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Item 7. Management’s Discussion and Analysis

2021-03-11 compared with 2020-03-16 · 145 added, 721 removed, 211 unchanged (80% of the section changed)

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Aerpio Pharmaceuticals, Inc.

is a biopharmaceutical company focused on developing compounds that activate Tie2 to treat ocular diseases and diabetic complications.

In March 2019, we announced the top line results of the Phase 2b (“TIME-2b”) clinical trial which we initiated in June 2017 for the treatment of non-proliferative diabetic retinopathy (“NPDR”) a disease characterized by progressive compromise of blood vessels in the back of the eye.

While we believed AKB-9778 had the potential to slow down or possibly reverse retinal vascular changes caused by diabetes, the subcutaneous administration of AKB-9778 twice daily did not meet the study’s primary endpoint of increasing the percentage of patients with an improvement of two or more steps in diabetic retinopathy severity score (“DRSS”) in the study eye, compared to placebo.

However, the TIME-2b study further supported the reduction of intraocular pressure (“IOP”) seen with subcutaneous AKB-9778 in the previous TIME-2 study.

Importantly, IOP is the only identified modifiable risk factor for prevention of vision loss in patients with open angle glaucoma (“OAG”) and ocular hypertension (“OHT”).

Moreover, recently published mouse and human genetic data implicate the Angpt/Tie2 pathway in maintenance of Schlemm’s canal, a critical component of the conventional outflow tract.

The conventional outflow tract is the main conduit for fluid drainage from the front of the eye and the principle regulator of IOP.

Based on these findings, we developed a topical ocular formulation of AKB-9778 and observed in preclinical studies activation of Tie2 in Schlemm’s canal, IOP reduction via enhanced outflow facility and favorable tolerability.

OAG Clinical Trial

In June 2019, we initiated a double-masked, multiple-ascending dose Phase 1b trial and enrolled four cohorts of 12 subjects each.

Subjects received increasing daily doses of a topical ocular formulation of AKB-9778 or placebo for seven days.

is a biopharmaceutical company focused on developing compounds that activate Tie2 as well as other indications in which the Company believes that activation of Tie2 may have therapeutic potential.

Our product candidates include razuprotafib (formerly known as AKB-9778), a small molecule VE-PTP inhibitor.

In March 2019, we announced topline results from our Phase 2b (“TIME-2b”) clinical trial of AKB-9778 for the treatment of non-proliferative diabetic retinopathy.

Although the results did not meet the study’s primary endpoint, we believe that the TIME-2b study further supported the reduction of intraocular pressure (“IOP”) seen with subcutaneous razuprotafib in the previous TIME-2 study.

Based on these findings, we developed a topical ocular formulation of razuprotafib, and observed in preclinical studies activation of Tie2 in Schlemm’s canal, IOP reduction via enhanced outflow facility and favorable tolerability.

In June 2019, we initiated a double-masked, multiple-ascending dose Phase 1b clinical trial for open angle glaucoma (“OAG”).

We enrolled four cohorts of 12 subjects each and subjects received increasing daily doses of a topical ocular formulation of razuprotafib or placebo for seven days.

The primary endpoint of the trial was ocular safety and tolerability, with IOP lowering as the key pharmacodynamic endpoint.

In October 2019, we announced interim results from our Phase 1b clinical trial.

The unmasked interim analysis, limited to the first three cohorts, showed the topical ocular administration of AKB-9778 was well tolerated.

Compared to placebo, there was a dose dependent increase in minimal to mild conjunctival hyperemia with AKB-9778, which was transient and generally considered non-adverse, and a time and dose dependent reduction in IOP that, in the highest once daily (“QD”) dose cohort peaked at 4 hours post-dose and was sustained through eight hours on day 7, returning to baseline levels at 24 hours post-dose.

Based on these data, a cohort of 43 patients with OHT/OAG (hypertensive eyes) was added to the ongoing study to assess safety and pilot efficacy in the target patient population.

In January 2020, we announced the results of the fifth cohort of subjects noting subjects in cohort five randomized to the active arm exhibited statistically significant decreases in IOP at all post-AKB-9778 administration time points on both days 1 and 7 compared with day -1 baseline values when they were being treated with prostaglandin alone.

When the change is placebo-corrected, AKB-9778 plus prostaglandin versus prostaglandin alone produced a statistically significant decrease in IOP on Day 7 at 0, 4 and 8 hours post dose as compared to placebo.

We believe these results suggest a persistent IOP-lowering activity from adding AKB-9778 to standard-of-care prostaglandin therapy.

Topical ocular administration of AKB-9778 was well tolerated over seven days in cohort 5.

The unmasked interim analysis, limited to the first three cohorts, showed the topical ocular administration of razuprotafib was well tolerated.

Compared to placebo, there was a dose dependent increase in minimal to mild conjunctival hyperemia with razuprotafib, which was transient and generally considered non-adverse, and a time and dose dependent reduction in IOP that, in the highest once daily (“QD”) dose cohort peaked at 4 hours post-dose and was sustained through eight hours on day 7, returning to baseline levels at 24 hours post-dose.

Based on these data, a cohort of 43 patients with ocular hypertension (“OHT”)/OAG (hypertensive eyes) was added to the ongoing study to assess safety and pilot efficacy in the target patient population.

In January 2020, we announced the results of the fifth cohort of subjects noting subjects in cohort five randomized to the active arm exhibited statistically significant decreases in IOP at all post razuprotafib administration time points on both days 1 and 7 compared with day -1 baseline values when they were being treated with prostaglandin alone.

When the change is placebo-corrected, razuprotafib plus prostaglandin versus prostaglandin alone produced a statistically significant decrease in IOP on Day 7 at 0, 4 and 8 hours post dose as compared to placebo.

We believe these results suggest a persistent IOP-lowering activity from adding razuprotafib to standard-of-care prostaglandin therapy.

Topical ocular administration of razuprotafib was well tolerated over seven days in cohort five.

There were no reports of conjunctival hemorrhage or pain on instillation during the seven days of dosing and no systemic/non-ocular AEs were observed.

Based on the preclinical proof of concept and the results of the Phase 1b trial showing a reduction in IOP in patients with OHT and OAG, we plan to further advance the glaucoma program into a Phase 2 clinical trial with results expected in the first quarter of 2021.

Based on the preclinical proof of concept and the results of the Phase 1b trial showing a reduction in IOP in patients with OHT and OAG, we initiated a Phase 2 clinical trial in June 2020 designed to evaluate the safety and efficacy of a topical formulation of razuprotafib 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

In December 2020, we reported that r azuprotafib met the primary efficacy endpoint at Day 28 with the twice-daily (“BID”) dose group in our double-blind, placebo-controlled Phase 2 trial in patients with elevated IOP associated with OAG or OHT.

The change from baseline in diurnal mean IOP at Day 28 of study eyes treated with razuprotafib BID plus latanoprost showed a statistically significant improvement, or drop in IOP, (two-sided p-value 0.0130 and LS mean difference of -0.92 mm Hg) compared to those treated with latanoprost monotherapy.

The razuprotafib once-daily (“QD”) dose group did not show a statistically significant improvement at Day 28.

Further analysis of the results demonstrated that razuprotafib had a larger IOP reduction after longer duration dosing (28 days versus 14 days) consistent with its potential mechanism of repairing Schlemm’s canal.

Razuprotafib also produced larger IOP reductions in patients with higher starting IOP, or a 1.6 mmHg IOP reduction in patients with post wash-out IOP’s of >26 mmHg and the topical drops were well tolerated in this trial.

While the trial met the primary efficacy endpoint at Day 28 with the BID group, the IOP decrease was not at a level deemed sufficient to move to Phase 3 development.

Therefore, f ollowing the announcement regarding the topline results from the Phase 2 clinical trial of razuprotafib in patients with elevated IOP associated with OAG or OHT, we initiated a process to explore a range of strategic alternatives focused on maximizing stockholder value from our clinical assets and cash resources.

As part of this process, we are exploring strategic options for partnering our programs, as well as the potential for an acquisition, company sale, merger, business combination, asset sale, in-license, out-license or other strategic transaction.

There can be no assurance that this exploration of strategic alternatives will result in the Company entering or completing any transaction.

Ladenburg Thalmann & Co.

and Duane Nash, M.D., J.D., M.B.A, have been retained with respect to the strategic review process.

In January 2021, we executed a realignment plan to reduce operating costs and better align our workforce with the needs of our ongoing business.

The realignment plan reduces our current workforce by 7 employees, representing approximately 58% of our workforce.

As a result of this realignment plan, we estimate that we will incur one-time employee related severance expenses of approximately $1.2 million in the first quarter of 2021.

We anticipate the majority of the one-time employee severance liability to be paid during 2021.

The charges that we expect to incur in connection with the realignment plan are subject to a number of assumptions, and actual results may differ from our original estimate.

We may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the realignment plan.

Acute Respiratory Distress Syndrome

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

We hypothesize that razuprotafib, our 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, we were selected by Quantum Leap Healthcare Collaborative to participate in the I-SPY COVID 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 (ClinicalTrials.gov Identifier:

NCT04488081).

The trial was initiated during the third quarter of 2020 but in January 2021, the Data Monitoring Committee recommended discontinuation of razuprotafib after 21 patients due to the complexity of monitoring patients in the setting of a surge in ICU patients.

There were no apparent safety signals associated with razuprotafib in these 21 patients and we believe the scientific basis is sound for continuing to evaluate the drug in patients presenting with ARDS across a broader array of infections.

In August 2020, we announced the receipt of funding to evaluate subcutaneous razuprotafib in a new randomized, investigational trial for the prevention and treatment of ARDS in adult patients with moderate to severe COVID-19 (“RESCUE” trial;

ClinicalTrials.gov Identifier:

NCT04511650).

The 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 the MTEC-20-09-COVID-19 Treatment Military Infectious Disease Research Program (“MIDRP”).

The Medical Technology Enterprise Consortium (“MTEC”), a non-profit organization primarily funded by the U.S.

Army Medical Research and Development Command, 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.

The RESCUE clinical trial was initiated during the third quarter of 2020 but we decided to stop recruiting in February 2021 after the first 31 patients were enrolled based on challenges recruiting and monitoring patients in the current pandemic environment.

There were no apparent safety signals associated with dosing COVID-19 patients in the RESCUE trial and we plan to further analyze the data to assess trends in efficacy and biomarkers.

We expect to report top-line data in the second quarter of 2021.

Diabetic Kidney Disease

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

In a post-hoc analysis of the earlier TIME-2 clinical trial, there was a 21% reduction (geometric mean) in UACR from baseline in the AKB-9778 treatment arms, but an overall increase in UACR in the placebo arm.

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.

In a post-hoc analysis of the earlier TIME-2 clinical trial, there was a 21% reduction (geometric mean) in UACR from baseline in the razuprotafib treatment arms, but an overall increase in UACR in the placebo arm.

The prospective UACR analyses from the recently completed TIME-2b trial largely replicated the results from the previous trial and reinforced the potential beneficial effects of Tie2 activation in diabetic kidney disease.

We believe that systemic treatment with AKB-9778 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.

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

We believe 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.

ARP-1536 and Bi-specific Antibody

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

We are 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.

Bi-specific Antibody

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

We are 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.

We believe this bispecific antibody has the potential to be an improved treatment for wet 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 has completed the Phase 1 multiple ascending dose (“MAD”) clinical study and is currently running a Phase 1b clinical study in ulcerative colitis patients.

Gossamer has progressed GB004 during 2019 by completing the Phase 1 study in healthy volunteers and initiating a Phase 1b study in ulcerative colitis patients of 28 day duration.

Gossamer expects to have results from the Phase 1b study in the first half of 2020.

Gossamer has completed the Phase 1 multiple ascending dose (“MAD”) clinical study and is currently running a Phase 1b clinical study in ulcerative colitis (“UC”) patients.

Gossamer has progressed GB004 during 2019 by completing the Phase 1 trial in healthy volunteers and initiating a Phase 1b study in ulcerative colitis patients of 28-day duration.

Gossamer reported topline results from the Phase 1b study in the second quarter of 2020 and announced that, subject to developments in the ongoing COVID-19 pandemic, it initiated a 12-week Phase 2 study of GB004 in patients with mild-to-moderate UC in the second half of 2020.

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

In April 2019, we adopted a realignment plan to reduce operating costs and better align our workforce with the needs of our ongoing business.

The realignment plan reduced our workforce by 11 employees, representing approximately 41% of our workforce.

On October 15, 2019, our Chief Executive Officer and our Chief Financial and Business Officer departed from their positions.

Our Chief Executive Officer also resigned as a director.

As a result of these actions, we recorded severance expense of $1.9 million during the year ended December 31, 2019 for employee related costs, including severance benefits and payment of healthcare insurance premiums .

Additionally, we recorded a one-time stock-based compensation cumulative reversal of $1.1 million during the year ended December 31, 2019 for the forfeitures of outstanding equity awards .

We anticipate that such employee related costs will be paid by the fourth quarter of 2020.

The total remaining liability under these severance-related actions was $0.8 million as of December 31, 2019.

Our primary source of liquidity to date has been through public and private sales of our common stock, redeemable convertible preferred stock, convertible debt and the proceeds from the License Agreement entered into with Gossamer (“Gossamer License Agreement”).

Our primary source of liquidity to date has been through public and private sales of our common stock, redeemable convertible preferred stock, convertible debt and the proceeds from a license agreement entered into with Gossamer (the “Gossamer License Agreement”), as amended by that certain Amendment No.

1 to the Gossamer License Agreement (“Amendment No.

1” and together with the Gossamer License Agreement, as amended by Amendment No.

1, the “Amended Gossamer License Agreement”).

For the year ended December 31, 2020, we generated $15.0 million in revenue pursuant to Amendment No.

We will need to raise additional funds to further advance our clinical research programs, commence additional clinical trials and commercialize our products, if approved.

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If we are unable to raise the necessary funds when needed or reduce spending on currently planned activities, we may not be able to continue the development of our product candidates or we could be required to delay, scale back or eliminate some or all of our development programs and other operations and will materially harm our business and consolidated financial position.

We expect to continu e to incur significant expenses and operating losses for the foreseeable future as a result of our ongoing activities.

We are subject to a number of risks similar to other life science companies in the current stage of our life cycle, including, but not li mited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, competitors developing new technological innovations, and protection of proprietary technology.

We expect to continue to incur significant expenses and operating losses for the foreseeable future as a result of our ongoing activities.

We are subject to a number of risks similar to other life science companies in the current stage of our life cycle, including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, competitors developing new technological innovations, and protection of

proprietary technology.

If we do not successfully mitigate any of these risks, we will be unable to generate revenue or achieve profitability.

Except for the Gossamer License Agreement that we entered into with Gossamer in June 2018, our operations to date have been limited to organizing and staffing our Company, business planning, raising capital, acquiring and developing our technology, identifying potential product candidates and undertaking preclinical and clinical studies.

For the year ended December 31, 2018, we generated $20.2 million in revenue related to the Gossamer License Agreement and transition services provided to Gossamer.

However, there can be no assurance of future revenues either from future payments related to the Gossamer License Agreement, transition services or from our product candidates.

Except for the Amended Gossamer License Agreement that we entered into with Gossamer in June 2018 and amended in May 2020, our operations to date have been limited to organizing and staffing our Company, business planning, raising capital, acquiring and developing our technology, identifying potential product candidates and undertaking preclinical and clinical studies.

There can be no assurance of future revenues either from future payments related to the Amended Gossamer License Agreement, transition services or from our product candidates.

Our product candidates are subject to long development cycles, and there is no assurance we will be able to successfully develop, obtain regulatory approval for, or market our product candidates.

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If the Company cannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and the Company may have to cease operations.

Based on the Company’s current cash reserves of $38.5 million at December 31, 2019 and financial condition as of this Annual Report on Form 10-K, w e believe our existing cash and cash equivalent will be sufficient to fund currently planned operations at least through the second quarter of 2021.

Based on the Company’s current cash reserves of $42.6 million at December 31, 2020 and financial condition as of this Annual Report on Form 10-K, we believe our existing cash and cash equivalent will be sufficient to fund currently planned operations through the fourth quarter of 2022.

The Company is currently evaluating a range of strategic alternatives focused on maximizing stockholder value from our clinical assets and cash resources.

There can be no assurance that this exploration of strategic alternatives will result in the Company entering or completing any transaction.

COVID-19 Considerations:

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, as a global pandemic, which continues to spread throughout the United States and around the world.

The COVID-19 pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, stay-at-home orders, travel restrictions, mandated business closures and other public health safety measures.

In addition, in response to the spread of COVID-19, we have continued to keep our executive offices closed with our employees continue to work outside of our offices.

We are closely monitoring the impact of COVID-19 on all aspects of our business, including how it may impact our planned Phase 2 clinical trial for our glaucoma program, expected timelines and costs on an ongoing basis.

We do not yet know the full extent of potential delays or the impact on our business, our planned clinical trial, our research programs, healthcare systems or the global economy and we cannot presently predict the scope and severity of any potential business shutdowns or disruptions.

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

While some states and jurisdictions have started to rollback stay-at-home orders, quarantines and similar restrictions and reopened in phases, the regulations vary on a state by state basis and the impact of loosening of those restrictions is not yet known.

If we or any of the third parties with whom we engage were to experience additional shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could have a material adverse impact on our business, results of operation and financial condition.

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

We continue to monitor developments as we deal with the disruptions and uncertainties relating to the COVID-19 pandemic.

Basis of Presentation

The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information management believes is relevant for an assessment and understanding of the consolidated balance sheets and the consolidated statements of operations and comprehensive loss presented herein.

The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the consolidated balance sheets and the consolidated statements of operation and comprehensive loss presented herein.

The following discussion and analysis are based on our consolidated financial statements contained in this Annual Report on Form 10-K, which we have prepared in accordance with U.S.

generally accepted accounting principles or GAAP.

generally accepted accounting principles (“U.S.

GAAP” or “GAAP”).

You should read the discussion and analysis together with such consolidated financial statements and the related notes thereto.

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License revenue relates to the Gossamer License Agreement.

For the foreseeable future, we expect substantially all of our revenue will be generated from the Gossamer License Agreement and any other collaborations into which we may enter.

Research and Development Expenses

Research and development costs are expensed as incurred.

Research and development expenses are expensed as incurred.

Research and development expenses consist primarily 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 (“CRO’s”) and consultants, (iii) the cost of acquiring, developing, and manufacturing clinical study materials, and (iv) costs associated with preclinical, clinical and regulatory activities.

Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and clinical sites.

As we continue to invest in basic research and clinical development of our product candidates, we expect research and development expenses to increase in absolute dollars.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation and related costs for finance, human resources and other administrative personnel, including stock-based compensation, employee benefits and travel.

General and administrative expenses consist primarily of compensation and related costs for our finance, human resources and other administrative personnel, including stock-based compensation, employee benefits and travel.

In addition, general and administrative expenses include third-party consulting, legal, patent, audit, accounting services and facilities costs.

We expect to continue to incur general and administrative expenses due to additional legal, accounting, insurance, investor relations and other costs associated with being a public company, as well as other costs associated with our business.

Restructuring Expense

Restructuring expense consists primarily of severance related expenses of employees terminated as a result of the Company’s restructuring efforts.

Restructuring expense consists primarily of severance related expenses of employees terminated as a result of our restructuring efforts.

Expenses include continued payroll, benefits and outplacement services (collectively “severance”) as defined and agreed upon by the respective employees’ severance agreement.

Severance was recognized as restructuring expense on the dates when employees were notified of the restructuring event.

A corresponding restructuring accrual was also recorded and will be reduced as payments are made to the former employees.

Severance is recognized as restructuring expense when employees are notified of the restructuring event with a corresponding restructuring accrual which was reduced as payments are made to the employees.

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

Other income is recorded, and generally received, in the period the internal or external qualified clinical trial as we incur and pay expenses.

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

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Years Ended December 31,

License revenue, and other

License revenue

Operating expenses

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Comparison of Years Ended December 31, 2020 and 2019

License Revenue, and Other

License revenue, and other for the year ended December 31, 2018 consists of the $20.0 million upfront payment received upon execution of the Gossamer License Agreement during the second quarter of 2018 and certain transition services provided to Gossamer as part of the Gossamer License Agreement.

No such license agreement was executed in 2019, nor were any milestones of the Gossamer License Agreement achieved in 2019.

License Revenue

License revenue for the year ended December 31, 2020 of $15.0 million related to payment received as consideration pursuant to Amendment No.

1 of the Gossamer License Agreement.

This revenue was recognized when cash was received upon execution of Amendment No.

1 on May 12, 2020.

There were no milestones achieved related to the Gossamer License Agreement in 2020 or 2019.

No such license agreement amendment was executed in 2019.

Operating Expenses

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Years Ended December 31,

Operating expenses:

Research and development

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Research and development expenses for the year ended December 31, 2020, decreased $0.2 million, or 1.8%, compared to the year ended December 31, 2019.

This was the result of decreased spending on clinical trials (TIME-2b vs Phase 1 Glaucoma) and a reduction in expenses related to Research and Development personnel during 2019.

This was the result of decreased spending on clinical trials during 2020, specifically the Phase 2 program for glaucoma, and the I-SPY and RESCUE clinical trials, compared to the spending related to the completion of razuprotafib TIME-2b and glaucoma Phase 1b clinical trial during 2019.

General and Administrative

General and administrative expenses for the year ended December 31, 2020, decreased $1.0 million, or 10.2%, compared to the year ended December 31, 2019.

This decrease was primarily attributable to a decrease in stock-based compensation of $2.5 million, employee related expenses of $0.8 million and general office expenses of $0.7 million related to the Company’s restructuring efforts in 2019, offset by an increase in legal expenses of $0.3 million.

This decrease was primarily attributable to a decrease in employee related expenses of $0.7 million, legal expenses of $0.3 million and general office expenses of $0.8 million related to the Company’s restructuring efforts in 2019, offset by an increase in liability insurance of $0.3 million, consulting expense of $0.3 million and stock-based compensation of $0.2 million.

Restructuring Expense

Restructuring expenses for the year ended December 31, 2019 were $1.9 million and result of a reduction of headcount during 2019.

Restructuring expenses for the year ended December 31, 2019 was $1.9 million and result of a reduction of headcount during 2019.

No such actions were taken during 2020.

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Total other income

Other income for the year ended December 31, 2020 of $1.8 million represents reimbursed internal and external qualified expenses related to the ARDS RESCUE clinical trial, per the terms of the MTEC arrangement.

No such arrangement existed in 2019.

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

Grant income amounts can vary greatly from period to period depending on the funding and work performed.

Grant income increased in year ended December 31, 2019 compared to year ended December 31, 2018 primarily due to a new grant awarded during 2019 for development of ARP-1536.

Grant income decreased in year ended December 31, 2020 compared to year ended December 31, 2019 primarily due to a grant awarded during 2019, and completed the middle of 2020, for development of ARP-1536.

No new grants were awarded during 2020.

Interest Income

Interest income for the years ended December 31, 2019 and 2018, reflects interest earned on short term money market instruments (cash equivalents).

The net proceeds from our underwritten public offering in June 2018 and upfront payment received in conjunction with the execution of the Gossamer License Agreement in June 2018, less cash used in operations, were available for investment and generated more interest income in the year ended December 31, 2019, compared to year ended December 31, 2018.

Interest income for the years ended December 31, 2020 and 2019, reflects interest earned on short term money market instruments.

The net proceeds from our underwritten public offering in June 2018, sale of Company stock and payments received in conjunction with the execution of the Gossamer License Agreement in June 2018 and Amendment No.

1 in May 2020, less cash used in operations, were available for investment.

The decrease in interest income in the year ended December 31, 2020 was due primarily to lower interest rates compared to prior year.

Liquidity and Capital Resources

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At December 31, 2020, we had cash and cash equivalents of $42.6 million.

To date, we have financed our operations principally through private and public offerings of our equity securities, private placements of our redeema ble convertible preferred stock, common stock, issuances of secured convertible promissory notes and proceeds from the Gossamer L icense A greement.

Based on our current plans , we expect that our existing cash and cash equivalents, will enable us to conduct our planned operations at least through the second quarter of 2021.

On June 28, 2018, we closed an underwritten public offering, pursuant to the S-3 filed in February 2018, for the sale of 11,688,000 shares of our common stock and subsequently, on July 2, 2018, we closed on the sale of an additional 1,720,200 shares of our common stock, pursuant to the underwriters’ partial exercise of their option to purchase additional shares of common stock (collectively, the “2018 Offering”).

In the aggregate, we received net proceeds of approximately $48.1 million from the 2018 Offering after deducting underwriting discounts and commissions and offering expenses.

Also in June 2018, we received $20.0 million of cash in connection with the Gossamer License Agreement.

In February 2018, we 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”).

To date, we have financed our operations principally through private and public offerings of our equity securities, private placements of our redeemable convertible preferred stock, common stock, issuances of secured convertible promissory notes and proceeds from the Amended Gossamer License Agreement and Amendment No.

Based on our current plans , we expect that our existing cash and cash equivalents, will enable us to conduct our planned operations through the fourth quarter of 2022.

In February 2018, we 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”).

The shelf registration statement allows us to sell from time-to-time up to $150.0 million of common stock, preferred stock, debt securities, warrants, or units comprised of any combination of these securities, for our own account in one or more offerings.

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We will pay Cantor 3.0% of the aggregate gross proceeds from each sale of shares of common stock under the Sales Agreement.

As of December 31, 2019, no shares of common stock had been sold under this Sales Agreement.

In October 2019, we announced the engagement of Evercore, Ladenburg Thalmann & Co.

and Duane Nash, M.D., J.D., M.B.A.

to explore a range of strategic alternatives focused on maximizing stockholder value from our clinical assets and cash resources.

Such alternatives may include the potential for an acquisition, company sale, merger, business combination, asset sale, in-license, out-license or other strategic transaction.

There can be no assurance that the exploration of strategic alternatives will result in any transaction or other alternative.

During the year ended December 31, 2020, 6,523,655 shares of common stock had been sold under this Sales Agreement and received net proceeds of $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.

In January 2021, the Company initiated a process to explore a range of strategic alternatives focused on maximizing stockholder value from our clinical assets and cash resources.

There can be no assurance that this exploration of strategic alternatives will result in the Company entering or completing any transaction.

Ladenburg Thalmann & Co.

and Duane Nash, M.D., J.D., M.B.A, have been retained with respect to the strategic review process.

We could potentially use our available financial resources sooner than we currently expect, and we may incur additional indebtedness to meet future operation liquidity.

We continuously evaluate our needs for additional capital and consider opportunities on an ongoing basis, including capital from many different sources including equity capital, strategic alliances, business development debt, collaborations and business combinations.

Adequate additional funding may not be available to us on acceptable terms or at all.

Market volatility resulting from COVID-19 or other factors could also adversely impact our ability to access capital as and when needed.

In addition, although we anticipate being able to obtain additional financing through non-dilutive means, we may be unable to do so.

Our failure to raise capital as and when needed could have significant negative consequences for our business, financial condition and results of operations.

The following table summarizes our cash flows for the years presented:

3 unchanged sentences

Net cash provided by financing activities

Net (decrease) increase in cash and

Net increase (decrease) in cash and

cash equivalents

Operating Activities

We have historically experienced negative cash flows as we developed AKB-9778, ARP-1536 and AKB-4924.

Our net cash used in operating activities primarily resulted from our net loss adjusted for non-cash expenses and changes in working capital components, amounts due to research organizations to conduct our clinical programs and employee-related expenditures for research and development and general and administrative activities.

Our cash flows from operating activities will continue to be affected by increased spending to advance and support our product candidates in the clinic and other operating and general administrative activities.

For the year ended December 31, 2019, operating activities used $23.9 million in cash primarily as a result of a n et loss of $23.3 million offset by $1.9 million in working capital and $1.3 million in non-cash expenses related to stock-based compensation and depreciation expense.

For the year ended December 31, 2018, net cash used in operating activities includes $20.0 million of revenue earned from the Gossamer License Agreement.

We do not expect revenue will reoccur until milestones outlined in the Gossamer License Agreement are achieved.

We have historically experienced negative operating cash outflows as we developed razuprotafib and our pipeline programs.

Our net cash used in operating activities primarily results from our net loss adjusted for non-cash expenses, changes in working capital components, amounts due to contract research organizations to conduct our clinical programs and employee-related expenditures for research and development and general and administrative activities.

Our cash flows from operating activities will continue to be affected by spending to advance and support our product candidates in the clinic and other operating and general administrative activities.

For the year ended December 31, 2020 , operating activities used $ 5.4 million in cash primarily as a result of a net loss of $ 4.3 million , which includes $15.0 million of revenue earned from Amendment No.

1 to the Gossamer License Agreement , offset by $ 2.5 million in working capital and $ 1.4 million in non-cash expenses related to stock-based compensation and depreciation expense.

We do not expect revenue will reoccur unless milestones outlined in the Gossamer License Agreement are achieved.

For the year ended December 31, 2019, operating activities used $23.9 million in cash primarily as a result of the net loss of $23.3 million offset by $1.9 million in working capital and $1.3 million in non-cash expenses related to stock-based compensation and depreciation expense.

Investing Activities

1 unchanged sentence

Financing Activities

For the year ended December 31, 2018, we received $48.1 million net proceeds from the 2018 Offering and $0.08 million from the exercise of stock options.

Net cash provided by financing activities for the year ended December 31, 2020 includes $9.3 million net proceeds from the sale of our common stock sold under the Sales Agreement with Cantor.

No such activity occurred in 2019.

21 unchanged sentences

(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;

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

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

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

and (v) recognition of revenue when (or as) the Company

satisfies each performance obligation.

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 pric e of each performance obligation identified in the contract.

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

19 unchanged sentences

The Company does not include a financing component to its estimated transaction price at contract inception unless it estimates that certain performance obligations will not be satisfied within one year.

Upfront License Fees:

If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, upfront license fees based on the relative value prescribed to the license compared to the total value of the arrangement.

Upfront License and Amendment License Fees:

If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, upfront license and amendment license fees based on the relative value prescribed to the license compared to the total value of the arrangement.

The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license.

5 unchanged sentences

A milestone payment is included in the transaction price in the reporting period the Company concludes that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods.

The Company may record revenues from certain mi lestones in a reporting period before the milestone is achieved if the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods.

The Company may record revenues from certain milestones in a reporting period before the milestone is achieved if the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods.

The Company records a corresponding contract asset when this conclusion is reached.

Milestone payments that have not been included in the transaction price to date are fully constrained.

These milestones remain fully constrained until th e Company concludes that achievement of the milestone is probable and recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods.

These milestones remain fully constrained until the Company concludes that achievement of the milestone is probable and recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods.

The Company re-evaluates the probability of achievement of such development milestones and any related constraint each reporting period.

52 unchanged sentences

See Note 2 to the consolidated financial statements for a discussion of recent accounting pronouncements.

Quantitative and Qualitati ve Disclosures About Market Risk.

We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required by this Item.

Interest Rate Risk

The Company’s cash and cash equivalents at December 31, 2019 consist of all cash on hand, deposits and funds invested in short-term investments with original maturities of three months or less at the time of purchase and earn interest income.

Therefore, there was minimal or no interest rate risk.

Consolidated Financial Statements and Supplementary Data.

Beginning on page 73 are the consolidated financial statements with applicable notes and the related Report of Independent Registered Public Accounting Firm.

Report of Independent Regist ered Public Accounting Firm

To the Stockholders and the Board of Directors of Aerpio Pharmaceuticals, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Aerpio Pharmaceuticals, Inc.

(the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with U.S.

generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2011

Cincinnati, Ohio

March 16, 2020

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2019 and 2018

Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2019 and 2018

Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2019 and 2018

Consolidated Statements of Cash Flows for the Years ended December 31, 2019 and 2018

Notes to Consolidated Financial Statements

AERPIO PHARMACEUTICALS, INC.

Consolidated Balance Sheets

Year Ended December 31,

Current assets:

Cash and cash equivalents

Prepaid research and development contracts

Other current assets

Total current assets

Furniture and equipment, net

Operating lease right-of-use assets, net

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable and accrued expenses

Current portion of operating lease liability

Total current liabilities

Operating lease liability, net of current portion

Total liabilities

Commitments and contingencies (Note 11)

Stockholders’ equity:

Common stock, $0.0001 par value per share;

300,000,000 shares

authorized and 40,588,004 shares issued and outstanding at December

31, 2019 and 2018.

Additional paid-in capital

Accumulated deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

AERPIO PHARMACEUTICALS, INC.

Consolidated Statements of Operations and Comprehensive Loss

Year Ended December 31,

License revenue, and other

Operating expenses

Research and development

General and administrative

Restructuring expense

Total operating expenses

Loss from operations

Interest income

Total other income

Net and comprehensive loss

Net and comprehensive loss per share

Basic and diluted

Weighted average number of common shares used in

computing net loss per share attributable to common

stockholders, basic and diluted

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

AERPIO PHARMACEUTICALS, INC.

Consolidated Statements of Stockholders ’ Equity

Stockholders’ Equity

Balance at December 31, 2017

Issuance of restricted stock

Issuance of common stock,

net of issuance costs of

Issuance of common

stock upon exercise of

stock options

Forfeiture of restricted stock

Share-based compensation

Net and comprehensive loss

Balance at December 31, 2018

Issuance of warrants

Cumulative effect of change

in accounting principle

Share-based compensation

Net and comprehensive loss

Balance at December 31, 2019

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

AERPIO PHARMACEUTICALS, INC.

Consolidated Statements of Cash Flows

Year Ended December 31,

Operating activities:

Net and comprehensive loss

Adjustments to reconcile net and comprehensive loss to net cash used in

operating activities:

Loss on disposal of assets

Consulting expenses related to warrants

Stock-based compensation

Changes in operating assets and liabilities:

Prepaid research and development contracts

Other current assets

Accounts payable and accrued expenses

Net cash used in operating activities

Investing activities:

Purchase of furniture and equipment

Net cash used in investing activities

Financing activities:

Proceeds from exercise of stock options

Proceeds from sale of common stock

Cash paid in connection with the sale of common stock

Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

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

NOTES TO CONSOLID ATED FINANCIAL STATEMENTS

Nature of Organization and Operations

Aerpio Pharmaceuticals, Inc.

(the “Company”) is a biopharmaceutical company focused on developing compounds that activate Tie2 to treat ocular diseases and diabetic complications.

The Company was incorporated as Zeta Acquisition Corp.

II (“Zeta”) in the State of Delaware on November 16, 2007.

Zeta was a “shell company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended).

The Company’s pipeline includes the humanized monoclonal antibody, ARP-1536, directed at the same target as subcutaneous AKB-9778, 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 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.

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

The Company believes that systemic treatment with AKB-9778 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.

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 plans to further advance the glaucoma program into a Phase 2 clinical trial with results expected in the first quarter of 2021.

In June 2018, the Company licensed AKB-4924, a selective stabilizer of hypoxia-inducible factor-1 alpha (“HIF-1 alpha”) to Gossamer Bio, Inc.

(“Gossamer”) AKB-4924, (now called GB004), is being developed for the treatment of inflammatory bowel disease (“IBD”).

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

Gossamer has completed the Phase 1 multiple ascending dose (“MAD”) clinical study and is currently running a Phase 1b clinical study in ulcerative colitis patients.

Gossamer is expected to have results of the Phase 1b study in ulcerative colitis patients in the first half of 2020.

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

On June 28, 2018, the Company closed an underwritten public offering for the sale of 11,688,000 shares of its common stock, and subsequently on July 2, 2018, the Company closed on the sale of an additional 1,720,200 shares of its common stock, pursuant to the underwriters’ partial exercise of their option to purchase additional shares of common stock (the “2018 Offering”).

In the aggregate, the Company received net proceeds of $48.1 million from the 2018 Offering after a deduction of $3.5 million related to underwriting discounts and commissions and offering expenses paid in conjunction with the 2018 Offering.

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.

The Company’s revenue has been primarily limited to license revenue from Gossamer Bio.

Inc., GB004, Inc.

(collectively “Gossamer”).

Future revenue is dependent on the terms of the license agreement with Gossamer Bio., Inc.

as further described in Note 15.

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 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 products that are approved, and protection of proprietary technology.

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

The Company incurred losses from operations and had a negative cash flows from operating activities for the years ended December 31, 2019 and 2018 (and since inception).

The Company’s current operating plan indicates that it will continue to incur losses f rom 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 $ 38.5 million at December 31, 2019 will be sufficient to allow the Company to fund its current operating plan into at least the second quarter of 2021, and as a result, through at least twelve months from the filing of the Company’s 2019 Annual Report on Form 10-K.

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.

The Company will need to raise additional funds in order to further advance its clinical research programs, commence additional clinical trials, and operate its business and meet its obligations as they come due.

The Company is pursuing financing alternatives, which include permanent equity financing, business development arrangements, and licensing arrangements.

However, financing may not be available to the Company in the necessary time frame, in amounts that the Company requires, on terms that are acceptable to the Company, or at all.

If the Company raises additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to its potential products or proprietary technologies or grant licenses on terms that are not favorable to the Company.

If the Company is unable to raise the necessary funds when needed or reduce spending on currently planned activities, it may not be able to continue the development of its product candidates or the Company could be required to delay, scale back, or eliminate some or all of its development programs and other operations and will materially harm its business, financial position and results of operations.

Summary of Significant Accounting Policies

Basis of Presentation

The 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.

generally accepted accounting principles ("U.S.

GAAP" or "GAAP").

Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S.

GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

The Company’s consolidated financial statements are stated in U.S.

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.

The Company views its operations and manages its business in one operating segment, which is the business of developing and commercializing proprietary therapeutics.

All the assets and operations of the Company are located in the U.S.

Use of Estimates

The preparation of 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

Actual results may differ from those estimates.

Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these consolidated financial statements.

Management must apply significant judgment in this process.

In addition, other factors may affect estimates, including:

expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends.

The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates.

Estimates are used in the following areas, among others:

prepaid and accrued research and development expense, stock-based compensation expense, revenue recognition and income taxes.

Cash and Cash Equivalents

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 December 31, 2019 and 2018, the Company’s cash equivalents are primarily in money market funds.

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

Revenue Recognition

At the inception of an arrangement, the Company evaluates if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance and the term of the contract.

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: