GYRE THERAPEUTICS INC

Notes to Condensed Consolidated Financial Statements (Unaudited)

Description of Business

Gyre Therapeutics, Inc. (the “Company,” “Gyre,” or the “combined company”), formerly known as Catalyst Biosciences, Inc. (“Catalyst”), is a biopharmaceutical company originally incorporated in Delaware on March 7, 1997 under the name Targacept, Inc. Catalyst was a biopharmaceutical company with expertise in protease engineering. Prior to ceasing research and development activities in March 2022, Catalyst had several protease assets that were designed to address unmet medical needs in disorders of the complement or coagulation systems.

On October 30, 2023, the Company consummated the transactions (the “Contributions”) contemplated by the Business Combination Agreement as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “Annual Report”), which were accounted for as a reverse asset acquisition and a purchase of noncontrolling interest in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”). Continent Pharmaceuticals Inc. (“CPI”) was treated as the accounting acquirer of the reverse asset acquisition and is presented as the predecessor for post-acquisition financial reporting purposes. CPI holds an indirect controlling interest in Beijing Continent Pharmaceuticals Co., Ltd. (d/b/a Gyre Pharmaceuticals Co., Ltd., “Gyre Pharmaceuticals”), a commercial-stage biopharmaceutical company registered and established in the People’s Republic of China (“PRC”) in 2002.

After consummation of the Contributions, the immediate holding company of CPI became Gyre. The Company holds in aggregate a 65.2% indirect interest in Gyre Pharmaceuticals. The majority shareholder of Gyre is GNI USA, Inc. (“GNI USA”), which is indirectly wholly owned by GNI Group Ltd. (“GNI Japan”). Gyre is a financially-sustainable pharmaceutical company with a record of success in developing and commercializing small-molecule anti-inflammatory and anti-fibrotic drugs targeting organ diseases, focusing specifically on organ fibrosis. Fibrotic diseases represent a large patient population with significant unmet medical needs.

Liquidity

For the nine months ended September 30, 2024, the Company had net income of$17.3 million, while net cash used in operating activities was$0.9 million. As of September 30, 2024, the Company had an accumulated deficit of$73.4 million and cash and cash equivalents of$15.9 million. Based on the Company’s current operating plan, management believes that existing cash and cash equivalents, cash flows from operations, and access to capital markets will be sufficient to fund the Company’s operating activities and obligations for at least 12 months following the issuance of these condensed consolidated financial statements.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its controlled subsidiaries. All intercompany accounts and transactions among consolidated entities were eliminated upon consolidation. The condensed consolidated financial statements have been prepared in accordance with GAAP and following the requirements of the Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the Company’s condensed consolidated financial information. These condensed consolidated results of operations and cash flows for any interim period are not necessarily indicative of the results to be expected for the year ending December 31, 2024, or for any other future annual or interim period.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the consolidated financial statements filed with the Annual Report.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance of doubtful accounts, long-term receivable, contingent value right (“CVR”) derivative liability, warrant liability, allowance for credit losses, reserves for excess or obsolete inventory, operating lease right-of-use assets and liabilities, recognition of research and development expenses to the appropriate financial reporting period based on the progress of the research and development projects, income taxes, stock-based compensation and useful lives of property and equipment and intangibles with definite lives. The Company bases its estimates on various assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Risks and Uncertainties

The Company is subject to a number of risks associated with companies at a similar stage, including dependence on key individuals, competition from larger and established companies, uncertainty of clinical results, ability to obtain adequate financing to support growth, the ability to attract and retain additional qualified personnel to manage the anticipated growth of the Company, and general economic conditions.

Concentration of Credit Risk

In May 2015, a new Deposit Insurance System (“DIS”) managed by the People’s Bank of China was implemented by the Chinese government. Deposits in the licensed banks in mainland China are protected by DIS, up to a limit of Chinese Renminbi (“RMB”)500,000. The Company maintains cash and deposits at commercial banks in excess of the amount protected by DIS and the Federal Deposit Insurance Corporation and in the event of bankruptcy of one of these financial institutions, the Company may be unable to claim its deposits back in full. Management believes that these financial institutions are of high credit quality and continually monitors the creditworthiness of these financial institutions. As of September 30, 2024 and December 31, 2023, the Company had cash and cash equivalents of$15.9 million and$33.5 million, and long-term certificates of deposit of$29.5 million and$23.4 million, respectively. In addition, the Company had short-term bank deposits of$9.2 million as of September 30, 2024. For the periods ended September 30, 2024 and December 31, 2023, cash and cash equivalents, short-term bank deposits and long-term certificates of deposits exceeded the PRC DIS coverage by$49.7 million and$49.4 million, respectively.

Accounts receivable are typically unsecured and are derived from product sales. The Company manages credit risk related to the accounts receivable through ongoing monitoring of outstanding balances and limiting the amount of credit extended based upon payment history and creditworthiness. Historically, the Company has collected receivables from customers within the credit terms with no significant credit losses incurred.

Concentration of Customer Risk

For the three months ended September 30, 2024, the Company had three customers, Sinopharm Group Co., Ltd. ("Sinopharm"), China Resources Pharmaceutical Group Ltd. (“Resources Pharmaceutical”), and Shanghai Pharmaceuticals Holding Co., Ltd. (“Shanghai Pharmaceuticals”), who accounted for approximately 44.8%,12.9% and 12.1% of total revenue, respectively. For the three months ended September 30, 2023, the Company had three customers, Sinopharm, Resources Pharmaceutical, and Shanghai Pharmaceuticals, who accounted for approximately 49.3%,13.7% and 10.8% of total revenue, respectively.

For the nine months ended September 30, 2024, the Company had three customers, Sinopharm, Resources Pharmaceutical, and Shanghai Pharmaceuticals, who accounted for approximately 47.1%,14.6% and 12.1% of total revenue, respectively. For the nine months ended September 30, 2023, the Company had three customers, Sinopharm, Resources Pharmaceutical, and Shanghai Pharmaceuticals, who accounted for approximately 50.6%,13.5% and 11.0% of total revenue, respectively. All customers are located in mainland China.

As of September 30, 2024 and December 31, 2023, the Company had one customer Sinopharm, who accounted for approximately 41.6% and 50.5% of accounts receivable, respectively.

Foreign Currency Risk

The RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into other currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.72.7% of the Company’s cash and cash equivalents, and 100% of the Company’s short-term bank deposits and long-term certificates of deposit as of September 30, 2024, in the amount of$11.5 million,$9.2 million, and$29.5 million, respectively, were denominated in RMB.

Accounting Pronouncements Recently Adopted

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within each reported measure of a segment’s profit or loss. This ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The amendments in this ASU are effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company adopted this standard as of January 1, 2024. The adoption of this ASUdid not have any material impact on the Company’s interim condensed consolidated financial statements.

New Accounting Pronouncements– Issued But Not Yet Adopted

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740). The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is permitted. This ASU will result in the required additional disclosures being included in the Company’s consolidated financial statements, once adopted. The Company plans to adopt ASU 2023-09 and related updates as of January 1, 2025. The Company is in the process of assessing the impact of adoption of this standard on its consolidated financial statements.

For a description of the fair value hierarchy and the Company’s fair value methodology, see Note 2 –Summary of Significant Accounting Policies in the Annual Report. There were no significant changes in these methodologies during the nine months ended September 30, 2024. As of September 30, 2024, the Company’s highly liquid money market funds are included within cash equivalents.

The following tables present the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 (in thousands):

(1)

Included in cash and cash equivalents on the accompanying condensed consolidated balance sheets.

The carrying amounts of cash, accounts and note receivables, net, other receivables, accounts payable, due to related parties, CVR excess closing cash payable, and accrued liabilities approximate their fair values due to the short-term maturity of these instruments.

During the nine months ended September 30, 2024 and the year ended December 31, 2023, there wereno transfers of fair value measurement between Level 1 and Level 2 andno transfers into or out of Level 3 for both financial assets and liabilities.

Long-term Receivables and Derivative Liabilities

Concurrent with the signing of the Business Combination Agreement on December 26, 2022, Catalyst and the Rights Agent (as defined in the CVR Agreement) executed a contingent value rights agreement (the “CVR Agreement”), as amended on March 29, 2023, pursuant to which each holder of Catalyst common stock as of January 5, 2023 (each, a “CVR Holder”), excluding GNI Japan and GNI Hong Kong Limited (“GNI HK”), received one contractual CVR for each share of Catalyst common stock held by such holder. Each CVR entitles the holder thereof to receive certain cash payments in the future.

The long-term receivable and the corresponding CVR derivative liability, noncurrent relate to the asset purchase agreement with GC Biopharma Corp. (“GCBP”). The fair value of this long-term receivable and derivative liability is based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. The estimated fair value of the long-term receivable and CVR derivative liability, noncurrent was determined based on the anticipated amount and timing of projected cash flows to be received from GCBP pursuant to the GCBP asset purchase agreement discounted to their present values using an estimated discount rate of 5.05%. As of September 30, 2024, the Company expects to receive a$5.0 million hold-back payment from GCBP in the first quarter of 2025, which will be distributed, net of expenses, to the CVR Holders. The change in fair value of the long-term receivable from GCBP and the corresponding CVR derivative liability, noncurrent was recorded in interest and other income, net on the condensed consolidated statement of operations and comprehensive income.

Warrant Liability

In October 2023, Catalyst entered into a Securities Purchase Agreement for a private placement with GNI USA (the “Private Placement”). The Private Placement closed immediately following the Contributions, on October 30, 2023. Upon closing of the Private Placement, the Company issued 811 shares of Series X Convertible Preferred Stock, par value $0.001 per share (the “Convertible Preferred Stock”), and warrants to purchase up to 811 shares of Convertible Preferred Stock (the “Preferred Stock Warrants”) to GNI USA for an aggregate purchase price of approximately $5.0 million. The Preferred Stock Warrants are immediately exercisable at an exercise price of $4,915.00 per share of Convertible Preferred Stock and expire on October 30, 2033. The number of shares of common stock issuable upon exercise and conversion of the Preferred Stock Warrants is 540,666. The Company accounted for the Private Placement as a non-arm’s length transaction. The Preferred Stock Warrants were initially recognized at fair value upon issuance and the remaining proceeds from the Private Placement were allocated to the Convertible Preferred Stock.

The Preferred Stock Warrants are freestanding financial instruments classified as a warrant liability on the Company’s condensed consolidated balance sheet. The Preferred Stock Warrants are revalued in each reporting period with the change in fair value recorded as change in fair value of warrant liability in other income (expense), net on the condensed consolidated statement of operations and comprehensive income.

The fair value of the warrant liability is estimated based on the Black-Scholes option pricing model using the following weighted-average assumptions:

The following table sets forth the changes in the estimated fair value of the Company’s Level 3 financial assets and liabilities (in thousands):

Financial Instruments

Cash equivalents consisted of the following (in thousands):

Inventories, net

Inventories, net of reserves of$5,000 and$46,000 as of September 30, 2024 and December 31, 2023, respectively, consisted of the following components (in thousands):

The provision for inventory and write-downs for the periods ended September 30, 2024 and December 31, 2023 were immaterial.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

Accounts and Note Receivables, Net

Accounts and note receivables, net consisted of the following (in thousands):

Property and Equipment, Net

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

Long-Term Investment Measured Under Equity Method

On June 28, 2024, Gyre Pharmaceuticals entered into a partnership agreement as a limited partner with other investors and is obligated to pay$4.2 million for an 18.90% equity interest in the partnership. Pursuant to the partnership agreement, Gyre Pharmaceuticals, as a limited partner, shall not participate in any activities related to the management of the investment business. However, Gyre Pharmaceuticals may appoint a member to the advisory committee of the partnership. As of September 30, 2024, the Company's total investment into the partnership and the carrying value of the Company’s long-term investment in this affiliate was$1.7 million and$1.7 million, respectively.

The gross carrying amounts and accumulated amortization of the Company’s intangible assets with determinable lives as of September 30, 2024 and December 31, 2023 were as follows (in thousands):

Intangible assets are carried at cost less accumulated amortization and impairment, if applicable, and the amortization expense is recorded in operating expenses. The weighted average amortization period for the intangible assets as of September 30, 2024 is 4.6 years.

Amortization expense was$10,000 and$14,000 for the three months ended September 30, 2024 and 2023, respectively. Amortization expense was$26,000 and$107,000 for the nine months ended September 30, 2024 and 2023, respectively. Based on finite-lived intangible assets recorded as of September 30, 2024, the estimated future amortization expense is as follows (in thousands):

The Company’s product revenues were mainly generated from the sale of ETUARY. Sales of ETUARY accounted for 99.2% and 99.0% of total revenue for the three months ended September 30, 2024 and 2023, respectively. Sales of ETUARY accounted for 99.2% and 98.9% of total revenue for the nine months ended September 30, 2024 and 2023, respectively.

Sales of Pharmaceutical Products

The Company generates revenue mostly through sales of ETUARY and certain generic drugs. The distributors are the Company’s direct customers, and sales to distributors account for 100.0% of revenue from ETUARY. The distributors sell ETUARY to outlets, including hospitals and other medical institutions, as well as pharmacies.

Product returns to date have not been significant and the Company has not considered it necessary to record a reserve for product returns. The Company’s product revenues were recognized at a point in time when the underlying product was delivered to the customer, which was when the customer obtained control of the product. Revenue from sales of pharmaceutical products was$25.5 million and$32.0 million for the three months ended September 30, 2024 and 2023, respectively. Revenue from sales of pharmaceutical products was$77.9 million and$86.3 million for the nine months ended September 30, 2024 and 2023, respectively. All sales are generated in the PRC. Deferred revenue recognized for the three and nine months ended September 30, 2024 were immaterial.

Operating Leases

In April 2024, Gyre Pharmaceuticals entered into a lease arrangement for its new corporate headquarters, an approximately 2,130 square meter office space in Beijing, PRC, which lease is set to expire in June 2027. In 2022, Gyre Pharmaceuticals secured a lease for an office space of approximately 180 square meters in Zhengzhou, PRC, which was renewed in July 2024 and is set to expire in August 2026. In November 2023, the Company secured a lease for its U.S. headquarters in San Diego, California, with the lease set to expire in thefirst quarter of 2027.

The Company also has multiple short-term leased properties used as offices and employee dormitories. The Company recorded a total of$19,000 and$22,000 in short-term rent expenses during the three months ended September 30, 2024 and 2023, respectively. The Company recorded a total of$54,000 and$72,000 in short-term rent expenses during the nine months ended September 30, 2024 and 2023, respectively. The short-term rent expense amounts are recorded in operating expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

As of September 30, 2024, the Company recorded an aggregate right-of-use asset of$2.0 million and an aggregate lease liability of$1.8 million in the accompanying condensed consolidated balance sheets.

For the three months ended September 30, 2024 and 2023, the Company’s operating lease expense was$0.3 million and$0.1 million, respectively. For the nine months ended September 30, 2024 and 2023, the Company’s operating lease expense was$0.5 million and$0.4 million, respectively. Variable lease payments for the three and nine months ended September 30, 2024 and 2023 were immaterial.

Supplemental cash flow information related to operating leases was as follows (in thousands):

The present value assumptions used in calculating the present value of the lease payments were as follows:

As of September 30, 2024, undiscounted future minimum payments under the Company’s operating leases were as follows (in thousands):

The Company is required to maintain security deposits of$0.3 million in connection with various leases, which amounts are included in other assets, noncurrent on the Company’s condensed consolidated balance sheets.

Land Use Rights

As of September 30, 2024, the Company held land use rights for two land parcels in Beijing’s Shunyi District, expiring in 2053, and in Cangzhou, Hebei Province, expiring from 2067 to 2070. These parcels, with a combined area of approximately 66,559 square meters, are utilized as manufacturing facilities. As of September 30, 2024, the aggregate recorded land use rights, net assets for these parcels was $1.5 million.

Common Stock

Common stock reserved for future issuance is as follows:

[1]Includes 7,701,462 options exercisable for shares of common stock, which underlying shares of common stock were transferred in the name of the Company to Futu Network Technology Limited, the stock plan administrator of the 2023 Omnibus Incentive Sub-Plan for Chinese Participants.

Restricted Net Assets

Under PRC laws and regulations, Gyre Pharmaceuticals is subject to restrictions on foreign exchange and cross-border cash transfers, including to parent companies and U.S. stockholders. The ability to distribute earnings to the parent companies and U.S. stockholders is also limited. Current PRC regulations permit Gyre Pharmaceuticals to pay dividends to BJContinent Pharmaceuticals Limited (“BJC”) only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations. Amounts restricted include paid-in capital and the statutory reserves of Gyre Pharmaceuticals. The aggregate amounts of restricted capital and statutory reserves of the relevant subsidiaries not available for distribution were$64.3 million as of September 30, 2024 and December 31, 2023.

Statutory Reserve

Gyre Pharmaceuticals is required to set aside at least 10% of its after-tax profits as the statutory reserve fund until the cumulative amount of the statutory reserve fund reaches 50% or more of its registered capital, if any, to fund its statutory reserves, which are not available for distribution as cash dividends. At the Company’s discretion, the Company may allocate a portion of after-tax profits based on PRC accounting standards to a discretionary reserve fund.

There wereno appropriations to these reserves during thenine months ended September 30, 2024 or during the year ended December 31, 2023.

In December 2022, Catalyst issued an aggregate of 12,340 shares of Convertible Preferred Stock to GNI Japan and GNI HK in connection with the F351 Asset Acquisition (see Note 1 —Organization and Nature of Operations of the Annual Report), which were subsequently transferred to GNI USA in October 2023.

In October 2023, immediately following the closing of the Contributions, the Company issued 811 shares of Convertible Preferred Stock and 811 Preferred Stock Warrants to GNI USA under the Private Placement. For additional information, see Note 3—Fair Value Measurements and Financial Instruments.

In November 2023, GNI USA provided notice to the Company to convert its 13,151 shares of Convertible Preferred Stock. Each share of Convertible Preferred Stock was convertible into approximately 666.67 shares of common stock. On January 22, 2024, subject to the terms and conditions of the Convertible Preferred Stock Certificate of Designation,8,767,333 shares of common stock were issued to GNI USA upon such conversion.

2023 Omnibus Incentive Plan

The 2023 Omnibus Incentive Plan was approved by Catalyst’s stockholders in August 2023 and ratified by Gyre’s board of directors (the “Board”) in October 2023. The 2023 Omnibus Incentive Plan became effective on October 30, 2023. The 2023 Omnibus Incentive Plan permits the Company to issue up to 17,845,496 shares of common stock and will automatically increase by the lesser of (i)5% of the total number of outstanding shares of common stock on December 31st of the preceding calendar year and (ii) such smaller number of shares of common stock as determined by the Board on the first day of each fiscal year beginning on January 1, 2024. On January 1, 2024, pursuant to the automatic increase in the number of shares reserved, an additional 3,829,780 shares of common stock were reserved and made available for issuance under the 2023 Omnibus Incentive Plan.

The following table summarizes stock option activity considering the conversion of Gyre Pharmaceuticals options to Gyre options to purchase shares of Gyre common stock upon completion of the Contributions:

Valuation Assumptions

The Company estimated the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. Due to its limited relevant historical data, the Company estimated its volatility considering a number of factors, including the use of the volatility of comparable public companies. The expected term of options granted under the 2023 Omnibus Incentive Plan, all of which qualify as “plain vanilla” per SEC Staff Accounting Bulletin 107, is determined based on the simplified method due to the Company’s limited relevant history. The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option. This fair value is being amortized ratably over the requisite service periods of the awards, which is generally the vesting period.

Sinceno stock options were granted during thenine months ended September 30, 2023, all weighted-average assumptions for that period were not applicable. The fair value of employee stock options granted during thethree and nine months ended September 30, 2024 and 2023 was estimated using the following weighted-average assumptions:

Total stock-based compensation expense recognized was as follows (in thousands):

As of September 30, 2024, the Company had an unrecognized stock-based compensation expense of$4.7 million, related to unvested stock option awards, which is expected to be recognized over an estimated weighted-average period of 3.2 years.

The dilutive effect of outstanding stock options and warrants is calculated using the treasury stock method. Stock options and warrants are anti-dilutive and excluded from the diluted EPS attributable to common stock calculation if the exercise price exceeds the average market price of the common shares.

The following table sets forth the computation of EPS attributable to common stockholders, basic and diluted (in thousands, except share and per share data):

Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:

Contingent Value Rights Agreement

Each CVR under the CVR Agreement entitles the holder to receive (i) certain cash payments from the net proceeds related to the disposition of Catalyst’s legacy assets, (ii)100%of the excess cash (net of all current or contingent liabilities, including transaction-related expenses) retained by the Company in excess of $1.0 million as of the closing date of the Contributions and (iii)100% of the excess amount, by which the preapproved costs to manage, negotiate, settle and finalize certain third party claims exceed the costs actually incurred with respect to such claims. The CVRs are not transferable, except in certain limited circumstances as provided for in the CVR Agreement, will not be certificated or evidenced by any instrument, and will not be registered with the SEC or listed for trading on any exchange.

In February 2023, Catalyst sold its legacy rare bleeding disorder program to GCBP. As a result, the Company distributed the net cash proceeds received from the GCBP asset sale of $0.2 million to the CVR Holders as well as recorded a $4.5 million long-term CVR derivative liability for the future distribution of the hold-back amount to be received in May 2025. As of December 31, 2023, the carrying value of the CVR derivative liability was $4.7 million on the condensed consolidated balance sheet. Refer to Note 3 —Fair Value Measurements and Financial Instrumentsfor additional information regarding the CVR derivative liability and GCBP asset sale.

On October 30, 2023, pursuant to the CVR Agreement, the Company recorded a $1.1 million CVR excess closing cash payable upon closing of the Contributions. As of September 30, 2024, the CVR Holders have received all requisite cash payable under the CVR Agreement and there areno outstanding distributions.

Litigation and Legal Matters

The Company is subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that the outcome of any such matter will be decided favorably to the Company or that the resolution of any such matter will not have a material adverse effect upon the Company’s condensed consolidated financial statements.

Purchasing Commitments

Property and Equipment

The Company’s commitments related to purchase of property and equipment contracted but not yet reflected in the condensed consolidated financial statements were$1.6 million as of September 30, 2024 and were expected to be incurred within one year.

F351

In September 2020, Gyre Pharmaceuticals entered into an intellectual property (“IP”) transfer agreement (the “F351 Transfer Agreement”) with GNI Japan and certain of its wholly owned subsidiaries (the “GNI Group” or “GNI”). According to the F351 Transfer Agreement, Gyre Pharmaceuticals acquired the exclusive right to use Hydronidone IP rights in mainland China and the right of first offer for the global IP rights (the “F351 IP Rights”).

Under the F351 Transfer Agreement, in exchange for the F351 IP Rights, Gyre Pharmaceuticals is obligated to pay GNI Group$4.7 million upon submission of the F351 New Drug Application (the “NDA”) to Center for Drug Evaluation of the National Medical Products Administration (the “NMPA”) of the PRC,$1.2 million after the NDA passes the NMPA’s Center for Food and Drug Review and Inspection’s on-site registration inspection for the F351 product, and$7.1 million upon NMPA’s approval of the NDA.

Research and Development Programs

In addition to the F351 program, as of September 30, 2024, Gyre Pharmaceuticals has committed to allocate$21.3 million toward future research and development activities for various programs.

During thethree and nine months ended September 30, 2024 and 2023, the Company recorded the following income tax provision (in thousands) and effective tax rate:

The change of effective tax rate for the three and nine months ended September 30, 2024 and 2023 was primarily due the consummation of the Contributions in October 2023 and the fluctuation of the nondeductible expenses of Gyre Pharmaceuticals.

As of September 30, 2024, after consideration of certain limitations (see below), the Company had approximately$193.5 million federal and$10.5 million state net operating loss (“NOL”) carryforwards for U.S. tax purposes available to reduce future taxable income which, if unused, will begin to expire in 2037 for federal and 2034 for state tax purposes. The federal NOL carryforward includes$191.9 million that have an indefinite life.

If the Company experiences a greater than 50% aggregate change in ownership over a three-year period (a Section 382 ownership change), utilization of its pre-change NOL carryforwards are subject to annual limitation under Section 382 of the Internal Revenue Code (California has similar provisions). The annual limitation is determined by multiplying the value of the Company’s stock at the time of such ownership change by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization. The Company determined that ownership changes under Section 382 occurred on December 31, 2007, August 20, 2015, April 13, 2017, February 15, 2018, February 18, 2020, and December 26, 2022. Approximately$156.5 million and$75.2 million of the NOL carryforwards will expire unutilized for federal and California state income tax purposes, respectively. The ability of the Company to use its remaining NOL and tax credit carryforwards may be further limited if the Company experiences a Section 382 ownership change as a result of future changes in its stock ownership.

Research and Development with GNI

Research and development fees paid to GNI during the three and nine months ended September 30, 2024 were$0.1 million and$0.2 million, respectively. No research and development fees were paid to GNI during the three and nine months ended September 30, 2023. As of September 30, 2024 and December 31, 2023, the Company had$1.3 million and$1.4 million related parties payable due to GNI.

Other Receivables from GNI

As of September 30, 2024 and December 31, 2023, the Company had recorded$1.3 million in other receivables from GNI, of which$0.8 million was from CPI’s restructuring transaction (see Note 8 –Restructuring in the Annual Report) and$0.5 million was from Gyre’s cost sharing with GNI.

Mainland China Contribution Plan

Pursuant to relevant PRC regulations, the Company is required to make contributions to various defined contribution plans organized by municipal and provincial PRC governments. The contribution for each employee is based on a percentage of the employee’s current compensation as required by the local government. The contributions are charged to profit or loss as they become payable in accordance with the rules of the central pension scheme. The total contributions for such employee benefits were$1.4 million and$1.2 million for the three months ended September 30, 2024 and 2023, respectively. The total contributions for such employee benefits were$3.8 million and$3.2 million for the nine months ended September 30, 2024 and 2023, respectively.

Defined-Contribution Savings Plan

In the U.S., the Company maintains a defined-contribution savings plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. The plan is available to employees who meet the minimum age and length of service requirements. The contributions made during the three and nine months ended September 30, 2024 were immaterial.

The Company is a consolidated entity comprised oftwo distinct operating segments: Gyre Pharmaceuticals and Gyre after the Contributions. The Company’s reportable segments are based upon internal organizational structure, the manner in which operations are managed, the criteria used by CODM to evaluate segment performance, the availability of separate financial information, and overall materiality considerations. All Gyre’s operations are within the U.S., while all of Gyre Pharmaceuticals’ operations are in mainland China.

Gyre Pharmaceuticals

Gyre Pharmaceuticals has one major commercial drug product, ETUARY, and several product candidates in pre-clinical and clinical development. Gyre Pharmaceuticals’ product revenues are mainly generated from the sale of ETUARY and certain generic drugs. Gyre Pharmaceuticals primarily sells its pharmaceutical products to distributors in the PRC, who ultimately sell the products to hospitals, other medical institutions and pharmacies. Gyre Pharmaceuticals also generates revenue from license agreements. However, the license agreements did not generate any revenue for the three and nine months ended September 30, 2024 and 2023.

Gyre

Gyre is a biopharmaceutical company focused on the development and commercialization of F351 for the treatment of non-alcoholic steatohepatitis-associated liver fibrosis in the United States. Other than the IP associated with F351 in the U.S., Gyre has no other product candidates since the Company sold all of its legacy IP assets prior to the closing of the Contributions. Subsequent to the closing of the Contributions, Gyre has not generated any revenue.

Other

Other represents the financial information from other subsidiaries, consisting of mainly CPI, GNI HK, and Continent Pharmaceuticals U.S., Inc. During the year ended December 31, 2023, prior to the Contributions, CPI divested almost all of its assets other than its 56.0% indirect ownership interest in Gyre Pharmaceuticals (see Note 8 –Restructuringin the Annual Report).

Segment information for thethree and nine months ended September 30, 2024 and 2023 is as follows (in thousands):

The table below presents total assets as of September 30, 2024 and December 31, 2023.

The table below only includes cash outflows for the purchase of property and equipment and excludes non-cash activities.

None.