Hepion Pharmaceuticals(HEPA) - 2022 Q4 - Annual Report

Preliminary Information Filing Details The company filed its Form 10-K Annual Report for the fiscal year ended December 31, 2022 - Filing Type: Annual Report on Form 10-K for the year ended December 31, 2022[2] - Registrant Name: HEPION PHARMACEUTICALS, INC.[2] - Filer Status: Non-accelerated filer and Smaller reporting company[3] Securities Registered | Title of each class | Trading Symbol | Name of each exchange on which registered | | :--- | :--- | :--- | | Common Stock, par value $0.0001 per share | HEPA | The Nasdaq Capital Market | Market Value and Shares Outstanding The aggregate market value of voting stock held by non-affiliates was approximately $43.4 million as of June 30, 2022 - Aggregate market value of voting stock held by non-affiliates (as of June 30, 2022): Approximately $43.4 million[3] - Common Stock outstanding (as of March 23, 2023): 76,229,626 shares[4] Documents Incorporated by Reference Portions of the 2023 Proxy Statement will be incorporated by reference into Part III of this report - Proxy Statement for 2023 Annual Meeting of Stockholders to be incorporated by reference into Part III[6] - Proxy Statement filing deadline: Within 120 days of fiscal year ended December 31, 2022[6] Cautionary Note Regarding Forward-Looking Statements Forward-Looking Statements Disclaimer The report contains forward-looking statements involving substantial risks and uncertainties that are not guarantees of future performance - Forward-looking statements are not guarantees of performance and involve known and unknown risks, uncertainties, and assumptions[17] - The company does not assume any obligation to update forward-looking statements as circumstances change[17] Key Risk Factors for Forward-Looking Statements Key risk factors include market conditions, capital position, competition, and regulatory approvals - Market conditions[18] - Capital position[18] - Ability to compete with larger pharmaceutical companies[18] - Uncertainty of developing marketable products[18] - Ability to obtain regulatory approvals[18] - Ability to maintain and protect intellectual property rights[18] - Inability to raise additional future financing and lack of financial and other resources[18] - Ability to control product development costs[18] - Inability to attract and retain key employees[18] - Changes in government regulation affecting product candidates[18] - Involvement in patent and other intellectual property litigation[18] - No market acceptance for products[18] - Changes in third-party reimbursement policies[18] Risk Factor Summary General Business Risks The company faces significant risks including a history of losses, early-stage product development, and the need for additional funding - Incurred losses since inception and anticipates continued losses, raising concerns about future operations[21] - Rencofilstat is in early development, with commercial viability dependent on successful preclinical studies, clinical trials, and regulatory approvals[22] - Limited capacity for recruiting and managing clinical trials could impair timing and harm business[24] - Requires substantial additional funding, which may not be available on acceptable terms, potentially hindering product development and commercialization[25] - The COVID-19 pandemic and future outbreaks could adversely impact business, financial condition, and clinical trials[27] - The AI-POWR™ discovery and development approach is novel and unproven, with no guarantee of developing commercially valuable products[28] Commercialization Risks Commercialization risks include potential development termination, reliance on third-party collaborations, and inadequate reimbursement from payers - Development of a product candidate may be delayed or terminated if the perceived market or commercial opportunity does not justify further investment[29] - Failure to enter into collaborations or license agreements with third parties means the company bears the full risk of developmental failure[29] - Inadequate reimbursement or coverage from government and third-party payers could harm revenues and profitability[30] Intellectual Property Risks The company faces risks related to protecting its intellectual property, potential infringement claims, and failure to expand its product pipeline - Inability to adequately protect or expand intellectual property related to current or future product candidates could harm business prospects[31] - Third-party claims of intellectual property infringement could lead to significant expenses or prevent further development/commercialization[31] - Failure to successfully discover, acquire, develop, and market additional product candidates or approved products would impair growth[32] Government Regulation Risks Regulatory risks include post-approval difficulties, challenges in obtaining international approval, and adverse effects from healthcare reform - Even with regulatory approval, products may face future development and regulatory difficulties[33] - Approval to commercialize products outside the United States is not guaranteed, even if U.S. approval is received[33] - Healthcare reform measures and other recent legislative initiatives could adversely affect the business[33] Common Stock Risks Common stock risks include potential Nasdaq delisting, stock price decline from ineffective accounting controls, and no plans for cash dividends - Failure to comply with Sarbanes-Oxley Act rules on accounting controls and procedures, or discovery of additional material weaknesses, could significantly decline stock price and make capital raising difficult. Management determined disclosure controls and internal controls were ineffective as of December 31, 2022[34] - The company does not currently intend to pay cash dividends on its common stock[35] PART I Business Overview The company develops therapies for chronic fibrosis-related diseases, with its lead candidate, rencofilstat, in Phase 2 NASH trials - Hepion Pharmaceuticals is a biopharmaceutical company focused on developing drug therapy for chronic fibrosis-related diseases, including NASH, HCC, and viral hepatitis[38] - Rencofilstat (formerly CRV431), a pan cyclophilin inhibitor, is the lead therapeutic candidate, targeting multiple pathologic pathways in advanced fibrotic diseases[38] - Completed a Phase 1 program in healthy subjects, demonstrating safety, tolerability, and pharmacokinetics (PK) with no serious adverse events (SAEs)[39][40] - Completed a Phase 2a study in NASH F2/F3 subjects, meeting primary objectives (safety, tolerability, PK) and showing early efficacy evidence through biomarker improvements (e.g., ALT, PRO-C3)[41] - Initiated two separate Phase 2 NASH trials in 2022: a Phase 2b randomized, double-blind, placebo-controlled study (up to 336 subjects) and a Phase 2 open-label study (70 subjects) evaluating hepatic function[42] - FDA granted Fast Track designation for rencofilstat for NASH (Nov 2021) and Orphan Drug Designation for HCC (June 2022)[57][58] - Developed AI-POWR™ to optimize clinical programs, identify novel indications, and potentially discover new targets and drug molecules, aiming to save time, resources, and money in drug development[59][60][61][62] - Relies on contract manufacturers for all preclinical and clinical trial materials under cGMP and anticipates partnering or collaborating with larger pharmaceutical companies for late-stage clinical development and commercialization[71][72] Risk Factors The company faces high risk, including significant operating losses and substantial doubt about its ability to continue as a going concern - The company has incurred losses since inception, with an accumulated deficit of $175.7 million as of December 31, 2022, and anticipates continued losses, raising substantial doubt about its ability to continue as a going concern without additional capital[117][118][119][120] - Product candidate rencofilstat is in early development, and its commercial viability is subject to successful preclinical studies, clinical trials, and regulatory approvals, which are expensive, lengthy, and have uncertain outcomes[121][122][123] - The company relies heavily on third-party vendors for preclinical studies, clinical trials, and manufacturing, exposing it to risks of delays, failures, and non-compliance with regulations[127][166][178] - The biopharmaceutical industry is highly competitive, with larger companies possessing greater resources and experience, potentially limiting demand for rencofilstat if competitors develop superior or more cost-effective therapies[160][161][162][182][183][184][186] - Protecting intellectual property is crucial but uncertain, with risks of patent challenges, infringement claims, and the difficulty of maintaining trade secrets[209][210][211][212][213][214][215][216][217][218][219] - Regulatory approval processes are lengthy, unpredictable, and subject to changes in policies, potentially delaying or preventing commercialization, and foreign approvals add further complexity[145][146][147][148][149][150][156][157][158][159][223][224] - Market acceptance and sales of approved products depend on factors like safety, efficacy, pricing, and reimbursement policies, which are subject to increasing pressure from government and third-party payers[175][176][201][202][203][204][205][229][230][231] - The company's common stock faces risks including potential delisting from Nasdaq, volatility due to various factors (e.g., clinical trial outcomes, economic conditions), and material weaknesses in internal control over financial reporting as of December 31, 2022[244][245][246][247][248] Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments[257] Properties The company leases corporate headquarters in New Jersey and a research laboratory in Canada - Corporate headquarters: Approximately 6,400 sq ft of leased space in Edison, New Jersey[258] - Research laboratory: Approximately 3,500 sq ft of leased office and lab space in Edmonton, Canada[258] Legal Proceedings The company is involved in ordinary course legal actions not expected to have a material adverse effect - The company is subject to various legal actions and claims in the ordinary course of business[259] - Currently, the company does not believe the outcome of such proceedings will have a material adverse effect on its consolidated financial condition or results of operations[259] Mine Safety Disclosures Mine Safety Disclosures are not applicable to the company - Not applicable[260] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'HEPA', and no cash dividends are anticipated - Common stock trades on the Nasdaq Capital Market under the ticker symbol 'HEPA'[262] - As of March 23, 2023, there were 212 holders of record of common stock[263] - The company has never paid cash dividends and does not anticipate paying any in the foreseeable future, intending to retain funds for business development and expansion[264] Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Number of Shares of Common Stock to be Issued upon Exercise of Outstanding Options (a) | Weighted-Average Exercise Price of Outstanding Options | Number of Options Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a)) | | :--- | :--- | :--- | :--- | | Equity Compensation Plans Approved by Stockholders | 8,894,973 | $2.31 | 0 | [Reserved] This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses financial results, highlighting continued losses, reliance on external funding, and critical accounting estimates - The company is a biopharmaceutical company focused on developing drug therapy for chronic fibrosis-related diseases, with rencofilstat as its lead cyclophilin inhibitor[268] - The COVID-19 pandemic has not had a material impact on consolidated financial statements for 2022, but its future impact remains uncertain[281] - The company has an accumulated deficit of $175.7 million as of December 31, 2022, and has not generated any revenue from operations since inception, expecting to incur additional losses for the foreseeable future[282] - The company's ability to continue as a going concern is in substantial doubt without additional capital, as it will require substantial additional financing to fund product development and commercialization[293][297][298] Overview The company is developing rencofilstat for chronic liver diseases and utilizes its AI-POWR™ platform for drug discovery - Lead molecule: Rencofilstat, a cyclophilin inhibitor, targeting fibrosis, inflammation, and showing potential for NASH, HCC, and viral hepatitis[268] - Clinical Development Progress:[269][271][272] - Completed Phase 1 program in healthy subjects (SAD, MAD, DDI, Food Effect studies), demonstrating safety, tolerability, and PK - Completed Phase 2a study in NASH F2/F3 subjects, meeting primary objectives (safety, tolerability, PK) and showing early efficacy signals (reduced ALT, improved PRO-C3) - Initiated two Phase 2 NASH trials in 2022: a Phase 2b (up to 336 subjects) for histologic changes and a Phase 2 (70 subjects) for hepatic function (expected completion Q2 2023) - AI-POWR™: Proprietary AI tool used to optimize clinical programs, identify novel indications, and discover new drug molecules, aiming for improved patient selection, biomarker selection, and drug target selection[277][278][279][280] Impact of COVID-19 The COVID-19 pandemic has not materially impacted 2022 financial statements, but future effects remain uncertain - No material impact on consolidated financial statements for the year ended December 31, 2022, from COVID-19[281] - Future operational and financial impact of COVID-19 remains uncertain and unpredictable[281] Financial Operations Overview The company has an accumulated deficit of $175.7 million, has generated no revenue, and expects to incur further losses - Accumulated deficit as of December 31, 2022: $175.7 million[282] - No revenue generated from operations since inception; no commercial biopharmaceutical products expected for several years, if at all[282] - Product development is in early stages, with high risks and uncertainties regarding costs, timelines, clinical testing, regulatory approval, and capital raising[283] Recent Accounting Pronouncements The adoption of ASU No. 2021-04 on January 1, 2022, did not have a material effect on financial statements - Adopted ASU No. 2021-04 (Earnings Per Share, Debt Modifications, Stock Compensation, Derivatives and Hedging) on January 1, 2022[284][413] - The adoption did not have a material effect on the consolidated financial statements[413] Results of Operations The net loss increased to $42.2 million in 2022 from $32.7 million in 2021, driven by higher R&D expenses Comparison of Financial Results (Years Ended December 31) | Metric | 2022 (USD) | 2021 (USD) | Change (USD) | | :--- | :--- | :--- | :--- | | Revenues | — | — | — | | Research and development | 33,269,337 | 20,395,136 | 12,874,201 | | General and administrative | 10,348,465 | 10,008,173 | 340,292 | | Goodwill impairment loss | 1,870,924 | — | 1,870,924 | | Loss from operations | (45,488,726) | (30,403,309) | (15,085,417) | | Interest expense | (10,164) | (8,859) | (1,305) | | Change in fair value of contingent consideration | 414,992 | (2,310,000) | 2,724,992 | | Loss before income taxes | (45,083,898) | (32,722,168) | (12,361,730) | | Income tax benefit | 2,883,849 | — | 2,883,849 | | Net loss | (42,200,049) | (32,722,168) | (9,477,881) | - Research and development expenses increased by $12.9 million (63.1%) in 2022, primarily due to a $5.2 million increase in clinical trial costs and an $8.7 million increase in Chemistry, Manufacturing, and Controls (CMC) costs[286] - General and administrative expenses increased by $0.3 million (3.4%) in 2022, mainly due to a $0.7 million increase in compensation costs and $1.1 million in consulting fees, offset by a $1.6 million decrease in stock compensation[287] - A goodwill impairment loss of $1.9 million was recorded in 2022[288] - An income tax benefit of $2.9 million was recognized in 2022, related to the sale of state NOLs and R&D credits[288] Liquidity and Capital Resources Cash decreased to $51.2 million in 2022, and the company requires substantial future funding for its operations - Primary funding sources: Issuance of convertible preferred stock, common stock, and at-the-market offerings[289] - Future capital requirements are substantial and depend on R&D progress, regulatory approvals, manufacturing scale-up, intellectual property costs, and commercialization efforts[295] - Raising additional funds through equity securities may result in significant dilution for stockholders[298] Cash and Working Capital (as of December 31) | Metric | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | | Cash | 51,189,088 | 91,348,967 | | Working Capital | 48,600,000 | 89,200,000 | | Decrease in Working Capital (YoY) | (40,600,000) | N/A | - Net cash used in operating activities: $35.0 million in 2022 (vs. $31.2 million in 2021), primarily due to net loss and increased non-cash charges[299][300][301] - Net cash used in investing activities: De minimis in 2022 (vs. $0.1 million in 2021)[302] - Net cash used in financing activities: $5.1 million in 2022, primarily due to redemption of Series F and G Preferred Stock and a milestone payment, contrasting with $82.0 million provided in 2021 from common stock issuance[303][304] Critical Accounting Estimates Financial statements rely on significant estimates for financial instruments, income taxes, R&D expenses, and impairment testing - Significant estimates include fair value of financial instruments, income taxes, contingencies, research and development, in-process research and development, and share-based payments[307] - Contingent consideration (related to Ciclofilin acquisition) is recorded at fair value using a probability-weighted discounted cash flow model, with key assumptions including discount rate, projected milestone dates, and probability of success[309][384][428][429] - Research and development costs are expensed as incurred due to no history of successful commercialization, and non-refundable advance payments are deferred and capitalized[314][315][403][404] - Goodwill and acquired IPR&D are indefinite-lived assets tested for impairment annually or more frequently if indicators arise. A goodwill impairment charge of $1.9 million was recognized in 2022 due to macroeconomic factors[316][317][318][386][387][388][389][390][391][438] - Share-based payments are measured at fair value using the Black-Scholes model, with expense recognized over the vesting period. A liability-classified award of $1.9 million was recorded as of December 31, 2022, due to insufficient available options under the plan[322][323][324][405][406][440] - A full valuation allowance is maintained for U.S. and foreign net deferred tax assets due to a history of operating losses, and the valuation allowance increased by $12.1 million in 2022[311][397][454][455] Off-Balance Sheet Arrangements The company had no off-balance sheet arrangements as of December 31, 2022 - No off-balance sheet arrangements as of December 31, 2022[325] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable to the company - Not applicable[326] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for the years ended December 31, 2022, and 2021 - The consolidated financial statements for the years ended December 31, 2022 and 2021, have been audited by BDO USA, LLP, who issued an opinion stating fair presentation in all material respects[329] - The auditor's report highlights substantial doubt about the company's ability to continue as a going concern due to recurring losses and accumulated deficit[330] - Critical audit matters identified include the valuation of In-Process Research & Development (IPR&D) intangible assets, valuation of contingent consideration liability, and accounting for Convertible Redeemable Preferred Stock, due to their subjectivity and complex judgments[334][335][337][340] - The Notes to Consolidated Financial Statements provide detailed information on business overview, basis of presentation (including going concern uncertainty), significant accounting policies, stockholders' equity (including Series F and G Convertible Redeemable Preferred Stock redemption), fair value measurements, property and equipment, indefinite-lived intangible assets and goodwill, accrued liabilities, share-based payments, income taxes, loss per share, and commitments and contingencies[358][370][378][414][427][435][436][439][440][451][463][464] Consolidated Balance Sheet Highlights (as of December 31) | Metric | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | | Cash | 51,189,088 | 91,348,967 | | Total current assets | 56,496,073 | 97,451,768 | | In-process research and development | 3,190,000 | 3,190,000 | | Goodwill | — | 1,870,924 | | Total assets | 60,244,452 | 103,552,479 | | Total current liabilities | 7,885,722 | 8,206,396 | | Contingent consideration, non-current | 2,093,771 | 1,891,716 | | Total liabilities | 10,388,515 | 10,557,476 | | Total stockholders' equity | 49,855,937 | 92,995,003 | | Accumulated deficit | (175,701,344) | (133,501,295) | Consolidated Statements of Operations Highlights (Years Ended December 31) | Metric | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | | Revenues | — | — | | Research and development | 33,269,337 | 20,395,136 | | General and administrative | 10,348,465 | 10,008,173 | | Goodwill impairment loss | 1,870,924 | — | | Net loss | (42,200,049) | (32,722,168) | | Net loss attributable to common shareholders | (45,337,549) | (32,722,168) | | Basic and diluted net loss per common share | (0.59) | (0.47) | Consolidated Statements of Cash Flows Highlights (Years Ended December 31) | Metric | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | | Net cash used in operating activities | (34,961,171) | (31,224,481) | | Net cash used in investing activities | (14,070) | (130,405) | | Net cash (used in) provided by financing activities | (5,137,500) | 81,977,015 | | Cash at end of period | 51,189,088 | 91,348,967 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no changes in or disagreements with accountants to report - Not applicable[474] Controls and Procedures Disclosure controls and internal control over financial reporting were deemed ineffective as of December 31, 2022 - As of December 31, 2022, disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting[474][477] - Identified material weaknesses:[479] - Improper design and implementation of control over formal review, approval, and evaluation of non-core, complex accounting transactions - Improper design and implementation of certain controls over income tax provision and management's review of the income tax provision, specifically regarding completeness and accuracy of tax provision and disclosures - Remediation plans include utilizing external consultants for technical accounting, expanding and improving review processes for complex transactions, and enhancing controls and processes around tax provision calculations and disclosures[479][485] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended December 31, 2022[482] Other Information There is no other information to report under this item - None[483] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections There are no disclosures regarding foreign jurisdictions that prevent inspections - None[484] PART III Directors, Executive Officers and Corporate Governance Information will be included in the company's 2023 Proxy Statement and is incorporated by reference - Information incorporated by reference from the 2023 Proxy Statement[487] Executive Compensation Information will be included in the company's 2023 Proxy Statement and is incorporated by reference - Information incorporated by reference from the 2023 Proxy Statement[488] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information will be included in the company's 2023 Proxy Statement and is incorporated by reference - Information incorporated by reference from the 2023 Proxy Statement[489] Certain Relationships, Related Person Transactions and Director Independence Information will be included in the company's 2023 Proxy Statement and is incorporated by reference - Information incorporated by reference from the 2023 Proxy Statement[490] Principal Accountant Fees and Services Information will be included in the company's 2023 Proxy Statement and is incorporated by reference - Information incorporated by reference from the 2023 Proxy Statement[491] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed with the report - Financial statements are referenced to page 51 of the report[494] - Financial statement schedules are omitted because conditions for their requirement are absent or information is included in consolidated financial statements/notes[495] - A comprehensive list of exhibits is provided, including corporate governance documents, warrant agreements, and certifications[496][497] Form 10-K Summary This item indicates that no Form 10-K Summary is provided - None[498] Signatures The report was signed on April 10, 2023, by the CEO, CFO, and Board of Directors - Report signed on April 10, 2023[501] - Signatories include Chief Executive Officer Robert Foster, Chief Financial Officer John Cavan, and members of the Board of Directors[501][503]