LONA US Equity☆

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

You should read the following management’s discussion and analysis of financial condition and results of operations in conjunction with our consolidated financial statements and notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. This discussion and analysis and other parts of this report contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives, expectations, forecasts and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the section of this Annual Report on Form 10-K titled “Risk Factors” and elsewhere in this report. You should carefully read the “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section of this report titled “Special Note Regarding Forward-Looking Statements.”

Overview

We are a late clinical-stage biopharmaceutical company focused on developing small molecules to restore neuronal health and slow neurodegeneration. With our product candidates, we aim to provide rapid cognitive improvement and alter the course of neurological diseases, leveraging our novel mechanism of action. Our approach is designed to augment neuronal growth factor signaling through the hepatocyte growth factor/MET, or HGF/MET, a naturally occurring, repair and regenerative system. We believe enhancing HGF/MET signaling has the potential to protect existing neurons from damage, reduce inflammation, promote regeneration, and benefit brain physiology. We anticipate that all of these characteristics may improve neuronal health and translate into clinical benefits. Our pipeline is built from our proprietary drug discovery platform, or ATH platform, and consists of a series of small molecules that are designed to target either (1) the central nervous system, or CNS, by crossing the blood brain barrier, or BBB, or (2) the peripheral nervous system.

Our lead candidate, fosgonimeton (ATH-1017), is a subcutaneously administered, BBB-penetrating, small molecule HGF/MET positive modulator. The primary target indication is Alzheimer’s disease (AD). In our Phase 1a/b clinical trial, fosgonimeton was well tolerated in healthy young and elderly volunteers and AD subjects, without serious adverse events. This clinical trial recruited 88 subjects, including 11 AD subjects with mild-to-moderate AD, who were randomly assigned to active and control groups. Nonclinical studies and Phase 1 clinical trials with fosgonimeton demonstrated improvements in brain network activity indicating potentially positive effects on brain function. In AD subjects, multiple dosing of fosgonimeton significantly improved Event Related Potential (ERP) P300 latency. ERP P300 latency is a functional measure that is highly correlated with cognition; however, we have not yet established a connection between these ERP P300 latency results and improved cognition. In September 2020, we began site initiation and patient screening for LIFT-AD, our Phase 2/3 clinical trial with fosgonimeton designed with the potential to provide pivotal data in support of registration, for the treatment of mild-to-moderate AD, with topline results expected in the first half of 2023. In November 2020, we also initiated ACT-AD, a proof-of-concept Phase 2 clinical trial with ERP P300 latency as the primary endpoint, in mild-to-moderate AD, which trial is designed to better characterize the overall effects of fosgonimeton on working memory processing speed and cognitive measures, with topline results expected in the second quarter of 2022. In July 2021, we announced that we are enrolling patients into a 26-week open-label extension study for our LIFT-AD and ACT-AD clinical trials, which will allow us to collect up to a total of one year of safety data with fosgonimeton. In October 2021, we announced that we completed patient enrollment in our ACT-AD clinical trial. In January 2022, we increased the LIFT-AD study sample size by approximately 120 participants, from 300 to 420, to strengthen the statistical power of co-key secondary endpoints, including ADAS-Cog11.

The following figure illustrates the current development stage of our ATH compounds and discovery and development programs. In addition, we are expanding our ATH platform to additional indications in the CNS and peripheral nervous system as we aim to improve neuronal health in multiple disorders. Our drug

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discovery efforts are focused on exploring the potential of ATH technology, which is designed to promote HGF/MET activity for a variety of clinical applications.

The fosgonimeton LIFT-AD Phase 3 clinical trial may provide pivotal data in support of registration with the FDA.

We constantly strive to grow and optimize our portfolio through in-house discovery and plan on additional external business development activities enabled by our innovative internal research and development capabilities.

We were incorporated in March 2011 and since our inception, we have devoted substantially all of our resources to our research and development efforts such as small molecule compound discovery, nonclinical studies and clinical trials, as well as manufacturing activities, establishing and maintaining our intellectual property portfolio, hiring personnel, raising capital, and providing general and administrative support for these operations. We do not have any products approved for commercial sale, and we have not generated any revenues related to our products since inception. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend on the successful development of one or more of our product candidates which we expect will take a number of years.

We are focused on the development of small molecule therapeutics which enables us to use well-established and widely available manufacturing processes and infrastructure, formulation compositions and drug administration technologies or devices. We do not currently operate our own facilities for manufacturing, storing, or distributing our product candidates. We utilize third-party contract manufacturing organizations, or CMOs, to manufacture and supply our preclinical and clinical materials during the development of our product candidates. We believe the synthesis of fosgonimeton is reliable and reproducible and the synthetic methods can be further optimized to enable large-scale production that continues to avoid use of toxic materials or specialized equipment or handling during the manufacturing process. We plan to continue to optimize the manufacturing process to support future large-scale and commercial supply. Our goal is to identify and develop small molecule product candidates that are cost-effective to manufacture and easily transferable to third party CMOs. We expect to use similar contract resources for commercialization of our products, at least until our resources and operations are at a scale that justifies investment in internal manufacturing capabilities.

Given our stage of development, we have not yet established a commercial organization or distribution capabilities. We intend to build a commercial infrastructure to support sales of our product candidates. We expect to manage sales, marketing and distribution through internal resources and third-party relationships. While we may commit significant financial and management resources to commercial activities, we will also consider collaborating with one or more pharmaceutical companies to enhance our commercial capabilities.

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To date, we have funded our operations primarily through proceeds from the sale of equity securities, including proceeds from the sale and issuance of common stock in our IPO and in a subsequent follow-on public offering, the sale and issuance of convertible preferred stock, common stock warrants, and convertible notes, and to a lesser extent from grant income and stock option exercises. From inception to December 31, 2021, we have raised aggregate net cash proceeds of approximately $407.4 million primarily from the issuance of our common stock, convertible preferred stock, common stock warrants, and convertible notes. We have incurred significant operating losses to date. Our net losses were $54.9 million and $19.9 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $95.9 million and cash, cash equivalents and investments of $319.7 million.

We expect to continue to incur increasing operating losses for the foreseeable future as we:

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continue to advance fosgonimeton and our other product candidates through preclinical studies and clinical trials, and potentially further extend the open label extension of the ACT-AD and LIFT-AD trials;

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expand our pipeline of product candidates;

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continue to grow our discovery organization and invest in the ATH platform;

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ramp up manufacturing activities;

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attract, hire and retain additional personnel;

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obtain, maintain, expand and protect our intellectual property portfolio;

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operate as a public company;

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expand our laboratory and office facilities;

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implement operational, financial and management information systems;

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seek regulatory approval for any product candidates that successfully complete clinical trials;

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establish a sales, marketing and distribution infrastructure to commercialize any product candidate for which we may obtain marketing approval; and

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incur legal expenses associated with ongoing litigation, as further described in “Part I, Item 3—Legal Proceedings,” and elsewhere in this report.

Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities.

We will require substantial additional funding to support our continuing operations and further the development of our product candidates. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings, or other capital sources, which could include income from collaboration, licensing or similar arrangements, for the foreseeable future. Adequate funding may not be available when needed or on terms acceptable to us, or at all. If we are unable to raise additional capital as needed, we may have to significantly delay, scale back or discontinue development of our product candidates. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic and otherwise. If we fail to obtain necessary capital when needed on acceptable terms, or at all, it could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities. Based upon our current operating plan, we estimate that our existing cash, cash equivalents and investments will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 12 months following the date of this report.

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The global COVID-19 pandemic continues to evolve, and we will continue to monitor the COVID-19 situation closely. While COVID-19 related restrictions have been eased in many locations around the globe, including in Bothell, Washington, where our principal offices are located, a resurgence in cases of COVID-19 or similar health epidemic could occur at any time, and the ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. In particular, new and highly contagious variants of COVID‐19 continue to emerge and spread quickly throughout certain areas of the United States and elsewhere, and at this point we are unable to determine when and to what extent any such resurgence will affect our business. We will continue to actively monitor the evolving situation and ongoing impacts on our clinical trial enrollment, trial sites, contract research organizations, or CROs, third-party manufacturers, and other third parties with whom we do business, as well as on regulatory authorities and our key scientific and management personnel. As the situation evolves, we may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the ultimate extent to which the COVID-19 pandemic, or any potential resurgence of a variant thereof, may affect our business, operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain.

Our Collaboration and Grant Agreements

Amended and Restated Washington State University License Agreement

We are party to an amended and restated exclusive license agreement with Washington State University (“WSU”) that we entered into in September of 2015. Under this agreement, WSU granted us an exclusive license to make, use, sell, and offer for sale products covered by certain of the licensed patents, including dihexa, the chemical compound into which fosgonimeton metabolizes following administration. The term of the license continues until the earlier of the date in which no valid claim remains enforceable and the payment of royalties ceases for more than four consecutive quarters after such royalty payments begin.

The initiation of our first Phase 2 clinical trial in September 2020 triggered a $50,000 liability to WSU, which was repaid in full as of December 31, 2020.

We are obligated to pay to WSU the following if the related milestones are reached:

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$300,000 – At initiation of the first Phase 3 clinical trial in the United States, European Union or Japan for the first licensed product.

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$600,000 – Marketing approval in the United States, European Union or Japan for the first licensed product.

We are obligated to pay WSU a royalty in the mid-single digits of net sales.

Additionally, under the agreement we have the right to sublicense the licensed rights, subject to additional payments to WSU for sublicense consideration received. Such amounts are dependent on the terms of the underlying sublicense, and range from the mid-single digits to mid tens of any non-sales based payments received, and low twenties of net sales based sublicense royalties.

Grant Liability

In 2014 and 2015, we received $250,000 and $500,000, respectively, from the Washington Life Sciences Discovery Fund (“LSDF”) under the terms of two matching grant award agreements. The consummation of our initial public offering in September 2020 was a triggering event under the terms of the grant and the liability was remeasured to the pay-off amount of $1.5 million as of September 30, 2020 and repaid in full as of December 31, 2020.

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National Institutes of Health Grant

In December 2020, we accepted a grant from the National Institutes of Health (“NIH”) to support our ACT-AD Phase 2 clinical trial for fosgonimeton. Under the terms of the agreement, we may receive approximately $7.8 million with the potential for an additional $7.4 million up to an aggregate of $15.2 million. For additional information regarding this grant, see the section of this Annual Report on Form 10-K titled “Business—Our Collaboration and Grant Agreements.” We recognized $8.8 million and $1.1 million of income related to our NIH grant during the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, we received cash of $7.6 million in connection with the NIH grant. As of December 31, 2021 and 2020, we had incurred qualifying expenses in excess of cash received of approximately $2.3 million and $1.1 million, respectively, which is included in unbilled grant receivable on the consolidated balance sheets. In February 2022, we received cash of $2.3 million in connection with the unbilled grant receivable balance as of December 31, 2021.

Part the Cloud

In January 2019, the Alzheimer’s Association awarded us a $1.0 million Part the Cloud research grant. Grant proceeds must be used to advance our fosgonimeton product candidate in the Alzheimer’s disease setting. Reporting of expenses incurred supported by the grant as well as research updates are sent to the Alzheimer’s Association semi-annually. Under the terms of the agreement, we received $776,000 in 2019 and received the remaining $224,000 in March 2021 after having completed certain development milestones in October 2020. We recognize income related to the Part the Cloud research grant as qualifying expenses under the grant agreement are incurred. As of December 31, 2020, we had incurred qualifying expenses in excess of cash received of approximately $224,000, which is included in unbilled grant receivable on the consolidated balance sheets.

Components of Operating Results

Operating Expenses

Research and Development

Research and development expenses consist primarily of direct and indirect costs incurred for our research activities, including development of the ATH platform, our drug discovery efforts and the development of our product candidates. Direct costs include laboratory materials and supplies, contracted research and manufacturing, clinical trial costs, consulting fees, and other expenses incurred to sustain our research and development program. Indirect costs include personnel-related expenses, consisting of employee salaries, related benefits, and stock-based compensation expense for employees engaged in research and development activities, and facilities, including expenses associated with relocating to and building out our new lab space, and other expenses consisting of direct and allocated expenses for rent and depreciation, and lab consumables.

We expense research and development costs as incurred. Non-refundable advance payments for goods and services that will be used over time for research and development are capitalized and recognized as goods are delivered or as the related services are performed. In-licensing fees and other costs to acquire technologies used in research and development that have not yet received regulatory approval and that are not expected to have an alternative future use are expensed when incurred. We track direct costs by stage of program, clinical or preclinical. However, we do not track indirect costs on a program specific basis because these costs are deployed across multiple programs and, as such, are not separately classified.

As of the date of this report, we cannot reasonably determine the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. Product candidates in later stages of development generally have higher development costs than those in earlier stages. We expect that our research and development expenses will increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, as our product candidates advance into later stages of development, as we begin to conduct larger clinical trials, as we seek regulatory approvals for any product

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candidates that successfully complete clinical trials, as we expand our product pipeline, as we maintain, expand, protect and enforce our intellectual property portfolio, and as we incur expenses associated with hiring additional personnel to support our research and development efforts. In particular, we expect our research and development expenses will increase substantially as we conduct our Phase 2 and Phase 3 clinical trials for fosgonimeton, including the open-label extension for those trials. Additionally, we may experience an overall increase in research and development expenses as a result of inflation.

The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. Our research and development expenses may vary significantly based on factors such as:

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the number and scope of preclinical and IND-enabling studies;

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the phases of development of our product candidates;

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the progress and results of our research and development activities;

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per subject trial costs;

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the number of trials required for regulatory approval, in particular with respect to fosgonimeton for the treatment of mild-to-moderate AD;

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the potential to further extend the open label extension of the ACT-AD and LIFT-AD trials;

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the number of sites included in the trials;

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the countries in which the trials are conducted;

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the length of time required to enroll eligible subjects and initiate clinical trials;

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the number of subjects that participate in the trials;

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the drop-out and discontinuation rate of subjects;

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potential additional safety monitoring requested by regulatory agencies;

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the duration of subject participation in the trials and follow-up;

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the cost and timing of manufacturing of our product candidates;

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the receipt of regulatory approvals from applicable regulatory authorities;

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the timing, receipt and terms of any marketing approvals from applicable regulatory authorities;

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the hiring and retention of research and development personnel;

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the degree to which we obtain, maintain, defend and enforce our intellectual property rights;

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the impact of COVID-19 on timelines and clinical operations, which may lead to increased costs; and

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the extent to which we establish collaboration, licensing or similar arrangements and the performance of any related third parties.

A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate.

General and Administrative

General and administrative expenses consist primarily of personnel-related costs, consisting of employee salaries, related benefits, and stock-based compensation expense for our employees in the executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include third-party costs such as legal costs, insurance costs, accounting,

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auditing and tax related fees, consulting fees and facilities and other expenses not otherwise included as research and development expenses. We expense general and administrative costs as incurred.

We expect that our general and administrative expenses will increase substantially for the foreseeable future as we increase our headcount to support our continued research activities and development of our programs. We also anticipate that we will incur substantially increased expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, and those of any national securities exchange on which our securities are traded, legal, auditing, additional insurance expenses, investor relations activities, and other administrative and professional services. We expect an increase in legal expenses related to our ongoing class action litigation and proxy contest. We also expect to continue to increase the size of our administrative function to support the growth of our business. Additionally, we may experience an overall increase in general and administrative expenses as a result of inflation.

Grant Income

Grant income consists of income related to the NIH grant and the Part the Cloud grant, which was completed in 2020. Income from these grants is recognized as qualifying expenses under the grant agreements are incurred. We expect grant income associated with the NIH grant will increase in future years, as we expect qualifying expenses under the grant terms to increase substantially in relation to our continued research activities and development of our programs. Under the terms of the agreement, we may receive approximately $7.8 million, with the potential for an additional $7.4 million, up to an aggregate of $15.2 million.

Other Income (Expense), Net

Other income (expense), net consists of interest earned on our cash, cash equivalents, and investments, periodic mark-to-market gains and losses on the derivative, grant, and convertible preferred stock warrant liabilities carried at fair value, and interest expense on our convertible notes. In the future, we expect investment income to be the primary component of other income, net as the mark-to-market liabilities and convertible notes were all settled in 2020 and will no longer be adjusted to fair value.

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Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

The following table summarizes our results of operations for the periods presented:

Year Ended December 31,

Dollar %

(in thousands)

Operating expenses:

* Not meaningful

Research and Development Expenses

The following table shows the primary components of our research and development expenses for the periods presented:

Year Ended December 31,

Dollar %

(in thousands)

Direct costs:

Indirect costs:

Research and development expenses increased by $29.5 million, from $13.3 million for the year ended December 31, 2020 to $42.8 million for the year ended December 31, 2021. The increase was driven primarily by an increase in expenses for fosgonimeton of $23.8 million related to continued patient enrollment and clinical site visit activity for our Phase 2 and Phase 3 clinical trials and the corresponding open-label extension for our Phase 2 and Phase 3 clinical trials, an increase in personnel-related costs of $2.7 million due to an increase in headcount and stock-based compensation expense in connection with awards granted subsequent to our IPO, and an increase in preclinical research and development expenses of $2.6 million for new product candidates.

General and Administrative Expenses

General and administrative expenses increased by $14.5 million, from $6.7 million for the year ended December 31, 2020 to $21.2 million for the year ended December 31, 2021. The increase was primarily due to an increase in personnel-related costs of $5.5 million, due primarily to increases in headcount to support our continued growth and in stock-based compensation expense in connection with awards granted subsequent to our IPO, an increase in legal costs of $3.1 million, which includes costs related to legal proceedings and the board of directors' special committee investigation, an increase in insurance costs of

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$2.4 million, an increase in facilities costs of $1.4 million, an increase in business development expenses of $1.1 million, and to a lesser extent, increases in accounting, technical and consulting services expenses.

Grant Income

Grant income increased by $7.5 million, from $1.3 million for the year ended December 31, 2020 to $8.8 million for the year ended December 31, 2021. The increase was solely driven by research progress on our program that is reimbursable by the NIH grant, under which we recognized grant income of $8.8 million. Grant income recognized during the year ended December 31, 2020 under the Part the Cloud grant did not recur in the year ended December 31, 2021.

Other Income (Expense), Net

Other income (expense), net, changed from expense of $1.3 million for the year ended December 31, 2020 to income of $0.3 million for the year ended December 31, 2021. Other income for the year ended December 31, 2021 consisted of interest income on our available for sale securities. Other expense for the year ended December 31, 2020 consisted of losses on liability instruments recorded at fair value of $1.2 million, interest expense and accretion of discounts on convertible notes of $0.2 million, offset by a gain of $0.2 million on the extinguishment of convertible notes.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have funded our operations primarily with proceeds from the sale and issuance of common stock, convertible preferred stock, common stock warrants, and convertible notes, and to a lesser extent from grant income and stock option exercises. From our inception through December 31, 2021, we have raised aggregate net cash proceeds of $407.4 million primarily from the issuance of our common stock, convertible preferred stock, common stock warrants, and convertible notes.

Recent sales of our common stock were as follows:

Common Net

Shares Price Proceeds

Issued Per Share (in millions)

As of December 31, 2021, we had $319.7 million in cash, cash equivalents and investments and have not generated positive cash flows from operations. Since our inception, we have devoted substantially all of our resources to our research and development efforts such as small molecule compound discovery, nonclinical studies and clinical trials, as well as manufacturing activities, establishing and maintaining our intellectual property portfolio, hiring personnel, raising capital, and providing general and administrative support for these operations.

Material Cash and Future Funding Requirements

Our material cash requirements include our operating leases for laboratory and office facilities. As of December 31, 2021, we had lease payment obligations of $2.7 million, with $0.5 million payable within 12 months. For additional information regarding our lease commitments, see Note 9 to our consolidated financial statements included elsewhere in this report. We are contingently committed to $0.9 million of potential future research and development milestone payments, in addition to sales-based payments and royalties, under our license agreement with WSU. Payments generally are due and payable only upon achievement of certain developmental, regulatory, and sales milestones for which the specific timing cannot

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be predicted. Refer to Note 7 to our consolidated financial statements for additional information regarding the WSU license agreement. Additionally, we have purchase obligations and open purchase orders that support normal operations and are primarily due in the next 12 months. These purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions. We also anticipate that our research and development expenses and our general and administrative expenses will increase over at least the near-term as we advance our product candidates through clinical trials and increase our headcount to support our operations as we advance through clinical development and incur legal and other professional expenses related to our ongoing class action litigation and proxy contest. We cannot predict with certainty the amount and timing of these increased expenses.

Based upon our current operating plan, we estimate that our $319.7 million of cash, cash equivalents, and investments at December 31, 2021 will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 12 months following the date of this report. We will need to raise substantial additional capital to fund the development of our product candidates. Until such time as we can generate significant revenue from product sales, we expect to finance our operations through the sale of equity securities, debt financings, or other capital, which could include income from collaboration, licensing or similar arrangements with third parties, or receiving research contributions, or grants. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, licenses and other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. Adequate funding may not be available when needed or on terms acceptable to us, or at all. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic and otherwise. If we fail to obtain necessary capital when needed on acceptable terms, or at all, it could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. We cannot assure you that we will ever be profitable or generate positive cash flows from operating activities.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of biotechnology products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

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the scope, timing, progress and results of our ongoing preclinical studies and clinical trials of our product candidates;

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the number of trials required for regulatory approval, in particular with respect to fosgonimeton for the treatment of mild-to-moderate AD;

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the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials of other product candidates that we may pursue;

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our ability to establish and maintain collaboration, licensing or other similar arrangements, and the financial terms of any such arrangements, including the timing and amount of any future milestone, royalty or other payments due thereunder;

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the costs, timing and outcome of regulatory review of our product candidates;

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the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;

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the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;

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the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

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the costs related to ongoing legal proceedings;

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any expenses needed to attract, hire and retain skilled personnel;

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the costs of operating as a public company;

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the costs associated with expanding our laboratory and office facilities; and

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the extent to which we acquire or in-license other companies’ product candidates and technologies.

A change in the outcome of any of these or other factors with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plan may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plan.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

Year Ended December 31,

(in thousands)

Net cash provided by (used in):

Net increase in cash and cash equivalents $ 49,912 $ 58,569

Operating Activities

During the year ended December 31, 2021, net cash used in operating activities was $43.1 million. This consisted primarily of a net loss of $54.9 million, partially offset by non-cash charges of $5.6 million and a decrease in our net operating assets of $6.2 million. The non-cash charges primarily consisted of stock-based compensation expense, depreciation expense, and amortization of premiums and accretion of discounts on our available for sale securities. The decrease in our net operating assets was due to an increase in accounts payable and accrued expenses and a decrease in prepaid expenses and other current assets, partially offset by an increase in unbilled grant receivable.

During the year ended December 31, 2020, net cash used in operating activities was $24.1 million. This consisted primarily of a net loss of $19.9 million, partially offset by non-cash charges of $2.3 million and an increase in our net operating assets of $6.5 million. The non-cash charges primarily consisted of stock-based compensation expense, non-cash interest expense and accretion of discounts on our convertible notes, changes in the carrying value of liabilities stated at fair value, and the gain on extinguishment of our convertible notes. The increase in our net operating assets was due to an increase in unbilled grant receivable and prepaid expenses and other current assets and a decrease in grant liabilities, partially offset by an increase in accounts payable and accrued expenses.

Investing Activities

During the year ended December 31, 2021, net cash used in investing activities was $4.1 million. This consisted primarily of purchases of available-for-sale securities of $299.2 million and purchases of property

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and equipment of $1.6 million, partially offset by maturities of available-for-sale securities of $278.6 million and sales of available-for-sale securities of $18.1 million.

During the year ended December 31, 2020, net cash used in investing activities was $210.1 million. This consisted primarily of purchases of available-for-sale securities of $226.8 million and purchases of property and equipment of $2.3 million, partially offset by maturities of available-for-sale securities of $19.1 million.

Financing Activities

During the year ended December 31, 2021, net cash provided by financing activities was $97.1 million, primarily driven by proceeds received from our follow-on public offering, and to a lesser extent from exercises of stock options.

During the year ended December 31, 2020, net cash provided by financing activities was $292.8 million. This consisted primarily of net proceeds received from our IPO of $208.5 million, net proceeds of $81.9 million from the issuance of our Series B convertible preferred stock and common stock warrants, $1.7 million from the issuance of our convertible notes, and to a lesser extent from exercises of stock options and common stock warrants.

Critical Accounting Policies, Significant Judgments and Use of Estimates

Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Derivative Liability, Convertible Notes Discount and Amortization

Our convertible notes had conversion and redemption features that met the definition of an embedded derivative and were therefore subject to derivative accounting. The initial fair value of the derivative was recorded as a discount to the convertible notes, with a corresponding derivative liability. The discount to the convertible notes was amortized using the effective interest method. The amortization of the discount was included in other income (expense), net in our statements of operations and comprehensive loss. The derivative liability related to these features was recorded at estimated fair value on a recurring basis. Any changes in fair value were reflected in other income (expense), net in our statements of operations and comprehensive loss at each period end while such instruments were outstanding. The derivative liability was remeasured to fair value until its settlement in May 2020 upon the conversion of the underlying convertible notes into shares of our Series B-1 convertible preferred stock.

Convertible Preferred Stock Warrant Liability

Freestanding warrants to purchase shares of our convertible preferred stock were accounted for as liabilities at fair value, because the shares underlying the warrants contained contingent redemption features outside our control. Warrants classified as liabilities are recorded on the balance sheets at their fair value on the date of issuance and remeasured to fair value on each subsequent reporting period, with the changes in fair value recognized as a component of other income (expense), net in the statements of operations. The liability is adjusted for changes in the fair value of these warrants until the earlier of the

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exercise of the warrants, the expiration of the warrants, or until such time as the warrants are no longer considered liability instruments. The convertible preferred stock warrant liability was remeasured to fair value until its settlement in September 2020 upon the net exercise of warrants in connection with our IPO.

Grant Liability

The grant liability associated with the grants from the LSDF was accounted for under Accounting Standards Codification, or ASC, 825-10, Financial Instruments—Overall. The estimated fair value of the grant liability was reassessed at each balance sheet date, with changes in fair value reflected in other income (expense), net in our statements of operations and comprehensive loss at each period end. The fair value of the grant liability was estimated using a discounted cash flow simulation methodology that assigns probabilities to the timing and likelihood of each triggering event, each of which is disclosed in Note 7 to our consolidated financial statements included elsewhere in this report, as well as a discount rate based on market data for securities with similar durations and credit ratings to us, and the expected payment amount. The assumptions used to calculate the fair value of the grant liability were subject to significant judgment, and payment may be in an amount different from the liability that we estimate. The consummation of our IPO in September 2020 was a triggering event under the terms of the grant and the liability was remeasured to the pay-off amount of $1.5 million as of September 30, 2020 and repaid in full as of December 31, 2020.

Grant Income

In January 2019, the Alzheimer’s Association awarded us a $1.0 million Part the Cloud research grant. Grant proceeds must be used to advance our fosgonimeton product candidate in the Alzheimer’s disease setting. In December 2020, we accepted a grant from the National Institutes of Health (“NIH”) to support our ACT-AD Phase 2 clinical trial for fosgonimeton. Under the terms of the agreement, we may receive approximately $7.8 million with the potential for an additional $7.4 million up to an aggregate of $15.2 million. We recognize income related to the Part the Cloud research grant and NIH grant within the consolidated statement of operations and comprehensive loss as qualifying expenses under the grant agreement are incurred. We record qualifying expenses incurred in excess of cash received in unbilled grant receivable on the consolidated balance sheets.

Research and Development Costs

Research and development costs, including costs associated with our clinical trials, are expensed as incurred. In-licensing fees and other costs to acquire technologies used in research and development that have not yet received regulatory approval and that are not expected to have an alternative future use are expensed when incurred. Non-refundable advance payments for goods and services that will be used over time for research and development are capitalized and recognized as goods are delivered or as the related services are performed. We estimate the period over which such services will be performed and the level of effort to be expended in each period. If actual timing of performance or the level of effort varies from the estimate, we will adjust the amounts recorded accordingly. We have not experienced any material differences between accrued or prepaid costs and actual costs since inception.

Stock-based Compensation

We maintain a stock-based compensation plan as a long-term incentive for employees, non-employee directors and consultants. The plan allows for the issuance of incentive stock options, non-qualified stock options, restricted stock units, and other forms of equity awards.

We recognize stock-based compensation expense for stock options on a straight-line basis over the requisite service period and account for forfeitures as they occur. Our stock-based compensation costs for stock options are based upon the grant date fair value of options estimated using the Black-Scholes option pricing model. To the extent any stock option grants are made subject to the achievement of a

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performance-based milestone, management evaluates when the achievement of any such performance-based milestone is probable based on the relative satisfaction of the performance conditions as of the reporting date.

The Black-Scholes option pricing model utilizes inputs which are highly subjective assumptions and generally require significant judgment. These assumptions include:

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Fair Value of Common Stock. See the subsection titled “—Common Stock Valuations” below.

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Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.

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Expected Volatility. Because we were privately held prior to September 2020 and do not yet have sufficient trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded life sciences companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on the similar size, stage in life cycle or area of specialty. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.

•

Expected Term. The expected term represents the period that the stock-based awards are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term), as we do not have sufficient historical data to use any other method to estimate expected term.

•

Expected Dividend Yield. We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.

See Note 12 to our consolidated financial statements included elsewhere in this report for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options. Certain of 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 could be materially different.

We recognize stock-based compensation expense for restricted stock units on a straight-line basis over the requisite service period and account for forfeitures as they occur. We recognize compensation expense for restricted stock unit grants subject to performance-based milestone vesting using the accelerated attribution method over the remaining service period when we determine that achievement of the milestone is probable. We evaluate when the achievement of a performance-based milestone is probable based on the relative satisfaction of the performance conditions as of the reporting date. Our stock-based compensation costs for restricted stock units are based upon the fair market value of our common stock based on its closing price as reported on the date of grant on the Nasdaq Global Select Market.

We recorded stock-based compensation expense of $4.6 million and $0.6 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, there was $10.2 million of total unrecognized stock-based compensation expense related to non-vested stock options which we expect to recognize over a remaining weighted-average period of 1.52 years. As of December 31, 2021, there was $4.8 million of total unrecognized stock-based compensation expense related to non-vested restricted stock units which we expect to recognize over a remaining weighted-average period of 1.33 years. We expect to continue to grant stock options and other equity-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

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Common Stock Valuations

Historically, for all periods prior to our IPO, since there was no public market of our common stock, the fair value of the shares of common stock underlying our share-based awards was estimated on each grant date by our board of directors. To determine the fair value of our common stock underlying option grants, our board of directors considered, among other things, input from management, valuations of our common stock prepared by unrelated third-party valuation firms in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant, and factors that may have changed from the date of the most recent valuation through the date of the grant. These factors include, but are not limited to:

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our results of operations and financial position, including our levels of available capital resources;

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our stage of development and material risks related to our business;

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progress of our research and development activities;

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our business conditions and projections;

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the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies;

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the lack of marketability of our common stock as a private company;

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the prices at which we sold shares of our convertible preferred stock to outside investors in arms-length transactions;

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the rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;

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the likelihood of achieving a liquidity event for our securityholders, such as an initial public offering or a sale of our company, given prevailing market conditions;

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the hiring of key personnel and the experience of management;

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trends and developments in our industry; and

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external market conditions affecting the life sciences and biotechnology industry sectors.

For our valuations performed prior to December 31, 2019, we used the option pricing method, or OPM, back-solve method. In an OPM framework, the back-solve method for inferring the equity value implied by a recent financing transaction involves making assumptions for the expected time to liquidity, volatility and risk-free rate and then solving for the value of equity such that value for the most recent financing equals the amount paid. This method was selected as management concluded that the contemporaneous financing transaction was an arms-length transaction.

For our valuations performed subsequent to December 31, 2019, we used a hybrid method of the OPM and the Probability-Weighted Expected Return Method, or PWERM. PWERM considers various potential liquidity outcomes. Our approach included the use of an initial public offering scenario and a scenario assuming continued operation as a private entity. Under the hybrid OPM and PWERM method, the per share value calculated under the OPM and PWERM are weighted based on expected exit outcomes and the quality of the information specific to each allocation methodology to arrive at a final estimated fair value per share of the common stock before a discount for lack of marketability is applied.

Since the completion of our IPO in September 2020, our board of directors determines the fair market value of our common stock based on its closing price as reported on the date of grant on the Nasdaq Global Select Market.

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Income Taxes

We recognize deferred income taxes for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. In evaluating our valuation allowance, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance.

As of December 31, 2021, we had $9.5 million of federal net operating loss, or NOL, carryforwards and $2.9 million of tax credit carryforwards which expire over a period of 10 to 16 years. As of December 31, 2021, we had $80.7 million of such NOLs that do not expire.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, substantial changes in our ownership may limit the amount of NOL and research and development credit carryforwards that could be used annually in the future to offset taxable income. The tax benefits related to future utilization of federal and state NOL carryforwards, credit carryforwards, and other deferred tax assets may be limited or lost if cumulative changes in ownership exceeds 50% within any three-year period. We have not completed a Section 382/383 analysis under the Code regarding the limitation of NOL and credit carryforwards. If a change in ownership were to have occurred, the annual limitation may result in the expiration of NOL carryforwards and credits before utilization.

We record unrecognized tax benefits as liabilities or reduce the underlying tax attribute, as applicable, and adjust them when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this report for additional information.

Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

We will remain an emerging growth company until the earliest to occur of: (1) the last day of the fiscal year in which we have at least $1.07 billion in annual revenue; (2) the last day of the fiscal year in which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide the information requested by this item pursuant to Item 305 of Regulation S-K.

Item 8. Financial Statements and Supplementary Data.

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Athira Pharma, Inc.

Index to Financial Statements

Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 132

Consolidated Balance Sheets 133

Consolidated Statements of Operations and Comprehensive Loss 134

Consolidated Statements of Cash Flows 136

Notes to Consolidated Financial Statements 137

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Athira Pharma, Inc.:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Athira Pharma, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2018.

Seattle, Washington

March 28, 2022

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Athira Pharma, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

December 31,

Assets

Current assets:

Prepaid expenses and other current assets 4,704 6,355

Operating lease right-of-use asset 1,460 936

Other long-term assets 56 132

Liabilities and stockholders' equity

Current liabilities:

Current operating lease liability 288 124

Operating lease liability, less current portion 1,632 876

Stockholders' equity:

Accumulated other comprehensive (loss) income (388 ) 33

Total liabilities and stockholders' equity $ 332,008 $ 279,563

The accompanying notes are an integral part of these consolidated financial statements.

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Athira Pharma, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

Year Ended December 31,

Operating expenses:

Other income (expense), net 334 (1,281 )

Unrealized (loss) gain on available-for-sale securities (421 ) 33

Comprehensive loss attributable to common stockholders $ (55,274 ) $ (19,922 )

The accompanying notes are an integral part of these consolidated financial statements.

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Athira Pharma, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(in thousands, except share amounts)

Accumulated Total

Shares Amount Shares Amount Capital Income (Loss) Deficit Equity

Stock-based compensation — — — — 633 — — 633

Unrealized gain on available-for-sale securities — — — — — 33 — 33

Stock-based compensation — — — — 4,623 — — 4,623

Unrealized loss on available-for-sale securities — — — — — (421 ) — (421 )

The accompanying notes are an integral part of these consolidated financial statements.

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Athira Pharma, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Year Ended December 31,

Operating activities

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation expense 479 2

Other non-cash expense — 1,401

Changes in operating assets and liabilities:

Unbilled grant receivable (1,036 ) (1,300 )

Prepaid expenses and other current assets 1,650 (6,310 )

Accounts payable and accrued liabilities 5,150 2,601

Operating lease liability 396 64

Grant Liability — (1,500 )

Net cash used in operating activities (43,098 ) (24,113 )

Investing activities

Purchases of available-for-sale securities (299,197 ) (226,837 )

Maturities of available-for-sale securities 278,639 19,053

Proceeds from sales of available-for-sale securities 18,052 —

Purchases of property and equipment (1,573 ) (2,320 )

Principal payments received on stockholder note receivable — 36

Net cash used in investing activities (4,079 ) (210,068 )

Financing activities

Proceeds from exercise of common stock options and common stock warrants 327 643

Proceeds from public offering, net of issuance costs 96,762 208,517

Net cash provided by financing activities 97,089 292,750

Net increase in cash and cash equivalents 49,912 58,569

Cash and cash equivalents, beginning of period 60,625 2,056

Cash and cash equivalents, end of period $ 110,537 $ 60,625

Supplemental disclosures of cash flow information:

Recognition of derivative liability upon issuance of convertible notes $ — $ 774

The accompanying notes are an integral part of these consolidated financial statements.

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ATHIRA PHARMA, INC.

Notes to Consolidated Financial Statements

1. Description of Business

Organization

Athira Pharma, Inc. (the “Company”) was incorporated as M3 Biotechnology, Inc. in the state of Washington on March 31, 2011 and reincorporated in the state of Delaware on October 27, 2015. In April 2019, the Company changed its name to Athira Pharma, Inc. The Company currently has office and laboratory space in Bothell, Washington. The Company is a late clinical-stage biopharmaceutical company focused on developing small molecules to restore neuronal health and stop neurodegeneration.

Reverse Stock Split

On September 11, 2020, the Company effected a one-for-7.9302 reverse split of its issued and outstanding common stock, convertible preferred stock, warrants, and stock options.The par value of the common stock and convertible preferred stock was not adjusted as a result of the reverse stock split. All share and per share amounts in the accompanying consolidated financial statements and notes to the consolidated financial statements have been retroactively adjusted for all periods presented to reflect the reverse stock split.

Initial Public Offering

In September 2020, the Company completed its initial public offering of common stock (“IPO”) in which the Company issued and sold 12,000,000 shares of common stock at a public offering price of $17.00 per share, resulting in net proceeds of $186.4 million after deducting underwriting discounts and commissions and offering expenses paid by the Company. In October 2020, the Company sold an additional 1,397,712 shares of common stock to the underwriters of the IPO upon partial exercise of the underwriters’ option to purchase additional shares at the initial public offering price of $17.00 per share, less underwriting discounts and commissions and offering costs resulting in additional net proceeds to the Company of approximately $22.1 million.

In connection with the closing of the IPO, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into 12,503,009 shares of common stock. Immediately prior to the Company’s IPO, all outstanding common stock warrants were exercised into 1,085,334 shares of common stock. Additionally, all outstanding Series B convertible preferred stock warrants were remeasured to their fair value. The final remeasurement of the Series B convertible preferred stock warrant liability resulted in a $0.6 million loss which was recorded to other income (expense), net. Following remeasurement, all Series B convertible preferred stock warrants automatically net exercised into 59,093 shares of common stock and the corresponding liability was reclassified to additional paid in capital. Following the IPO, there are no shares of convertible preferred stock, common stock warrants, or Series B convertible preferred stock warrants outstanding.

Follow-on Public Offering

In January 2021, the Company completed a follow-on public offering of its common stock. As part of the follow-on offering, the Company issued and sold 4,000,000 shares of its common stock at a public offering price of $22.50 per share. The Company received net proceeds of approximately $84.1 million from the follow-on offering, after deducting underwriting discounts and commissions and offering costs. In February 2021, the Company sold an additional 600,000 shares of common stock to the underwriters of the follow-on public offering upon full exercise of the underwriters’ option to purchase additional shares at the follow-on public offering price of $22.50 per share, less underwriting discounts and commissions and offering costs resulting in additional net proceeds to the Company of approximately $12.7 million.

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Liquidity and Capital Resources

Since the Company’s inception, it has funded its operations primarily with proceeds from the sale and issuance of common stock, convertible preferred stock, common stock warrants, and convertible notes, and to a lesser extent from grant income and stock option exercises. From the Company’s inception through December 31, 2021, it has raised aggregate net cash proceeds of $407.4 million primarily from the issuance of its common stock, convertible preferred stock, common stock warrants, and convertible notes. As of December 31, 2021, the Company had $319.7 million in cash, cash equivalents, and investments and had not generated positive cash flows from operations. Since the Company’s inception, it has devoted substantially all of its resources to its research and development efforts such as small molecule compound discovery, nonclinical studies and clinical trials, as well as manufacturing activities, establishing and maintaining the Company’s intellectual property portfolio, hiring personnel, raising capital, and providing general and administrative support for these operations.

Based upon the Company’s current operating plan, it estimates that its $319.7 million of cash, cash equivalents, and investments at December 31, 2021 will be sufficient to fund its operating expenses and capital expenditure requirements through at least the next 12 months following the date of the Company’s Annual Report on Form 10-K.

2. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). During the third quarter of 2020, the Company incorporated Athira Pharma Australia PTY LTD in Australia and since its creation, the Australian subsidiary’s financial position and results of operations are consolidated in the accompanying consolidated financial statements. Certain prior period amounts have been reclassified to conform to current period presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Estimates include those used for fair value of assets and liabilities, accrued liabilities, valuation allowance for deferred tax assets, and stock-based compensation. Management evaluates related assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents.

Short-term and Long-term Investments

The Company generally invests its excess cash in investment grade short- to intermediate-term fixed income securities. Such investments are included in cash and cash equivalents, short-term investments, and long-term investments on the consolidated balance sheets, classified as available-for-sale, and reported at fair value with unrealized gains and losses included in accumulated other comprehensive income or loss. Realized gains and losses on the sale of these securities are recognized in net loss.

The Company periodically evaluates whether declines in fair values of its investments below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to

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hold the investment until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not it will be required to sell any investment before recovery of its amortized cost basis. Factors considered include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, other publicly available information that may affect the value of the investments, duration and severity of the decline in value, and our strategy and intentions for holding the investment.

Concentration of Credit Risk

The Company is exposed to credit risk from its deposits of cash in excess of amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses on its deposits of cash since inception.

Property and Equipment

Property and equipment consist of computer equipment, computer software, laboratory equipment, leasehold improvements and furniture and office equipment. Property and equipment are recorded at cost and depreciation is recognized using the straight-line method based on estimated useful life, generally three to five years. Leasehold improvements are amortized over the shorter of their useful life or the remaining lease term. Maintenance and repairs are charged to expense as incurred, and costs of improvements are capitalized.

The Company reviews long-lived assets for impairment whenever events or circumstances indicate the carrying amount of an asset group may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess of the asset's carrying amount over its fair value. Gains and losses from asset disposals and impairment losses are classified within the consolidated statements of operations and comprehensive loss in accordance with the use of the asset. There were no impairment losses in the years ended December 31, 2021 and 2020 as there have been no events warranting an impairment analysis.

Fair Value Measurements

The carrying amounts of certain financial instruments, including cash, cash equivalents, investments, accounts payable and accrued expenses approximate their fair values due to the short-term nature of those financial instruments. The fair values of the grant liability to Washington Life Sciences Discovery Fund (“LSDF”), currently managed by the Washington State Department of Commerce, the derivative liability, and the convertible preferred stock warrant liability were estimated using level 3 unobservable inputs.

Convertible Preferred Stock Warrant Liability

Freestanding warrants to purchase shares of the Company’s convertible preferred stock were accounted for as liabilities at fair value, because the shares underlying the warrants contained contingent redemption features outside the control of the Company. Warrants classified as liabilities are recorded on the Company’s balance sheets at their fair value on the date of issuance and remeasured to fair value on each subsequent reporting period, with the changes in fair value recognized as a component of other income (expense), net in the accompanying statements of operations and comprehensive loss. The Company adjusted the liability for the final change in the fair value of these warrants immediately preceding their automatic exercise in connection with the Company’s IPO. Subsequent to the Company’s IPO, the corresponding liability was reclassified to additional paid in capital.

Grant Liability

The grant liability associated with the grants from the Washington LSDF was accounted for under Accounting Standards Codification (“ASC”) 825-10, Financial Instruments − Overall. The estimated fair value of the grant liability was reassessed at each balance sheet date, with changes in fair value reflected

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in other income (expense), net. The Company estimated the fair value of the grant liability by using a discounted cash flow simulation methodology that assigns probabilities to the timing and likelihood of each triggering event, a discount rate based on market data for securities with similar durations and credit ratings to the Company, and the expected payment amount. The assumptions used to calculate the fair value of the grant liability were subject to significant judgment. The consummation of the Company’s IPO in September 2020 was a triggering event under the terms of the grant and the liability was remeasured to the pay-off amount of $1.5 million and repaid in full as of December 31, 2020. See Note 7.

Derivative Liability, Convertible Notes Discount and Amortization

The Company’s convertible notes (see Note 8) had conversion and redemption features that met the definition of an embedded derivative and were therefore subject to derivative accounting. The initial fair value of the derivative was recorded as a discount to the convertible notes, with a corresponding derivative liability. The discount to the convertible notes was amortized using the effective interest method. The amortization of the discount is included in other income (expense), net in the statements of operations and comprehensive loss. The derivative liability related to these features was recorded at estimated fair value on a recurring basis. Any changes in fair value were reflected in other income (expense), net in the statements of operations and comprehensive loss at each period end while such instruments were outstanding. The derivative liability was settled in May 2020 upon conversion of the underlying convertible notes into Series B-1 convertible preferred stock. See Note 10.

Grant Income

Grant income in the accompanying consolidated statements of operations and comprehensive loss consisted of the following (in thousands):

Year Ended December 31,

Alzheimer's Association Part the Cloud Research Grant $ — $ 245

National Institutes of Health Grant 8,835 1,076

Amounts recorded in the accompanying consolidated balance sheets as unbilled grant receivable from these granting agencies were as follows (in thousands):

December 31,

Alzheimer's Association Part the Cloud Research Grant $ — $ 224

National Institutes of Health Grant 2,336 1,076

Total unbilled grant receivable $ 2,336 $ 1,300

In January 2019, the Alzheimer’s Association awarded the Company a $1.0 million Part the Cloud research grant. Grant proceeds must be used to advance the Company’s fosgonimeton product candidate in the Alzheimer’s disease setting. Reporting of expenses incurred supported by the grant as well as research updates are sent to the Alzheimer’s Association semi-annually. Under the terms of the agreement, the Company received $776,000 in 2019 and received the remaining $224,000 in March 2021 after having completed certain development milestones in October 2020. The Company recognized income related to the Part the Cloud research grant as qualifying expenses under the grant agreement were incurred.

In December 2020, the Company accepted a grant from the National Institute on Aging (“NIA”) of the National Institutes of Health (“NIH”) to support its ACT-AD Phase 2 clinical trial for fosgonimeton, the Company’s lead therapeutic candidate being developed for the treatment of individuals with mild-to-moderate Alzheimer’s disease. Under the terms of the agreement, the Company may potentially receive

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$7.8 million with the potential for an additional $7.4 million, up to an aggregate of $15.2 million. The Company recognizes income related to the NIH grant as qualifying expenses under the grant agreement are incurred. The Company received cash of $7.6 million related to the NIH grant during the year ended December 31, 2021.

Research and Development Expenses

Research and development expenses consist primarily of direct and indirect costs incurred for research activities, including development of the pipeline from the Company’s proprietary drug discovery platform (“ATH platform”), the Company’s drug discovery efforts and the development of its product candidates. Direct costs include laboratory materials and supplies, contracted research and manufacturing, clinical trial costs, consulting fees, and other expenses incurred to sustain the Company’s research and development program. Indirect costs include personnel-related expenses, consisting of employee salaries, related benefits, and stock-based compensation expense for employees engaged in research and development activities, and facilities and other expenses consisting of direct and allocated expenses for rent and depreciation and lab consumables.

Research and development costs are expensed as incurred. In-licensing fees and other costs to acquire technologies used in research and development that have not yet received regulatory approval and that are not expected to have an alternative future use are expensed when incurred. Non-refundable advance payments for goods and services that will be used over time for research and development are capitalized and recognized as goods are delivered or as the related services are performed. The Company estimates the period over which such services will be performed and the level of effort to be expended in each period. If actual timing of performance or the level of effort varies from the estimate, the Company adjusts the amounts recorded accordingly. The Company has not experienced any material differences between accrued or prepaid costs and actual costs since inception.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related costs, consisting of employee salaries, related benefits, and stock-based compensation expense for employees in the executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include third-party costs such as legal costs, insurance costs, accounting, auditing and tax related fees, consulting fees and facilities and other expenses not otherwise included as research and development expenses. General and administrative costs are expensed as incurred.

Leases

The Company adopted Accounting Standards Codification (“ASC”) Topic 842 - Leases effective January 1, 2020. The Company determines if an arrangement contains a lease at inception. The Company performed an evaluation of contracts in accordance with ASC 842 and has determined it has an operating lease agreement for the laboratory and office facilities that the Company occupies. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized at the date the underlying asset becomes available for the Company’s use. Operating lease liabilities are based on the present value of the future minimum lease payments over the lease term. ROU assets are measured at the amount of the lease liability, adjusted for any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. As the Company’s leases generally do not provide an implicit interest rate, the present value of the future minimum lease payments is determined using the Company’s incremental borrowing rate. This rate is an estimate of the collateralized borrowing rate the Company would incur on its future lease payments over a similar term and is based on the information available to the Company at the lease commencement date, discussed in more detail below.

The Company’s leases contain options to extend the leases; lease terms are adjusted for these options only when it is reasonably certain the Company will exercise these options. The Company’s lease agreements do not contain residual value guarantees or covenants.

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The Company has made a policy election regarding its real estate leases not to separate non-lease components from lease components, to the extent they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease expense. The Company’s lease includes variable non-lease components, such as common-area maintenance costs. The Company has elected not to record on the balance sheet a lease that has a lease term of 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise. The Company accounts for leases with initial terms of 12 months or less as operating expenses on a straight-line basis over the lease term.

Lease expense is recognized within operating expenses on a straight-line basis over the terms of the lease. Incentives granted under the Company’s facilities lease, including rent holidays, are recognized as adjustments to lease expense on a straight-line basis over the term of the lease.

Stock-based Compensation

The Company measures compensation expense for all stock-based payments to employees, officers and directors based on the estimated fair value of the award at the grant date. For stock options, the Company estimates the grant date fair value of each option award using the Black-Scholes option-pricing model. The grant date fair value of restricted stock units is based upon the fair market value of the Company’s common stock based on its closing price as reported on the date of grant on the Nasdaq Global Select Market. Compensation expense is recognized over the requisite service period on a straight-line basis. Forfeitures are recognized as they occur.

The Company records compensation expense for stock option and restricted stock unit grants subject to performance-based milestone vesting over the remaining implicit service period when management determines that achievement of the milestone is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the relative satisfaction of the performance conditions as of the reporting date.

The Company adopted Accounting Standards Update (“ASU”) 2018-07 as of January 1, 2020. As a result, stock-based payments issued to non-employees prior to January 1, 2020 have been recorded at their fair values as of the transition date and are no longer subject to periodic adjustments as the underlying equity instruments vest. Any remaining compensation expense is recognized over the remaining vesting term on a straight-line basis, which reflects the service period, based on the fair value as of January 1, 2020.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the Company’s ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future income, tax planning strategies in making this assessment.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in

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which the change in judgment occurs. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for incomes taxes.

Comprehensive Loss Attributable to Common Stockholders

Comprehensive loss attributable to common stockholders consists of net loss and other gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net loss. The Company’s comprehensive loss attributable to common stockholders is comprised of net loss and unrealized gains and losses on available-for-sale securities.

Net Loss Per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period, without consideration of potentially dilutive securities. Diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders since the effect of potentially dilutive securities is anti-dilutive given the net loss of the Company.

Foreign Currency Transaction Remeasurement Adjustments

Monetary assets and liabilities denominated in foreign currencies were translated into U.S. dollars, the reporting currency, at the exchange rate prevailing at the balance sheet date. Income and expenses denominated in foreign currencies were translated into U.S. dollars at the average exchange rate for the period and the transaction remeasurement adjustments are reported within other income (expense), net in the consolidated statement of operations and comprehensive loss. The functional currency of the Company’s Australian subsidiary is the U.S. dollar.

Segments

The Company has determined that it operates and manages one operating segment, which is the business of developing and commercializing therapeutics. The Company’s chief operating decision maker, its chief executive officer, reviews financial information on an aggregate basis for the purpose of allocating resources.

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it is (a) no longer an emerging growth company or (b) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act, unless early adoption is permitted. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments: Credit Losses (Topic 326) as clarified in ASU 2019-04, ASU 2019-05, and ASU 2020-02. The objective of the standard is to provide information about expected credit losses on financial instruments at each reporting date and to change how other-than-temporary impairments on investment securities are recorded. The ASU will become effective beginning January 1, 2023, with early adoption permitted. The Company is currently evaluating the potential

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impacts of the ASU on its financial condition, results of operations, cash flows and financial statement disclosures.

Although there were several other new accounting pronouncements issued or proposed by the FASB, the Company does not believe any of these have had or will have material impact on its consolidated financial statements.

3. Fair Value

The Company has certain assets and liabilities that are measured at fair value on a recurring basis according to a fair value hierarchy that prioritizes the inputs, assumptions and valuation techniques used to measure fair value. The three levels of the fair value hierarchy are:

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2—Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3—Inputs are generally unobservable and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are determined using model-based techniques, including probability-based simulation methodologies.

The determination of a financial instrument’s level within the fair value hierarchy is based on an assessment of the lowest level of any input that is significant to the fair value measurement. The Company considers observable data to be market data, which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The following tables reflects the Company’s financial asset balances measured on a recurring basis (in thousands):

Level AmortizedCost UnrealizedGains UnrealizedLosses FairValue

Cash equivalents:

Money market fund 1 $ 57 $ — $ — $ 57

Short-term investments:

Long-term investments:

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Level AmortizedCost UnrealizedGains UnrealizedLosses FairValue

Cash equivalents:

Money market fund 1 $ 5 $ — $ — $ 5

U.S. government debt and agency securities 2 4,999 — — 4,999

Short-term investments:

U.S. government debt and agency securities 2 31,835 7 — 31,842

Long-term investments:

All the commercial paper, U.S. government debt, municipal bonds and agency securities, U.S. treasury bills, and corporate bonds designated as short-term investments have an effective maturity date that is equal to or less than one year from the respective balance sheet date. Those that are designated as long-term investments have an effective maturity date that is more than one year, but less than two years, from the respective balance sheet date.

The Company evaluated its investments for other-than-temporary impairment and considers the decline in market value for the securities to be primarily attributable to current economic and market conditions. For the investments, it is not more-likely-than-not that the Company will be required to sell the investments, and the Company does not intend to do so prior to the recovery of the amortized cost basis.

Prior to the IPO, the Company’s level 3 financial liabilities carried at fair value and remeasured on a recurring basis are the grant liability, derivative liability, and the convertible preferred stock warrant liability. In the third quarter of 2020 the Company recorded an additional $464,000 to bring the total grant liability to $1.5 million as the Company’s IPO triggered the repayment obligation (see Note 7), and the derivative was settled upon the Company’s conversion of its convertible notes in May 2020 (see Note 8). The losses resulting from the change in fair value of the grant liability, the bifurcated conversion and redemption features related to the derivative liability, and the convertible preferred stock warrant liability are classified as other income (expense), net in the accompanying consolidated statements of operations and comprehensive loss. Changes in any of the assumptions related to the unobservable inputs identified may change the fair value of these instruments. For example, an increase in interest rates would generally correspond to a decrease in the fair value of the liabilities.

The following table presents the activity for the grant liability (in thousands):

Fair value at beginning of period $ 1,036

Change in fair value of grant liability 464

Grant liability settled upon completion of IPO (1,500 )

Fair value at end of period $ —

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The following table presents the activity for the derivative liability (in thousands):

Fair value at beginning of period $ 999

Derivative liability recorded upon issuance of convertible notes 774

Change in fair value of derivative liability 132

Derivative liability settled upon conversion of convertible notes (1,905 )

Fair value at end of period $ —

The following table presents the activity for the convertible preferred stock warrant liability (in thousands):

Fair value at beginning of period $ —

Recognition of convertible preferred stock warrant liability 364

Change in fair value 641

Settlement upon IPO (1,005 )

Fair value at end of period $ —

Prior to the IPO, the activity for the convertible preferred stock warrant liability presented in the table above was shown in the Company’s financial statements as level 3. Following the IPO, the preferred stock warrant liability was revalued based on the IPO price of $17.00 per share.

4. Property and Equipment, Net

Property and equipment consisted of the following (in thousands):

December 31,

Office furniture, fixtures, and computer equipment 325 —

Leasehold improvement 2,563 —

Property and equipment, at cost 4,280 2,720

Less: accumulated depreciation (523 ) (71 )

Property and equipment, net $ 3,757 $ 2,649

Depreciation expense was $479,000 and $2,000 for the years ended December 31, 2021 and 2020, respectively.

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5. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

December 31,

Research and development expenses $ 5,723 $ 1,169

Employee compensation and benefits 1,907 1,624

Professional services and other 807 330

Total accrued liabilities $ 8,437 $ 3,123

6. Other Income (Expense), Net

Other income (expense), net consisted of the following (in thousands):

Year Ended December 31,

Interest and other income $ 337 $ 124

Interest expense (3 ) (367 )

Change in fair value of derivative liability — (132 )

Change in fair value of grant liability — (464 )

Change in convertible preferred stock warrant liability — (641 )

Gain on extinguishment of convertible notes — 199

Total other income (expense), net $ 334 $ (1,281 )

7. Significant Agreements

Washington State University (“WSU”) License Agreement

The Company is party to an amended and restated exclusive license agreement with sublicensing terms between the Company and Washington State University (“WSU”) that the Company entered into in 2015. Under this agreement, the Company has an exclusive license to make, use, sell, and offer for sale products covered by certain licensed patents, including dihexa, the chemical compound into which fosgonimeton metabolizes following administration.

To keep in good standing, the agreement requires the Company to meet certain development milestones and pay annual maintenance fees. All contractual requirements have been met as of December 31, 2021.

During the year ended December 31, 2020, the Phase 2 clinical trial milestone had been reached and a payment of $50,000 to WSU was recorded.

The Company may also be obligated to pay the following if the related milestones are reached:

•

$300,000 – At initiation of the first Phase 3 clinical trial in the United States, European Union or Japan for the first licensed product; and

•

$600,000 – Upon receipt of marketing approval in the United States, European Union or Japan for the first licensed product.

Under the terms of the agreement, the Company will pay a royalty in the mid-single digits of net sales, with the first $100,000 of net sales being exempt from royalty payment, and annual minimum royalty payments of $25,000 beginning after the first commercial sale of a licensed product. As of December 31, 2021, no sales of any licensed products had occurred and the Company had not incurred a royalty obligation under this agreement.

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Additionally, the agreement allows the Company to sublicense the rights conveyed by the agreement, subject to additional payments to WSU based upon the sublicense consideration received in such event. Such amounts are dependent on the terms of the underlying sublicense and range from the mid-single digits to mid-teens of any non-sales based payments received, and low twenties of net sales based sublicense royalties. As of December 31, 2021, the Company has not entered into or incurred any liability from a sublicense agreement.

LSDF Grant Liability

In 2014 and 2015, the Company received $250,000 and $500,000, respectively, from LSDF under the terms of two matching grant award agreements. In connection with the agreements, LSDF retained the right to receive cash payments of 2.0 times the amounts received, or $1.5 million, upon the occurrence of specified triggering events, including:

•

receipt of license revenue, sales revenue, or consideration related to the underlying IP;

•

transfers the underlying IP without receiving consideration;

•

relocation of the Company from Washington state;

•

completion of an initial public offering;

•

a third-party acquisition of a controlling interest in the Company, and;

•

termination of the agreements.

To appropriately capture the economics of this arrangement, the grant liability was accounted for under ASC 825-10, Financial Instruments − Overall. The estimated fair value of the grant liability was reassessed at each balance sheet date, with changes in fair value reflected in other income (expense), net. To determine the estimated fair value of the grant liability, the Company used a discounted cash flow simulation methodology that assigns probabilities to the timing and likelihood of each triggering event, a discount rate based on market data for securities with similar durations and credit ratings to the Company, and the expected payment amount. The assumptions used to calculate the fair value of the grant liability were subject to significant judgment, and payment may have been in an amount different from the liability that the Company estimated. However, total payments under the agreements would not exceed $1.5 million.

The consummation of the Company’s IPO in September 2020 was a triggering event under the terms of the grant and the liability was remeasured to the pay-off amount of $1.5 million prior to settlement. The change in the fair value of the liability resulted in expense of approximately $464,000 for the year ended December 31, 2020, which was included in other income (expense), net in the accompanying consolidated statements of operations and comprehensive loss.

8. Convertible Notes

The Company issued unsecured convertible notes with an aggregate principal amount of $1.7 million in 2020. Previously, the Company issued unsecured convertible notes with aggregate principal amounts of $0.9 million and $1.3 million in 2019 and 2018, respectively. The notes accrued interest at a rate of 5% per year and mature in December 2021, unless earlier converted. No principal or interest was payable prior to maturity as the convertible notes and any accrued interest would automatically convert upon a qualified financing event at a conversion price equal to 85% of the price per share of the qualified financing. Holders may have also elected to convert their notes to shares of common stock upon the maturity of the notes at the then fair value of common stock. If the Company experienced a change in control, holders may have either converted the outstanding principal amount plus any accrued interest into shares of common stock at the then fair value of common stock or may have required the Company to repurchase the notes in cash at a price equal to 200% of the outstanding principal amount plus any accrued interest.

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Certain conversion and redemption features as described above were determined to be an embedded derivative requiring bifurcation and separate accounting in accordance with ASC 815, Derivatives and Hedging. The fair value of the embedded derivative was determined using a discounted cash flow simulation methodology that assigns probabilities to the timing and likelihood of each event. The discount rate was determined based on market interest rate data for securities with similar durations and credit ratings to the convertible notes. The fair value of the embedded derivative was recorded as a liability with an offsetting amount recorded as a discount on the convertible notes at each issuance. The discount is being amortized to interest expense using the effective interest method over the contractual term of the notes.

In May 2020, the outstanding principal balance of the convertible notes of $3.8 million and accrued interest of $160,000 converted into 512,858 shares of Series B-1 convertible preferred stock.

The excess of the carrying value of the convertible notes and the derivative liability over the fair value of the Series B-1 convertible preferred stock at conversion resulted in a gain upon extinguishment of $199,000.

9. Commitments and Contingencies

Legal Proceedings

From time to time, we are subject to various legal proceedings or claims that arise in the ordinary course of business. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, and as of December 31, 2021, we have not recorded any such liabilities. The following is a brief description of the more significant legal proceedings.

Securities Class Actions

On June 25, 2021, plaintiffs Fan Wang and Hang Gao filed a putative securities class action lawsuit in the U.S. District Court for the Western District of Washington against the Company and the Company’s former Chief Executive Officer Dr. Leen Kawas, captioned Wang v. Athira Pharma, Inc., et al., No. 2:21-cv-00861. Plaintiffs Wang and Gao assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, alleging that the defendants made materially false and misleading statements and omitted material adverse facts regarding the Company’s business. Specifically, the Wang plaintiffs allege that the Company failed to disclose to investors that certain research conducted by Dr. Kawas was allegedly tainted by scientific misconduct during her doctoral work at WSU, including the manipulation of data, and that as a result, the defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading. The Wang plaintiffs seek unspecified compensatory and punitive damages, and reasonable costs and expenses, including attorneys’ fees.

That same day, on June 25, 2021, plaintiff Harshdeep Jawandha filed a putative securities class action lawsuit in the U.S. District Court for the Western District of Washington against the Company, Dr. Kawas, the Company’s Chief Financial Officer, certain members of the Company’s board of directors at the time of the Company’s IPO, as well as the IPO underwriters, captioned Jawandha v. Athira Pharma, Inc., et al., No. 2:21-cv-00862. The Jawandha complaint asserts violations of Sections 11 and 15 of the Securities Act of 1933, alleging that that the Company’s IPO registration statement was materially false and misleading because it omitted to state that certain of Dr. Kawas’s published doctoral research papers at WSU contained allegedly improperly altered images, that the research was allegedly foundational to the Company’s efforts to develop treatments for Alzheimer’s disease, and that the defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading. The plaintiff seeks unspecified compensatory damages, and reasonable costs and expenses, including attorneys’ fees.

Also on June 25, 2021, plaintiffs Timothy Slyne and Tai Slyne filed a putative securities class action lawsuit in the U.S. District Court for the Western District of Washington against the Company, Dr. Kawas,

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the Company’s Chief Financial Officer, and the same members of the Company’s board of directors and underwriters as in the Jawandha complaint, captioned Slyne v. Athira Pharma, Inc. et al., No. 2:21-cv-00864. The Slyne complaint asserts violations of Sections 11 and 15 of the Securities Act of 1933, alleging that purported issues with Dr. Kawas’s doctoral research at WSU should have been disclosed in the Company’s IPO registration statement. The Slyne plaintiffsseek unspecified compensatory damages, reasonable costs and expenses, including attorneys’ fees, and injunctive and other equitable relief.

On August 9, 2021, the district judge presiding over Wang v. Athira Pharma, Inc., et al., No. 2:21-cv-00861, issued an order consolidating the three cases under that case number. On October 5, 2021, the district court issued an order appointing lead plaintiffs and approved their selection of lead and liaison counsel.

On January 7, 2022, lead plaintiffs filed a consolidated amended complaint, which asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and Sections 11, 12, and 15 of the Securities Act of 1933. The consolidated amended complaint is brought against the Company, Dr. Kawas, the Company’s chief financial officer, certain members of our board of directors at the time of our IPO and secondary public offering (SPO), and the IPO and SPO underwriters. As with the previous complaints, it is based on allegations that the IPO and SPO registration statements and/or other public statements were materially false and misleading because they omitted to state that certain of Dr. Kawas’s published doctoral research papers at WSU contained allegedly improperly altered images. Lead plaintiffs seek unspecified compensatory damages, equitable and injunctive relief, and reasonable costs and expenses, including attorneys’ fees, on behalf of themselves and the purported class. On March 8, 2022, the defendants filed a motion to dismiss lead plaintiffs’ consolidated amended complaint for failure to state a claim under the federal securities laws.

The Company cannot predict the outcome of these suits, and failure by the Company to obtain a favorable resolution of these suits could have a material adverse effect on its business, results of operations and financial condition. The Company’s chances of success on the merits are still uncertain and any possible loss or range of loss cannot be reasonably estimated and as such the Company has not recorded a liability as of December 31, 2021.

Indemnifications

In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company enters into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company currently has directors’ and officers’ insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid.

Operating Leases

The Company has operating leases for laboratory and office facilities in Bothell, Washington that expire in August 2027. The initial terms of the leases range from 6.3 to 7 years and the Company has options to extend the leases for an additional five years that it is not reasonably certain to exercise. As of December 31, 2021, the Company was not party to any finance leases.

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The following table reconciles the Company’s undiscounted operating lease cash flows to its operating lease liability (in thousands):

Total undiscounted lease payments 2,748

Present value adjustment for minimum lease commitments (548 )

Tenant improvement allowance receivable (280 )

Net lease liability $ 1,920

The weighted average remaining lease term and the weighted average discount rate used to determine the operating lease liability were as follows:

Weighted average remaining lease term (years) 5.9

Weighted average discount rate 8.1 %

Operating lease expense was $323,000 for the year ended December 31, 2021. Separately, variable lease expense was $108,000 for operating leases during the year ended December 31, 2021.