HEPION PHARMACEUTICALS, INC. The following discussion should be read in conjunction with our condensed consolidated financial statements and other financial information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking statements. You can identify these statements by forward-looking words such as "plan," "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. 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. 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. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under "Risk Factors" in our Annual Report on Form 10-K as of and for the year endedDecember 31, 2021 filed with theUnited States Securities and Exchange Commission ("SEC") onApril 8, 2022 . Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of us, please be advised that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in forward-looking statements, and you should not unduly rely on such statements.
Business Overview
We are a biopharmaceutical company headquartered inEdison, New Jersey , focused primarily 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 relate to advanced liver disease. Rencofilstat is a pan cyclophilin inhibitor that targets multiple pathologic pathways involved in the progression of liver disease. Preclinical studies with Rencofilstat in NASH models demonstrated consistent reductions in liver fibrosis and additional reductions in inflammation and cancerous tumors in some studies. Rencofilstat additionally showed in vitro antiviral activity towards hepatitis B, C, and D viruses which also trigger liver disease. Preclinical studies also have shown potentially therapeutic activities of Rencofilstat in experimental models of acute lung injury, platelet activation, and SARS-CoV-2 replication. NASH is a form of liver disease that is triggered by what has come to be known as the "Western diet", characterized especially by high-fat, high-sugar, and processed foods. Among the effects of a prolonged Western diet is fat accumulation in liver cells (steatosis), which is described as non-alcoholic fatty liver disease ("NAFLD") and can predispose cells to injury. NAFLD may evolve into NASH when the fatty liver begins to progress through stages of cell injury, inflammation, fibrosis, and carcinogenesis. People who develop NASH often have additional predisposing conditions such as diabetes and hypertension, but the exact biochemical events that trigger and maintain the progression are not fully understood. Many people in the early stages of disease do not have significant clinical symptoms and therefore do not know that they have NASH. NASH becomes evident and a major concern when the liver becomes fibrotic and puts the individual at increased risk of developing cirrhosis and other complications. Individuals with advanced liver fibrosis have significantly higher risk of developing liver cancer, although cancer may also arise in some patients before significant hepatitis or fibrosis. NASH is increasing worldwide at an alarming rate due to the spread of the Western diet, obesity, and other related conditions. Approximately 4-5% of the global population is estimated to have NASH, including theUSA . NASH is the leading reason for individuals requiring a liver transplant in theUSA . Considering the serious outcomes linked to advancing NASH, the economic and social burdens of the disease are enormous. There are no simple blood tests to diagnose or track the progression of NASH, and no drugs are approved to specifically treat the disease. HCC is a major type of liver cancer, accounting for approximately 85% - 90% of all cases. NASH, hepatitis viral infections, and alcohol consumption are all major causes of HCC. Globally, over 700,000 people die each year from liver cancer which is second only to lung cancer among all cancer-related deaths. The high mortality is due to the fact that only around half of all people who develop HCC (in developed countries) receive the diagnosis early enough to have an opportunity for therapeutic intervention. Additionally, recurrence rates are high, and current treatment options remain limited. HCC is a type of cancer in which the tissue microenvironment plays a major role in its development. In most cases HCC is preceded by significant, long-term damage to liver cells, inflammation, and fibrosis. One-third of people with cirrhosis, a very advanced stage of liver disease, will eventually progress to HCC. The chronic injury to the liver leads to many genetic mutations that eventually lead to transformation of cells and formation of tumors. The noxious tissue microenvironment also promotes cancer by altering the function of immune cells and endothelial cells which form tumor-supporting blood vessels. 21
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Table of Contents These various events underscore the importance of halting liver injury and scarring as early and effectively as possible to prevent cancer development.
Artificial Intelligence (AI)
We have created a proprietary AI tool called, "AI-POWR™ to optimize the outcomes of our current clinical programs and to potentially identify novel indications for Rencofilstat and possibly identify new targets and new drug molecules to broaden our pipeline. AI-POWR™ is our acronym for Artificial Intelligence - Precision Medicine;Omics that include genomics, proteomics, metabolomics, transcriptomics, and lipidomics; World database access; and Response and clinical outcomes. AI-POWR™ allows for the selection of novel drug targets, biomarkers, and appropriate patient populations. AI-POWR™ is used to identify responders from big data sources using our multi-omics approach, while modelling inputs and scenarios to increase response rates. The components of AI-POWR™ include access to publicly available databases, and in-house genomic and multi-omic big data, processed via machine learning algorithms. We believe AI outputs will allow for improved response outcomes through enhanced patient selection, biomarker selection and drug target selection. We believe AI outputs will help identify responders a priori and reduce the need for large sample sizes through study design enrichment. We intend to use AI-POWR™ to help identify which NASH patients will best respond to Rencofilstat. It is anticipated that applying this proprietary platform to our drug development program will ultimately save time, resources, and money. In so doing, we believe that AI-POWR™ is a risk-mitigation strategy that should reap benefits all the way through from clinical trials to commercialization. The AI-POWR™ platform is continually updated with in-house and published data to further refine the accuracy of the neural network. We believe that NASH is a heterogenous disease, and we need to have a better understanding of interactions among proteins, genes, lipids, metabolites, and other disease variables to help predict disease progression, regression, and responses to Rencofilstat. All of this is further complicated by variable drug concentrations, patient traits and temporal factors. AI-POWR™ is designed to address many of the typical challenges in drug development, as we believe we can use our proprietary platform to shorten development timelines and increase the delta between placebo and treatment groups. AI-POWR™ will be used to drive our Phase 2b Ascend-NASH program and identify additional potential indications for Rencofilstat to expand our footprint in the cyclophilin inhibition therapeutic space. Impact of COVID-19 The COVID-19 outbreak inthe 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 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 endedSeptember 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).
FINANCIAL OPERATIONS OVERVIEW
From our inception inMay 2013 throughSeptember 30, 2022 , we have an accumulated deficit of$168.9 million and we have not generated any revenue from operations. We expect to incur additional losses to perform further research and development activities and do not currently have any commercial biopharmaceutical products. We do not expect to have such for several years, if at all. Our product development efforts are in their early stages and we cannot make estimates of the costs or the time they will take to complete. The risk of completion of any program is high because of the many uncertainties involved in bringing new drugs to market including the long duration of clinical testing, the specific performance of proposed products under stringent clinical trial protocols, the extended regulatory approval and review cycles, our ability to raise additional capital, the nature and timing of research and development expenses and competing technologies being developed by organizations with significantly greater resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States (U.S. GAAP). The preparation of these condensed consolidated financial statements requires us to 22 -------------------------------------------------------------------------------- Table of Contents make estimates and assumptions that affect the reported amounts of assets, liabilities, costs and expenses, income taxes and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. During the nine months endedSeptember 30, 2022 , there were no significant changes to our critical accounting policies and estimates as described in the financial statements contained in the Annual Report on Form 10-K for the year endedDecember 31, 2021 .
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Note 3 of Notes to Condensed Consolidated Financial Statements, Recent Accounting Pronouncements, in this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Comparison of the three months ended
Three Months Ended
September 30,
2022 2021 Change
Revenues $ - $ - $ -
Costs and Expenses:
Research and development 5,740,122 5,800,464 (60,342)
General and administrative 2,725,204 2,716,892 8,312
Loss from operations (8,465,326) (8,517,356) 52,030
Other income (expense):
Interest expense (2,265) (2,131) (134)
Change in fair value of contingent consideration (80,000) (749,986) 669,986
Loss before income taxes (8,547,591) (9,269,473) 721,882
Income tax benefit (expense) - - -
Net loss $ (8,547,591) $ (9,269,473) $ 721,882
We had no revenues during the three months ended September 30, 2022 and 2021,
respectively, because we do not have any commercial biopharmaceutical products
and we do not expect to have such products for several years, if at all.
Research and development expenses for the three months ended September 30, 2022
and 2021 was $5.7 million and $5.8 million , respectively. The decrease of $0.1
million was primarily due to a decrease of $0.5 million in chemistry,
manufacturing, and controls (or CMC) costs primarily relating to a decrease in
animal study costs, a decrease of $0.2 million for consulting fees and outside
services, and a $0.2 million decrease in stock compensation expense. This was
offset by an increase of $0.6 million in clinical trial costs relating to our
current studies, and a $0.2 million increase in employee compensation costs due
to an increase in headcount.
General and administrative expenses for the three months ended September 30,
2022 and 2021 was $2.7 million and $2.7 million , respectively. The slight
increase was primarily due to an increase of $0.2 million for employee
compensation due to an increase in headcount, a $0.1 million increase in travel
costs, and a $0.5 million increase in professional, consulting, and outside
services. This was offset by a $0.7 million decrease in stock comp expense and a
$0.1 million decrease in miscellaneous taxes.
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Comparison of the nine months ended
Nine Months Ended
September 30,
2022 2021 Change
Revenues $ - $ - $ -
Costs and Expenses:
Research and development 25,753,211 13,485,061 12,268,150
General and administrative 9,962,704 7,918,357 2,044,347
Loss from operations (35,715,915) (21,403,418) (14,312,497)
Other income (expense):
Interest expense (7,652) (6,677) (975)
Change in fair value of contingent consideration 334,992 (1,590,000) 1,924,992
Loss before income taxes (35,388,575) (23,000,095) (12,388,480)
Income tax (expense) benefit - - -
Net loss $ (35,388,575) $ (23,000,095) $ (12,388,480)
We had no revenues during the nine months ended September 30, 2022 and 2021,
respectively, because we do not have any commercial biopharmaceutical products
and we do not expect to have such products for several years, if at all.
Research and development expenses for the nine months ended September 30, 2022
and 2021 was $25.8 million and $13.5 million , respectively. The increase of
$12.3 million was primarily due to an increase of $0.8 million for employee
compensation costs relating to an increase in headcount, a $3.3 million increase
in clinical trial costs relating to our current studies, a $9.7 million increase
in CMC costs primarily for drug manufacturing costs, and a $0.2 million increase
in miscellaneous research costs. This was offset by a decrease of $0.3 million
in stock compensation costs and a decrease of $1.3 million in consulting costs.
General and administrative expenses for the nine months ended September 30, 2022
and 2021 was $10.0 million and $7.9 million , respectively. The increase of $2.0
million was primarily related to an increase of $1.9 million for goodwill
impairment (see Note 3 to the condensed consolidated financial statements), a
$0.4 million increase in compensation costs related to an increase in headcount,
a $0.1 million increase in insurance costs, a $0.2 million increase in travels
costs, and a $0.8 million increase in professional and consulting fees. This was
offset by a decrease of $1.2 million in stock compensation costs and a $0.2
million decrease in miscellaneous taxes.
Liquidity and Capital Resources
Sources of Liquidity
We have funded our operations throughSeptember 30, 2022 primarily through the issuance of convertible preferred stock, the issuance of convertible debt, and issuances of shares of our common stock through at-the market offerings. OnNovember 4, 2022 , we entered into a Securities Purchase Agreement (the "Purchase Agreement") with certain institutional 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 Stock"), and 100,000 shares of our Series G Convertible Redeemable Preferred Stock, par value$0.0001 per share (the "Series G Preferred Stock," and together with the Series F Preferred Stock, the "Preferred Stock"), at an offering price of$9.50 per share, representing a 5% original issue discount to the stated value of$10.00 per share, for gross proceeds of$20 million in the aggregate for the Offering, before the deduction of discounts, fees and offering expenses. The shares of Preferred Stock will be convertible, at a conversion price of$1.00 per share (subject in certain circumstances to adjustments), into shares of our common stock, par value$0.0001 per share, at the option of the holders and, in certain circumstances, by us. The Purchase Agreement contains customary representations, warranties and agreements by us and customary conditions to closing. The Offering closed onNovember 8, 2022 .
Future Funding Requirements
We have no products approved for commercial sale. To date, we have devoted
substantially all of our resources to organizing and staffing our company,
business planning, raising capital, undertaking preclinical studies and clinical
trials of our product candidate. As a result, we are not profitable and have
incurred losses in each period since our inception in 2013. As of
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September 30, 2022 , we had an accumulated deficit of $168.9 million . We expect
to continue to incur significant losses for the foreseeable future. We
anticipate that our expenses will increase substantially as we:
•pursue the clinical and preclinical development of our current product candidate;
•leverage our technologies to advance product candidates into preclinical and clinical development;
•seek regulatory approvals for our product candidate that successfully complete clinical trials, if any;
•attract, hire and retain additional clinical, quality control and scientific personnel;
•establish our manufacturing capabilities through third parties and scale-up manufacturing to provide adequate supply for clinical trials and commercialization;
•expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company;
•expand and protect our intellectual property portfolio;
•establish a sales, marketing, medical affairs and distribution infrastructure to commercialize any products for which we may obtain marketing approval and intend to commercialize on our own or jointly;
•acquire or in-license other product candidates and technologies; and
•incur additional legal, accounting and other expenses in operating our business, including ongoing costs associated with operating as a public company.
Even if we succeed in commercializing our product candidate, we will continue to incur substantial research and development and other expenditures to potentially develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders' equity and working capital.
We will require substantial additional financing and a failure to obtain this necessary capital could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations.
Since our inception, we have invested a significant portion of our efforts and financial resources in research and development activities for our non-replicating and replicating technologies and our product candidates derived from these technologies. Preclinical studies and clinical trials and additional research and development activities will require substantial funds to complete. We believe that we will continue to expend substantial resources for the foreseeable future in connection with the development of our current product candidates and programs as well as any future product candidates we may choose to pursue, as well as the gradual gaining of control over our required manufacturing capabilities and other corporate uses. These expenditures will include costs associated with conducting preclinical studies and clinical trials, obtaining regulatory approvals, and manufacturing and supply, as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any preclinical study or clinical trial is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our current or future product candidates.
Our future capital requirements depend on many factors, including:
•the scope, progress, results and costs of researching and developing our current and future product candidate and programs, and of conducting preclinical studies and clinical trials;
•the number and development requirements of other product candidates that we may pursue, and other indications for our current product candidate that we may pursue;
•the stability, scale and yields during the manufacturing process as we scale-up production and formulation of our product candidate for later stages of development and commercialization;
•the timing of, and the costs involved in, obtaining regulatory and marketing approvals and developing our ability to establish sales and marketing capabilities, if any, for our current and future product candidates we develop if clinical trials are successful;
•our ability to establish and maintain collaborations, strategic licensing or other arrangements and the financial terms of such agreements;
•the cost of commercialization activities for our current and future product candidates that we may develop, whether alone or with a collaborator;
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•the costs involved in preparing, filing, prosecuting, maintaining, expanding,
defending and enforcing patent claims, including litigation costs and the
outcome of such litigation;
•the timing, receipt and amount of sales of, or royalties on, our future products, if any; and
A change in the outcome of any of these or other variables with respect to the development of any of our current and future product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will need additional funds to meet operational needs and capital requirements associated with such operating plans. We believe we have enough cash on hand to fund our operations for the next twelve months after the date of this Quarterly Report on Form 10-Q for the nine months endedSeptember 30, 2022 . We will be required to raise additional capital 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, 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. Cash Flows
The following table summarizes our cash flows for the following periods:
Nine Months Ended
September 30,
2022 2021
Net cash (used in) provided by:
Operating activities $ (30,163,670) $ (23,842,214)
Investing activities 2,266 (130,406)
Financing activities (2,000,000) 81,977,015
Effect of exchange rates (42,370) -
Net (decrease) increase in cash
As ofSeptember 30, 2022 , we had working capital of$58.2 million compared to working capital of$89.2 million as ofDecember 31, 2021 . The decrease of$31.0 million in working capital is primarily related to our cash spend for the nine months endedSeptember 30, 2022 .
Operating Activities:
As ofSeptember 30, 2022 , we had$59.1 million in cash. Net cash used in operating activities was$30.2 million for the nine months endedSeptember 30, 2022 consisting primarily of our net loss of$35.4 million . Changes in non-cash operating activities was$3.9 million , primarily for stock-based compensation, goodwill impairment and the change in fair value of the contingent consideration. Changes in working capital accounts had a positive impact of$1.3 million on cash primarily for an increase in accounts payable and accrued expenses of$1.8 million offset by an increase in prepaid expenses of$0.5 million . Net cash used in operating activities was$23.8 million for the nine months endedSeptember 30, 2021 consisting primarily of our net loss of$23.0 million . Changes in non-cash operating activities was$5.5 million , primarily for stock-based compensation and the change in fair value of the contingent consideration. Changes in working capital accounts had a negative impact of$6.3 million on cash primarily for an increase in prepaid expenses, and for a decrease in accounts payable and accrued expenses.
Investing Activities:
Net cash provided by investing activities was nominal during the nine months
ended
Net cash used in investing activities for the nine months endedSeptember 30, 2021 of$0.1 million was related to lab equipment purchases for research and development. Financing Activities: Net cash used in financing activities was$2.0 million for the nine months endedSeptember 30, 2022 for the contingent consideration milestone payment per theCiclofilin acquisition merger agreement. 26 -------------------------------------------------------------------------------- Table of Contents Net cash provided by financing activities was$82.0 million for the nine months endedSeptember 30, 2021 due primarily to the issuance of common stock, net of issuance costs.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of
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