PART I. FINANCIAL INFORMATION

Item1. Financial Statements

VERSARTIS,

ARAVIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)

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

VERSARTIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

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

VERSARTIS,ARAVIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSOPERATIONS

(unaudited)

(in thousands)thousands, except per share data)

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

VERSARTIS,ARAVIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS' EQUITY

(unaudited)

(in thousands)thousands, except share data)

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

ARAVIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

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

ARAVIVE, INC

VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Formation and Business of the Company

Versartis,

Aravive, Inc. (the(“Aravive” or the “Company”) was incorporated on December 10, 2008 in the State of Delaware. Aravive Biologics, Inc. (“Aravive Biologics”) our wholly owned subsidiary was incorporated in 2007. Aravive is a clinical-stage biopharmaceutical company developing treatments designed to halt the progression of life-threatening diseases, including cancer and fibrosis.

The Company’s lead product candidate, batiraxcept (formerly AVB-500), is an ultrahigh-affinity, decoy protein that targets the GAS6-AXL signaling pathway. By capturing serum GAS6, batiraxcept starves the AXL pathway of its signal, potentially halting the biological programming that promotes disease progression. AXL receptor signaling plays an important role in multiple types of malignancies by promoting metastasis, cancer cell survival, resistance to treatments, and immune suppression.

The Company’s current development program benefits from the availability of a proprietary serum-based biomarker that accelerated batiraxcept drug development by allowing the Company to select a pharmacologically active dose and may potentially identify the cancer patients that have the best chance of responding to batiraxcept.

In July 2016, Aravive Biologics was approved for a $20.0 million Product Development Award from the Cancer Prevention and Research Institute of Texas (“CPRIT Grant”). The CPRIT Grant was expected to allow Aravive Biologics to develop the product candidate referenced above through clinical trials. The CPRIT Grant was effective as of June 1, 2016 and terminated on November 30, 2019. Aravive Biologics’ royalty and other obligations, including its obligation to repay the disbursed grant proceeds under certain circumstances, survive the termination of the agreement. The CPRIT Grant was subject to customary CPRIT funding conditions including a matching funds requirement where Aravive Biologics matched 50% of funding from the CPRIT Grant. Consequently, Aravive Biologics was required to raise $10.0 million in matching funds over the three-year project. Aravive Biologics raised all its required $10.0 million in matching funds.

Aravive Biologics’ award from CPRIT requires it to pay CPRIT a portion of its revenues from sales of certain products, or received from its licensees or sublicensees, at tiered percentages of revenue in the low- to mid-single digits until the aggregate amount of such payments equals 400% of the grant award proceeds, and thereafter at a rate of less than one percent for as long as Aravive Biologics maintains government exclusivity. In addition, the grant contract also contains a provision that provides for repayment to CPRIT of the full amount of the grant proceeds under certain specified circumstances involving relocation of Aravive Biologics’ principal place of business outside Texas.

In the Company’s completed Phase 1 clinical trial in healthy volunteers with its lead product candidate, batiraxcept, the Company demonstrated proof of mechanism for batiraxcept in neutralizing GAS6. Importantly, batiraxcept had a favorable safety profile preclinically and in the first in human trial and Phase 1b clinical trial in cancer patients.

In August 2018, the U.S. Food and Drug Administration (“FDA”) designated as a Fast Track development program the investigation of the Company’s lead development candidate, batiraxcept, for platinum-resistant recurrent ovarian cancer ("PROC").

In December 2018, the Company initiated a Phase 1b clinical trial of batiraxcept combined with standard of care therapies in patients with platinum-resistant ovarian cancer, or PROC, for which it reported results in July 2020.

In April 2020, the Company entered into a license and collaboration agreement with WuXi Biologics (Hong Kong) Limited, the objective of which is to identify and develop novel high-affinity bispecific antibodies against CCN2, also known as connective tissue growth factor ("CTGF"), implicated in cancer and fibrosis, and identified from a similar target discovery screen that identified the significance of the AXL/GAS6 pathway in cancer. The goal is to generate a best-in-class therapeutic targeting desmoplasia and tumor growth for initial investigation in the clinic in 2023.

In November 2020, the Company entered into a collaboration and license agreement (the "Agreement") with 3D Medicines Inc. ("3D Medicines"), whereby the Company granted 3D Medicines an exclusive license to develop and commercialize products that contain batiraxcept as the sole drug substance for the diagnosis, treatment or prevention of human oncological diseases, in mainland China, Taiwan, Hong Kong and Macau (the "Territory") for an upfront cash payment of $12 million. In April 2021, the Company dosed the first patient in our Phase 3 trial of batiraxcept in platinum resistant ovarian cancer. Based upon this event, the Company has completed its first clinical milestone with 3D Medicines and the Company received a $6 million cash payment related to the completion of this milestone, during the second quarter of 2021. In August 2021, the Company received a $3 million development milestone from its licensee, 3D Medicines. This milestone is based on the Center for Drug Evaluation ("CDE") of the China National Medical Products Administration ("NMPA") approval of the Investigational New Drug application ("IND") submitted by 3D Medicines to participate in the Company’s international batiraxcept Phase 3 PROC clinical trial.

During the fourth quarter of 2020, the Company initiated its Phase 1b portion of its Phase 1b/2 trial of batiraxcept in clear cell renal cell carcinoma (“ccRCC”) and the Company dosed its first patient in the trial in March 2021.

During the first quarter of 2021, the Company initiated a registrational Phase 3 trial of batiraxcept in PROC and the Company dosed its first patient in the trial in April 2021.

In May 2021, the Company announced expansion of batiraxcept development programs into first line pancreatic adenocarcinoma with the goal of initiating the trial by end of 2021.The Company isdosed its first patient in August 2021.

In June 2021, the Company announced positive initial safety, pharmacokinetic, and pharmacodynamic results from the batiraxcept Phase 1b portion of the Phase 1b/2 clinical trial in ccRCC. Based on the pharmacokinetics, pharmacodynamics, and safety data at 15mg/kg of batiraxcept, and approval by the Data and Safety Monitoring Board ("DSMB"), the Company announced plans to expand the dosing of 15mg/kg of batiraxcept to an endocrine-focused biopharmaceutical company initially developing long-acting recombinant human growth hormoneadditional three patients to determine the potential of initiating the Phase 2 portion with this dose. The Company also expects to continue to investigate higher doses of batiraxcept in the Phase 1b to obtain additional safety, pharmacokinetics, and pharmacodynamics information.

In October 2021, the European Medicines Agency granted orphan drug designation for batiraxcept for the treatment of growth hormone deficiency.ovarian cancer, following a recommendation from the Committee for Orphan Medicinal Products.

The Company’s headquarters

As the Company advances its clinical programs, the Company is in close contact with its clinical research organizations ("CROs") and operations are in Menlo Park, California. Since incorporation,clinical sites and is continually assessing the impact of COVID-19 on its planned trials and current timelines and costs. As noted previously, the Company has been primarily performing research and development activities, including clinical trials, filing patent applications, obtaining regulatory approvals, hiring personnel, and raising capitalexperienced delays in patient enrollment due to support and expand these activities.

In September 2017,the COVID-19 pandemic. Accordingly, the Company announcedanticipates a delay in the interim analysis until mid-2022. If the COVID-19 pandemic continues and persists for an extended period of time or increases in severity, the Company could experience significant disruptions to its clinical development timelines and, if the Company experiences delays in patient enrollment and deems it necessary or advisable to improve patient recruitment by, among other things, opening additional clinical sites, the Company could incur increased clinical program expenses. Any such disruptions or delays would, and any such increased clinical program expenses could, adversely affect the Company’s business, financial condition, results of operations and growth prospects.

ARAVIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)(unaudited)

As consideration for the rights granted as part of a license agreement with Stanford University, Aravive Biologics is obligated to pay yearly license fees and milestone payments, and a royalty based on net sales of products covered by the patent-related rights. More specifically, Aravive Biologics is obligated to pay Stanford University (i) annual license payments (ii) milestone payments of up to an aggregate of $1,000,000 upon achievement of clinical and regulatory milestones, and (iii) royalties equal to a percentage (in the low single digits) of net sales of licensed products; provided that the VELOCITY Phase 3 clinical trialannual license payments made will offset (and be credited against) any royalties due in such license year. In the event of somavaratana sublicense to a third party of any rights based on the patents that are solely owned by Stanford University, Aravive Biologics is obligated to pay royalties to Stanford University equal to a percentage of what Aravive Biologics would have been required to pay to Stanford University had it sold the products under sublicense itself. In addition, in pediatric growth hormone deficiency (GHD) did not meet its primary endpointsuch event it is required to pay to Stanford University a percent of non-inferiority.  All ongoing clinical trialssublicensing income. In the event of somavaratana termination, Aravive Biologics will conclude by the end of 2017.  Analysis of the trial results continues in orderbe obligated to assess the viability of further development of somavaratan.        pay all amounts that accrued prior to such termination.

Unaudited Interim Financial Information

In the opinion of the Company,Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2017,2021 and, its results of operations for the three and nine months period ended September 30, 2017 2021 and 2016, comprehensive loss for the three and nine months period ended September 30, 2017 and 2016,2020, and cash flows for the nine months ended September 30, 2017, 2021 and 2016.2020. The December 31, 2016 condensed2020 consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles in the United States of America or GAAP.(“GAAP”). The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 20162020 included in the Company’s annual reportAnnual Report on Form 10-K10-K filed by the Company on March 9, 201716,2021, with the U.S. Securities and Exchange Commission (“SEC”(the “SEC”).

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the accompanying condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

ARAVIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)(unaudited)

The accompanying unaudited condensed consolidated statement of financial position as of September 30, 20172021 and as of December 31, 2016,the results of operations and statements of comprehensive loss for the three and nine months period ended September 30, 2017 2021 and 2016,2020 and cash flows for the nine months ended September 30, 2017 2021 and 20162020 include the accounts of Versartis,Aravive, Inc. and its wholly-owned subsidiaries, Versartis Cayman Holdings Company and Versartis GmbH.subsidiary Aravive Biologics. All intercompany accounts and transactions have been eliminated.

Liquidity and Financial Condition

The U.S. dollaraccompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s management has evaluated whether there is substantial doubt about the functional currencyCompany’s ability to continue as a going concern.   

Since inception, the Company has incurred net losses and negative cash flows from operations. At September 30, 2021, the Company had an accumulated deficit of $526.8 million and working capital of $57.3 million. The Company expects to continue to incur losses from expenses related to the development of batiraxcept and related administrative activities for all the Company'sforeseeable future. These factors raised substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated operations.

financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should the Company be unable to continue as a going concern. As of September 30, 2017,2021, the Company had a cash and cash equivalents balance of $118.8approximately $67.5 million consisting of cash and investments in highly liquid U.S. money market funds. The Company believes thatintends to seek additional capital through equity and/or debt financings, collaborative or other funding arrangements with partners or through other sources of financing to fulfill its existing cashoperating and cash equivalents will be sufficient to sustain operationscapital requirement for at least the next 12 months from the issuanceto advance its clinical development program to later stages of these financial statements, based ondevelopment and potentially commercialize its current business plan. As a result of the failure of the VELOCITY trial to meet its primary endpoint, the Company has implemented a number of cost-cutting measures, including a reduction in workforce of approximately two-thirds.  As part of its current business plan, the Company continues its assessment of the viability of somavaratan and is also evaluating possible strategic transactions to diversify its pipeline.  The Company’s expected cash needs for the foreseeable future have been significantly reduced with the current initiatives and expected termination of a number of supplier contracts, including commercial contracts with our contract manufacturers. Since inception, the Company has incurred net losses and negative cash flows from operations. At September 30, 2017, the Company had an accumulated deficit of $405.4 million and working capital of $42.5 million. The Company expects to continue to incur losses from costs related to its assessment of the viability of somavaratan, the evaluation of possible strategic transactions  and related administrative activities for the foreseeable future.clinical product candidate batiraxcept. Although management has been successful in raising capital in the past, most recently $59.1 million in October and November 2016, given the failure of the VELOCITY trial to meet its primary endpoint, there can be no assurance that the Company will be successful or that any needed financing will be available in the future at terms acceptable to the Company. If the Company is unable to raise additional funds when needed, the Company may be required to delay, reduce, or terminate some or all of its development programs and clinical trials. The Company may also be required to sell or license to others technologies or clinical product candidates or programs that it would prefer to develop and commercialize itself.

Segments

7

VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(unaudited)

Segments

The Company operates in one segment. Management uses one measurement of profitabilityperformance and does not segregate its business for internal reporting. All long-lived assets are maintained in the United States of America.

Concentration of credit riskCredit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. All of the Company’s cash and cash equivalents are held at multipleseveral financial institutions that management believes are of high credit quality. Such deposits may at times, exceed federally insured limits.

The Company enters into forward foreign currency contracts that expose it to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company does, however, seek to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.

Derivative Financial Instruments

The Company engages in transactions denominated in foreign currencies and, as a result, is exposed to changes in foreign currency exchange rates. To manage the volatility resulting from fluctuating foreign currency exchange rates, the Company enters into option and forward foreign currency exchange contracts.

The Company accounts for its derivative instruments as either assets or liabilities on the balance sheet and measures them at fair value. The Company assesses, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in cash flows of the hedged items. If the Company determines that a forecasted transaction is no longer probable of occurring, it discontinues hedge accounting for the affected portion of the hedge instrument, and any related unrealized gain or loss on the contract is recognized in other comprehensive income (expense).

Risk and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s potential drug candidates, uncertainty of market acceptance of the Company’s products, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals and sole source suppliers.

Products developed by the Company require clearances from the U.S. Food and Drug Administration, (“FDA”), the Pharmaceuticals Medicines and Devices Agency, (“PMDA”), or other international regulatory agencies prior to commercial sales. There can be no assurance that the products will receive the necessary clearances. If the Company wasis denied clearance, clearance wasis delayed or the Company wasis unable to maintain clearance, it could have a materiallymaterial adverse impact on the Company.

The Company expects to incur substantial operating losses for the next several years and will need to obtain additional financing in order to launch and commercialize any product candidates for which it receives regulatory approval. Even though the Company expects additional proceeds if certain clinical and regulatory milestones are met under the Teijin Agreement, there can be no assurance that such additional financing will be available at all, or at terms acceptable to the Company.

Cash and cCash eEquivalents, Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At September 30, 20172021 and December 31, 2016,2020, the Company’s cash and cash equivalents were held inat multiple institutions in the United States and Europe and included deposits in money market funds which were unrestricted as to withdrawal or use. Restricted cash consists of a letter of credit to secure the Company’s obligations under the right-of-use ("ROU") lease.

Property and eEquipment, Net

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, generally between three and five years. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized.

8

VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(unaudited)

When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.

Build-to-Suit Lease

In the Company’s recent lease arrangement (as described

ARAVIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)(unaudited)

Leases

The Company leases all of its office space in Note 6),conducting its business. At inception, the Company is involved in the construction of the building. To the extentdetermines whether an agreement represents a lease and at commencement the Company evaluates each lease agreement to determine whether the lease is involved with the structural improvements of the construction projectan operating or takes construction risk prior to the commencement of a lease, accounting guidance requires the Company to be considered the owner for accounting purposes of these types of projects during the construction period. Therefore, thefinancing lease.

The Company records an operating lease ROU asset in property and equipmentan operating lease obligation on the consolidated balance sheet when entering into a lease. ROU assets represent the Company’s ROU of the underlying asset for the replacement costlease term and the lease obligation represents the Company’s commitment to make the lease payments arising from the lease. Lease obligations are recognized at the commencement date based on the present value of remaining lease payments over the lease term and ROU assets are calculated as the lease liability, adjusted by unamortized initial direct costs, unamortized lease incentives received, cumulative deferred or prepaid lease payments, and accumulated impairment losses. As the Company’s leases do not provide an implicit rate, the Company has used an estimated incremental borrowing rate based on the information available at the lease inception date in determining the present value of lease payments. The lease term may include options to extend or terminate the lease and the Company includes renewal options in its calculation of the Company’s leased portion of the pre-existing building.  The Company records a corresponding build-to-suitestimated lease obligation on its consolidated balance sheets representing the amounts paid by the lessor.

Upon completion of construction,term when it is reasonably certain that the Company consideredwill exercise that option. Operating lease expense is recognized on a straight-line basis over the requirements for sale-leaseback accounting treatment, including evaluating whether all risks of ownership have been transferred backlease term, subject to the landlord, as evidenced by a lack of continuing involvementany changes in the leased property. The Company’s assessment oflease or expectations regarding the arrangement did terms. Variable lease costs such as common area costs and property taxes are expensed as incurred. Variable lease costs and short-term lease payments not qualify for sale-leaseback accounting treatment; therefore included in the building asset remains on the Company’s consolidated balance sheets at its historical cost, and such asset is depreciated over its estimated useful life. The initial recording of these assets and liabilities islease liability are classified as non-cash investing and financing items, respectively, for purposes ofwithin operating activities in the consolidated statements of cash flows. For all lease agreements, the Company has combined lease and nonlease components. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. These expenses are recognized within operating expenses in the consolidated statements of operations.

Impairment of Long-Lived Assets

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by the comparison of the carrying amount to the undiscounted future net cash flows thatwhich the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value (i.e., determined through estimating projected discounted future net cash flows or other acceptable methods of determining fair value) arising from the asset. There have been were no such impairments of long-lived assets as of September 30, 20172021.

The Company accounted for the sublease with EVA Automation, Inc. (“EVA”) as an operating lease and reviews the ROU asset recorded associated with the sublease for impairment whenever events or Decemberchanges in circumstances indicate that the carrying amount of the ROU asset may not be recoverable in accordance with ASC 360-10. Recoverability is measured if the lease cost for the term of the sublease exceeds the anticipated sublease income for the same period on an undiscounted basis and the Company shall treat this circumstance as an indicator that the carrying amount of the ROU asset may not be recoverable.

At the end of the first quarter ended March 31, 2016.2020, the Company was informed by EVA, its sublease tenant at the time, that EVA would not be in a position to pay future sublease rental payments and intended to exit the sublease. Given the uncertainty of the sublease tenant’s ability to pay the remaining sublease rental payments, the Company determined the carrying amounts of the ROU asset and leasehold improvements associated with the facility located at 1020 Marsh Road (the "1020 Marsh Facility") may not be recoverable. Accordingly, the Company performed a recoverability test, using an undiscounted cash flow analysis as of March 31, 2020. Based on the undiscounted cash flow analysis, the Company determined that the ROU and leasehold improvement assets had net carrying values that exceeded their estimated undiscounted future cash flows. The Company then measured the impairment of the asset group using a discounted cash flow analysis of the estimated future sublease payments to be received from an expected sublessee. In determining the fair value of the asset group, the Company utilized current real estate market rates, time needed to sublet the building and estimated a discount rate of 9.5%. As a result of the impairment analysis, the Company recognized an impairment charge against its ROU asset of and leasehold improvement assets of $2.4 million and $0.5 million, respectively, for the quarter ended March 31, 2020.

At the end of the third quarter ended September 30, 2020, the Company continued to evaluate the estimates used in the valuation used in the first quarter of 2020. Given the continued uncertainty due to the COVID-19 shut down and the significant negative impact to the real estate market as of the end of the third quarter, the Company determined the carrying amounts of the ROU asset and leasehold improvements associated with the 1020 Marsh Facility may not be recoverable. Accordingly, the Company performed a recoverability test, using an undiscounted cash flow analysis as of September 30, 2020. Based on the undiscounted cash flow analysis, the Company determined that the ROU and leasehold improvement assets had net carrying values that exceeded their estimated undiscounted future cash flows. The Company then measured the impairment of the asset group using a discounted cash flow analysis of the estimated future sublease payments to be received from an expected sublessee as the Company is currently marketing the 1020 Marsh Facility location for subletting. In determining the fair value of the asset group, the Company utilized current real estate market estimated rates, time needed to sublet the building and estimated a discount rate of 9.5%. As a result of the impairment analysis, the Company recognized an impairment charge against its ROU asset and leasehold improvement assets of $2.4 million and $0.5 million, respectively, for the quarter ended September 30, 2020. A total of $5.8 million was reported as an impairment loss on the Company’s long-lived asset balances within the statement of operations for the nine month period ended September 30, 2020.

In June 2021, the Company entered into a sublease arrangement with Grail, Inc. ("Subtenant") to occupy all of the approximately 34,464 rentable square feet of office space at the 1020 Marsh Facility. The landlord consent was received and final agreement was signed in July 2021. The term of the sublease commenced on August 1, 2021 and will continue through October 31, 2024. Aggregate base rent due to the Company under the sublease agreement is approximately $7.65 million.

ARAVIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)(unaudited)

Fair Value of Financial Instruments

The carrying value of the Company’s cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines a three-levelthree-level valuation hierarchy for disclosure of fair value measurements as follows:

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company’s financial instruments consist of Level I1 assets as of September 30, 2021 and December 31, 2020.  Level II assets. Level I1 securities are comprised of highly liquid money market funds.

The Company’s foreign currency derivative contracts have maturities over a 12-month time horizon and is with a counterparty that has a minimum credit rating of A- or equivalent by Standard & Poor's, Moody's Investors Service, Inc. or Fitch, Inc.

Preclinical and Clinical Trial Accruals

The Company’s clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations (“CROs”)CROs that conduct and manage clinical trials on the Company’s behalf.

9

VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(unaudited)

The Company estimates preclinical and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of patient enrollment and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

Research and dDevelopment

Research and development costs are charged to operations as incurred. Research and development costs include, but are not limited to, payroll and personnel expenses, laboratory supplies, consulting costs, external research and development expenses and allocated overhead, including rent, equipment depreciation, and utilities. Costs to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use are expensed to research and development costs when incurred.

ARAVIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)(unaudited)

Income tTaxes

The Company accounts for income taxes under the asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basesbasis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.     

Stock-Based cCompensation

For stock options granted to employees, the Company recognizes compensation expense for all stock-based awards based on the grant-date estimated fair value. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service period. The fair value of stock options is determined using the Black-Scholes option pricing model. The determination of fair value for stock-based awards on the date of grant using an option pricing model requires management to make certain assumptions regarding a number of complex and subjective variables.

Stock-based compensation expense related to stock options granted to nonemployees is recognized based on the fair value of the stock options, determined using the Black-Scholes option pricing model, as they are earned. The awards generally vest over the time period the Company expects to receive services from the nonemployee.

Stock-based compensation expense, net of estimated forfeitures, is reflected in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):

Comprehensive Loss

Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions from non-owner sources.  Specifically, the Company includes cumulative foreign currency translation adjustments and net unrealized gains and losses on effective cash flow hedges.

10

VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(unaudited)

Net Loss per Share of Common Stock

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, stock options and restricted stock units and shares issued under our Employee Stock Purchase Plan are considered to be potentially dilutive securities. Because the Company has reported a net loss for all of the periods presented,three and nine months ended September 30, 2021 and 2020, diluted net loss per common share is the same as basic net loss per common share for those periods.

Intangible Asset

Intangible assets consist of an assembled workforce which was acquired as part of the merger between Aravive Biologics and Versartis, Inc. Intangible assets with definite lives are amortized based on their pattern of economic benefit over their estimated useful lives and reviewed periodically for impairment. The estimated useful life of the assembled workforce is 3 years.

Collaborative Arrangements

The Company records the elements of its collaboration agreements that represent joint operating activities in accordance with ASC Topic 808, Collaborative Arrangements (ASC 808). Accordingly, the elements of the collaboration agreements that represent activities in which both parties are active participants and to which both parties are exposed to the significant risks and rewards that are dependent on the commercial success of the activities are recorded as collaborative arrangements. The Company considers the guidance in ASC 606-10-15, Revenue from Contracts with Customers – Scope and Scope Exceptions, in determining the appropriate treatment for the transactions between the Company and its collaborative partner and the transactions between the Company and third parties. Generally, the classification of transactions under the collaborative arrangements is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. Currently, the Company has one collaboration agreement, the Agreement with 3D Medicines, see Note 4 for further discussion.

ARAVIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)(unaudited)

Revenue Recognition

The Company’s sole source of revenue for 2021 and 2020 has been generated through its Agreement with 3D Medicines. The Company’s Agreement contains multiple elements including (i) intellectual property licenses, and (ii) research and development services. Consideration received under these arrangements may include upfront payments, research and development funding, cost reimbursements, milestone payments, payments for product sales and royalty payments. The Company’s only customer currently is 3D Medicines.

The Company follows ASC 606,Revenue from Contracts with Customers (ASC 606) for recognition of its revenues under the Agreement. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for goods or services and excludes sales incentives and amounts collected on behalf of third parties. The Company analyzes the nature of these performance obligations in the context of individual agreements in order to assess the distinct performance obligations.

The Company applies the following five-step model to recognize revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

i) Identify the contract with a customer. The Company considers the terms and conditions of its agreements to identify contracts within the scope of ASC 606. The Company concludes it has a contract with a customer when the contract is approved, each party's rights regarding the goods and services to be transferred can be identified, the payment terms for the goods and services can be identified, it has been determined that the customer has the ability and intent to pay and the contract has commercial substance. The Company uses judgment in determining the customer's ability and intent to pay, which is based upon factors including the customer's historical payment experience or, for new customers, credit and financial information pertaining to the customers.

ii) Identify the performance obligations in the contract. Performance obligations in the agreements are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. The Company’s performance obligations generally consist of intellectual property licenses and research and development services with respect to license and service agreements, and the manufacture and supply of product for product sales agreements.

iii) Determine the transaction price. The Company determines the transaction price based on the consideration to which the Company expects to be entitled in exchange for transferring goods and services to the customer. In determining the transaction price, any variable consideration would be considered, to the extent applicable, if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. In accordance with the royalty exception under ASC 606 for licenses of intellectual property, the transaction price excludes future royalty payments to be received from the Company’s customers. None of the Company’s revenue generating contracts contain consideration payable to its customer or a significant financing component.

iv) Allocate the transaction price to performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price.

v) Recognize revenue when or as we satisfy a performance obligation. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised goods or services to a customer. The Company recognizes revenue when control of the goods or services is transferred to the customers for an amount that reflects the consideration that the Company expect to receive in exchange for those goods or services.

ARAVIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)(unaudited)

Performance Obligations

The following is a general description of principal goods and services from which the Company generates revenue.

License to intellectual property

The Company generates revenue from licensing its intellectual property including know-how and development and commercialization rights. The license provides a customer with the right to further research, develop and commercialize internally-discovered or collaborated drug candidates, or the right to use batiraxcept to further research, develop and commercialize customer drug candidates. The consideration the Company receives is in the form of nonrefundable upfront consideration related to the functional intellectual property licenses and is recognized when the Company transfers such license to the customer unless the license is combined with other goods or services into one performance obligation, in which case the revenue is recognized over a period of time based on the estimated pattern in which the Company satisfies the combined performance obligation. The Company’s licensing agreements are generally cancelable. 

Research and development services

The Company generates revenue from research and development services it provides to its customer and primarily includes clinical trials, and assistance during regulatory approval application process. Revenue associated with these services is recognized based on the Company’s estimate of total consideration to be received for such services and the pattern in which the Company perform the services. The pattern of performance is generally determined to be the amount of incurred costs related to the service portion of the contract with the customer as a percentage of total expected costs associated with the service portion of the contract.

Contracts with Multiple Performance Obligations

The Company’s Agreement with its customer contains multiple promised goods or services. Based on the characteristics of the promised goods and services the Company analyzes whether they are separate or combined performance obligations. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The estimated standalone selling price is based on the adjusted market assessment approach including estimated present value of future cash flows and cost-plus margin approach, taking into consideration the type of services, estimates of hourly market rates, and stage of the development.

Variable Consideration

The Company’s contracts with its customer primarily include two types of variable consideration: (i) development and regulatory milestone payments, which are due to the Company upon achievement of specific development and regulatory milestones and (ii) one-time sales-based payments and sales-based royalties associated with licensed intellectual property.

Due to uncertainty associated with achievement of the development and regulatory milestones, the related milestone payments are excluded from the contract consideration and the corresponding revenue is not recognized until the Company concludes it is probable that reversal of such milestone revenue will not occur.  As part of the Company’s evaluation of the constraint, the Company considers numerous factors, including whether the achievement of the milestone is outside of the Company’s control, contingent upon regulatory approval or dependent on licensee efforts.

Product sales-based royalties under licensed intellectual property and one-time payments are accounted for under the royalty exception. The Company recognizes revenue for sales-based royalties under licensed intellectual property and one-time payments at the later of when the sales occur or the performance obligation is satisfied or partially satisfied.

The transaction price is reevaluated each reporting period and as uncertain events are resolved or other changes in circumstances occur.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective is not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

In May 2017, December 2019, the FASB issued ASU-2017-09, Compensation—Stock CompensationASU No.2019-12,Income Taxes (Topic 718).740): Simplifying the Accounting for Income Taxes. This guidance clarifies when changesis intended to improve consistent application and simplify the accounting for income taxes. This ASU removes certain exceptions to the termsgeneral principles in Topic 740 and conditionsclarifies and amends existing guidance. This standard is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual reporting periods, with early adoption permitted. The Company adopted this guidance as of share-based awards must be accounted for as modifications. The guidance does not change the accounting treatment for modifications. The guidance, which will become effective on a prospective basis on January 1, 2018, is 2021, the adoption did not expected to have a material impact on the Company’s consolidated financial statements.

In January 2017, August 2020, the FASB issued ASU-2017-01, Business Combinations (Topic 805)ASU No.2020- Definition of06,Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40)-Accounting For Convertible Instruments and Contracts in an Entity's Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a Business. This guidance clarifies changessingle liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the definition of a businessderivative scope exception, which will permit more equity contracts to qualify for accounting purposes. Underit. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance an entity first determines whether substantially allis effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted this guidance as of the fair value of a set of assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of assets is not deemed to be a business. If the threshold is not met, the entity then evaluates whether the set of assets meets the requirement to be deemed a business, which at a minimum, requires there to be an input and a substantive process that together significantly contribute to the ability to create outputs. The guidance will become effective on a prospective basis for the Company on January 1, 2018 and is 2021, the adoption did not expected to have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued, ASU-2016-18, Statement of Cash Flows (Topic 230)- Restricted Cash.  This guidance requires that a statement of cash flows present the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. The guidance will become effective on a retrospective basis for the Company on January 1, 2018 and is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued, ASU 2016-15, Statement of Cash Flows (Topic 230).  This ASU simplifies elements of cash flow classification. The guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance requires cash payments for debt prepayment or debt extinguishment costs to be classified as cash outflows for financing activities. It also requires cash payments made soon after an acquisition's consummation date (approximately three months or less) to be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities. The Company has adopted ASU 2016-15 as of January 1, 2017 and there is no material impact to the 2017 condensed consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update ASU-2016-09, Compensation – Stock Compensation (Topic 718).  This guidance simplified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company will adopt ASU 2016-09 in the first quarter of 2017. The Company has adopted ASU 2016-09 as of January 1, 2017 and there is no material impact to the 2017 condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. The new

11

VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(unaudited)

standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements.

The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, and earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity.  The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial condition, results of operations and cash flows.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires all deferred income tax assets and liabilities to be classified as noncurrent on the balance sheet. The new standard is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company has adopted ASU 2015-17 as of January 1, 2017 and there is no material impact to the 2017 condensed consolidated financial statements.

In May 2014, the FASB issued a new accounting standard that amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services. The FASB has subsequently issued additional, clarifying standards to address issues arising from implementation of the new revenue recognition standard. The new revenue recognition standard and clarifying standards are effective for interim and annual periods beginning on January 1, 2018, and may be adopted earlier, but not before January 1, 2017. The revenue standards are required to be adopted by taking either a full retrospective approach or a modified retrospective approach. The Company is currently evaluating the impact that the revenue standards will have on the Company’s consolidated financial statements and determining the transition method that it will apply.

3. Balance Sheet Components

Prepaid expenses (in thousands)

Accrued Liabilities (in thousands)

12

VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(unaudited)

4.3. Fair Value Measurements

The Company’s financial instruments consist principally of cash and cash equivalents, prepaid expenses, foreign currency exchange contracts, accounts payable and accrued liabilities. The remaining financial instruments are reported on the Company’s consolidated balance sheets at amounts that approximate current fair value. The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the periods ended September 30, 2021 or December 31, 2020.

5. Teijin AgreementNonrecurring Fair Value Measurements

In August 2016, As disclosed in Note 2, the Company recorded an impairment charge of approximately $5.8 million related to ROU and leasehold improvement assets for the nine months ended September 30, 2020. This impairment charge was derived using Level 3 inputs and the fair value of the long-lived assets was derived by using a discounted cash flow analysis of the 1020 Marsh Facility.

4. Collaboration and License Agreement

On November 6, 2020, the Company entered into an Exclusive License and Supplythe Agreement (the “Agreement”) with Teijin Limited, or Teijin, a pharmaceutical company based in Japan, pursuant to which3D Medicines, whereby the Company granted to Teijin3D Medicines an exclusive license to develop use, sell, offerand commercialize products that contain batiraxcept as the sole drug substance, for sale, import, and otherwise commercialize, in Japan, any pharmaceutical product incorporating somavaratan (VRS-317), while Versartis retains exclusive rights to somavaratanthe diagnosis, treatment or prevention of human oncological diseases, in the rest of the world.  In exchange for such rights, the Company received a nonrefundable upfront payment of $40.0 million from Teijin, as well as the potential to receive a development milestone of $35.0 million, regulatory milestones of up to $55.0 million, and sales milestones of up to $35.0 million, in addition to sales based payments.Territory.

Under the terms of the Agreement, the Company was paid $21 million (inclusive of $9 million in milestone payments) and is eligible to receive from 3D Medicines cash payments of up to an aggregate of $207 million (inclusive of $9 million in milestone payments) in clinical development, regulatory and commercial milestone payments. There can be no guarantee that any such milestones will in fact be met. The Company is obligated to make certain payments to The Board of Trustees of Stanford University ("Stanford") based on certain amounts received from 3D Medicines under the Agreement pursuant to the existing license agreement by and between the Company and Stanford, dated January 25, 2012, and as amended to date. For the nine months ended September 30, 2021, the Company has paid amounts due to Stanford of $0.3 million. For the year ended December 31, 2020, the Company received payments of $12 million from 3D Medicines and during the three and nine months ended September 30, 2021, the Company received payments of $3 million and $9 million, respectively.

ARAVIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)(unaudited)

The Company will also be entitled to receive tiered royalties ranging from low double digits to mid-teens on sales in the Territory, if any, of products containing batiraxcept. Royalties are payable with respect to each jurisdiction in the Territory until the latest to occur of: (i) the last-to-expire of specified patent rights in such jurisdiction in the Territory; or (ii) ten (10) years after the first commercial sale of a product in such jurisdiction in the Territory. In addition, royalties payable under the Agreement will be subject to reduction on account of generic competition under certain specified conditions, with any such reductions capped at certain percentages of the amounts otherwise payable during the applicable royalty payment period.

Under the terms and conditions of the Agreement, 3D Medicines will be solely responsible for the development and commercialization of somavaratanlicensed products in Japanthe Territory.

If either the Company or 3D Medicines materially breaches the Agreement and does not cure such breach, the non-breaching party may terminate the Agreement in its entirety. Either party may also terminate the Agreement, upon written notice, if the other party files for bankruptcy, is overseen bydissolved or has a joint steering committee composedreceiver appointed for substantially all of representativesits property. The Company may terminate the Agreement if 3D Medicines, its affiliates or its sublicensees challenges the validity or enforceability of Teijinany of the Company’s patents covering any of the licensed compounds or products or ceases substantially all development and commercialization of licensed products in the Territory for a specified period, subject to certain exceptions. 3D Medicines may also terminate the Agreement for convenience provided certain notice is provided to the Company.

The Agreement contemplates that the Company will enter into ancillary arrangements with 3D Medicines, including a clinical supply agreement and a manufacturing technology transfer agreement.

The Company assessed this arrangement in accordance with ASC 606 and identified the following performance obligations: 1) license to intellectual property, batiraxcept, and 2) research and development services, including conducting clinical trials.  The Company concluded that each of these performance obligations were distinct because 3D Medicines can benefit from the good or service either on its own or together with other resources that are readily available, and each performance obligation is separately identifiable from other promises within the contract.

The estimated total transaction price was allocated between performance obligations based on their relative standalone selling prices. The Company uses a discounted cash flow approach and an expected cost plus a margin approach to estimate the standalone selling price for the performance obligations. The Company allocated the $21.0 million transaction price of the upfront payments as such: $11.3 million to the research and development services performance obligation and $9.7 million to the license to intellectual property. Accordingly, the Company will recognize revenue related to the allocable research and development services obligation on a proportional performance basis as the underlying services are performed pursuant to the current development plan which is commensurate with the period and consistent with the pattern over which the Company’s research and development services obligation is satisfied. The Company will recognize the revenue related to the license to intellectual property at a point in time. This is due to the fact that the license was determined to be a functional license due to the current stage in development of batiraxcept. Batiraxcept has been developed, dosing levels have already been determined and the Company. Versartisdrug is responsiblecurrently in a Phase 3 clinical trial related to its PROC ovarian cancer trial. As of September 30, 2021, the Company has achieved a clinical milestone based on the Center for completing (atDrug Evaluation of the China National Medical Products Administration approval of the IND submitted by 3D Medicines to participate in the Company’s expense) all ongoinginternational batiraxcept Phase 3 PROC clinical studies, includingtrial for $3 million. No other clinical or regulatory milestones have been assessed as probable of being reached and thus have been fully constrained. The Company continues to re-assess the pediatric Growth Hormone Deficiency (GHD) Phase 2/3 trial,probability of achievement of future milestones at the end of each reporting period.

The Company recognized in revenue $1.0 million and its$2.3 million related long-term safety study,to the research and development services for the three and nine months ended September 30, 2021 and $1.4 million and $4.2 million related to the license to the intellectual property for the three and nine months ended September 30, 2021. During the nine months ended September 30, 2021, the Company adjusted its estimate of the overall transaction price as a result of the achievement of the $6 million and $3 million development milestones. This adjustment resulted in a cumulative catch-up recorded to revenue in the nine months ended September 30, 2021 of approximately $5.0 million. As of September 30, 2021, the Company had a contract liability balance of $8.9 million of which $5.3 million is also responsible forclassified as current and $3.6 million is classified as long-term, consisting of deferred revenue related to a portion of the costs associated with any additional trials, if they are required by the Japanese authorities for approval of the Marketing Authorization Application, or MAA, in Japan in the pediatric indication, up to a cap on the Company’s share of such costs of $5.0 million. Following the MAA submission in Japan, Teijin would be responsible for conducting any additional Japanese studies for the pediatric or any other indications, at its own expense.  In September 2017, the Phase 3 VELOCITY trial of somavaratan failed to reach its primary endpoint.  As a result, because Japanese approval relied upon a positive Phase 3 Velocity trial result, the Japan pediatric GHD Phase 3 trial and its related long-term safety study have been discontinued.  The Company is continuing to assess the viability of further development of somavaratan and is working with Teijin to analyze existing data from the Japan pediatric GHD Phase 3 trial.

If somavaratan is approved in Japan, the Company is required, under the Agreement, to supply Teijin with its clinical and commercial requirements for product for Japan. In exchange for delivering finished product for commercial use, the Company will receive a combination of a running royalty and transfer pricing based upon net sales of the product in Japan, in a percentage ranging from the high-20s to mid-30s.

The Agreement continues until the earlier of (i) twelve years after the first commercial sale of a licensed product in Japan, or (ii) the expiration of certain Versartis patents, unless terminated earlier by mutual agreement of the parties. The initial term of the Agreement is subject to automatic extension for three three-year terms, unless otherwise mutually agreed. The Agreement may be earlier terminated by either party for the other party’s uncured material breach or insolvency. In addition, Teijin may terminate the Agreement without cause upon six months’ advance notice prior to the sale of a licensed product, and upon twelve months’ notice thereafter.  

The Company has recorded the $40.0 million upfront payment received from Teijin as a component of other current liabilities under3D Medicines. Revenue recognized from the caption “Upfront payment from collaboration partner.” The Company concluded that the evidence of arrangement criteria and fixed or determinable price pursuant to SEC Staff Accounting Bulletin No. 104 Revenue Recognition and applicable authoritative guidance has not been metdeferred revenue balance as of December 31, 2020 was $1.2 million for the nine months ended September 30, 2017. The Company's analysis2021. As of September 30, 2021, the revenue recognition criteriaservice period for the future research and development services is ongoing andexpected to occur over the next 2.25 years.

5. Leases

13

VERSARTIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(unaudited)

subject to dialogue with Teijin, including whether or not the Agreement will continue as currently constructed, amended or otherwise be terminated as described above.    

6. Commitments and Contingencies

Facility Leases

In March 2014, the Company entered into an operating facility lease agreement to lease approximately 12,900 square feet in Menlo Park, California for its new headquarters building for a period of thirty-nine months. The term of this lease ended in August 2017.  

In December 2015, the Company entered into an operating sublease agreement to lease approximately 10,900 square feet of additional office space in Menlo Park for a period of twenty-four months.  The sublease date began January 1, 2016 and the total obligation under this sublease for the Company is approximately $0.3 million as of September 30, 2017.

In March 2017, the Company entered into an operating facility lease agreement for approximately 34,500 rentable square feet located inat the building located at 1020 Marsh Road, Menlo Park, California and for approximately 17,400 rentable square feet located on the second floor of the building located at 1060 Marsh Road.  In September 2017, the Company terminated it’s lease specific to the 1060 Space.Facility. The 1020 space serves as the Company’s corporate headquarters.

The delivery of the 1020 Space was April 2017. The 1020 lease commenced on in August 8, 2017 for a period of 8687 months with one renewal option for a five-yearfive-year term. The total obligation under thisCompany did not include the renewal option period as the Company determined it was not reasonably certain the lease would be renewed as of the modification date.

ARAVIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)(unaudited)

In October 2018, the Company executed a sublease agreement in Palo Alto, California for approximately 4,240 square feet for office space. The rental term of the sublease commenced on October 30, 2018 and expired August 31, 2020.  

In August 2020, the Company entered into a lease agreement in North Carolina for approximately 4,128 square feet for office space. The monthly lease payments will be approximately $9 thousand per month for a period of 63 months with a three-month rent abatement period. The lease commenced in the fourth quarter of 2020.

The Company’s rent expense including both short-term and variable lease components of $0.1 million associated with the facility leases was $0.4 million and $0.5 million for the Company is approximately $20.0 million as of three months ended September 30, 2017.2021 and 2020, respectively. The Company’s rent expense including both short-term and variable lease components of  $0.3 million associated with the facility leases was $1.1 million and $1.3 million for the nine months ended September 30, 2021 and 2020, respectively. Cash paid for amounts included in the measurement of lease obligations for operating cash flows from operating leases was $1.8 million and $2.0 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, the Company’s operating leases had a weighted average remaining lease term of 3.2 years and a weighted average discount rate of 7.64%, which approximates the Company’s incremental borrowing rate.

As an inducement to enter into the lease, Landlord will provide the Company with approximately a $1.9 million tenant improvement allowance for the 1020 Space. The Company has provided the Landlord with a letter of credit to secure its obligations under the lease in the initial amount of approximately $2.4 million, reported as restricted cash on the balance sheet, which is subject to reductions in future years if certain financial hurdles are met.

FutureSeptember 30, 2021, minimum lease payments under all of the Company’s noncancelablenon-cancelable operating and facility leases as of September 30, 2017,by period were expected to be as follows (in thousands):

Build-to-Suit1020 Marsh Facility Sublease

In March 2017,

On June 8, 2021, the Company entered into an operating facility leasesublease with Subtenant for the 1020 Marsh Facility. The final agreement as described above, to lease office space located in Menlo Park, California in a building to be constructed byand consent received from the landlord. landlord was obtained on July 13, 2021. The company began occupying the 1020 Space in August 2017. The lease has a term of 86the sublease will commence on August 1, 2021 through October 31, 2024, unless the master lease is terminated earlier due to a breach by Subtenant. Subtenant will also pay to the Company, as additional rent, an amount equal to the Company’s share of operating expenses attributable to the subleased premises due under the master lease. The terms entered into for this sublease agreement did not result in an impairment of the Company’s long-lived assets for the three and nine months ended September 30, 2021. Lease income associated with this sublease is recorded in other income in the accompanying consolidated statements of operations. The Company has recorded lease income associated with this sublease of approximately $0.4 million for the three and nine months ended September 30, 2021. During the three and nine months ended September 30, 2021, cash received from the commencement dateSubtenant was $0.6 million, which amount was included in operating cash flows.

Future base rent the Subtenant shall pay to the Company over the sublease term as defined in of September 30, 2021, are as follows (in thousands):

In August 2018, the leaseCompany entered into an operating sublease agreement with EVA Automation, Inc. (“EVA”) for the Company’s option1020 Marsh Facility. The 1020 Marsh Facility sublease commenced on October 1, 2018 for 72 months. EVA was entitled to extendan abatement of base rent of approximately $0.9 million for the firstfive full calendar months of the term of the lease for an additional five years. The Companysublease. Lease income associated with this sublease is obligated to make lease payments totaling approximately $20.0 million overrecorded in other income in the initial termaccompanying consolidated statement of operations. At the end of the lease.first quarter ended March 31, 2020, the Company was informed by EVA that it will not be in a position to pay future sublease rental payments and intends to exit the sublease. For the nine months ended September 30, 2020, the Company recorded an impairment charge to long-lived assets as previously discussed in Note 2. In connectionaddition, associated with this lease, the landlord is providing a tenant improvement allowance of approximately $1.9 million for the 1020 Space, for costs associated with the design, development and construction of the Company’s improvements. The Company is obligated to fund all costs incurred in excess of the tenant improvement allowance.

Under the terms of the lease agreement,impairment charge the Company recorded a write down totaling $1.4 million related to a straight-line sublease rent receivable balance and previously capitalized commission charges, which has indemnified the landlord during the construction period.  Accordingly, for accounting purposes, the Company has concluded that they are deemed the owner of the building during the construction period and the Company capitalized approximately $8.9 millionbeen recorded in other expense within property and equipment and recognized an $5.4 million corresponding build-to-suit obligation in non-current liabilities in the condensed consolidated balance sheet asstatement of operations for the nine months ended September 30, 2017.  2020. Overall, for the three and nine months ended September 30, 2020, the Company recorded sublease income associated with this sublease of $31 thousand and a loss of $13 thousand. During the nine months ended September 30, 2020, cash received from EVA was $1.2 million, which amount was included in the change in prepaid expenses and other assets for operating cash flows.

6. Commitments and Contingencies

14Purchase Commitments

The Company conducts research and development programs through a combination of internal and collaborative programs that include, among others, arrangements with contract manufacturing organizations and contract research organizations. The Company had contractual arrangements with these organizations including license agreements with milestone obligations and service agreements with obligations largely based on services performed.

In the normal course of business, the Company enters into various firm purchase commitments related to certain preclinical and clinical studies.

VERSARTIS,

ARAVIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)(unaudited)