GYRE THERAPEUTICS, INC. (GYRE) FY 2023 MD&A

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors.” You should carefully read the “Cautionary Note About Forward-Looking Statements” and “Risk Factors” sections of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from the results described below.

Overview

We are a financially-sustainable pharmaceutical company with a record of financial success that develops and commercializes small-molecule anti-inflammatory and anti-fibrotic drugs targeting organ diseases, focusing specifically on organ fibrosis. Fibrotic diseases represent a large patient population with significant unmet medical needs. Fibrosis involves a complex, multi-stage process with multiple pathways. While there are numerous potential targets for anti-fibrotic therapy, both established and emerging, addressing a single molecular pathway may not be sufficient to prevent, halt, or reverse fibrosis.

Our strategy is to use our experience in the successful development and commercialization of ETUARY® (Pirfenidone) to expand into new indications and develop similar drug candidates. Pirfenidone, the first anti-fibrotic drug approved for IPF in Japan, the EU, the U.S., and the PRC, is a small molecule drug that inhibits the synthesis of TGF-ß1, TNF-α, and other fibrosis and inflammation modulators. We have obtained approval for ETUARY (pirfenidone) in the PRC for IPF.

Gyre Pharmaceuticals successfully advanced Pirfenidone from R&D to commercialization in the PRC for the treatment of IPF. ETUARY’s annual sales have consistently grown each year, reaching $112.1 million in 2023. In addition to IPF, Pirfenidone is undergoing three additional Phase 3 studies for CTD-ILD to broaden its indications and market: SSc-ILD, DM-ILD and PD.

F351, our lead development candidate, is a structural derivative of ETUARY (Pirfenidone). It is a new oral chemical entity with an anti-fibrotic, TGF-ß1-targeting mechanism of action, for which we hold patents in major markets. Studies suggest that F351 and its major metabolites have minimal drug-drug interaction risks. Despite potential efficacy in IPF, we are prioritizing F351 for the treatment of liver fibrosis due to the large potential addressable market and significant unmet need.

Gyre Pharmaceuticals has completed a Phase 2 trial of F351 in the PRC for CHB-associated liver fibrosis. The Phase 2 trial showed that F351 was well-tolerated without notable toxicity and patients treated showed statistically-significant improvement of liver fibrosis, with the best efficacy results achieved at 270 mg/day dosing. Based on these results, a confirmatory Phase 3 trial is ongoing in the PRC. The enrollment of 248 patients for the confirmatory Phase 3 trial has been completed, with last patient out expected in 2024 and clinical results expected by early 2025.

In the U.S., we have completed a Phase 1 clinical trial of F351 in healthy volunteers. We are preparing an IND application and expect to submit it in late 2024. Following results from the PRC Phase 3 trial in CHB-associated liver fibrosis and pending approval of our IND, we expect to initiate a Phase 2a trial to evaluate F351 for the treatment of NASH-associated liver fibrosis in 2025.

F351 Asset Acquisition

On December 26, 2022, Catalyst, purchased the F351 Assets from GNI Japan and GNI Hong Kong, other than such assets and intellectual property rights located in the PRC, pursuant to the F351 Agreement.

Business Combination Agreement

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On December 26, 2022, Catalyst entered into a Business Combination Agreement, as amended on March 29, 2023 and August 30, 2023 (the “Business Combination Agreement”) with GNI USA, GNI Japan, GNI Hong Kong, SG (collectively with GNI USA, GNI Japan and GNI Hong Kong, the “Contributors,” and each a “Contributor”), certain individuals and CPI. On October 30, 2023 (the “Effective Time”), the Contributions (as defined below) became effective and Catalyst acquired an indirect controlling interest in Beijing Continent Pharmaceuticals Co., Ltd. (doing business as Gyre Pharmaceuticals Co., Ltd.). In connection with the Contributions, and immediately prior to the Effective Time of the Contributions, Catalyst amended its certificate of incorporation, increased the number of authorized shares of its common stock, par value $0.001 per share (the “Catalyst Common Stock”) from 100,000,000 shares to 400,000,000 shares, effected the Reverse Stock Split and changed its name to Gyre Therapeutics, Inc.

Shares of Catalyst Common Stock were previously listed on The Nasdaq Capital Market under the symbol “CBIO.” Catalyst filed a listing application for the combined company with the Nasdaq Stock Market Inc. (“Nasdaq”). On October 31, 2023, Gyre’s common stock commenced trading on the Nasdaq Capital Market under the symbol “GYRE”, on a post-reverse stock split adjusted basis.

Pursuant to the Business Combination Agreement, at the Effective Time of the Contributions, and after giving effect to the 1-for-15 reverse stock split:

a)
GNI USA contributed all of its ordinary shares in the capital of CPI to Catalyst in exchange for 45,923,340 shares of Gyre Common Stock (the “CPI Contribution”),

b)
GNI USA contributed its interest in Further Challenger International Limited (“Further Challenger”) for 17,664,779 shares of Gyre Common Stock (the “FC Contribution” and together with the CPI Contribution, the “GNI USA Contributions”), and

c)
each Minority Holder contributed 100% of the interest he or she held in his or her respective entity in exchange for an aggregate of 10,463,627 shares of Gyre Common Stock (the “Minority Holder Contributions” and together with the GNI USA Contributions, the “Contributions”).

As a result of the GNI USA Contributions, Gyre directly and indirectly holds 100% of CPI’s shares. Through Gyre’s ownership of CPI, prior to the Minority Holder Contributions, Gyre held a 56.0% indirect interest in Gyre Pharmaceuticals. Upon completion of the Minority Holder Contributions, Gyre obtained additional indirect interests in Gyre Pharmaceuticals and holds, in aggregate, a 65.2% indirect interest in Gyre Pharmaceuticals.

Immediately after the closing of the Contributions, excluding potentially dilutive securities, GNI USA owned approximately 83.6% of the outstanding shares of Gyre Common Stock, Catalyst’s existing stockholders, excluding GNI USA, owned approximately 2.8% of the outstanding Gyre Common Stock, and the Minority Holders owned approximately 13.7% of the outstanding shares of Gyre Common Stock. The Convertible Preferred Stock remained outstanding after the closing of the Contributions and is not included in the above ownership percentages.

At the Effective Time, Gyre Pharmaceuticals terminated its 2021 Stock Incentive Plan (the “2021 Plan”) and the options (the “Gyre Pharmaceuticals Options”) outstanding under the 2021 Plan were terminated and replaced with options granted under a subplan for Chinese participants under the Gyre 2023 Omnibus Incentive Plan (the “2023 Omnibus Incentive Plan”) that are substantially similar in all material respects to the Gyre Pharmaceuticals Options previously outstanding under the 2021 Plan.

Each share of Catalyst Common Stock and option to purchase Catalyst Common Stock that was issued and outstanding at the Effective Time remained issued and outstanding, and such shares and options were unaffected by the Contributions.

Gyre Pharmaceuticals is a commercial-stage biopharmaceutical company registered and established in the PRC in 2002. Gyre Pharmaceuticals is committed to the research and development of new drugs as well as manufacturing and commercialization of ETUARY (pirfenidone capsule) for the treatment of idiopathic pulmonary fibrosis and other pharmaceutical products. The registered office of Gyre Pharmaceuticals is located at 60 Shunkang Road, Shunyi District, Beijing, PRC.

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The immediate holding company of Gyre Pharmaceuticals is BJContinent Pharmaceuticals Limited (“BJC”). The intermediate holding company of Gyre Pharmaceuticals is CPI. Immediately following the GNI USA Contributions, the immediate holding company of CPI is Gyre. The majority stockholder of Gyre is GNI USA and the majority stockholder of GNI USA is GNI Japan.

The GNI USA Contributions were treated as an asset acquisition under U.S. generally accepted accounting principles (“U.S. GAAP”), with CPI treated as the accounting acquirer and presented as the predecessor for post-acquisition reporting purposes. Since Catalyst is the legal acquirer, the GNI USA Contributions were accounted for as a reverse asset acquisition. This determination was based upon the terms of the Business Combination Agreement and other factors including that, immediately following the GNI USA Contributions: (i) GNI USA (as the parent company of CPI immediately prior to the GNI USA Contributions) owns a substantial majority of the voting power of the combined company; (ii) GNI USA has the ability to control the board of directors of the combined company; and (iii) senior management of Gyre Pharmaceuticals and GNI USA hold a majority of the key positions in senior management of the combined company. Immediately prior to the closing of the GNI USA Contributions, Catalyst did not meet the definition of a business because Catalyst did not have an organized workforce that significantly contributed to its ability to create output, and substantially all of its fair value was concentrated in in-process research and development (“IPR&D”).

As of the closing date of the GNI USA Contributions, the net assets of Catalyst were recorded at their acquisition-date relative fair values in the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K and the reported operating results prior to the GNI USA Contributions are those of CPI.

The Minority Holder Contributions were treated as an equity transaction, where we obtained additional indirect interests in and maintained our control over Gyre Pharmaceuticals.

Contingent Value Rights Agreement

Concurrent with the signing of the Business Combination Agreement on December 26, 2022, Catalyst and the Rights Agent (as defined in the CVR Agreement) executed a contingent value rights agreement (the “CVR Agreement”), as amended on March 29, 2023, pursuant to which each CVR Holder, excluding the Sellers, received one contractual contingent value right (a “CVR”) issued by the Company for each share of Catalyst common stock held by such holders. Each CVR entitles the CVR Holder thereof to receive certain cash payments in the future. For additional information, see Note 13 — Commitments and Contingencies to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Reverse Stock Split

We effected a 1-for-15 reverse stock split immediately prior to the Effective Time of the Contributions. The par value of the Catalyst Common Stock following the Reverse Stock Split was not adjusted and remains at $0.001 per share. All of the Catalyst’s issued and outstanding common stock and options have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.

All share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented, unless otherwise indicated. Proportionate adjustments were made to the per share exercise price and the number of shares issuable upon the exercise or vesting of all stock options and warrants outstanding, which resulted in a proportional decrease in the number of shares of our common stock reserved for issuance upon exercise or vesting of such stock options, warrants, and in the case of stock options and warrants, a proportional decrease in the exercise price of such stock options and warrants.

No fractional shares were issued in connection with the Reverse Stock Split and stockholders who would otherwise be entitled to a fraction of one share received a proportional cash payment.

Private Placement and Securities Purchase Agreement

On October 27, 2023, we entered into the Securities Purchase Agreement for a private placement with GNI USA. Pursuant to the Securities Purchase Agreement, GNI USA agreed to purchase (i) 811 shares of Gyre’s Convertible

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Preferred Stock and (ii) warrants to purchase up to 811 shares of Convertible Preferred Stock (the “Preferred Stock Warrants”) for an aggregate purchase price of $5.0 million. The Private Placement closed immediately after the closing of the Contributions.

The Preferred Stock Warrants are exercisable at an exercise price of $4,915.00 per share of Convertible Preferred Stock and expire on October 30, 2033. Each share of Convertible Preferred Stock is convertible into approximately 666.67 shares of the Gyre Common Stock, as adjusted for the Reverse Stock Split. The Preferred Stock Warrants issued are considered freestanding financial instruments and classified as a liability.

Financial Operations Overview

During the year ended December 31, 2023, we had a net loss of $85.5 million and a net loss attributable to common stockholders of $92.9 million. For the year ended December 31, 2022, our net income was $4.3 million and net income attributable to common stockholders was $2.3 million. As of December 31, 2023, we had accumulated deficit of $85.5 million and cash and cash equivalents of $33.5 million. As of December 31, 2022, we had retained earnings of $7.4 million and cash of $25.2 million.

Components of Results of Operations

Revenues

Sales of Pharmaceutical Products

We generate revenue primarily through sales of ETUARY and certain generic drugs in the PRC. Distributors are our direct customers, and sales to distributors accounted for 100% of the revenue from ETUARY. Such distributors sell ETUARY to certain outlets, including hospitals and other medical institutions, as well as pharmacies.

License of Intellectual Property

Revenue from licensing intellectual property is recognized when the control of the right to use the license is transferred to the customer.

Operating Expenses

Cost of Revenue

Cost of revenue mainly consists of cost of sales representing direct and indirect costs incurred to bring the product to saleable condition. Cost of sales primarily consists of (i) raw material costs; (ii) staff costs for production employees; (iii) depreciation and amortization related to property and equipment and intangible assets used in production; (iv) taxes and surcharges; (v) transportation costs; and (vi) miscellaneous other costs.

Selling and Marketing Expenses

Selling and marketing expenses primarily relate to selling and marketing our product ETUARY in the PRC and consist of expenses incurred from hosting academic conferences, seminars and symposia; promotional expenses associated with market education on ETUARY for its use in hospitals; and staff costs primarily consisting of salaries and benefits for in-house marketing and promotion staff.

Research and Development Expenses

Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services used in research and development are initially deferred and capitalized in prepaid and other current assets. The capitalized amounts are then expensed as the related goods are delivered or services are performed, or until it is no longer expected that the goods or services will be delivered.

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Research and development costs consist primarily of costs related to the pre-clinical and clinical development of our product candidates, which include payroll and other personnel-related expenses, laboratory supplies and reagents, contract research and development services for pre-clinical research and clinical trials, materials, and consulting costs, as well as allocations of facilities, depreciation and other overhead costs.

General and Administrative Expenses

General and administrative expenses consist of (i) accounting, IT, legal, administrative, and other internal service staff costs; (ii) stock-based compensation representing share options granted to our functional employees; (iii) professional service fees, primarily for legal and accounting services; and (iv) other miscellaneous expenses.

Acquired IPR&D

Acquired IPR&D expenses represent costs incurred for acquisitions of IPR&D with no alternative future use, which are expensed immediately upon acquisition.

Divestiture Losses

Prior to the GNI USA Contributions, we recorded a loss from the divestiture of almost all our assets other than our 56.0% indirect ownership interest in Gyre Pharmaceuticals. This expense was reflected in our consolidated statements of operations and comprehensive (loss) income. The loss is presented net of the direct costs incurred with the transaction.

Loss on Disposal of Property and Equipment

Prior to the GNI USA Contributions, we recorded a loss on disposal of property and equipment. This expense was reflected in our consolidated statements of operations and comprehensive (loss) income. The loss is presented net of loses incurred in connection with the sale of property and equipment.

Other Income (Expense), Net

Interest Income, Net

Interest income consists primarily of interest earned on our long-term certificates of deposit. Interest income is recognized on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset.

Other Income

Other income consists mostly of government grants. Government grants are recognized at their fair value where there is reasonable assurance that the grant will be received, and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognized as income on a systematic basis over the periods that the costs, for which it is intended to compensate, are expensed. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to profit or loss over the expected useful life of the relevant asset by equal annual installments or deducted from the carrying amount of the asset and released to profit or loss by way of a reduced depreciation charge.

Change in Fair Value of Warrant Liability

In connection with the Private Placement, we issued the Preferred Stock Warrants, which are freestanding financial instruments classified as warrant liability since the underlying securities are contingently redeemable upon the occurrence of events which are outside of our control. The Preferred Stock Warrants are recorded at fair value upon issuance and are subject to remeasurement at the end of each reporting period, with any change in fair value recognized in our statements of operations as other (income) expense.

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Other Expenses

Other expense consists of any non-operating costs, such as loss from equity method investments.

Provision for Income Taxes

Provision for income taxes are comprised primarily of current income tax provision, mainly attributable to the profitable Gyre Pharmaceuticals operations in the PRC, and deferred income tax provision, mainly including deferred tax recognized for temporary differences in relation to research and development tax credit and net operating loss carry forwards for U.S. tax purposes, deemed income inclusions from controlled foreign corporations for U.S. tax purposes, and fixed and intangible assets, net of valuation allowances.

Results of Operations

The following tables summarize our results of operations for the years ended December 31, 2023 and 2022 (in thousands, except percentage change):

** Not meaningful.

Comparison of the Years Ended December 31, 2023 and 2022

Revenues

Revenues for the years ended December 31, 2023 and 2022 were $113.5 million and $102.3 million, respectively. The increase was primarily due to a $12.6 million increase in pharmaceutical product sales, driven by enhanced marketing and sales initiatives in regions of the PRC where sales were previously lower in 2022, partially offset by a $1.4 million decrease in revenue related to a one-time licensing fee recognized in 2022 from our license agreement with Fu Fang Chuan Gui Tincture entered into in 2021.

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Cost of Revenues

Cost of revenues for the years ended December 31, 2023 and 2022 was $4.6 million and $4.8 million, respectively. The decrease of $0.2 million was primarily driven by a $0.3 million reduction attributed to favorable foreign exchange rate fluctuations and a $0.2 million decrease in stock-based compensation expenses. These reductions were partially offset by a $0.3 million increase in cost of revenues due to increased sales. The change in stock-based compensation is related to options being fully vested in 2022 and the modification of option terms in 2023.

Selling and Marketing Expenses

Selling and marketing expenses increased by $6.9 million, or 12.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily driven by a $3.8 million increase in selling and marketing payroll costs due to an increase in staff headcount, a $3.5 million increase in promotional expenses, and a $0.7 million increase in traveling expenses of our sales staff, partially offset by a $1.3 million decrease in stock-based compensation. The change in stock-based compensation is related to options being fully vested in 2022 and the modification of option terms in 2023.

Research and Development Expenses

The table below details our costs for research and development for the years ended December 31, 2023 and 2022 (in thousands, except percentage change):

Research and development expenses decreased by $2.9 million, or 17.4%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily driven by a $1.8 million decrease in stock-based compensation, related to options being fully vested in 2022 and the modification of option terms in 2023, as well as by a $1.2 million decrease in pre-clinical research expenses. The latter is a result of several research and development projects advancing to the clinical trials stage or reaching the application phase in 2023. This overall decrease was partially offset by a $0.2 million increase in research and development payroll costs due to increased headcount.

General and Administrative Expenses

General and administrative expenses decreased by $2.7 million, or 15.6%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily driven by a $2.8 million decrease in stock-based compensation. The change in stock-based compensation is related to options being fully vested in 2022, the modification of option terms in 2023 and the new option grants offered after the GNI USA Contributions.

Acquired IPR&D

Acquired IPR&D expenses of $83.1 million for the year ended December 31, 2023 represent costs of incurred for acquisitions of IPR&D with no alternative future use, which were expensed immediately upon the closing of GNI USA Contributions.

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Divestiture Losses

During the year ended December 31, 2023, we recorded a loss of $2.7 million from the divestiture of almost all our assets other than our 56.0% indirect ownership interest in Gyre Pharmaceuticals. The loss is presented net of the direct costs incurred with the transaction.

Loss on Disposal of Property and Equipment

We recorded a loss on disposal of property and equipment of $0.6 million during the year ended December 31, 2023. The loss is presented net of loses incurred in connection with the sale of property and equipment.

Other Income (Expense), Net

Interest income increased by $0.3 million, or 43.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to additional investments in long-term certificates of deposit.

Other income increased by $0.2 million, or 25.6%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase in other income was mainly attributed to $1.0 million of PRC government grants income recognized during the year ended December 31, 2023 in comparison to $0.9 million of PRC government grants income recognized during the year ended December 31, 2022.

Change in fair value of warrant liability was a $9.3 million expense for the year ended December 31, 2023 and was related to the remeasurement of the Preferred Stock Warrants liability. There were no warrants outstanding during the year ended December 31, 2022.

Other expenses increased by $1.2 million, or 88.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. This increase was primarily driven by a $0.7 million increase in loss from equity method investments and $0.5 million in sponsorships for local charity events.

Provision for Income Taxes

Provision for income taxes was $8.5 million and $5.1 million for the years ended December 31, 2023 and 2022, respectively. The increase was primarily attributable to a higher profit from Gyre Pharmaceuticals operations and an increase in deferred tax asset.

Liquidity and Capital Resources

Sources of Liquidity

As of December 31, 2023, we had cash and cash equivalents of $33.5 million and long-term certificates of deposit of $23.4 million, which are available to fund operations, and an accumulated deficit of $85.5 million. Our net loss during the year ended December 31, 2023 was $85.5 million, while cash provided by operating activities was $25.9 million. We believe that our existing cash and cash equivalents, cash flows from operations, and access to capital markets will be sufficient to fund our operating activities and obligations for at least 12 months following the filing date of this Annual Report.

Future Funding Requirements

We expect to use cash flows from operations to meet our current and future financial obligations, including funding our operations, and capital expenditures. Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic, regulatory, and other factors, many of which we cannot control. Factors that may affect financing requirements include, but are not limited to:

•
the timing, progress, cost and results of our clinical trials, preclinical studies and other discovery and research and development activities;

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•
the timing and outcome of, and costs involved in, seeking and obtaining marketing approvals for our products, and in maintaining quality systems standards for our products;

•
the timing of, and costs involved in, commercial activities, including product marketing, sales and distribution;

•
our ability to successfully commercialize and to obtain regulatory approval for, and successfully commercialize our other or future product candidates;

•
increases or decreases in revenue from our marketed products, including decreases in revenue resulting from generic entrants or health epidemics or pandemics;

•
the number and development requirements of other product candidates that we pursue;

•
our ability to manufacture sufficient quantities of our products to meet expected demand;

•
the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other intellectual property rights, litigation costs and the results of litigation;

•
our ability to enter into collaboration, licensing or distribution arrangements and the terms and timing of these arrangements;

•
the potential need to expand our business, resulting in additional payroll and other overhead expenses;

•
the potential in-licensing of other products or technologies;

•
the emergence of competing technologies or other adverse market or technological developments; and

•
the impacts of inflation and resulting cost increases.

Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products and technologies.

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

Cash Flows from Operating Activities

Cash provided by operating activities for the year ended December 31, 2023 was $25.9 million, reflecting our net loss of $85.5 million, offset by non-cash items of $103.9 million primarily related to the acquired IPR&D of $83.1 million in connection with the GNI USA Contributions, $9.3 million related to the change in fair value of warrant liability, stock-based compensation of $7.3 million, divestiture losses of $2.7 million, and equity loss of unconsolidated affiliates of $1.3 million. Additionally, cash provided by operating activities reflected changes in net operating assets and liabilities of $7.5 million.

Cash provided by operating activities for the year ended December 31, 2022 was $10.7 million, reflecting our net income of $4.3 million and non-cash items of $14.2 million primarily related to stock-based compensation of $13.4 million, partially offset by net cash outflow of $7.8 million from the changes in net operating assets and liabilities.

Cash Flows from Investing Activities

Cash used in investing activities for the year ended December 31, 2023 was $19.8 million, which consisted of $15.7 million in purchases of certificates of deposit, $8.5 million in purchases of property and equipment and $1.0 million paid for equity method investment, partially offset by $5.6 million of cash acquired in connection with the GNI USA Contributions.

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Cash used in investing activities for the year ended December 31, 2022 was $13.8 million, which consisted of $7.5 million in purchases of certificates of deposit, $5.0 million in purchases of property and equipment and $1.3 million in cash paid for equity method investments.

Cash Flows from Financing Activities

Cash provided by financing activities for the year ended December 31, 2023 was $2.5 million due to the portion of proceeds from the issuance of Convertible Preferred Stock and Preferred Stock Warrants in the Private Placement received after the GNI USA Contributions.

There was no cash provided by or used in financing activities for the year ended December 31, 2022.

Contractual Obligations and Other Commitments

Leases

We have entered into lease arrangements in (1) San Diego, California for our headquarters, which expires on the last day of the 38th full calendar month beginning on or after November 11, 2023, and (2) the PRC, for office and laboratory spaces through August 2024. As of December 31, 2023, our fixed lease payment obligations were $0.4 million, with $0.2 million payable within 12 months.

Other Contractual Obligations and Commitments

In June 2021, we entered into a transfer agreement with Nanjing Healthnice Pharmaceutical Technology Co., Ltd. (“Nanjing Healthnice”), an independent third party, pursuant to which Nanjing Healthnice agreed to transfer to us the avatrombopag maleate tablets for the treatment of CLD-associated thrombocytopenia and all relevant technologies, complete any research or trials and transfer to us all materials necessary for the application of marketing approval by CDE. Upon the completion of the transfer, we expect that we will be approved by NMPA as the marketing authorization holder of the avatrombopag maleate tablets. In exchange, we will pay a total of approximately $2.3 million upon certain milestones (e.g., the completion of bioequivalence study, or the registration application to CDE) being met. We have completed the bioequivalence study and received CDE acceptance on August 1, 2022, and as of December 15, 2023, we have made total payments of approximately $1.8 million.

In September 2022, we entered into a transfer agreement with New Jiyuan (Beijing) Pharmaceutical Technology Co., Ltd. (“New Jiyuan”), an independent third party, pursuant to which New Jiyuan agreed to transfer to us the minocycline hydrochloride foam for the treatment of moderate to severe acne and all relevant technologies, complete product development and transfer to us all materials necessary for the application of marketing approval of CDE. Upon the completion of the transfer, we expect that we will be approved by NMPA as the marketing authorization holder of the minocycline hydrochloride foam. In exchange, we will pay a total amount of $1.0 million and the payments will be made by installments conditioned upon certain milestones (e.g., the completion of bioequivalence study, or the registration application to CDE) being met. Process verification has been completed. As of December 31, 2023, we have made total payments of approximately $0.7 million.

In December 2022, we entered into a transfer agreement with Hangzhou Baicheng Pharmaceutical Technology Co., Ltd. and Zhejiang CDMO Pharmaceutical Co., Ltd., an independent third party, pursuant to which Baicheng agreed to transfer to us the acetylcysteine injection for the treatment of respiratory diseases with excessive thick mucus discharge and all relevant technologies, assist us in completing any research, trial and other required procedures and transfer to us all materials necessary for the application of marketing approval of CDE. Upon the completion of this transfer agreement, we expect that we will be approved by NMPA as the marketing authorization holder of the acetylcysteine injection. We have received CDE acceptance on January 8, 2024. As of December 31, 2023, we have made payments totaling approximately $0.5 million under this agreement. Upon receiving the CDE's final approval, we will make an additional $40,000 in payments.

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Research and Development Programs

As of December 31, 2023, we have committed to allocate $12.7 million toward future research and development activities for various programs.

Property and Equipment

Our commitments related to the purchase of property and equipment contracted but not yet reflected in the consolidated financial statements were $2.8 million as of December 31, 2023 and are expected to be incurred within one year.

Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements and related disclosures in conformity with U.S. GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our significant accounting policies and methods used in preparation of the consolidated financial statements are described in Note 2 — Summary of Significant Accounting Policies to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.

Management believes our critical accounting policies and estimates discussed below are critical to understanding its historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

We record revenue in accordance with ASC Topic 606 (“ASC 606”), Revenue from Contracts with Customers, whereby revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. A five-step model is used to achieve the core principle: (1) identify the customer contract, (2) identify the contract’s performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations and (5) recognize revenue when or as a performance obligation is satisfied. We apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.

(a) Sale of Pharmaceutical Products

Revenue from the sale of pharmaceutical products is recognized at the point in time when control of the asset is transferred to the customer, generally on completion of delivery of the pharmaceutical products and quality inspection by the customer. For the sales of pharmaceutical products, most of our customers are distributors.

Revenue from product sales is recognized net of estimated sales discounts. These discounts are estimated based on sales volumes from the preceding months and applying the discount percentages specified in each contract.

Certain contracts for the sale of pharmaceutical products include certain sales rebates which are incurred after the control and rights of products have been passed to customers that give rise to consideration payable to a customer. As the specific amount of the rebates is not finalized at the point of revenue recognition, we make deductions from revenue based on historical experience. In estimating consideration payable to a customer, we are required to use either the expected value method or the most likely amount method depending on which method better predicts the amount of consideration to which the customer will be entitled. We regularly review the information related to these estimates and adjusts the amounts accordingly.

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To estimate the variable consideration for the expected future rebates, the most likely amount method is used for contracts with a single-volume threshold while the expected value method is used for contracts with more than one volume threshold. The selected method that best predicts the amount of variable consideration is primarily driven by the number of volume thresholds contained in the contract. The requirements on constraining estimates of variable consideration are applied and the expected future rebates are deducted from the trade receivables from the customers.

(b) License of intellectual property

Revenue from a license agreement is recognized when the control of the right to use the license is transferred to the customer. Milestone payments, which are included in the transaction price to the extent that it is highly probable that a significant reversal of accumulative revenue recognized will not occur, represent a form of variable consideration when the uncertainty associated with the variable consideration is subsequently resolved. At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered highly probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. Milestone payments, such as regulatory approvals, are not considered highly probable of being achieved until those approvals are received.

Research and Development Expenses and Accruals

Research and development expenses are expensed as incurred when these expenditures relate to our research and development services and have no alternative future uses.

Pre-clinical and clinical trial costs are a significant component of our research and development expenses. We have a history of contracting with third parties that perform various pre-clinical and clinical trial activities on our behalf in the ongoing development of our product candidates. Expenses related to pre-clinical and clinical trials are accrued based on our estimates of the actual services performed by the third parties for the respective period.

We estimate the amount of work completed through discussions with internal personnel and external service providers in conjunction with reporting information obtained directly from the external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We record the costs of research and development activities based upon the estimated services provided but not yet invoiced and include these costs in accrued expenses and other current liabilities in our consolidated balance sheets and in research and development expense in our consolidated statements of operations and comprehensive income (loss). We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates.

Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting expenses that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of research and development expenses.

Income Taxes

We record income taxes using the liability method, under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are recorded against deferred tax assets, including net operating losses and tax credits, when it is determined it is more-likely-than-not that some or all of the tax benefits will not be realized.

We account for uncertain tax positions in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes. When uncertain tax positions exist, we recognize the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.

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Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense, if any.

Stock-Based Compensation

We measure the cost of employee, non-employee and director services received in exchange for an award of equity instruments based on the fair value-based measurement of the award on the date of grant and recognize the related expense over the period during which an employee, non-employee or director is required to provide services in exchange for the award on a straight-line basis. The estimated fair value of equity awards that contain performance conditions is expensed over the term of the award once we have determined that it is probable that performance conditions will be satisfied.

Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by our assumptions regarding a number of variables including the fair value of our common stock, its expected common stock price volatility over the expected life of the options, expected term of the stock option, risk-free interest rates and expected dividends. We record stock-based compensation as a compensation expense, net of the forfeited awards. We elected to account for forfeitures when they occur. As such, we recognize stock-based compensation expense over their requisite service period based on the vesting provisions of the individual grants. Such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. We will continue to use judgment in evaluating the assumptions utilized for our stock-based compensation expense calculations on a prospective basis. See Note 12 — Stock Based Compensation to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information.

Warrant Liability

In connection with the Private Placement, we issued the Preferred Stock Warrants (see Note 3 — Fair Value Measurements and Financial Instruments to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K) which are freestanding financial instruments classified as warrant liability since the underlying securities are contingently redeemable upon the occurrence of events which are outside of our control. The Preferred Stock Warrants are recorded at fair value upon issuance and are subject to remeasurement at the end of each reporting period. We use the Black-Scholes option-pricing model to determine the fair value of the Preferred Stock Warrants which is affected by our assumptions regarding a number of variables, including the fair value of our Convertible Preferred Stock, the expected share price volatility over the expected life of the options, expected term of the warrant, risk-free interest rates and expected dividends. Such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our estimated fair value of warrant liability could be materially different. We will continue to use judgment in evaluating the assumptions utilized for our warrant liability fair value calculations on a prospective basis.

Smaller Reporting Company Status

We are a “smaller reporting company” as defined in the Exchange Act. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our ordinary shares held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our ordinary shares held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

Recent Accounting Pronouncements

Refer to Note 2 — Summary of Significant Accounting Policies to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a discussion of recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations.

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