WHWK

Business Context and Reporting Period

Company: Aerpio Pharmaceuticals, Inc. (formerly Zeta Acquisition Corp. II)

Reporting Date: March 15, 2017

Event: This Form 8-K reports the completion of a reverse merger between Zeta Acquisition Corp. II (a shell company) and Aerpio Therapeutics, Inc. (Aerpio). Following the merger, the registrant changed its name to Aerpio Pharmaceuticals, Inc. and ceased to be a shell company. Aerpio is considered the accounting acquirer, and its historical financial statements will replace those of the former shell company in future filings.

Business Overview: Aerpio is a biopharmaceutical company focused on developing first-in-class treatments for ocular disease, specifically diabetic retinopathy (DR) and diabetic macular edema (DME). Its lead product candidate, AKB-9778, is a small molecule activator of the Tie-2 pathway designed for systemic administration via subcutaneous injection.

Key Financial Metrics

Capital Raise (The Offering):

• Gross Proceeds: $40,247,787.73
• Shares Issued: 8,049,555 shares of Common Stock
• Price Per Share: $5.00
• Placement Agent Fees: Estimated at $4,751,697 (7% commission plus warrants).

Historical Financial Performance (Aerpio - Years Ended Dec 31):

Capital Structure (Post-Merger):

• Common Stock Outstanding: 27,049,555 shares
• Authorized Common Stock: Increased to 300,000,000 shares
• Options Outstanding: 927,592 shares (converted from Aerpio 2011 Plan)
• Warrants Outstanding: 317,562 shares (Placement Agent Warrants at $5.00 exercise price)

Material Changes vs. Prior Period

Corporate Structure: The company transitioned from a shell company (Zeta Acquisition Corp. II) to an operating biopharmaceutical entity (Aerpio Pharmaceuticals, Inc.) via a reverse merger. Aerpio's historical financials are now the basis for reporting.

Liquidity: Cash position improved significantly due to the private placement offering. Pre-offering cash was $1.6 million (as of Dec 31, 2016); post-offering, the company expects sufficient funds to operate into the first quarter of fiscal year 2019.

Operating Expenses:

• R&D: Decreased by 2.2% ($0.3 million) in 2016 compared to 2015, primarily due to reduced spending on the lead program AKB-9778 following the conclusion of its Phase 2 study in DME, offset by increased spending on AKB-4924 and ARP-1536.
• G&A: Decreased by 10.2% ($0.6 million) in 2016 compared to 2015, driven by reduced patent prosecution costs.

Debt: Outstanding Senior Secured Convertible Promissory Notes were converted into Aerpio common stock immediately prior to the merger and subsequently exchanged for the registrant's Common Stock. No debt remains outstanding post-merger.

Guidance, Outlook, and Risks

Clinical Outlook:

• AKB-9778 (Lead Candidate): Completed a Phase 2 trial in DME showing promising signs of reducing DR severity as monotherapy and significant improvement in central retinal thickness when combined with ranibizumab. The company plans to initiate a 12-month, double-blind Phase 2 trial in patients with non-proliferative DR in Q2 2017, with topline results expected in Q2 2019.
• AKB-4924: Completed Phase 1a trial for inflammatory bowel disease (IBD). Further development is contingent on securing additional funding or a strategic partner.
• ARP-1536: A humanized monoclonal antibody in preclinical development for wet AMD and DME. Development is contingent on funding/partnerships.

Management Commentary: Management believes the systemic delivery of AKB-9778 offers a paradigm shift for treating diabetic eye disease by addressing vascular damage earlier than current intravitreal injection therapies. The company intends to commercialize AKB-9778 in the U.S. independently and seek collaborations for international markets.

Risks and Contingencies:

• Going Concern: Auditors have expressed substantial doubt about the company's ability to continue as a going concern based on historical losses and the need for additional capital, though the recent offering mitigates this risk through Q1 2019.
• Regulatory Approval: No product candidates have received regulatory approval. Success depends on completing clinical trials and obtaining FDA/EMA approval.
• Market Liquidity: Common Stock is not listed on a national exchange. The company intends to seek quotation on the OTC Markets QB tier, but there is no assurance an active trading market will develop.
• Internal Controls: The independent auditor identified a material weakness in internal control over financial reporting related to disclosure controls and segregation of duties.

Key Facts for Investor Verification

• Reverse Merger Accounting: Verify that future financial filings reflect Aerpio's historical operations, not the shell company's.
• Use of Proceeds: Confirm the company's ability to fund operations into Q1 2019 without further dilution, given the $40.25 million raised.
• Clinical Trial Timeline: Monitor the initiation of the Phase 2 DR trial in Q2 2017 and the reporting of topline data in Q2 2019.
• Stock Liquidity: Verify the status of the OTC Markets QB listing application and the effectiveness of the registration statement for resale of shares (required within 60 days of closing).
• Internal Control Remediation: Track management's progress in remedying the material weakness in internal controls identified by the auditor.
• Related Party Transactions: Note that significant shareholders (Novartis, OrbiMed, Satter entities) participated in the offering and hold substantial ownership (approx. 65.9% held by insiders and principal stockholders).