Hepion Pharmaceuticals(HEPA) - 2023 Q4 - Annual Report

PART I Item 1. Business Hepion Pharmaceuticals is a clinical-stage biopharmaceutical company focused on developing drug therapies for chronic liver diseases, particularly Non-Alcoholic Steatohepatitis (NASH) and Hepatocellular Carcinoma (HCC) - The company's primary focus is the development of its lead drug candidate, rencofilstat, for the treatment of chronic liver diseases like NASH and HCC[40][41] - In May 2023, the Phase 2a "ALTITUDE-NASH" study met its primary endpoint, demonstrating improved liver function and good tolerability, reinforcing confidence in the ongoing 12-month Phase 2b "ASCEND-NASH" trial[33][40] - The FDA has granted rencofilstat Fast Track designation for NASH (November 2021) and Orphan Drug Designation for HCC (June 2022), potentially expediting its development and review process[33][35] - The company operates without its own manufacturing facilities, relying on contract manufacturers for clinical trial materials, and lacks a sales and marketing team, planning to partner for future commercialization[24][29][30] - A strategic restructuring plan was approved in December 2023 to preserve capital, involving a reduction in operating costs and a one-time charge of approximately $0.7 million[40][271] Item 1A. Risk Factors The company faces substantial risks, including a history of significant financial losses and an accumulated deficit, raising doubts about its ability to continue as a going concern - The company has a history of losses, with an accumulated deficit of $224.6 million as of December 31, 2023, and has concluded there is substantial doubt about its ability to continue as a going concern without raising additional capital[174][326] - The business is almost entirely dependent on the successful clinical development, regulatory approval, and commercialization of its sole product candidate, rencofilstat[12][174] - Hepion requires significant additional funding to continue its development programs and operations, and there is no certainty that such capital will be available on acceptable terms, or at all[12][189] - The company relies on third-party contract manufacturers, which poses risks related to production delays, quality control, and regulatory compliance (cGMP)[212][225] - Management has identified material weaknesses in internal controls over financial reporting as of December 31, 2023, which could result in material misstatements in financial statements[22][71] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[77] Item 1C. Cybersecurity The company has established policies and processes for managing cybersecurity risks, which are integrated into its overall risk management system - The Board of Directors oversees cybersecurity risk, with the audit committee and Interim CEO/CFO responsible for direct management and implementation of policies[269] - The company utilizes third-party consultants for risk assessment, monitoring, and implementation of cybersecurity measures[268] - No material cybersecurity incidents have been reported that have impaired operations or financial standing[268] Item 2. Properties The company's corporate headquarters are located in approximately 4,000 square feet of leased office space in Edison, New Jersey - Corporate headquarters are leased space located at 399 Thornall Street, First Floor, Edison, New Jersey, 08837[80] Item 3. Legal Proceedings The company may be involved in various legal actions in the ordinary course of business but currently has no reason to believe that the outcome of any such proceedings would have a material adverse effect on its financial condition or operations - The company is not currently party to any legal proceedings that are expected to have a material adverse effect[257] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[257] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Hepion's common stock is traded on the Nasdaq Capital Market under the symbol "HEPA" - The company's common stock trades on the Nasdaq Capital Market under the ticker symbol "HEPA"[259] - As of March 13, 2024, there were 344 holders of record of the common stock[259] - The company has never paid cash dividends and does not anticipate paying any in the foreseeable future[259] Item 6. [Reserved] This item is reserved Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section details the company's financial performance and position, highlighting an increased net loss in 2023 and significant liquidity tightening, raising substantial doubt about its ability to continue as a going concern Results of Operations For the year ended December 31, 2023, the company reported a net loss of $48.9 million, compared to a net loss of $42.2 million in 2022, primarily due to increased R&D expenses and an IPR&D asset impairment Comparison of Years ended December 31, 2023 and 2022 | Metric | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | | Net Loss | ($48,926,042) | ($42,200,049) | | Research and development | $35,639,656 | $33,269,337 | | General and administrative | $9,618,298 | $10,348,465 | | Asset impairment loss | $3,190,000 | $1,870,924 | - The increase in R&D expenses was primarily due to a $12.4 million increase in clinical trial costs for the Phase 2b study, offset by a $10.0 million decrease in drug development costs[100] - A $3.2 million impairment was recorded for the IPR&D asset in 2023 due to the slowdown of the Phase 2b study and the decision to discontinue development for Hepatitis B as a second indication[100][118] Liquidity and Capital Resources The company's financial position has weakened significantly, with working capital decreasing from $48.6 million at the end of 2022 to $12.2 million at the end of 2023, primarily due to cash expenditures on clinical trials Cash Flow Summary (Years Ended Dec 31) | Activity | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | | Net cash used in Operating | ($40.9M) | ($35.0M) | | Net cash used in Investing | ($14.3K) | ($14.1K) | | Net cash from (used in) Financing | $4.5M | ($5.1M) | - Working capital decreased by $36.4 million during 2023, primarily due to cash expenditures related to clinical trials[98] - As of December 31, 2023, the company had an accumulated deficit of $224.6 million and has concluded there is substantial doubt in its ability to continue as a going concern[97][103] Critical Accounting Estimates The company's critical accounting estimates involve significant judgment, including the fair value of financial instruments, income taxes, R&D expenses, and the valuation and impairment of IPR&D, which was fully impaired in 2023 - Key estimates include fair value of financial instruments, income taxes, contingencies, R&D, IPR&D, and share-based payments[106] - The full $3.2 million In-Process Research and Development (IPR&D) asset was impaired as of December 31, 2023, due to the slowdown of the Phase 2b clinical trial and the decision to discard Hepatitis B as a second indication[118] - Share-based compensation is calculated using the Black-Scholes model, with key assumptions for volatility, expected term, and risk-free rate[110][119] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company - Not applicable[124] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the years ended December 31, 2023, and 2022, with auditors' reports highlighting substantial doubt about the company's ability to continue as a going concern - The independent auditors' reports for both 2023 and 2022 express substantial doubt about the company's ability to continue as a going concern due to recurring losses and an accumulated deficit[127][137] Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | | Cash | $14,785,880 | $51,189,088 | | Total Assets | $18,094,397 | $60,244,452 | | Total Liabilities | $10,813,590 | $10,388,515 | | Total Stockholders' Equity | $7,280,807 | $49,855,937 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | | Net Loss | ($48,926,042) | ($42,200,049) | | Net Loss Per Share (Basic & Diluted) | ($12.32) | ($11.90) | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On December 27, 2023, the company dismissed BDO USA, P.C. and engaged Grassi & Co., CPAs, P.C. as its new independent auditor for the fiscal year ended December 31, 2023 - The company dismissed BDO USA, P.C. and engaged Grassi & Co., CPAs, P.C. as its new independent auditor effective January 1, 2024[358] - There were no disagreements with BDO on any matter of accounting principles or practices. BDO's prior audit reports included a going concern qualification[358] Item 9A. Controls and Procedures Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were ineffective due to identified material weaknesses in internal control over financial reporting - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023[297] - Material weaknesses were identified in the control environment, stemming from cost-cutting measures that resulted in insufficient personnel and a lack of proper segregation of duties[361] - Additional material weaknesses relate to the design and implementation of controls for non-core, complex accounting transactions and the income tax provision[361] - The company's plan to remediate these weaknesses, including hiring additional personnel, is contingent upon its ability to raise additional capital[361] Item 9B. Other Information There is no other information to report under this item - None[298] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections There is no information to report under this item - None[300] PART III Items 10, 11, 12, 13 and 14 Information required for Items 10 through 14 is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders, to be filed within 120 days of the fiscal year-end - Information for Items 10 (Directors, Executive Officers and Corporate Governance), 11 (Executive Compensation), 12 (Security Ownership), 13 (Certain Relationships and Related Transactions), and 14 (Principal Accountant Fees and Services) will be provided in the forthcoming 2024 Proxy Statement and is incorporated by reference[2][302][364] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report - This item provides an index to the consolidated financial statements (found on page 49) and a list of all exhibits filed with the annual report[367][306] Item 16. Form 10-K Summary There is no summary provided under this item - None[308]