What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-17 compared with 2020-11-10 · 131 added, 149 removed, 97 unchanged (74% of the section changed)

Management’s Discussion an d Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of the financial condition and results of operations of Aerpio Pharmaceuticals, Inc.

should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements included in this Quarterly Report on Form 10-Q as of and for the period ended September 30, 2020 and our audited consolidated financial statements and related notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 16, 2020.

should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements included in this Quarterly Report on Form 10-Q as of and for the period ended March 31, 2021 and our audited consolidated financial statements and related notes thereto for the year ended December 31, 2020 included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 11, 2021 .

Some of the information contained in this discussion and analysis including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risk, uncertainties and assumptions.

You should read the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 16, 2020, as updated by the risk factors contained this Quarterly Report on Form 10-Q and our other filings with the SEC, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

You should read the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as updated by the risk factors contained this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission (the “SEC”), for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Operating Overview

Aerpio Pharmaceuticals, Inc.

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 a novel strain of coronavirus (“COVID-19”) infections.

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

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

Importantly, IOP is the only identifiable 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 the 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 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 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 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 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 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.

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

We believe that glaucoma, a serious condition of the eye affecting three million patients in the U nited S tates (“U.S.”) , is an attractive commercial opportunity.

If we develop, obtain marketing approval for and commercialize razuprotafib, our goal is to capture a portion of annual sales for adjunctive glaucoma therapies.

We currently estimate that the dollar value of the U.S.

glaucoma market is approximately $4 billion dollars per year, and adjunctive therapies represent approximately half of this value.

There were approximately 17 million prescriptions written for adjunctive glaucoma therapies in the U.S.

(the “Company”) is a biopharmaceutical company focused on developing compounds that activate Tie2 as well as other indications in which we believe that activation of Tie2 may have therapeutic potential.

We were 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 Exchange Act).

In December 2020, we announced the topline results from our Phase 2 clinical trial of razuprotafib (formerly known as AKB-9778), a small molecule v ascular endothelial protein tyrosine phosphatase (“VE-PTP”) inhibitor.

The double-blind, placebo controlled Phase 2 study, in patients with elevated intraocular pressure (“IOP”) associated with open angle glaucoma or ocular hypertension, met its primary efficacy endpoint with its twice-daily dosing group;

however, the IOP decrease was not at a level deemed sufficient to move to Phase 3 development.

As a result, 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.

Ladenburg Thalmann & Co.

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

On May 16, 2021, the Company entered into an agreement and plan of merger (“Merger Agreement” or “Merger”) with Aadi Bioscience, Inc.

(“Aadi”), a Delaware corporation, and Aspen Merger Subsidiary, Inc.

(“Merger Sub”), a Delaware corporation and a direct, wholly-owned subsidiary of the Company, pursuant to which, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Aadi, with Aadi surviving as a wholly-owned subsidiary of the Company (the “Merger”).

If the Merger is completed, the business of Aadi will continue as the business of the combined company.

The Merger Agreement was approved by the members of the board of directors of the Company (the “Board”) and the Board resolved to recommend approval of the Merger Agreement to the Company’s shareholders.

In connection with the Merger Agreement, the Company has entered into subscription agreements to raise an aggregate amount of $155.0 million in a Private Investment in Public Equity (“PIPE”) financing in shares of common stock and pre-funded warrants to purchase Aerpio common stock.

The PIPE financing is expected to be consummated concurrently with the closing of the Merger, subject to customary closing conditions, and is contingent on the closing of the Merger.

The Merger is expected to close in the second half of 2021.

The closing of the Merger is subject to approval of the Company's shareholders and the satisfaction of certain closing conditions, including, among others, obtaining the requisite approval of the stockholders of Aerpio, Aerpio’s cash and cash equivalents maintaining a balance equal to or greater than $10.0 million and the completion of the PIPE financing.

The Merger is intended to qualify as a tax-free reorganization for U.S.

federal income tax purposes.

If the Company is unable to satisfy the closing conditions in Aadi’s favor or if other applicable closing conditions are not satisfied, Aadi will not be obligated to complete the Merger.

The Merger Agreement provides Aerpio and Aadi with specified termination rights, and further provides that, upon termination of the Merger Agreement under specified circumstances, Aerpio may be required to pay the Aadi a termination fee of $2.0 million.

In addition, in connection with certain terminations of the Merger Agreement, Aerpio may be required to pay Aadi’s out-of-pocket fees and expenses up to $750,000.

If the Merger is consummated, on a pro forma basis, current shareholders of Aadi will own approximately 66.8% and current shareholders of the Company will own approximately 33.2% of the combined company upon the closing of the Merger, without giving effect to the proposed PIPE.

Following the closing of the anticipated PIPE financing, the former Aadi shareholders are expected to own approximately 29.6% of the outstanding shares of Aerpio common stock, on a fully-diluted basis, the shareholders of Aerpio (as of immediately prior to the closing of the Merger) are expected to own approximately 14.7% of the outstanding shares of Aerpio common stock, on a fully-diluted basis, and the PIPE investors are expected to own approximately 55.7% of the outstanding shares of Aerpio common stock, on a fully-diluted basis.

The Merger Agreement contemplates that, at or prior to the effective time of the Merger (the “Effective Time”), Aerpio, the Holder Representative (as defined therein) and the Rights Agent (as defined therein) will execute and deliver a contingent value rights agreement (the “CVR Agreement”), pursuant to which each holder of Aerpio common stock as of immediately prior to the Effective Time shall be entitled to one contractual contingent value right issued by Aerpio, subject to and in accordance with the terms and conditions of the CVR Agreement, for each share of Aerpio common stock held by such holder.

Each contingent value right shall entitle the holder thereof to receive a defined percentage of the net proceeds, if any, received by the newly combined company, subsequent to the closing of the Merger, pursuant to the Amended Gossamer License Agreement (as defined in N ote 10) and any other agreements , with respect to certain other Aerpio assets , entered into prior to the c losing of the Merger.

The contingent value rights are not transferable, except in certain limited circumstances as will be provided in the CVR Agreement, will not be certificated or evidenced by any instrument and will not be registered with the SEC or listed for trading on any exchange .

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

The realignment plan reduced our workforce by seven employees, representing approximately 58% of our workforce.

As a result of this realignment plan, we incurred one-time employee related severance expenses of approximately $1.2 million in the first quarter of 2021 and anticipate the majority of the one-time employee severance liability to be paid during 2021.

The final payment of the severance liability in connection with the realignment plan is subject to a number of assumptions, actual results may differ from the original estimate.

Additionally, 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.

Our other clinical programs include the following:

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 and 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, 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 is part of the MTEC-20-09-COVID-19 Treatment Military Infectious Disease Research Program (“MIDRP”).

The RESCUE clinical trial was initiated during the third quarter of 2020 and is expected 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.

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.

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

Based on results in preclinical studies and observations in patients in TIME-2 and TIME-2b trials, we believed that a vascular endothelial receptor, Tie2, may play a pivotal role in the defense against microvascular breach in Acute Respiratory Distress Syndrome (“ARDS”) and have therapeutic potential for the treatment of COVID-19 associated ARDS.

During 2020, we initiated two Phase 2 trials to evaluate subcutaneous razuprotafib for the prevention and treatment of ARDS in adult patients with moderate to severe COVID-19 (“RESCUE”) and critical COVID-19 (“I-SPY”).

In January 2021, the Data Monitoring Committee recommended discontinuation of razuprotafib in the I-SPY trial after 21 patients due to the complexity of monitoring patients in the setting of a surge in ICU patients.

For the RESCUE trial, t he Company 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.

Based on topline data for the RESCUE trial, there was a mechanism-based, dose-dependent reduction of blood pressure which was not associated with other adverse events.

There was an apparent dose-dependent decrease in Angiopoietin 2 (“Ang2”) that would be consistent with the Tie2 activation mechanism.

The efficacy of razuprotafib could not be fully assessed due to the limited number of patients treated in the drug and standard of care arms.

At the 28 day study endpoint, there were an equal number of deaths in each group (one per group).

Further analysis of the full data set is ongoing.

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

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.

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

ARP-1536 and Bi-Specific Antibody:

ARP-1536, the 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.

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.

We are also developing a bispecific antibody that binds both v ascular endothelial growth factor (“VEGF”) and 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 aged-related macular degeneration (“AMD”) and diabetic macular edema via intravitreal injection.

Gossamer License Agreement:

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

I n June 2018, we 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 (“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 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.

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 initiated a 12-week Phase 2 study of GB004 in patients with mild-to-moderate UC during 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 payments and tiered royalty rates over the life of the license agreement.

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 busines s and in October 2019, our Chief Executive Officer and Chief Financial and Business Officer departed from their position s .

As a result, we recorded severance (benefit) and 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 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 outst anding equity awards .

The total remaining liability under these severance-related actions was $ 38,000 as of September 30, 2020 and was paid in October 2020.

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.

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 ( the “Gossamer License Agreement”) , as amended by that certain Amendment No.

1 to the Gossamer License Agreement (“Amendment No.

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1, the “Amended Gossamer License Agreement”).

For the three and nine months ended September 30, 2020, we generated $0.0 and $15.0 million, respectively, 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.

While we continue to pursue financing alternatives, which may include equity financing, business development arrangements, licensing arrangements and business combination transactions, financing may not be available to us in the necessary time frame, in the amounts that we need, on terms that are acceptable to us or at all.

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

We generated $15.0 million of revenue during 2020;

however, n o revenue was generated during the quarter ended March 31, 2021 pursuant to Amendment No.

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 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.

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.

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.

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.

As of September 30, 2020, we had an accumulated deficit of $141.8 million and anticipate incurring additional losses for the next several years.

The Company’s inability to obtain required funding in the near future could have a material adverse effect on its operations and strategic development plan for future growth.

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 $47.3 million at September 30, 2020 and financial condition as of this Quarterly Report on Form 10-Q, w e believe our existing cash and cash equivalent will be sufficient to fund currently planned operations through the fourth quarter of 2022.

As of March 31, 2021, we had an accumulated deficit of $151.0 million and anticipate incurring additional losses for the next several years.

Based on the Company’s current cash reserves of $39.0 million at March 31, 2021 and financial condition as of this Quarterly Report on Form 10-Q, w e believe our existing cash and cash equivalent will be sufficient to fund currently planned operations through at least the fourth quarter of 2022.

COVID-19 Considerations:

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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 cas es could cause other widespread or more severe impacts depending on where infection rates are highest.

Although states have quarantines and similar restrictions in place, the regulations vary on a state by state basis and the effectiveness of these restrictions and mass vaccination campaigns on slowing the spread of COVID-19 varies.

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 or “additional waves” 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 the Company’s 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 condensed consolidated balance sheets and the condensed consolidated statements of operation and comprehensive (loss) income presented herein.

The following discussion and analysis are based on the Company’s condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q, which we have prepared in accordance with U.S.

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

Components of Statements of Operations and Comprehensive (Loss) Income

License Revenue

License revenue relates to payments received pursuant to the license agreement with Gossamer.

Components of Statements of Operations and Comprehensive Loss

Operating Expenses

Research and Development

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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

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 growing our business.

Restructuring (Benefit) Expense

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

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.

In addition, we expect our general and administrative expenses to increase for the foreseeable future due to transaction costs and expenses related to our potential merger with Aadi.

Restructuring Expense

Restructuring expense consists primarily of severance related expenses of employees terminated as a result of the Company’s 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 in 2019 when employees were notified of the restructuring event with a corresponding restructuring accrual which was reduced as payments were made to the employees.

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

Other income represents reimbursed internal and external qualified expense, per the terms of the U.S.

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

The reimbursable qualified expenses were incurred in conjunction with the RESCUE trial and the potential of subcutaneous razuprotafib for the prevention and treatment of ARDS in adult patients with moderate to severe COVID-19.

During the first quarter of 2021, $1.2 million was recorded as other income during the three months ended March 31, 2021.

Other income is recorded, and costs are generally reimbursed, 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.

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.

Interest Income

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The following table presents the results of operations for the periods presented:

Comparison of the Three and Nine Months Ended September 30, 2020 and 2019

Three Months Ended September 30,

Nine Months Ended September 30,

License revenue

Three Months Ended March 31,

Operating expenses:

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General and administrative

Restructuring (benefit) expense

Restructuring expense

Total operating expenses

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Total other income

Net and comprehensive (loss) income

License Revenue

License revenue for the three and nine months ended September 30, 2020 was $0.0 and $15.0 million, respectively, related to payment received as consideration pursuant to Amendment No.

This revenue was recognized when cash was received on May 12, 2020.

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

Net and comprehensive loss

Comparison of the Three Months Ended March 31, 2021 and 2020

Operating Expenses

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Research and development

General and administrative

Restructuring (benefit) expense

Restructuring expense

Total operating expenses

Research and Development

Research and development expenses for the three months ended September 30, 2020, increased by approximately $1.1 million or 40.1%, compared to the three months ended September 30, 2019.

This was the result of increased spending on clinical trials during the three months ended September 30, 2020, specifically the Phase 2 program for glaucoma, and the I-SPY and RESCUE clinical trials, compared to spending related to the glaucoma Phase 1b clinical trial during the same period in 2019.

Research and development expenses for the nine months ended September 30, 2020, decreased approximately $1.3 million or 12.4%, compared to the nine months ended September 30, 2019.

This was the result of decreased spending on clinical trials during the nine months ended September 30, 2020 compared to the two trials in process during the same period in 2019, specifically the completion of razuprotafib TIME-2b and glaucoma Phase 1b clinical trials.

Research and development expenses for the three months ended March 31, 2021 increased approximately $0.4 million or 21.8%, compared to the three months ended March 31, 2020.

This was the result of increased spending on the Phase 2 Glaucoma trial and two COVID-19 trials compared to spending related to the Glaucoma Phase 1b clinical trial, which was completed during the first quarter of 2020.

General and Administrative

General and administrative expenses for the three months ended September 30, 2020, decreased by approximately $0.3 million, or 13.2%, compared to the three months ended September 30, 2019.

This decrease was primarily attributable to a decrease in employee related expenses.

General and administrative expenses for the nine months ended September 30, 2020 , decreased by approximately $1.9 million , or 22.6% , compared to the nine months ended September 30, 2019 .

This decrease was primarily attributable to a decrease in employee related expenses of $ 0.5 million, legal expenses of $ 0.3 million , stock-based compensation of $ 0 .

9 million and general office expenses of $ 0.

Restructuring (Benefit) Expense

Restructuring (benefit) expense for the three and nine months ended September 30, 2019 was ($38,810) and $0.9 million, respectively.

The credit in the three months ended September 30, 2019 relates to a one-time true up of the expense recorded as a result of a reduction of headcount during the second quarter of 2019.

General and administrative expenses for the three months ended March 31, 2021, decreased approximately $0.1 million, or 6.5%, compared to the three months ended March 31, 2020.

Restructuring Expense

Restructuring expense for the three months ended March 31, 2021 increased by $1.2 million as a result of the reduction of headcount during the first quarter of 2021.

No such actions were taken in 2020.

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Interest income

Total other income

Other income for the three months ended March 31, 2021 of $1.2 million represents reimbursed internal and external qualified expenses related to the ARDS RESCUE clinical trial, per the terms of the MTEC arrangement.

The arrangement with the Company started in the third quarter of 2020.

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 needs of the party for whom we perform the requested services.

Other income for the three and nine months ended September 30, 2020 of $0.9 million represents reimbursed internal and external qualified expenses related to the ARDS RESECUE clinical trial, per the terms of the MTEC arrangement.

No grants were received during the three months ended March 31, 2021.

Interest Income

Interest income in the three and nine months ended September 30, 2020 and 2019, reflects interest earned on short term money market instruments.

Interest income in the three months ended March 31, 2021 and 2020, 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 2020 was due primarily to lower interest rates compared to the prior year.

The decrease in interest income is due to lower interest rates during the three months ended March 31, 2021, compared to the prior year.

Liquidity and Capital Resources

Since inception, we have incurred significant net and comprehensive losses and negative cash flows from operations.

For the nine months ended September 30, 2020 and 2019, we had net and comprehensive income (loss) of $0.4 million and ($18.8) million, respectively.

At September 30, 2020 and December 31, 2019, we had an accumulated deficit of $141.8 and $142.2 million, respectively.

At September 30, 2020, we had cash and cash equivalents of $47.3 million.

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 201 8, 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 o wn account in one or more offerings.

Since inception, we have incurred significant net losses and negative cash flows from operations.

For the three months ended March 31, 2021 and 2020, we had net losses of $4.4 million and $3.9 million, respectively.

At March 31, 2021 and December 31, 2020, we had an accumulated deficit of $151.0 million and $146.6 million, respectively.

At March 31, 2021 , we had cash and cash equivalents of $39.0 million .

Based on our current plans , we expect that our existing cash and cash equivalents will enable us to conduct our planned operations through at least the fourth quarter of 202 2 .

In April 2021, we filed a shelf registration statement on Form S-3 with the SEC which was declared effective by the SEC on April 15, 2021 (the “Form S-3”).

The shelf registration statement is intended to provide us flexibility to conduct registered sales of our securities, subject to market conditions and our future capital needs.

The terms of any offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering.

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

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

In February 2018, we entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co.

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

Cantor may sell our 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 our 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.

The shares of our common stock to be sold under the Sales Agreement will be sold and issued pursuant to the Form S-3 and the related prospectus and one or more prospectus supplements.

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

During the three months ended September 30, 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 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.

The Company continues to explore strategic alternatives;

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

The shares of our common stock that we sold under the Sales Agreement were conducted pursuant to an earlier registration statement on Form S-3 that we filed with the SEC in February 2018.

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 our common stock.

During the three months ended March 31, 2021, no shares of common stock were sold under this Sales Agreement.

Because the earlier registration statement on Form S-3 expired on its three-year anniversary of its effectiveness, we may not make future sales under the Sales Agreement.

On May 16, 2021, we entered into a Merger Agreement with Aadi and Merger Sub pursuant to which, subject to the satisfaction or waiver of the conditions therein, Aadi will merge with and into Merger Sub, with Aadi continuing as the surviving company and a wholly-owned subsidiary of our company.

The Merger Agreement was unanimously approved by the members of the Company's Board, and the Board resolved to recommend approval of the Merger Agreement to the Company's shareholders.

Our future operations are highly dependent on the success of the merger with Aadi.

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

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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.

Market volatility resulting from COVID-19 pandemic 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.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Operating Activities

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

Our net cash used in operating activities primarily results from our net (loss) income 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.

We have historically experienced negative cash outflows.

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 nine months ended September 30, 2020, operating activities used $0.6 million in cash as result of $2.1 million decrease in working capital offset by approximately $0.4 million of net income and $1.1 million in non-cash expenses related to stock-based compensation and depreciation expense.

For the nine months ended September 30, 2019, operating activities used $19.0 million in cash as a result of $2.1 million decrease in working capital and $18.8 million net loss offset by approximately $1.9 million in non-cash expenses related to stock-based compensation and depreciation expense.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2020 and 2019, was related to capital expenditures to support operations.

For the three months ended March 31, 2021 , operating activities used $ 3.

7 million in cash as result a net loss of approximately $ 4 .

4 million offset by $0.4 million of decrease in working capital and $ 0.4 million in non-cash expenses related to stock-based compensation and depreciation expense.

For the three months ended March 31, 2020 , operating activities used $ 3.

9 million in cash as a result of $ 0.4 million of decrease in working capital and a net loss of $ 3.9 million, offset by $ 0.

4 million in non-cash expenses that consisted of consulting expense related to warrants, stock-based compensation expense and depreciation expense.

Financing Activities

During the nine months ended September 30, 2020, we received $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.

Net cash provided by financing activities for the three months ended March 31, 2021 includes $70,279 net proceeds from issuance of common stock upon exercise of stock options.

There were no financing activities during the three months ended March 31, 2020.

Contractual Obligations and Commitments

There have been no material changes outside the ordinary course of business during the period covered by this Quarterly Report on Form 10-Q from the contractual obligations and commitments as of December 31, 2019 as described in our Annual Report on Form 10-K filed with the SEC on March 16, 2020.

Other than as described herein with respect to the Merger Agreement with Aadi and the related transactions, there have been no material changes outside the ordinary course of business during the period covered by this Quarterly Report on Form 10-Q from the contractual obligations and commitments as of December 31, 2020 as described in our Annual Report on Form 10-K filed with the SEC on March 11, 2021.

Off-Balance Sheet Arrangements

As of September 30, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements as defined by applicable SEC regulations.

As of March 31, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements as defined by applicable SEC regulations.

Critical Accounting Policies and Estimates

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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 2. Management’s Discussion and Analysis