shares requires the approval of Aerpio’s stockholders under Aerpio’s certificate of incorporation. Pursuant to the rules of The Nasdaq Stock Market LLC (referred to as the “Nasdaq rules”), the issuance of Aerpio common stock in the merger and the PIPE financing also requires the approval of Aerpio’s stockholders because it exceeds 20% of the number of shares of Aerpio’s common stock outstanding prior to the issuance. Furthermore, the issuance of the shares requires the approval of Aerpio’s stockholders under the Nasdaq rules because it will result in a “change of control” of Aerpio (referred to as the “share issuance proposal” or “Proposal 1”);

 

   

Aerpio will ask its stockholders to approve an amended and restated certificate of incorporation, including to effect a reverse stock split of Aerpio common stock (referred to as the “reverse stock split”), which approval is also necessary to complete the transactions contemplated by the merger agreement. Upon the effectiveness of the amended and restated certificate of incorporation effecting the reverse stock split, the outstanding shares of Aerpio common stock will be combined into a lesser number of shares to be determined by Aerpio’s board of directors (referred to as the “Aerpio Board”) prior to the effective time of such amended and restated certificate of incorporation and public announcement by Aerpio (referred to as the “charter proposal” or “Proposal 2”);

 

   

Aerpio will ask its stockholders to approve an incentive award plan (referred to as the “equity incentive plan proposal” or “Proposal 3”);

 

   

Aerpio will ask its stockholders to approve an employee stock purchase plan (referred to as the “ESPP proposal” or “Proposal 4”); and

 

   

Aerpio will ask its stockholders, if necessary, if a quorum is present, to approve an adjournment or postponement of the special meeting for the purpose of soliciting additional proxies to approve the share issuance proposal and/or the charter proposal (referred to as the “adjournment proposal” or “Proposal 5”).

After careful consideration, the Aerpio Board has unanimously (other than abstentions) approved the merger agreement and the proposals referred to above, and has determined that they are advisable, fair and in the best interests of Aerpio’s stockholders. Accordingly, the Aerpio Board unanimously (other than abstentions)


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recommends that stockholders vote “FOR” the share issuance proposal, “FOR” the charter proposal, “FOR” the equity incentive plan proposal, “FOR” the ESPP proposal, and “FOR” the adjournment proposal.

Shares of Aerpio common stock are currently listed on Nasdaq under the symbol “ARPO.” After completion of the merger, it is expected that Aerpio common stock will trade on Nasdaq under the symbol “AADI.”

More information about Aerpio, Aadi and the proposed transactions are contained in the accompanying proxy statement. Aerpio urges you to read the proxy statement carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 20.

Your vote is important. Whether or not you expect to attend the virtual special meeting, please complete, date, sign and promptly return the accompanying proxy card in the enclosed postage paid envelope to ensure that your shares will be represented and voted at the special meeting. You can also vote your shares via the internet or by telephone as provided in the instructions set forth in the enclosed proxy card. If you hold your shares in “street name” through a broker, you should follow the procedures provided by your broker.

Aerpio is excited about the opportunities the merger brings to its stockholders, and we thank you for your consideration and continued support.

 

Yours sincerely,

/s/ Joseph Gardner, Ph.D.

Joseph Gardner, Ph.D.

Principal Executive Officer

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the merger described in this proxy statement or the Aerpio common stock to be issued in connection with the merger or determined if this proxy statement is accurate or adequate. Any representation to the contrary is a criminal offense.

This proxy statement is dated July 8, 2021 and is first being mailed to stockholders on or about July 8, 2021.


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LOGO

9987 CARVER ROAD

CINCINNATI, OHIO 45242

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON AUGUST 17, 2021.

To the Stockholders of Aerpio Pharmaceuticals, Inc.:

Notice is hereby given that a special meeting of stockholders of Aerpio Pharmaceuticals, Inc. (referred to as “Aerpio”) will be held virtually, conducted via live audio webcast at 10:00 AM, Eastern Time, on August 17, 2021, at www.virtualshareholdermeeting.com/ARPO2021SM, to consider and act upon the following matters:

 

  1.

To approve the issuance of Aerpio common stock pursuant to the Agreement and Plan of Merger, dated as of May 16, 2021 (referred to as the “merger agreement”), by and among Aerpio, Aspen Merger Subsidiary, Inc. (referred to as the “merger subsidiary”), a wholly-owned subsidiary of Aerpio, and Aadi Bioscience, Inc. (referred to as “Aadi”), and the issuance of Aerpio common stock pursuant to the merger agreement and the issuance of Aerpio common stock and Aerpio pre-funded warrants (referred to as the “PIPE financing”) pursuant to the subscription agreements, dated as of May 16, 2021 (referred to as the “subscription agreements”), by and among Aerpio and the purchasers named therein (referred to as the “PIPE investors”) and the resulting change of control of Aerpio pursuant to the Nasdaq rules (referred to as the “share issuance proposal” or “Proposal 1”);

 

  2.

To approve an amended and restated certificate of incorporation of Aerpio (referred to as the “charter proposal” or “Proposal 2”);

 

  3.

To approve the equity incentive award plan (referred to as the “equity incentive plan proposal” or “Proposal 3”);

 

  4.

To approve the employee stock purchase plan (referred to as the “ESPP proposal” or “Proposal 4”); and

 

  5.

To approve an adjournment or postponement of the special meeting for the purpose of soliciting additional proxies to approve Proposals 1 and/or 2 (referred to as the “adjournment proposal” or “Proposal 5”).

If Aerpio is to complete the merger with Aadi, stockholders must approve Proposals 1 and 2. The approval of Proposals 3, 4 or 5 is not a condition to the completion of the merger with Aadi; however, pursuant to the merger agreement, Aerpio and Aadi have each agreed that they will use commercially reasonable efforts to cause Aerpio’s stockholders to approve Proposals 3 and 4.

Aerpio common stock is the only type of security entitled to vote at the special meeting. Aerpio’s board of directors has fixed July 6, 2021 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof. Only holders of record of shares of Aerpio common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting. At the close of business on the record date, Aerpio had 47,477,084 shares of common stock outstanding and entitled to vote at the special meeting. Each holder of record of shares of common stock on the record date will be entitled to one vote for each share held on all matters to be voted upon at the special meeting.

Your vote is important. The affirmative vote of the holders of at least 66 2/3% of the outstanding shares of Aerpio common stock is required for approval of Proposals 1 and 2. The affirmative vote of the holders of a


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majority of the votes properly cast for or against such matter at the special meeting is required for approval of Proposals 3, 4 and 5. Whether or not you plan to attend the virtual special meeting virtually, please submit your proxy promptly by telephone or via the internet in accordance with the instructions on the enclosed proxy card or complete, date, sign and promptly return the accompanying proxy card in the enclosed postage paid envelope to ensure that your shares will be represented and voted at the special meeting. If you date, sign and return your proxy card without indicating how you wish to vote, your proxy will be voted in favor of Proposals 1 through 5.

 

By Order of the Board of Directors of Aerpio Pharmaceuticals, Inc.

/s/ Joseph Gardner, Ph.D.

Joseph Gardner, Ph.D.

Principal Executive Officer

July 8, 2021

Cincinnati, Ohio

THE AERPIO BOARD HAS DETERMINED AND BELIEVES THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE, FAIR AND IN THE BEST INTERESTS OF AERPIO AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY (OTHER THAN ABSTENTIONS) APPROVED EACH SUCH PROPOSAL. THE AERPIO BOARD RECOMMENDS THAT AERPIO’S STOCKHOLDERS VOTE “FOR” PROPOSALS 1, 2, 3, 4 AND 5.


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended (referred to as the “Exchange Act”), and the rules thereunder, contains a notice of meeting with respect to the special meeting of stockholders at which Aerpio’s stockholders will consider and vote on the proposals to approve the issuance of Aerpio common stock issuable to the holders of Aadi’s common stock pursuant to the merger agreement described in this proxy statement, the issuance of Aerpio common stock and Aerpio pre-funded warrants issuable to the PIPE investors and the resulting “change of control” of Aerpio under the Nasdaq rules, the amendment and restatement of Aerpio’s certificate of incorporation, including to effect a reverse stock split of Aerpio common stock to maintain the listing of Aerpio common stock on Nasdaq and consummate the merger and the PIPE financing, the adoption of an incentive award plan and an employee stock purchase plan and an adjournment or postponement of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 and/or 2.

Additional business and financial information about Aerpio can be found in documents previously filed by Aerpio with the U.S. Securities and Exchange Commission (referred to as the “SEC”). This information is available to you without charge on the SEC’s website (www.sec.gov). Aerpio stockholders will also be able to obtain the proxy statement, free of charge, from Aerpio by requesting copies in writing using the following contact information:

Aerpio Pharmaceuticals, Inc.

Attn: Secretary

9987 Carver Road

Cincinnati, OH 45242

Tel: (513) 985-11920

You may also request additional copies from Aerpio’s proxy solicitor, The Proxy Advisory Group, LLC, using the following contact information:

18 East 41st Street, 20th Floor

New York, NY 10017-6219

Stockholders Call: (212) 616-2181

To ensure timely delivery of these documents, any request should be made no later than August 10, 2021 to receive them before the special meeting. See “Where You Can Find Additional Information” beginning on page 284.

 


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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

     iv  

SUMMARY

     1  

The Companies

     1  

Summary of the Merger

     2  

Aerpio’s Reasons for the Merger

     3  

Aadi’s Reasons for the Merger

     4  

Opinion of Aerpio’s Financial Advisor

     4  

Overview of the Merger Agreement

     4  

Support Agreements

     7  

Lock-up Agreements

     8  

Contingent Value Rights Agreement

     8  

Private Placement and Subscription Agreement

     8  

Registration Rights Agreement

     8  

Management Following the Merger

     9  

The Board of Directors Following the Merger

     9  

Interests of Aerpio’s Directors and Executive Officers in the Merger

     9  

Interests of Aadi’s Directors and Executive Officers in the Merger

     10  

Federal Securities Law Consequences; Resale Restrictions

     10  

Material U.S. Federal Income Tax Consequences of the Merger, the Issuance of the CVRs and the Reverse Stock Split

     10  

Regulatory Approvals

     11  

Anticipated Accounting Treatment

     11  

Appraisal Rights

     11  

Summary of Risk Factors

     11  

SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA

     12  

Selected Historical Consolidated Financial Data of Aerpio

     12  

Selected Historical Financial Data of Aadi

     13  

Selected Unaudited Pro Forma Combined Financial Data of Aerpio and Aadi

     15  

Comparative Historical And Unaudited Pro Forma Per Share Data

     17  

MARKET PRICE AND DIVIDEND INFORMATION

     19  

RISK FACTORS

     20  

Risks Related to the Merger

     20  

Risks Related to the Reverse Stock Split

     28  

Risks Related to Aerpio

     28  

Risks Related to Aadi

     28  

Risks Related to the Combined Company

     96  

CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     104  

 

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THE MERGER

     106  

Background of the Merger

     106  

Aerpio’s Reasons for the Merger; Recommendations of the Aerpio Board of Directors

     116  

Aadi’s Reasons for the Merger

     118  

Certain Aerpio Management Unaudited Prospective Financial Information

     119  

Opinion of Aerpio’s Financial Advisor

     122  

Interests of Aerpio’s Directors and Executive Officers in the Merger

     130  

Interests of Aadi’s Directors and Executive Officers in the Merger

     135  

Federal Securities Law Consequences; Resale Restrictions

     135  

Material U.S. Federal Income Tax Consequences of the Merger, the Issuance of the CVRs and the Reverse Stock Split

     136  

THE SPECIAL MEETING

     141  

THE MERGER AGREEMENT

     146  

Form of the Merger

     146  

Effective Time of the Merger

     146  

Merger Consideration and Exchange Ratio

     146  

Determination of Aerpio’s Net Cash

     148  

Equity Awards

     149  

Employees

     150  

Regulatory Approvals

     151  

Nasdaq Listing

     151  

Adoption of Aerpio’s Amended and Restated Certificate of Incorporation; Certificate of Incorporation of the Surviving Corporation

     151  

Conditions to the Completion of the Merger

     151  

Representations and Warranties

     153  

No Solicitation

     154  

Meeting of Aerpio’s Stockholders

     156  

Directors and Officers Following the Merger

     157  

Indemnification of Officers and Directors

     157  

Covenants; Conduct of Business Pending the Merger

     158  

Other Agreements

     161  

Termination

     162  

Termination Fee

     164  

Amendment

     165  

AGREEMENTS RELATED TO THE MERGER

     166  

Support Agreements

     166  

Lock-Up Agreements

     166  

Subscription Agreements

     166  

CVR Agreement

     167  

 

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MATTERS BEING SUBMITTED TO A VOTE OF AERPIO’S STOCKHOLDERS

     169  

Proposal 1: Approval of the Issuance of Aerpio Common Stock in the Merger and the Issuance of Aerpio Common Stock and Aerpio Pre-Funded Warrants in the PIPE Financing and the Resulting Change of Control under the Nasdaq Rules

     169  

Proposal 2: Approval of the Amended and Restated Certificate of Incorporation

     172  

Proposal 3: Approval of the Equity Incentive Award Plan

     184  

Proposal 4: Approval of the Employee Stock Purchase Plan

     192  

Proposal 5: Approval of Possible Adjournment of the Special Meeting

     197  

AERPIO’S BUSINESS

     198  

AERPIO’S PROPERTY

     198  

AADI’S BUSINESS

     198  

AERPIO’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     238  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT AERPIO’S MARKET RISK

     239  

AADI’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     240  

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     254  

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

     259  

EXECUTIVE OFFICERS AND DIRECTORS FOLLOWING THE MERGER

     267  

DESCRIPTION OF AERPIO’S CAPITAL STOCK

     271  

PRINCIPAL STOCKHOLDERS OF AERPIO

     277  

PRINCIPAL STOCKHOLDERS OF AADI

     279  

PRINCIPAL STOCKHOLDERS OF THE COMBINED COMPANY

     281  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     284  

HOUSEHOLDING

     284  

FUTURE STOCKHOLDER PROPOSALS

     285  

INFORMATION INCORPORATED BY REFERENCE

     287  

AERPIO’S AUDITED CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

AADI’S AUDITED FINANCIAL STATEMENTS

     F-2  

AADI’S UNAUDITED CONDENSED FINANCIAL STATEMENTS

     F-32  

ANNEX A—MERGER AGREEMENT

ANNEX B—PROPOSED AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF AERPIO

ANNEX C—SUBSCRIPTION AGREEMENT

ANNEX D—OPINION OF LADENBURG THALMANN & CO. INC.

ANNEX E—EQUITY INCENTIVE AWARD PLAN

ANNEX F—EMPLOYEE STOCK PURCHASE PLAN

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

Except as specifically indicated, the following information and all other information contained in this proxy statement does not give effect to the PIPE financing described in Proposal 1 or the reverse stock split described in Proposal 2.

The following section provides answers to frequently asked questions about the special meeting of stockholders and the merger. This section, however, only provides summary information. These questions and answers may not address all issues that may be important to you as a stockholder. For a more complete response to these questions and for additional information, please refer to the cross-referenced pages below. You should carefully read this entire proxy statement, including each of the annexes.

 

Q:

What is the merger?

 

A:

Aerpio, Aadi and Aspen Merger Subsidiary, Inc., a Delaware corporation and wholly-owned subsidiary of Aerpio formed by Aerpio in connection with the merger (referred to as the “merger subsidiary”) have entered into an Agreement and Plan of Merger, dated as of May 16, 2021, as may be amended from time to time (referred to as the “merger agreement”), that contains the terms and conditions of the proposed business combination of Aerpio and Aadi. Under the merger agreement, at the effective time of the merger, the merger subsidiary will merge with and into Aadi, with Aadi surviving as a wholly-owned subsidiary of Aerpio (referred to as the “merger”). As consideration in the merger, Aadi’s stockholders will be issued a number of shares of Aerpio’s common stock, par value $0.0001 per share (referred to as “Aerpio common stock”), determined based on the total number of outstanding shares of Aerpio common stock and shares of Aadi’s common stock, each on a fully-diluted basis, and the respective valuations of Aadi and Aerpio, as of immediately prior to the closing of the merger. Immediately following the effective time of the merger, Aadi’s stockholders are expected to own or hold rights to acquire approximately 66.8% of the combined company, on a fully-diluted basis, and Aerpio’s stockholders will own or hold rights to acquire approximately 33.2% of the combined company, on a fully-diluted basis, in each case subject to adjustments as described below.

 

    

The Aerpio valuation of $41,000,000 is based on a projected “net cash” balance (or cash, cash equivalents and investments minus outstanding liabilities) at the closing of $26,000,000, plus an additional $15,000,000 of enterprise value. If Aerpio’s actual net cash as of the close of business on the last business day prior to the anticipated closing date as agreed upon by Aerpio and Aadi (referred to as the “determination date”) is between $24,500,000, the lower target net cash amount, and $27,500,000, the upper target net cash amount, no adjustment will be made to the ownership percentages based on Aerpio’s net cash. If Aerpio’s net cash is less than $24,500,000, the ownership percentage of Aadi’s stockholders in the combined company will be increased based on the difference between Aerpio’s actual net cash and the Aerpio target net cash (i.e. $26,000,000). If Aerpio’s net cash is greater than $27,500,000, the ownership percentage of Aadi’s stockholders in the combined company will be decreased based on the difference between Aerpio’s actual net cash and the Aerpio target net cash (i.e. $26,000,000). In addition, if the closing of the merger occurs after July 26, 2021, the Aerpio target net cash and lower target net cash and upper target net cash amounts will be reduced by $21,667 per day beginning on July 26, 2021 through the closing date of the merger, potentially resulting in a corresponding adjustment to the exchange ratio and to the ownership percentage of Aadi’s stockholders in the combined company. If Aerpio’s net cash is less than $26,000,000 and the closing of the merger occurs prior to July 26, 2021, then Aerpio’s valuation will be equal to the amount of Aerpio’s net cash plus an additional $15,000,000 of enterprise value.

 

    

Without giving effect to the PIPE financing or proposed reverse stock split of Aerpio common stock described elsewhere in this proxy statement, and based on the foregoing percentages as of a July 26, 2021 closing and Aerpio’s and Aadi’s capitalization as of June 14, 2021, the exchange ratio for the Aadi common stock would be approximately 4.9152 shares of Aerpio common stock for each share of Aadi common stock (approximately 96,118,961 total shares of Aerpio common stock would be issued to Aadi’s stockholders, on a fully diluted basis).

 

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Q:

What will happen to Aerpio if, for any reason, the merger with Aadi does not close?

 

A:

Aerpio has invested significant time and incurred, and expects to continue to incur, significant expenses related to the proposed merger with Aadi. In the event the merger does not close, the PIPE financing will also not close, as the closing of the PIPE financing is expected to occur concurrently with, and is conditioned upon, the closing of the merger, and Aerpio will have a limited ability to continue its current operations without obtaining additional financing. Although the Aerpio Board may elect, among other things, to attempt to complete another strategic transaction if the merger with Aadi does not close, the Aerpio Board may instead divest all or a portion of Aerpio’s business or take steps necessary to liquidate or dissolve Aerpio’s business and assets if a viable alternative strategic transaction is not available. If Aerpio decides to dissolve and liquidate its assets, Aerpio would be required to pay all of its contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurance as to the amount or the timing of such a liquidation and distribution of available cash left to distribute to stockholders after paying the obligations of Aerpio and setting aside funds for reserves.

 

Q:

Why is Aerpio proposing to merge with Aadi?

 

A:

The Aerpio Board considered a number of factors that supported its decision to approve the merger agreement. In the course of its deliberations, the Aerpio Board also considered a variety of risks and other countervailing factors related to entering into the merger agreement.

 

    

For a more complete discussion of Aerpio’s reasons for the merger, please see the section entitled “The Merger—Aerpio’s Reasons for the Merger; Recommendations of the Aerpio Board of Directors” beginning on page 116 of this proxy statement.

 

Q:

What is required to consummate the merger?

 

A:

The consummation of the proposed merger with Aadi is subject to a number of closing conditions, including the condition that Aerpio’s stockholders approve the issuance of shares of Aerpio common stock in the merger and the issuance of shares of Aerpio common stock and Aerpio pre-funded warrants in the PIPE financing and the resulting “change of control” of Aerpio under the Nasdaq rules, which requires the affirmative vote of a majority of the votes properly cast for or against such matter at the special meeting, and the issuance of shares of Aerpio common stock in the merger and the amended and restated certificate of incorporation of Aerpio, which require the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of Aerpio common stock entitled to vote on such matter.

 

    

For a more complete description of the closing conditions under the merger agreement, please see the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 151 of this proxy statement.

 

Q:

Are there any federal or state regulatory requirements that must be complied with or federal or state regulatory approvals or clearances that must be obtained in connection with the merger?

 

A:

Neither Aerpio nor Aadi is required to make any filings or to obtain any approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Aerpio must comply with applicable federal and state securities laws and the Nasdaq rules in connection with the issuance of shares of Aerpio common stock in the merger, including the filing with the SEC of this proxy statement and the required stockholder approval for the resulting “change of control” of Aerpio under the Nasdaq rules. Aerpio has filed an initial listing application with Nasdaq pursuant to Nasdaq’s “reverse merger” rules to effect the initial listing of Aerpio common stock issuable in connection with the merger.

 

Q:

What will Aadi’s stockholders receive in the merger?

 

A:

Subject to the terms of the merger agreement, the percentage of the combined company that Aadi’s stockholders will own as of the closing of the merger will be determined based on the total number of

 

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  outstanding shares of Aerpio common stock and Aadi common stock, each on a fully-diluted basis, and the respective valuations of Aadi and Aerpio, as of immediately prior to the closing of the merger. On a pro forma basis, based upon the number of shares of Aerpio common stock to be issued in the merger, the closing occurring on or before July 26, 2021 and Aerpio’s and Aadi’s capitalization as of June 14, 2021, (i) current Aerpio stockholders will own or hold rights to acquire 33.2% of the combined company, on a fully-diluted basis, and (ii) Aadi’s stockholders will own or hold rights to acquire 66.8% of the combined company, on a fully-diluted basis, if Aerpio’s net cash is between the range of $24,500,000 and $27,500,000 as of the determination date. If Aerpio’s net cash is less than $24,500,000 or greater than $27,500,000, the ownership percentages will be adjusted based on, among other things, the difference between the actual net cash and the target Aerpio net cash (i.e. $26,000,000).

The closing of the PIPE financing is expected to occur concurrently with, and is conditioned upon, the closing of the merger. Following the closing of the PIPE financing, the former Aadi stockholders are expected to own approximately 29.6% of the outstanding shares of Aerpio common stock on a fully-diluted basis, the stockholders of Aerpio as of immediately prior to the effective time of the merger are expected to own approximately 14.7% of the outstanding shares of Aerpio common stock on a fully-diluted basis and the PIPE investors are expected to own approximately 55.7% of the outstanding shares of Aerpio common stock on a fully-diluted basis.

For a more complete discussion of the exchange ratio at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration” beginning on page 146 of this proxy statement.

 

Q:    What

will Aerpio’s stockholders receive in the merger?

 

A:

Aerpio’s stockholders will continue to own and hold their existing shares of Aerpio common stock, subject to adjustment for the reverse stock split. Each Aerpio unexpired, unexercised and unvested Aerpio option will be accelerated in full effective as of immediately prior to the effective time of the merger, and each unexpired, unexercised, and fully vested Aerpio option will continue to remain outstanding in accordance with its terms after the effective time of the merger.

In addition, the merger agreement contemplates that at or prior to completion of the merger, Aerpio, the Holder Representative (as defined in the CVR agreement) and the Rights Agent (as defined in the CVR agreement) will execute and deliver a contingent value rights agreement (referred to as the “CVR agreement”), pursuant to which each holder of Aerpio common stock as of immediately prior to the completion of the merger (for the avoidance of doubt, not including the PIPE investors) shall be entitled to one contractual contingent value right (referred to as a “CVR”) issued by Aerpio, subject to and in accordance with the terms and conditions of the CVR agreement, for each share of Aerpio common stock held by such holder. Each CVR shall entitle the holder thereof to 90% of the net proceeds, if any, received by Aerpio pursuant to the license agreement, dated June 24, 2018, entered into by and between Aerpio and Gossamer Bio, Inc., as amended by the Amendment No. 1 thereto and any agreement related to the Aspen Legacy Assets (as defined in the merger agreement) entered into prior to the closing of the merger. The contingent value rights are not transferable, except in certain limited circumstances as will be provided in the CVR agreement, will not be certificated or evidenced by any instrument and will not be registered with the SEC or listed for trading on any exchange.

 

Q:

What are the material U.S. federal income tax consequences of the merger, the issuance of the CVRs and the reverse stock split to Aerpio stockholders?

 

A:

The merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (referred to as the “Code”). Aerpio stockholders will not sell, exchange or dispose of any shares of Aerpio common stock as a result of the merger. Thus, there will be no material U.S. federal income tax consequences to Aerpio stockholders as a result of the merger. Aerpio stockholders should not recognize gain or loss upon the reverse stock split, except to the extent an Aerpio stockholder

 

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  receives cash in lieu of a fractional share of Aerpio common stock. However, the U.S. federal income tax treatment of the CVRs is unclear. There is no legal authority directly addressing the U.S. federal income tax treatment of the receipt of, and payments on, the CVRs, and there can be no assurance that the IRS, would not assert, or that a court would not sustain, a position different than what is reported by Aerpio and that could result in adverse U.S. federal income tax consequences to holders of the CVRs.

For a more complete description of the material U.S. federal income tax consequences of the reverse stock split, receipt of the CVRs, and merger, including possible alternative treatments of the CVRs, please see the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Reverse Stock Split, Issuance of the CVRs, and Merger” beginning on page 136 of this proxy statement.

 

Q:

Why is Aerpio seeking stockholder approval to issue shares of Aerpio common stock to existing stockholders of Aadi in the merger?

 

A:

Aerpio’s amended and restated certificate of incorporation requires stockholder approval for a transaction such as the merger and the issuance of shares of Aerpio common stock to Aadi’s stockholders. Additionally, because Aerpio common stock is listed on Nasdaq, we are subject to the Nasdaq rules. Rule 5635(a) of the Nasdaq rules requires stockholder approval with respect to issuances of Aerpio common stock, among other instances, when the shares to be issued are being issued in connection with the acquisition of the stock or assets of another company and are equal to 20% or more of the outstanding shares of Aerpio common stock before the issuance. Rule 5635(b) of the Nasdaq rules also requires stockholder approval when any issuance or potential issuance will result in a “change of control” of the issuer. Although Nasdaq has not adopted any rule on what constitutes a “change of control” for purposes of Rule 5635(b), Nasdaq has previously indicated that the acquisition of, or right to acquire, by a single investor or affiliated investor group, as little as 20% of the common stock (or securities convertible into or exercisable for common stock) or voting power of an issuer could constitute a change of control. Rule 5635(d) of the Nasdaq rules also requires stockholder approval for a transaction other than a public offering involving the sale, issuance or potential issuance by an issuer of common equity securities (or securities convertible into or exercisable for common equity securities) at a price that is less than market value of the stock if the number of equity securities to be issued is or may be equal to 20% or more of the common equity securities, or 20% or more of the voting power, outstanding before the issuance.

In the case of the merger, Aerpio will be issuing approximately 96,118,961 shares of Aerpio common stock on a fully diluted basis, and Aerpio common stock to be issued pursuant to the merger agreement will represent greater than 20% of its voting stock. In the case of the PIPE financing, Aerpio will be issuing approximately 180,587,138 shares of Aerpio common stock on a fully diluted basis, and the Aerpio common stock to be issued pursuant to the subscription agreements will represent greater than 20% of Aerpio’s voting stock. Accordingly, Aerpio is seeking stockholder of approval of the issuance pursuant to the merger agreement and the issuance pursuant to the subscription agreements under the Nasdaq rules.

 

Q:

What is the reverse stock split and why is it necessary?

 

A:

Prior to the effective time of the merger, by virtue of the filing of an amended and restated certificate of incorporation in the form attached hereto as Annex B and incorporated herein by reference, the outstanding shares of Aerpio common stock will be combined into a lesser number of shares to be determined by the Aerpio Board prior to the effective time and publicly announced by Aerpio and identified in the amended and restated certificate of incorporation so filed. The Aerpio Board believes that a reverse stock split may be desirable for a number of reasons. Aerpio plans to issue shares of Aerpio common stock to the existing stockholders of Aadi in the merger and to the PIPE investors in the PIPE financing, and the reverse stock split will allow for such issuance to be possible so that Aerpio may consummate the merger and the PIPE financing. Additionally, Aerpio common stock is currently, and will be following the completion of the merger, listed on Nasdaq. According to the applicable Nasdaq rules, in order for Aerpio common stock to continue to be listed on Nasdaq, Aerpio must satisfy certain requirements established by Nasdaq. The Aerpio Board expects that a reverse stock split of Aerpio common stock will increase the market price of

 

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  Aerpio common stock so that Aerpio will be able to maintain compliance with the relevant Nasdaq listing requirements for the foreseeable future, although Aerpio cannot assure holders of Aerpio common stock that it will be able to do so. The Aerpio Board intends to effect a reverse stock split of the shares of Aerpio common stock at a ratio of one new share for every 5 to 15 shares outstanding (or any whole number in between).

 

Q:

Why am I receiving this proxy statement?

 

A:

You are receiving this proxy statement because you have been identified as a stockholder of Aerpio as of the record date, and thus you are entitled to vote at Aerpio’s special meeting. This document contains important information about the merger and the special meeting of Aerpio and serves as a proxy statement of Aerpio used to solicit proxies for the special meeting, and you should read it carefully.

 

Q:

How does Aerpio’s board of directors recommend that Aerpio’s stockholders vote?

 

A:

After careful consideration, the Aerpio Board unanimously (other than abstentions) recommends that Aerpio’s stockholders vote:

 

   

FOR Proposal 1 to approve the issuance of Aerpio common stock pursuant to the merger agreement and the issuance of Aerpio common stock and Aerpio pre-funded warrants pursuant to the PIPE financing and the resulting change of control of Aerpio pursuant to the Nasdaq rules;

 

   

FOR Proposal 2 to approve an amended and restated certificate of incorporation of Aerpio;

 

   

FOR Proposal 3 to approve the equity incentive award plan;

 

   

FOR Proposal 4 to approve the employee stock purchase plan; and

 

   

FOR Proposal 5 to approve an adjournment or postponement of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 and/or 2.

 

Q:

What risks should Aerpio’s stockholders consider in deciding whether to vote in favor of the share issuance and the reverse stock split?

 

A:

Aerpio’s stockholders should carefully read the section of this proxy statement entitled “Risk Factors” beginning on page 20, which sets forth certain risks and uncertainties related to the merger and reverse stock split, risks and uncertainties to which the combined company’s business will be subject, risks and uncertainties to which Aerpio, as an independent company, is subject and risks and uncertainties to which Aadi, as an independent company, is subject.

 

Q:

When do you expect the merger to be consummated?

 

A:

The consummation of the merger will occur as promptly as practicable after the special meeting and following satisfaction or waiver of all closing conditions. Aerpio and Aadi anticipate that the consummation of the merger will occur in the third quarter of 2021. However, the exact timing of the consummation of the merger is not yet known. For a more complete description of the closing conditions under the merger agreement, please see the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 151 of this proxy statement.

 

Q:

What constitutes a quorum for purposes of the special meeting?

 

A:

The presence at the special meeting by means of remote communication in a manner authorized by the Aerpio Board in its sole discretion, or represented by proxy, of the holders of a majority in voting power of the shares of common stock issued and outstanding and entitled to vote at the meeting will constitute a quorum for the transaction of business at the special meeting. The inspector of election appointed for the special meeting will determine whether a quorum is present. The inspector of election will treat abstentions as present for purposes of determining the presence of a quorum.

 

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If a quorum is not present, the only business that can be transacted at the special meeting is the adjournment or postponement of the meeting to another date or time.

 

Q:

What vote of our stockholders is required to approve each of the proposals?

 

A:

The approval of the share issuance proposal and the charter proposal each require the affirmative vote of stockholders holding at least 66 2/3% of the outstanding shares of Aerpio common stock entitled to vote thereon as of the close of business on the record date. Accordingly, shares deemed not in attendance at the special meeting, whether due to a record holder’s failure to vote or a “street name” holder’s failure to provide voting instructions to such holder’s bank, broker or other nominee or failure to vote at the special meeting, abstentions and broker non-votes will have the same effect as a vote “AGAINST” the share issuance proposal and the charter proposal.

The approval of the equity incentive plan proposal, the ESPP proposal and the adjournment proposal each require the affirmative vote of the holders of a majority in voting power of the shares of Aerpio common stock properly cast for or against such proposal. Accordingly, shares deemed not in attendance and/or not voted at the special meeting, whether due to a record holder’s failure to vote or a “street name” holder’s failure to provide any voting instructions to such holder’s bank, broker or other nominee or failure to vote at the special meeting, and broker non-votes will have no effect on the outcome of the equity incentive plan proposal, the ESPP proposal or the adjournment proposal. Abstentions will have no effect on the outcome of the equity incentive plan proposal, the ESPP proposal or the adjournment proposal.

 

Q:

How will the reverse stock split and the merger affect stock options to acquire Aerpio common stock and Aerpio’s stock option and incentive plans?

 

A:

The Aerpio 2011 Equity Incentive Plan and the Aerpio 2017 Stock Option and Incentive Plan will remain in effect following the merger, and all stock options to acquire shares of Aerpio common stock that are outstanding immediately prior to the effective time of the merger will remain outstanding following the effective time of the merger. As of the effective time of the reverse stock split, Aerpio will adjust and proportionately decrease the number of shares of Aerpio common stock that may be the subject of future grants under Aerpio’s 2017 Stock Option and Incentive Plan. Additionally, as of the effective time of the reverse stock split, Aerpio will adjust and proportionately decrease the number of shares of Aerpio common stock subject to, and adjust and proportionately increase the exercise price of, all stock options to acquire Aerpio common stock.

 

Q:

What do I need to do now?

 

A:

You are urged to read this proxy statement carefully, including each of the annexes, and to consider how the merger affects you. If your shares are registered directly in your name, you may submit your proxy by telephone or via the internet in accordance with the instructions on the enclosed proxy card or complete, date and sign the enclosed proxy card and mail return it in the enclosed postage-paid envelope. If your shares of Aerpio common stock are held by a bank, broker or other nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you together with a voting instruction card by your bank, broker or other nominee. Beneficial owners can vote by following the instructions provided by their bank, broker or other nominee. Alternatively, stockholders can vote online during the special meeting. To attend and participate in the special meeting, you will need the 16-digit control number included on your proxy card or on the instructions that accompanied your proxy materials. The control number is designed to verify your identity and allow you to vote your shares of common stock at the special meeting or to vote by proxy prior to the special meeting. If you are a beneficial owner of shares of common stock held in “street name,” you may contact the bank, broker or other institution where you hold your account if you have questions about obtaining your control number and attending the special meeting. If you attend the special meeting and vote via the Internet, your vote will revoke any proxy that you have previously submitted.

 

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Q:

What happens if I do not return a proxy card or otherwise fail to provide proxy instructions?

 

A:

The failure to return your proxy card or otherwise provide proxy instructions will have the same effect as voting against Proposals 1 and 2, and your shares will not be counted for purposes of determining whether a quorum is present at the special meeting.

 

Q:

What is a “broker non-vote”?

 

A:

If a beneficial owner of shares of common stock held in “street name” by a bank, broker or other nominee does not provide the organization that holds its shares with specific voting instructions, then, under applicable rules, the organization that holds its shares may generally vote on “discretionary” matters but cannot vote on “non-discretionary” matters. If the organization that holds the beneficial owner’s shares does not receive instructions from such stockholder on how to vote its shares on any proposal to be voted on at the special meeting, that bank, broker or other nominee will inform the inspector of election at the special meeting that it does not have authority to vote on any proposal at the special meeting with respect to such shares, and, furthermore, such shares will not be deemed to be in attendance at the meeting. This is generally referred to as a “broker non-vote.” However, if the bank, broker or other nominee receives instructions from such stockholder on how to vote its shares as to at least one proposal but not all of the proposals, the shares will be voted as instructed on the proposal as to which voting instructions have been given but will not be voted on the other, uninstructed proposal(s).

 

Q:

May I vote in person?

 

A:

Aerpio is hosting the special meeting virtually via www.virtualshareholdermeeting.com/ARPO2021SM. There will be no physical location for stockholders to attend. If you are a stockholder of record, you may attend the special meeting and vote your shares virtually at the special meeting.

In order to attend the virtual special meeting and vote online, you will need the 16-digit control number included on your proxy card or on the instructions that accompanied your proxy materials. The control number is designed to verify your identity and allow you to vote your shares of common stock at the special meeting or to vote by proxy prior to the special meeting. If you attend the special meeting and vote via the Internet, your vote will revoke any proxy that you have previously submitted.

Please note that even if you plan to attend the special meeting, we recommend that you vote in advance, to ensure that your shares will be represented.

 

Q:

May I change my vote after I have submitted a proxy by telephone or via the internet or mailed my signed proxy card?

 

A:

Any Aerpio stockholder of record voting by proxy, other than those Aerpio stockholders who have executed a support agreement, has the right to revoke the proxy at any time before the polls close at the special meeting by delivery of a written notice stating that he, she or it would like to revoke his, her or its proxy to Aerpio’s Secretary, by providing a duly executed proxy card bearing a later date than the proxy being revoked, by submitting a proxy on a later date by telephone or via the internet (only your last telephone or internet proxy will be counted), before 11:59 PM Eastern Time on August 16, 2021 or by attending the special meeting via the Internet and voting during the special meeting. Attendance alone at the special meeting will not revoke a proxy. If a stockholder of Aerpio has instructed a broker to vote its shares of Aerpio common stock that are held in “street name,” the stockholder must follow directions received from its broker to change those instructions.

 

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Q:

Who will count the vote?

 

A:

Votes will be counted by the inspector of elections appointed for the special meeting, who will separately count “FOR” and “AGAINST” votes and abstentions.

 

Q:

Should Aerpio’s stockholders send in their stock certificates now?

 

A:

No. After the merger is consummated, and if the reverse stock split is approved and effected, Aerpio’s stockholders will receive written instructions, as applicable, from Aerpio’s transfer agent for exchanging their certificates representing shares of Aerpio common stock for new certificates giving effect to the reverse stock split.

 

Q:

Am I entitled to appraisal rights?

 

A:

Aerpio’s stockholders are not entitled to appraisal rights in connection with the merger or any of the proposals to be voted on at the special meeting.

 

Q:

Have Aadi’s stockholders agreed to adopt the merger agreement?

 

A:

Yes. On May 16, 2021, Aadi’s stockholders adopted the merger agreement and approved the merger and related transactions by written consent.

 

Q:

Have any of Aerpio’s stockholders agreed to vote in favor of the issuance of the shares in the merger?

 

A:

Yes. In connection with the execution of the merger agreement, holders of approximately 1.3% of the outstanding shares of Aerpio common stock have entered into support agreements, as further described in the section entitled “Agreements Related To The Merger” beginning on page 166 of this proxy statement, with Aerpio and Aadi that provide, among other things, that the stockholders subject to these agreements will vote in favor of the issuance of shares of Aerpio common stock in the merger and the approval of the issuance of the shares of Aerpio common stock and Aerpio pre-funded warrants in the PIPE financing and grant to Aadi an irrevocable proxy to vote all of such stockholders’ shares of Aerpio common stock in favor of the approval of the issuance of the shares of Aerpio common stock in the merger, the approval of the issuance of the shares of Aerpio common stock and Aerpio pre-funded warrants in the PIPE financing and against any proposal made in opposition to, or in competition with, the issuance of shares of Aerpio common stock in the merger or the issuance of the shares of Aerpio common stock and Aerpio pre-funded warrants in the PIPE financing.

For a more complete discussion of the exchange ratio at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration” beginning on page 146 of this proxy statement.

 

Q:

What is the PIPE financing?

 

A:

On May 16, 2021, Aerpio entered into subscription agreements (referred to as the “subscription agreements”) with the purchasers named therein (referred to as the “PIPE investors”). Pursuant to the subscription agreements, Aerpio agreed to sell shares of Aerpio common stock (in the form of shares of Aerpio common stock and/or pre-funded warrants to acquire common stock of Aerpio (referred to as the “Aerpio pre-funded warrants”)) for an aggregate purchase price of approximately $155,000,000 (collectively, referred to as the “PIPE financing”).

The closing of the PIPE financing is expected to occur concurrently with, and is conditioned upon, the closing of the merger. Following the closing of the PIPE financing, the former Aadi stockholders are expected to own approximately 29.6% of the outstanding shares of Aerpio common stock on a fully-diluted basis, the stockholders of Aerpio as of immediately prior to the effective time of the merger are expected to

 

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own approximately 14.7% of the outstanding shares of Aerpio common stock on a fully-diluted basis and the PIPE investors are expected to own approximately 55.7% of the outstanding shares of Aerpio common stock on a fully-diluted basis.

At the closing of the PIPE financing, in connection with the subscription agreements, Aerpio intends to enter into a registration rights agreement (referred to as the “registration rights agreement”) with the PIPE investors. Pursuant to the registration rights agreement, Aerpio will prepare and file a resale registration statement with the SEC within 30 calendar days following the closing of the PIPE financing (referred to as the “filing deadline”). Aerpio will use its reasonable best efforts to cause this registration statement to be declared effective by the SEC within 60 calendar days of the closing of the PIPE financing (or within 90 calendar days if the SEC reviews the registration statement).

 

Q:

Who is paying for this proxy solicitation?

 

A:

Aerpio will bear the cost of soliciting proxies, including the printing, mailing and filing of this proxy statement, the proxy card and any additional information furnished to Aerpio’s stockholders. You will need to obtain your own internet access if you choose to access the proxy materials and/or vote over the internet. Aerpio and Aadi may use the services of its directors, officers and other employees to solicit proxies from Aerpio’s stockholders without additional compensation. In addition, Aerpio has engaged The Proxy Advisory Group, LLC, a proxy solicitation firm, to assist in the solicitation of proxies and provide related advice and informational support, for a services fee and the reimbursement of customary disbursements, which are not expected to exceed $45,000 in total. Arrangements will also be made with banks, brokers, nominees, custodians and fiduciaries who are record holders of Aerpio common stock for the forwarding of solicitation materials to the beneficial owners of Aerpio common stock. Aerpio will reimburse these banks, brokers, nominees, custodians and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

 

Q:

Who can provide me with additional information and help answer my questions?

 

A:

If you would like additional copies, without charge, of this proxy statement or if you have questions about the merger and the other proposals being considered at the special meeting, including the procedures for voting your shares, you should contact The Proxy Advisory Group, LLC, Aerpio’s proxy solicitor, by telephone at (212) 616-2181.

 

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SUMMARY

This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To better understand the merger and the other proposals being considered at the special meeting, you should read this entire proxy statement carefully, including the materials attached as annexes, as well as other documents referred to or incorporated by reference herein. You may obtain the information incorporated by reference into this proxy statement without charge by following the instructions under the section of this proxy statement entitled “Where You Can Find Additional Information”.

The Companies

Aerpio Pharmaceuticals, Inc.

9987 Carver Road, Suite 420

Cincinnati, Ohio 45242

(513) 985-1920

Aerpio Pharmaceuticals, Inc. (referred to as “Aerpio”) is a biopharmaceutical company focused on developing compounds that activate Tie2 for indications in which Aerpio believes that activation of Tie2 may have therapeutic potential. Aerpio’s product candidates include razuprotafib (formerly known as AKB-9778), a small molecule VE-PTP inhibitor. In March 2019, Aerpio announced topline results from its Phase 2b (referred to as “TIME-2b”) clinical trial of AKB-9778 for the treatment of non-proliferative diabetic retinopathy, and in June 2020, Aerpio initiated a Phase 2 clinical trial designed to evaluate the safety and efficacy of a topical formulation of razuprotafib in approximately 195 patients followed over a 28-day period. Following the announcement regarding the topline results from the Phase 2 clinical trial of razuprotafib in patients with elevated IOP associated with OAG or OHT, Aerpio initiated a process to explore a range of strategic alternatives focused on maximizing stockholder value from our clinical and preclinical assets and cash resources.

Aspen Merger Subsidiary, Inc.

9987 Carver Road, Suite 420

Cincinnati, Ohio 45242

(513) 985-1920

The merger subsidiary is a wholly-owned subsidiary of Aerpio that was recently incorporated in Delaware for the purpose of the merger. It does not conduct any business and has no material assets.

Aadi Bioscience, Inc.

17383 Sunset Boulevard, Suite A250

Pacific Palisades, California 90272

(424) 473-8055

Aadi Bioscience, Inc. (referred to as “Aadi”) is a clinical-stage biopharmaceutical company focused on precision therapies for genetically-defined cancers with alterations in mTOR pathway genes. Aadi’s lead drug candidate, ABI-009 (FYARROTM, nab-sirolimus), is a form of sirolimus bound to albumin. Sirolimus is a potent inhibitor of the mTOR biological pathway and inhibits downstream signaling from mTOR, that can promote tumor growth. Aadi is evaluating ABI-009 in cancers with known mTOR pathway activation, including tumor agnostic indications targeting specific genomic alterations that activate the mTOR pathway.

In May 2021, Aadi completed the filing of a rolling new drug application (referred to as an “NDA”), for ABI-009 to the U.S. Food and Drug Administration (referred to as the “FDA”), for approval to treat patients with advanced malignant perivascular epithelioid cell tumors (referred to as “PEComa”). Aadi’s NDA is based on results from its Phase 2 registrational study AMPECT (Advanced Malignant PEComa Trial), in advanced


 

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malignant PEComa for which there are currently no approved therapies in the U.S. and for which there has never been a prior prospective clinical trial. In November 2019, Aadi announced top-line results from the AMPECT study, including that the study achieved its primary endpoint of overall response rate (referred to as “ORR”), as determined by blinded independent central radiologic review using modified Response Evaluation Criteria in Solid Tumors, RECIST v1.1.

Aadi is actively engaged in commercial preparations to support the potential U.S. launch of ABI-009 for the treatment of patients with advanced malignant PEComa, if approved. Aadi intends to build a specialist sales force to target physicians in the U.S. who treat advanced malignant PEComa.

In addition to advanced malignant PEComa, based on data from the completed AMPECT study and Aadi’s ongoing expanded access program, Aadi is planning a registrational Phase 2 study (referred to as “PRECISION 1”) of ABI-009 in tumor-agnostic Tuberous Sclerosis Complex 1 and 2 (TSC1 & TSC2) alterations. Aadi completed a Type B meeting with the FDA in which Aadi discussed the initial trial design with the FDA. Aadi plans to initiate the PRECISION 1 trial by the end of 2021.

Aadi has an exclusive license with Abraxis BioScience, LLC, a wholly owned subsidiary of Celgene Corporation, now Bristol Myers Squibb, under which Aadi obtained exclusive rights to develop, manufacture, and commercialize ABI-009.

The Combined Company

At the effective time of the merger, the current stockholders of Aerpio and current stockholders of Aadi, are expected to own or hold rights to acquire approximately 33.2% and 66.8% of the combined company, respectively, on a fully-diluted basis, which is based among other things on Aerpio’s estimated net cash balance (or cash, cash equivalents and marketable securities minus outstanding liabilities) at the closing of $26,000,000, plus an additional $15,000,000 of enterprise value. The ownership percentage is subject to adjustment based on Aerpio’s net cash as of a certain determination date, as discussed in “The Merger Agreement—Merger Consideration.” Concurrently with the consummation of the merger, the combined company may complete a financing transaction. The principal executive office of the combined company will be located in Los Angeles, California.

Summary of the Merger

Upon the terms and subject to the conditions of the merger agreement, the merger subsidiary, a wholly-owned subsidiary of Aerpio formed by Aerpio in connection with the merger, will merge with and into Aadi. The merger agreement provides that upon the consummation of the merger the separate existence of merger subsidiary shall cease. Aadi will continue as the surviving corporation and will be a wholly-owned subsidiary of Aerpio. Immediately following the effective time of the merger, Aadi’s stockholders are expected to own approximately 66.8% of the combined company, on a fully-diluted basis, and Aerpio’s stockholders will own or hold rights to acquire approximately 33.2% of the combined company, on a fully-diluted basis, in each case subject to adjustments as described below.

The Aerpio valuation of $41,000,000 is based on a projected “net cash” balance (or cash, cash equivalents and investments minus outstanding liabilities) at the closing of $26,000,000, plus an additional $15,000,000 of enterprise value. If Aerpio’s actual net cash as of a determination date prior to the closing is between $24,500,000 and $27,500,000, no adjustment will be made to the ownership percentages based on Aerpio’s net cash. If Aerpio’s net cash is less than $24,500,000, the ownership percentage of Aadi’s stockholders in the combined company will be increased based on the difference between Aerpio’s actual net cash and the Aerpio target net cash (i.e. $26,000,000). If Aerpio’s net cash is greater than $27,500,000, the ownership percentage of


 

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Aadi’s stockholders in the combined company will be decreased based on the difference between Aerpio’s actual net cash and the Aerpio target net cash (i.e. $26,000,000). In addition, if the closing of the merger occurs after July 26, 2021, the Aerpio target net cash and lower target net cash and upper target net cash amounts will be reduced by $21,667 per day beginning on July 26, 2021 through the closing date of the merger, potentially resulting in a corresponding adjustment to the exchange ratio and to the ownership percentage of Aadi’s current stockholders in the combined company. If Aerpio’s net cash is less than $26,000,000 and the closing of the merger occurs prior to July 26, 2021, then Aerpio’s valuation will be equal to the amount of Aerpio’s net cash plus an additional $15,000,000 of enterprise value.

Without giving effect to the PIPE financing or the proposed reverse stock split of Aerpio common stock described elsewhere in this proxy statement, and based on the foregoing percentages as of a July 26, 2021 closing and Aerpio’s and Aadi’s capitalization as of June 14, 2021, the exchange ratio for the Aadi common stock would be approximately 4.9152 shares of Aerpio common stock for each share of Aadi common stock (approximately 96,118,961 total shares of Aerpio common stock would be issued to Aadi’s stockholders, on a fully diluted basis). In connection with the merger, Aerpio will change its name to “Aadi Bioscience, Inc.” (referred to as the “combined company”).

Aerpio’s Reasons for the Merger

The Aerpio Board considered various reasons for the merger, including, among others, the following factors:

 

   

Information concerning Aerpio’s business, financial performance (both past and prospective) and its financial condition, results of operation (both past and prospective), business and strategic objectives, as well as the risks of accomplishing those objectives;

 

   

Aerpio’s business and financial prospects if it were to remain an independent company and the Aerpio Board’s determination that Aerpio could not continue to operate as an independent company and needed to enter into an agreement with a strategic partner;

 

   

the possible alternatives to the merger, the range of possible benefits and risks to the Aerpio stockholders of those alternatives and the timing and the likelihood of accomplishing the goal of any of such alternatives and the Aerpio Board’s assessment that the merger presented a superior opportunity to such alternatives for Aerpio stockholders, including a liquidation of Aerpio and the distribution of any available cash;

 

   

the current plans of Aadi for developing its late-stage pipeline for genetically-defined cancers with alterations in mTOR pathway genes and its lead product candidate, FYARROTM (sirolimus albumin-bound nanoparticles for injectable suspension; nab-sirolimus; ABI-009) and Aadi’s compelling clinical data in the currently unmet indication of PEComa, with its opportunity for near-term commercialization and revenue, as well as FYARRO’s potential to address the large markets of TSC1 and TSC2 tumors and the likelihood that the combined company would possess sufficient financial resources to allow the management team of the combined company to focus on such continued development and anticipated commercialization. The Aerpio Board also considered the possibility that the combined company would be able to take advantage of the potential benefits resulting from the combination of Aerpio’s public company structure with Aadi’s business to raise additional funds in the future, if necessary; and

 

   

the ability of Aerpio stockholders to participate in the future growth potential of the combined company following the merger, while potentially receiving 90% of all net proceeds derived from the disposition of Company Assets on account of the CVR agreement to be executed at the closing of the merger.

For more information on the Aerpio Board’s reasons for the transaction, see the section entitled “The Merger—Aerpio’s Reasons for the Merger; Recommendation of the Aerpio Board of Directors.”


 

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Aadi’s Reasons for the Merger

The board of directors of Aadi (referred to as the “Aadi Board”) considered various reasons for the merger, including, among others, the following factors:

 

   

the potential to provide its current stockholders with greater liquidity by owning stock in a public company;

 

   

Aadi’s need for capital to support the clinical development of ABI-009 and the potential to access public market capital, including sources of capital from a broader range of investors than it could otherwise obtain if it continued to operate as a privately-held company;

 

   

the expectation that the merger would be a more time- and cost-effective means to access capital than other options considered; and

 

   

the expectation that the merger will qualify as a transaction described under Section 368(a) of the Code for U.S. federal income tax purposes, with the result that Aadi’s stockholders will generally not recognize taxable gain or loss for U.S. federal income tax purposes.

For more information on the Aadi Board’s reasons for the transaction, see the section entitled “The Merger—Aadi’s Reasons for the Merger.”

Opinion of Aerpio’s Advisor

The Aerpio Board engaged Ladenburg Thalmann & Co. (referred to as “Ladenburg”) on December 21, 2020 to act as the financial advisor to the Aerpio Board to assist it in identifying and analyzing potential targets for a potential transaction and, if requested by the Aerpio Board, to render an opinion as to the fairness, from a financial point of view, to the Aerpio stockholders of the exchange ratio. On May 15, 2021, at the request of the Aerpio Board, Ladenburg rendered the oral opinion, subsequently confirmed by delivery of the written opinion dated May 15, 2021 (referred to as the “Opinion”), to the Aerpio Board, that the exchange ratio was fair, from a financial point of view, to the stockholders of Aerpio as of the date of such Opinion and based upon the various assumptions, qualifications and limitations set forth therein.

The full text of the written Opinion is attached as Annex D to this proxy statement and is incorporated by reference. Aerpio encourages its stockholders to read the Opinion in its entirety for the assumptions made, procedures followed, other matters considered and limits of the review by Ladenburg. The summary of the written Opinion set forth herein is qualified by reference to the full text of the Opinion.

Ladenburg provided its Opinion for the sole benefit and use by the Aerpio Board in its consideration of the merger. The Opinion is not a recommendation to the Aerpio Board or to any stockholder as to how to vote with respect to the proposed merger or to take any other action in connection with the merger or otherwise.

Overview of the Merger Agreement

Merger Consideration

At the effective time of the merger:

 

   

any shares of Aadi common stock held as treasury stock immediately prior to the effective time of the merger shall be canceled and retired and shall cease to exist with no consideration delivered in exchange;

 

   

each share of Aadi common stock outstanding immediately prior to the effective time of the merger (excluding shares of Aadi common stock held as treasury stock) shall be converted solely into the right to receive a number of shares of Aerpio common stock equal to the Exchange Ratio (as defined in the


 

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merger agreement), which will be calculated based on the total number of outstanding shares of Aerpio common stock and Aadi common stock, each on a fully-diluted basis, and the valuation of Aerpio as of immediately prior to the closing of the merger, as described below, subject to adjustment to account for the reverse stock split and further adjusted based on Aerpio’s net cash immediately prior to the completion of the merger; and

 

   

no fractional shares of Aerpio common stock will be issuable to Aadi’s stockholders pursuant to the merger.

Under the terms of the merger agreement, the Exchange Ratio (as defined in the merger agreement), or the number of shares of Aerpio common stock to be issued to Aadi’s stockholders for each share of Aadi common stock outstanding at the completion of the merger, will be calculated based on the total number of outstanding shares of Aerpio common stock and Aadi common stock, each on a fully-diluted basis, and the respective valuations of Aadi and Aerpio, as of immediately prior to the completion of the merger. As of the effective date of the merger agreement, the closing date valuation of Aadi (referred to as the “Aadi valuation”) was assumed to be $82,500,000, and the closing date valuation of Aerpio (referred to as the “Aerpio valuation”) was assumed to be $41,000,000 but is subject to adjustment as described below. Accordingly, if the closing of the merger occurs on or prior to July 26, 2021 and there is no adjustment to the Aerpio valuation as described below, then immediately following the effective time of the merger, Aadi’s stockholders will own or hold rights to acquire 66.8% of the combined company, on a fully-diluted basis, and Aerpio’s stockholders will own or hold rights to acquire 33.2% of the combined company, on a fully-diluted basis.

The Aerpio valuation was determined based on a projected net cash balance (defined in the merger agreement as cash, cash equivalents and marketable securities minus certain outstanding liabilities) of $26,000,000 as of a determination date prior to the completion of the merger (referred to as the “target Aerpio net cash”), but subject to adjustment as described below. If Aerpio’s actual net cash balance as of a determination date prior to the completion of the merger (referred to as the “closing Aerpio net cash”) is between a lower net cash target of $24,500,000, subject to adjustment as described below (referred to as the “lower target net cash”) and an upper net cash target of $27,500,000, subject to adjustment as described below (referred to as the “upper target net cash”), no adjustment will be made to the Aerpio valuation. If closing Aerpio net cash is less than the lower net cash target, the Aerpio valuation will be decreased by the difference between the closing Aerpio net cash and the target Aerpio net cash, resulting in a corresponding adjustment to the exchange ratio and an increase to the ownership percentage of Aadi’s stockholders in the combined company. If closing Aerpio net cash is greater than the upper target net cash, the Aerpio valuation will be increased by the difference between the closing Aerpio net cash and the target Aerpio net cash, resulting in a corresponding adjustment to the exchange ratio and a decrease to the ownership percentage of Aadi’s stockholders in the combined company. In addition, the target Aerpio net cash and lower target net cash and upper target net cash amounts will be reduced by $21,667 per day beginning on July 26, 2021 through the closing date of the merger, potentially resulting in a corresponding adjustment to the exchange ratio and to the ownership percentage of Aadi’s stockholders in the combined company.

Without giving effect to the PIPE financing or the proposed reverse stock split described elsewhere in this proxy statement, and based on the foregoing percentages as of a July 26, 2021 closing and Aerpio’s and Aadi’s capitalization as of June 14, 2021, the exchange ratio for the Aerpio common stock would be approximately 4.9152 shares of Aerpio common stock for each share of Aadi common stock (approximately 96,118,961 total shares of Aerpio common stock would be issued to Aadi’s stockholders, on a fully diluted basis). There will be no adjustment to the number of shares of Aerpio common stock to be issued to Aadi’s stockholders based on the market value of Aerpio common stock, and the market value of Aerpio common stock may vary significantly from the market value as of the date of this proxy statement. Because Aerpio’s net cash will not be determined until prior to the completion of the merger, and because the number of shares of Aerpio common stock issuable to Aadi’s stockholders is determined based on Aerpio’s net cash balance prior to the completion of the merger,


 

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Aerpio stockholders cannot be certain of the exact number of shares of Aerpio common stock that will be issued to Aadi’s stockholders when Aerpio stockholders vote on the proposals at the special meeting.

Equity Awards

Prior to the completion of the merger, the Aerpio Board will adopt appropriate resolutions and take all other actions necessary and appropriate to provide that the vesting of each unexpired, unexercised and unvested option to purchase Aerpio common stock (referred to as “Aerpio options”) will be accelerated in full effective as of immediately prior to the effective time of the merger. The number of shares of common stock underlying such options and the exercise price for such options will be adjusted to account for the reverse stock split. The Aerpio 2011 Equity Incentive Plan and the Aerpio 2017 Stock Option and Incentive Plan and each unexpired, unexercised Aerpio option shall continue to remain outstanding after the effective time of the merger.

Prior to the completion of the merger, unless otherwise determined by the parties, Aerpio will use commercially reasonable efforts to provide fully executed original separation agreements with each Aerpio employee. Aerpio and Aadi shall cause Aerpio to comply with the terms of any employment, severance, retention, change of control, or similar agreement with the Aerpio employees, including with respect to the acceleration of any Aerpio options held by the Aerpio employees.

Pursuant to the merger agreement, at the effective time of the merger, the shares of Aadi capital stock outstanding immediately prior to the effective time of the merger shall be substituted for the shares of Aerpio common stock that are to the same extent unvested and subject to the same repurchase option or risk of forfeiture, and certificates (if any) representing such shares of Aerpio common stock shall accordingly be marked with appropriate legends.

Pursuant to the merger agreement, at the effective time of the merger, each Aadi option that is outstanding and unexercised immediately prior to the effective time of the merger issued under Aadi’s existing employee plan, whether or not vested, shall be substituted for an Aerpio option, and Aerpio shall take all necessary steps to effectuate such substitution. From and after the effective time of the merger, (i) each substituted Aadi option may be exercised solely for shares of Aerpio common stock, (ii) the number of shares of Aerpio common stock subject to each Aadi option assumed by Aerpio shall be determined by multiplying (A) the number of shares of Aadi common stock that were subject to such Aadi option, as in effect immediately prior to the effective time of the merger, by (B) the Exchange Ratio, and rounding the resulting number down to the nearest whole number of shares of Aerpio common stock, (iii) the per share exercise price for the Aerpio common stock issuable upon exercise of each Aadi option assumed by Aerpio shall be determined by dividing (A) the per share exercise price of Aadi common stock subject to such Aadi option, as in effect immediately prior to the effective time of the merger, by (B) the Exchange Ratio and rounding the resulting exercise price up to the nearest whole cent and (iv) any restriction on the exercise of any Aadi option assumed by Aerpio shall continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such Aadi option shall otherwise remain unchanged.

Conditions to the Completion of the Merger

To consummate the merger, Aerpio’s stockholders must approve the issuance of shares of Aerpio common stock in the merger, the issuance of shares of Aerpio common stock and Aerpio pre-funded warrants in connection with the PIPE financing, and an amended and restated certificate of incorporation of Aerpio effecting the reverse stock split. In addition to obtaining such Aerpio stockholder approvals and appropriate regulatory approvals, the merger agreement includes a termination right for Aadi based upon Aerpio having a minimum net cash amount of at least $10,000,000. Additionally, each of the other closing conditions set forth in the merger


 

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agreement and described in the section titled “The Merger Agreement—Conditions to the Completion of the Merger” must be satisfied or waived.

No Solicitation

Each of Aerpio and Aadi agreed that, except as described below, from the date of the merger agreement until the earlier of the consummation of the merger or the termination of the merger agreement in accordance with its terms, Aerpio and Aadi and any of their respective subsidiaries will not, nor will either party or any of its subsidiaries authorize any of the directors, officers, employees, agents, attorneys, accountants, investment bankers, advisors or representatives retained by it or any of its subsidiaries to, directly or indirectly:

 

   

solicit, initiate or knowingly encourage, induce or facilitate the communication, making, submission or announcement of, any “acquisition proposal” (as defined in the section titled “The Merger Agreement—No Solicitation” below), or “acquisition inquiry” (as defined in the section titled “The Merger Agreement—No Solicitation” below);

 

   

furnish any non-public information with respect to it to any person in connection with or in response to an acquisition proposal or acquisition inquiry;

 

   

engage in discussions or negotiations with any person with respect to any acquisition proposal or acquisition inquiry;

 

   

in the case of Aerpio, approve, endorse or recommend an acquisition proposal; or

 

   

execute or enter into any letter of intent or similar document or any contract contemplating or otherwise relating to an acquisition transaction (as defined in the section titled “The Merger Agreement—No Solicitation” below).

Termination of the Merger Agreement

Either Aerpio or Aadi can terminate the merger agreement under specified circumstances, which would prevent the merger from being consummated.

Termination Fee

The merger agreement provides for the payment of a termination fee of $2,000,000 by Aerpio to Aadi upon termination of the merger agreement under specified circumstances.

Expense Reimbursement

The merger agreement provides for the payment of an expense reimbursement of $750,000 by Aerpio to Aadi upon termination of the merger agreement under specified circumstances.

Nasdaq Listing

Pursuant to the merger agreement, Aerpio agreed to use its commercially reasonable efforts to cause the shares of Aerpio common stock being issued in the merger to be approved for listing on Nasdaq at or prior to the effective time of the merger.

Support Agreements

Concurrently with the execution of the merger agreement, certain Aerpio stockholders, owning in the aggregate approximately 1.3% of the outstanding shares of Aerpio common stock, entered into support


 

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agreements with Aerpio and Aadi. The support agreements provide, among other things, that the parties to the support agreements will vote the shares of Aerpio common stock held by them in favor of the transactions contemplated by the merger agreement, including the issuance of the shares of Aerpio common stock in the merger and the PIPE financing, and grant a proxy to vote such shares in favor of the transactions. In addition, the support agreements place restrictions on the transfer of the shares of Aerpio common stock held by the respective signatory stockholders.

In addition, Aadi’s stockholders have already approved the merger.

Lock-up Agreements

Concurrently with the execution of the merger agreement, Aerpio’s current directors who will serve on the board of directors of the combined company and certain stockholders of Aadi, which collectively beneficially own or control an aggregate of approximately 96.08% of Aadi’s voting securities, entered into lock-up agreements with Aerpio, pursuant to which such parties have agreed not to, except in limited circumstances, sell or transfer, or engage in swap or similar transactions with respect to, shares of Aerpio common stock, including, as applicable, shares received in the merger and issuable upon exercise of certain warrants and options, from the closing of the merger until 180 days from the closing date of the merger. Pursuant to the merger agreement, certain directors and executive officers of the combined company will execute lock-up agreements prior to the closing of the merger.

Contingent Value Rights Agreement

The merger agreement contemplates that at or prior to completion of the merger, Aerpio, the holder representative and the rights agent will execute and deliver a CVR agreement (referred to as the “CVR agreement”), pursuant to which each holder of Aerpio common stock as of immediately prior to the completion of the merger shall be entitled to one contractual CVR (each referred to as a “CVR”) issued by Aerpio, subject to and in accordance with the terms and conditions of the CVR agreement, for each share of Aerpio common stock held by such holder. Each CVR shall entitle the holder thereof to receive 90% of the net proceeds (calculated as gross consideration minus certain permitted deductions), if any, under the CVR covered agreements. The CVRs are not transferable, except in certain limited circumstances as will be provided in the CVR agreement, will not be certificated or evidenced by any instrument and will not be registered with the SEC or listed for trading on any exchange.

PIPE Financing and Subscription Agreements

On May 16, 2021, Aerpio entered into subscription agreements (referred to as the “subscription agreements”) with the purchasers named therein (referred to as the “PIPE investors”). Pursuant to the subscription agreements, Aerpio agreed to sell shares of Aerpio common stock (in the form of shares of common stock and/or pre-funded warrants to acquire common stock of Aerpio (referred to as the “Aerpio pre-funded warrants”)) for an aggregate purchase price of approximately $155.0 million (collectively, referred to as the “PIPE financing”). The closing of the PIPE financing is expected to occur concurrently with, and is conditioned upon, the closing of the merger. Following the closing of the PIPE financing, the former Aadi stockholders are expected to own approximately 29.6% of the outstanding shares of Aerpio common stock on a fully-diluted basis, the stockholders of Aerpio as of immediately prior to the effective time of the merger are expected to own approximately 14.7% of the outstanding shares of Aerpio common stock on a fully-diluted basis and the PIPE investors are expected to own approximately 55.7% of the outstanding shares of Aerpio common stock on a fully-diluted basis.

Registration Rights Agreement

At the closing of the PIPE financing, in connection with the subscription agreements, Aerpio intends to enter into a registration rights agreement (referred to as the “registration rights agreement”) with the PIPE


 

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investors. Pursuant to the registration rights agreement, Aerpio will prepare and file a resale registration statement with the SEC within 30 calendar days following the closing of the PIPE financing (referred to as the “filing deadline”). Aerpio will use its reasonable best efforts to cause this registration statement to be declared effective by the SEC within 60 calendar days of the closing of the PIPE financing (or within 90 calendar days if the SEC reviews the registration statement).

Aerpio will also agree among other things, to indemnify the PIPE investors, their officers, directors, members, employees and agents, successors and assigns under the registration statement from certain liabilities and pay all fees and expenses (excluding any legal fees of the selling holder(s), and any underwriting discounts and selling commissions) incident to Aerpio’s obligations under the registration rights agreement.

The PIPE financing is exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (referred to as the “Securities Act”), and/or Regulation D promulgated thereunder, as a transaction by an issuer not involving a public offering. The PIPE investors have acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends have been affixed to the securities issued in this transaction.

Management Following the Merger

At the effective time of the merger, the executive management team of the combined company is expected to include the following individuals:

 

Name

  

Position with the Combined Company

  

Current Position with Aadi

Neil Desai, Ph.D.

   President and Chief Executive Officer    President and Chief Executive Officer

At the effective time of the merger, the executive management team of the combined company is also expected to include a chief financial officer, chief commercial officer and a chief medical officer.

The Board of Directors Following the Merger

At the effective time of the merger, the combined company will initially have a seven member board of directors, expected to be comprised of Neil Desai, Ph.D., Richard Maroun, Karin Hehenberger, M.D., Ph.D., Anupam Dalal, M.D., Caley Castelein, M.D., Behzad Aghazadeh, M.D., and one additional board member to be agreed upon by Aerpio and Aadi (until each of their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal). It is expected that Dr. Castelein will serve as chairman of the combined company’s board of directors.

Interests of Aerpio’s Directors and Executive Officers in the Merger

Aerpio’s directors and executive officers have economic interests in the merger that are different from, or in addition to, those of Aerpio stockholders generally. These interests include:

 

   

Aerpio’s executive officers are parties to employment agreements that provide for severance benefits, including accelerated vesting of outstanding equity awards and certain cash payments;

 

   

Aerpio’s executive officers will receive cash retention bonuses, which were approved on January 31, 2021;

 

   

Aerpio’s directors, Caley Castelein, M.D. and Anupam Dalal, M.D., serve as a Managing Director of KVP Capital and chief investment officer of Acuta Capital Partners, respectively. KVP Capital and Acuta Capital Partners are investors in the PIPE financing;

 

   

Aerpio’s director, Cheryl Cohen, received an award of Aerpio options in exchange for her services, time and effort rendered to Aerpio; and


 

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Aerpio’s directors and executive officers are entitled to continued indemnification and insurance coverage under indemnification agreements and the merger agreement.

These interests are discussed in more detail in the section entitled “The Merger—Interests of Aerpios Directors and Executive Officers in the Merger” beginning on page 130. The Aerpio Board was aware of and considered these interests, among other matters, in reaching its decision to approve and declare advisable the merger agreement, the merger and the other transactions contemplated by the merger agreement.

Interests of Aadi’s Directors and Executive Officers in the Merger

Aadi’s directors and executive officers have economic interests in the merger that are different from, or in addition to, those of Aadi’s stockholders generally. These interests include:

 

   

All of Aadi’s executive officers and its non-employee directors have options, subject to vesting, to purchase shares of Aadi capital stock that will be assumed by Aerpio and converted into and become options to purchase shares of Aerpio’s common stock.

 

   

Certain of Aadi’s directors and executive officers are expected to become the directors and executive officers of the combined company upon the closing of the merger.

 

   

All of Aadi’s directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the merger agreement.

 

   

Aadi’s director, Mahendra Shah, Ph.D., serves as a Senior Fellow of Vivo Capital. Vivo Capital is an investor in the PIPE financing.

These interests are discussed in more detail in the section entitled “The Merger—Interests of Aadi’s Directors and Executive Officers in the Merger” beginning on page 135. The Aadi Board was aware of and considered these interests, among other matters, in reaching its decision to approve and declare advisable the merger agreement, the merger and the other transactions contemplated by the merger agreement.

Federal Securities Law Consequences; Resale Restrictions

The issuance of Aerpio common stock in the merger to Aadi’s stockholders and the issuance of Aerpio common stock and Aerpio pre-funded warrants (as well as Aerpio common stock underlying such warrants) to the PIPE investors in the PIPE financing will be effected by means of a private placement, which is exempt from registration under the Securities Act, in reliance on Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D or Regulation S promulgated thereunder and such shares will be “restricted securities.” The shares issued in connection with the merger and the PIPE financing will not be registered under the Securities Act upon issuance and will not be freely transferable. Holders of such shares may not sell their respective shares unless the shares are registered under the Securities Act or an exemption is available under the Securities Act. Additionally, the shares of Aerpio common stock issued in the merger to Aadi’s stockholders will be subject to the resale restrictions under the lock-up agreements, as further described in the section entitled “Agreements Related To The Merger” beginning on page 166 of this proxy statement.

Material U.S. Federal Income Tax Consequences of the Merger, the Issuance of the CVRs and the Reverse Stock Split

The merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code. Aerpio stockholders will not sell, exchange or dispose of any shares of Aerpio common stock as a result of the merger. Thus, there will be no material U.S. federal income tax consequences to Aerpio or its stockholders as a result of the merger. Aerpio stockholders should not recognize gain or loss upon the reverse stock split. Aerpio


 

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and Aadi intend to report the issuance of the CVRs, to be received by Aerpio stockholders pursuant to the CVR agreement, as a taxable distribution of property with respect to Aerpio stock. However, the U.S. federal income tax treatment of the CVRs is unclear. There is no legal authority directly addressing the U.S. federal income tax treatment of the receipt of, and payments on, the CVRs, and there can be no assurance that the IRS would not assert, or that a court would not sustain, a position different than what is reported by Aerpio and that could result in adverse U.S. federal income tax consequences to holders of the CVRs.

For a more complete description of the material U.S. federal income tax consequences of the reverse stock split, receipt of the CVRs, merger, including possible alternative treatments of the CVRs, please see the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Reverse Stock Split, Issuance of the CVRs, and Merger” beginning on page 136 of this proxy statement.

Regulatory Approvals

Neither Aerpio nor Aadi is required to make any filings or to obtain approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Aerpio must comply with applicable federal and state securities laws and the Nasdaq rules in connection with the issuance of shares of Aerpio common stock in the merger and the PIPE financing, including the filing with the SEC of this proxy statement.

Anticipated Accounting Treatment

The merger will be treated by Aerpio as a reverse asset acquisition under the acquisition method of accounting in accordance with U.S. generally accepted accounting principles (referred to as “GAAP”). For accounting purposes, Aadi is considered to be the accounting acquirer in this transaction.

Appraisal Rights

Aerpio’s stockholders are not entitled to appraisal rights in connection with the merger.

Summary of Risk Factors

Below is a summary of the principal factors that stockholders should considered when deciding whether to vote or instruct their vote to be cast to approve the proposals described in this proxy statement. This summary does not address all of the risks that Aerpio and Aadi face. Additional discussion of the risks summarized in this risk factor summary, and other risks that Aerpio and Aadi face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this proxy statement.


 

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SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA

The following tables present summary historical financial data for each of Aerpio and Aadi, summary unaudited pro forma condensed combined financial data for Aerpio and Aadi and comparative historical and unaudited pro forma per share data for Aerpio and Aadi.

Selected Historical and Interim Consolidated Financial Data of Aerpio

The following table summarizes Aerpio’s condensed consolidated financial data. Aerpio derived the following consolidated statements of operations data for the years ended December 31, 2020 and 2019, the consolidated balance sheet data as of December 31, 2020 and 2019 and the consolidated statement of cash flows for the years ended December 31, 2020 and 2019 from its audited consolidated financial statements and related notes, included in Aerpio’s Annual Report on Form 10-K for the years ended December 31, 2020 and 2019 and incorporated by reference herein. Aerpio derived the following condensed consolidated statements of operations data for the three months ended March 31, 2021 and 2020, the condensed consolidated balance sheet data as of March 31, 2021 and the condensed consolidated statement of cash flows for the three months ended March 31, 2021 and 2020 from its interim condensed consolidated financial statements and related notes incorporated by reference herein. The following selected financial data have been derived from Aerpio’s consolidated financial statements and should be read in conjunction with “Aerpio’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes incorporated by reference herein. Aerpio’s historical results are not necessarily indicative of the results that may be expected in any future period.

Condensed Consolidated Statement of Operations:

 

     Three Months Ended March 31,     Year Ended December 31,  
     2021     2020     2020     2019  
     (unaudited)              

License revenue

   $ —       $ —       $ 15,000,000     $ —    

Operating expenses

        

Research and development

     2,228,002       1,829,042       12,594,823       12,824,402  

General and administrative

     2,136,591       2,285,891       8,762,222       9,756,185  

Restructuring expense

     1,238,270       —         —         1,863,495  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     5,602,863       4,114,933       21,357,045       24,444,082  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (5,602,863     (4,114,933     (6,357,045     (24,444,082

Other income

     1,158,088       —         1,813,976       —    

Grant income

     —         79,900       79,900       142,729  

Interest income

     3,036       116,370       147,846       1,030,839  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     1,161,124       196,270       2,041,722       1,173,568  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,441,739   $ (3,918,663   $ (4,315,323   $ (23,270,514
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share

        

Basic and diluted

   $ (0.09   $ (0.10   $ (0.10   $ (0.57
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares used in computing net loss per share attributable to common stockholders, basic and diluted

     47,282,322       40,588,004       42,624,148       40,588,004  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidated Balance Sheet:

 

     March 31,
2021
     December 31,  
     2020      2019  
     (unaudited)                

Cash and cash equivalents

   $ 39,008,517      $ 42,604,935      $ 38,524,536  

Working capital (1)

     38,870,051        42,852,216        36,236,470  

Total assets

     41,161,363        44,924,674        39,936,786  

Total liabilities

     2,129,202        1,866,809        3,401,443  

Accumulated deficit

     (150,992,584      (146,550,845      (142,235,522

Total stockholders’ equity

     39,032,161        43,057,865        36,535,343  

Note to table:

 

(1)

Working capital is defined as current assets less current liabilities

Condensed Consolidated Statement of Cash Flows:

 

     Three Months Ended March 31,     Year Ended December 31,  
             2021                     2020             2020     2019  
     (unaudited)              

Net cash used in operating activities

   $ (3,666,697   $ (3,939,826   $ (5,384,952   $ (23,852,522

Net cash used in investing activities

     —         —         (19,025     (236,952

Net cash provided by financing activities

     70,279       —         9,484,376       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ (3,596,418   $ (3,939,826   $ 4,080,399     $ (24,089,474
  

 

 

   

 

 

   

 

 

   

 

 

 

Selected Historical Financial Data of Aadi

The following table summarizes Aadi’s financial data. Aadi has derived the statements of operations data for the years ended December 31, 2020 and 2019, the balance sheet data as of December 31, 2020 and 2019 and the statement of cash flows for the years ended December 31, 2020 and 2019 from Aadi’s audited financial statements included elsewhere in this proxy statement. Aadi has derived the condensed statements of operations data for the three months ended March 31, 2021 and 2020, the condensed balance sheet data as of March 31, 2021 and the condensed statement of cash flows for the three months ended March 31, 2021 and 2020 from Aadi’s condensed interim financial statements included elsewhere in this proxy statement. You should read the following selected financial data together with Aadi’s condensed financial statements and the related notes appearing at the end of this proxy statement and “Aadi’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 240 of this proxy statement. Aadi’s historical results are not necessarily indicative of the results that may be expected in any future period.


 

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Aadi Condensed Statement of Operations and Comprehensive Loss:

 

     Three Months Ended March 31,     Year Ended December 31,  
             2021                     2020             2020     2019  
     (unaudited)              

Revenue:

        

License revenue

   $ —       $ —       $ 14,000,000     $ —    

Grant revenue

     119,561       110,558       580,014       749,000  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

     119,561       110,558       14,580,014       749,000  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Research and development

     3,643,484       2,641,482       15,008,376       11,064,467  

General and administrative

     562,639       672,402       2,121,018       1,854,378  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     4,206,123       3,313,884       17,129,394       12,918,845  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (4,086,562     (3,203,326     (2,549,380     (12,169,845

Other expense

        

Change in fair value of convertible promissory notes

     (1,165,349     —         (152,519     —    

Interest income (expense), net

     (223,732     (120,469     (773,773     (83,935
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (1,389,081     (120,469     (926,292     (83,935
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

     (5,475,643     (3,323,795     (3,475,672     (12,253,780

Income tax expense

     —         —         (1,800     (1,300
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss

     (5,475,643     (3,323,795     (3,477,472     (12,255,080

Convertible preferred stock cumulative and undeclared dividends

     (246,639     (246,639     (986,554     (986,554
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (5,722,282   $ (3,570,434   $ (4,464,026   $ (13,241,634
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share attributable to common stockholders, basic and diluted

   $ (0.71   $ (0.45   $ (0.56   $ (1.65
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares used in computing net loss per share attributable to common stockholders, basic and diluted

     8,015,000       8,015,000       8,015,000       8,015,000  
  

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Balance Sheet:

 

     March 31,
2021
     December 31,  
     2020      2019  
     (unaudited)                

Cash and cash equivalents

   $ 15,018,601      $ 4,454,730      $ 15,961,923  

Working capital (1)

     (17,926,922      (11,372,951      (9,313,121

Total assets

     15,465,619        18,824,768        16,658,622  

Total liabilities

     33,336,911        31,256,376        25,752,288  

Accumulated deficit

     (38,070,153      (32,594,510      (29,117,038

Total stockholders’ deficit

     (17,871,292      (12,431,608      (9,093,666

Note to table:

 

(1)

Working capital is defined as current assets less current liabilities


 

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Condensed Statement of Cash Flows:

 

     Three Months ended March 31,     Year ended December 31,  
     2021      2020     2020     2019  
     (unaudited)              

Net cash provided by (used in) operating activities

   $ 10,563,871      $ (4,469,612   $ (12,701,559   $ (7,584,076

Net cash used in investing activities

     —          —         —         (35,712

Net cash provided by financing activities

     —          1,000,000       1,194,366       8,075,000  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 10,563,871      $ (3,469,612   $ (11,507,193   $ 455,212  
  

 

 

    

 

 

   

 

 

   

 

 

 

Selected Unaudited Pro Forma Combined Financial Data of Aerpio and Aadi

The following unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting under GAAP. For accounting purposes, Aadi will be considered to be acquiring Aerpio and the merger is expected to be accounted for as a reverse asset acquisition. Aadi is considered the accounting acquirer even though Aerpio will be the issuer of the common stock in the merger. To determine the accounting for this transaction under GAAP, a company must assess whether an integrated set of assets and activities should be accounted for as an acquisition of a business or an asset acquisition. The guidance requires an initial screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set is not a business. In connection with the merger with Aerpio, the merger is expected to be treated as a reverse asset acquisition.

The unaudited pro forma combined balance sheet data as of March 31, 2021 gives effect to the merger as if it took place on March 31, 2021. The unaudited pro forma combined statement of operations and comprehensive loss data for the three months ended March 31, 2021 and the year ended December 31, 2020 gives effect to the merger as if it took place on January 1, 2020. The following information does not give effect to the proposed reverse stock split described in the section entitled “Matters Being Submitted to a Vote of Aerpio’s Stockholders—Proposal 2: Approval of the Amended and Restated Certificate of Incorporation,” beginning on page 172 of this proxy statement. The unaudited pro forma combined financial information does not reflect the proposed reverse stock split that is expected to be effected prior to consummation of the merger. The range of the stock split is expected to be in the range of one new share for every five to 15, inclusive, shares outstanding. Unaudited pro forma combined net loss per common share would increase to $0.11 and $1.32 for a 1-for-5 reverse stock split for the three months ended March 31, 2021 and year ended December 31, 2020, respectively; and would increase to $0.33 and $3.96 for a 1-for-15 reverse stock split for the three months ended March 31, 2021 and year ended December 31, 2020, respectively.

Using the estimated total consideration for the merger, management has preliminarily allocated such consideration to the assets acquired and liabilities assumed of Aerpio in the merger based on a preliminary valuation analysis and preliminary purchase price allocation. This preliminary purchase price allocation was used to prepare pro forma adjustments in the unaudited pro forma combined financial statements. The final purchase price allocation will be determined when management has determined the final consideration paid in the merger and completed the detailed valuations and necessary calculations. The final purchase price allocation could differ materially from the preliminary purchase price allocation used to prepare the pro forma adjustments and the unaudited pro forma combined financial statements. The final purchase price allocation may (i) include changes to assets and liabilities included in the pro forma combined financial data and (ii) include changes to the fair value of purchase consideration in the merger.

The unaudited pro forma combined financial information has been prepared in accordance with Article 11, as amended by SEC Final Rule Release No. 33-10786, “Amendments to Financial Disclosures About Acquired


 

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and Disposed Businesses.” In accordance with Release No. 33-10786, the unaudited condensed combined pro forma balance sheet and statements of operations reflect transaction accounting adjustments, as well as other adjustments deemed to be directly related to the merger, irrespective of whether or not such adjustments are deemed to be recurring.

The unaudited pro forma condensed combined financial information is based on the assumptions and adjustments that are described in the accompanying Notes. The merger is anticipated to be accounted for as a reverse asset acquisition. Accordingly, the pro forma adjustments are preliminary, subject to further revision as additional information becomes available and additional analyses are performed, and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. Differences between these preliminary estimates and the final accounting, expected to be completed after the closing of the merger, will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial information and the combined company’s future results of operations and financial position. In addition, differences between the preliminary and final amounts will likely occur as a result of the amount of cash used for Aerpio’s operations, changes in the fair value of Aerpio common stock, and other changes in Aerpio’s assets and liabilities.

The unaudited pro forma combined financial information has been prepared for illustrative purposes only and is not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had Aerpio and Aadi been a combined company during the specified periods.

The following selected unaudited pro forma combined financial data should be read in conjunction with the section entitled “Unaudited Pro Forma Combined Financial Statements,” beginning on page 254, Aerpio’s audited consolidated financial statements and the notes thereto included in the section entitled “Aerpio’s Audited Consolidated Financial Statements” in this proxy statement, Aadi’s audited financial statements and the notes thereto beginning on page F-1, Aadi’s unaudited condensed financial statements beginning on page F-31, the sections entitled “Aadi’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 240, and the other information contained in this proxy statement.


 

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Combined Company Unaudited Pro Forma Condensed Combined Statement of Operations:

 

     Three Months Ended
March 31, 2021
    Year Ended
December 31, 2020
 
     (unaudited)     (unaudited)  

Revenue

    

License revenue

   $ —       $ 29,000,000  

Grant revenue

     119,561       659,914  
  

 

 

   

 

 

 

Total revenue

     119,561       29,659,914  
  

 

 

   

 

 

 

Operating expenses

    

Research and development

     5,871,486       27,603,199  

General and administrative

     2,401,357       19,410,798  

Impairment of intangible asset

     —         67,247,596  
  

 

 

   

 

 

 

Total operating expenses

     8,272,843       114,261,593  
  

 

 

   

 

 

 

Loss from operations

     (8,153,282     (84,601,679

Other income

     1,158,088       1,813,976  

Interest income, net

     3,071       187,328  
  

 

 

   

 

 

 

Total other income

     1,161,159       2,001,304  
  

 

 

   

 

 

 

Net loss, before taxes

     (6,992,123     (82,600,375

Income tax expense

     —         (1,800
  

 

 

   

 

 

 

Net loss

   $ (6,992,123   $ (82,602,175
  

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (0.02   $ (0.26
  

 

 

   

 

 

 

Weighted average number of common shares used in computing net loss per share attributable to common stockholders, basic and diluted

     317,156,954       312,498,780  
  

 

 

   

 

 

 

Combined Company Unaudited Pro Forma Condensed Combined Balance Sheet

 

     March 31,
2021
 
     (unaudited)  

Cash and cash equivalents

   $ 182,662,322  

Working capital(1)

     162,200,526  

Total assets

     185,111,430  

Total liabilities

     22,693,164  

Accumulated deficit

     (108,805,406

Total stockholders’ equity

     162,418,266  

Note to table:

 

(1)

Working capital is defined as current assets less current liabilities

Comparative Historical and Unaudited Pro Forma Per Share Data

The information below reflects historical per share information for Aerpio and Aadi and unaudited pro forma per share information of the combined company as if Aerpio and Aadi had been combined as of or for the periods presented. This does not give effect to the proposed reverse stock split.

The pro forma book value information reflects the merger as if it had occurred as of the end of the period presented. The net loss per share information reflects the merger as if it had occurred on January 1, 2020.


 

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The unaudited pro forma combined loss per share information does not purport to represent the net loss per share which would have occurred had Aerpio and Aadi been combined during the periods presented, nor earnings (loss) per share for any future data or period. The unaudited pro forma combined book value (stockholders’ equity (deficit)) per share information below does not purport to represent what the value of Aerpio and Aadi would have been had the companies combined during the periods presented.

 

     As of and for the
Three Months
Ended
March 31, 2021
     As of and for the
Year Ended
December 31, 2020
 

Aerpio

     

Book value per common share—historical(1)

   $ 0.82      $ 0.91  

Basic and diluted net loss per common share—historical

   $ (0.09    $ (0.10

Cash dividends declared per common share—historical

     —          —    

Weighted average common shares

     47,282,322        42,624,148  

Aadi

     

Book value per common share—historical(1)

   $ (2.23    $ (1.55

Basic and diluted net loss per common share—historical

   $ (0.71    $ (0.56

Cash dividends declared per common share—historical

     —          —    

Weighted average common shares

     8,015,000        8,015,000  

Unaudited Pro Forma Combined

     

Book value per common share—pro forma(2)

   $ 0.51        —    

Basic and diluted net loss per common share—pro forma

   $ (0.02    $ (0.26

Cash dividends declared per common share—pro forma

     —          —    

Weighted average common shares

     317,156,954        312,498,780  

Notes to table:

 

(1)

Historical book value per common share is calculated by taking total stockholders’ equity (deficit) divided by total outstanding common shares, as of the end of the period.

(2)

Combined pro forma book value per common share is calculated by taking pro forma combined total stockholder equity divided by pro forma combined total outstanding common shares.


 

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MARKET PRICE AND DIVIDEND INFORMATION

Aerpio common stock began trading on the OTC Markets—OTCQB Tier on August 8, 2017 and subsequently uplisted to the Nasdaq Capital Market on June 26, 2018 under the symbol “ARPO.”

Aadi is a private company and its common stock is not publicly traded. As of June 16, 2021, there were approximately 3 holders of record of Aadi common stock.

On May 14, 2021, just prior to the public announcement of the proposed merger on May 17, 2021, the closing price per share of Aerpio common stock as reported on Nasdaq was $1.16 per share. On July 2, 2021, the last practicable date before the printing of this proxy statement, the closing price per share of Aerpio common stock as reported on Nasdaq was $1.75, per share.

Following the consummation of the merger, and subject to successful application for initial listing with Nasdaq, Aerpio common stock will continue to be listed on Nasdaq, but will trade under the symbol “AADI” and under the combined company name of “Aadi Bioscience, Inc.”

As of the record date, Aerpio had approximately 110 stockholders of record.

Aerpio has never declared or paid cash dividends on Aerpio common stock. Aerpio currently anticipates that all of its earnings in the foreseeable future will be used for the operation and growth of its business, and does not expect to pay any cash dividends to Aerpio stockholders. Payment of future dividends, if any, will be at the discretion of the Aerpio Board.

 

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RISK FACTORS

You should consider the following factors in evaluating whether to approve the issuance of shares of Aerpio common stock in the merger, the issuance of Aerpio common stock and pre-funded warrants in the PIPE financing and the resulting “change of control” of Aerpio under the Nasdaq rules and the amended and restated certificate of incorporation, including to effect a reverse stock split of Aerpio common stock. These factors should be considered in conjunction with the other information included or incorporated by reference by Aerpio in this proxy statement.

Risks Related to the Merger

If the proposed merger with Aadi is not consummated, Aerpio’s business could suffer materially and Aerpio’s stock price could decline.

The consummation of the proposed merger with Aadi is subject to a number of closing conditions, including the approval by Aerpio’s stockholders, approval by Nasdaq of Aerpio’s application for initial listing of Aerpio common stock in connection with the merger, and other customary closing conditions. Aerpio is targeting a closing of the transaction in the third quarter of 2021.

If the proposed merger is not consummated, Aerpio may be subject to a number of material risks, and its business and stock price could be adversely affected, as follows:

 

   

Aerpio has incurred and expects to continue to incur significant expenses related to the proposed merger with Aadi even if the merger is not consummated.

 

   

The merger agreement contains covenants relating to Aerpio’s solicitation of competing acquisition proposals and the conduct of Aerpio’s business between the date of signing the merger agreement and the closing of the merger. As a result, significant business decisions and transactions before the closing of the merger require the consent of Aadi. Accordingly, Aerpio may be unable to pursue business opportunities that would otherwise be in its best interest as a standalone company. If the merger agreement is terminated after Aerpio has invested significant time and resources in the transaction process, Aerpio will have a limited ability to continue its current operations without obtaining additional financing to fund its operations.

 

   

Aerpio could be obligated to pay Aadi a $2,000,000 termination fee in connection with the termination of the merger agreement, depending on the reason for the termination.

 

   

Aerpio could be obligated to pay Aadi a $750,000 expense reimbursement in connection with the termination of the merger agreement, depending on the reason for the termination.

 

   

Aerpio’s collaborators and other business partners and investors in general may view the failure to consummate the merger as a poor reflection on its business or prospects.

 

   

Some of Aerpio’s suppliers, collaborators and other business partners may seek to change or terminate their relationships with Aerpio as a result of the proposed merger.

 

   

As a result of the proposed merger, current and prospective employees could experience uncertainty about their future roles within the combined company. This uncertainty may adversely affect Aerpio’s ability to retain its key employees, who may seek other employment opportunities. Additionally, pursuant to the merger agreement, all Aerpio employees will be terminated effective as of the closing.

 

   

Aerpio’s management team may be distracted from day to day operations as a result of the proposed merger.

 

   

The market price of Aerpio common stock may decline to the extent that the current market price reflects a market assumption that the proposed merger will be completed.

 

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In addition, if the merger agreement is terminated and the Aerpio Board determines to seek another business combination, it may not be able to find a third party willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the merger. In such circumstances, the Aerpio Board may elect to, among other things, divest all or a portion of Aerpio’s business, or take the steps necessary to liquidate all of Aerpio’s business and assets, and in either such case, the consideration that Aerpio receives may be less attractive than the consideration to be received by Aerpio pursuant to the merger agreement.

If Aerpio does not successfully consummate the merger or another strategic transaction, the Aerpio Board may decide to pursue a dissolution and liquidation of Aerpio. In such an event, the amount of cash available for distribution to Aerpio’s stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

There can be no assurance that the merger will be completed. If the merger is not completed, the Aerpio Board may decide to pursue a dissolution and liquidation of Aerpio. In such an event, the amount of cash available for distribution to Aerpio’s stockholders will depend heavily on the timing of such decision and, as with the passage of time the amount of cash available for distribution will be reduced as Aerpio continues to fund its operations. In addition, if the Aerpio Board were to approve and recommend, and Aerpio’s stockholders were to approve, a dissolution and liquidation of Aerpio, Aerpio would be required under Delaware corporate law to pay its outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to Aerpio’s stockholders. As a result of this requirement, a portion of Aerpio’s assets may need to be reserved pending the resolution of such obligations, and the timing of any such resolution is uncertain. In addition, Aerpio may be subject to litigation or other claims related to a dissolution and liquidation of Aerpio. If a dissolution and liquidation were pursued, the Aerpio Board, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of Aerpio common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of Aerpio.

The amount of merger consideration may vary depending on the amount of net cash of Aerpio as of a certain determination date prior to closing and the date on which the closing occurs, which could result in Aerpio’s stockholders owning a smaller percentage of the combined company than expected.

Under the terms of the merger agreement, the number of shares of Aerpio common stock to be issued to Aadi’s stockholders at the closing of the merger will be determined based on an exchange ratio, which will be calculated based on the total number of outstanding shares of Aerpio common stock and Aadi common stock, each on a fully-diluted basis, and the respective valuations of Aadi and Aerpio, as of immediately prior to the closing of the merger. If the closing occurs on or before July 26, 2021 and there is no adjustment to the closing valuation of Aerpio (as described below), then immediately following the effective time of the merger, Aadi’s stockholders will own, or hold rights to acquire, 66.8% of the common stock of the combined company, on a fully-diluted basis, and Aerpio’s existing stockholders will own or hold rights to acquire 33.2% of the common stock of the combined company, on a fully-diluted basis. If Aerpio’s net cash is less than $26,000,000 and the closing of the merger occurs prior to July 26, 2021, then Aerpio’s valuation will be equal to the amount of Aerpio’s net cash plus an additional $15,000,000 of enterprise value. The respective valuations of Aadi and Aerpio, and the corresponding ownership percentages of Aadi’s stockholders and existing Aerpio stockholders, may be adjusted upward or downward based on the date the closing occurs and the net cash balance (defined in the merger agreement as cash, cash equivalents and marketable securities minus certain outstanding liabilities) of Aerpio as of a determination date prior to the closing of the merger, and as a result, either Aerpio’s stockholders could own less of the combined company than expected. There can be no assurances as to Aerpio’s level of net cash between now and closing or as to the date the closing will occur.

 

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Aerpio’s net cash may be less than $10,000,000 at the closing of the merger, which would cause a condition to Aadi’s obligation to consummate the merger to fail to be satisfied and may result in the termination of the merger agreement.

Aerpio is required to have a net cash balance of at least $10,000,000 at the closing of the merger as a condition to Aadi’s obligation to consummate the merger. For purposes of the merger agreement, net cash is subject to certain reductions, including, without limitation, accounts payable, accrued expenses (except those related to the merger), current liabilities payable in cash, unpaid expenses related to the merger and certain other unpaid obligations, including outstanding lease obligations. In the event that Aerpio’s net cash falls below this threshold, a condition to Aadi’s obligation to consummate the merger will fail to be satisfied and Aadi will have the right to terminate the merger agreement at an outside date of February 16, 2022 (subject to extension as provided in the merger agreement) if Aerpio’s net cash continues to be lower than the $10,000,000 threshold.

Aerpio may not consummate the PIPE financing or may fail to receive, substantially concurrently with the closing of the merger, the minimum required PIPE financing proceeds of $50,000,000, which would cause a condition to both parties’ obligations to consummate the merger to fail to be satisfied and may result in the termination of the merger agreement.

The closing of the PIPE financing is expected to occur concurrently with, and is conditioned upon, the closing of the merger. Aerpio is required to have received, or substantially concurrently with the closing of the merger receive, the minimum required PIPE financing proceeds of $50,000,000 as a condition to both Aadi’s and Aerpio’s obligations to consummate the merger. For purposes of the merger agreement, the PIPE financing proceeds must be at least $50,000,000, but the parties expect the PIPE financing to be comprised of an aggregate purchase price of approximately $155,000,000. In the event that the PIPE financing is not consummated or the amount of the PIPE financing proceeds is below $50,000,000, a condition to Aadi’s and Aerpio’s obligations to consummate the merger will fail to be satisfied and Aadi and Aerpio will each have the right to terminate the merger agreement at an outside date of February 16, 2022 (subject to extension as provided in the merger agreement) if the condition continues to fail to be satisfied.

Some of Aerpio’s officers and directors have conflicts of interest that may influence them to support or approve the merger.

Officers and directors of Aerpio participate in arrangements that provide them with interests in the merger that are different from yours, including, among others, their continued service as a director of the combined company, retention and severance benefits, the acceleration of option vesting and continued indemnification. These interests, among others, may influence the officers and directors of Aerpio to support or approve the merger. For a more detailed discussion see “The Merger—Interests of Aerpio’s Directors and Executive Officers in the Merger” beginning on page 130 of this proxy statement.

The merger may be completed even though material adverse changes may result from the announcement of the merger, industry-wide changes and other causes.

In general, either party can refuse to complete the merger if there is a material adverse change affecting the other party between May 16, 2021, the date of the merger agreement, and the closing. However, some types of changes do not permit either party to refuse to complete the merger, even if such changes would have a material adverse effect on Aerpio or Aadi, to the extent they resulted from the following and do not have a materially disproportionate effect on Aerpio or Aadi, as the case may be:

 

   

the announcement or pendency of the merger agreement or the transactions contemplated thereby;

 

   

any natural disaster or any act or threat of terrorism or war anywhere in the world, any armed hostilities or terrorist activities anywhere in the world, any threat or escalation of armed hostilities or terrorist activities anywhere in the world or any governmental or other response or reaction to any of the foregoing;

 

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any epidemic or pandemic (including continuation or escalation of the COVID-19 pandemic or orders issued by a Governmental Authority in response to the COVID-19 pandemic) in the United States or any other country or region in the world, or any escalation of the foregoing;

 

   

any change in generally accepted accounting principles or any change in applicable laws, rules or regulations or the interpretation thereof;

 

   

general economic or political conditions or conditions generally affecting the industries in which either party and its subsidiaries operate;

 

   

with respect to Aerpio, any change in the stock price or trading volume of Aerpio common stock; or

 

   

with respect to Aerpio, subject to certain exceptions, a change in the listing status of Aerpio common stock on Nasdaq.

If adverse changes occur but Aerpio and Aadi must still complete the merger, the combined company’s stock price may suffer.

The market price of the combined company’s common stock may decline as a result of the merger.

The market price of the combined company’s common stock may decline as a result of the merger for a number of reasons including if:

 

   

the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts;

 

   

the effect of the merger on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

   

investors react negatively to the effect on the combined company’s business and prospects from the merger.

Aerpio’s stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger.

If the combined company is unable to realize the strategic and financial benefits currently anticipated from the merger, Aerpio’s stockholders will have experienced substantial dilution of their ownership interest without receiving any commensurate benefit. Significant management attention and resources will be required to integrate the two companies. Delays in this process could adversely affect the combined company’s business, financial results, financial condition and stock price following the merger.

During the pendency of the merger, Aerpio may not be able to enter into a business combination with another party and will be subject to contractual limitations on certain actions because of restrictions in the merger agreement.

Covenants in the merger agreement impede the ability of Aerpio or Aadi to make acquisitions or complete other transactions that are not in the ordinary course of business pending completion of the merger. As a result, if the merger is not completed, the parties may be at a disadvantage to their competitors. In addition, while the merger agreement is in effect and subject to limited exceptions, each party is prohibited from soliciting, initiating, encouraging or taking actions designed to facilitate any inquiries or the making of any proposal or offer that could lead to the entering into certain extraordinary transactions with any third party, such as a sale of assets, an acquisition of Aerpio common stock, a tender offer for Aerpio common stock, a merger or other business combination outside the ordinary course of business. Any such transactions could be favorable to such party’s stockholders.

 

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Because the lack of a public market for Aadi common stock makes it difficult to evaluate the fairness of the merger, Aadi’s stockholders may receive consideration in the merger that is greater than or less than the fair market value of Aadi common stock.

The outstanding share capital of Aadi is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Aadi. Since the percentage of Aerpio’s equity to be issued to Aadi’s stockholders was determined based on negotiations between the parties, it is possible that the value of the Aerpio common stock to be issued in connection with the merger will be greater than the fair market value of Aadi. Alternatively, it is possible that the value of the shares of Aerpio common stock to be issued in connection with the merger will be less than the fair market value of Aadi.

The combined company will incur significant transaction costs as a result of the merger, including investment banking, legal and accounting fees. In addition, the combined company will incur significant consolidation and integration expenses which cannot be accurately estimated at this time. These costs could include the possible relocation of certain operations from Massachusetts to other offices of the combined company as well as costs associated with terminating existing office leases and the loss of benefits of certain favorable office leases. Actual transaction costs may substantially exceed Aadi’s estimates and may have an adverse effect on the combined company’s financial condition and operating results.

Failure of the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code could harm the combined company.

The parties intend for the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code, as amended. For a full description of the tax consequences of the merger, see “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 136 of this proxy statement. To comply with the requirements for a Section 368(a) reorganization, certain requirements for the transaction must be met; if such requirements are not satisfied, Aadi’s stockholders could be subject to tax liability.

The merger is expected to result in a limitation on Aerpio’s ability to utilize its net operating loss carryforward.

Under Section 382 of the Code, use of Aerpio’s net operating loss carryforwards (referred to as “NOLs”) will be limited if Aerpio experiences an “ownership change.” For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Aerpio is expected to experience an ownership change as a result of the merger and therefore its ability to utilize its NOLs and certain credit carryforwards remaining at the effective time will be limited. The limitation will be determined by the fair market value of Aerpio common stock outstanding prior to the ownership change, multiplied by the applicable federal rate. Limitations imposed on Aerpio’s ability to utilize NOLs could cause U.S. federal and state income taxes to be paid earlier than would be paid if such limitations were not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs.

Certain stockholders could attempt to influence changes within Aerpio which could adversely affect Aerpio’s operations, financial condition and the value of Aerpio common stock.

Aerpio’s stockholders may from time-to-time seek to acquire a controlling stake in Aerpio, engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes. Campaigns by stockholders to effect changes at publicly-traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, and could disrupt Aerpio’s operations and divert the attention of

 

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the Aerpio Board and senior management from the pursuit of the proposed merger transaction. These actions could adversely affect Aerpio’s operations, financial condition, Aerpio’s ability to consummate the merger and the value of Aerpio common stock.

Aerpio and Aadi are involved in securities class action litigation related to the merger and may become involved in additional securities class action litigation or stockholder derivative litigation in connection with the merger, and this could divert the attention of Aerpio and Aadi management and harm the combined company’s business, and insurance coverage may not be sufficient to cover all related costs and damages.

Securities class action litigation or stockholder derivative litigation frequently follows the announcement of certain significant business transactions, such as a business combination transaction. Aerpio and Aadi may become involved in this type of litigation in connection with the merger, and the combined company may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect the business of Aerpio, Aadi and the combined company.

In connection with the merger, on June 30, 2021, a purported stockholder of Aerpio filed a complaint in the United States District Court for the Southern District of New York, captioned Dwayne Komurke v. Aerpio Pharmaceuticals Inc., et al., Case No. 1:21-CV-05686 (referred to as the “Komurke complaint”), naming as defendants Aerpio, each member of the Aerpio Board as of the date of the merger agreement, the merger subsidiary, and Aadi. The Komurke complaint alleges, among other things, that the Merger consideration is inadequate and that Aerpio’s proxy statement filed with the SEC on June 21, 2021 misrepresents and/or omits certain purportedly material information relating to financial projections, analysis performed by Ladenburg, and the process leading up to the execution of the merger agreement. The Komurke complaint asserts claims for breach of fiduciary duty against Aerpio’s directors; aiding and abetting breaches of fiduciary duty against Aerpio, the merger subsidiary, and Aadi; violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder against all defendants; and violations of Section 20(a) of the Exchange Act against Aerpio’s directors. The stockholder complaint seeks, among other things: an injunction enjoining consummation of the merger, costs of the action, including plaintiff’s attorneys’ fees and experts’ fees, declaratory relief, and any other relief the court may deem just and proper.

On July 6, 2021, a purported stockholder of Aerpio filed a complaint in the United States District Court for the Southern District of New York, captioned Matthew Whitfield v. Aerpio Pharmaceuticals Inc., et al., Case No. 1:21-cv-05787 (referred to as the “Whitfield complaint”), naming as defendants Aerpio and each member of the Aerpio Board as of the date of the merger agreement. The Whitfield complaint alleges, among other things, that Aerpio’s proxy statement filed with the SEC on June 21, 2021 omits certain allegedly material information by failing to disclose (i) financial projections of Aerpio, (ii) certain information concerning Aerpio management’s financial projections for Aadi, (iii) certain assumptions used in a discounted cash flow analysis performed by Ladenburg, and (iv) certain information concerning Aerpio’s second financial advisor. The Whitfield complaint asserts claims for violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder against all defendants, and violations of Section 20(a) of the Exchange Act against Aerpio’s directors. The Whitfield complaint seeks, among other things: an injunction enjoining consummation of the merger, an order directing the defendants to disseminate a proxy statement that includes certain additional and allegedly material information, rescissory relief, costs of the action, including plaintiff’s attorneys’ fees and experts’ fees, declaratory relief, and any other relief the court may deem just and proper.

On July 6, 2021, a purported stockholder of Aerpio filed a complaint in the United States District Court for the Southern District of New York, captioned Robin Odach v. Aerpio Pharmaceuticals Inc., et al., Case No. 1:21-cv-05802 (referred to as the “Odach complaint”), naming as defendants Aerpio and each member of the Aerpio Board as of the date of the merger agreement. The Odach complaint alleges, among other things, that Aerpio’s proxy statement filed with the SEC on June 21, 2021 contains allegedly material misstatements and omissions, including by failing to disclose (i) the basis for certain assumptions underlying Aerpio management’s financial projections for Aadi, (ii) certain inputs used in a discounted cash flow analysis performed by

 

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Ladenburg, and (iii) certain information concerning Aerpio’s second financial advisor. The Odach complaint asserts claims for violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder against all defendants, and violations of Section 20(a) of the Exchange Act against Aerpio’s directors. The Odach complaint seeks, among other things: an injunction enjoining consummation of the merger, rescissory relief, costs of the action, including plaintiff’s attorneys’ fees and experts’ fees, and any other relief the court may deem just and proper.

The Aerpio Board has also received a demand letter from a purported stockholder of Aerpio, requesting certain books and records of Aerpio concerning the merger pursuant to Section 220 of the Delaware General Corporation Law.

It is possible that additional similar cases could be filed in connection with the merger.

Failure to complete the merger may result in Aerpio paying a termination fee or expenses to the other party and could harm the price of Aerpio common stock and the future business and operations of each company.

If the merger is not completed and the merger agreement is terminated under certain circumstances, Aerpio may be required to pay Aadi a termination fee of $2,000,000 and/or an expense reimbursement of up to $750,000. Even if a termination fee or expense reimbursement is not payable in connection with a termination of the merger agreement, Aerpio will have incurred significant fees and expenses, which must be paid whether or not the merger is completed. Further, if the merger is not completed, it could significantly harm the market price of Aerpio common stock.

The exchange ratio is not adjustable based on the market price of Aerpio common stock so the merger consideration at the closing may have greater or lesser value than the market price at the time the merger agreement was signed.

The merger agreement has set the exchange ratio for Aadi common stock, and the exchange ratio is based on the outstanding Aadi common stock and the outstanding Aerpio common stock, in each case immediately prior to the closing of the merger as described under the heading “The Merger—Merger Consideration.” Applying the exchange ratio formula in the merger agreement, Aadi’s stockholders immediately before the merger are expected to own 66.8% of the outstanding capital stock of Aerpio immediately following the merger, and the stockholders of Aerpio immediately before the merger are expected to own approximately 33.2% of the outstanding capital stock of Aerpio immediately following merger, subject to certain assumptions and without giving effect to the PIPE financing. Under certain circumstances further described in the merger agreement, however, these ownership percentages may be adjusted upward or downward based on the date the closing occurs and the cash levels of the respective companies at the closing of the merger, and as a result, Aerpio’s stockholders could own less of the combined company than expected.

Any changes in the market price of Aerpio common stock before the completion of the merger will not affect the number of shares of Aerpio common stock issuable to Aadi’s stockholders pursuant to the merger agreement. Therefore, if before the completion of the merger the market price of Aerpio common stock declines from the market price on the date of the merger agreement, then Aadi’s stockholders could receive merger consideration with substantially lower value than the value of such merger consideration on the date of the merger agreement. Similarly, if before the completion of the merger the market price of Aerpio common stock increases from the market price of Aerpio common stock on the date of the merger agreement, then Aadi’s stockholders could receive merger consideration with substantially greater value than the value of such merger consideration on the date of the merger agreement. The merger agreement does not include a price-based termination right. Because the exchange ratio does not adjust as a result of changes in the market price of Aerpio common stock, for each one percentage point change in the market price of Aerpio common stock, there is a corresponding one percentage point rise or decline, respectively, in the value of the total merger consideration payable to Aadi’s stockholders pursuant to the merger agreement.

 

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Certain provisions of the merger agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the merger agreement.

The terms of the merger agreement prohibit each of Aerpio and Aadi from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when the Aerpio Board determines in good faith that an unsolicited alternative takeover proposal is or is reasonably likely to lead to a superior takeover proposal and that failure to cooperate with the proponent of the proposal would be reasonably likely to be inconsistent with the Aerpio Board’s fiduciary duties.

If the conditions to the merger are not met, the merger may not occur.

Even if the share issuances and amended and restated certificate of incorporation to effect the reverse stock split are approved by Aerpio’s stockholders, specified conditions must be satisfied or waived to complete the merger, including the consummation of the PIPE financing. These conditions are set forth in the merger agreement and described in the section entitled “The Merger Agreement—Conditions to the Completion of the Merger”. Aerpio cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger will not occur or will be delayed, and Aerpio and Aadi each may lose some or all of the intended benefits of the merger.

Aerpio stockholders may not receive any payment on the CVRs and the CVRs may otherwise expire valueless.

The merger agreement contemplates that at or prior to completion of the merger, Aerpio, the Holder Representative (as defined in the CVR agreement) and the Rights Agent (as defined in the CVR agreement) will execute and deliver the CVR agreement, pursuant to which each holder of Aerpio common stock as of immediately prior to the effective time of the merger shall be entitled to one contractual CVR issued by Aerpio, subject to and in accordance with the terms and conditions of the CVR agreement, for each share of Aerpio common stock held by such holder. Each CVR shall entitle the holder thereof to receive 90% of the net proceeds (calculated as gross consideration minus certain permitted deductions), if any, under the license agreement, dated June 24, 2018, entered into by and between Aerpio and Gossamer Bio, Inc., as amended by the Amendment No. 1 thereto and any written definitive agreements entered into by Aerpio and a third party prior to the effective time of the merger related to the sale, license, transfer, disposition, divestiture or other monetization transaction (i.e., a royalty transaction) and/or winding down of the Aspen Legacy Business or any Aspen Legacy Assets (each as defined in the merger agreement) (referred to as the “CVR covered agreements”). The CVRs are not transferable, except in certain limited circumstances as will be provided in the CVR agreement, will not be certificated or evidenced by any instrument and will not be registered with the SEC or listed for trading on any exchange or quotation system. The CVRs will not represent any equity or ownership interest in Aerpio or in any constituent company to the merger and will not have any voting or dividend rights, and interest will not accrue on any amounts payable in respect of the CVRs to any holder.

The combined company will be under no contractual obligation to sell, license, or otherwise monetize the Aspen Legacy Business or any Aspen Legacy Assets. If Aerpio is unable to sell, license, or otherwise monetize the Aspen Legacy Business or any Aspen Legacy Assets before the closing of the merger, or does not enter into any CVR covered agreements, there may not be any proceeds relating to the CVR covered agreements, no payments will be made under the CVRs, and the CVRs will expire valueless.

Finally, the U.S. federal income tax treatment of the CVRs is unclear. There is no legal authority directly addressing the U.S. federal income tax treatment of the receipt of, and payments on, the CVRs, and there can be no assurance that the IRS would not assert, or that a court would not sustain, a position different than what is reported by Aerpio and that could result in adverse U.S. federal income tax consequences to holders of the CVRs. The CVR agreement is discussed in greater detail in the section entitled “Agreements Related to the Merger—Contingent Value Rights Agreement” on page 167 of this proxy statement.

 

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Risks Related to the Reverse Stock Split

The reverse stock split may not increase Aerpio’s stock price over the long-term.

The principal purpose of the reverse stock split is to increase the per-share market price of Aerpio common stock above the minimum bid price requirement under the Nasdaq rules so that the listing on Nasdaq of the combined company and the shares of Aerpio common stock being issued in the merger will be approved. It cannot be assured, however, that the reverse stock split will accomplish this objective for any meaningful period of time. While it is expected that the reduction in the number of outstanding shares of common stock will proportionally increase the market price of Aerpio common stock, it cannot be assured that the reverse stock split will increase the market price of its common stock by a multiple of the reverse stock split ratio chosen by the Aerpio Board, or result in any permanent or sustained increase in the market price of Aerpio common stock, which is dependent upon many factors, including Aerpio’s business and financial performance, general market conditions, and prospects for future success. Thus, while the stock price of the combined company might meet the continued listing requirements for Nasdaq initially, it cannot be assured that it will continue to do so.

The reverse stock split may decrease the liquidity of Aerpio common stock.

Although the Aerpio Board believes that the anticipated increase in the market price of Aerpio common stock could encourage interest in its common stock and possibly promote greater liquidity for its stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the reverse stock split. The reduction in the number of outstanding shares may lead to reduced trading and a smaller number of market makers for Aerpio common stock.

The reverse stock split may lead to a decrease in Aerpio’s overall market capitalization.

Should the market price of Aerpio common stock decline after the reverse stock split, the percentage decline may be greater, due to the smaller number of shares outstanding, than it would have been prior to the reverse stock split. A reverse stock split is often viewed negatively by the market and, consequently, can lead to a decrease in Aerpio’s overall market capitalization. If the per share market price does not increase in proportion to the reverse stock split ratio, then the value of the combined company, as measured by its stock capitalization, will be reduced. In some cases, the per-share stock price of companies that have effected reverse stock splits subsequently declined back to pre-reverse split levels, and accordingly, it cannot be assured that the total market value of Aerpio common stock will remain the same after the reverse stock split is effected, or that the reverse stock split will not have an adverse effect on Aerpio’s stock price due to the reduced number of shares outstanding after the reverse stock split.

Risks Related to Aerpio

For risks related to the business of Aerpio, please refer to the section entitled “Item 1A. Risk Factors” set forth in Aerpio’s Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 11, 2021, as updated by the subsequent quarterly reports on Form 10-Q.

Risks Related to Aadi

Risks Related to Aadi’s Business, Financial Condition and Capital Requirements

Aadi is a clinical stage biopharmaceutical company, has a limited operating history, has not initiated or completed any large-scale clinical trials, and has no products approved for commercial sale, which may make it difficult for you to evaluate its current business and likelihood of success and viability.

Aadi is a clinical-stage biopharmaceutical company with a limited operating history upon which you can evaluate its business and prospects. Aadi has no products approved for commercial sale and has not generated any revenue. Drug development is a highly uncertain undertaking and involves a substantial degree of risk.

 

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Aadi’s Phase 2 registrational study of its drug FYARRO (ABI-009, nab-sirolimus) (referred to as the “AMPECT trial”) for advanced (metastatic or locally advanced) malignant perivascular epithelioid sarcoma (referred to as “PEComa”) has been completed. A rolling New Drug Application (referred to as an “NDA”) submission for its lead product candidate, ABI-009, was completed in May 2021. Based on the AMPECT trial and emerging data for ABI-009 in other solid tumors with tumor-agnostic Tuberous Sclerosis Complex 1 and 2 (referred to as “TSC1 & TSC2) alterations, and following discussions with the U.S. Food and Drug Administration (referred to as the “FDA”), Aadi plans to initiate a tumor-agnostic registrational trial in cancers harboring TSC1 & TSC2 inactivating alterations by the end of 2021. Its other programs are in early clinical research stages. To date, Aadi has devoted substantially all of its resources to research and development activities, business planning, establishing and maintaining its intellectual property portfolio, hiring personnel, raising capital and providing general and administrative support for these operations.

Aadi has not yet demonstrated its ability to successfully obtain regulatory approvals, manufacture a commercial-scale product or arrange for a third party to do so on its behalf, or conduct sales and marketing activities necessary for successful product commercialization. As a result, it may be more difficult for you to accurately predict Aadi’s likelihood of success and viability than it could be if it had a longer operating history.

In addition, Aadi may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors and risks frequently experienced by clinical-stage biopharmaceutical companies in rapidly evolving fields. Aadi may also need to transition from a company with a research and development focus to a company capable of supporting commercial activities. Aadi has not yet demonstrated an ability to successfully overcome such risks and difficulties, or to make such a transition. If Aadi does not adequately address these risks and difficulties or successfully make such a transition, its business will suffer.

Aadi has incurred significant net losses since its inception, and it expects to continue to incur significant net losses for the foreseeable future.

Aadi has incurred significant net losses since its inception, has not generated any revenue from product sales to date and has financed its operations principally through private placements of its convertible preferred stock, federal grants and proceeds from licenses. Aadi’s net losses were $5.5 million for the three months ended March 31, 2021 and $3.5 million for the year ended December 31, 2020. Aadi had an accumulated deficit of $38.1 million as of March 31, 2021 and $32.6 million as of December 31, 2020. These losses have resulted primarily from costs incurred in connection with research and development activities and general and administrative costs associated with Aadi’s operations. Aadi does not expect to generate meaningful revenue from product sales for the foreseeable future, and it expects to continue to incur significant operating expenses for the foreseeable future due to the cost of research and development, including identifying and designing additional product candidates and conducting preclinical studies and clinical trials, and the regulatory approval process for its product candidates. Aadi expects its expenses, and the potential for losses, to increase substantially as it conducts clinical trials of its lead product candidates and seeks to expand its pipeline. The amount of Aadi’s future expenses and potential losses is uncertain.

Even if Aadi succeeds in receiving regulatory approval for and commercializing one or more of its current and future product candidates, Aadi expects to continue to incur significant expenses and increasing operating losses over the next several years and for the foreseeable future. The net losses Aadi incurs may fluctuate significantly from quarter to quarter such that a period-to-period comparison of its results of operations may not be a good indication of its future performance. The size of its future net losses will depend, in part, on the rate of future growth of its expenses and its ability to generate revenue. Aadi’s prior losses and expected future losses have had, and will continue to have, an adverse effect on its working capital, its ability to fund the development of its product candidates, its ability to achieve and maintain profitability and the performance of the combined company’s stock.

 

 

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Aadi’s ability to generate revenue and achieve profitability depends significantly on its ability to achieve several objectives relating to the discovery, development and commercialization of its product candidates.

Aadi’s ability to generate product revenue sufficient to achieve profitability depends on the successful discovery, development and eventual commercialization of one or more of its current and future product candidates. To date, Aadi has no products approved for commercial sale and does not anticipate generating any revenue from product sales until after Aadi has received regulatory approval for the commercial sale of a product candidate, if ever. Its ability to generate revenue and achieve profitability depends significantly on its ability, or any current or future collaborator’s ability, to achieve several objectives, including, but not limited to:

 

   

timely review and regulatory approval of Aadi’s NDA submission for FYARRO for the treatment of advanced malignant PEComa by the FDA;

 

   

demonstrating the safety and efficacy of ABI-009 to the satisfaction of the FDA and obtaining regulatory approval for ABI-009 and other current and future product candidates, if any, for which there is a commercial market;

 

   

completing development activities, including planned clinical trials for ABI-009, successfully and on a timely basis;

 

   

its ability to complete investigational new drug application (referred to as an “IND”) enabling studies and successfully submit INDs or IND supplements or comparable applications, that become effective without any objections by the FDA or comparable regulatory authorities before commencing a clinical trial for any of its product candidates;

 

   

establishing and maintaining relationships with contract research organizations (referred to as “CROs”) and clinical sites for the clinical development of ABI-009 and its other future product candidates;

 

   

timely receipt of regulatory approvals from applicable regulatory authorities for any product candidates for which it successfully completes clinical development;

 

   

developing or contracting for an efficient and scalable manufacturing process for its product candidates, including obtaining finished products that are appropriately packaged for sale;

 

   

establishing and maintaining commercially viable supply and manufacturing relationships with third parties that can provide adequate, in both amount and quality, products and services to support clinical development and meet the market demand for its product candidates, if approved;

 

   

launching and successfully commercializing product candidates following any regulatory approval, including the development of a commercial infrastructure, whether in-house or with one or more collaborators;

 

   

negotiating and maintaining an adequate price for its product candidates, both in the United States and in foreign countries where its products are commercialized;

 

   

a continued acceptable safety profile following any regulatory approval of its product candidates;

 

   

commercial acceptance of its product candidates by patients, the medical community and third-party payors;

 

   

satisfying any required post-regulatory approval commitments to applicable regulatory authorities;

 

   

identifying, assessing and developing new product candidates;

 

   

obtaining, maintaining and expanding patent protection, trade secret protection and regulatory exclusivity, both in the United States and internationally;

 

   

protecting its rights in its intellectual property portfolio;

 

   

defending against third-party interference or infringement claims, if any;

 

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entering into and maintaining, on favorable terms, any collaboration, licensing or other arrangements that may be necessary or desirable to develop, manufacture or commercialize its product candidates;

 

   

obtaining coverage and adequate reimbursement by third-party payors for its product candidates;

 

   

addressing any competing therapies and technological and market developments; and

 

   

attracting, hiring and retaining qualified personnel.

Aadi may never be successful in achieving its objectives and, even if it does, may never generate revenue that is significant or large enough to achieve profitability. If Aadi does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis. Aadi’s failure to become and remain profitable would decrease its value and could impair its ability to maintain or further its research and development efforts, raise additional necessary capital, grow its business or continue its operations and could cause a decline in the value of its common stock.

Even following the merger and PIPE financing, Aadi will require additional capital to finance its operations. If it is unable to raise such capital when needed, or on acceptable terms, it may be forced to delay, reduce and/or eliminate one or more of its research and drug development programs or future commercialization efforts.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. Aadi’s operations have consumed substantial amounts of cash since inception, and Aadi expects its expenses to increase in connection with its ongoing and planned activities, particularly as it seeks regulatory approval for, and the potential commercialization of, ABI-009. Aadi’s expenses could increase beyond its current expectations if it is required by the FDA, the European Medicines Agency (referred to as the “EMA”) or other regulatory agencies to perform clinical trials or preclinical studies in addition to those that it currently anticipates, or if there are any delays in any of its clinical trials or the development of any of its product candidates. Other unanticipated costs may also arise. In addition, even if Aadi obtains regulatory approval for any of its product candidates, including ABI-009, Aadi expects to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution activities and ongoing compliance activities. Because the outcome of Aadi’s rolling NDA submission for the PEComa indication and the design and outcome of Aadi’s planned and anticipated clinical trials is uncertain, it cannot reasonably estimate the actual amount of resources and funding that will be necessary to successfully complete the development and commercialization of ABI-009 for the PEComa indication, if approved, or any other product candidates or other indications it develops. Aadi is not permitted to market or promote ABI-009, or any other product candidate, in the United States before it receives regulatory approval from the FDA. In addition, upon the completion of the merger, Aadi expects to incur additional costs associated with operating as a public company. Accordingly, Aadi will need to obtain substantial additional funding in order to continue its operations.

As of March 31, 2021, Aadi had $15 million in cash and cash equivalents. Based on Aadi’s current operating plan, it believes that the cash and cash equivalents of the combined company following the close of the merger, including the proceeds from the PIPE financing, will enable it to fund its planned operating expenses and capital expenditures for at least the next 12 months. Aadi’s estimate as to how long it expects the cash and cash equivalents of the combined company to be able to continue to fund its operations is based on assumptions that may prove to be wrong, and it could exhaust its available capital resources sooner than it currently expects. Changing circumstances, some of which may be beyond its control, could cause Aadi to consume capital significantly faster than it currently anticipates, and it may need to seek additional funds sooner than planned.

Aadi plans to use the cash and cash equivalents of the combined company to fund the commercialization of ABI-009 for the PEComa indication, if approved, ongoing and planned clinical trials of ABI-009 for other indications such as the TSC1 & TSC2 indications, for manufacturing operations and to fund its other research for other product candidates and development activities, as well as for working capital and other general corporate

 

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purposes. Advancing the development of ABI-009 and any other product candidate will require a significant amount of capital. The existing cash and cash equivalents of the combined company will not be sufficient to fund all of the activities that are necessary to complete the development of ABI-009.

Aadi will be required to obtain further funding to support its continuing operations through public or private equity offerings, debt financings, third-party funding, marketing and distribution arrangements, collaborations with third parties and licensing arrangements or other sources or a combination of these approaches, which may dilute its stockholders or restrict its operating activities. Any additional fundraising efforts may divert its management from their day-to-day activities, which may adversely affect its ability to develop and, if approved, commercialize its product candidates. Adequate additional financing may not be available to Aadi in sufficient amounts or on acceptable terms, or at all. To the extent that Aadi raises additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder and the possibility of such issuance may cause the market price of Aadi’s shares to decline. Debt financing may result in imposition of debt covenants, increased fixed payment obligations or other restrictions that may affect the conduct of Aadi’s business. If Aadi raises additional funds through up-front payments or milestone payments pursuant to strategic collaborations with third parties, it may have to relinquish valuable rights to certain of its technologies or its product candidates, or grant licenses on terms that are not favorable to it, which may have a material adverse effect on its business, operating results and prospects. Aadi’s ability to raise additional funds will depend on financial, economic and other factors, many of which are beyond its control. In addition, Aadi may seek additional capital due to favorable market conditions or strategic considerations even if it believes it has sufficient funds for its current or future operating plans.

Aadi’s failure to raise capital as and when needed or on acceptable terms would have a negative impact on its financial condition and its ability to pursue its business strategy, and Aadi may have to significantly delay, reduce the scope of, suspend or eliminate one or more of its research or development programs, clinical trials or future commercialization efforts.

Risks Related to the Discovery, Development and Commercialization of Aadi’s Product Candidates

Aadi is substantially dependent on the success of its lead product candidate, ABI-009, which requires significant clinical testing before submitting a new drug application for regulatory approval and potentially launching commercial sales if approval is granted. If Aadi is unable to complete development of, obtain approval for and commercialize ABI-009 for one or more indications in a timely manner, its business will be harmed.

Aadi’s future success is dependent on its ability to timely and successfully obtain regulatory approval for, and then successfully commercialize, ABI-009, its lead product candidate. Aadi is investing the majority of its efforts and financial resources in the research and development of ABI-009 for multiple indications. ABI-009 is an injectable, albumin-bound nanoparticle form of sirolimus bound to albumin, for the treatment of malignant PEComas, as well as other cancer types with mTOR pathway alterations in the TSC1 & TSC2 genes that are most likely to respond to mTOR treatment.

In May 2021, Aadi completed the filing of a rolling NDA for ABI-009 to the FDA for approval to treat patients with advanced malignant PEComa. Aadi’s NDA is based on results from its AMPECT trial, involving patients for whom there are currently no approved therapies in the United States. In November 2019, Aadi announced top-line results from the AMPECT trial, including that the study achieved its primary endpoint of objective response rate (referred to as the “ORR”) as determined by blinded independent central radiologic review using modified Response Evaluation Criteria in Solid Tumors (referred to as “RECIST”). ABI-009 will require additional clinical development, expansion of manufacturing capabilities, regulatory approval from the FDA and other regulatory authorities in jurisdictions where Aadi plans to market ABI-009, substantial investment and significant marketing efforts before Aadi can generate any revenues from product sales. Aadi is not permitted to market or promote ABI-009, or any other

 

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product candidate, before it receives regulatory approval from the FDA and comparable foreign regulatory authorities, and Aadi may never receive such regulatory approvals.

The success of ABI-009 will depend on several factors, including the following:

 

   

the successful and timely completion of the required preclinical studies and clinical trials of ABI-009 for current and future indications;

 

   

INDs going into effect with the FDA for Aadi’s planned and future clinical trials;

 

   

the initiation and successful patient enrollment and completion of additional clinical trials of ABI-009 on a timely basis, including the planned registrational Phase 2 study (referred to as “PRECISION 1”) of ABI-009 in patients with tumor-agnostic TSC1 & TSC2 alterations;

 

   

maintaining and establishing relationships with CROs and clinical sites for the development of ABI-009 both in the United States and internationally;

 

   

the type, frequency and severity of adverse events in clinical trials;

 

   

demonstrating efficacy and safety profiles that are satisfactory to the FDA and any comparable foreign regulatory authority for regulatory approval;

 

   

the timely receipt of regulatory approval for ABI-009 from applicable regulatory authorities;

 

   

the extent of any required post-regulatory approval commitments to applicable regulatory authorities;

 

   

the maintenance of existing or the establishment of new supply arrangements with third-party drug product suppliers and manufacturers for clinical development and, if approved, commercialization of ABI-009;

 

   

obtaining and maintaining patent protection, trade secret protection and regulatory exclusivity, both in the United States and internationally;

 

   

the protection of Aadi’s rights in its intellectual property portfolio;

 

   

the successful launch of commercial sales following any regulatory approval;

 

   

a continued acceptable safety profile following any regulatory approval;

 

   

commercial acceptance by patients, the medical community and third-party payors; and

 

   

Aadi’s ability to compete with other therapies.

In addition to advanced malignant PEComa, based on data from the completed AMPECT trial and Aadi’s ongoing expanded access program, Aadi is planning a registrational Phase 2 study, PRECISION 1, of ABI-009 in TSC1 & TSC2 alterations. Aadi completed a Type B meeting with the FDA in which it discussed the initial trial design with the FDA. Aadi plans to file the IND for ABI-009 in tumor-agnostic TSC1 & TSC2 alterations and initiate a registrational clinical trial by the end of 2021. Aadi’s product development costs could increase if it experiences delays. Significant trial delays also could shorten any periods during which Aadi may have the exclusive right to commercialize ABI-009 or allow Aadi’s competitors to bring products to market before Aadi does, which would impair Aadi’s ability to successfully capitalize on ABI-009 and may harm its business, results of operations and prospects. Events that may result in a delay or unsuccessful completion of clinical development of ABI-009 include, among other things:

 

   

unexpectedly high rate of patients withdrawing consent or being lost to follow-up;

 

   

feedback from the FDA and foreign regulatory authorities, institutional review boards (referred to as “IRBs”), or a data safety monitoring board, or results from clinical trials that might require modification to a clinical trial protocol;

 

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imposition of a clinical hold by the FDA or other regulatory authorities, a decision by the FDA, other regulatory authorities, IRBs or Aadi, or a recommendation by a data safety monitoring board to suspend or terminate trials at any time for safety issues or for any other reason;

 

   

deviations from the trial protocol by clinical trial sites and investigators or failure to conduct the trial in accordance with regulatory requirements;

 

   

failure of third parties, such as CROs, to satisfy their contractual duties or meet expected deadlines;

 

   

delays in the testing, validation, manufacturing and delivery of ABI-009 to the clinical trial sites;

 

   

delays caused by patients dropping out of a trial due to side effects, disease progression or other reasons;

 

   

unacceptable risk-benefit profile or unforeseen safety issues or adverse drug reactions;

 

   

failure to demonstrate the efficacy of ABI-009 in this clinical trial;

 

   

changes in government regulations or administrative actions or lack of adequate funding to continue the trials; or

 

   

business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters and public health epidemics, such as the COVID-19 outbreak.

An inability by Aadi to timely complete clinical development could result in additional costs to Aadi or impair its ability to generate product revenues or development, regulatory, commercialization and sales milestone payments and royalties on product sales.

Aadi does not have complete control over many of these factors, including certain aspects of clinical development and the regulatory submission process, potential threats to its intellectual property rights and the manufacturing, marketing, distribution and sales efforts of its current or any future collaborators. If Aadi is not successful with respect to one or more of these factors in a timely manner or at all, it could experience significant delays or an inability to successfully commercialize ABI-009, which would materially harm its business. If Aadi does not receive regulatory approvals for ABI-009 or other product candidates, Aadi may not be able to continue its operations.

In addition to ABI-009, Aadi’s prospects depend in part upon discovering, developing and commercializing additional product candidates, which may fail in development or suffer delays that adversely affect their commercial viability.

Aadi’s future operating results are dependent on its ability to successfully discover, develop, obtain regulatory approval for and commercialize product candidates other than ABI-009. All of Aadi’s current product candidates other than ABI-009 are in research or preclinical development. Prior to initiating clinical trials with its other product candidates, Aadi will need to file an IND or similar application to the FDA or regulatory authorities in other jurisdictions. Aadi may not be able to file future INDs for its product candidates on the timelines it expects. For example, Aadi may experience manufacturing delays or other delays with IND-enabling studies. Moreover, Aadi cannot be sure that submission of an IND will result in the FDA allowing further clinical trials to begin, or that, once begun, issues will not arise that result in the suspension or termination of clinical trials. Additionally, even if such regulatory authorities agree with the design and implementation of the clinical trials set forth in an IND, Aadi cannot guarantee that such regulatory authorities will not change their requirements in the future. These considerations also apply to new clinical trials Aadi may submit as amendments to existing INDs or to a new IND. Any failure to file INDs on the timelines Aadi expects or to obtain regulatory clearance for its trials may prevent Aadi from developing its product candidates on a timely basis, if at all. A product candidate can unexpectedly fail at any stage of preclinical and clinical development. The historical failure rate for product candidates is high due to risks relating to safety, efficacy, clinical execution, changing standards of medical care and other unpredictable variables. The results from preclinical

 

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studies or early clinical trials of a product candidate may not be predictive of the results that will be obtained in later stage clinical trials of the product candidate.

The success of other product candidates Aadi may develop will depend on many factors, including the following:

 

   

generating sufficient preclinical data to support the initiation of clinical trials;

 

   

obtaining regulatory permission to initiate clinical trials;

 

   

contracting with the necessary parties to conduct preclinical studies and clinical trials;

 

   

successful enrollment of patients in, and the completion of, clinical trials on a timely basis;

 

   

the timely manufacture of sufficient quantities of a product candidate for use in clinical trials; and

 

   

generating sufficient safety and efficacy data to warrant continued development and which are satisfactory to the FDA or any other regulatory authority for marketing approval.

Even if Aadi successfully advances any other product candidates into clinical development, their success will be subject to all of the clinical, regulatory and commercial risks described elsewhere in this “Risk Factors” section. Accordingly, Aadi cannot assure you that it will ever be able to discover, develop, obtain regulatory approval of, commercialize or generate significant revenue from any product candidates.

The preclinical studies and clinical trials of Aadi’s product candidates may not demonstrate safety and efficacy to the satisfaction of the FDA, EMA or other comparable foreign regulatory authorities or otherwise produce positive results, which would prevent, delay, or limit the scope of development, regulatory approval and commercialization.

Before obtaining regulatory approval from the FDA, EMA or other comparable foreign regulatory authorities for the sale of its product candidates, Aadi, among other requirements, must complete preclinical development and extensive clinical trials to demonstrate with substantial evidence the safety and efficacy of such product candidates. Each product candidate must demonstrate an adequate risk versus benefit profile in its intended patient population and for its intended use. Clinical testing is expensive, difficult to design and implement, can take many years to complete and its ultimate outcome is inherently uncertain. A failure of one or more preclinical studies or clinical trials can occur at any stage of the process. The outcome of preclinical studies and early-stage clinical trials may not be predictive of the success of later clinical trials. In addition, initial success in clinical trials may not be indicative of results obtained when such trials are completed. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies in the biopharmaceutical industry that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain regulatory approval of their products. Aadi’s current or future clinical trials may not ultimately be successful or support further clinical development of any of its product candidates.

Aadi may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent its ability to receive regulatory approval or its ability to commercialize its product candidates, including:

 

   

receipt of feedback from regulatory authorities that require it to modify the design of its clinical trials;

 

   

negative or inconclusive clinical trial results that may require it to conduct additional clinical trials or abandon certain drug development programs;

 

   

the number of patients required for clinical trials being larger than anticipated, enrollment in these clinical trials being slower than anticipated or participants dropping out of these clinical trials at a higher rate than anticipated;

 

   

clinical trial sites or Aadi’s CRO failing to comply with regulatory requirements or meet their contractual obligations to it in a timely manner, or at all;

 

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the suspension or termination of its clinical trials for various reasons, including non-compliance with regulatory requirements or a finding that its product candidates have undesirable side effects or other unexpected characteristics or risks;

 

   

the cost of clinical trials of Aadi’s product candidates being greater than anticipated;

 

   

the supply or quality of its product candidates or other materials necessary to conduct clinical trials of Aadi’s product candidates being insufficient or inadequate; and

 

   

delays due to the recent COVID-19 pandemic, including starting any clinical trials for other indications or programs.

For instance, Aadi does not know whether ABI-009 will perform in current or future clinical trials as it has performed in preclinical studies or prior clinical trials. Product candidates in later-stage clinical trials may fail to demonstrate sufficient safety and efficacy to the satisfaction of the FDA, EMA and other comparable foreign regulatory authorities despite having progressed through preclinical studies and early-stage clinical trials. Additionally, while Aadi is aware of several other approved and clinical-stage mTOR inhibitors being developed by multiple other companies, to Aadi’s knowledge, there are no mTOR inhibitors approved specifically for the treatment of advanced malignant PEComa. As such, the development of ABI-009 and Aadi’s stock price may be impacted by inferences, whether correct or not, that are drawn between the success of its product candidate and those of other companies’ mTOR inhibitors. Regulatory authorities may also limit the scope of later-stage trials until Aadi has demonstrated satisfactory safety, which could delay regulatory approval, limit the size of the patient population to which it may market its product candidates, or prevent regulatory approval.

In some instances, there can be significant variability in safety and efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial protocols, differences in size and type of the patient populations, differences in and adherence to the dose and dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. Patients treated with Aadi’s product candidates may also be undergoing surgical, radiation and chemotherapy treatments and may be using other approved products or investigational new drugs, which can cause side effects or adverse events that are unrelated to its product candidates. As a result, assessments of efficacy can vary widely for a particular patient, and from patient to patient and site to site within a clinical trial. This subjectivity can increase the uncertainty of, and adversely impact, Aadi’s clinical trial outcomes.

Aadi does not know whether any clinical trials it may conduct will demonstrate consistent or adequate efficacy and safety sufficient to obtain approval to market any of its product candidates. If Aadi is required to conduct additional clinical trials or other testing of its product candidates beyond those that it currently contemplates, if it is unable to successfully complete clinical trials of its product candidates or other testing in a timely manner, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, it may (i) incur unplanned costs, (ii) be delayed in seeking and obtaining regulatory approval, if it receives such approval at all, (iii) receive more limited or restrictive regulatory approval, (iv) be subject to additional post-marketing testing requirements or (v) have the drug removed from the market after obtaining regulatory approval. Even if regulatory approval is secured for any of its product candidates, the terms of such approval may limit the scope and use of its product candidates, which may also limit their commercial potential.

Aadi’s product candidates may cause significant adverse events, toxicities or other undesirable side effects when used alone or in combination with other approved products or investigational new drugs that could delay or prevent regulatory approval, prevent market acceptance, limit their commercial potential or result in significant negative consequences.

If Aadi’s product candidates are associated with serious adverse events or other undesirable side effects or have unexpected characteristics in preclinical studies or clinical trials when used alone or in combination with other approved products or investigational new drugs, it may need to conduct additional studies to further

 

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evaluate the product candidates’ safety, interrupt, delay or abandon their development or halt clinical trials or limit development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Treatment-related side effects could also affect patient recruitment or the ability of enrolled subjects to complete the trial or result in a more restrictive label, delay or denial of regulatory approval or potential product liability claims. Any of these occurrences may prevent Aadi from achieving or maintaining market acceptance of the affected product candidate, could substantially increase the costs of commercializing its product candidates and significantly impact its ability to successfully commercialize its product candidates and generate revenues, and may harm its business, financial condition and prospects significantly. For example, in Aadi’s AMPECT trial of ABI-009, most treatment-related adverse events were mild or moderate, with the most commonly reported adverse events being anemia, edema, infections, mucositis, pain, nail changes, vomiting, thrombocytopenia, hypertension and nausea. Treatment-related adverse events in our other oncology and PAH trials of ABI-009 included thrombocytopenia, diarrhea, fatigue, mucosal inflammation, nausea, anemia, and rash. Additionally, in our first-in-human study of ABI-009 in solid tumors, one patient died of dyspnea which was deemed possibly related to ABI-009.

Patients in Aadi’s completed and planned clinical trials may in the future suffer other significant adverse events or other side effects not observed or anticipated based on its preclinical studies or previous clinical trials. ABI-009 or other product candidates may be used in populations for which safety concerns may be particularly scrutinized by regulatory agencies. In addition, ABI-009 is being studied in combination with other therapies, which may exacerbate adverse events associated with the therapy. Patients treated with ABI-009 or Aadi’s other product candidates may also be undergoing surgical, radiation and/or chemotherapy treatments, which can cause side effects or adverse events that are unrelated to Aadi’s product candidate but may still impact the success of its clinical trials. The inclusion of critically ill patients in Aadi’s clinical trials may result in deaths or other adverse medical events due to other therapies or medications that such patients may be using or due to the gravity of such patients’ illnesses. For example, it is expected that some of the patients enrolled in its ABI-009 clinical trials will die or experience major adverse clinical events either during the course of Aadi’s clinical trials or after such trials, which has occurred in the past.

If further significant adverse events or other side effects are observed in any of Aadi’s current or future clinical trials, Aadi may have difficulty recruiting patients to the clinical trials, patients may drop out of its trials, or it may be required to abandon the trials or its development efforts of that product candidate altogether. Aadi, the FDA, EMA, other comparable regulatory authorities or an institutional review board may suspend or terminate clinical research at any time for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks or adverse side effects. Some potential therapeutics developed in the biotechnology industry that initially showed therapeutic promise in early-stage trials have later been found to cause side effects that prevented their further development. Even if the side effects do not preclude the product candidate from obtaining or maintaining regulatory approval, undesirable side effects may inhibit market acceptance due to its tolerability versus other therapies. Any of these developments could materially harm Aadi’s business, financial condition and prospects.

Further, if any of Aadi’s product candidates obtains regulatory approval, toxicities associated with such product candidates and not seen during clinical testing may also develop after such approval and lead to a requirement to (i) conduct additional clinical safety trials, (ii) add additional contraindications, warnings and precautions to the drug label, (iii) significantly restrict the use of the product, (iv) change the way the product is distributed or administered, (v) implement a risk evaluation and mitigation strategy, or create a medication guide outlining the risks of such side effects for distribution to patients, or (vi) suspend or withdraw the product from the market. Aadi cannot predict whether its product candidates will cause toxicities in humans that would preclude or lead to the revocation of regulatory approval based on preclinical studies or early stage clinical trials.

 

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Results from early preclinical studies and clinical trials of Aadi’s product candidates are not necessarily predictive of the results of later preclinical studies and clinical trials of its product candidates. If Aadi cannot replicate the results from its earlier preclinical studies and clinical trials of its product candidates in its later preclinical studies and clinical trials, Aadi may be unable to successfully develop, obtain regulatory approval for and commercialize its product candidates.

Any results from early preclinical studies and clinical trials of Aadi’s product candidates may not necessarily be predictive of the results from later preclinical studies and clinical trials. Similarly, even if Aadi is able to complete its planned preclinical studies and clinical trials of its product candidates according to its current development timeline, the results from such preclinical studies and clinical trials of its product candidates may not be replicated in subsequent preclinical studies or clinical trial results.

Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development and Aadi cannot be certain that it will not face similar setbacks. These setbacks have been caused by, among other things, preclinical and other nonclinical findings made while clinical trials were underway, or safety or efficacy observations made in preclinical studies and clinical trials, including previously unreported adverse events. Moreover, preclinical, nonclinical and clinical data are often susceptible to varying interpretations and analyses and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA or EMA approval.

Additionally, some of Aadi’s ongoing, planned and future clinical trials utilize an open-label study design and may be conducted at a limited number of clinical sites on a limited number of patients. An “open-label” clinical trial is one where both the patient and investigator know whether the patient is receiving the investigational product candidate or either an existing approved drug or placebo. Most typically, open-label clinical trials test only the investigational product candidate and sometimes may do so at different dose levels. Open-label clinical trials are subject to various limitations that may exaggerate any therapeutic effect as patients in open-label clinical trials are aware when they are receiving treatment. Open-label clinical trials may be subject to a “patient bias” where patients perceive their symptoms to have improved merely due to their awareness of receiving an experimental treatment. Moreover, patients selected for early clinical studies often include the most severe sufferers and their symptoms may have been bound to improve notwithstanding the new treatment. In addition, open-label clinical trials may be subject to an “investigator bias” where those assessing and reviewing the physiological outcomes of the clinical trials are aware of which patients have received treatment and may interpret the information of the treated group more favorably given this knowledge. The results from an open-label trial may not be predictive of future clinical trial results with any of its product candidates when studied in a controlled environment with a placebo or active control.

Interim, topline and preliminary data from Aadi’s clinical trials that it announces or publishes from time to time may change as more patient data become available or as additional analyses are conducted, and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, Aadi may publicly disclose preliminary, interim or topline data from its clinical trials, such as the preliminary data from its completed AMPECT trial of ABI-009 in patients with malignant PEComas. The preliminary data is based on a preliminary analysis of then available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study or trial. For example, Aadi may report tumor responses in certain patients that are unconfirmed at the time and which do not ultimately result in confirmed responses to treatment after follow-up evaluations. Aadi also makes assumptions, estimations, calculations and conclusions as part of its analyses of data, and it may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the topline results that Aadi reports may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially different from the

 

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preliminary data Aadi previously published. As a result, topline data should be viewed with caution until the final data are available. In addition, Aadi may report interim analyses of only certain endpoints rather than all endpoints. Interim data from clinical trials that Aadi may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse changes between interim data and final data could significantly harm Aadi’s business and prospects. Further, additional disclosure of interim data by Aadi or by its competitors in the future could result in volatility in the price of Aadi’s common stock.

In addition, the information Aadi chooses to publicly disclose regarding a particular clinical trial is typically selected from a more extensive amount of available information. You or others may not agree with what Aadi determines is the material or otherwise appropriate information to include in its disclosure, and any information it determines not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular product candidate or its business. If the preliminary or topline data that Aadi reports differ from late, final or actual results, or if others, including regulatory authorities, disagree with the conclusions reached, Aadi’s ability to obtain approval for, and commercialize, ABI-009 or any other product candidates may be harmed, which could harm its business, financial condition, results of operations and prospects.

Adverse results of clinical trials conducted by third parties investigating the same product candidates as Aadi in different territories could adversely affect its development of such product candidate.

Lack of efficacy, adverse events, undesirable side effects or other adverse results may emerge in clinical trials conducted by third parties investigating the same product candidates as Aadi in different territories for the same or different indications. For example, pursuant to the exclusive license agreement (referred to as the “EOC License Agreement”) with EOC Pharma (Hong Kong) Limited (referred to as “EOC”) for the development and commercialization of ABI-009 in Greater China, including the Republic of China, Hong Kong, Macau and Taiwan (collectively, referred to as the “EOC Territory”), EOC has been granted the right to develop and commercialize the same compounds licensed to Aadi, as specified in the EOC License Agreement, including ABI-009, in the EOC Territory and, subject to certain restrictions, to collaborate with others for such development and commercialization. Aadi does not have control over EOC’s clinical trials or development program, and adverse findings from or EOC’s conduct of clinical trials could adversely affect Aadi’s development of ABI-009 or the viability of ABI-009 as a product candidate. Aadi may be required to report EOC’s adverse events or unexpected side effects to the FDA or comparable foreign regulatory authorities, which could, among other things, order Aadi to cease further development of ABI-009.

If Aadi experiences delays or difficulties in the enrollment and/or maintenance of patients in clinical trials, its regulatory submissions or receipt of necessary regulatory approvals could be delayed or prevented.

Aadi may not be able to initiate or continue clinical trials for its product candidates if it is unable to locate and enroll a sufficient number of eligible patients to participate in these trials to such trial’s conclusion as required by the FDA, EMA or other comparable foreign regulatory authorities. Orphan indications, in particular, have small populations, and it may be difficult for Aadi to locate and enroll sufficient patients in trials for orphan-designated indications. Patient enrollment is a significant factor in the timing of clinical trials. Aadi’s ability to identify and enroll eligible patients for clinical trials may be limited or may result in slower enrollment than it anticipates. For instance, patients for Aadi’s trials for the TSC1 & TSC2 study are screened using genomic information to identify alterations in the TSC1 & TSC2 genes and utilizing such criteria and/or certain highly specific criteria related to the cancer sub-types may limit patient populations eligible for Aadi’s clinical trials. In particular, because Aadi is focused on patients with specific genetic mutations for certain of its development programs, its ability to enroll eligible patients may be limited or may result in slower enrollment than anticipated. For example, with respect to ABI-009, Aadi cannot be certain how many patients will harbor the TSC1 & TSC2 mutations that ABI-009 is designed to target or that the number of patients enrolled for each mutation will suffice for regulatory approval and inclusion of each such mutation in the approved label. Aadi may also engage third

 

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parties to develop companion diagnostics for use in its clinical trials, but such third parties may not be successful in developing such companion diagnostics, furthering the difficulty in identifying patients with the targeted genetic mutations for its clinical trials. If Aadi’s strategies for patient identification prove unsuccessful, it may have difficulty enrolling or maintaining patients appropriate for ABI-009.

Patient enrollment may be affected if Aadi’s competitors have ongoing clinical trials for product candidates that are under development for the same indications as Aadi’s product candidates, and patients who would otherwise be eligible for Aadi’s clinical trials instead enroll in clinical trials of Aadi’s competitors’ product candidates. Also, marketing authorization of competitors in this same class of drugs may impair Aadi’s ability to enroll patients into its clinical trials, delaying or potentially preventing Aadi from completing recruitment for one or more of its trials. Patient enrollment and retention for Aadi’s current or any future clinical trials may be affected by other factors, including:

 

   

size and nature of the patient population;

 

   

severity of the disease under investigation;

 

   

availability and efficacy of approved drugs for the disease under investigation;

 

   

patient eligibility criteria for the trial in question as defined in the protocol or as mandated by regulatory agencies;

 

   

perceived risks and benefits of the product candidate under study;

 

   

clinicians’ and patients’ perceptions as to the potential advantages and side effects of the product candidate being studied in relation to other available therapies and product candidates, including any new products that may be approved or other product candidates being investigated for the indications Aadi is investigating;

 

   

the ability to recruit clinical study investigators with the appropriate competencies and experience;

 

   

clinicians’ willingness to screen their patients for biomarkers to indicate which patients may be eligible for enrollment in Aadi’s clinical trials;

 

   

patient referral practices of physicians;

 

   

the ability to obtain and maintain patient consents;

 

   

the ability to monitor patients adequately during and after treatment;

 

   

proximity and availability of clinical trial sites for prospective patients; and

 

   

factors Aadi may not be able to control, such as current or potential pandemics that may limit patients, principal investigators or staff or clinical site availability (e.g., the COVID-19 pandemic).

Aadi’s inability to enroll a sufficient number of patients for its clinical trials could result in significant delays or may require it to abandon one or more clinical trials altogether. Furthermore, any negative results Aadi may report in clinical trials of its product candidates may make it difficult or impossible to recruit and retain patients in other clinical trials it is conducting. Similarly, negative results reported by Aadi’s competitors about their drug candidates may negatively affect patient recruitment in Aadi’s clinical trials. Enrollment delays in Aadi’s clinical trials may result in increased development costs for its product candidates and jeopardize its ability to obtain regulatory approval for the sale of its product candidates. Furthermore, even if Aadi is able to enroll a sufficient number of patients for its clinical trials, there is a risk that patients enrolled in clinical trials will drop out of the trials before completion or, because they may be late-stage cancer patients, will not survive the full terms of the clinical trials. As a result, Aadi may have difficulty maintaining participation in its clinical trials through the treatment and any follow-up periods. In addition, Aadi relies on clinical trial sites to ensure timely conduct of its clinical trials and, while it has entered into agreements governing their services, Aadi is limited in its ability to compel their actual performance.

 

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Aadi expects to develop ABI-009 and potentially other product candidates in combination with other therapies, which exposes Aadi to additional risks.

Aadi intends to develop ABI-009 and potentially other product candidates, in combination with one or more currently approved or unapproved therapies to treat cancer or other diseases. Patients may not be able to tolerate ABI-009 or any of Aadi’s other product candidates in combination with other therapies or dosing of ABI-009 in combination with other therapies may have unexpected consequences. Even if any of Aadi’s product candidates were to receive regulatory approval or be commercialized for use in combination with other existing therapies, Aadi would continue to be subject to the risks that the FDA, EMA or other comparable foreign regulatory authorities could revoke approval of the therapy used in combination with any of Aadi’s product candidates, or safety, efficacy, manufacturing or supply issues could arise with these existing therapies. In addition, it is possible that existing therapies with which Aadi’s product candidates are approved for use could themselves fall out of favor or be relegated to later lines of treatment. This could result in the need to identify other combination therapies for Aadi’s product candidates, the FDA, EMA or comparable foreign regulatory authorities in other jurisdictions requiring additional clinical trials, or Aadi’s own products being removed from the market or being less successful commercially.

Aadi may also evaluate its product candidates in combination with one or more other cancer therapies that have not yet been approved for marketing by the FDA, EMA or comparable foreign regulatory authorities. Aadi will not be able to market and sell any product candidate in combination with any such unapproved cancer therapies that do not ultimately obtain regulatory approval.

If the FDA, EMA or other comparable foreign regulatory authorities do not approve or revoke their approval of these other therapies, or if safety, efficacy, commercial adoption, manufacturing or supply issues arise with the therapies Aadi chooses to evaluate in combination with ABI-009 or any other product candidate, Aadi may be unable to obtain approval of or successfully market any one or all of the product candidates it develops. These unapproved therapies face the same risks described with respect to Aadi’s product candidates currently in development, including serious adverse effects and delays in their clinical trials. In addition, other companies may also develop their products or product candidates in combination with the unapproved therapies with which Aadi is developing its product candidates for use in combination. Any setbacks in these companies’ clinical trials, including the emergence of serious adverse effects, may delay or prevent the development and approval of Aadi’s product candidates.

Additionally, if the third-party providers of therapies or therapies in development used in combination with Aadi’s product candidates are unable to produce sufficient quantities for clinical trials or for commercialization of Aadi’s product candidates, or if the cost of combination therapies are prohibitive, Aadi’s development and commercialization efforts would be impaired, which would have an adverse effect on Aadi’s business, financial condition, results of operations and growth prospects.

Aadi has limited resources and is currently focusing its efforts on developing ABI-009 for particular indications. As a result, Aadi may fail to capitalize on other indications or product candidates that may ultimately prove to be more profitable or to have a greater likelihood of success.

Aadi is currently focusing its resources and efforts on developing ABI-009 for particular indications and advancing its preclinical programs for certain other product candidates. As a result, because Aadi has limited financial and managerial resources, it may forgo or delay pursuit of opportunities for other indications or with other product candidates that may later prove to have greater commercial potential. Aadi’s resource allocation decisions may cause it to fail to capitalize on viable commercial drugs or profitable market opportunities. Failure to properly assess potential product candidates could result in Aadi’s focus on product candidates with low market potential, which would harm its business, financial condition, results of operations and prospects. Aadi’s spending on current and future research and development activities for ABI-009 and other programs may not yield any commercially viable drugs. If Aadi does not accurately evaluate the likelihood of clinical trial success,

 

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commercial potential or target markets for ABI-009 or any of its other product candidates, it may relinquish valuable rights to that product candidate or program through collaboration, licensing or other strategic or royalty arrangements in cases in which it would have been more advantageous for it to retain sole development and commercialization rights to such product candidate or program.

Aadi faces significant competition, and if its competitors develop and market technologies or products more rapidly than it does, or achieve regulatory approval before it does or that are more effective, safer or less expensive than the products it develops, Aadi’s commercial opportunities will be negatively impacted.

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary and novel products and product candidates. Aadi’s competitors have developed, are developing or may develop products, product candidates and processes competitive with Aadi’s product candidates and products, if approved. Any product candidates that Aadi successfully develops and commercializes will compete with existing therapies and new therapies that may become available in the future. Aadi believes that a significant number of products are currently under development, and may become commercially available in the future, for the treatment of conditions for which Aadi may attempt to develop product candidates. In addition, Aadi’s products may need to compete with drugs that physicians currently use to treat the indications for which Aadi seeks approval. This may make it difficult for Aadi to replace existing therapies with its products.

In particular, there is intense competition in the field of oncology. Aadi has competitors both in the United States and internationally, including major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies, emerging and start-up companies, government agencies, universities and other research institutions. Aadi also competes with these organizations to recruit and retain management, scientists and clinical development personnel, which could negatively affect its level of expertise and its ability to execute its business plan. Aadi will also face competition in establishing clinical trial sites, enrolling subjects for clinical trials and in identifying and in-licensing new product candidates.

Aadi is not aware of any FDA- or EMA -approved products indicated specifically for the treatment of advanced malignant PEComa. Patients with malignant PEComa commonly receive chemotherapy regimens and currently mTOR inhibitors including sirolimus, everolimus, and temsirolimus are recommended in the National Comprehensive Cancer Network (referred to as the “NCCN”) guidelines for treatment of advanced malignant PEComa based on published retrospective data. For tumor agnostic TSC1 & TSC2 inactivating alterations, there are no existing FDA- or EMA-approved products indicated for such use. If ABI-009 receives regulatory approval, it may face competition from other drug candidates in clinical trials that target the mTOR pathway. These may include dual mTORC1/2 inhibitors in clinical trials or next generation mTOR inhibitors in development. Any potential competitors may have significantly greater financial, manufacturing, marketing, drug development, technical and human resources, and commercial expertise than Aadi. Large pharmaceutical and biotechnology companies, in particular, have extensive experience in clinical testing, obtaining regulatory approvals, recruiting patients and manufacturing biotechnology products. These companies also have significantly greater research and marketing capabilities than Aadi does and may also have products that have been approved or are in late stages of development, and collaborative arrangements in Aadi’s target markets with leading companies and research institutions. Established pharmaceutical and biotechnology companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make the product candidates that Aadi develops obsolete. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of its competitors. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies, as well as in acquiring technologies complementary to, or necessary for, Aadi’s programs. As a result of all of these factors, Aadi’s competitors may succeed in obtaining approval from the FDA, EMA or other comparable foreign regulatory authorities or in discovering, developing and commercializing products in the field before Aadi.

 

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Aadi’s commercial opportunity could be reduced or eliminated if its competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient, have a broader label, are marketed more effectively, are more widely reimbursed or are less expensive than any products that Aadi may develop. Aadi’s competitors also may obtain regulatory approval from the FDA, EMA or other comparable foreign regulatory authorities for their products more rapidly than Aadi may obtain approval for its products, which could result in its competitors establishing a strong market position before Aadi is able to enter the market. Even if the product candidates Aadi develops achieve regulatory approval, they may be priced at a significant premium over competitive products if any have been approved by then, resulting in reduced competitiveness. Technological advances or products developed by Aadi’s competitors may render its technologies or product candidates obsolete, less competitive or not economical. If Aadi is unable to compete effectively, its opportunity to generate revenue from the sale of any products it may develop, if approved, could be adversely affected.

Changes in methods of product candidate manufacturing or formulation may result in additional costs or delay.

As product candidates progress through preclinical studies and clinical trials to regulatory approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods and formulation, are altered along the way in an effort to optimize yield and manufacturing batch size, minimize costs and achieve consistent quality and results. For example, Aadi may introduce alternative formulations or dosage forms of ABI-009 into the planned PRECISION 1 trial. Such material changes will require regulatory approval before implementation and carry the risk that they will not achieve these intended objectives. Any of these changes could cause Aadi’s product candidates to perform differently and affect the results of planned clinical trials or other future clinical trials conducted with the altered materials. This could delay completion of clinical trials, require the conduct of bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of Aadi’s product candidates and jeopardize Aadi’s ability to commercialize its product candidates, if approved, and generate revenue.

Aadi’s product candidates may not achieve adequate market acceptance among physicians, patients, healthcare payors and others in the medical community necessary for commercial success, which would limit the revenue that Aadi generates from its sales.

Even if Aadi’s product candidates receive regulatory approval, the approved product candidates may not gain adequate market acceptance among physicians, patients, third-party payors and others in the medical community. The degree of market acceptance of any of Aadi’s approved product candidates will depend on a number of factors, including, among others:

 

   

the efficacy and safety profile as demonstrated in clinical trials compared to alternative treatments;

 

   

the timing of market introduction of the product candidate as well as competitive products;

 

   

the clinical indications for which a product candidate is approved;

 

   

restrictions on the use of product candidates in the labeling approved by regulatory authorities, such as boxed warnings or contraindications in labeling, or a risk evaluation and mitigation strategy, if any, which may not be required of alternative treatments and competitor products;

 

   

the potential and perceived advantages of Aadi’s product candidates over alternative treatments;

 

   

the cost of treatment in relation to alternative treatments;

 

   

the availability of coverage and adequate reimbursement by third-party payors, including government authorities or the willingness of patients to pay out-of-pocket in the absence of third-party payor coverage;

 

   

the availability of an approved product candidate for use as a combination therapy;

 

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the prevalence and severity of any adverse effects associated with any approved product candidate;

 

   

any restrictions on the use of Aadi’s product candidates together with other medications;

 

   

relative convenience and ease of administration;

 

   

the willingness of the target patient population to try new therapies and undergo required diagnostic screening to determine treatment eligibility and of physicians to prescribe these therapies and diagnostic tests;

 

   

the effectiveness of sales and marketing efforts;

 

   

unfavorable publicity relating to Aadi’s product candidates; and

 

   

the approval of other new therapies for the same indications.

If any of Aadi’s product candidates is approved but does not achieve an adequate level of acceptance by physicians, hospitals, healthcare payors and patients, Aadi may not generate or derive sufficient revenue from that product candidate and its financial results could be negatively impacted. Before granting reimbursement approval, healthcare payors may require Aadi to demonstrate that its product candidates, in addition to treating target indications, also provide incremental health benefits to patients. Aadi’s efforts to educate the medical community and third-party payors about the benefits of its product candidates may require significant resources and may never be successful.

The market opportunities for ABI-009 and other product candidates Aadi develops, if approved, may be limited to certain smaller patient subsets.

Cancer therapies are sometimes characterized by line of therapy (first-line, second-line, third-line, etc.) and the FDA often approves new therapies initially only for a particular line or lines of use. When cancer is detected early enough, first-line therapy, such as chemotherapy, hormone therapy, surgery, radiation therapy or a combination of these, is sometimes adequate to cure the cancer or prolong life without a cure. Second line therapies often consist of more chemotherapy, radiation, antibody drugs, tumor-targeted small molecules, or a combination of these. Third line therapies can include chemotherapy, antibody drugs and small molecule tumor-targeted therapies, more invasive forms of surgery and new technologies. Aadi’s completed and planned clinical trials for ABI-009 are with patients who may have received one or more prior treatments. There is no guarantee that product candidates that Aadi develops, even if approved, would be approved for first-line or second-line therapy, including FYARRO for the treatment of advanced malignant PEComa, and, prior to any such approvals, Aadi may have to conduct additional clinical trials that may be costly, time-consuming and subject to risk.

The number of patients who have the cancers Aadi is targeting may turn out to be lower than expected. Aadi’s projections of addressable patient populations that may benefit from treatment with its product candidates are based on its estimates, which may prove to be incorrect. Additionally, the potentially addressable patient population for ABI-009 and other product candidates may be limited or may not be amenable to treatment with Aadi’s product candidates. Regulatory approval may limit the market of a product candidate to target patient populations when such biomarker-driven identification and/or highly specific criteria related to the stage of disease progression are utilized. If any of Aadi’s estimates prove to be inaccurate, the market opportunity for any product candidate that it or its strategic partners develop could be significantly diminished and have an adverse material impact on its business.

Even if Aadi obtains significant market share for any approved product, if the potential target populations are small, Aadi may never achieve profitability without obtaining regulatory approval for additional indications.

Aadi may not be successful in growing its product pipeline through acquisitions and in-licenses.

Aadi believes that accessing external innovation and expertise is important to its success; and while Aadi plans to leverage its leadership team’s prior business development experience as it evaluates potential

 

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in-licensing and acquisition opportunities to further expand its portfolio, it may not be able to identify suitable licensing or acquisition opportunities, and even if it does, it may not be able to successfully secure such licensing and acquisition opportunities. The licensing or acquisition of third-party intellectual property rights is a competitive area, and several more established companies may pursue strategies to license or acquire third-party intellectual property rights that Aadi may consider attractive or necessary. These companies may have a competitive advantage over Aadi due to their size, capital resources and greater clinical development and commercialization capabilities. In addition, companies that perceive Aadi to be a competitor may be unwilling to assign or license rights to Aadi. Aadi may also be unable to license or acquire third-party intellectual property rights on terms that would allow it to make an appropriate return on its investment, or at all. If Aadi is unable to successfully license or acquire additional product candidates to expand its portfolio, its pipeline, competitive position, business, financial condition, results of operations, and prospects may be materially harmed.

Any product candidates Aadi develops may become subject to unfavorable third-party coverage and reimbursement practices, as well as pricing regulations.

The availability and extent of coverage and adequate reimbursement by third-party payors, including government health administration authorities, private health coverage insurers, managed care organizations and other third-party payors is essential for most patients to be able to afford expensive treatments. Sales of any of Aadi’s product candidates that receive regulatory approval will depend substantially, both in the United States and internationally, on the extent to which the costs of such product candidates will be covered and reimbursed by third-party payors. If reimbursement is not available, or is available only to limited levels, Aadi may not be able to successfully commercialize its product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow Aadi to establish or maintain pricing sufficient to realize an adequate return on its investment. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which Aadi obtains regulatory approval. If coverage and reimbursement are not available or reimbursement is available only to limited levels, Aadi may not successfully commercialize any product candidate for which it obtains regulatory approval.

There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved products, which would include any product candidates for which Aadi may obtain regulatory approval. Market acceptance and sales of its product candidates will depend on reimbursement policies and may be affected by healthcare reform measures. Coverage and adequate reimbursement from governmental healthcare programs, such as Medicare and Medicaid in the United States, and commercial payors are critical to new product acceptance. Third-party payors decide which drugs they will pay for and establish reimbursement levels. In the United States, for example, principal decisions about reimbursement for new products are typically made by the Centers for Medicare & Medicaid Services (referred to as “CMS”), an agency within the U.S. Department of Health and Human Services (referred to as “HHS”). CMS decides whether and to what extent a new product will be covered and reimbursed under Medicare, and private third-party payors often follow CMS’s decisions regarding coverage and reimbursement to a substantial degree. However, one third-party payor’s determination to provide coverage for a product candidate does not assure that other payors will also provide coverage for the product candidate. As a result, the coverage determination process is often time-consuming and costly. Factors that payors consider in determining reimbursement are based on whether the product is: (i) a covered benefit under its health plan; (ii) safe, effective and medically necessary; (iii) appropriate for the specific patient; (iv) cost-effective; and (v) neither experimental nor investigational. This process will require Aadi to provide scientific and clinical support for the use of its products to each third-party payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance.

Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Further, such payors are increasingly challenging the price, examining the medical necessity and reviewing the cost effectiveness of medical product candidates. There may be especially significant delays in obtaining coverage and reimbursement for newly approved drugs. Third-party payors may limit coverage to specific product candidates on an approved

 

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list, known as a formulary, which might not include all FDA-approved drugs for a particular indication. In addition, many pharmaceutical manufacturers must calculate and report certain price reporting metrics to the government, such as average sales price (referred to as an “ASP”) and best price. Penalties may apply in some cases when such metrics are not submitted accurately and timely. Further, these prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs. Aadi may need to conduct expensive pharmaco-economic studies to demonstrate the medical necessity and cost effectiveness of its products. Nonetheless, Aadi’s product candidates may not be considered medically necessary or cost effective. Aadi cannot be sure that coverage and reimbursement will be available for any product that it commercializes and, if reimbursement is available, what the level of reimbursement will be.

Outside the United States, the commercialization of therapeutics is generally subject to extensive governmental price controls and other market regulations, and Aadi believes the increasing emphasis on cost containment initiatives in Europe, Canada and other countries has and will continue to put pressure on the pricing and usage of therapeutics such as Aadi’s product candidates. In many countries, particularly the countries of the European Union, medical product prices are subject to varying price control mechanisms as part of national health systems. In these countries, pricing negotiations with governmental authorities can take considerable time after a product receives regulatory approval. To obtain favorable reimbursement or pricing approval in some countries, Aadi may be required to conduct a clinical trial that compares the cost-effectiveness of its product candidate to other available therapies. In general, product prices under such systems are substantially lower than in the United States. Other countries allow companies to fix their own prices for products but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that Aadi is able to charge for its product candidates. Accordingly, in markets outside the United States, the reimbursement for its products may be unavailable or reduced compared with the United States and may be insufficient to generate commercially reasonable revenue and profits. If reimbursement is conditioned upon Aadi’s completion of additional clinical trials, or if pricing is set at unsatisfactory levels, Aadi’s operating results could be materially adversely affected.

If Aadi is unable to establish or sustain coverage and adequate reimbursement for any product candidates from third-party payors, the adoption of those products, the prices of those products and sales revenue will be adversely affected, which, in turn, could adversely affect the ability to market or sell those product candidates, if approved. Coverage policies and third-party payor reimbursement rates may change at any time. Further, due to the COVID-19 pandemic, millions of individuals have lost/will be losing employer-based insurance coverage, which may adversely affect our ability to commercialize our products. It is unclear what effect, if any, the American Rescue Plan will have on the number of covered individuals. Even if favorable coverage and reimbursement status is attained for one or more products for which Aadi receives regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Aadi’s business entails a significant risk of product liability and if it is unable to obtain sufficient insurance coverage such inability could have a material adverse effect on its business and financial condition.

Aadi’s business exposes it to significant product liability risks inherent in the development, testing, manufacturing and marketing of therapeutic treatments. Product liability claims might be brought against Aadi by patients, healthcare providers, or others selling or otherwise coming into contact with its product candidates. For example, Aadi may be sued if any product Aadi develops allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If Aadi becomes subject to product liability claims and cannot successfully defend itself against them, Aadi could incur substantial liabilities. Product liability claims could delay or prevent completion of Aadi’s development programs. If Aadi succeeds in marketing products, such claims could result in an FDA, EMA or other regulatory authority investigation of the safety and effectiveness of its products, its (or third-party) manufacturing processes and facilities or its marketing programs. FDA, EMA or other regulatory

 

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authority investigations could potentially lead to a recall of Aadi’s products or more serious enforcement action, limitations on the approved indications for which they may be used or suspension or withdrawal of approvals. Regardless of the merits or eventual outcome, liability claims may also result in decreased demand for Aadi’s products, injury to its reputation, costs to defend the related litigation, a diversion of management’s time and its resources and substantial monetary awards to trial participants or patients. Aadi currently has product liability insurance that it believes is appropriate for its stage of development and may need to obtain higher levels prior to marketing any of its product candidates, if approved. Any insurance Aadi has or may obtain may not provide sufficient coverage against potential liabilities. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, Aadi may be unable to obtain or maintain sufficient insurance at a reasonable cost to protect it against losses caused by product liability claims that could have an adverse effect on its business and financial condition. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in its favor, could be substantial, particularly in light of the size of its business and financial resources. A product liability claim or series of claims brought against Aadi could cause its stock price to decline.

The recent global COVID-19 outbreak has affected and is expected to continue to affect Aadi’s business and operations.

Broad-based business or economic disruptions could adversely affect Aadi’s ongoing or planned research and development activities. To date, the COVID-19 pandemic has caused significant disruptions to the United States and global economy. Further, infections and deaths related to COVID-19 are disrupting certain healthcare and healthcare regulatory systems globally. Such disruptions could divert healthcare resources away from, or materially delay review by, the FDA and comparable foreign regulatory agencies. It is unknown how long these disruptions could continue, were they to occur. Any elongation or de-prioritization of Aadi’s clinical trials or delay in regulatory review resulting from such disruptions could materially adversely affect the development and study of its product candidates. The COVID-19 pandemic caused Aadi to modify business practices (including but not limited to curtailing or modifying employee travel, curtailing or modifying Aadi’s clinical trials, moving to full remote work, and cancelling physical participation in meetings, events, and conferences). For example, Aadi has experienced some clinical development disruptions due to the pandemic, including closures at certain lab facilities, which led to longer than anticipated clinical development times.

As a result of the evolving COVID-19 pandemic, Aadi has experienced and expects to continue to experience disruptions that could severely impact its business, preclinical studies and clinical trials, including:

 

   

continued delays or difficulties in enrolling and retaining and adequate number of patients in its clinical trials;

 

   

continued delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;

 

   

delays in receiving authorizations from regulatory authorities to initiate its planned clinical trials;

 

   

diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as its clinical trial sites and hospital staff supporting the conduct of its clinical trials;

 

   

interruption of key clinical trial activities, such as clinical trial site data monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others or interruption of clinical trial subject visits and study procedures, which may impact the integrity of subject data and clinical study endpoints;

 

   

risk that participants enrolled in its clinical trials will contract COVID-19 while the clinical trial is ongoing, which could impact the results of the clinical trial, including by increasing the number of observed adverse events;

 

   

interruption or delays in the operations of the FDA or other regulatory authorities, which may impact review and approval timelines;

 

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interruption of, or delays in receiving, supplies of its product candidates from its contract manufacturing organizations (referred to as “CMOs”) due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;

 

   

interruptions in preclinical studies due to restricted or limited operations at its laboratory facility;

 

   

delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees;

 

   

changes in local regulations as part of a response to the COVID-19 pandemic, which may require changes in the ways in which its clinical trials are conducted, which may result in unexpected costs, or to discontinue such clinical trials altogether;

 

   

limitations on employee resources that would otherwise be focused on the conduct of its preclinical studies and clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;

 

   

interruption or delays to its sourced discovery and clinical activities; and

 

   

refusal of the FDA to accept data from clinical trials in affected geographies outside the United States.

The extent of the impact of the COVID-19 pandemic on Aadi’s future liquidity and operational performance will depend on certain developments, including the duration and spread of the outbreak, the availability and effectiveness of vaccines, the impact on its clinical trials, patients, and collaboration partners, and the effect on its suppliers.

Risks Related to Regulatory Approval and Other Legal Compliance Matters

Aadi submitted an NDA to the FDA for FYARRO for the treatment of advanced malignant PEComa under the 505(b)(2) regulatory pathway. The FDA may refuse to file its NDA, or conclude that its NDA no longer qualifies for the Section 505(b)(2) regulatory pathway, which may delay or prevent the approval of FYARRO) for commercial use.

Aadi submitted a Section 505(b)(2) NDA to the FDA in May 2021 for FYARRO for the treatment of advanced malignant PEComa. Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act (referred to as the “FDCA”) was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984 (referred to as the “Hatch-Waxman Amendments”), and permits the submission of an NDA where at least some of the information required for approval comes from preclinical studies or clinical trials not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The FDA interprets Section 505(b)(2) of the FDCA to permit the applicant to rely upon the FDA’s previous findings of safety and efficacy for an approved product. The FDA requires submission of information needed to support any changes to a previously approved drug, such as published data or new studies conducted by the applicant or clinical trials demonstrating safety and efficacy. The FDA could require additional information to sufficiently demonstrate safety and efficacy to support approval. If the FDA determines FYARRO does not meet the requirements of Section 505(b)(2), or that additional information is needed to support a marketing application for FYARRO, Aadi could experience delays in obtaining marketing approval. Moreover, even if FYARRO is approved under the Section 505(b)(2) regulatory pathway, the approval may be subject to limitations on the indicated uses for which it may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product.

Additionally, the FDA must inform Aadi within 60 days of submission if it has accepted its NDA submission and filed it for regulatory review. If the FDA determines that its NDA submission is incomplete or insufficient for filing, the FDA may refuse to file the NDA. The FDA may refuse to file Aadi’s NDA for ABI-009, which may delay or prevent the approval of ABI-009. Any such refusal by the FDA could require Aadi to expend additional time and resources to revise and resubmit its NDA or harm its business and reputation. Furthermore, there is no guarantee that any revised or resubmitted NDA filing Aadi makes will be accepted by the FDA.

 

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Aadi may be unable to obtain United States or foreign regulatory approval for ABI-009 or its other product candidates and, as a result, may be unable to commercialize ABI-009 or its product candidates and its business will be substantially harmed.

Aadi’s product candidates are and will continue to be subject to extensive governmental regulations relating to, among other things, research, testing, development, manufacturing, safety, efficacy, approval, recordkeeping, reporting, labeling, storage, packaging, advertising and promotion, pricing, marketing and distribution of drugs. Rigorous preclinical testing and clinical trials and an extensive regulatory approval process must be successfully completed in the United States and in many foreign jurisdictions before a new drug can be approved for marketing. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. Aadi cannot provide any assurance that any product candidate it may develop will progress through required clinical testing and obtain the regulatory approvals necessary for it to begin selling them.

Aadi submitted an NDA under Section 505(b)(2) to the FDA in May 2021 for FYARRO for the treatment of advanced malignant PEComa. Aadi has not previously submitted an NDA or similar application for approval to the FDA or any other regulatory authority and it cannot assure that any of its product candidates will receive marketing approval. The time required to obtain approvals from the FDA and other regulatory authorities is unpredictable and requires successful completion of extensive clinical trials which typically takes many years, depending upon numerous factors, including the type, complexity and novelty of the product candidate. The standards that the FDA and its foreign counterparts use when evaluating clinical trial data can, and often does, change during drug development, which makes it difficult to predict with any certainty how they will be applied. Aadi may also encounter unexpected delays or increased costs due to new government regulations, including future legislation or administrative action, or changes in FDA policy during the period of drug development, clinical trials and FDA regulatory review. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that its data are insufficient for approval and require additional preclinical, clinical or other studies. It is possible that none of Aadi’s existing product candidates or any product candidates Aadi may seek to develop in the future will ever obtain regulatory approval.

Additionally, as of March 18, 2021, the FDA noted it is continuing to ensure timely reviews of applications for medical products during the COVID-19 pandemic in line with its user fee performance goals and conducting mission critical domestic and foreign inspections to ensure compliance of manufacturing facilities with FDA quality standards. However, the FDA may not be able to continue its current pace and approval timelines could be extended, including where a pre-approval inspection or an inspection of clinical sites is required and due to the COVID-19 pandemic and travel restrictions the FDA is unable to complete such required inspections during the review period. In 2020 and 2021, a number of companies announced receipt of complete response letters due to the FDA’s inability to complete required inspections for their applications.

Any delay or failure in seeking or obtaining required approvals would have a material and adverse effect on Aadi’s ability to generate revenue from any particular product candidates it is developing and for which it is seeking approval. Furthermore, any regulatory approval to market a drug may be subject to significant limitations on the approved uses or indications for which Aadi may market, promote and advertise the drug or the labeling or other restrictions. In addition, the FDA has the authority to require a Risk Evaluation and Mitigation Strategy (referred to as “REMS”) plan as part of approving an NDA, or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug. These requirements or restrictions might include limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry. These limitations and restrictions may significantly limit the size of the market for the drug and affect reimbursement by third-party payors.

Aadi is also subject to numerous foreign regulatory requirements governing, among other things, the conduct of clinical trials, manufacturing and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process varies among countries, and generally includes all of the risks associated

 

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with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Moreover, the time required to obtain approval may differ from that required to obtain FDA approval.

The regulatory approval processes of the FDA, EMA and other comparable foreign regulatory authorities are lengthy, time consuming and inherently unpredictable. If Aadi is ultimately unable to obtain regulatory approval for its product candidates, Aadi will be unable to generate product revenue, and its business will be substantially harmed.

Obtaining approval by the FDA, EMA and other comparable foreign regulatory authorities is unpredictable, typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the type, complexity and novelty of the product candidates involved. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions, which may cause delays in the approval or the decision not to approve an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that Aadi’s data are insufficient for approval and require additional preclinical, clinical or other studies. Even if Aadi eventually completes clinical testing and receives approval for its product candidates, the FDA, EMA and other comparable foreign regulatory authorities may approve its product candidates for a more limited indication or a narrower patient population than it originally requested or may impose other prescribing limitations or warnings that limit the product’s commercial potential. Aadi has not obtained regulatory approval for any product candidate, and it is possible that none of its product candidates will ever obtain regulatory approval.

Further, regulatory approval may be delayed for reasons beyond Aadi’s control. For example, a United States federal government shutdown or budget sequestration, such as ones that occurred during 2013, 2018 and 2019, or the current diversion of resources to handle the COVID-19 public health emergency and pandemic may result in significant reductions to the FDA’s budget, employees and operations, which may lead to slower response times and longer review periods, potentially affecting Aadi’s ability to obtain regulatory approval for its product candidates. In addition, the impact of COVID-19 may cause the FDA to allocate additional resources to product candidates focused on treating related illnesses, which could lead to longer approval processes for Aadi’s product candidates. Finally, Aadi’s competitors may file citizens’ petitions with the FDA in an attempt to persuade the FDA that Aadi’s product candidates, or the clinical trials that support their approval, contain deficiencies. Such actions by Aadi’s competitors could delay or even prevent the FDA from approving any of Aadi’s NDAs.

Applications for Aadi’s product candidates could fail to receive regulatory approval for many reasons, including the following:

 

   

the FDA, EMA or other comparable foreign regulatory authorities may disagree with the design, implementation or results of Aadi’s clinical trials;

 

   

the FDA, EMA or other comparable foreign regulatory authorities may determine that Aadi’s product candidates are not safe or effective, are only moderately effective or have undesirable or unintended side effects, toxicities or other characteristics that preclude Aadi from obtaining regulatory approval or prevent or limit commercial use;

 

   

the population studied in the clinical trial may not be sufficiently broad or representative to assure efficacy and safety in the full population for which Aadi seeks approval;

 

   

the FDA, EMA or other comparable foreign regulatory authorities may disagree with Aadi’s interpretation of data from preclinical studies or clinical trials;

 

   

Aadi may be unable to demonstrate to the FDA, EMA or other comparable foreign regulatory authorities that its product candidate’s risk-benefit ratio for its proposed indication is acceptable;

 

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the FDA, EMA or other comparable foreign regulatory authorities may find deficiencies with or fail to approve the manufacturing processes, test procedures and specifications or facilities of third-party manufacturers with which Aadi contracts for clinical and commercial supplies;

 

   

the FDA, EMA or other comparable regulatory authorities may fail to approve companion diagnostic tests for Aadi’s product candidates, if required; and

 

   

the approval policies or regulations of the FDA, EMA or other comparable foreign regulatory authorities may significantly change in a manner rendering Aadi’s clinical data insufficient for approval.

This lengthy approval process, as well as the unpredictability of the results of clinical trials, may result in Aadi failing to obtain regulatory approval to market any of its product candidates, which would significantly harm its business, results of operations and prospects.

The FDA, EMA and other comparable foreign regulatory authorities may not accept data from trials conducted in locations outside of their jurisdiction.

Aadi’s clinical trials have been and may in the future be undertaken in the United States. Aadi may choose to conduct additional clinical trials internationally as well. For example, Aadi may conduct its PRECISION 1 trial of ABI-009 in the United States, Europe and other countries. The acceptance of study data by the FDA, EMA or other comparable foreign regulatory authority from clinical trials conducted outside of their respective jurisdictions may be subject to certain conditions. In cases where data from United States clinical trials are intended to serve as the basis for regulatory approval in foreign countries outside the United States, the standards for clinical trials and approval may be different. There can be no assurance that any United States or foreign regulatory authority would accept data from trials conducted outside of its applicable jurisdiction. If the FDA, EMA or any applicable foreign regulatory authority does not accept such data, it would result in the need for additional trials, which would be costly and time-consuming and delay aspects of Aadi’s business plan, and which may result in its product candidates not receiving approval or clearance for commercialization in the applicable jurisdiction.

Brexit and uncertainty in the regulatory framework as well as future legislation in the United Kingdom (referred to as the “UK”), European Union, and other jurisdictions can lead to disruption in the execution of international multi-center clinical trials, the monitoring of adverse events through pharmacovigilance programs, the evaluation of the benefit-risk profiles of new medicinal products, and determination of marketing authorization across different jurisdictions. Uncertainty in the regulatory framework could also result in disruption to the supply and distribution as well as the import/export both of active pharmaceutical ingredients and finished product. Such a disruption could create supply difficulties for ongoing clinical trials. The cumulative effects of the disruption to the regulatory framework, uncertainty in future regulation, and changes to existing regulations may increase Aadi’s development lead time to marketing authorization and commercialization of products in the European Union and/or the UK and increase its costs. Aadi cannot predict the impact of such changes and future regulation on its business or the results of its operations.

Obtaining and maintaining regulatory approval of Aadi’s product candidates in one jurisdiction does not mean that Aadi will be successful in obtaining regulatory approval of its product candidates in other jurisdictions.

Obtaining and maintaining regulatory approval of Aadi’s product candidates in one jurisdiction does not guarantee that Aadi will be able to obtain or maintain regulatory approval in any other jurisdiction. For example, even if the FDA or EMA grants regulatory approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion and reimbursement of the product candidate in those countries. However, a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the

 

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United States, including additional preclinical studies or clinical trials as clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. The regulatory approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United States, as well as other risks. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that Aadi intends to charge for its products is also subject to approval.

Obtaining foreign regulatory approvals and establishing and maintaining compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for Aadi and could delay or prevent the introduction of its products in certain countries. If Aadi or any future collaborator fail to comply with the regulatory requirements in international markets or fail to receive applicable regulatory approvals, Aadi’s target market will be reduced and its ability to realize the full market potential of its product candidates will be harmed.

Following Brexit, to the extent Aadi conducts any operations in the UK, Aadi will be subject to applicable regulatory requirements in the UK. Although the UK is no longer a member of the European Union, European Union law remains applicable in Northern Ireland. There are a number of new marketing authorization routes available in the UK, Great Britain (England, Scotland and Wales) or Northern Ireland, in addition to the national procedure. As with the European Union position, a company can only start to market a medicine in the UK once it has received a marketing authorization. The main legislation that applies to clinical trials in the UK is the UK Medicines for Human Use (Clinical Trials) Regulations 2004, which transposes the Clinical Trials Directive into domestic law. Consequently, the requirements and obligations that relate to the conduct of clinical trials in the UK currently remain largely aligned with the European Union position. It is unclear how future regulatory regime in the UK will impact regulations of products, manufacturers, and approval of product candidates in the UK. In the immediately foreseeable future, the UK regulatory approval process is likely to remain similar to that applicable in the European Union, albeit that the processes for applications will be separate. Longer term, the UK is likely to develop its own legislation that diverges from that in the European Union.

Even if Aadi’s product candidates receive regulatory approval, they will be subject to significant ongoing post-marketing regulatory requirements and oversight.

Even if Aadi receives regulatory approval for its product candidates, they will be subject to ongoing regulatory obligations and continued review by regulatory authorities, which may include imposing significant restrictions on its product candidates, indicated uses or marketing, or imposing ongoing requirements for potentially costly post-approval studies. Any regulatory approvals that Aadi may receive for its product candidates will require the submission of reports to regulatory authorities and on-going surveillance to monitor the safety and efficacy of the product candidate, may contain significant limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, and may include burdensome post-approval study or risk management requirements and regulatory inspection. The FDA has significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the use of a drug. For example, the FDA may require the submission of a REMS in order to approve Aadi’s product candidates, which could entail requirements for a medication guide, physician training and communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any REMS required by the FDA may lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume and revenue. In addition, if the FDA or foreign regulatory authorities approve Aadi’s product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for its product candidates will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as on-going compliance with current good manufacturing practices (referred to as “cGMPs”), good laboratory practices (referred to as “GLPs”) and good clinical practices (referred to as “GCPs”) for any clinical trials that Aadi conducts post-approval. In addition,

 

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manufacturers of drug products and their facilities are subject to continual review and periodic, unannounced inspections by the FDA and other regulatory authorities for compliance with cGMP regulations and standards. Accordingly, Aadi and others with whom Aadi works must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control.

Aadi will be required to report certain adverse reactions and production problems, if any, to the FDA and comparable foreign regulatory authorities. If Aadi or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facilities where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or Aadi, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. Any new legislation addressing drug safety issues could result in delays in product development or commercialization, or increased costs to assure compliance. In addition, failure to comply with FDA, EMA and other comparable foreign regulatory requirements may subject Aadi to administrative or judicially imposed sanctions, including:

 

   

delays in or the rejection of product approvals;

 

   

restrictions on Aadi’s ability to conduct clinical trials, including full or partial clinical holds on ongoing or planned trials;

 

   

restrictions on the product, manufacturers or manufacturing process;

 

   

warning letters or untitled letters that would result in adverse publicity;

 

   

civil and criminal penalties;

 

   

injunctions;

 

   

suspension or withdrawal of regulatory approvals;

 

   

product seizures, detentions or import bans;

 

   

voluntary or mandatory product recalls and publicity requirements;

 

   

total or partial suspension of production; and

 

   

imposition of restrictions on operations, including costly new manufacturing requirements.

The holder of an approved NDA or comparable regulatory approval must submit new or supplemental applications and obtain approval for certain changes to the approved product, product labeling, or manufacturing process and the FDA or comparable foreign regulatory authority may refuse to approve pending applications or supplements to approved applications filed by Aadi.

The occurrence of any event or penalty described above may inhibit Aadi’s ability to commercialize its product candidates, if approved, and generate revenue. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of the company and its operating results will be adversely affected.

The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses.

If any of Aadi’s product candidates are approved and Aadi is found to have improperly promoted off-label uses of those products, it may become subject to significant liability. The FDA and other regulatory agencies, including the U.S. Department of Justice, strictly regulate the post-approval marketing and promotional claims that may be made about prescription products, such as Aadi’s product candidates, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly

 

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promoted off-label uses may be subject to significant civil, criminal and administrative penalties. As such, Aadi may not promote its products for indications or uses for which they do not have approval. For example, if Aadi receives regulatory approval for ABI-009 as a treatment for advanced malignant PEComa, physicians may, in their practice of medicine, use drug products for their patients in a manner that is inconsistent with the approved label. If Aadi, or any of its contractors or agents acting on behalf of Aadi, is found to have promoted such off-label uses, Aadi may become subject to significant liability. The United States federal government has levied large civil and criminal fines against companies for alleged improper promotion of off-label use and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If Aadi cannot successfully manage the promotion of its product candidates, if approved, Aadi could become subject to significant liability, which would materially adversely affect its business and financial condition.

If Aadi is required by the FDA to obtain approval of a companion diagnostic product in connection with approval of any future product in candidates or new indication that it may develop, and if Aadi fails to obtain or faces delays in obtaining FDA approval of such companion diagnostic product, Aadi will not be able to commercialize such product candidate intended for use with such companion diagnostic product and its ability to generate revenue form such product candidate will be materially impaired.

In connection with the development of any future product candidates or new indication Aadi may develop or work with collaborators to develop or obtain access to companion diagnostic tests to identify patient subsets within a disease category who may derive selective and meaningful benefit from Aadi’s programs. Such companion diagnostics would be used during Aadi’s clinical trials as well as in connection with the commercialization of any future product candidates or new indication it may develop. To be successful in developing and commercializing such product candidate in combination with these companion diagnostics, Aadi or its collaborators will need to address a number of scientific, technical, regulatory and logistical challenges. According to FDA guidance, if the FDA determines that a companion diagnostic device is essential to the safe and effective use of a novel therapeutic product or indication, the FDA generally will not approve the therapeutic product or new therapeutic product indication if the companion diagnostic is not also approved or cleared at the same time the product candidate is approved. To date, the FDA has required marketing approval of all companion diagnostic tests for cancer therapies. Various foreign regulatory authorities also regulate in vitro companion diagnostics as medical devices and, under those regulatory frameworks, will likely require the conduct of clinical trials to demonstrate the safety and effectiveness of Aadi’s current diagnostics and any future diagnostics Aadi may develop, which it expects will require separate regulatory clearance or approval prior to commercialization.

The approval of a companion diagnostic as part of the therapeutic product’s labeling limits the use of the therapeutic product to only those patients who express certain biomarkers or the specific genetic alteration that the companion diagnostic was developed to detect. If the FDA, EMA or a comparable regulatory authority requires approval of a companion diagnostic for any future product candidate or new indication that Aadi may develop, whether before or concurrently with approval of such product candidate, Aadi, and/or future collaborators, may encounter difficulties in developing and obtaining approval for these companion diagnostics. Any delay or failure by Aadi or third-party collaborators to develop or obtain regulatory approval of a companion diagnostic could delay or prevent approval or continued marketing of such product candidate. Further, in April 2020, the FDA issued new guidance on developing and labeling companion diagnostics for a specific group of oncology therapeutic products, including recommendations to support a broader labeling claim rather than individual therapeutic products. Aadi will continue to evaluate the impact of this guidance on its companion diagnostic development and strategy. This guidance and future issuances from the FDA and other regulatory authorities may impact Aadi’s development of a companion diagnostic for its product candidates and result in delays in regulatory approval. Aadi may be required to conduct additional studies to support a broader claim. Also, to the extent other approved diagnostics are able to broaden their labeling claims to include Aadi’s approved drug products, Aadi may be forced to abandon its companion diagnostic development plans or it may

 

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not be able to compete effectively upon approval, which could adversely impact Aadi’s ability to generate revenue from the sale of its approved products and its business operations.

Additionally, Aadi may rely on third parties for the design, development and manufacture of companion diagnostic tests for its product candidates that may require such tests. If Aadi enters into such collaborative agreements, it will be dependent on the sustained cooperation and effort of its future collaborators in developing and obtaining approval for these companion diagnostics. It may be necessary to resolve issues such as selectivity/specificity, analytical validation, reproducibility, or clinical validation of companion diagnostics during the development and regulatory approval processes. Moreover, even if data from preclinical studies and early clinical trials appear to support development of a companion diagnostic for a product candidate, data generated in later clinical trials may fail to support the analytical and clinical validation of the companion diagnostic. Aadi and its future collaborators may encounter difficulties in developing, obtaining regulatory approval for, manufacturing and commercializing companion diagnostics similar to those Aadi faces with respect to its product candidates, including issues with achieving regulatory clearance or approval, production of sufficient quantities at commercial scale and with appropriate quality standards, and in gaining market acceptance. If Aadi is unable to successfully develop companion diagnostics for any future product candidate or new indication, or experience delays in doing so, the development of such product candidate may be adversely affected, the product candidate may not obtain marketing approval, and Aadi may not realize the full commercial potential of such product candidate after obtaining marketing approval. As a result, Aadi’s business, results of operations and financial condition could be materially harmed. In addition, a diagnostic company with whom Aadi contracts may decide to discontinue selling or manufacturing the companion diagnostic test that it anticipates using in connection with development and commercialization of any such future product candidate or its relationship with such diagnostic company may otherwise terminate. Aadi may not be able to enter into arrangements with another diagnostic company to obtain supplies of an alternative diagnostic test for use in connection with the development and commercialization of any such future product or new indication. or do so on commercially reasonable terms, which could adversely affect and/or delay the development or commercialization of any such future product candidate Aadi may develop.

A Fast Track or Breakthrough Therapy designation for ABI-009 may not lead to a faster development or review process, or Aadi may be unable to maintain or effectively utilize such a designation. Aadi may also seek additional Fast Track designations from the FDA for ABI-009 or any of its other product candidates. Even if one or more of Aadi’s product candidates receive Fast Track designation, Aadi may be unable to obtain or maintain the benefits associated with the Fast Track designation.

In October 2018, Aadi announced that the FDA granted Fast Track designation for ABI-009 for the investigation of the treatment of patients with advanced malignant PEComa. This Fast Track designation does not guarantee that Aadi will qualify for or be able to take advantage of the expedited review procedures or that it will ultimately obtain regulatory approval of ABI-009. Even though Aadi received this Fast Track designation, it may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw the Fast Track designation if it believes that the Fast Track designation is no longer supported by data from Aadi’s clinical development program. Aadi may also seek Fast Track designation for additional cancer indications or other diseases, and it may not be successful in securing such additional designation or in expediting development if such designations were received.

Fast Track designation is designed to facilitate the development and expedite the review of therapies intended for the treatment of a serious or life-threatening condition which demonstrate the potential to address unmet medical needs for the condition. Programs with Fast Track designation may benefit from early and frequent communications with the FDA, potential priority review and the ability to submit a rolling application for regulatory review. Fast Track designation applies to both the product candidate and the specific indication for which it is being studied. If any of Aadi’s product candidates receive Fast Track designation but do not continue to meet the criteria for Fast Track designation, or if Aadi’s clinical trials are delayed, suspended or terminated, or put on clinical hold due to unexpected adverse events or issues with clinical supply, Aadi will not receive the

 

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benefits associated with the Fast Track program. The FDA may withdraw any Fast Track Designation at any time. Furthermore, Fast Track designation does not change the standards for approval. Fast Track designation alone does not guarantee qualification for the FDA’s priority review procedures and Aadi may not experience a faster development process, review or approval compared to conventional FDA procedures.

In December 2018, Aadi announced that the FDA granted Breakthrough Therapy designation for ABI-009 for the treatment of patients with advanced malignant PEComa. Aadi may also seek a Breakthrough Therapy designation for ABI-009 for various cancer indications or other diseases. Breakthrough Therapy designation is for a product candidate that is intended, alone or in combination with one or more other drugs or biologics, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product candidate may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. A sponsor may request the FDA to designate its product candidate as a Breakthrough Therapy at the time of, or any time after, the submission of an IND for the product candidate. For product candidates that have been designated as a Breakthrough Therapy, the FDA may take actions appropriate to expedite the development and review of the application, which may include holding meetings with the sponsor and the review team throughout the development of the product candidate; providing timely advice to, and interactive communication with, the sponsor regarding the development of the product candidate to ensure that the development program to gather the nonclinical and clinical data necessary for approval is as efficient as practicable; involving senior managers and experienced review staff, as appropriate, in a collaborative, cross-disciplinary review; assigning a cross-disciplinary project lead for the FDA review team to facilitate an efficient review of the development program and to serve as a scientific liaison between the review team and the sponsor; and taking steps to ensure that the design of the clinical trials is as efficient as practicable, when scientifically appropriate, such as by minimizing the number of patients exposed to a potentially less efficacious treatment.

The FDA has broad discretion in determining whether to grant a Fast Track or Breakthrough Therapy designation for a drug. Obtaining a Fast Track or Breakthrough Therapy designation does not change the standards for product approval, but may expedite the development or approval process. There is no assurance that the FDA will grant either such designation for any other indication or product candidate that Aadi may pursue. Even if the FDA does grant either such designation, it may not actually result in faster clinical development or regulatory review or approval. Furthermore, such a designation does not increase the likelihood that ABI-009 will receive regulatory approval in the United States.

Aadi may not be able to obtain or maintain orphan drug designation or obtain or maintain orphan drug exclusivity for its product candidates and, even if it does, such exclusivity may not prevent the FDA, EMA or other comparable foreign regulatory authorities, from approving competing products.

Regulatory authorities in some jurisdictions, including the United States and the European Union, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product candidate as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. Aadi’s target indications may include diseases with large patient populations or may include orphan indications. However, there can be no assurances that Aadi will be able to obtain orphan designations for its product candidates.

In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers. In addition, if a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity in the United States provides that the FDA may not approve any other applications, including a full NDA, to market the same drug for the same indication for seven years, except in limited circumstances. The applicable exclusivity period is ten years in Europe.

 

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The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified.

Even if orphan drug designation is granted for a product candidate, Aadi may not be able to obtain or maintain orphan drug exclusivity for that product candidate. Aadi may not be the first to obtain regulatory approval of any product candidate for which it has obtained orphan drug designation for the orphan-designated indication due to the uncertainties associated with developing pharmaceutical products. In addition, exclusive marketing rights in the United States may be limited if Aadi seeks approval for an indication broader than the orphan-designated indication or may be lost if the FDA later determines that the request for designation was materially defective or if Aadi is unable to ensure that it will be able to manufacture sufficient quantities of the product to meet the needs of patients with the rare disease or condition. Further, that the orphan drug exclusivity may not effectively protect an approved product from competition because different drugs with different active moieties may be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug with the same active moiety for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care or the manufacturer of the product with orphan exclusivity is unable to maintain sufficient product quantity. Orphan drug designation neither shortens the development time or regulatory review time of a drug nor gives the product candidate any advantage in the regulatory review or approval process or entitles the product candidate to priority review.

Aadi received orphan drug designation from the FDA for ABI-009 for the treatment of advanced malignant PEComa. Aadi may be unable to obtain regulatory approval for ABI-009 for this orphan population or any other orphan population, or Aadi may be unable to successfully commercialize ABI-009 for such orphan population due to risks that include:

 

   

the orphan patient populations may change in size;

 

   

there may be changes in the treatment options for patients that may provide alternative treatments to ABI-009;

 

   

the development costs may be greater than projected revenue of drug sales for the orphan indications;

 

   

the regulatory agencies may disagree with the design or implementation of Aadi’s clinical trials;

 

   

there may be difficulties in enrolling patients for clinical trials;

 

   

ABI-009 may not prove to be efficacious in the respective orphan patient populations;

 

   

clinical trial results may not meet the level of statistical significance required by the regulatory agencies; and

 

   

ABI-009 may not have a favorable risk/benefit assessment in the respective orphan indication.

If Aadi is unable to obtain regulatory approval for ABI-009 for advanced malignant PEComa or any orphan population for which it obtains orphan drug designation or is unable to successfully commercialize ABI-009 for such orphan population, it could harm Aadi’s business prospects, financial condition and results of operations.

Aadi may not be able to obtain orphan drug exclusivity for ABI-009 or for one or more of its product candidates that it may develop in the future, and even if Aadi does, that exclusivity may not prevent the FDA from approving other competing products.

Under the Orphan Drug Act, the FDA may designate a product candidate as an orphan drug if it is a drug or biologic intended to treat a rare disease or condition. A similar regulatory scheme governs approval of orphan product candidates by the EMA in the European Union. Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the FDA or the EMA from approving

 

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another marketing application for another similar product candidate for the same orphan therapeutic indication for that time period. The applicable period is seven years in the United States and ten years in the European Union. The exclusivity period in the European Union can be reduced to six years if a product no longer meets the criteria for orphan drug designation, in particular if the product is sufficiently profitable so that market exclusivity is no longer justified.

In order for the FDA to grant orphan drug exclusivity to one of our product candidates, the agency must find that the product candidate is indicated for the treatment of a condition or disease that affects fewer than 200,000 individuals in the United States or that affects 200,000 or more individuals in the United States and for which there is no reasonable expectation that the cost of developing and making the product candidate available for the disease or condition will be recovered from sales of the product in the United States. The FDA may conclude that the condition or disease for which Aadi seeks orphan drug exclusivity does not meet this standard. Even if Aadi obtains orphan drug exclusivity for a product candidate, that exclusivity may not effectively protect the product candidate from competition because different product candidates can be approved for the same condition. In addition, even after an orphan drug is approved, the FDA can subsequently approve the same product candidate for the same condition if the FDA concludes that the later product candidate is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care compared with the product that has orphan exclusivity. Orphan drug exclusivity may also be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of the patients with the rare disease or condition.

Where appropriate, Aadi plans to secure approval from the FDA or comparable foreign regulatory authorities through the use of accelerated registration pathways. If Aadi is unable to obtain such approval, it may be required to conduct additional preclinical studies or clinical trials beyond those that it contemplates, which could increase the expense of obtaining, and delay the receipt of, necessary regulatory approvals. Even if Aadi receives accelerated approval from the FDA, if its confirmatory trials do not verify clinical benefit, or if it does not comply with rigorous post-marketing requirements, the FDA may seek to withdraw accelerated approval.

Where possible, Aadi plans to pursue accelerated development strategies in areas of high unmet need. Aadi may seek an accelerated approval pathway for one or more of its product candidates. Under the accelerated approval provisions in the FFDA, and the FDA’s implementing regulations, the FDA may grant accelerated approval to a product candidate designed to treat a serious or life-threatening condition that generally provides a meaningful therapeutic benefit over available therapies upon a determination that the product candidate has an effect on a surrogate endpoint or intermediate clinical endpoint that is reasonably likely to predict clinical benefit. The FDA considers a clinical benefit to be a positive therapeutic effect that is clinically meaningful in the context of a given disease, such as irreversible morbidity or mortality. For the purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory measurement, radiographic image, physical sign, or other measure that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. An intermediate clinical endpoint is a clinical endpoint that can be measured earlier than an effect on irreversible morbidity or mortality that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit. The accelerated approval pathway may be used in cases in which the advantage of a new drug over available therapy may not be a direct therapeutic advantage, but is a clinically important improvement from a patient and public health perspective. If granted, accelerated approval is usually contingent on the sponsor’s agreement to conduct, in a diligent manner, additional post-approval confirmatory studies to verify and describe the drug’s clinical benefit. If such post-approval studies fail to confirm the drug’s clinical benefit, the FDA may withdraw its approval of the drug. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product.

Prior to seeking such accelerated approval, Aadi will seek feedback from the FDA and will otherwise evaluate its ability to seek and receive such accelerated approval. There can be no assurance that after Aadi’s evaluation of the feedback and other factors Aadi will decide to pursue or submit an NDA for accelerated approval or any other form of expedited development, review or approval. Similarly, there can be no assurance

 

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that after subsequent FDA feedback Aadi will continue to pursue or apply for accelerated approval or any other form of expedited development, review or approval, even if Aadi initially decides to do so. Furthermore, if Aadi decides to submit an application for accelerated approval or under another expedited regulatory designation (e.g., breakthrough therapy designation), there can be no assurance that such submission or application will be accepted or that any expedited development, review or approval will be granted on a timely basis, or at all. The FDA or other comparable foreign regulatory authorities could also require Aadi to conduct further studies prior to considering its application or granting approval of any type. A failure to obtain accelerated approval or any other form of expedited development, review or approval for Aadi’s product candidate would result in a longer time period to commercialization of such product candidate, could increase the cost of development of such product candidate and could harm Aadi’s competitive position in the marketplace.

Aadi may face difficulties from changes to current regulations and future legislation.

Existing regulatory policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of Aadi’s product candidates. Aadi cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If Aadi is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if it is not able to maintain regulatory compliance, it may lose any regulatory approval that it may have obtained, and it may not achieve or sustain profitability.

For example, in March 2010, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (referred to as the “ACA”), was passed, which substantially changes the way healthcare is financed by both the government and private insurers, and significantly impacts the United States pharmaceutical industry. In December 2018, CMS published a final rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program in response to the outcome of the federal district court litigation regarding the method CMS uses to determine this risk adjustment. Since then, the ACA risk adjustment program payment parameters have been updated annually. Some of the provisions of the ACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the former Trump administration to repeal or replace certain aspects of the ACA. In June 2021, the Supreme Court held that Texas and other challengers had no legal standing to challenge the ACA, upholding the ACA. It is unclear how this decision and other healthcare reforms will impact Aadi’s business.

In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, effective April 1, 2013, which, due to subsequent legislative amendments, will stay in effect through 2030, with the exception of a temporary suspension implemented under various COVID-19 relief legislation from May 1, 2020 through the end of 2021, unless additional congressional action is taken. In January 2013, former President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on customers for Aadi’s product candidates, if approved, and accordingly, Aadi’s financial operations.

Moreover, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. For example, at the federal level, in September 2018, CMS announced that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019. Additionally, CMS issued a final rule, effective on July 9, 2019, that requires direct-to-consumer television advertisements of prescription drugs and biological products, for which

 

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payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug or biological product if it is equal to or greater than $35 for a monthly supply or usual course of treatment. Prescription drugs and biological products that are in violation of these requirements will be included on a public list. In 2020, at the federal level, under the former Trump administration, HHS and CMS issued various rules that are expected to impact, among others, price reductions from pharmaceutical manufacturers to plan sponsors under Part D, fee arrangements between pharmacy benefit managers and manufacturers, importation of prescription drugs from Canada and other countries, manufacturer price reporting requirements under the Medicaid Drug Rebate Program, including regulations that affect manufacturer-sponsored patient assistance programs subject to pharmacy benefit manager accumulator programs and Best Price reporting related to certain value-based purchasing arrangements. Multiple lawsuits have been brought against the HHS challenging various aspects of these new rules. In January 2021, the Biden administration issued a “regulatory freeze” memorandum that directs department and agency heads to review new or pending rules of the prior administration. It is unclear whether these new regulations will be withdrawn or when they will become fully effective under the current administration. The impact of these lawsuits as well as legislative, executive, and administrative actions of the current administration on Aadi and the pharmaceutical industry as a whole is unclear.

At the state level, legislatures are increasingly passing legislation and states are implementing regulations designed to control spending on, and patient out-of-pocket costs for, drug products. Implementation of cost containment measures or other healthcare reforms that affect the pricing and/or availability of drug products may impact Aadi’s ability to generate revenue, attain or maintain profitability, or commercialize products for which it may receive regulatory approval in the future. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

Further, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017 (Right to Try Act), was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new product candidates that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its products available to eligible patients as a result of the Right to Try Act.

Aadi expects that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that it receives for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent Aadi from being able to generate revenue, attain profitability or commercialize Aadi’s product candidates.

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for biotechnology products. Aadi cannot be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the regulatory approvals of its product candidates, if any, may be. In addition, increased scrutiny by Congress of the FDA’s approval process may significantly delay or prevent regulatory approval, as well as subject Aadi to more stringent product labeling and post-marketing testing and other requirements.

Additionally, the collection and use of health data in the European Union is governed by the General Data Protection Regulation (referred to as the “GDPR”), which extends the geographical scope of European Union

 

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data protection law to non-European Union entities under certain conditions and imposes substantial obligations upon companies and new rights for individuals. Failure to comply with the GDPR and the applicable national data protection laws of the European Union Member States may result in fines up to €20.0 million or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher, and other administrative penalties. The GDPR may increase Aadi’s responsibility and liability in relation to personal data that Aadi’s may process, and Aadi may be required to put in place additional mechanisms in an effort to comply with the GDPR. This may be onerous and if Aadi’s efforts to comply with GDPR or other applicable European Union laws and regulations are not successful, it could adversely affect Aadi’s business in the European Union.

Finally, state and foreign laws may apply generally to the privacy and security of information Aadi maintains, and may differ from each other in significant ways, thus complicating compliance efforts. For example, the California Consumer Privacy Act of 2018 (referred to as the “CCPA”), which took effect on January 1, 2020, gives California residents expanded rights to access and require deletion of their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. In addition, the CCPA (a) allows enforcement by the California Attorney General, with fines set at $2,500 per violation (i.e., per person) or $7,500 per intentional violation and (b) authorizes private lawsuits to recover statutory damages for certain data breaches. While it exempts some data regulated by the Health Insurance Portability and Accountability Act of 1996 (referred to as “HIPAA”) and certain clinical trials data, the CCPA, to the extent applicable to Aadi’s business and operations, may increase Aadi’s compliance costs and potential liability with respect to other personal information Aadi collects about California residents. Some observers note that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase Aadi’s potential liability and adversely affect Aadi’s business.

Inadequate funding for the FDA, the Securities and Exchange Commission and other government agencies could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on which the operation of Aadi’s business may rely, which could negatively impact Aadi’s business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of the Securities and Exchange Commission (referred to as the “SEC”) and other government agencies on which Aadi’s operations may rely, including those that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new product candidates to be reviewed and/or approved by necessary government agencies, which would adversely affect Aadi’s business. For example, in recent years, including in 2018 and 2019, the United States government shut down several times and certain regulatory agencies, such as the FDA and the SEC, had to furlough critical employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process Aadi’s regulatory submissions, which could have a material adverse effect on Aadi’s business. Separately, in response to the COVID-19 pandemic, in March 2020, the FDA announced its intention to postpone most inspections of foreign manufacturing facilities and products as well as routine surveillance inspections of domestic manufacturing facilities and provided guidance regarding the conduct of clinical trials. In April 2021, the FDA issued guidance for industry formally announcing plans to employ remote interactive evaluations, using risk management methods, to meet user fee commitments and goal dates and based on updated guidance issued in May 2021, FDA continues to conduct mission-critical inspections on a case-by-case basis, or, where possible to do so safely, has, since July 2020, resumed prioritized domestic inspections, which generally include pre-approval, pre-license, surveillance, and for-cause inspections. Should FDA determine that an inspection is necessary for approval and an inspection cannot be completed during the

 

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review cycle due to restrictions on travel, and the FDA does not determine a remote interactive evaluation to be adequate, the agency has stated that it generally intends to issue a complete response letter or defer action on the application until an inspection can be completed. In 2020 and 2021, a number of companies announced receipt of complete response letters due to the FDA’s inability to complete required inspections for their applications While the FDA indicated that it will consider alternative methods for inspections and exercise discretion on a case-by-case basis to approve products based on a desk review, if a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities on a timely basis, it could significantly impact the ability of the FDA to timely review and process Aadi’s regulatory submissions, which could have a material adverse effect on its business. Regulatory authorities outside the U.S. may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic and may experience delays in their regulatory activities. Further, in Aadi’s operations as a public company, future government shutdowns could impact its ability to access the public markets and obtain necessary capital in order to properly capitalize and continue its operations.

If Aadi fails to comply with other United States healthcare laws and compliance requirements, Aadi could become subject to fines or penalties or incur costs that could have a material adverse effect on its business. Further, Aadi’s relationships with healthcare professionals, clinical investigators, CROs and third-party payors in connection with its current and future business activities may be subject to federal and state healthcare fraud and abuse laws, false claims laws, transparency laws, government price reporting, and health information privacy and security laws, which could expose Aadi to significant losses, including, among other things, criminal sanctions, civil penalties, contractual damages, exclusion from governmental healthcare programs, reputational harm, administrative burdens and diminished profits and future earnings.

Healthcare providers and third-party payors play a primary role in the recommendation and prescription of any product candidates for which Aadi obtains regulatory approval. Aadi’s current and future arrangements with healthcare professionals, clinical investigators, CROs, third-party payors and customers may expose it to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which Aadi markets, sells and distributes its products for which it obtains regulatory approval. Restrictions under applicable federal and state healthcare laws and regulations may include the following:

 

   

the federal Anti-Kickback Statute prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the federal Anti- Kickback Statute or specific intent to violate it to have committed a violation. Violations are subject to civil and criminal fines and penalties for each violation, plus up to three times the remuneration involved, imprisonment, and exclusion from government healthcare programs. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act or federal civil money penalties;

 

   

the federal false claims laws, including the civil False Claims Act, which can be enforced by private citizens through civil whistleblower or qui tam actions, and civil monetary penalties laws, prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. Manufacturers can be held liable under the federal False Claims Act even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. The federal False Claims Act also permits a private individual acting as a “whistleblower” to bring actions on behalf of the federal government alleging violations of the federal False Claims Act and to share in any monetary recovery;

 

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Federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making, or causing to be made, false statements relating to healthcare matters;

 

   

the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;

 

   

the FCPA, the U.K. Bribery Act of 2010, and other local anti-corruption laws that apply to Aadi’s international activities;

 

   

the federal HIPAA, which created new federal criminal statutes that prohibit a person from knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false, fictitious, or fraudulent statements or representations in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

   

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (referred to as “HITECH”) and their respective implementing regulations, including the Final Omnibus Rule published in January 2013, which impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their respective business associates, independent contractors or agents of covered entities, that perform services for them that involve the creation, maintenance, receipt, use, or disclosure of, individually identifiable health information relating to the privacy, security and transmission of individually identifiable health information. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, there may be additional federal, state and non-U.S. laws which govern the privacy and security of health and other personal information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance effort;

 

   

the federal Physician Payments Sunshine Act requires applicable manufacturers of covered drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to annually report to CMS information regarding certain payments and other transfers of value made to covered recipients in the previously year, including physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other healthcare professionals, and teaching hospitals, as well as information regarding ownership and investment interests held by physicians and their immediate family members. Additionally, beginning with data reported to CMS in 2022, such reporting obligations with respect to payments or other transfers of value made in the previous year to covered recipients have been extended to include new provider types: physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists and anesthesiologist assistants, and certified nurse-midwives. Aadi’s failure to submit required information timely, accurately, and completely may result in significant civil monetary penalties and may increase its liability under other federal laws or regulations; and

 

   

additionally, we are subject to state and foreign equivalents of each of the healthcare laws and regulations described above, among others, some of which may be broader in scope and may apply regardless of the payor. Many U.S. states have adopted laws similar to the federal Anti-Kickback

 

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Statute and False Claims Act, and may apply to our business practices, including, but not limited to, research, distribution, sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental payors, including private insurers. In addition, some states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state and require the registration of pharmaceutical sales representatives. State and foreign laws, including for example the European Union General Data Protection Regulation, which became effective May 2018 also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. There are ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement we could be subject to penalties. Finally, there are state and foreign laws governing the privacy and security of health information, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance effort.

Because of the breadth of these laws and the narrowness of available statutory and regulatory exceptions or safe harbors, it is possible that some of Aadi’s activities, including those of its contractors or agents who conduct business for or on behalf of Aadi, could be subject to challenge under one or more of such laws. Any action brought against Aadi for violations of these laws or regulations, even successfully defended, could cause Aadi to incur significant legal expenses and divert Aadi’s management’s attention from the operation of its business. Aadi may be subject to private “qui tam” actions brought by individual whistleblowers on behalf of the federal or state governments.

If Aadi were to grow its business and expand its sales organization or rely on distributors outside of the United States, it would be at increased risk of violating these laws or Aadi’s internal policies and procedures. The risk of Aadi being found in violation of these or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action brought against Aadi for violation of these or other laws or regulations, even if it successfully defends against it, could cause Aadi to incur significant legal expenses and divert its management’s attention from the operation of its business.

Efforts to ensure that Aadi’s current and future business arrangements with third parties will comply with applicable healthcare and data privacy laws and regulations will involve on-going substantial costs. It is possible that governmental authorities will conclude that Aadi’s business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If Aadi’s operations are found to be in violation of any of these laws or any other governmental regulations that may apply to it, it may be subject to significant penalties, including civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government funded healthcare programs, such as Medicare and Medicaid, integrity oversight and reporting obligations, contractual damages, reputational harm, diminished profits and future earnings and the curtailment or restructuring of Aadi’s operations. Any of the foregoing consequences could seriously harm Aadi’s business and its financial results. Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if Aadi is successful in defending against any such actions that may be brought against it, its business may be impaired. Further, if any of the physicians or other healthcare providers or entities with whom Aadi expects to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

 

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Aadi’s employees, independent contractors, consultants, commercial collaborators, principal investigators, CROs, suppliers and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

Aadi is exposed to the risk that its employees, independent contractors, consultants, commercial collaborators, principal investigators, CROs, suppliers and vendors may engage in fraud, misconduct or other improper activities. Misconduct by these parties could include intentional, reckless, and negligent conduct that fails to: comply with the regulations of the FDA and other comparable foreign regulatory authorities; provide true, complete and accurate information to the FDA and other comparable foreign regulatory authorities; comply with manufacturing standards Aadi has established; comply with federal and state health care fraud and abuse laws and regulations and similar foreign fraudulent misconduct laws; accurately report financial information or data or disclose unauthorized activities to Aadi. In particular, research, sales, marketing and business arrangements in the health care industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, certain customer incentive programs and other business arrangements. Misconduct by these parties could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to Aadi’s reputation. Aerpio has adopted a code of conduct, which will continue to apply to the combined company as of the closing of the merger, but it is not always possible to identify and deter misconduct by these parties, and the precautions it takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting it from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against Aadi, and Aadi is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business, including the imposition of significant penalties, including civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government funded healthcare programs, such as Medicare and Medicaid, integrity oversight and reporting obligations, contractual damages, reputational harm, diminished profits and future earnings and the curtailment or restructuring of Aadi’s operations.

If Aadi or any contract manufacturers and suppliers Aadi engages fails to comply with environmental, health and safety laws and regulations, Aadi could become subject to fines or penalties or incur costs that could have a material adverse effect on its business.

Aadi and any contract manufacturers and suppliers Aadi engages are subject to numerous federal, state and local environmental, health and safety laws, regulations and permitting requirements, including those governing laboratory procedures, the generation, handling, use, storage, treatment and disposal of hazardous and regulated materials and wastes, the emission and discharge of hazardous materials into the ground, air, and water; and employee health and safety. The operations of Aadi’s contractors may involve the use of hazardous and flammable materials, including chemicals and biological materials. Aadi’s operations also produce hazardous waste products. Aadi generally contracts with third parties for the disposal of these materials and wastes. Aadi cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from Aadi’s use of hazardous materials, including any contamination at its current or past facilities and at third-party facilities, it could be held liable for any resulting damages, and any liability could exceed its resources. Aadi also could incur significant costs associated with civil or criminal fines and penalties.

Although Aadi maintains workers’ compensation insurance to cover it for costs and expenses it may incur due to injuries to its employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. Aadi does not maintain insurance for environmental liability or toxic tort claims that may be asserted against it in connection with its storage or disposal of hazardous and flammable materials, including chemicals and biological materials.

In addition, Aadi may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair its research,

 

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development or commercialization efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

Aadi’s business activities may be subject to the United States Foreign Corrupt Practices Act (referred to as “FCPA”) and similar anti-bribery and anti-corruption laws of other countries in which Aadi operates, as well as United States and certain foreign export controls, trade sanctions, and import laws and regulations. Compliance with these legal requirements could limit Aadi’s ability to compete in foreign markets and subject Aadi to liability if Aadi violates them.

Aadi’s business activities may be subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which it operates, including the UK Bribery Act. The FCPA generally prohibits companies and their employees and third-party intermediaries from offering, promising, giving or authorizing others to give anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action or otherwise obtain or retain business. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Aadi’s business is heavily regulated and therefore involves significant interaction with public officials, including officials of non-U.S. governments. Additionally, in many other countries, hospitals are owned and operated by the government, and doctors and other hospital employees are employed by the government and would be considered foreign officials under the FCPA, and often the purchasers of pharmaceuticals are government entities; therefore, Aadi’s dealings with these doctors, hospital employees and purchasers are subject to regulation under the FCPA. Recently, the SEC and DOJ have increased their FCPA enforcement activities with respect to biotechnology and pharmaceutical companies. There is no certainty that all of Aadi’s employees, agents, collaborators, or contractors, or those of its affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in fines, criminal sanctions against Aadi, its officers or its employees, disgorgement, and other sanctions and remedial measures, the closing down of its facilities, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs, and prohibitions on the conduct of its business. Any such violations could include prohibitions on Aadi’s ability to offer its products in one or more countries and could materially damage its reputation, its brand, its international activities, its ability to attract and retain employees and its business, prospects, operating results and financial condition.

In addition, Aadi’s products may be subject to U.S. and foreign export controls, trade sanctions and import laws and regulations. Governmental regulation of the import or export of Aadi’s products, or Aadi’s failure to obtain any required import or export authorization for its products, when applicable, could harm its international sales and adversely affect its revenue. Compliance with applicable regulatory requirements regarding the export of Aadi’s products may create delays in the introduction of Aadi’s products in international markets or, in some cases, prevent the export of its products to some countries altogether. Furthermore, United States export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments, and persons targeted by United States sanctions. If Aadi fails to comply with export and import regulations, and such economic sanctions, penalties could be imposed, including fines and/or denial of certain export privileges. Moreover, any new export or import restrictions, new legislation or shifting approaches in the enforcement or scope of existing regulations, or in the countries, persons, or products targeted by such regulations, could result in decreased use of Aadi’s products by, or in Aadi’s decreased ability to export its products to, existing or potential customers with international operations. Any decreased use of Aadi’s products or limitation on its ability to export or sell its products would likely adversely affect its business.

 

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Risks Related to Employee Matters, Managing Aadi’s Growth and Other Risks Related to its Business

Aadi’s success is highly dependent on its ability to attract and retain highly skilled executive officers, key scientific personnel and employees.

To succeed, Aadi must recruit, retain, manage and motivate qualified clinical, scientific, technical and management personnel, and Aadi faces significant competition for experienced personnel. Aadi is highly dependent on the principal members of its management and scientific and medical staff. If Aadi does not succeed in attracting and retaining qualified personnel, particularly at the management level, it could adversely affect Aadi’s ability to execute its business plan and harm its operating results. In particular, the loss of one or more of Aadi’s executive officers or key scientific personnel could be detrimental to it if it cannot recruit suitable replacements in a timely manner. Aadi will need to hire additional personnel as it expands its clinical development and if it initiates commercial activities. Aadi could in the future have difficulty attracting and retaining experienced personnel and may be required to expend significant financial resources in its employee recruitment and retention efforts.

Many of the other biotechnology companies that Aadi competes against for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than Aadi. They also may provide higher compensation, more diverse opportunities and better prospects for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what Aadi has to offer. If Aadi is unable to continue to attract and retain high-quality personnel, the rate and success at which it can discover, develop and commercialize its product candidates will be limited and the potential for successfully growing its business will be harmed.

Additionally, Aadi relies on its scientific and clinical advisors and consultants to assist it in formulating its research, development and clinical strategies. These advisors and consultants are not employees of Aadi and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to Aadi. In addition, these advisors and consultants typically will not enter into non-compete agreements with Aadi. If a conflict of interest arises between their work for Aadi and their work for another entity, Aadi may lose their services. Furthermore, Aadi’s advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with Aadi’s. In particular, if Aadi is unable to maintain consulting relationships with these advisors or they provide services to Aadi’s competitors, Aadi’s development and commercialization efforts will be impaired and its business will be significantly harmed.

If Aadi is unable to establish sales or marketing capabilities or enter into agreements with third parties to sell or market its product candidates, Aadi may not be able to successfully sell or market its product candidates that obtain regulatory approval.

Aadi currently does not have and has never had a marketing or sales team or infrastructure for distribution of product candidates. In order to commercialize any product candidates, if approved, Aadi must build marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services for each of the territories in which Aadi may have approval to sell or market its product candidates. There are risks involved with both establishing its own commercial capabilities and entering into arrangements with third parties to perform these services and Aadi may not be successful in accomplishing these required tasks, which may negatively impact the successful commercialization of FYARRO for advanced malignant PEComa, if approved.

Establishing an internal sales or marketing team with technical expertise and supporting distribution capabilities to commercialize Aadi’s product candidates will be expensive and time-consuming and will require significant attention of Aadi’s executive officers to manage. Any failure or delay in the development of Aadi’s internal sales, marketing and distribution capabilities could adversely impact the commercialization of any of its product candidates that Aadi obtains approval to market, if it does not have arrangements in place with third parties to provide such services on its behalf. If the commercial launch of a product candidate for which Aadi

 

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recruits a sales team and establishes marketing and other commercialization capabilities is delayed or does not occur for any reason, Aadi would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and its investment would be lost if Aadi cannot retain or reposition its commercialization personnel. Alternatively, if Aadi chooses to collaborate, either globally or on a territory-by-territory basis, with third parties that have direct sales forces and established distribution systems, either to augment Aadi’s own sales force and distribution systems or in lieu of Aadi’s own sales force and distribution systems, Aadi will be required to negotiate and enter into arrangements with such third parties relating to the proposed collaboration and such arrangements may prove to be less profitable than commercializing the product on its own. If Aadi is unable to enter into such arrangements when needed, on acceptable terms, or at all, Aadi may not be able to successfully commercialize any of its product candidates that receive regulatory approval, or any such commercialization may experience delays or limitations. Aadi may have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market its products effectively. If Aadi is unable to successfully commercialize its approved product candidates, either on its own or through collaborations with one or more third parties, Aadi’s future product revenue will suffer, and it may incur significant additional losses.

In order to successfully implement Aadi’s plans and strategies, Aadi will need to grow the size of its organization, and it may experience difficulties in managing this growth.

As of June 1, 2021, Aadi had 10 full-time employees, including 8 employees engaged in research and development. In order to successfully implement Aadi’s development and commercialization plans and strategies, and as it transitions into operating as a public company, Aadi expects to need additional managerial, operational, development, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:

 

   

identifying, recruiting, integrating, maintaining and motivating additional employees;

 

   

managing Aadi’s internal development efforts effectively, including the clinical, FDA, EMA and other comparable foreign regulatory agencies’ review process for ABI-009 and any other product candidates, while complying with any contractual obligations to contractors and other third parties Aadi may have; and

 

   

improving Aadi’s operational, financial and management controls, reporting systems and procedures.

Aadi’s future financial performance and its ability to successfully develop and, if approved, commercialize ABI-009 and other product candidates will depend, in part, on its ability to effectively manage any future growth, and Aadi’s management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.

Aadi currently relies, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors and consultants to provide certain services, including key aspects of clinical development and manufacturing. Aadi cannot assure you that the services of independent organizations, advisors and consultants will continue to be available to Aadi on a timely basis when needed, or that Aadi can find qualified replacements. In addition, if Aadi is unable to effectively manage its outsourced activities or if the quality or accuracy of the services provided by third-party service providers is compromised for any reason, Aadi’s clinical trials may be extended, delayed or terminated, and Aadi may not be able to obtain regulatory approval of ABI-009 and any other product candidates or otherwise advance its business. Aadi cannot assure you that it will be able to manage its existing third-party service providers or find other competent outside contractors and consultants on economically reasonable terms, or at all.

If Aadi is not able to effectively expand its organization by hiring new employees and/or engaging additional third-party service providers, it may not be able to successfully implement the tasks necessary to further develop and commercialize ABI-009 and other product candidates and, accordingly, may not achieve its research, development and commercialization goals.

 

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Aadi’s internal computer systems, or those of any of its CROs, manufacturers, other contractors or consultants or potential future collaborators, may fail or suffer security or data privacy breaches or other unauthorized or improper access to, use of, or destruction of Aadi’s proprietary or confidential data, employee data, or personal data, which could result in additional costs, loss of revenue, significant liabilities, harm to Aadi’s brand and material disruption of Aadi’s operations.

Despite the implementation of security measures in an effort to protect systems that store Aadi’s information, given their size and complexity and the increasing amounts of information maintained on Aadi’s internal information technology systems, and those of its third-party CROs, other contractors (including sites performing its clinical trials) and consultants, these systems are potentially vulnerable to breakdown or other damage or interruption from service interruptions, system malfunction, natural disasters, terrorism, war and telecommunication and electrical failures, as well as security breaches from inadvertent or intentional actions by Aadi’s employees, contractors, consultants, business partners, and/or other third parties, or from cyber-attacks by malicious third parties (including the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information), which may compromise Aadi’s system infrastructure or lead to the loss, destruction, alteration or dissemination of, or damage to, Aadi’s data. As the cyber-threat landscape evolves, these attacks are growing in frequency, sophistication and intensity, and are becoming increasingly difficult to detect. To the extent that any disruption or security breach were to result in a loss, destruction, unavailability, alteration or dissemination of, or damage to, Aadi’s data or applications, or for it to be believed or reported that any of these occurred, Aadi could incur liability and reputational damage and the development and commercialization of its product candidates could be delayed. Aadi cannot assure you that its data protection efforts and its investment in information technology, or the efforts or investments of CROs, consultants or other third parties, will prevent significant breakdowns or breaches in systems or other cyber incidents that cause loss, destruction, unavailability, alteration or dissemination of, or damage to, Aadi’s data that could have a material adverse effect upon its reputation, business, operations or financial condition. For example, if such an event were to occur and cause interruptions in Aadi’s operations, it could result in a material disruption of Aadi’s programs and the development of its product candidates could be delayed. In addition, the loss of clinical trial data for Aadi’s product candidates could result in delays in its regulatory approval efforts and significantly increase Aadi’s costs to recover or reproduce the data. Furthermore, significant disruptions of Aadi’s internal information technology systems or security breaches could result in the loss, misappropriation, and/or unauthorized access, use, or disclosure of, or the prevention of access to, data (including trade secrets or other confidential information, intellectual property, proprietary business information, and personal information or individually identifiable health information), which could result in financial, legal, business, and reputational harm to Aadi. For example, any such event that leads to unauthorized access, use, or disclosure of personal information, including personal information regarding Aadi’s clinical trial subjects or employees, could harm Aadi’s reputation directly, compel Aadi to comply with federal and/or state breach notification laws and foreign law equivalents, subject Aadi to mandatory corrective action, and otherwise subject Aadi to liability under laws and regulations that protect the privacy and security of personal information, which could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on Aadi’s business.

Some of the federal, state and foreign government requirements include obligations of companies to notify individuals of security breaches involving particular personally identifiable information, which could result from breaches experienced by Aadi or by its vendors, contractors or organizations with which it has formed strategic relationships. Notifications and follow-up actions related to a security incident could impact Aadi’s reputation and cause it to incur significant costs, including legal expenses and remediation costs. For example, the loss of clinical trial data from completed, ongoing or future clinical trials could result in delays in Aadi’s regulatory approval efforts and significantly increase Aadi’s costs to recover or reproduce the lost data. Aadi expects to incur significant costs in an effort to detect and prevent security incidents, and it may face increased costs and requirements to expend substantial resources in the event of an actual or perceived security breach. Aadi also relies on third parties to manufacture its product candidates, and similar events relating to their computer systems could also have a material adverse effect on Aadi’s business. To the extent that any disruption or security

 

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incident were to result in a loss, destruction or alteration of, or damage to, Aadi’s data, or inappropriate disclosure of confidential or proprietary information, Aadi could be exposed to litigation and governmental investigations, the further development and commercialization of Aadi’s product candidates could be delayed, and Aadi could be subject to significant fines or penalties for any noncompliance with certain state, federal and/or international privacy and security laws.

Aadi’s insurance policies may not be adequate to compensate it for the potential losses arising from any such disruption, failure or security breach of its systems or third-party systems where information important to its business operations or commercial development is stored. In addition, such insurance may not be available to Aadi in the future on economically reasonable terms, or at all. Further, Aadi’s insurance may not cover all claims made against it and could have high deductibles in any event, and defending a suit, regardless of its merit, could be costly and divert management attention.

Aadi’s current operations are located in California, and Aadi or the third parties upon whom Aadi depends, may be adversely affected by earthquakes, wildfires and other natural disasters, and its business continuity and disaster recovery plans may not adequately protect Aadi from a serious disaster.

Aadi’s current operations are located in California. Any unplanned event, such as flood, fire, explosion, earthquake, extreme weather condition, medical epidemics, such as the COVID-19 outbreak, power shortage, telecommunication failure or other natural or manmade accidents or incidents that result in it being unable to fully utilize its facilities, or the manufacturing facilities of its third-party CMOs, may have a material and adverse effect on its ability to operate its business, particularly on a daily basis, and have significant negative consequences on its financial and operating conditions. Loss of access to these facilities may result in increased costs, delays in the development of its product candidate or interruption of its business operations. Earthquakes, wildfires or other natural disasters could further disrupt its operations and have a material and adverse effect on its business, financial condition, results of operations and prospects. If a natural disaster, power outage or other event occurred that prevented it from using all or a significant portion of its headquarters, that damaged critical infrastructure, such as its research facilities or the manufacturing facilities of its third-party CMOs, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible, for Aadi to continue its business for a substantial period of time. The disaster recovery and business continuity plans Aadi has in place may prove inadequate in the event of a serious disaster or similar event. Aadi may incur substantial expenses as a result of the limited nature of its disaster recovery and business continuity plans, which, could have a material adverse effect on its business. As part of its risk management policy, Aadi maintains insurance coverage at levels that Aadi believes are appropriate for its business. However, in the event of an accident or incident at these facilities, Aadi cannot assure you that the amounts of insurance will be sufficient to satisfy any damages and losses. If its facilities, or the manufacturing facilities of its third-party CMOs, are unable to operate because of an accident or incident or for any other reason, even for a short period of time, any or all of its research and development programs may be harmed. Any business interruption may have a material and adverse effect on its business, financial condition, results of operations and prospects.

Aadi’s ability to utilize its NOL carryforwards and certain other tax attributes to offset future taxable income may be limited.

Aadi’s NOL carryforwards may be unavailable to offset future taxable income because of restrictions under United States tax law. Aadi’s NOLs generated in tax years beginning before January 1, 2018 are only permitted to be carried forward for 20 taxable years under applicable United States federal tax law, and therefore could expire unused. Under the Tax Cuts and Jobs Act of 2017 (referred to as the “Tax Act”), as modified by the Coronavirus Aid, Relief, and Economic Security Act (referred to as the “CARES Act”), Aadi’s federal NOLs generated in tax years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of federal NOLs in tax years beginning after December 31, 2020 is limited to 80% of Aadi’s current year taxable income. NOLs generated in tax years beginning before January 1, 2018 will not be subject to the taxable income limitation and will continue to have a two-year carryback and twenty-year carryforward period.

 

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California recently enacted legislation limiting Aadi’s ability to use its state NOLs for taxable years 2020, 2021, and 2022. It is uncertain if and to what extent various states will conform to the Tax Act. As of December 31, 2020, Aadi had federal NOL carryforwards of approximately $3.5 million, which will begin to expire in 2037. In addition, Aadi has $27.4 million federal NOL carryforwards which do not expire. Aadi also has available California NOL carryforwards of approximately $27.4 million as of December 31, 2020, which begin to expire in 2037.

In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (referred to as the “Code”), if a corporation undergoes an “ownership change” (generally defined as a cumulative change in the corporation’s ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period), the corporation’s ability to use its pre-change NOLs and certain other pre-change tax attributes to offset its post-change taxable income may be limited. Similar rules may apply under state tax laws. Aadi may have experienced such ownership changes in the past, and it may experience ownership changes in the future as a result of the merger or subsequent shifts in its stock ownership, some of which are outside its control. Aadi has not conducted any studies to determine annual limitations, if any, that could result from such changes in the ownership. Aadi’s ability to utilize its NOLs and certain other tax attributes could be limited by an “ownership change” as described above and consequently, Aadi may not be able to utilize a material portion of its NOLs and certain other tax attributes, which could have a material adverse effect on its cash flows and results of operations.

United States federal income tax reform could materially adversely affect Aadi’s financial condition.

Legislation or other changes in United States and international tax laws could increase Aadi’s tax liability and adversely affect after-tax profitability. For example, the Biden administration has proposed to increase the United States corporate income tax rate to 28% from 21%, increase the United States taxation of international business operations and impose a global minimum tax on corporate income. Such proposed changes, as well as regulations and legal decisions interpreting and applying these changes, may have significant impacts on Aadi’s effective tax rate, cash tax expenses and net deferred tax assets in future periods.

A variety of risks associated with marketing Aadi product candidates internationally could materially adversely affect its business.

Aadi may seek regulatory approval of its product candidates outside of the United States and, accordingly, Aadi expect that it will be subject to additional risks related to operating in foreign countries if it obtains the necessary approvals, including:

 

   

differing regulatory requirements and reimbursement regimes in foreign countries;

 

   

unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

 

   

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

   

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

   

foreign taxes, including withholding of payroll taxes;

 

   

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

   

difficulties staffing and managing foreign operations;

 

   

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

   

potential liability under the FCPA or comparable foreign regulations;

 

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challenges enforcing Aadi’s contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;

 

   

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

   

business interruptions resulting from geo-political actions, including war and terrorism.

These and other risks associated with Aadi’s international operations may materially adversely affect its ability to attain or maintain profitable operations.

Risks Related to Aadi’s Intellectual Property

Aadi’s success depends on its ability to protect its intellectual property and its proprietary technologies.

Aadi’s commercial success depends in part on its ability to obtain and maintain patent protection and trade secret protection in the United States and other countries for its product candidates, proprietary technologies and their uses, and know-how related to its business, as well as Aadi’s ability to operate without infringing upon the valid and enforceable patents and proprietary rights of others. Aadi generally seeks to protect its proprietary position by filing patent applications in the United States and abroad related to its product candidates, proprietary technologies and their uses that are important to its business. Aadi also seeks to protect its proprietary position by acquiring or in-licensing relevant issued patents or pending applications from third parties. Aadi also relies on trade secrets to protect aspects of its business that are not amenable to, or that Aadi does not consider appropriate for, patent protection.

Pending patent applications cannot be enforced against third parties practicing the technology claimed in such applications unless, and until, patents issue from such applications, and then only to the extent the issued claims cover the technology. There can be no assurance that Aadi’s patent applications or the patent applications of its licensors will result in additional patents being issued in any particular jurisdiction or that issued patents will afford sufficient protection against competitors with similar technology, nor can there be any assurance that the patents issued will not be infringed, designed around or invalidated by third parties.

Even issued patents may later be found invalid or unenforceable or may be modified or revoked in proceedings instituted by third parties before various patent offices or in courts. The degree of future protection for Aadi and its licensors’ proprietary rights is uncertain. Only limited protection may be available and may not adequately protect Aadi’s rights or permit Aadi to gain or keep any competitive advantage. These uncertainties and/or limitations in Aadi’s ability to properly protect the intellectual property rights relating to its product candidates could have a material adverse effect on its financial condition and results of operations.

Although Aadi owns or licenses ten (10) issued patents in the United States, Aadi cannot be certain that the claims in its other United States pending patent applications, corresponding international patent applications and patent applications in certain foreign territories, or those of its licensors, will be considered patentable by the United States Patent and Trademark Office (referred to as the “USPTO”), courts in the United States or by the patent offices and courts in foreign countries, nor can Aadi be certain that the claims in its issued patent will not be found invalid or unenforceable if challenged.

The patent application process is subject to numerous risks and uncertainties, and there can be no assurance that Aadi or any of its current or potential future collaborators will be successful in protecting Aadi’s product candidates by obtaining and defending patents. These risks and uncertainties include the following:

 

   

the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process, the

 

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noncompliance with which can result in abandonment or lapse of a patent or patent application, and partial or complete loss of patent rights in the relevant jurisdiction;

 

   

patent applications may not result in any patents being issued;

 

   

if clinical trials encounter delays, the period of time during which Aadi could market its current or future product candidates under patent protection would be reduced;

 

   

patents may be challenged, invalidated, modified, narrowed, revoked, circumvented, found to be unenforceable, found to be not infringed or otherwise may not provide any competitive advantage;

 

   

Aadi competitors, many of whom have substantially greater resources than Aadi does and many of whom have made significant investments in competing technologies, may seek or may have already obtained patents that could limit, interfere with or eliminate Aadi’s ability to make, use and sell its potential product candidates or design around any Aadi owned, co-owned, or licensed patents;

 

   

since patent applications in the United States and most other countries are confidential for a period of time after filing, Aadi cannot be certain that it was the first to either (i) file any patent application related to its product; or (ii) invent any of the inventions claimed in its patents or patent applications;

 

   

even when laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine the scope of Aadi’s proprietary rights, and the outcome of such litigation would be uncertain. Moreover, any actions Aadi may bring to enforce its intellectual property against its competitors could provoke them to bring counterclaims against Aadi;

 

   

there may be significant pressure on the United States government and international governmental bodies to limit the scope of patent protection both inside and outside the United States for disease treatments that prove successful, as a matter of public policy regarding worldwide health concerns; and

 

   

countries other than the United States may have patent laws less favorable to patentees than those upheld by United States courts, allowing foreign competitors a better opportunity to create, develop and market competing product candidates.

The patent prosecution process is also expensive, complex, and time-consuming, and Aadi and its licensors may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner or in all jurisdictions where protection may be commercially advantageous. It is also possible that Aadi and its licensors will fail to identify patentable aspects of Aadi’s (or such licensor’s) research and development output before it is too late to obtain patent protection. If Aadi is unable to obtain or maintain patent protection with respect to any of its proprietary products and technology Aadi develops, its business, financial condition, results of operations, and prospects could be materially harmed.

In addition, although Aadi enters into non-disclosure and confidentiality agreements with parties who have access to patentable aspects of Aadi’s research and development output, such as Aadi’s employees, outside scientific collaborators, CROs, third-party manufacturers, consultants, advisors and other third parties, any of these parties may breach such agreements and disclose such output before a patent application is filed, thereby jeopardizing Aadi’s ability to seek patent protection.

Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, Aadi’s intellectual property may not provide it with sufficient rights to exclude others from commercializing products similar or identical to Aadi’s products.

If the scope of any patent protection Aadi obtains is not sufficiently broad, or if Aadi loses any of its patent protection, Aadi’s ability to prevent its competitors from commercializing similar or identical product candidates would be adversely affected.

The patent position of biopharmaceutical companies generally is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. As a result, the issuance, scope,

 

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validity, enforceability and commercial value of Aadi’s patent rights are highly uncertain. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of its patents or narrow the scope of its patent protection. The laws of some foreign countries do not protect its proprietary rights to the same extent as the laws of the United States, and Aadi may encounter significant problems in protecting its proprietary rights in these countries. Aadi’s pending and future patent applications and those of its licensors may not result in patents being issued that protect its product candidates or effectively prevent others from commercializing competitive product candidates.

Moreover, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Even if patent applications Aadi owns or in-licenses currently or in the future issue as patents, they may not issue in a form that will provide Aadi with any meaningful protection, prevent competitors or other third parties from competing with Aadi, or otherwise provide Aadi with any competitive advantage. Any patents that Aadi owns or in-licenses may be challenged or circumvented by third parties or may be narrowed or invalidated as a result of challenges by third parties. Consequently, Aadi does not know whether its product candidates will be protectable or remain protected by valid and enforceable patents. Aadi’s competitors or other third parties may be able to circumvent Aadi’s patents or the patents of its licensors by developing similar or alternative technologies or products in a non-infringing manner which could materially adversely affect Aadi’s business, financial condition, results of operations and prospects.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and Aadi’s patents or the patents of its licensors may be challenged in the courts or patent offices in the United States and abroad. Aadi may be subject to a third-party pre-issuance submission of prior art to the USPTO, or become involved in opposition, derivation, revocation, reexamination, post-grant review (referred to as “PGR”) and inter partes review (referred to as “IPR”), or other similar proceedings challenging Aadi’s owned patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate or render unenforceable, Aadi’s patent rights or put its patent applications at risk of not issuing, allow third parties to commercialize Aadi’s product candidates and compete directly with Aadi, without payment to Aadi, or result in Aadi’s inability to manufacture or commercialize products without infringing third-party patent rights. Moreover, Aadi’s patents or the patents of its licensors may become subject to post-grant challenge proceedings, such as oppositions in a foreign patent office, that challenge Aadi’s priority of invention or other features of patentability with respect to Aadi’s patents and patent applications and those of Aadi’s licensors. Such challenges may result in loss of patent rights, loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, which could limit Aadi’s ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of Aadi’s product candidates. Such proceedings also may result in substantial cost and require significant time from Aadi’s scientists and management, even if the eventual outcome is favorable to Aadi. In addition, if the breadth or strength of protection provided by Aadi’s patents and patent applications or the patents and patent applications of Aadi’s licensors is threatened, regardless of the outcome, it could dissuade companies from collaborating with Aadi to license, develop or commercialize current or future product candidates. If any of its patents, if and when issued, covering its product candidates are invalidated or found unenforceable, Aadi’s financial position and results of operations would be materially and adversely impacted. Aadi may not prevail in any lawsuits that Aadi or any third-party initiate and the damages or other remedies awarded if Aadi were to prevail may not be commercially meaningful.

Intellectual property rights do not necessarily address all potential threats to Aadi’s competitive advantage.

The degree of future protection afforded by Aadi’s intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect Aadi’s business or permit Aadi to maintain its competitive advantage. For example:

 

   

others may be able to develop products that are similar to Aadi’s product candidates but that are not covered by the claims of the patents that Aadi owns or licenses;

 

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Aadi or its licensors or collaborators might not have been the first to make the inventions covered by the issued patents or patent application that it owns or licenses;

 

   

Aadi or its licensors or collaborators might not have been the first to file patent applications covering certain of its inventions;

 

   

others may independently develop similar or alternative technologies or duplicate any of Aadi’s technologies without infringing its intellectual property rights;

 

   

it is possible that the pending patent applications Aadi owns or licenses will not lead to issued patents;

 

   

issued patents that Aadi owns or licenses may be held invalid or unenforceable, as a result of legal challenges by Aadi’s competitors;

 

   

Aadi’s competitors might conduct research and development activities in countries where Aadi does not have patent rights and then use the information learned from such activities to develop competitive products for sale in Aadi’s major commercial markets;

 

   

Aadi may not develop additional proprietary technologies that are patentable;

 

   

the patents of others may have an adverse effect on Aadi’s business; and

 

   

Aadi may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.

Should any of these events occur, it could significantly harm Aadi’s business, financial condition, results of operations and prospects.

Aadi’s commercial success depends significantly on its ability to operate without infringing the patents and other proprietary rights of third parties. Claims by third parties that Aadi infringes their proprietary rights may result in liability for damages or prevent or delay Aadi’s developmental and commercialization efforts.

Aadi’s commercial success depends in part on avoiding infringement or misappropriation of the patents, intellectual property and proprietary rights of third parties. However, Aadi’s research, development and commercialization activities may be subject to claims that Aadi infringes or otherwise violates patents or other intellectual property rights owned or controlled by third parties. Other entities may have or obtain patents or proprietary rights that could limit Aadi’s ability to make, use, sell, offer for sale or import Aadi’s product candidates and products that may be approved in the future, or impair Aadi’s competitive position. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biopharmaceutical industry, including patent infringement lawsuits, oppositions, reexaminations, IPR proceedings and PGR proceedings before the USPTO and/or corresponding foreign patent offices. Numerous third-party United States and foreign issued patents and pending patent applications exist in the fields in which Aadi is developing product candidates. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of Aadi’s product candidates.

As the biopharmaceutical industry expands and more patents are issued, the risk increases that Aadi’s product candidates may be subject to claims of infringement of the patent rights of third parties. Because patent applications are maintained as confidential for a certain period of time, until the relevant application is published, Aadi may be unaware of third-party patents that may be infringed by commercialization of any of Aadi’s product candidates, and Aadi cannot be certain that it was the first to file a patent application related to a product candidate or technology. Moreover, because patent applications can take many years to issue, and because patent claims can be revised before issuance, there may be currently-pending patent applications that may later result in issued patents that Aadi’s product candidates may infringe or which such third parties claim are infringed by its technologies. In addition, identification of third-party patent rights that may be relevant to Aadi’s technology is difficult because patent searching is imperfect due to differences in terminology among patents, incomplete

 

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databases and the difficulty in assessing the meaning of patent claims. There is also no assurance that there is not prior art of which Aadi is aware, but which Aadi does not believe is relevant to its business, which may, nonetheless, ultimately be found to limit its ability to make, use, sell, offer for sale or import its products that may be approved in the future, or impair its competitive position. In addition, third parties may obtain patents in the future and claim that use of Aadi’s technologies infringes upon these patents. If a patent holder believes one or more of Aadi’s product candidates infringes such holder’s patent rights, the patent holder may sue Aadi even if Aadi has received patent protection. Moreover, Aadi may face patent infringement claims from non-practicing entities that have no relevant drug revenue and against whom its own patent portfolio may thus have no deterrent effect. Any claims of patent infringement asserted by third parties would be time consuming and could:

 

   

result in costly litigation that may cause negative publicity;

 

   

divert the time and attention of Aadi’s technical personnel and management;

 

   

cause development delays;

 

   

prevent Aadi from commercializing any of its product candidates until the asserted patent expires or is held finally invalid or not infringed in a court of law;

 

   

require Aadi to develop non-infringing technology, which may not be possible on a cost-effective basis;

 

   

subject Aadi to significant liability to third parties; or

 

   

require Aadi to enter into royalty or licensing agreements, which may not be available on commercially reasonable terms, or at all, or which might be non-exclusive, which could result in Aadi’s competitors gaining access to the same technology.

Although no third party has asserted a claim of patent infringement against Aadi as of the date of this proxy statement, others may hold proprietary rights that could prevent Aadi’s product candidates from being marketed. For example, various patent offices periodically grant mode of action patents and a third party may have or obtain a patent with claims covering modes of action relevant to Aadi’s product candidates. While these mode of action patents may be difficult to enforce, the third party may assert a claim of patent infringement directed at one of Aadi’s product candidates. Any patent-related legal action or any claim relating to intellectual property infringement that is successfully asserted against Aadi claiming damages and seeking to enjoin commercial activities relating to Aadi’s products or processes could subject Aadi to significant liability for damages, including treble damages and attorney’s fees if it was determined that Aadi willfully infringed, and require Aadi to obtain a license to manufacture or market Aadi’s product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from Aadi’s business. Aadi cannot predict whether it would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. Moreover, even if Aadi or its current or future strategic partners were able to obtain a license, the rights may be nonexclusive, which could result in Aadi’s competitors gaining access to the same intellectual property. In addition, Aadi cannot be certain that it could redesign its product candidates or processes to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent or delay Aadi from developing and commercializing its product candidates, which could harm its business, financial condition and operating results. In addition, intellectual property litigation, regardless of its outcome, may cause negative publicity and could prohibit Aadi from marketing or otherwise commercializing its product candidates and technology.

In addition, any uncertainties resulting from the initiation and continuation of any litigation could have material adverse effect on Aadi’s ability to raise additional funds or otherwise have a material adverse effect on Aadi’s business, results of operations, financial condition and prospects.

 

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Aadi may not be successful in obtaining or maintaining necessary rights to its product candidates through acquisitions and in-licenses.

Because Aadi’s development programs may in the future require the use of proprietary rights held by third parties, the growth of Aadi’s business may depend in part on Aadi’s ability to acquire, in-license, or use these third-party proprietary rights. Aadi may be unable to acquire or in-license any compositions, methods of use, processes or other third-party intellectual property rights from third parties that Aadi identifies as necessary for its product candidates. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies may pursue strategies to license or acquire third-party intellectual property rights that Aadi may consider attractive or necessary. These established companies may have a competitive advantage over Aadi due to their size, capital resources and greater clinical development and commercialization capabilities. In addition, companies that perceive Aadi to be a competitor may be unwilling to assign or license rights to Aadi. Moreover, collaboration arrangements are complex and time-consuming to negotiate, document, implement and maintain. Aadi may not be successful in its efforts to establish and implement collaborations or other alternative arrangements should it choose to enter into such arrangements Aadi may also be unable to license or acquire third-party intellectual property rights on terms that would be favorable to it or allow Aadi to make an appropriate return on its investment or at all. Even if Aadi is able to obtain a license to intellectual property of interest, it may not be able to secure exclusive rights, in which case others could use the same rights and compete with Aadi. If Aadi is unable to successfully obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights Aadi has, it may have to abandon development of the relevant program or product candidate, which could have a material adverse effect on its business, financial condition, results of operations, and prospects.

Aadi may be involved in lawsuits or other proceedings to protect or enforce its patents or intellectual property or its licensors’ patents or intellectual property, which could be expensive, time consuming and unsuccessful. Further, Aadi’s issued patents or its licensors’ patents could be found invalid or unenforceable if challenged in court.

Competitors and other third parties may infringe, misappropriate, or otherwise violate Aadi’s patents and other intellectual property rights. To prevent infringement or unauthorized use, Aadi may be required to file infringement claims, which can be expensive and time-consuming and divert the attention of its management and key personnel from its business operations. In addition, in a patent infringement proceeding, a court may decide that a patent Aadi owns or in-licenses is not valid, is unenforceable and/or is not infringed. If Aadi or any of its potential future collaborators were to initiate legal proceedings against a third party to enforce a patent directed at one of Aadi’s product candidates, the defendant could counterclaim that Aadi’s patent or the patent of its licensors is invalid and/or unenforceable in whole or in part. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, written description, non-enablement, or obviousness-type double patenting. Grounds for an unenforceability assertion could include an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution of the patent application.

Third parties may also raise similar invalidity claims before the USPTO or patent offices abroad, even outside the context of litigation. Such mechanisms include re-examination, PGR, IPR, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in the revocation of, cancellation of or amendment to Aadi’s patents or its licensors’ patents in such a way that such patents no longer cover Aadi’s technology or platform, or any product candidates that Aadi may develop. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, Aadi cannot be certain that there is no invalidating prior art, of which Aadi and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, Aadi would lose at least part, and perhaps all, of the patent protection on its technology or platform, or any product candidates that Aadi may develop. Such a loss of patent protection would have a material adverse impact on Aadi’s business, financial condition, results of operations and prospects.

 

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The outcome following legal assertions of invalidity and/or unenforceability is unpredictable, and prior art could render Aadi’s patents or its licensors’ patents invalid. There is no assurance that all potentially relevant prior art relating to Aadi’s patents and patent applications or the patents and patent applications of its licensors has been found. There is also no assurance that there is not prior art of which Aadi is aware, but which Aadi does not believe affects the validity or enforceability of a claim in its patents and patent applications or the patents and patent applications of its licensors, which may, nonetheless, ultimately be found to affect the validity or enforceability of a claim.

If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, Aadi may lose at least part, and perhaps all, of the patent protection on such product candidate. In addition, if the breadth or strength of protection provided by Aadi patents and patent applications or the patents and patent applications of its licensors is threatened, it could dissuade companies from collaborating with Aadi to license, develop or commercialize current or future product candidates. Such a loss of patent protection would have a material adverse impact on Aadi’s business.

Even if resolved in Aadi’s favor, litigation or other legal proceedings relating to Aadi’s intellectual property rights may cause Aadi to incur significant expenses and could distract Aadi’s technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of Aadi’s common stock. Such litigation or proceedings could substantially increase Aadi’s operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. Aadi may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of Aadi’s competitors may be able to sustain the costs of such litigation or proceedings more effectively than Aadi can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise Aadi’s ability to compete in the marketplace.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other legal proceedings relating to Aadi’s intellectual property rights, there is a risk that some of Aadi’s confidential information could be compromised by disclosure during this type of litigation or other proceedings.

In addition, the issuance of a patent does not give Aadi the right to practice the patented invention. Third parties may have blocking patents that could prevent Aadi from marketing Aadi’s own patented product and practicing Aadi’s own patented technology.

Intellectual property litigation may lead to unfavorable publicity that harms Aadi’s reputation and causes the market price of Aadi’s common shares to decline.

During the course of any intellectual property litigation, there could be public announcements of the initiation of the litigation as well as results of hearings, rulings on motions, and other interim proceedings or developments in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of Aadi’s product candidates, programs or intellectual property could be diminished. Accordingly, the market price of shares of Aadi common stock may decline. Such announcements could also harm Aadi’s reputation or the market for Aadi’s future products, which could have a material adverse effect on Aadi’s business.

Derivation proceedings may be necessary to determine priority of inventions, and an unfavorable outcome may require Aadi to cease using the related technology or to attempt to license rights from the prevailing party.

Derivation proceedings provoked by third parties or brought by Aadi or declared by the USPTO may be necessary to determine the priority of inventions with respect to Aadi’s patents or patent applications or those of

 

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Aadi’s licensors. An unfavorable outcome could require Aadi to cease using the related technology or to attempt to license rights to it from the prevailing party. Aadi’s business could be harmed if the prevailing party does not offer Aadi a license on commercially reasonable terms. Aadi’s defense of derivation proceedings may fail and, even if successful, may result in substantial costs and distract Aadi’s management and other employees. In addition, the uncertainties associated with such proceedings could have a material adverse effect on Aadi’s ability to raise the funds necessary to continue its clinical trials, continue its research programs, license necessary technology from third parties or enter into development or manufacturing partnerships that would help Aadi bring its product candidates to market.

Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of Aadi’s patent applications or those of its licensors and the enforcement or defense of Aadi’s issued patents or those of its licensors.

On September 16, 2011, the Leahy-Smith America Invents Act (referred to as the “Leahy-Smith Act”), was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. In particular, under the Leahy-Smith Act, the United States transitioned in March 2013 to a “first inventor to file” system in which, assuming that other requirements of patentability are met, the first inventor to file a patent application will be entitled to the patent regardless of whether a third party was first to invent the claimed invention. A third party that files a patent application in the USPTO after March 2013 but before Aadi could therefore be awarded a patent covering an invention of Aadi even if Aadi had made the invention before it was made by such third party. This will require Aadi to be cognizant going forward of the time from invention to filing of a patent application. Furthermore, Aadi’s ability to obtain and maintain valid and enforceable patents depends on whether the differences between Aadi’s technology and the prior art allow Aadi’s technology to be patentable over the prior art. Since patent applications in the United States and most other countries are confidential for a period of time after filing or until issuance, Aadi may not be certain that it or its licensors are the first to either (1) file any patent application related to Aadi’s product candidates or (2) invent any of the inventions claimed in the patents or patent applications.

The Leahy-Smith Act also includes a number of significant changes that affect the way patent applications will be prosecuted and also may affect patent litigation. These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including PGR, IPR, and derivation proceedings. An adverse determination in any such submission or proceeding could reduce the scope or enforceability of, or invalidate, Aadi’s patent rights, which could adversely affect Aadi’s competitive position.

Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate Aadi’s patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. Thus, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of Aadi’s patent applications or those of Aadi’s licensors and the enforcement or defense of Aadi’s issued patents or those of Aadi’s licensors, all of which could have a material adverse effect on Aadi’s business, financial condition, results of operations and prospects.

Changes in United States patent law, or laws in other countries, could diminish the value of patents in general, thereby impairing Aadi’s ability to protect its product candidates.

As is the case with other pharmaceutical companies, Aadi’s success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the pharmaceutical industry involve a high

 

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degree of technological and legal complexity. Therefore, obtaining and enforcing pharmaceutical patents is costly, time consuming and inherently uncertain. Changes in either the patent laws or in the interpretations of patent laws in the United States and other countries may diminish the value of Aadi’s intellectual property and may increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Aadi cannot predict the breadth of claims that may be allowed or enforced in its patents or in third-party patents. In addition, Congress or other foreign legislative bodies may pass patent reform legislation that is unfavorable to Aadi.

For example, the United States Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to Aadi’s ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the United States Congress, the United States federal courts, the USPTO, or similar authorities in foreign jurisdictions, the laws and regulations governing patents could change in unpredictable ways that would weaken Aadi’s ability to obtain new patents or to enforce Aadi’s existing patents and the patents Aadi might obtain or license in the future.

Aadi may be subject to claims challenging the inventorship or ownership of its patents and other intellectual property.

Aadi may also be subject to claims that former employees of Aadi or its licensors or other third parties have an ownership interest in Aadi’s patents or other intellectual property. Confidentiality and intellectual property assignment agreements may not be honored and may not effectively assign intellectual property rights to Aadi. The assignment of intellectual property rights under these agreements may not be automatic upon the creation of the intellectual property or the assignment agreements may be breached, and Aadi may be forced to bring claims against third parties, or defend claims that they may bring against it, to determine the ownership of what Aadi regards as its intellectual property. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If Aadi fails in defending any such claims, in addition to paying monetary damages, Aadi may lose valuable intellectual property rights. Such an outcome could have a material adverse effect on Aadi’s business. Even if Aadi is successful in defending against such claims, litigation could result in substantial costs and distraction to management and other employees.

Patent terms may be inadequate to protect Aadi’s competitive position on its product candidates for an adequate amount of time.

Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest United States non-provisional effective filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering Aadi’s product candidates are obtained, once the patent life has expired, Aadi may be open to competition from competitive products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, Aadi’s patent portfolio may not provide Aadi with sufficient rights to exclude others from commercializing products similar or identical to Aadi.

If Aadi does not obtain patent term extension for its product candidates, its business may be materially harmed.

Depending upon the timing, duration and specifics of FDA regulatory approval of Aadi’s product candidates, one or more of Aadi’s United States patents or those of Aadi’s licensors may be eligible for limited patent term restoration under the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. A maximum of one patent may be extended per FDA approved product as

 

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compensation for the patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only those claims covering such approved drug product, a method for using it or a method for manufacturing it may be extended. Patent term extension may also be available in certain foreign countries upon regulatory approval of Aadi’s product candidates. However, Aadi may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than Aadi requests or requires. If Aadi is unable to obtain patent term extension or restoration or the term of any such extension is less than Aadi requests or requires, its competitors may obtain approval of competing products following Aadi’s patent expiration, and Aadi’s revenue could be reduced, possibly materially. Further, if this occurs, Aadi’s competitors may take advantage of Aadi’s investment in development and trials by referencing Aadi’s clinical and preclinical data and launch their product earlier than might otherwise be the case.

Aadi may not be able to protect its intellectual property rights throughout the world.

Although Aadi owns, co-owns, or has licensed at least ten (10) issued patents in the United States and pending patent applications in the United States and other countries, filing, prosecuting and defending patents on its product candidates in all countries and jurisdictions throughout the world would be prohibitively expensive, and Aadi’s intellectual property rights in some countries outside the United States could be less extensive than those in the United States, assuming that rights are obtained in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, Aadi may not be able to prevent third parties from practicing Aadi’s inventions in all countries outside the United States or from selling or importing products made using Aadi’s inventions in and into the United States or other jurisdictions. In addition, the statutory deadlines for pursuing patent protection in individual foreign jurisdictions. are based on the priority date of each of its patent applications and Aadi may not timely file foreign patent applications.

Competitors may use Aadi’s technologies in jurisdictions where Aadi does not pursue or has not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where Aadi has patent protection, but enforcement is not as strong as that in the United States. These products may compete with Aadi’s product candidates, and Aadi’s patents, the patents of Aadi’s licensors, or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if Aadi pursues and obtains issued patents in particular jurisdictions, its patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from so competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of many foreign countries do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for Aadi to stop the infringement of Aadi’s patents or its licensors’ patents or marketing of competing products in violation of Aadi’s proprietary rights. Proceedings to enforce Aadi’s patent rights in foreign jurisdictions could result in substantial costs and divert Aadi’s efforts and attention from other aspects of Aadi’s business, could put Aadi’s patents or the patents of Aadi’s licensors at risk of being invalidated or interpreted narrowly and Aadi’s patent applications or the patent applications of Aadi’s licensors at risk of not issuing and could provoke third parties to assert claims against Aadi. Aadi may not prevail in any lawsuits that it initiates, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, Aadi’s efforts to enforce its intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that Aadi develops or licenses.

Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, the patent owner may have limited

 

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remedies, which could materially diminish the value of such patent. If Aadi is forced to grant a license to third parties with respect to any patents relevant to Aadi’s business, Aadi’s competitive position may be impaired, and Aadi’s business, financial condition, results of operations and prospects may be adversely affected.

Obtaining and maintaining Aadi’s patent protection depends on compliance with various procedural, documentary, fee payment and other requirements imposed by regulations and governmental patent agencies, and Aadi’s patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on its owned and in-licensed patents and/or applications will be due to be paid to the USPTO and various foreign patent offices at various points over the lifetime of Aadi’s patents and/or applications and those of Aadi’s licensors and any patent rights Aadi may own or license in the future. Aadi has systems in place to remind it to pay these fees, and, in certain instances, Aadi relies on its licensor partners to pay these fees when due. Additionally, the USPTO and various foreign patent offices require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process and over the lifetime of its owned patents and applications. Aadi employs reputable law firms and other professionals to help it comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with rules applicable to the particular jurisdiction. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If such an event were to occur, competitors or other third parties might be able to enter the market earlier than would otherwise have been the case and it could have a material adverse effect on Aadi’s business, financial condition, results of operations and prospects.

If Aadi’s trademarks and trade names are not adequately protected, then Aadi may not be able to build name recognition in its markets of interest and its business may be adversely affected.

Aadi intends to use registered or unregistered trademarks or trade names to brand and market itself and its products. Aadi’s trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. Aadi may not be able to protect its rights to these trademarks and trade names, which Aadi needs to build name recognition among potential partners or customers in Aadi’s markets of interest. At times, competitors may adopt trade names or trademarks similar to Aadi’s, thereby impeding Aadi’s ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of Aadi’s registered or unregistered trademarks or trade names. Over the long term, if Aadi is unable to establish name recognition based on its trademarks and trade names, then Aadi may not be able to compete effectively, and its business may be adversely affected. Aadi’s efforts to enforce or protect its proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely affect Aadi’s financial condition or results of operations.

If Aadi is unable to protect the confidentiality of its trade secrets, its business and competitive position would be harmed.

Aadi may also rely on trade secrets to protect aspects of its business that are not amenable to, or that Aadi does not consider appropriate for, patent protection. In addition, Aadi relies on the protection of its trade secrets, including unpatented know-how, technology and other proprietary information to maintain its competitive position. . However, trade secrets are difficult to protect. For example, Aadi may be required to share its trade secrets with third-party licensees, collaborators, consultants, contractors, or other advisors and Aadi has limited control over the protection of trade secrets used by such third parties. Although Aadi has taken steps to protect its trade secrets and unpatented know-how, including by entering into confidentiality agreements with third parties,

 

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and confidential information and inventions agreements with employees, consultants and advisors, Aadi cannot provide any assurances that all such agreements have been duly executed or that they have been obtained in all circumstances, and it is possible that any of these parties may breach the agreements and may unintentionally or willfully disclose Aadi’s proprietary information, including its trade secrets, and Aadi may not be able to obtain adequate remedies for such breaches. In addition, these agreements typically restrict the ability of Aadi’s collaborators, advisors, employees and consultants to publish data potentially relating to Aadi’s trade secrets. Aadi’s academic collaborators typically have rights to publish data, provided that Aadi is notified in advance and may delay publication for a specified time in order to secure Aadi’s intellectual property rights arising from the collaboration. In other cases, publication rights are controlled exclusively by Aadi, although in some cases Aadi may share these rights with other parties. Enforcing a claim that a party illegally obtained, disclosed, used or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets.

Moreover, third parties may still obtain this information or may come upon this or similar information independently, and Aadi would have no right to prevent them from using that technology or information to compete with Aadi. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of Aadi’s confidential information could be compromised by disclosure during this type of litigation or proceedings. If any of these events occurs or if Aadi otherwise loses protection for its trade secrets or confidential or proprietary information, the value of this information may be greatly reduced, and Aadi’s competitive position in the marketplace, business, financial condition, results of operations and prospects may be materially adversely affected. If Aadi does not apply for patent protection prior to such publication or if it cannot otherwise maintain the confidentiality of its proprietary technology and other confidential information, then Aadi’s ability to obtain patent protection or to protect its trade secret information may be jeopardized.

Aadi may be subject to claims that it or its employees, consultants or advisors have wrongfully used or disclosed alleged confidential information or trade secrets.

Aadi has entered into and may enter in the future into non-disclosure and confidentiality agreements to protect the proprietary positions of third parties, such as outside scientific collaborators, CROs, third-party manufacturers, consultants, advisors, potential partners, and other third parties. Aadi may become subject to litigation where a third party asserts that it or its employees, consultants or advisors inadvertently or otherwise breached the agreements and used or disclosed trade secrets or other information proprietary to the third parties. Defense of such matters, regardless of their merit, could involve substantial litigation expense and be a substantial diversion of employee resources from Aadi’s business. Aadi cannot predict whether it would prevail in any such actions. Moreover, intellectual property litigation, regardless of its outcome, may cause negative publicity and could prohibit Aadi from marketing or otherwise commercializing its product candidates and technology. Failure to defend against any such claim could subject Aadi to significant liability for monetary damages or prevent or delay Aadi’s developmental and commercialization efforts, which could adversely affect its business.

Aadi may be subject to claims that it has wrongfully hired an employee from a competitor or that Aadi or its employees have wrongfully used or disclosed alleged confidential information or trade secrets of their former employers.

As is common in the pharmaceutical industry, in addition to Aadi’s employees, Aadi engages the services of consultants to assist Aadi in the development of its product candidates. Many of these consultants, and many of Aadi’s employees, were previously employed at, or may have previously provided or may be currently providing consulting services to, other pharmaceutical companies including competitors or potential competitors of Aadi. Aadi may become subject to claims that it, its employees or a consultant inadvertently or otherwise used or disclosed trade secrets or other information proprietary to their former employers or their former or current clients. Litigation may be necessary to defend against these claims. If Aadi fails in defending any such claims, in

 

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addition to paying monetary damages, Aadi may lose valuable intellectual property rights or personnel, which could adversely affect Aadi’s business. Even if Aadi is successful in defending against these claims, litigation could result in substantial costs and be a distraction to Aadi’s management team and other employees.

Aadi’s rights to develop and commercialize its technology and product candidates may be subject, in part, to the terms and conditions of licenses granted to Aadi by others.

Aadi has entered into license agreements with third parties and Aadi may enter into additional license agreements in the future with others to advance Aadi’s research or allow commercialization of product candidates. These and other licenses may not provide exclusive rights to use such intellectual property and technology in all relevant fields of use and in all territories in which Aadi may wish to develop or commercialize its technology and products in the future.

In addition, subject to the terms of any such license agreements, Aadi may not have the right to control the preparation, filing, prosecution, maintenance, enforcement, and defense of patents and patent applications covering the technology that Aadi licenses from third parties. In such an event, Aadi cannot be certain that these patents and patent applications will be prepared, filed, prosecuted, maintained, enforced, and defended in a manner consistent with the best interests of its business. If Aadi’s licensors fail to prosecute, maintain, enforce, and defend such patents, or lose rights to those patents or patent applications, the rights Aadi has licensed may be reduced or eliminated, and Aadi’s rights to develop and commercialize any of its products that are subject of such licensed rights could be adversely affected.

Aadi’s licensors may have relied on third-party consultants or collaborators or on funds from third parties such that Aadi’s licensors are not the sole and exclusive owners of the patents Aadi in-licensed. If other third parties have ownership rights to Aadi’s in-licensed patents, they may be able to license such patents to Aadi’s competitors, and Aadi’s competitors could market competing products and technology. This could have a material adverse effect on Aadi’s competitive position, business, financial conditions, results of operations, and prospects.

It is possible that Aadi may be unable to obtain additional licenses at a reasonable cost or on reasonable terms, if at all. Even if Aadi is able to obtain a license, it may be non-exclusive, thereby giving Aadi’s competitors access to the same technologies licensed to Aadi. In that event, Aadi may be required to expend significant time and resources to redesign its technology, product candidates, or the methods for manufacturing them or to develop or license replacement technology, all of which may not be feasible on a technical or commercial basis. If Aadi is unable to do so, it may be unable to develop or commercialize the affected product candidates, which could harm its business, financial condition, results of operations, and prospects significantly. Aadi cannot provide any assurances that third-party patents do not exist which might be enforced against Aadi’s current technology, manufacturing methods, product candidates, or future methods or products resulting in either an injunction prohibiting Aadi’s manufacture or future sales, or, with respect to Aadi’s future sales, an obligation on Aadi’s part to pay royalties and/or other forms of compensation to third parties, which could be significant.

If Aadi fails to comply with its obligations in the agreements under which Aadi licenses intellectual property rights from third parties or otherwise experiences disruptions to Aadi’s business relationships with its licensors, Aadi could lose license rights that are important to its business.

Disputes may arise between Aadi and its licensors regarding intellectual property subject to a license agreement, including:

 

   

the scope of rights granted under the license agreement and other interpretation-related issues;

 

   

whether and the extent to which Aadi’s technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

   

Aadi’s right to sublicense patents and other rights to third parties;

 

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Aadi’s diligence obligations under the license agreement and what activities satisfy those diligence obligations;

 

   

Aadi’s right to transfer or assign the license;

 

   

the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by Aadi and Aadi’s licensors and partners; and

 

   

the priority of invention of patented technology.

In addition, the agreements under which Aadi licenses intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what Aadi believes to be the scope of its rights to the relevant intellectual property or technology, or increase what Aadi believes to be its financial or other obligations under the relevant agreement, either of which could have a material adverse effect on Aadi’s business, financial condition, results of operations, and prospects. Moreover, if disputes over intellectual property that Aadi has licensed prevent or impair its ability to maintain its current licensing arrangements on commercially acceptable terms, Aadi may be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on Aadi’s business, financial conditions, results of operations, and prospects.

In spite of Aadi’s best efforts, Aadi’s licensors might conclude that Aadi has materially breached its license agreements and might therefore terminate the license agreements, thereby removing Aadi’s ability to develop and commercialize products and technology covered by these license agreements. If these in-licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, competitors would have the freedom to seek regulatory approval of, and to market, products identical to Aadi’s. This could have a material adverse effect on Aadi’s competitive position, business, financial conditions, results of operations, and prospects.

The patent protection and patent prosecution for some of Aadi’s product candidates may be dependent on third parties.

While Aadi normally seeks to obtain the right to control prosecution, maintenance and enforcement of the patents relating to Aadi’s product candidates, there may be times when the filing and prosecution activities for patents relating to Aadi’s product candidates are controlled by Aadi’s licensors or collaboration partners, including those licensed to Aadi under its license agreements. If any of Aadi’s licensors or collaboration partners fail to prosecute, maintain and enforce such patents and patent applications in a manner consistent with the best interests of Aadi’s business, including by payment of all applicable fees for patents covering Aadi’s product candidates, Aadi could lose its rights to the intellectual property or its exclusivity with respect to those rights, Aadi’s ability to develop and commercialize those product candidates may be adversely affected and Aadi may not be able to prevent competitors from making, using and selling competing products. Aadi collaborates with other companies and institutions with respect to research and development matters. Also, Aadi relies on numerous third parties to provide it with materials that it uses to develop its technology. If Aadi cannot successfully negotiate sufficient ownership, licensing, and/or commercial rights to any invention that result from its use of any third-party collaborator’s materials, or if disputes arise with respect to the intellectual property developed with the use of a collaborator’s materials, or data developed in a collaborator’s study, Aadi’s ability to capitalize on the market potential of these inventions or developments may be limited or precluded altogether. In addition, even where Aadi has the right to control patent prosecution of patents and patent applications Aadi has licensed to and from third parties, Aadi may still be adversely affected or prejudiced by actions or inactions of its licensees, its licensors and their counsel that took place prior to the date upon which Aadi assumed control over patent prosecution.

Intellectual property discovered through government funded programs may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for United States-based

 

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companies. Compliance with such regulations may limit Aadi’s exclusive rights and limit Aadi’s ability to contract with non-United States manufacturers.

Aadi’s licensed patent applications may have been or may be in the future supported through the use of United States government funding awarded by the National Institute of Health or the FDA Office of Orphan Products Development. and the Army Medical Research and Development Command. Although Aadi does not currently own issued patents or pending patent applications that have been generated through the use of United States government funding, it has licensed, or may acquire or license in the future, intellectual property rights that have been generated through the use of United States government funding or grant. Pursuant to the Bayh-Dole Act of 1980, the United States government has certain rights in inventions developed with government funding. These United States government rights include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the United States government has the right, under certain limited circumstances, to require Aadi to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (1) adequate steps have not been taken to commercialize the invention; (2) government action is necessary to meet public health or safety needs; or (3) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The United States government also has the right to take title to these inventions if the grant recipient fails to disclose the invention to the government or fails to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require Aadi to expend substantial resources. In addition, the United States government requires that any products embodying any of these inventions or produced through the use of any of these inventions be manufactured substantially in the United States. This preference for United States industry may be waived by the federal agency that provided the funding if the owner or assignee of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for United States industry may limit Aadi’s ability to contract with non-United States product manufacturers for products covered by such intellectual property.

Risks Related to Aadi’s Reliance on Third Parties

The manufacture of drugs is complex, and Aadi’s third-party manufacturers may encounter difficulties in production. If any of Aadi’s third-party manufacturers encounter such difficulties, Aadi’s ability to provide adequate supply of its product candidates for clinical trials or its products for patients, if approved, could be delayed or prevented.

Manufacturing drugs, especially in large quantities, is complex and highly regulated and may require the use of innovative technologies. Each lot of an approved drug product must undergo thorough testing for identity, strength, quality, purity and efficacy. Manufacturing drugs requires facilities specifically designed for and validated for this purpose, as well as sophisticated quality assurance and quality control procedures. Manufacturing drugs is highly susceptible to product loss due to contamination, equipment failure, improper installation or operation of equipment, vendor or operator error, inconsistency in yields, variability in product characteristics and difficulties in scaling the production process. Slight deviations anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and quality control and testing, may result in lot failures, product recalls or spoilage. When changes are made to the manufacturing process, Aadi may be required to provide preclinical and clinical data showing the comparable identity, strength, quality, purity or efficacy of the products before and after such changes. If microbial, viral or other contaminations or impurities are discovered at the facilities of Aadi’s manufacturer, such facilities may need to be closed for an extended period of time to investigate and remedy the contamination or impurity, which could delay clinical trials and adversely harm Aadi’s business. If Aadi’s third-party manufacturers are unable to produce sufficient quantities of consistent quality for clinical trials or for commercialization as a result of these challenges, or otherwise, Aadi’s development and commercialization efforts would be impaired, which would have an adverse effect on its business, financial condition, results of operations and growth prospects.

 

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Aadi depends on intellectual property licensed from third parties and termination of any of these licenses could result in the loss of significant rights, which would harm Aadi’s business.

Aadi is dependent on patents, know-how and proprietary technology, both its own and licensed from others. Aadi entered into a license agreement with Abraxis BioScience, LLC pursuant to which it has licensed exclusive global rights to intellectual property and know-how related to ABI-009. Aadi is required to use commercially reasonable efforts or diligent efforts to commercialize products based on the licensed rights and to pay certain royalties based off its net sales, certain sublicense fees (such as with respect to Aadi’s license agreement with EOC) and certain other fees. Aadi may not meet these requirements, which could result in a loss or termination of any rights under such agreements. Any termination of these licenses will result in the loss of significant rights and will restrict Aadi’s ability to commercialize its product candidates.

Aadi is generally also subject to all of the same risks with respect to protection of intellectual property that it licenses, as it is for intellectual property that it owns, which are described above under “Risks Related to Aadi’s Intellectual Property.” If Aadi or its licensors fail to adequately protect this intellectual property, Aadi’s ability to commercialize products could suffer.

Aadi contracts with qualified third parties for the production of ABI-009 for preclinical studies and clinical trials, and expects to continue to do so for additional clinical trials and ultimately for commercialization. This reliance on third parties, some of which are sole source suppliers, increases the risk that Aadi will not have sufficient quality and quantities of ABI-009 or such quantities at an acceptable cost, which could delay, prevent or impair Aadi’s development or commercialization efforts.

Aadi does not currently have, nor does it plan to acquire, the infrastructure or internal capability to manufacture supplies of its product candidates for use in development and commercialization. Aadi relies, and expects to continue to rely, on third-party manufacturers for the production of Aadi’s product candidates for preclinical studies and clinical trials under the guidance of members of Aadi’s organization. In the case of ABI-009, Aadi relies on a single third-party manufacturer, Fresenius-Kabi, and currently has no alternative manufacturer in place. Aadi does not currently have any long-term supply agreements, and, to date, Aadi has obtained its required drug product on a purchase order basis, which means that aside from any binding purchase orders Aadi has from time to time, Aadi’s supplier could cease supplying to Aadi or change the terms on which it is willing to continue supplying to Aadi at any time. Aadi has supply agreements in place for key raw materials used in the manufacture of ABI-009 such as for the drug substance sirolimus and for human albumin, which are key ingredients in the drug product. In addition, Aadi is presently negotiating a supply agreement with Fresenius-Kabi for the commercial manufacture of ABI-009, but there is no assurance that Aadi will be able to enter into such agreement on acceptable terms, or if at all. If Aadi were to engage another third-party manufacturer, Aadi will be required to verify that the new third-party manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations. Aadi will also need to verify, such as through a bridging study, that any new manufacturing process will produce its product candidate or product, if approved, according to the specifications previously submitted to the FDA or another regulatory authority. If Aadi were to experience an unexpected loss of supply of ABI-009 or any other product candidates Aadi may develop in the future for any reason, whether as a result of manufacturing, supply or storage issues or otherwise, Aadi could experience delays, disruptions, suspensions or terminations of, or be required to restart or repeat, any pending or ongoing clinical trials or commercialize its product candidates, including FYARRO for advanced malignant PEComa, if approved, in a timely manner or on budget.

Aadi expects to rely on third-party manufacturers for the commercial supply of ABI-009, if approved, and the continued development of ABI-009 in other indications or any other product candidates Aadi may develop in the future for which Aadi obtains regulatory approval. Aadi may be unable to maintain or establish required agreements with third-party manufacturers or to do so on acceptable terms. Further, any delay in identifying and qualifying a manufacturer for commercial production could delay the potential commercialization of ABI-009, and, in the event that Aadi does not have sufficient product to complete its planned clinical trials, it could delay

 

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such trials. Even if Aadi is able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:

 

   

the failure of the third party to manufacture ABI-009 or any of Aadi’s other product candidates that it may develop in the future according to Aadi’s schedule and specifications, or at all, including if Aadi’s third-party contractors give greater priority to the supply of other products over Aadi’s product candidates, are constrained by the recent COVID-19 pandemic or otherwise do not satisfactorily perform according to the terms of the agreements between Aadi and them;

 

   

the termination or nonrenewal of arrangements or agreements by Aadi’s third-party contractors at a time that is costly or inconvenient for Aadi;

 

   

the breach by the third-party contractors of Aadi’s agreements with them;

 

   

the failure of third-party contractors to comply with applicable regulatory requirements, including manufacturing drug supply pursuant to strictly-enforced cGMPs;

 

   

the failure of the third-party contractor to manufacture ABI-009 or any of Aadi’s other product candidates that it may develop in the future according to Aadi’s specifications;

 

   

the mislabeling of clinical supplies, potentially resulting in the wrong dose amounts being supplied or active drug or placebo not being properly identified;

 

   

clinical supplies not being delivered to clinical sites on time, leading to clinical trial interruptions, or of drug supplies not being distributed to commercial vendors in a timely manner, resulting in lost sales; and

 

   

the misappropriation of Aadi’s proprietary information, including Aadi’s trade secrets and know-how.

Aadi does not have complete control over all aspects of the manufacturing process of Aadi’s contract manufacturing partners and is dependent on these contract manufacturing partners for compliance with cGMP regulations for manufacturing both active pharmaceutical ingredients (referred to as “API”) and finished drug products. To date, Aadi has obtained drug substance and drug product from third-party manufacturers to support preclinical and clinical testing of ABI-009. For example, Aadi has obtained its supplies of ABI-009 from a single source supplier, Fresenius-Kabi. Aadi has supply agreements in place for key raw materials used in the manufacture of ABI-009 such as for the drug substance sirolimus and for human albumin, which are key ingredients in the drug product. Aadi is in the process of developing its supply chain for ABI-009 and is presently negotiating a supply agreement with Fresenius-Kabi for the commercial manufacture of ABI-009. As Aadi advances its product candidates through development, it will consider redundant supply for the API and drug product for each of its product candidates to protect against any potential supply disruptions. However, Aadi may be unsuccessful in putting in place such framework agreements or protecting against potential supply disruptions.

Third-party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outside of the United States. If Aadi’s CMOs cannot successfully manufacture material that conforms to Aadi’s specifications and the strict regulatory requirements of the FDA, EMA or others, they will not be able to pass a pre-approval inspection or secure and/or maintain regulatory approval for their manufacturing facilities. In addition, Aadi does not have control over the ability of its CMOs to maintain adequate quality control, quality assurance and qualified personnel. Furthermore, many of its CMOs are engaged with other companies to supply and/or manufacture materials or products for such companies, which exposes its manufacturers to regulatory risks for the production of such materials and products. As a result, failure to satisfy the regulatory requirements for the production of those materials and products may affect the regulatory clearance of its CMOs facilities generally. If the FDA, EMA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of ABI-009 or any of Aadi’s other product candidates that it may develop in the future or if it withdraws any such approval in the future, Aadi will need to find alternative manufacturing facilities, and those new facilities would need to be inspected and approved by FDA, EMA or comparable regulatory authority prior to commencing manufacturing, which would significantly impact Aadi’s

 

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ability to develop, obtain regulatory approval for or market ABI-009 or any of Aadi’s other product candidates that it may develop in the future, if approved. Aadi’s reliance on CMOs also exposes Aadi to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate its trade secrets or other proprietary information. Aadi’s failure, or the failure of its third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on the parties, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or drugs, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of ABI-009 or any of Aadi’s other product candidates or drugs that it may develop in the future and harm Aadi’s business and results of operations.

In addition, the manufacture of pharmaceutical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production and absence of contamination. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if contaminants are discovered in Aadi’s supply of ABI-009 or in Aadi’s third-party manufacturing facilities, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. Any stability or other issues relating to the manufacture of Aadi’s product candidates may occur in the future. Further, as product candidates are developed through preclinical studies to late-stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives, and any of these changes could cause its product candidates to perform differently and affect the results of planned clinical trials or other future clinical trials. In addition, quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at Aadi’s third-party manufacturing facilities upon which it relies, or the availability or cost of materials, which could disrupt the supply chain for ABI-009 or any of its product candidates that it may develop in the future. Further, Aadi’s manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If Aadi’s manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, Aadi’s ability to provide its product candidate to patients in clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require Aadi to commence new clinical trials at additional expense or terminate clinical trials completely.

Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical study costs, delay approval of its product candidate, impair commercialization efforts, increase its cost of goods, and have an adverse effect on its business, financial condition, results of operations, and growth prospects. Aadi’s current and anticipated future dependence upon others for the manufacture of ABI-009 and any of Aadi’s other product candidates that it may develop in the future may adversely affect Aadi’s future profit margins and Aadi’s ability to commercialize ABI-009, if approved, or any other product candidates that it may develop in the future that receives regulatory approval on a timely and competitive basis.

Aadi is dependent on a single-source supplier for the drug product ABI-009, and the loss of such supplier could harm its business.

Aadi relies on a single-source supplier, Fresenius-Kabi for its drug product ABI-009. While Aadi has supply agreements in place for key raw materials used in the manufacture of ABI-009 such as for the drug substance sirolimus and for human albumin, which are key ingredients in the drug product, Aadi places purchase orders

 

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from Fresenius-Kabi on an as-needed basis. Aadi’s suppliers could discontinue the manufacturing or supply of ABI-009 at any time. Aadi does not carry a significant inventory of ABI-009 or its key raw materials used in the manufacture of ABI-009. Aadi’s suppliers may not be able to meet its demand for their products, either because of acts of nature, the nature of Aadi’s agreements with those manufacturers or Aadi’s relative importance to them as a customer, and Aadi’s manufacturers may decide in the future to discontinue or reduce the level of business they conduct with Aadi either entirely or for a particular territory. The loss of any of the foregoing would require significant time and effort to locate and qualify an alternative source of supply. Though Aadi does not currently have contracts for third parties to provide manufacturing capabilities for ABI-009, if it is successful in reaching the point of manufacturing its products for commercialization, it may rely on a single company for such manufacturing. Any contractual disputes between Aadi and such manufacturer or loss of manufacturing ability by such manufacturer could similarly require significant time, effort and expense to locate and qualify an alternative source of manufacturing, which could materially harm Aadi’s business.

In addition, Aadi might not be able to identify and qualify additional or replacement suppliers for the drug product ABI-009 or for the key raw materials used in the manufacture of ABI-009 quickly or at all or without incurring significant additional costs. Aadi cannot guarantee that it will be able to establish alternative relationships on similar terms, without delay or at all. Aadi may also face regulatory delays or be required to seek additional regulatory clearances or approvals if it experiences any delay or deficiency in the quality of products obtained from suppliers or if Aadi has to replace its suppliers. In addition, Aadi does not currently have arrangements in place for redundant supply of the drug product ABI-009 or for the key raw materials used in the manufacture of ABI-009.

Establishing additional or replacement suppliers for the drug product ABI-009 or for the key raw materials used in the manufacture of ABI-009, if required, or any supply interruption from Aadi’s suppliers, could limit Aadi’s ability to manufacture its products, result in production delays and increased costs and adversely affect its ability to deliver products to Aadi’s customers on a timely basis. Aadi’s inability to obtain sufficient quantities of the drug product ABI-009 or for the key raw materials used in the manufacture of ABI-009 also could adversely affect clinical development of the ABI-009. If Aadi is not able to identify alternate sources of supply for the drug product ABI-009 or for the key raw materials used in the manufacture of ABI-009, Aadi will not be able to obtain, or may be delayed in obtaining, regulatory approvals for Aadi’s product candidates and will not be able to, or may be delayed in Aadi’s efforts to, successfully commercialize its product candidates.

Aadi relies, and expects to continue to rely, on third parties to conduct its preclinical studies and clinical trials and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials, research and studies.

Aadi does not have the ability to independently conduct all of its preclinical studies and clinical trials. Aadi currently relies on third parties, such as CROs, clinical data management organizations, medical institutions and clinical investigators, to conduct, supervise and monitor Aadi’s current or planned preclinical studies and clinical trials of ABI-009, and Aadi expects to continue to rely upon third parties to conduct additional preclinical studies and clinical trials of ABI-009 and other product candidates it may develop in the future. Aadi enters into agreements with third parties that have a significant role in the conduct of Aadi’s preclinical studies and clinical trials and the subsequent collection and analysis of data. These third parties are not Aadi employees, and except for remedies available to Aadi under its agreements with such third parties, Aadi has limited ability to control the conduct of such third party, the amount or timing of resources that any such third party will devote to Aadi’s preclinical studies and clinical trials and the management of data developed through preclinical studies and clinical trials. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. The third parties Aadi relies on for these services may also (i) have staffing difficulties, (ii) fail to comply with contractual obligations, (iii) experience regulatory compliance issues, (iv) undergo changes in priorities or become financially distressed, or (v) have relationships with other entities, some of which may be Aadi’s competitors, which may draw time and resources from Aadi’s development programs. The third parties with whom Aadi may contract might not be diligent, careful or timely in conducting

 

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its preclinical studies or clinical trials, resulting in the preclinical studies and clinical trials being delayed or unsuccessful. Some of these third parties may terminate their engagements with Aadi at any time. If Aadi needs to enter into alternative arrangements with a third party, it would delay Aadi’s drug development activities.

Aadi’s reliance on these third parties for such drug development activities will reduce its control over these activities but will not relieve Aadi of its regulatory responsibilities. For example, Aadi will remain responsible for ensuring that each of its preclinical studies and clinical trials is conducted in accordance with the general investigational plan and protocols for the trial and legal, regulatory, and scientific requirements and standards. Moreover, the FDA requires Aadi and its third parties to comply with applicable GLP and GCP standards, regulations for conducting, monitoring, recording and reporting the results of preclinical studies and clinical trials to assure that the data and reported results are reliable and accurate and for clinical trials that the rights, integrity and confidentiality of trial participants are protected and that they are adequately informed of the potential risks of participating in clinical trials. The EMA also requires Aadi to comply with similar standards. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, principal investigators and trial sites. If Aadi or any of its CROs fail to comply with applicable GCP requirements, the clinical data generated in Aadi’s preclinical studies and clinical trials may be deemed unreliable and the FDA, EMA or comparable foreign regulatory authorities may require Aadi to perform additional preclinical studies or clinical trials before approving Aadi’s marketing applications. Aadi cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of Aadi’s preclinical studies and clinical trials substantially comply with GCP regulations. In addition, Aadi’s clinical trials must be conducted with product candidates produced under current cGMP regulations and will require a large number of test patients. Aadi’s failure or the failure of its CROs to comply with these regulations may require Aadi to repeat clinical trials, which would delay the regulatory approval process and could also subject it to enforcement action up to and including civil and criminal penalties. Aadi is also required to register certain ongoing clinical trials and post the results of certain completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

If Aadi cannot contract with acceptable third parties on commercially reasonable terms, or at all, or if these third parties do not successfully carry out their contractual duties or perform preclinical studies and clinical trials in a satisfactory manner, meet expected deadlines or conduct Aadi’s preclinical studies and clinical trials in accordance with legal and regulatory requirements or Aadi’s stated protocols, Aadi will not be able to obtain, or may be delayed in obtaining, regulatory approvals for Aadi’s product candidates and will not be able to, or may be delayed in Aadi’s efforts to, successfully commercialize its product candidates.

Aadi entered into a collaboration agreement with EOC Pharma, and Aadi may form or seek additional strategic alliances or collaborations in the future. Such alliances and collaborations may inhibit future opportunities, or Aadi may not realize the benefits of such collaborations or alliances.

In December 2020, Aadi granted to EOC Pharma (Hong Kong) Limited (referred to as “EOC”) exclusive rights to develop and commercialize ABI-009 in Greater China, including the Republic China, Hong Kong, Macau and Taiwan (collectively, referred to as the “EOC Territory”), pursuant to a license agreement (referred to as the “EOC License”), and Aadi may form or seek strategic alliances, joint ventures or collaborations or enter into licensing arrangements with other third parties that Aadi believes will complement or augment its development and commercialization efforts with respect to ABI-009 or any future product candidates that Aadi may develop. Under the EOC License Agreement, Aadi received an upfront payment and is eligible to receive regulatory and sales-based milestone payments upon the occurrence of certain milestone events totaling $271 million. Aadi is also eligible to earn tiered royalties based on annual net sales of ABI-009 based upon the royalties Aadi is obligated to pay Abraxis for sales of products in the EOC Territory pursuant to the Abraxis License, plus an additional single-digit percentage that is variable based on the level of annual net sales. EOC will be responsible for development, regulatory submissions, and commercialization in the EOC Territory. Aadi retains its rights outside of the EOC Territory.

 

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Future efforts for additional alliances or collaborations may also require Aadi to incur non-recurring and other charges, increase its near- and long-term expenditures, issue securities that dilute its existing stockholders or disrupt its management and business. In addition, Aadi faces significant competition in seeking appropriate strategic partners, and the negotiation process is time-consuming and complex. Furthermore, Aadi may not be able to realize the benefit of such transactions if Aadi is unable to successfully integrate them with its existing operations and company culture. Aadi cannot be certain that, following a strategic transaction or license, it will achieve the revenues or specific net income that justifies such transaction.

Aadi depends on EOC to develop and commercialize ABI-009 within the EOC Territory, and Aadi has limited control over how EOC will conduct development and commercialization activities for ABI-009.

Under the EOC License Agreement, Aadi relies on EOC for a substantial portion of the financial resources and for the development, regulatory, and commercialization activities for ABI-009 in the EOC Territory, and Aadi has limited control over the amount and timing of resources that EOC devotes to ABI-009. In addition, payments associated with development, regulatory and commercial milestones that Aadi may be eligible to receive, as well as royalties, will be dependent upon further advancement of the ABI-009 by EOC. If these milestones are not met and if ABI-009 is not commercialized in the EOC Territory, Aadi will not receive future revenues from the collaboration. EOC may fail to develop or effectively commercialize ABI-009 for a variety of reasons and the EOC License Agreement subjects Aadi to a number of risks, including:

 

   

EOC may not commit sufficient resources to the development, regulatory approval, marketing or distribution of ABI-009;

 

   

EOC may be unable to successfully complete the clinical development of ABI-009 or obtain all necessary approvals from foreign regulatory agencies in the EOC Territory required to market ABI-009;

 

   

EOC may terminate their agreement with Aadi prior to completing development or commercialization of the ABI-009 under the collaboration, in whole or in part, adversely impacting the potential approval and Aadi’s revenue from the licensed product;

 

   

EOC may fail to manufacture ABI-009 in compliance with requirements of the FDA and similar foreign regulatory agencies and in commercial quantities sufficient to meet market demand;

 

   

there may be disputes between Aadi and EOC, including disagreements regarding the EOC License Agreement with Aadi, that may result in (1) the delay of (or prevent entirely) the achievement of development, regulatory and commercial objectives that would result in milestone payments, (2) the delay or termination of the development or commercialization of ABI-009 in the EOC Territory, (3) costly litigation or arbitration that diverts Aadi’s management’s attention and resources; and/or (4) termination of the underlying license agreement;

 

   

EOC may not comply with applicable regulatory guidelines with respect to developing or commercializing ABI-009, which could adversely impact the development of or sales of ABI-009 and could result in administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizures or detention, product recalls, total or partial suspension of production and refusal to approve any new drug applications;

 

   

EOC may experience financial difficulties;

 

   

business combinations or significant changes in either the business strategy of EOC may also adversely affect EOC’s ability to perform its obligations under its license agreement with Aadi;

 

   

EOC may not properly maintain Aadi’s intellectual property rights or may use Aadi’s proprietary information in such a way as to invite litigation that could jeopardize or invalidate Aadi’s proprietary information or expose Aadi to potential litigation;

 

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EOC may develop or commercialize ABI-009 in a manner that may adversely impact Aadi’s development or commercialization of ABI-009 and/or future product candidates outside of such collaboration; and

 

   

Although EOC is subject to a limited non-compete obligation, EOC could independently move forward with a competing product candidate developed either independently or in collaboration with others, including Aadi’s competitors.

If EOC does not perform in the manner Aadi expects or fulfill its responsibilities in a timely manner, or at all, the development, regulatory approval, and commercialization efforts related to ABI-009 could be delayed. It may be necessary for Aadi to assume the responsibility at its own expense for the development of ABI-009 in the EOC Territory. In that event, Aadi would likely need to seek additional funding and its potential to generate future revenues from ABI-009 could be significantly reduced and Aadi’s business could be materially and adversely harmed.

Aadi has entered into collaborations with third parties in connection with the development of ABI-009. Even if Aadi believes that the development of such product candidate is promising, Aadi’s partners may choose not to proceed with such development.

Aadi’s existing agreement with EOC, and any future collaboration agreements Aadi may enter into, are generally subject to termination by the counterparty on short notice upon the occurrence of certain circumstances, including, in the case of EOC, without cause subject to a specified notice period. Accordingly, even if Aadi believes that the development of product candidates is worth pursuing, Aadi’s partners may choose not to continue with such development. If any of its collaborations are terminated, Aadi may not receive additional milestones or royalties under those collaborations. In addition, Aadi may be required to devote additional resources to the development of its product candidates or seek a new collaboration partner on short notice, and the terms of any additional collaboration or other arrangements that Aadi establishes may not be favorable to Aadi.

Aadi is also at risk that its current and any potential collaborations or other arrangements may not be successful. Factors that may affect the success of its collaborations include the following:

 

   

Aadi’s collaboration partners may incur financial and cash flow difficulties that force them to limit or reduce their efforts under their collaboration agreement with Aadi;

 

   

Aadi’s collaboration partners may be pursuing alternative technologies or developing alternative products that are competitive to Aadi’s technology and products, either on their own or in partnership with others;

 

   

Aadi’s collaboration partners may terminate their collaboration with Aadi, which could make it difficult for Aadi to attract new partners or adversely affect perception of Aadi in the business and financial communities; and

 

   

Aadi’s collaboration partners may pursue higher priority programs or change the focus of their development programs, which could affect their commitment to Aadi.

If Aadi cannot maintain successful collaborations, Aadi’s business, financial condition and operating results may be adversely affected.

If Aadi engages in future acquisitions or strategic partnerships, this may increase Aadi’s capital requirements, dilute Aadi’s stockholders, cause Aadi to incur debt or assume contingent liabilities, and subject Aadi to other risks.

From time to time, Aadi evaluates various acquisition opportunities and strategic partnerships, including licensing or acquiring complementary products, intellectual property rights, technologies or businesses. Any potential acquisition or strategic partnership may entail numerous risks, including:

 

   

increased operating expenses and cash requirements;

 

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the assumption of additional indebtedness or contingent liabilities;

 

   

the issuance of Aadi’s equity securities;

 

   

assimilation of operations, intellectual property and products of an acquired company, including difficulties associated with integrating new personnel;

 

   

the diversion of Aadi’s management’s attention from its existing programs and initiatives in pursuing such a strategic merger or acquisition;

 

   

retention of key employees, the loss of key personnel and uncertainties in Aadi’s ability to maintain key business relationships;

 

   

risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing products or product candidates and regulatory approvals; and

 

   

Aadi’s inability to generate revenue from acquired technology and/or products sufficient to meet Aadi’s objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.

In addition, if Aadi undertakes acquisitions or pursue partnerships in the future, it may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense.

If Aadi decides to establish additional collaborations but is not able to establish those collaborations on commercially reasonable terms, Aadi may have to alter its development and commercialization plans.

Aadi’s drug development programs and the potential commercialization of Aadi’s product candidates will require substantial additional cash to fund expenses. Aadi may seek to selectively form collaborations to expand its capabilities, potentially accelerate research and development activities and provide for commercialization activities by third parties. Any of these relationships may require Aadi to incur non-recurring and other charges, increase Aadi’s near- and long-term expenditures, issue securities that dilute Aadi’s existing stockholders, or disrupt Aadi’s management and business.

Aadi would face significant competition in seeking appropriate collaborators and the negotiation process is time-consuming and complex. Whether Aadi reaches a definitive agreement for a collaboration will depend, among other things, upon Aadi’s assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA, EMA or comparable foreign regulatory authorities, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing drugs, the existence of uncertainty with respect to Aadi’s ownership of intellectual property and industry and market conditions generally. The potential collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such collaboration could be more attractive than the one with Aadi for its product candidate. Further, Aadi may not be successful in its efforts to establish a collaboration or other alternative arrangements for product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view them as having the requisite potential to demonstrate safety and efficacy.

In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. Even if Aadi is successful in entering into a collaboration, the terms and conditions of that collaboration may restrict Aadi from entering into future agreements on certain terms with potential collaborators.

If and when Aadi seeks to enter into collaborations, Aadi may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If Aadi is unable to do so, it may have to curtail the development of a

 

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product candidate, reduce or delay its development program or one or more of its other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase its expenditures and undertake development or commercialization activities at its own expense. If Aadi elects to increase its expenditures to fund development or commercialization activities on its own, it may need to obtain additional capital, which may not be available to it on acceptable terms or at all. If Aadi does not have sufficient funds, it may not be able to further develop its product candidates or bring them to market and generate product revenue.

Aadi may enter into collaborations with third parties for the development and commercialization of product candidates. If those collaborations are not successful, Aadi may not be able to capitalize on the market potential of these product candidates.

If Aadi enters into any collaboration arrangements with any third parties, Aadi will likely have limited control over the amount and timing of resources that its collaborators dedicate to the development or commercialization of Aadi’s product candidates. Aadi’s ability to generate revenues from these arrangements will depend on Aadi’s collaborators’ abilities and efforts to successfully perform the functions assigned to them in these arrangements. Collaborations involving Aadi’s product candidates would pose numerous risks to Aadi, including the following:

 

   

collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations and may not perform their obligations as expected;

 

   

collaborators may deemphasize or not pursue development and commercialization of Aadi’s product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators’ strategic focus, including as a result of a business combination or sale or disposition of a business unit or development function, or available funding or external factors such as an acquisition that diverts resources or creates competing priorities;

 

   

collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

   

collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with Aadi’s product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than Aadi’s;

 

   

a collaborator with marketing and distribution rights to multiple products may not commit sufficient resources to the marketing and distribution of Aadi’s product, if approved, relative to other products;

 

   

Aadi may grant exclusive rights to its collaborators that would prevent Aadi from collaborating with others;

 

   

collaborators may not properly obtain, maintain, defend or enforce Aadi’s intellectual property rights or may use Aadi’s proprietary information and intellectual property in such a way as to invite litigation or other intellectual property related proceedings that could jeopardize or invalidate Aadi’s proprietary information and intellectual property or expose Aadi to potential litigation or other intellectual property related proceedings;

 

   

disputes may arise between the collaborators and Aadi that result in the delay or termination of the research, development or commercialization of Aadi’s product candidates or that result in costly litigation or arbitration that diverts management attention and resources;

 

   

collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates;

 

   

collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all;

 

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collaborators may not provide Aadi with timely and accurate information regarding development progress and activities under the collaboration or may limit Aadi’s ability to share such information, which could adversely impact Aadi’s ability to report progress to its investors and otherwise plan Aadi’s own development of its product candidates;

 

   

collaborators may own or co-own intellectual property covering Aadi’s products that results from Aadi collaborating with them, and in such cases, Aadi would not have the exclusive right to develop or commercialize such intellectual property; and

 

   

a collaborator’s sales and marketing activities or other operations may not be in compliance with applicable laws, resulting in civil or criminal proceedings.

Risks Related to the Combined Company

In determining whether you should vote to approve the proposals contained in this proxy statement, you should carefully read the following risk factors in addition to the risks described above.

The combined company will incur losses for the foreseeable future and might never achieve profitability.

The combined company may never become profitable, even if the combined company is able to complete clinical development for one or more product candidates and eventually commercialize such product candidates. The combined company will need to successfully complete significant research, development, testing and regulatory compliance activities that, together with projected general and administrative expenses, is expected to result in substantial increased operating losses for at least the next several years. Even if the combined company does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis.

The combined company will need to raise additional financing in the future to fund its operations, which may not be available to it on favorable terms or at all.

The combined company will require substantial additional funds to conduct the costly and time-consuming clinical efficacy trials necessary to pursue regulatory approval of each potential product candidate and to continue the development of FYARRO and future product candidates. The combined company’s future capital requirements will depend upon a number of factors, including: the number and timing of future product candidates in the pipeline; progress with and results from preclinical testing and clinical trials; the ability to manufacture sufficient drug supplies to complete preclinical and clinical trials; the costs involved in preparing, filing, acquiring, prosecuting, maintaining and enforcing patent and other intellectual property claims; and the time and costs involved in obtaining regulatory approvals and favorable reimbursement or formulary acceptance. Raising additional capital may be costly or difficult to obtain and could significantly dilute stockholders’ ownership interests or inhibit the combined company’s ability to achieve its business objectives. If the combined company raises additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect the rights of its common stockholders. Further, to the extent that the combined company raises additional capital through the sale of common stock or securities convertible or exchangeable into common stock, its stockholder’s ownership interest in the combined company will be diluted. In addition, any debt financing may subject the combined company to fixed payment obligations and covenants limiting or restricting its ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If the combined company raises additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, the combined company may have to relinquish certain valuable intellectual property or other rights to its product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to it. Even if the combined company were to obtain sufficient funding, there can be no assurance that it will be available on terms acceptable to the combined company or its stockholders.

 

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The combined company’s stock price is expected to be volatile, and the market price of its common stock may drop following the merger.

The market price of the combined company’s common stock following the merger could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology, and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of the combined company’s common stock to fluctuate following the merger include:

 

   

the ability of the combined company to obtain regulatory approvals for product candidates, and delays or failures to obtain such approvals;

 

   

the failure of any of the combined company’s product candidates, if approved for marketing and commercialization, to achieve commercial success;

 

   

any inability to obtain adequate supply of the combined company’s product candidates or the inability to do so at acceptable prices;

 

   

the entry into, or termination of, key agreements, including key licensing, supply or collaboration agreements;

 

   

the initiation of material developments in, or conclusion of, disputes or litigation to enforce or defend any of the combined company’s intellectual property rights or defend against the intellectual property rights of others;

 

   

changes in laws or regulations applicable to the combined company’s product candidates;

 

   

the results of current, and any future, nonclinical or clinical trials of the combined company’s product candidates;

 

   

announcements by commercial partners or competitors of new commercial products, clinical progress (or the lack thereof), significant contracts, commercial relationships, or capital commitments;

 

   

failure to meet or exceed financial and development projections the combined company may provide to the public;

 

   

failure to meet or exceed the financial and development projections of the investment community;

 

   

the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

 

   

adverse publicity relating to the combined company’s markets, including with respect to other products and potential products in such markets;

 

   

the introduction of technological innovations or new therapies competing with potential products of the combined company;

 

   

announcements of significant acquisitions, strategic collaborations, joint ventures or capital commitments by the combined company or its competitors;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters, and the combined company’s ability to obtain patent protection for its technologies;

 

   

the loss of key employees;

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

if securities or industry analysts do not publish research or reports about the combined company’s business, or if they issue an adverse or misleading opinion regarding its business and stock;

 

   

changes in the market valuations of similar companies;

 

   

general and industry-specific economic conditions potentially affecting the combined company’s research and development expenditures;

 

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sales of its common stock by the combined company or its stockholders in the future;

 

   

trading volume of the combined company’s common stock;

 

   

changes in the structure of health care payment systems;

 

   

adverse regulatory decisions;

 

   

trading volume of the combined company’s common stock; and

 

   

period-to-period fluctuations in the combined company’s financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies or the biotechnology sector. These broad market fluctuations may also adversely affect the trading price of the combined company’s common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Regardless of the merits or the ultimate results of such litigation, if instituted, such litigation could result in substantial costs and diversion of management’s attention and resources, which could significantly harm the combined company’s profitability and reputation.

Additionally, a decrease in the stock price of the combined company may cause the combined company’s common stock to no longer satisfy the continued listing standards of Nasdaq. If the combined company is not able to maintain the requirements for listing on Nasdaq, it could be delisted, which could have a materially adverse effect on its ability to raise additional funds as well as the price and liquidity of its common stock.

Financial reporting obligations of being a public company in the United States are expensive and time-consuming, and the combined company’s management will be required to devote substantial time to compliance matters.

As a publicly-traded company, the combined company will incur significant additional legal, accounting and other expenses that Aadi did not incur as a privately-held company, including costs associated with public company reporting requirements. The obligations of being a public company in the United States require significant expenditures and will place significant demands on the combined company’s management and other personnel, including costs resulting from public company reporting obligations under the Exchange Act and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act of 2002 (referred to as the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (referred to as the “Dodd-Frank Act”) and the listing requirements of the stock exchange on which the combined company’s securities are listed. These rules require the establishment and maintenance of effective disclosure and financial controls and procedures, internal control over financial reporting and changes in corporate governance practices, among many other complex rules that are often difficult to implement, monitor and maintain compliance with. In addition, the combined company expects these rules and regulations to make it more difficult and more expensive for the combined company to obtain director and officer liability insurance and the combined company may be required to incur substantial costs to maintain the same or similar coverage that Aadi had as a privately-held company. The combined company’s management and other personnel will need to devote a substantial amount of time to ensure that the combined company complies with all of these requirements and to keep pace with new regulations, otherwise the combined company may fall out of compliance and risk becoming subject to litigation or being delisted, among other potential problems.

The sale or availability for sale of a substantial number of shares of common stock of the combined company after the merger and the PIPE financing and after expiration of applicable lock-up periods could adversely affect the market price of such shares after the merger.

Sales of a substantial number of shares of common stock of the combined company in the public market after the merger, the PIPE financing or if existing stockholders of Aerpio and Aadi sell, or indicate an intention

 

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to sell, substantial amounts of the combined company’s common stock in the public market after expiration of applicable lock-up periods and other legal restrictions on resale, or the perception that these sales could occur, could adversely affect the market price of such shares and could materially impair the combined company’s ability to raise capital through equity offerings in the future. Aerpio and Aadi are unable to predict what effect, if any, market sales of securities held by significant stockholders, directors or officers of the combined company or the availability of these securities for future sale will have on the market price of the combined company’s common stock after the merger.

The combined company will have broad discretion in the use of proceeds from the PIPE financing and may invest or spend the proceeds in ways with which its stockholders do not agree and in ways that may not increase the value of their investments.

The combined company will have broad discretion over the use of proceeds from the PIPE financing. Its stockholders may not agree with the combined company’s decisions, and its use of the proceeds may not yield any return on its stockholders’ investments. The combined company’s failure to apply the net proceeds of the PIPE financing effectively could compromise its ability to pursue its growth strategy and the combined company might not be able to yield a significant return, if any, on its investment of these net proceeds. The combined company’s stockholders will not have the opportunity to influence its decisions on how to use the net proceeds from the PIPE financing.

Ownership of the combined company’s common stock may be highly concentrated, and it may prevent other stockholders from influencing significant corporate decisions.

Upon completion of the merger, Aadi’s stockholders are estimated to beneficially own or control approximately 66.8% of the combined company, on a fully-diluted basis. Upon completion of the PIPE financing, Aadi’s stockholders are estimated to beneficially own or control approximately 29.6% of the combined company, on a fully diluted basis and the PIPE investors are estimated to beneficially own or control approximately 55.7% of the combined company. Accordingly Aadi’s stockholders and the PIPE investors will have substantial influence over the outcome of any corporate action of the combined company requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company’s assets or any other significant corporate transaction. These stockholders also may exert influence in delaying or preventing a change in control of the combined company, even if such change in control would benefit the other stockholders of the combined company.

The combined company will continue to be a smaller reporting company. The combined company cannot be certain whether the reduced disclosure requirements applicable to smaller reporting companies will make the combined company’s common stock less attractive to investors or otherwise limit the combined company’s ability to raise additional funds.

Aerpio is currently, and the combined company will continue to be upon completion of the merger, a “smaller reporting company” under applicable securities regulations. A smaller reporting company is a company that, as of the last business day of its most recently completed second fiscal quarter, has an aggregate market value of the company’s voting stock held by non-affiliates, or public float, of less than $250 million, or has at least $100 million in revenue and at least $700 million in public float. SEC rules provide that companies with a non-affiliate public float of less than $75 million may only sell shares under a Form S-3 shelf registration statement, during any 12-month period, in an amount less than or equal to one-third of the public float. If the combined company does not meet this public float requirement, any offering by the combined company under a Form S-3 will be limited to raising an aggregate of one-third of the combined company’s public float in any 12-month period. In addition, a smaller reporting company is able to provide simplified executive compensation disclosures in its filings, is exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that an independent registered public accounting firm provide an attestation report on the effectiveness of internal control over financial reporting if its public float is less than $75 million, and has certain other reduced disclosure

 

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obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports. Reduced disclosure in the combined company’s SEC filings due to its status as a smaller reporting company may make it harder for investors to analyze its results of operations and financial prospects.

Aerpio and Aadi do not anticipate that the combined company will pay any cash dividends in the foreseeable future.

The current expectation is the combined company will retain its future earnings, if any, to fund the development and growth of the combined company’s business. As a result, capital appreciation, if any, of the combined company’s common stock will be stockholders’ sole source of gain, if any, for the foreseeable future.

An active trading market for the combined company’s common stock may not develop and its stockholders may not be able to resell their shares of common stock for a profit, if at all.

Prior to the merger, there had been no public market for Aadi’s common stock. An active trading market for the combined company’s shares of common stock may never develop or be sustained. If an active market for its common stock does not develop or is not sustained, it may be difficult for its stockholders to sell their shares at an attractive price or at all.

If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about the combined company, its business or its market, its stock price and trading volume could decline.

The trading market for the combined company’s common stock will be influenced by the research and reports that industry or equity research analysts publish about it and its business. Equity research analysts may elect not to provide research coverage of the combined company’s common stock after the completion of the merger, and such lack of research coverage may adversely affect the market price of its common stock. In the event it does have equity research analyst coverage, the combined company will not have any control over the analysts, or the content and opinions included in their reports. The price of the combined company’s common stock could decline if one or more equity research analysts downgrade its stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of the combined company or fails to publish reports on it regularly, demand for its common stock could decrease, which in turn could cause its stock price or trading volume to decline.

The combined company must maintain effective internal controls over financial reporting, and if the combined company is unable to do so, the accuracy and timeliness of the combined company’s financial reporting may be adversely affected, which could have a material adverse effect on the combined company’s business and stock price.

The combined company is expected to continue to be an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, and therefore will be able to take advantage of certain exemptions from various reporting requirements that are applicable to other companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

The combined company must maintain effective internal control over financial reporting in order to accurately and timely report its results of operations and financial condition. In addition, as a public company, the Sarbanes-Oxley Act requires, among other things, that the combined company assess the effectiveness of its disclosure controls and procedures quarterly and the effectiveness of the combined company’s internal control over financial reporting at the end of each fiscal year.

The rules governing the standards that must be met for the combined company management to assess the combined company’s internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act

 

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are complex and require significant documentation, testing and possible remediation. These stringent standards require that the combined company’s audit committee be advised and regularly updated on management’s review of internal control over financial reporting. The combined company’s management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that are applicable to the combined company as a public company. If the combined company fails to staff the combined company’s accounting, finance and information technology functions adequately or maintain internal control over financial reporting adequate to meet the demands that will be placed upon the combined company as a public company, including the requirements of the Sarbanes-Oxley Act, the combined company’s business and reputation may be harmed and its stock price may decline. Furthermore, investor perceptions of the combined company may be adversely affected, which could cause a decline in the market price of its common stock.

If the combined company fails to attract and retain management and other key personnel, it may be unable to continue to successfully develop or commercialize its product candidates or otherwise implement its business plan.

The combined company’s ability to compete in the highly competitive pharmaceuticals industry depends on its ability to attract and retain highly qualified managerial, scientific, medical, legal, sales and marketing and other personnel. The combined company will be highly dependent on its management and scientific personnel. The loss of the services of any of these individuals could impede, delay or prevent the successful development of the combined company’s product pipeline, completion of its planned clinical trials, commercialization of its product candidates or in-licensing or acquisition of new assets and could impact negatively its ability to implement successfully its business plan. If the combined company loses the services of any of these individuals, it might not be able to find suitable replacements on a timely basis or at all, and its business could be harmed as a result. The combined company might not be able to attract or retain qualified management and other key personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses.

Anti-takeover provisions in the combined company’s charter documents and under Delaware law could make an acquisition of the combined company more difficult and may prevent attempts by the combined company’s stockholders to replace or remove the combined company’s management.

Provisions in the combined company’s amended and restated certificate of incorporation and by-laws may delay or prevent an acquisition or a change in management. These provisions include a classified board of directors, a prohibition on actions by written consent of the combined company’s stockholders, and the ability of the board of directors to issue preferred stock without stockholder approval. In addition, because the combined company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the Delaware General Corporation Law (referred to as the “DGCL”), which prohibits stockholders owning in excess of 15% of the outstanding combined company’s voting stock from merging or combining with the combined company in certain circumstances. Although Aerpio and Aadi believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with the combined company’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the combined company’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

The by-laws of the combined company will provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between the combined company and its stockholders, which could limit its stockholders’ ability to obtain a favorable judicial forum for disputes with the combined company or its directors, officers or other employees.

The amended and restated by-laws of the combined company will provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery of the State of Delaware does not have jurisdiction, the federal

 

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district court for the District of Delaware) is the sole and exclusive forum for any state law claims for (i) any derivative action or proceeding brought on the combined company’s behalf, (ii) any action asserting a breach of fiduciary duty owed by any of its directors, officers or other employees or its stockholders to the combined company or its stockholders, (iii) any action asserting a claim against it arising pursuant to any provisions of the DGCL, or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, its amended and restated certificate of incorporation or its by-laws (including the interpretation, validity or enforceability thereof), or (iv) any action asserting a claim against it that is governed by the internal affairs doctrine; provided, that these choice of forum provisions do not apply to suits brought to enforce a duty or liability created by the Securities Act, the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. The amended and restated bylaws will provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or its directors, officers or other employees, which may discourage such lawsuits against the combined company and its directors, officers and other employees. If a court were to find the choice of forum provision contained in the by-laws to be inapplicable or unenforceable in an action, the combined company may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect the combined company’s business and financial condition. Any person or entity purchasing or otherwise acquiring any interest in shares of the combined company’s capital stock shall be deemed to have notice of and to have consented to the provisions of the combined company’s by-laws described above

The combined company will be a California-domiciled public company, and will be required to have at least two or three women on its board of directors by the end of 2021, depending on the size of its board at the time.

The combined company’s success depends in part on its continued ability to attract, retain and motivate highly qualified individuals to its board of directors. As a public company headquartered in California, the combined company will be required to have two or three women on its board of directors by the end of 2021, depending on the size of its board of directors at the time. The combined company has seven seats on its board of directors which will require it to have at least three women on its board of directors by the end of 2021. While it currently has one woman on the board of directors, recruiting and retaining board members carries uncertainty, and failure to comply with this California requirement will result in financial penalties.

The combined company’s employees may engage in misconduct or other improper activities, including violating applicable regulatory standards and requirements or engaging in insider trading, which could significantly harm the combined company’s business.

The combined company is exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations of the FDA and applicable non-U.S. regulators, provide accurate information to the FDA and applicable