What changed in this filing

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Item 1. Financial Statements

2020-11-10 compared with 2020-08-12 · 164 added, 137 removed, 363 unchanged (45% of the section changed)

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Condensed Consolidated Balance Sheets

September 30,

Current assets:

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Common stock, $0.0001 par value per share;

300,000,000 shares authorized and

40,588,004 shares issued and outstanding at June 30, 2020 and

December 31, 2019.

300,000,000 shares authorized and 47,111,659 and 40,588,004 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively.

Additional paid-in capital

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AERPIO PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Three Months Ended June 30,

Six Months Ended June 30,

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

Three Months Ended September 30,

Nine Months Ended September 30,

License revenue

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General and administrative

Restructuring expense

Restructuring (benefit) expense

Total operating expenses

Income (loss) from operations

Loss from operations

Interest income

Total other income

Net and comprehensive income (loss)

Net and comprehensive income (loss) per share

Net and comprehensive (loss) income

Net and comprehensive (loss) income per share

Basic and diluted

Weighted average number of common shares used

in computing net and comprehensive income (loss)

in computing net and comprehensive (loss) income

per share basic and diluted

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

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Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Six Months Ended June 30, 2020 (unaudited)

For the Three and Nine Months Ended September 30, 2020 (unaudited)

Stockholders' Equity

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Issuance of warrants

Stock-based compensation

Stock-based compensation expense

Net and comprehensive loss

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Issuance of warrants

Stock-based compensation

Net and comprehensive

Stock-based compensation expense

Net and comprehensive income

Balance at June 30, 2020

For the Three and Six Months Ended June 30, 2019 (unaudited)

Issuance of common stock, net of issuance costs

Stock-based compensation expense

Net and comprehensive loss

Balance at September 30, 2020

For the Three and Nine Months Ended September 30, 2019 (unaudited)

Stockholders' Equity

Balance at January 1, 2019

Cumulative effect of change in

accounting principle

Stock-based compensation

Cumulative effect of change in accounting principle

Stock-based compensation expense

Net and comprehensive loss

Balance at March 31, 2019

Stock-based compensation

Stock-based compensation expense

Net and comprehensive loss

Balance at June 30, 2019

Stock-based compensation expense

Net and comprehensive loss

Balance at September 30, 2019

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

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Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

Operating activities:

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Adjustments to reconcile net and comprehensive income (loss)

to net cash provided by (used in) operating activities:

to net cash used in operating activities:

Stock-based compensation

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Accounts payable and other current liabilities

Net cash provided by (used in) operating activities

Net cash used in operating activities

Investing activities:

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Net cash used in investing activities

Financing activities:

Proceeds from issuance of common stock

Cash paid in connection with the sale of common stock

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents, six months ended

Cash and cash equivalents, nine months ended

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

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Aerpio Pharmaceuticals, Inc.

(the “Company”) is a biopharmaceutical company focused on developing compounds that activate Tie2 to treat ocular diseases and diabetic complications, as well as other indications in which the Company believes that activation of Tie2 may have therapeutic potential, including acute respiratory distress syndrome (“ARDS”) associated with COVID-19 infections.

The Company was incorporated as Zeta Acquisition Corp.

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The Company’s pipeline includes the following programs:

Based on the preclinical proof of concept and the results of the Phase 1b trial showing a reduction in intraocular pressure (“IOP”) in patients with ocular hypertension (“OHT”) and open angle glaucoma (“OAG”), the Company initiated a Phase 2 clinical trial in June 2020 designed to evaluate the safety and efficacy of a topical formulation of razuprotafib (AKB-9778) in approximately 195 patients followed over a 28-day period.

Based on the preclinical proof of concept and the results of the Phase 1b trial showing a reduction in intraocular pressure (“IOP”) in patients with ocular hypertension (“OHT”) and open angle glaucoma (“OAG”), the Company initiated a Phase 2 clinical trial in June 2020 designed to evaluate the safety and efficacy of a topical formulation of razuprotafib (also known as AKB-9778) in approximately 195 patients followed over a 28-day period.

Patients enrolled in the trial will be administered a baseline of latanoprost ophthalmic solution 0.005%, and then randomized in a 1:1:1 fashion to receive adjunctive therapy consisting of placebo, 40 mg/ml razuprotafib once-daily, or 40 mg/ml razuprotafib twice-daily.

The primary endpoint of the study is mean diurnal IOP at 28 days in the razuprotafib treated groups compared to the latanoprost monotherapy group.

The Company expects to have results in the fourth quarter of 2020, subject to potential delays in subject enrollment and study completion, including due to delays arising from the ongoing COVID-19 pandemic.

Acute Respiratory Distress Syndrome (“ARDS”):

The Company expects to report topline results from this study in December or possibly in early January 2021 to coincide with seasonal healthcare industry conferences, subject to potential delays in study completion, including due to delays arising from the ongoing COVID-19 pandemic.

Acute Respiratory Distress Syndrome:

Based on results in preclinical studies and observations in patients in the TIME-2 and TIME-2b trials, the Company believes that a vascular endothelial receptor, Tie2, may play a pivotal role in the defense against microvascular breach in ARDS.

The Company hypothesizes that razuprotafib, the Company’s lead Tie2 activator, may have therapeutic potential for the treatment of COVID-19 associated ARDS.

In May 2020, the Company was selected by Quantum Leap Healthcare Collaborative to participate in the I-SPY COVID-19 Trial (Investigation of Serial studies to Predict Your COVID Therapeutic Response with biomarker Integration and Adaptive Learning ) to evaluate razuprotafib for the treatment of COVID-19 related ARDS in adult patients with critical COVID-19.

The Company expects the trial to be initiated during the third quarter of 2020 with trial updates anticipated in the first half of 2021, subject to potential delays in subject enrollment and study completion, including due to delays arising from the ongoing COVID-19 pandemic.

The Company hypothesizes that razuprotafib, the Company’s lead Tie2 activator, may have therapeutic potential for the treatment of COVID-19 associated ARDS and initiated two Phase 2 trials during 2020.

In May 2020, the Company was selected by Quantum Leap Healthcare Collaborative to participate in the I-SPY COVID-19 Trial (Investigation of Serial studies to Predict Your COVID Therapeutic Response with biomarker Integration and Adaptive Learning ) to evaluate subcutaneous razuprotafib for the treatment of COVID-19 related ARDS in adult patients with critical COVID-19.

Trial updates are anticipated in the first half of 2021, subject to potential delays in subject enrollment and study completion, including due to delays arising from the ongoing COVID-19 pandemic.

In August 2020, the Company initiated a second Phase 2 clinical trial (“RESCUE”) for the treatment of COVID-19 with the U.S.

Government operating through Medical Technology Enterprise Consortium (“MTEC”).

This RESCUE trial will evaluate subcutaneous razuprotafib for the prevention and treatment of ARDS in adult patients with moderate to severe COVID-19 as part of MTEC-20-09-COVID-19 Treatment Military Infectious Disease Research Program (“MIDRP”) “Development of Treatments for COVID-19”.

MTEC will provide up to $5.1 million of reimbursement related to qualified internal and external spending of the Company, as it relates to the clinical trial.

Total anticipated spend of the RESCUE clinical trial is $7.9 million.

Aerpio will support the trial with “in kind” spending in the amount of $2.8 million .

The Company expects to conduct the trial at approximately 10 clinical sites and expects the trial to be completed in the first half of 2021, subject to potential delays in subject enrollment and study completion, including due to delays arising from the ongoing COVID-19 pandemic.

Diabetic Kidney Disease:

In two consecutive trials, TIME-2 and TIME-2b, subcutaneous razuprotafib (AKB-9778) showed reduction in Urine Albumin-Creatinine Ratio (“UACR”), a measure of progression of diabetic kidney disease.

In two consecutive trials, TIME-2 and TIME-2b, subcutaneous razuprotafib showed reduction in Urine Albumin-Creatinine Ratio (“UACR”), a measure of progression of diabetic kidney disease.

The Company believes that systemic treatment with razuprotafib could have the potential to change the treatment paradigm for diabetics in the future and potentially address a major societal problem by lowering the cost of care associated generally with diabetes.

The humanized monoclonal antibody, ARP-1536, directed at the same target as subcutaneous razuprotafib (AKB-9778), is in preclinical development.

The humanized monoclonal antibody, ARP-1536, directed at the same target as subcutaneous razuprotafib, is in preclinical development.

The Company is evaluating development options for ARP-1536, including subcutaneous injection for the treatment of diabetic vascular complications, e.g., diabetic nephropathy and intravitreal injection as an adjunctive therapy for diabetic macular edema.

The Company is also developing a bispecific antibody that binds both VEGF and VE-PTP which is designed to inhibit VEGF activation and activate Tie2.

The Company is also developing a bispecific antibody that binds both v ascular endothelial growth factor (“VEGF”) and v ascular endothelial protein tyrosine phosphatase (“VE-PTP”) which is designed to inhibit VEGF activation and activate Tie2.

The Company believes this bispecific antibody has the potential to be an improved treatment for wet aged-related macular degeneration (“AMD”) and diabetic macular edema via intravitreal injection.

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HIF-1 alpha is involved in mucosal wound healing and the reduction of inflammation in the gastrointestinal tract.

Gossamer completed the Phase 1b clinical study in ulcerative colitis patients and reported results during the second quarter of 2020.

Gossamer has reported that it is planning for the commencement of its Phase 2 program for GB004 in the first half of 2021, subject to potential delays in subject enrollment and study completion, including due to delays arising from the ongoing COVID-19 pandemic.

In May 2020, the Company received a one-time payment of $15.0 million pursuant to an amendment to its license agreement with Gossamer resulting in a reduction in future potential milestone payments and tiered royalty rates over the life of the Agreement.

Gossamer completed the Phase 1b clinical trial in ulcerative colitis (“UC”) patients and reported results during the second quarter of 2020.

Gossamer has announced that, subject to developments in the ongoing COVID-19 pandemic, it plans to initiate a 12-week Phase 2 study of GB004 in patients with mild-to-moderate UC in the second half of 2020.

In May 2020, the Company received a one-time payment of $15 .0 million pursuant to an amendment to its license agreement with Gossamer resulting in a reduction in future potential milestone p ayments and tiered royalty rates over the life of the license a greement .

Gossamer is responsible for all remaining development and commercial activities for GB004.

In February 2018, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) which was declared effective by the SEC on April 11, 2018 (the “Form S-3”).

On February 21, 2018, and pursuant to the Form S-3, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co.

(“Cantor”), pursuant to which it may issue and sell, from time to time, shares of its common stock having an aggregate offering price of up to $75.0 million through Cantor as the sales agent.

Cantor may sell the Company’s common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act, including sales made directly on or through the Nasdaq Capital Market or any other existing trade market for the Company’s common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to prevailing market prices, or any other method permitted by law.

During the three months ended September 30, 2020, 6,523,655 shares of the Company’s common stock were sold under the Sales Agreement, pursuant to the Form S-3, the related prospectus, and the prospectus supplement.

The net proceeds received from this transaction were $9.3 million, after deducting expenses of approximately $403,000 (including sales agent compensation of approximately $292,000) that were direct and incremental to the sale of the Company’s common stock.

The Company’s operations to date have been limited to organizing and staffing the Company, business planning, raising capital, acquiring and developing its technology, identifying potential product candidates and undertaking preclinical and clinical studies.

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The Company’s product candidates are subject to long development cycles and there is no assurance the Company will be able to successfully develop, obtain regulatory approval for, or market its product candidates.

The Company is subject to a number of risks similar to other life science companies in the current stage of its life cycle including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testin g or clinical trials, the need to obtain marketing approval for its product candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of any of the Company’s pipeline products that a re approved, and protection of proprietary technology.

The Company is subject to a number of risks similar to other life science companies in the current stage of its life cycle including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, the need to obtain marketing approval for its product candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of any of the Company’s pipeline products that are approved, and protection of proprietary technology.

If the Company does not successfully commercialize any of its pipeline products or mitigate any of these other risks, it will be unable to generate revenue or achieve profitability.

Excluding the one-time payments from Gossamer, the Company incurred losses from operations and had negative cash flows from operating activities for the six months ended June 30, 2020 and 2019 (and since inception).

Excluding the one-time payments from Gossamer, the Company incurred losses from operations and had negative cash flows from operating activities for the nine months ended September 30, 2020 and 2019 (and since inception).

The Company’s current operating plan indicates that it will continue to incur losses from operations and generate negative cash flows from operating activities given ongoing expenditures related to the completion of its ongoing clinical trials and the Company’s lack of product revenue generating activities.

However, the Company believes it has the ability to control its current operating plan and that existing cash and cash equivalents of approximately $44.9 million at June 30, 2020 will be sufficient to allow the Company to fund its current operating plan through at least the fourth quarter of 2021.

However, the Company believes it has the ability to control its current operating plan and that existing cash and cash equivalents of approximately $47.3 million at September 30, 2020, will be sufficient to allow the Company to fund its current operating plan through the fourth quarter of 2022.

There can be no assurance, however, that the current operating plan will be achieved in the time frame anticipated by the Company, or that its cash resources will fund the Company’s operating plan for the period anticipated by the Company or that additional funding will be available on terms acceptable to the Company, or at all.

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The Company is closely monitoring the impact of COVID-19 on all aspects of its business and is taking steps to minimize the impact on its business.

However, the extent to which COVID-19 ultimately impacts the Company’s business, results of operations or financial condition will depend on future developments, which remain highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, new information that may emerge concerning the severity of COVID-19 and the effectiveness of actions taken to contain the pandemic or treat its impact, among others.

While states and jurisdictions have started to rollback stay-at-home and quarantine orders, it is difficult to predict what the lasting impact of the pandemic will be, and if the Company or any of the third parties with whom it engages were to experience additional shutdowns or other prolonged business disruptions, the Company’s ability to conduct its business in the manner and on the timelines presently planned could have a material adverse impact on the Company’s business, results of operation and financial condition.

However, the extent to which COVID-19 ultimately impacts the Company’s business, results of operations or financial condition will depend on future developments, which remain highly uncertain and cannot be predicted with confidence, such as the duration of the COVID-19 pandemic, new information that may emerge concerning the severity of COVID-19 and the effectiveness of actions taken to contain the COVID-19 pandemic or treat its impact, among others.

While some states and jurisdictions have started to rollback stay-at-home and quarantine orders and reopened in phases, it is difficult

to predict what the lasting impact of the COVID-19 pandemic will be, and if the Company or any of the third parties with whom it engage s were to experience additional shutdowns or other prolonged business disruptions, the Company ’s ability to conduct its business in the manner and on the timelines presently planned could have a material adverse impact on the Company’s business, results of operation and financial condition.

In addition, a recurrence of COVID-19 cases could cause ot her widespread or more severe impacts depending on where infection rates are highest.

The Company will continue to monitor developments as it deal s with the disruptions and uncertainties relating to the COVID-19 pandemic.

Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with U.S.

Securities and Exchange Commission (“SEC”) regulations and include all of the information and disclosures required by U.S.

The unaudited condensed consolidated financial statements have been prepared in accordance with SEC regulations and include all of the information and disclosures required by U.S.

generally accepted accounting principles (“U.S.

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Cash and cash equivalents consist of all cash on hand and $100,000 invested in short-term certificates of deposits with original maturities of three months or less at the time of purchase.

At June 30, 2020 and December 31, 2019, the Company’s cash equivalents are primarily in money market funds.

At September 30, 2020 and December 31, 2019, the Company’s cash equivalents are primarily held in money market funds.

The Company maintains balances with its banks in excess of federally insured limits.

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The Company recognizes revenue when its customer obtains control of promised goods or services in a contract for an amount that reflects the consideration the Company expects to receive in exchange for those goods or services.

For contracts with customers, the Company applies the following five-step model in order to determine this amount:

For contracts with customers, the Company applies the following five-step

model in order to determine this amount:

(i) identification of the promised goods or services in the contract;

(ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract;

(iii) measurement of the transaction price, including the constraint on variable consideration;

(iii) measurement of the tra nsaction price, including the constraint on variable consideration;

(iv) allocation of the transaction price to the performance obligations;

and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

As part of the accounting for contracts with customers, the Company must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract.

The Company then allocates the total transaction price to each performance obligation based on the estimated standalone selling prices of each performance obligation.

The Company recognizes the amount of the transaction price as revenue that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied.

The Company only app lies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

As part of the accounting for contracts with customers, the Compa ny must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract.

The Company then allocates the total transaction price to each performance obligation based on the estima ted standalone selling prices of each performance obligation.

The Company recognizes the amount of the transaction price as revenue that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfie d.

The Company enters into collaboration arrangements, under which it licenses certain rights to its intellectual property to third parties.

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Promised goods or services are considered to be separate performance obligations if they are distinct.

In order to determine the transaction price to be allocated to each performance oblig ation, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the c ontract.

In order to determine the transaction price to be allocated to each performance obligation, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract.

The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract.

When determining if variable conside ration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue.

In making these assessments, the Company considers the likelihood and magnitude of a potentia l reversal of revenue.

When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue.

In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue.

These estimates are re-assessed each reporting period as required.

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The Company’s collaborators may be required to pay the Company sales-based milestone payments or royalties on future sales of commercial products.

The Company recognizes revenues related to sales-based milestone and royalty payments upon the later to occur of (i) achievement of the collaborator’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the license to the Company’s intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.

The Company recognizes revenues related to sales-based milestone and royalty payments upon the later to occu r of (i) achievement of the collaborator’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the license to the Company’s intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.

Grant income is recognized as earned based on contract work performed.

Other income represents reimbursed internal and external qualified expenses, per the terms of the MTEC arrangement, related to the ARDS clinical trial.

Other income is recorded, and generally received, in the period the internal or external qualified clinical trial expenses are incurred, and paid, by the Company.

Research and Development

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Research and development expense consists of (i) employee-related expenses, including salaries, benefits, travel and stock-based compensation expense, (ii) external research and development expenses incurred under arrangements with third parties, such as contract research organizations and consultants, (iii) the cost of acquiring, developing and manufacturing clinical study materials, and (iv) costs associated with clinical, preclinical and regulatory activities.

The Company enters into consulting, research and other agreements with commercial firms, researchers, universities and others for the provision of go ods and services.

The Company enters into consulting, research and other agreements with commercial firms, researchers, universities and others for the provision of goods and services.

Under such agreements, the Company may pay for services on a monthly, quarterly, project, or other basis.

Such arrangements are generally cancellable upon reasonable notice and payment of costs incurred.

Costs are considered incurred base d on an evaluation of the progress to completion of specific tasks under each contract using information and data provided to the Company by its clinical sites and vendors.

Costs are considered incurred based on an evaluation of the progress to completion of specific tasks under each contract using information and data provided to the Company by its clinical sites and vendors.

These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company.

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The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position, as well as consideration of the available facts and circumstances.

As of June 30, 2020 and December 31, 2019, the Company does not have any uncertain tax positions.

As of September 30, 2020 and December 31, 2019, the Company does not have any uncertain tax positions.

The Company recognizes interest and penalties related to uncertain tax positions, if any exist, in income tax expense.

Net and Comprehensive Income (Loss) per Share Attributable to Common Stockholders

The Company’s basic net and comprehensive income (loss) per share attributable to common stockholders is calculated by dividing the net and comprehensive income (loss) by the weighted average number of shares of common stock outstanding for the period.

The diluted net and comprehensive income (loss) per share attributable to common stockholders is computed by adjusting the weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury stock method.

Net and Comprehensive (Loss) Income per Share Attributable to Common Stockholders

The Company’s basic net and comprehensive (loss) income per share attributable to common stockholders is calculated by dividing the net and comprehensive (loss) income by the weighted average number of shares of common stock outstanding for the period.

The diluted net and comprehensive (loss) income per share attributable to common stockholders is computed by adjusting the weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury stock method.

Stock-Based Compensation

The Company accounts for its stock-based compensation awards in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC 718”).

ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated statements of operations and comprehensive income (loss) based on their fair values.

All the Company’s stock-based awards are subject only to service-based vesting conditions.

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Level 3 – Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable

To the extent that a 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 the Company in determining fair value is greatest for instruments categorized in Level 3.

To the extent that a valuation is ba sed 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 the Company in determining fair value is greatest for instruments categ orized 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.

There were no transfers within the fair value hierarchy during the six months ended June 30, 2020 or 2019.

The assets of the Company measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019, are summarized below:

There were no transfers within the fair value hierarchy during the nine months ended September 30, 2020 or 2019 .

The assets of the Company measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 , are summarized below:

Fair Value Measurements Using

June 30, 2020

September 30, 2020

Cash and cash equivalents

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Cash and cash equivalents are the only financial instruments that potentially subject the Company to concentrations of credit risk.

At June 30, 2020 and December 31, 2019, the Company maintains its cash and cash equivalents with high-quality, accredited financial institutions and, accordingly, such funds are subject to minimal credit risk.

The Company has no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, if any.

Comprehensive income (loss) equaled net income (loss) for all periods presented.

At September 30, 2020 and December 31, 2019, the Company maintains its cash and cash equivalents with high-quality, accredited financial institutions and, accordingly, such funds are subject to minimal credit risk.

The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.

Comprehensive (Loss) Income

Comprehensive (loss) income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, if any.

Comprehensive (loss) income equaled net (loss) income for all periods presented.

Furniture and Equipment

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ASU 2018-07 improves financial reporting for share-based payments issued to nonemployees under ASC 718 by expanding the scope of the employee share-based payments guidance to include share-based payments issued to nonemployees.

The amendments in ASU 2018-07 are effective for public companies for fiscal years beginning after December 31, 2018, including interim periods within that fiscal year.

The amendments in ASU 2018-07 are effec tive for public companies for fiscal years beginning after December 31, 2018, including interim periods within that fiscal yea r.

The Company adopted ASU 2018-07 as of January 1, 2019 and recorded a one-time cumulative adjustment of $5,717 upon adoption .

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Accounts payable and accrued expenses are as follows:

Accrued retention bonus

Accounts payable

September 30,

Accrued project costs

Professional fees

Accounts payable

Accrued bonus

Restructuring accrual (see Note 12)

Professional fees

Accrued vacation

Restructuring accrual (see Note 12)

Accrued retention bonus

Total accounts payable and accrued expenses

As of June 30, 2020 and December 31, 2019, the Company had 300,000,000 shares of authorized common stock with par value of $0.0001 per share.

As of September 30, 2020 and December 31, 2019, the Company had 300,000,000 shares of authorized common stock with par value of $0.0001 per share.

The common stock has the following characteristics:

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Warrants to Purchase Common Stock

At June 30, 2020 and December 31, 2019, the Company had warrants outstanding for the purchase of 600,000 and 917,562 shares, respectively, of the Company’s common stock.

At September 30, 2020 and December 31, 2019, the Company had warrants outstanding for the purchase of 600,000 and 917,562 shares, respectively, of the Company’s common stock.

In October 2019, the Company issued warrants for the purchase of 600,000 shares of the Company’s common stock at an exercise price of $0.486 per share in connection with the hiring of a strategic advisor consultant for a six-month period.

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The 317,562 warrants expired on March 15, 2020, and none were exercised or settled as the fair value of the Company’s common stock was below the exercise price.

The number of shares and the exercise price shall be adjusted for standard anti-dilution events such as stock splits, combinations, reorganizations, or issue shares as part of a stock dividend.

Upon a change of control, the warrant holder will have the right to receive securities, cash or other properties it would have been entitled to receive had the warrant been exercised.

The warrants are equity classified instruments and do not contain contingent exercise provisions, or other features, that would preclude the Company from concluding that the warrants are indexed solely to the Company’s common stock.

The number of shares and the exercise price shall be adjusted for standard ant i -dilution events such as stock splits, combinations, reorganizations, or issue shares as part of a stock dividend.

Upon a change of control, the warrant holder will have the right to receive securities, cash or other properties it would have b een entitled to receive had the warrant been exercised.

Preferred Stock

As of June 30, 2020 and December 31, 2019, the Company had 10,000,000 shares of preferred stock, par value $0.0001 per share, in authorized capital.

No preferred stock was issued and outstanding at June 30, 2020 and December 31, 2019.

As of September 30, 2020 and December 31, 2019, the Company had 10,000,000 shares of preferred stock, par value $0.0001 per share, in authorized capital.

No preferred stock was issued and outstanding at September 30, 2020 and December 31, 2019.

Stock-Based Compensation

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The fair value of the options at the date of grant is recognized as an expense over the requisite service period.

During the three months ended June 30, 2020 and 2019, option awards to purchase an aggregate of 260,720 and 2,801,600 shares of common stock were granted, respectively, and option awards to purchase an aggregate of 962,720 and 4,622,428 shares of common stock were granted in the six months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020 and December 31, 2019, 3,570,705 and 1,983,093 shares were reserved for issuance under the 2017 Plan, respectively.

The following table summarizes the stock option activity during the six months ended June 30, 2020 :

No option awards to purchase common stock were granted during the three months ended September 30, 2020 and 2019.

Option awards to purchase an aggregate of 962,720 and 4,622,428 shares of common stock were granted in the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020 and December 31, 2019, 3,570,705 and 1,983,093 shares were reserved for issuance under the 2017 Plan, respectively.

The following table summarizes the stock option activity during the nine months ended September 30, 2020:

Weighted Average

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Expired/cancelled

Outstanding, June 30, 2020

Expected to vest, June 30, 2020

Options exercisable, June 30, 2020

Aggregate intrinsic value represents the estimated fair value of the Company’s common stock at in excess of the weighted average exercise price multiplied by the number of options outstanding or exercisable.

As of June 30, 2020, there was $2,108,948 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 1.98 years.

Outstanding, September 30, 2020

Expected to vest, September 30, 2020

Options exercisable, September 30, 2020

Aggregate intrinsic value represents the estimated fair value of the Company’s common stock in excess of the weighted average exercise price multiplied by the number of options outstanding or exercisable.

As of September 30, 2020, there was $1,776,807 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 1.80 years.

Compensation Expense Summary

The Company recognized the following compensation cost related to stock-based compensation activity for the periods presented:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Research and development

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Option pricing and models require the input of various assumptions, including the option’s expected life, expected dividend yield, price volatility and risk-free interest rate of the underlying stock.

Accordingly, the weighted-average fair value of the options granted during the three and six months ended June 30, 2020 was $0.76 and $0.43 per share, respectively.

Accordingly, the weighted-average fair value of the options granted during the three and nine months ended September 30, 2020 and 2019 was $0.43 and $1.11 per share, respectively.

No options were granted during the three months ended September 30, 2020 and September 30, 2019.

The calculation was based on the following assumptions.

Three Months Ended June 30,

Six Months Ended June 30,

Nine Months Ended September 30,

Expected term (years)

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Expected dividend yield

The Company did not record a current or deferred income tax expense or benefit for the three and six months ended June 30, 2020 and 2019, due to the Company’s net and comprehensive income (loss) and increases in its deferred tax asset valuation allowance.

Net and Comprehensive Income ( Loss ) per Share Attributable to Common Stockholders

The following table sets forth the computation of the Company’s basic and diluted net and comprehensive income (loss) per share (“EPS”) attributable to common stockholders for the periods presented:

Three Months Ended June 30,

Six Months Ended June 30,

Net and comprehensive income (loss) per share

The Company did not record a current or deferred income tax expense or benefit for the three and nine months ended September 30, 2020 and 2019, due to the Company’s net and comprehensive (loss) income and increases in its deferred tax asset valuation allowance.

Net and Comprehensive (Loss) Income per Share Attributable to Common Stockholders

The following table sets forth the computation of the Company’s basic and diluted net and comprehensive (loss) income per share (“EPS”) attributable to common stockholders for the periods presented:

Three Months Ended September 30,

Nine Months Ended September 30,

Net and comprehensive (loss) income per share

Weighted average common shares used in

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Holders of non-vested stock-based compensation awards do not have voting rights.

The following weighted average common stock equivalents were excluded from the calculation of basic and diluted net and comprehensive income (loss) per share for the periods presented because including them would have had an anti-dilutive effect:

Six Months Ended June 30,

The following weighted average common stock equivalents were excluded from the calculation of basic and diluted net and comprehensive loss per share for the three months ended September 30, 2020 and 2019 because including them would have had an anti-dilutive effect.

The following weighted average common stock equivalents were excluded from the calculation of diluted net and comprehensive income per share for the nine months ended September 30, 2020 and basic and diluted net and comprehensive loss per share for the nine months ended September 30, 2020 and 2019 because including them would have had an anti-dilutive effect:

Three Months Ended September 30,

Nine Months Ended September 30,

Options to purchase common stock

Warrants to purchase common stock

At June 30, 2020, the Company is a party to one property lease in Cincinnati, Ohio under an arrangement which provides the right to use the underlying asset and require lease payments for the lease term.

At September 30, 2020, the Company is a party to one property lease in Cincinnati, Ohio under an arrangement which provides the right to use the underlying asset and require lease payments for the lease term.

During the fourth quarter of 2019, the Company terminated its leases in Lexington, Massachusetts and Dexter, Michigan;

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Lease agreements with lease and non-lease components are generally accounted for as a single lease component.

The Company’s operating lease expense is recognized on a straight-line basis over the lease term and are recorded in general and administrative expenses on the condensed consolidated statements of operations and comprehensive income (loss).

The following table presents the lease cost and information related to the right-of-use assets and operating lease liabilities:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Average rent expense

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measurement of operating lease liabilities

The weighted average remaining lease term

and discount rate at June 30, 2020

The weighted average remaining lease term and discount rate at September 30, 2020

Weighted-average remaining lease

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Weighted-average discount rate – operating leases

As of June 30, 2020, future payments related to operating leases activities are presented in the table below:

As of September 30, 2020, future payments related to operating leases activities are presented in the table below:

Operating leases

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In March 2020, the Company’s Board of Directors approved an increase of 350,000 shares to the ESPP, which increase was effective as of January 1, 2020.

No shares under the ESPP are outstanding at June 30, 2020 and December 31, 2019.

No shares under the ESPP are outstanding at September 30, 2020 and December 31, 2019.

License Agreement

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On May 12, 2020, the Company entered into Amendment No.

1 to the Gossamer License Agreement (“Amendment 1”).

Pursuant to Amendment 1, Gossamer made a payment to the Company of $15.0 million on May 12, 2020.

For the three and six months ended June 30, 2020, the Company recognized revenue of $15.0 million based on the terms of Amendment 1.

1 to the Gossamer License Agreement (“Amendment No.

Pursuant to Amendment No.

1, Gossamer made a payment to the Company of $15.0 million on May 12, 2020.

For the nine months ended September 30, 2020, the Company recognized revenue of $15.0 million based on the terms of Amendment No.

1, and no such revenue was recognized during the three months ended September 30, 2020.

Gossamer is responsible for the development and commercialization of the licensed products, and a joint development committee has been formed to oversee the development and manufacturing activities related to the licensed products.

Under the terms of the Gossamer License Agreement and as amended by Amendment 1 (the “Gossamer Agreement”), Gossamer is obligated to use its commercially reasonable efforts to develop and commercialize licensed products in the United States, two major European countries and Japan for at least one of the initial indications.

The Gossamer Agreement includes an exclusivity provision that prohibits the Company from developing, manufacturing or commercializing, and prohibits Gossamer from clinically developing or commercializing certain HIF stabilizing compounds other than as permitted in the Gossamer Agreement.

U nder the terms of the Gossamer Agreement , t he Company is eligible to receive up to $40.0 million in approval milestone payments related to indications in ulcerative colitis and Crohn’s disease, and up to $50.0 million in sales milestone payments .

The Compa ny is also eligible to receive the tiered royalties on sales of licensed products from percentages ranging from a low-single-digit to mid-single-digit , subject to certain customary reductions.

Under the terms of the Gossamer License Agreement and as amended by Amendment No.

1 (collectively, the “Amended Gossamer License Agreement”), Gossamer is obligated to use its commercially reasonable efforts to develop and commercialize licensed products in the United States, two major European countries and Japan for at least one of the initial indications.

The Amended Gossamer License Agreement includes an exclusivity provision that prohibits the Company from developing, manufacturing or commercializing, and prohibits Gossamer from clinically developing or commercializing certain HIF stabilizing compounds other than as permitted in the Amended Gossamer License Agreement.

Under the terms of the Amended Gossamer License Agreement, the Company is eligible to receive up to $40.0 million in approval milestone payments related to indications in ulcerative colitis and Crohn’s disease, and up to $50.0 million in sales milestone payments.

The Company is also eligible to receive the tiered royalties on sales of licensed products from percentages ranging from a low-single-digit to mid-single-digit, subject to certain customary reductions.

In addition, under certain circumstances, in lieu of receiving the foregoing milestone payments and royalties, the Company may elect to receive 20% of payments received by Gossamer and its stockholders (with some exclusions) in connection with Gossamer’s grant of a sublicense or other rights to the licensed products or if Gossamer undergoes a change of control and the value of the transaction exceeds a certain value (provided that Gossamer can prevent the Company from exercising this option if the parent company of Gossamer is the entity undergoing the change of control, in which case each of the royalty rate percentages described above would automatically be increased by low single digits).

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Such amount may be reduced if the transaction includes pharmaceutical candidates or products or other named asset categories in addition to the licensed products.

The Gossamer Agreement expires on a licensed-product-by-licensed-product and country-by-country basis on the later of fifteen years from the date of first commercial sale or when there is no longer a valid patent claim covering such licensed product in such country.

Either party may terminate the Gossamer Agreement for an uncured material breach by the other party or upon the bankruptcy or insolvency of the other party.

Gossamer may terminate the Gossamer Agreement in the event Gossamer determines there is a potential safety or efficacy issue with the licensed products.

The Company may terminate the Gossamer Agreement if Gossamer institutes certain actions related to the licensed patents.

The Amended Gossamer License Agreement expires on a licensed-product-by-licensed-product and country-by-country basis on the later of fifteen years from the date of first commercial sale or when there is no longer a valid patent claim covering such licensed product in such country.

Either party may terminate the Amended Gossamer License Agreement for an uncured material breach by the other party or upon the bankruptcy or insolvency of the other party.

Gossamer may terminate the Amended Gossamer License Agreement in the event Gossamer determines there is a potential safety or efficacy issue with the licensed products.

The Company may terminate the Amended Gossamer License Agreement if Gossamer institutes certain actions related to the licensed patents.

Under certain termination circumstances, the Company would have worldwide rights to the terminated program.

As of June 30, 2020 and 2019, all development milestones, sales-based milestones and royalty payments within the Gossamer License Agreements are constrained to the point where no transaction price has been allocated to the future milestones or royalty payments.

As of September 30, 2020 and 2019, all development milestones, sales-based milestones and royalty payments within the Amended Gossamer License Agreement are constrained to the point where no transaction price has been allocated to the future milestones or royalty payments.

Restructuring

In April 2019, the Company executed a realignment plan to reduce operating costs and better align its workforce with the needs of its ongoing business and in October 2019, the Company’s Chief Executive Officer and Chief Financial Officer departed from their positions.

As a result, the Company recorded employee severance expense of $0.9 million during the three and six months ended June 30, 2019 and an additional $1.0 million in the three months ended December 31, 2019.

As a result, the Company recorded employee severance (benefit) expense of ($38,810) and $0.9 million during the three and nine months ended September 30, 2019, respectively, and an additional $1.0 million in the three months ended December 31, 2019.

The severance liability as of December 31, 2019 was approximately $0.8 million and was included in accounts payable and accrued expenses in the condensed consolidated balance sheet.

Total cash payments against the severance liability was approximately $0.3 million and $0.6 million in the three and six months ended June 30, 2020, respectively.

The remaining liability as of June 30, 2020, was approximately $0.3 million and is included in accounts payable and accrued expenses in the condensed consolidated balance sheet.

These amounts are expected to be substantially paid in cash by October 31, 2020.

Subsequent Event

In February 2018, the Company filed a shelf registration statement on Form S-3 with the SEC which was declared effective by the SEC on April 11, 2018 (the “Form S-3”).

On February 21, 2018, and pursuant to the Form S-3, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co.

(“Cantor”), pursuant to which it may issue and sell, from time to time, shares of its common stock having an aggregate offering price of up to $75.0 million through Cantor as the sales agent.

On August 5, 2020, 1,480,000 shares of the Company’s common stock were sold under the Sales Agreement, pursuant to the Form S-3, the related prospectus, and the prospectus supplement.

The net proceeds received from this transaction were $2.3 million, after deducting expenses of approximately $186,000 (including sales agent compensation of approximately $75,000) related to the sale of the Company’s common stock.

Total cash payments against the severance liability was approximately $0.2 million and $0.8 million in the three and nine months ended September 30, 2020, respectively.

The remaining liability as of September 30, 2020, was approximately $38,000 and is included in accounts payable and accrued expenses in the condensed consolidated balance sheet.

These amounts were paid in cash in October 2020.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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the ultimate impact of the current coronavirus pandemic (“COVID-19”), or any other health epidemic, on our business, our clinical trials, our research programs, healthcare systems or the global economy as a whole;

other risks and uncertainties, including those listed under the caption “Risk Factors.”

other material risks and uncertainties, including those listed under the caption “Risk Factors” in this Quarterly Report on Form 10-Q.

In some cases, forward-looking statements can be identified by terminology such as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements