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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2022
Or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-36856
HEPION PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
| | | | | |
Delaware (State or other jurisdiction of incorporation or organization) | 46-2783806 (I.R.S. Employer Identification Number) |
399 Thornall Street, First Floor
Edison, New Jersey 08837
(Address of Principal Executive Offices)
(732) 902-4000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.0001 per share | | HEPA | | The Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
| | | | | | | | | | | | | | |
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☒ | Smaller reporting company ☒ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s Common Stock outstanding as of November 9, 2022 was 76,229,617.
HEPION PHARMACEUTICALS, INC.
FORM 10-Q
TABLE OF CONTENTS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for Hepion Pharmaceuticals, Inc. may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are characterized by future or conditional verbs such as “may,” “will,” “expect,” “intend,” “anticipate,” believe,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Factors that may cause such differences include, but are not limited to, those discussed under Item 1A. Risk Factors and elsewhere in the audited consolidated financial statements as of and for the year ended December 31, 2021 contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 8, 2022. These factors include the uncertainties associated with product development, the risk that products that appeared promising in early clinical trials do not demonstrate safety and efficacy in larger-scale clinical trials, the risk that we will not obtain approval to market our products, the risks associated with dependence upon key personnel and the need for additional financing. We do not assume any obligation to update forward-looking statements as circumstances change and thus you should not unduly rely on these statements. Cautionary Note Regarding Forward-Looking Statements.
PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
Assets | | | |
Current assets: | | | |
Cash | $ | 59,145,193 | | | $ | 91,348,967 | |
Prepaid expenses | 6,524,337 | | | 6,102,801 | |
Total current assets | 65,669,530 | | | 97,451,768 | |
Property and equipment, net | 82,986 | | | 152,772 | |
Right-of-use assets | 100,241 | | | 303,689 | |
In-process research and development | 3,190,000 | | | 3,190,000 | |
Goodwill | — | | | 1,870,924 | |
Other assets | 654,521 | | | 583,326 | |
Total assets | $ | 69,697,278 | | | $ | 103,552,479 | |
| | | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 2,626,577 | | | $ | 2,445,837 | |
Accrued expenses | 4,757,159 | | | 2,505,625 | |
Operating lease liabilities, current | 105,578 | | | 266,650 | |
Short-term portion of contingent consideration | — | | | 2,988,284 | |
Total current liabilities | 7,489,314 | | | 8,206,396 | |
Contingent consideration | 2,540,000 | | | 1,891,716 | |
Deferred tax liability | 409,022 | | | 409,022 | |
Operating lease liabilities, non-current | — | | | 50,342 | |
Total liabilities | 10,438,336 | | | 10,557,476 | |
Commitments and contingencies | | | |
Stockholders' equity: | | | |
Series A convertible preferred stock, stated value $10 per share, 85,581 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 855,808 | | | 855,808 | |
Series C convertible preferred stock, stated value $1,000 per share, 1,801 and 1,806 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 840,320 | | | 845,320 | |
Common stock—$0.0001 par value per share; 120,000,000 shares authorized, 76,229,617 and 76,225,254 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 7,623 | | | 7,623 | |
Additional paid-in capital | 226,535,396 | | | 224,787,547 | |
Accumulated other comprehensive loss | (90,335) | | | — | |
Accumulated deficit | (168,889,870) | | | (133,501,295) | |
Total stockholders' equity | 59,258,942 | | | 92,995,003 | |
Total liabilities and stockholders' equity | $ | 69,697,278 | | | $ | 103,552,479 | |
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenues | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Cost and expenses: | | | | | | | |
Research and development | 5,740,122 | | | 5,800,464 | | | 25,753,211 | | | 13,485,061 | |
General and administrative | 2,725,204 | | | 2,716,892 | | | 9,962,704 | | | 7,918,357 | |
Total operating expenses | 8,465,326 | | | 8,517,356 | | | 35,715,915 | | | 21,403,418 | |
Loss from operations | (8,465,326) | | | (8,517,356) | | | (35,715,915) | | | (21,403,418) | |
| | | | | | | |
Other income (expense): | | | | | | | |
Interest expense | (2,265) | | | (2,131) | | | (7,652) | | | (6,677) | |
Change in fair value of contingent consideration | (80,000) | | | (749,986) | | | 334,992 | | | (1,590,000) | |
Loss before income taxes | (8,547,591) | | | (9,269,473) | | | (35,388,575) | | | (23,000,095) | |
Income tax benefit (expense) | — | | | — | | | — | | | — | |
Net loss | $ | (8,547,591) | | | $ | (9,269,473) | | | $ | (35,388,575) | | | $ | (23,000,095) | |
| | | | | | | |
Weighted-average common shares outstanding: | | | | | | | |
Basic and diluted | 76,229,617 | | | 76,225,249 | | | 76,229,380 | | | 68,291,894 | |
| | | | | | | |
Net loss per common share: (see Note 10) | | | | | | | |
Basic and diluted | $ | (0.11) | | | $ | (0.12) | | | $ | (0.46) | | | $ | (0.34) | |
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net loss | $ | (8,547,591) | | | $ | (9,269,473) | | | $ | (35,388,575) | | | $ | (23,000,095) | |
Other comprehensive loss: | | | | | | | |
Foreign currency translation | (60,368) | | | — | | | (90,335) | | | — | |
Total other comprehensive loss | (60,368) | | | — | | | (90,335) | | | — | |
Comprehensive loss | $ | (8,607,959) | | | $ | (9,269,473) | | | $ | (35,478,910) | | | $ | (23,000,095) | |
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Preferred Stock | | | | | | Additional Paid in Capital | | Accumulated other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders' Equity |
| Series A | | Series C | | Common Stock | | | | |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
Balance at December 31, 2021 | 85,581 | | | $ | 855,808 | | | 1,806 | | | $ | 845,320 | | | 76,225,254 | | | $ | 7,623 | | | $ | 224,787,547 | | | $ | — | | | $ | (133,501,295) | | | $ | 92,995,003 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,929,685) | | | (6,929,685) | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,146 | | | — | | | 9,146 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 556,610 | | | — | | | — | | | 556,610 | |
Conversion of Series C to common | — | | | — | | | (5) | | | (5,000) | | | 46 | | | — | | | 5,000 | | | — | | | — | | | — | |
Issuance of common stock, net | — | | | — | | | — | | | — | | | 4,317 | | | — | | | 5,008 | | | — | | | — | | | 5,008 | |
Balance at March 31, 2022 | 85,581 | | | 855,808 | | | 1,801 | | | 840,320 | | | 76,229,617 | | | 7,623 | | | 225,354,165 | | | 9,146 | | | (140,430,980) | | | 86,636,082 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (19,911,299) | | | (19,911,299) | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (39,113) | | | — | | | (39,113) | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 634,651 | | | — | | | — | | | 634,651 | |
| | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2022 | 85,581 | | | 855,808 | | | 1,801 | | | 840,320 | | | 76,229,617 | | | 7,623 | | | 225,988,816 | | | (29,967) | | | (160,342,279) | | | 67,320,321 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (8,547,591) | | | (8,547,591) | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (60,368) | | | — | | | (60,368) | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 546,580 | | | — | | | — | | | 546,580 | |
| | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2022 | 85,581 | | | $ | 855,808 | | | 1,801 | | | $ | 840,320 | | | 76,229,617 | | | $ | 7,623 | | | $ | 226,535,396 | | | $ | (90,335) | | | $ | (168,889,870) | | | $ | 59,258,942 | |
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Preferred Stock | | | | | | Additional Paid in Capital | | Accumulated other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
| Series A | | Series C | | Common Stock | | | | |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
Balance at December 31, 2020 | 85,581 | | | $ | 855,808 | | | 1,817 | | | $ | 856,320 | | | 32,025,153 | | | $ | 3,203 | | | $ | 142,910,523 | | | $ | — | | | $ | (104,105,463) | | | $ | 40,520,391 | |
Adoption of new accounting standard | — | | | — | | | — | | | — | | | — | | | — | | | (3,314,663) | | | — | | | 3,326,335 | | | 11,672 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,063,517) | | | (6,063,517) | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 957,871 | | | — | | | — | | | 957,871 | |
Conversion of Series C to common | — | | | — | | | (10) | | | (10,000) | | | 92 | | | — | | | 10,000 | | | — | | | — | | | — | |
Issuance of common stock, net | — | | | — | | | — | | | — | | | 44,200,000 | | | 4,420 | | | 82,149,180 | | | — | | | — | | | 82,153,600 | |
| | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2021 | 85,581 | | | 855,808 | | | 1,807 | | | 846,320 | | | 76,225,245 | | | 7,623 | | | 222,712,911 | | | $ | — | | | (106,842,645) | | | 117,580,017 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7,667,105) | | | (7,667,105) | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 811,952 | | | — | | | — | | | 811,952 | |
| | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | 85,581 | | | 855,808 | | | 1,807 | | | 846,320 | | | 76,225,245 | | | 7,623 | | | 223,524,863 | | | — | | | (114,509,750) | | | 110,724,864 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (9,269,473) | | | (9,269,473) | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 1,188,375 | | | — | | | — | | | 1,188,375 | |
Conversion of Series C to common | — | | | — | | | (1) | | | (1,000) | | | 9 | | | — | | | 1,000 | | | — | | | — | | | — | |
Balance at September 30, 2021 | 85,581 | | | $ | 855,808 | | | 1,806 | | | $ | 845,320 | | | 76,225,254 | | | $ | 7,623 | | | $ | 224,714,238 | | | $ | — | | | $ | (123,779,223) | | | $ | 102,643,766 | |
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net loss | $ | (35,388,575) | | | $ | (23,000,095) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Stock-based compensation | 2,320,793 | | | 3,821,295 | |
Depreciation | 58,985 | | | 62,658 | |
| | | |
Change in fair value of contingent consideration | (334,992) | | | 1,590,000 | |
Impairment of goodwill | 1,870,924 | | | — | |
Changes in operating assets and liabilities: | | | |
Accounts payable and accrued expenses | 1,849,760 | | | (1,240,567) | |
Right of use asset | 203,448 | | | 187,327 | |
Operating lease liability | (211,414) | | | (191,166) | |
Prepaid expenses and other assets | (532,599) | | | (5,071,666) | |
Net cash used in operating activities | (30,163,670) | | | (23,842,214) | |
| | | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | — | | | (130,406) | |
Proceeds from disposal of property and equipment | 2,266 | | | — | |
Net cash provided by (used in) investing activities | 2,266 | | | (130,406) | |
| | | |
Cash flows from financing activities: | | | |
Proceeds from the issuance of common stock, net of issuance costs | — | | | 82,153,600 | |
| | | |
Contingent consideration milestone payment | (2,000,000) | | | — | |
Repayment of debt financing | — | | | (176,585) | |
| | | |
Net cash (used in) provided by financing activities | (2,000,000) | | | 81,977,015 | |
Effect of exchange rates on cash | (42,370) | | | — | |
Net (decrease) increase in cash | (32,203,774) | | | 58,004,395 | |
Cash at beginning of period | 91,348,967 | | | 40,726,838 | |
Cash at end of period | $ | 59,145,193 | | | $ | 98,731,233 | |
| | | |
Supplementary disclosure of cash flow information: | | | |
Cash paid for interest | $ | 941 | | | $ | 2,024 | |
Supplementary disclosure of non-cash financing activities: | | | |
Conversion of Series C convertible preferred stock | $ | 5,000 | | | $ | 11,000 | |
Issuance of common stock in conjunction with milestone payment | 5,008 | | | — | |
Fair value of warrants issued to placement agent | — | | | 2,013,055 | |
Adoption of new accounting standard | — | | | 11,672 | |
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Business Overview
Hepion Pharmaceuticals, Inc. (we, our, or us) is a biopharmaceutical company headquartered in Edison, New Jersey, focused on the development of drug therapy for treatment of chronic liver diseases. This therapeutic approach targets fibrosis, inflammation, and shows potential for the treatment of hepatocellular carcinoma (“HCC”) associated with non-alcoholic steatohepatitis (“NASH”), viral hepatitis, and other liver diseases. Our cyclophilin inhibitor, Rencofilstat (formerly CRV431), is being developed to offer benefits to address multiple complex pathologies related to advanced liver disease. Rencofilstat is a cyclophilin inhibitor that targets multiple pathologic pathways involved in the progression of liver disease.
We are developing Rencofilstat as our lead molecule. Rencofilstat is a compound that binds and inhibits the function of a specific class of isomerase enzymes called cyclophilins that regulate protein folding. Many closely related isoforms of cyclophilins exist in humans. Cyclophilins A, B, and D are the best characterized cyclophilin isoforms. Inhibition of cyclophilins has been shown in the scientific literature to have therapeutic effects in a variety of experimental models, including liver disease models.
On May 10, 2018, we submitted an Investigational New Drug Application (“IND”) to the U.S. Food and Drug Administration (“FDA”) to support initiation of our Rencofilstat HBV clinical development program in the United States and received approval in June 2018. We completed the first segment of our Phase 1 clinical activities for Rencofilstat in October 2018 wherein we reached a major clinical milestone of positive data from a Phase I trial of Rencofilstat in humans. This achievement triggered the first milestone payment, as stated in the May 26, 2016 acquisition agreement between the Company and Ciclofilin Pharmaceuticals, Inc. (“Ciclofilin”) (the “Merger Agreement") for the acquisition of Ciclofilin and we paid a related milestone payment of approximately $0.3 million to Aurinia Pharmaceuticals, Inc. ("Aurinia") and $0.7 million to the former Ciclofilin shareholders along with the issuance of 1,439 shares of our common stock with a fair value of $0.1 million, representing 2.5% of our issued and outstanding common stock as of June, 2016, to the former Ciclofilin shareholders. Our CEO is a former Ciclofilin shareholder and received approximately $0.3 million and 603 shares of common stock and Petrus Wijngaard, a director of our company, received $2,805 and 6 shares of common stock.
The Merger Agreement was amended on January 14, 2022 for the following: (i) upon receipt of Phase II positive data from the first Phase II clinical trial of Rencofilstat in NASH patients which has been achieved: (1) such number of validly issued, fully paid and non-assessable shares of our common stock equal to 7.5% of the issued and outstanding of our common stock on the Closing Date as defined in the original agreement, which 4,317 was issued in March 2022, and (2) a payment of $2.0 million, made in January 2022 to Ciclofilin shareholders, including a payment to our CEO of $0.8 million and other Hepion employees of $0.2 million, (ii) a payment of $1.0 million upon the positive read out of the first planned interim futility analysis of a Phase IIb clinical trial of Rencofilstat in NASH patients, supporting the continuation of the Phase IIb trial. The original agreement required a $3.0 million payment upon receipt of Phase II positive data from a proof-of-concept clinical trial of CRV431, (iii) a payment of $5.0 million upon initiation of the first Phase III trial of Rencofilstat in patients, where initiation occurs with first patient in the study dosed with study medication, which remains unchanged from the original agreement, (iv) a payment of $5.0 million upon the filing and acceptance by the U.S. Food and Drug Administration of the first new drug application for Rencofilstat, which was $8.0 million in the original agreement; and (v) a payment of $8.0 million upon the regulatory approval by the U.S. Food and Drug Administration of the first new drug application for Rencofilstat.
On June 17, 2019, we submitted an IND to the FDA to support initiation of our Rencofilstat NASH clinical development program in the United States and received approval in July 2019. We completed dosing of Rencofilstat in our multiple ascending dose (“MAD") clinical trial in September 2020.
On July 13, 2021, we announced positive topline results from our Phase 2a "AMBITION" NASH clinical trial. All primary endpoints of the trial were met. This Phase 2a study confirmed Rencofilstat tolerability and successfully elucidated the drug dosing range for the upcoming Phase 2b trial.
On September 13, 2021, we announced additional positive data from the Phase 2a AMBITION trial and the initiation of the Phase 2b "ASCEND" NASH clinical trial.
On November 20, 2020, we submitted an IND to the FDA to support initiation of a Rencofilstat clinical development program in the United States for COVID-19. We received approval December 17, 2020, to conduct a COVID-19 clinical trial and are investigating potential sources of collaboration and/or funding for the trial. Effective June 15, 2022, the IND for the COVID-19 indication is in inactive status with the FDA.
On November 19, 2021, we submitted an IND to the FDA to support initiation of a Rencofilstat clinical development program in the United States for the treatment of HCC and received approval on December 17, 2021.
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On November 30, 2021, the FDA granted Fast Track designation for our lead drug candidate, Rencofilstat, for the treatment of NASH. The FDA Fast Track designation allows sponsors to gain access to expedited drug approval reviews for medical conditions that are serious and potentially life-threatening, and where there is an unmet medical need. The program is also designed to facilitate drug development by making provisions for more frequent meetings with the FDA to discuss drug development plans, and Fast Track designation can lead to Accelerated Approval and/or Priority Review eligibility if certain criteria are met.
On June 20, 2022, the FDA granted Orphan Drug Designation to Rencofilstat, a liver-targeting, orally administered, novel cyclophilin inhibitor, for the treatment of HCC. The FDA Orphan Drug Designation program provides orphan status to drugs or biologics intended for the prevention, diagnosis, or treatment of diseases that affect fewer than 200,000 people in the United States. Sponsors of medicines that are granted Orphan Drug Designation are entitled to certain incentives, including tax credits for qualified clinical trials, prescription drug user-fee exemptions, and potential seven-year marketing exclusivity upon FDA approval.
2. Basis of Presentation
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim reporting. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary to present fairly our interim financial information. The consolidated balance sheet as of December 31, 2021, was derived from the audited annual consolidated financial statements but does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2021, contained in our Annual Report on Form 10-K filed with the SEC on April 8, 2022.
Principles of Consolidation
The accompanying condensed consolidated financial statements include our accounts and the accounts of our subsidiaries, Contravir Research Inc. and Hepion Research Corp, which conduct their operations in Canada. All intercompany balances and transactions have been eliminated in consolidation.
Liquidity
As of September 30, 2022, we had $59.1 million in cash, an accumulated deficit of $168.9 million, and working capital of $58.2 million. For the nine months ended September 30, 2022, cash used in operating activities was $30.2 million and we had a net loss of $35.4 million. We have not generated revenue to date and have incurred substantial losses and negative cash flows from operations since our inception. We have historically funded our operations through issuances of convertible debt, common stock and preferred stock. We expect to continue to incur losses for the next several years as we expand our research, development and clinical trials of Rencofilstat. We are unable to predict the extent of any future losses or when we will become profitable, if at all. We believe that our cash and cash equivalents balances are sufficient to fund our anticipated operating cash requirements for more than one year from the date of issuance of these condensed consolidated financial statements. These condensed consolidated financial statements have been prepared under the assumption that we will continue as a going concern.
We will be required to raise additional capital in future years to continue the development and commercialization of our current product candidate and to continue to fund operations at the current cash expenditure levels. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are unable to raise additional capital when required or on acceptable terms, we may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize on unfavorable terms.
COVID-19 Pandemic
The COVID-19 outbreak in the United States has caused significant business disruption. The extent of the impact of COVID-19 on our future operational and financial performance will depend on certain developments, including the duration
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
and spread of the outbreak, and impact on our clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact our future financial condition or results of operations is uncertain. While there has not been a material impact on our condensed consolidated financial statements for the three and nine months ended September 30, 2022, a continued outbreak could have a material adverse impact on our financial results and business operations, including the timing and our ability to complete certain clinical trials and other efforts required to advance the development of our product candidate and raise additional capital.
Although we have data to suggest Rencofilstat may be beneficial in the treatment of COVID-19 and other viral infections (e.g., HBV), the main focus of our company is currently on liver disease. We may, at some point, re-visit the antiviral indications should the opportunity arise (e.g., external funding/collaboration).
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Changes in estimates and assumptions are reflected in reported results in the period in which they become known. Actual results could differ from those estimates.
Our significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2021, included in our Annual Report on Form 10-K. Since the date of such consolidated financial statements, there have been no changes to our significant accounting policies.
Cash
As of September 30, 2022 and December 31, 2021, cash was $59.1 million and $91.3 million, respectively, consisting of checking accounts held at U.S. and Canadian commercial banks. At certain times, our cash balances with any one financial institution may exceed Federal Deposit Insurance Corporation insurance limits. We believe it mitigates our risk by depositing our cash balances with high credit, quality financial institutions. We have never experienced losses related to these balances.
Fair Value of Financial Instruments
Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.
ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a three-tier fair value hierarchy that distinguishes among the following:
•Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we can access.
•Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.
•Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Financial instruments consist of cash, accounts payable, and contingent consideration. These financial instruments are stated at their respective historical carrying amounts, which approximate fair value due to their short-term nature, except for contingent consideration, which is recorded at fair value at the end of each reporting period. We recorded contingent
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
consideration from the 2016 acquisition of Ciclofilin, which is required to be carried at fair value. See Note 5 for additional information on the fair value of the contingent consideration.
Property, equipment and depreciation
As of September 30, 2022 and December 31, 2021, we had $0.1 million and $0.2 million, respectively, of property and equipment, consisting primarily of lab equipment, computer equipment, and furniture and fixtures. Expenditures for additions, renewals and improvements will be capitalized at cost. Depreciation will generally be computed on a straight-line method based on the estimated useful lives of the related assets. The estimated useful lives of the depreciable assets are 3 to 7 years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the remaining term of the lease, whichever is shorter. Expenditures for repairs and maintenance are charged to operations as incurred. We will periodically evaluate whether current events or circumstances indicate that the carrying value of our depreciable assets may not be recoverable. There were no adjustments to the carrying value of property and equipment at September 30, 2022 or December 31, 2021.
Goodwill and In-Process Research & Development
In accordance with ASC Topic 350, Intangibles — Goodwill and Other (“ASC Topic 350”), goodwill and acquired IPR&D are determined to have indefinite lives and, therefore, are not amortized. Instead, they are tested for impairment annually, in our fourth quarter, and between annual tests if we become aware of an event or a change in circumstances that would indicate the carrying value may be impaired.
The annual, or interim (if events or changes in circumstances indicate that it is more likely than not that the asset is impaired), goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with the quantitative impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, we recognize a goodwill loss in an amount equal to any excess.
Goodwill relates to amounts that arose in connection with the acquisition of Ciclofilin. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired when accounted for using the acquisition method of accounting for business combinations.
Interim Assessment of Goodwill
During the six months ended June 30, 2022, increases in interest rates, higher than expected inflation in the U.S., a reduction of value of associated companies developing drug therapy for NASH along with other macroeconomic factors impacted key assumptions used to value goodwill on our balance sheet. These facts and circumstances indicate that the fair value of our goodwill was less than its carrying amount at the reporting date, and therefore a quantitative fair value test was performed for the reporting unit.
We performed a trigger-based goodwill impairment test at June 30, 2022. We are a single reporting unit with an actively traded stock. As part of our impairment testing procedures for goodwill, we relied upon the observed equity premiums paid for a set of guideline merger and acquisition transactions. The application of a control premium to our closing stock price at June 30, 2022 led to an indication of fair value for our equity on a controlling, marketable basis that was less than its carrying value as of June 30, 2022. As a result, we recognized an impairment charge of $1.9 million during the three months ended June 30, 2022 as general and administrative costs in our condensed consolidated statement of operations.
In-Process Research and Development ("IPR&D") acquired in a business combination is capitalized as indefinite-lived assets on our consolidated balance sheets at the acquisition-date fair value. IPR&D relates to amounts that arose in connection with the acquisition of Ciclofilin. Once the project is completed, the carrying value of the IPR&D is reclassified to other intangible assets, net and is amortized over the estimated useful life of the asset. Post-acquisition research and development expenses related to the IPR&D projects are expensed as incurred. The projected discounted cash flow models used to estimate the fair values of our IPR&D assets, acquired in connection with the Ciclofilin acquisition, reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset, including: (i)
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
probability of successfully completing clinical trials and obtaining regulatory approval; (ii) market size, market growth projections, and market share; (iii) estimates regarding the timing of and the expected costs to advance clinical programs to commercialization; (iv) estimates of future cash flows from potential product sales; and (v) a discount rate. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The use of different inputs and assumptions could increase or decrease our estimated discounted future cash flows, the resulting estimated fair values and the amounts of related impairments, if any.
The annual, or interim (if events or changes in circumstances indicate that it is more likely than not that the asset is impaired), IPR&D impairment test is performed by comparing the fair value of the asset to the asset’s carrying amount. When testing indefinite-lived intangibles for impairment, we may assess qualitative factors for its indefinite-lived intangibles to determine whether it is more likely than not that the asset is impaired. Alternatively, we may bypass this qualitative assessment for our indefinite-lived intangible asset and perform the quantitative impairment test that compares the fair value of the indefinite-lived intangible asset with the asset’s carrying amount. If IPR&D becomes impaired or is abandoned, the carrying value of the IPR&D is written down to the revised fair value with the related impairment charge recognized in the period in which the impairment occurs. If the carrying value of the asset becomes impaired as the result of unfavorable data from any ongoing or future clinical trial, changes in assumptions that negatively impact projected cash flows, or because of any other information regarding the prospects of successfully developing or commercializing our programs, we could incur significant charges in the period in which the impairment occurs.
We performed a quantitative assessment of IPR&D at September 30, 2022 and for fiscal year 2021 and determined that the asset was not impaired.
Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in the results of operations in the period that includes the enactment date. We reduce the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that we will not realize some or all of the deferred tax asset. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is “more-likely-than-not” that the position will be sustained upon examination. Potential interest and penalties associated with unrecognized tax positions are recognized in income tax expense.
We continue to maintain a full valuation allowance for our U.S and foreign net deferred tax assets. Income tax expense for the three and nine months ended September 30, 2022 and 2021 is related to our foreign operations.
Under the provisions of the Internal Revenue Code, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, respectively, as well as similar state tax provisions. This could limit the amount of tax attributes that we can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on our value immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The utilization of these NOLs is subject to limitations based on past and future changes in our ownership pursuant to Section 382. We completed a Section 382 study of transactions in our stock through December 31, 2021 and concluded that we have experienced ownership changes since inception that we believe under Section 382 and 383 of the Code will result in limitations on our ability to use certain pre-ownership change NOLs and credits. In addition, we may experience subsequent ownership changes as a result of future equity offerings or other changes in the ownership of our stock, some of which are beyond our control. As a result, the amount of the NOLs and tax credit carryforwards presented in our consolidated financial statements could be limited. Similar provisions of state tax law may also apply to limit the use of accumulated state tax attributes.
Contingencies
In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of our business that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and tax matters. In accordance with ASC Topic 450, Accounting for Contingencies, (“ASC 450”), we record accruals for such loss contingencies when it is probable that a liability will be incurred, and the amount of loss
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
can be reasonably estimated. In accordance with this guidance, we do not recognize gain contingencies until realized.
Research and Development
Research and development costs, which include expenditures in connection with an in-house research and development laboratory, salaries and staff costs, application and filing for regulatory approval of proposed products, purchased in-process research and development, license costs, regulatory and scientific consulting fees, as well as contract research, insurance and FDA consultants, are accounted for in accordance with ASC Topic 730, Research and Development, (“ASC 730”). Also, as prescribed by this guidance, patent filing and maintenance expenses are considered legal in nature and therefore classified as general and administrative expense, if any.
We do not currently have any commercial biopharmaceutical products and do not expect to have such for several years, if at all. Accordingly, our research and development costs are expensed as incurred. While certain of our research and development costs may have future benefits, our policy of expensing all research and development expenditures is predicated on the fact that we have no history of successful commercialization of product candidates to base any estimate of the number of future periods that would be benefited.
Also as prescribed by ASC 730, non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts would be recognized as an expense. At September 30, 2022 and December 31, 2021, we had prepaid research and development costs of $6.2 million and $5.9 million, respectively.
Share-based payments
ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), requires companies to measure the cost of employee and non-employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. Generally, we issue stock options with only service-based vesting conditions and record the expense for awards using the straight-line method (see Note 9). We account for awards granted to employees that are in excess of what is available to grant as a liability recorded at fair value each reporting period in the consolidated financial statements.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The estimated expected stock volatility is based on the historical volatility of our own traded stock price. The expected term of stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.
Foreign Exchange
For 2022, the functional currency of Hepion Pharmaceuticals, Inc. and ContraVir Research Inc. is the U.S. dollar. The functional currency of Hepion Research Corp. is the Canadian dollar. The change in the functional currency for Hepion Research Corp. was applied on a prospective basis starting January 1, 2022. Prior to 2022, the functional and reporting currency of Hepion Pharmaceuticals, Inc., Hepion Research Corp. and ContraVir Research Inc. was the U.S. dollar. For 2022, the assets and liabilities of Hepion Research Corp. are translated into U.S. dollars using period-end exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Unrealized foreign currency translation adjustments are deferred in accumulated other comprehensive loss, a separate component of shareholders’ equity. The amount of currency translation adjustment was $90,335 at September 30, 2022. Transactions in foreign currencies are remeasured into the functional currency of the relevant subsidiaries at the exchange rate in effect at the date of the transaction. Any monetary assets and liabilities arising from these transactions are translated into the functional currency at exchange rates in effect at the balance sheet date or on settlement. Resulting gains and losses are recorded in general and administrative expense within the consolidated statements of operations. The impact of foreign exchange gains (losses) was $27,601 and $26,134 for the three months ended September 30, 2022 and 2021, respectively, and was $(4,917) and $115,500 for the nine months ended September 30, 2022 and 2021, respectively.
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Segment Information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker views our operations and manages the business in one segment.
Net loss per share
Basic and diluted net loss per share is presented in conformity with ASC Topic 260, Earnings per Share, (“ASC 260”) for all periods presented. In accordance with this guidance, basic and diluted net loss per common share was determined by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding during the period.
Recent Accounting Pronouncements
In May 2021, the FASB issued ASU No. 2021-04 ("ASU 2021-04), Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We adopted this standard on January 1, 2022. The adoption of this standard did not have a material effect on our condensed consolidated financial statements and related disclosures.
4. Stockholders’ Equity and Derivative Liability — Warrants
Series A Convertible Preferred Stock
On October 14, 2014, our Board of Directors authorized the sale and issuance of up to 1,250,000 shares of Series A Convertible Preferred Stock (the “Series A”). All shares of the Series A were issued between October 2014 and February 2015. Each share of the Series A is convertible at the option of the holder into the number of shares of common stock determined by dividing the stated value of such share by the conversion price that is subject to adjustment. As of September 30, 2022, there were 85,581 shares outstanding. During the nine months ended September 30, 2022 and 2021, no shares of the Series A were converted. If we sell common stock or equivalents at an effective price per share that is lower than the conversion price, the conversion price may be reduced to the lower conversion price. The Series A will be automatically convertible into common stock in the event of a fundamental transaction as defined in the offering.
Series C Convertible Preferred Stock Issuance
On July 3, 2018, we completed a rights offering pursuant to our effective registration statement on Form S-1. We offered for sale units in the rights offering and each unit sold in connection with the rights offering consisted of 1 share of our Series C Convertible Preferred Stock, or Series C, and common stock warrants (the “Rights Offering”). Upon completion of the offering, pursuant to the rights offering, we sold an aggregate of 10,826 units at an offering price of $1,000 per unit comprised of 10,826 shares of Series C and 88,928 common stock warrants. As of September 30, 2022, there were 1,801 shares outstanding. During the nine months ended September 30, 2022, 5 shares of the Series C were converted into 46 shares of our common stock and during the nine months ended September 30, 2021, 11 shares of the Series C were converted into 101 shares of our common stock. Each share of Series C is convertible into common stock at any time at the option of the holder thereof at the conversion price then in effect. The conversion price for the Series C is determined by dividing the stated value of $1,000 per share by $1.55 per share (subject to adjustments upon the occurrence of certain dilutive events).
Common Stock and Warrant Offerings
In April 2017, and July 2018, we issued common stock and warrants in connection with public offerings. In April 2022, the remaining April 2017 warrants expired. Based on the terms of the July 2018 offering and warrant agreements, if we do not maintain an effective registration statement, which is outside of our control, we are obligated to deliver registered shares upon the exercise and settlement of the warrant. As a result of the aforementioned terms and in accordance with the guidance contained in ASC Topic 815-40, we determined that the April 2017 and July 2018 warrants issued in connection with these offerings were recorded as derivative liabilities upon issuance and marked to market on a quarterly basis in our consolidated statement of operations and comprehensive loss. In connection with the adoption of ASU 2020-06, we reclassified the July 2018 warrants to equity.
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table sets forth the components of changes in our derivative financial instruments liability balance for the nine months ended September 30, 2022: | | | | | | | | | | | | | | | | | | | | |
Date | | Description | | Number of Warrants Outstanding | | Derivative Instrument Liability |
December 31, 2021 | | Balance of derivative financial instruments liability | | 10,714 | | | $ | — | |
| | Expiration of warrants | | (10,714) | | | — | |
| | | | | | |
September 30, 2022 | | Balance of derivative financial instruments liability | | — | | | $ | — | |
5. Fair Value Measurements
The following table presents our liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy at September 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement at Reporting Date Using |
Description | | Fair value | | (Level 1) | | (Level 2) | | (Level 3) |
As of September 30, 2022: | | | | | | | | |
Contingent consideration | | $ | 2,540,000 | | | $ | — | | | $ | — | | | $ | 2,540,000 | |
| | | | | | | | |
| | | | | | | | |
As of December 31, 2021: | | | | | | | | |
Contingent consideration | | $ | 4,880,000 | | | $ | — | | | $ | — | | | $ | 4,880,000 | |
| | | | | | | | |
Contingent consideration was recorded for the acquisition of Ciclofilin Pharmaceuticals, Inc. (Ciclofilin) on June 10, 2016. The contingent consideration represented the acquisition date fair value of potential future payments, to be paid in cash and our stock, upon the achievement of certain milestones and was estimated based on a probability-weighted discounted cash flow model utilizing a discount rate of 6.5% and a stock price of $19.60.
At September 30, 2022 and December 31, 2021, the assumptions we used to calculate the fair value were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Assumptions |
| September 30, 2022 | | December 31, 2021 |
Discount rate | 7.0% | | 7.0% |
Stock price | n/a | | $1.14 |
Projected milestone achievement dates | December 2023 | — | December 2028 | | December 2021 | — | June 2026 |
Probability of success of milestone achievements | 13 | % | — | 40% | | 18 | % | — | 100% |
We completed the first segment of our Phase I clinical activities for Rencofilstat in October 2018 wherein we reached a major clinical milestone of positive data from a Phase I trial of Rencofilstat in humans. This achievement triggered the first milestone payment, as stated in the Merger Agreement for the acquisition of Ciclofilin and in the fourth quarter of 2018, we paid a related milestone payment of $1,000,000 and issued 1,439 shares of our common stock with a fair value of $55,398, representing 2.5% of our issued and outstanding common stock as of June 2016, to the Ciclofilin shareholders.
The Merger Agreement was amended on January 14, 2022 for the following: (i) upon receipt of Phase II positive data from the first Phase II clinical trial of Rencofilstat in NASH patients which has been achieved: (1) such number of validly issued, fully paid and non-assessable shares of our common stock equal to 7.5% of the issued and outstanding of our common stock on the Closing Date as defined in the original agreement, which 4,317 was issued in March 2022, and (2) a payment of $2.0 million, made in January 2022 to Ciclofilin shareholders, including a payment to our CEO of $0.8 million and other Hepion employees of $0.2 million, (ii) a payment of $1.0 million upon the positive read out of the first planned interim futility analysis of a Phase IIb clinical trial of Rencofilstat in NASH patients, supporting the continuation of the Phase IIb trial. The original agreement required a $3.0 million payment upon receipt of Phase II positive data from a proof-of-concept clinical trial of CRV431, (iii) a payment of $5.0 million upon initiation of the first Phase III trial of Rencofilstat in patients, where initiation occurs with first patient in the study dosed with study medication, which remains unchanged from the original agreement, (iv) a payment of $5.0 million upon the filing and acceptance by the U.S. Food and Drug Administration of the first new drug application for Rencofilstat, which was $8.0 million in the original agreement; and (v) a payment of $8.0 million upon the regulatory approval by the U.S. Food and Drug Administration of the first new drug application for Rencofilstat.
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of September 30, 2022, $2,540,000 was classified as a non-current liability based upon management's best estimate using the latest available information. Management reviewed and updated the assumptions at September 30, 2022 for the amendment of the Merger Agreement.
The following table presents the change in fair value of the contingent consideration for the nine months ended September 30, 2022.
| | | | | |
| Acquisition-related Contingent Consideration |
Liabilities: | |
Balance at December 31, 2021 | $ | 4,880,000 | |
Contingent consideration payments (includes common shares with a fair value of $5,008) | (2,005,008) | |
Change in fair value recorded in earnings | (334,992) | |
Balance at September 30, 2022 | $ | 2,540,000 | |
6. Property and Equipment, net
Property and equipment are stated at cost and depreciated using the straight-line method, based on useful lives as follows:
| | | | | | | | | | | | | | | | | |
| Estimated Useful Life (in years) | | September 30, 2022 | | December 31, 2021 |
Equipment | 3 years | | $ | 307,844 | | | $ | 330,830 | |
Furniture and fixtures | 7 years | | 62,183 | | | 62,183 | |
Less: Accumulated depreciation | | | (287,041) | | | (240,241) | |
| | | $ | 82,986 | | | $ | 152,772 | |
Depreciation expense for the three months ended September 30, 2022 and 2021 was $17,726 and $23,106, respectively, and was $58,985 and $62,658 for the nine months ended September 30, 2022 and 2021, respectively.
7. Indefinite-lived Intangible Assets and Goodwill
IPR&D
Our IPR&D asset consisted of the following at:
| | | | | |
| Indefinite-lived Intangible Asset |
Rencofilstat balance at December 31, 2021 | $ | 3,190,000 | |
Change during the nine months ended September 30, 2022 | — | |
Rencofilstat balance at September 30, 2022 | $ | 3,190,000 | |
No impairment losses were recorded on IPR&D during the nine months ended September 30, 2022 and 2021.
Goodwill
The table below provides a roll-forward of our goodwill balance:
| | | | | |
| Amount |
Goodwill balance at December 31, 2021 | $ | 1,870,924 | |
Impairment of goodwill (see Note 3) during the nine months ended September 30, 2022 | (1,870,924) | |
Goodwill balance at September 30, 2022 | $ | — | |
No impairment loss was recorded to goodwill during the nine months ended September 30, 2021.
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Accrued Liabilities
Accrued liabilities consisted of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Payroll and related costs | $ | 852,000 | | | $ | — | |
Stock-based compensation - see Note 9 | 2,220,260 | | | 1,637,308 | |
Research and development | 1,287,588 | | | 536,965 | |
Legal fees | 119,153 | | | 57,345 | |
| | | |
Professional fees | 60,518 | | | 167,346 | |
Other | 217,640 | | | 106,661 | |
Total accrued expenses | $ | 4,757,159 | | | $ | 2,505,625 | |
9. Accounting for Share-Based Payments
On June 3, 2013, we adopted the 2013 Equity Incentive Plan (the “Plan”). Stock options granted under the Plan typically will vest after three years of continuous service from the grant date and will have a contractual term of ten years. We granted options during the three months ended June 30, 2022 and 2021, and at the time that these grants were made, we did not have any options available for grant under the Plan. We accounted for these option grants as liability-classified awards requiring us to measure the fair value of the awards each reporting period since there were not enough shares available at the time of the grant. As of September 30, 2022, the liability related to the awards was $2.2 million and is included in accrued expenses in our condensed consolidated balance sheets with the corresponding expense included in our condensed consolidated statements of operations and comprehensive loss. At our annual meeting of stockholders June, 2022, shareholders voted against our 2021 Omnibus Equity Incentive Plan. Therefore, we will continue to account for this option grant as liability-classified until we receive stockholder approval to increase the available options to grant.
We classify stock-based compensation expense in our condensed consolidated statement of operations in the same way the award recipient's payroll costs are classified or in which the award recipients' service payments are classified. We recorded stock-based compensation expense as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
General and administrative | $ | 350,990 | | | $ | 1,032,119 | | | $ | 1,561,574 | | | $ | 2,737,732 | |
Research and development | 265,845 | | | 436,406 | | | 759,219 | | | 1,083,563 | |
Total stock-based compensation expense | $ | 616,835 | | | $ | 1,468,525 | | | $ | 2,320,793 | | | $ | 3,821,295 | |
A summary of stock option activity under the Plan is presented as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Exercise Price Per Share | | Weighted Average Exercise Price Per Share | | Intrinsic Value | | Weighted Average Remaining Contractual Team |
Balance outstanding, December 31, 2021 | 8,774,974 | | | $ | 1.63 | | - | $ | 2,016.00 | | | $ | 2.33 | | | $ | — | | | 9.10 years |
Granted | 120,000 | | | $ | 0.69 | | - | $ | 0.69 | | | $ | 0.69 | | | $ | — | | | |
Exercised | — | | | $ | — | | - | $ | — | | | $ | — | | | $ | — | | | |
Forfeited | — | | | $ | — | | - | $ | — | | | $ | — | | | $ | — | | | |
Cancelled | (1) | | | $ | — | | - | $ | — | | | $ | 515.20 | | | $ | — | | | |
Balance outstanding, September 30, 2022 | 8,894,973 | | | $ | 0.69 | | - | $ | 2,016.00 | | | $ | 2.31 | | | $ | — | | | 8.63 years |
Awards outstanding, vested awards and those expected to vest at September 30, 2022 | 8,808,270 | | | $ | 0.69 | | - | $ | 2,016.00 | | | $ | 2.31 | | | $ | — | | | 8.29 years |
Vested and exercisable at September 30, 2022 | 5,345,352 | | | $ | 0.69 | | - | $ | 2,016.00 | | | $ | 2.64 | | | $ | — | | | 8.38 years |
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following weighted-average assumptions were used in the Black-Scholes valuation model to estimate the fair value of stock option awards when granted to employees.
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Stock price | $ | 0.69 | | | $ | 1.70 | |
Risk-free interest rate | 4.02 | % | | 1.04 | % |
Dividend yield | — | | | — | |
Expected volatility | 115.4 | % | | 120.8 | % |
Expected term (in years) | 6.0 | | 5.9 |
The total fair value of awards vested during the nine months ended September 30, 2022 and 2021 was $4.3 million and $4.1 million, respectively.
As of September 30, 2022, the unrecognized compensation cost related to non-vested stock options outstanding, net of expected forfeitures, was $2.6 million to be recognized over a weighted-average remaining vesting period of approximately 1.1 years.
10. Loss per Share
Basic and diluted net loss per common share was determined by dividing net loss by the weighted-average common shares outstanding during the period. Prior to the adoption of ASU 2020-06 in 2021, basic and diluted net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted-average common shares outstanding during the period with net loss attributable to common stockholders’ being adjusted for the preferred stock deemed dividends related accretion of the beneficial conversion feature and other discount on this instrument for the periods in which the preferred stock is outstanding.
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Basic and diluted net loss per common share | | 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | | |
Net loss | | $ | (8,547,591) | | | $ | (9,269,473) | | | $ | (35,388,575) | | | $ | (23,000,095) | |
| | | | | | | | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding | | 76,229,617 | | | 76,225,249 | | | 76,229,380 | | | 68,291,894 | |
Net loss per share of common stock—basic and diluted | | $ | (0.11) | | | $ | (0.12) | | | $ | (0.46) | | | $ | (0.34) | |
The following outstanding securities at September 30, 2022 and 2021 have been excluded from the computation of basic and diluted weighted shares outstanding, as they would have been anti-dilutive:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Common shares issuable upon conversion of Series A preferred stock | 3,184 | | | 3,184 | |
Common shares issuable upon conversion of Series C preferred stock | 16,599 | | | 16,654 | |
Stock options | 8,894,973 | | | 8,774,974 | |
Warrants – liability classified | — | | | 98,328 | |
Warrants – equity classified | 4,311,182 | | | 4,223,568 | |
Total | 13,225,938 | | | 13,116,708 | |
The liability and equity classified warrants disclosed above have been excluded from the computation of basic and diluted earnings per share because the exercise price of the warrants exceeds the average market price of our common stock for the period they were outstanding.
HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Commitments and Contingencies
Contractual Obligations
In August 2014, we entered into a lease for corporate office space in Edison, New Jersey. In December 2017, we entered an amendment to the lease for corporate office space in Edison, New Jersey expanding the office footprint and extending the lease for an approximate 5-year period. This lease will expire in March 2023. In October 2019, we entered into a 3-year lease for office and research laboratory space in Edmonton, Canada, which expired on September 30, 2022 and will be subsequently on a month-to-month basis.
Legal Proceedings
We are involved in legal proceedings of various types from time to time. Significant judgment is required to determine both the likelihood and the estimated amount of a loss related to such matters. Additionally, while any litigation contains an element of uncertainty, we have at this time no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on our condensed consolidated financial condition or results of operations.
Leases
We account for leases in accordance with ASC Topic 842, Leases, (“ASC 842”). We determine if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified property or equipment for a period in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property and equipment), and (2) the customer has the right to control the use of the identified asset.
Operating leases where we are the lessee are included under the caption “Right of Use Assets” on our condensed consolidated balance sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. Key estimates and judgments include how we determine (1) the discount rate used to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.
The Right-Of-Use (“ROU”) asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
As of September 30, 2022, the ROU assets were $0.1 million, the current lease liabilities were $0.1 million, and there were no non-current lease liabilities. The discount rate used to account for our operating leases under ASC 842 is our estimated incremental borrowing rate of 6.5%.
Rent expense for the three months ended September 30, 2022 and 2021 was $0.1 million and $0.1 million, respectively, and was $0.3 million and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively. The weighted average remaining term of our noncancelable operating leases is 0.50 years.
Future minimum rental payments under our noncancelable operating leases at September 30, 2022 is as follows:
| | | | | |
Remainder of 2022 | $ | 53,097 | |
2023 | 53,902 | |
2024 | — | |
2025 | — | |
2026 and thereafter | — | |
Total | 106,999 | |
Present value adjustment | (1,421) | |
Lease liability at September 30, 2022 | $ | 105,578 | |
12. Subsequent Events
On November 4, 2022, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Investors”), pursuant to which we agreed to issue and sell, in a private placement (the “Offering”), 1,900,000 shares of our Series F Convertible Redeemable Preferred Stock, par value $0.0001 per share (the “Series F Preferred