Business Context and Reporting Period
The provided filing is Aerpio Pharmaceuticals, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018, not a filing identified as Whitehawk Therapeutics, Inc. Aerpio is a biopharmaceutical company developing ocular and vascular therapies. Its lead candidate was AKB-9778 for non-proliferative diabetic retinopathy; AKB-4924 was licensed to Gossamer Bio for inflammatory bowel disease applications.
Financial Results and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| License revenue and other | $18.8 million | $20.2 million |
| Research and development expense | $4.3 million | $12.6 million |
| General and administrative expense | $3.3 million | $9.9 million |
| Total operating expenses | $7.6 million | $22.5 million |
| Operating income (loss) | $11.2 million | $(2.3) million |
| Net income (loss) | $11.5 million | $(1.9) million |
| Basic and diluted EPS | $0.28 | $(0.06) |
Third-quarter operating margin was approximately 59.5% and net margin approximately 61.3%, largely reflecting recognition of the Gossamer license payment. Nine-month operating margin was approximately negative 11.5% and net margin approximately negative 9.3%.
- Cash and cash equivalents were $68.8 million at September 30, 2018, compared with $20.3 million at December 31, 2017.
- Net cash provided by operating activities was $0.4 million for the nine months, compared with $14.3 million used in the prior-year period.
- Net cash provided by financing activities was $48.2 million, primarily from the 2018 public offering.
- Total liabilities were $3.6 million, consisting of current accounts payable and accrued expenses. The filing reports no outstanding convertible debt; prior notes converted into common stock in 2017.
- Accumulated deficit was $110.4 million at September 30, 2018.
- Stockholders’ equity was $66.5 million, and 40.6 million common shares were outstanding at September 30, 2018 and November 7, 2018.
Material Changes Versus the Prior Comparable Period
- Revenue increased from zero in the prior-year periods to $18.8 million in the third quarter and $20.2 million year-to-date, primarily from the Gossamer transaction.
- Third-quarter net results shifted from a $4.6 million loss to $11.5 million of income; nine-month loss narrowed from $15.2 million to $1.9 million.
- Research and development expense increased 47.7% in the third quarter and 50.6% year-to-date, primarily due to continued AKB-9778 clinical development.
- General and administrative expense increased 80.7% in the third quarter and 46.5% year-to-date, driven by higher stock-based compensation, personnel costs and, in the quarter, patent legal expenses.
- The company raised approximately $48.1 million net through the June and July 2018 public offering, issuing 13.4 million shares in aggregate.
- Stock-based compensation increased to $2.8 million year-to-date from $0.4 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- On June 24, 2018, Aerpio granted Gossamer an exclusive worldwide license to AKB-4924 and related products. Gossamer paid a $20.0 million upfront fee; Aerpio recognized the payment ratably over a 90-day transition period, recording $18.7 million in the third quarter and $20.0 million year-to-date.
- Future development and sales milestones and royalties under the Gossamer agreement were fully constrained as of September 30, 2018. The agreement provides for potential milestones and tiered royalties ranging from high-single-digit to mid-teens percentages, but the filing does not provide a clear value for future payments.
- Management expected to report top-line results from the 48-week Phase 2b TIME-2b trial of AKB-9778 in the second quarter of 2019 and planned a Phase 1b topical-eye-drop study in the second quarter of 2019.
- Management stated that existing cash and cash equivalents were expected to fund currently planned operations through the first quarter of fiscal 2020, but also stated that additional financing would be required to advance development and commercialization activities.
- The company expects continued operating losses and substantial expenses. Risks include clinical-trial failure, regulatory delays or denial, inability to commercialize products, competition, intellectual-property challenges, dependence on collaborators, and inability to obtain additional funding.
- The financial statements were prepared on a going-concern basis. Management warned that failure to raise capital could require delaying, reducing or eliminating development programs and could result in cessation of operations.
- Operating lease commitments totaled $344,779 as of September 30, 2018. The filing reports no material legal proceedings and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Aerpio Pharmaceuticals, Inc., whereas the request identifies Whitehawk Therapeutics, Inc.
- Assess the sustainability of reported revenue, because substantially all 2018 revenue arose from a one-time license upfront payment and transition services.
- Review the Gossamer agreement for milestone probability, royalty terms, termination rights and any future revenue recognition constraints.
- Verify the projected cash runway against expected clinical, regulatory and corporate spending and the company’s stated need for additional financing.
- Evaluate TIME-2b enrollment, timing and results for AKB-9778 and the status of planned glaucoma and other development programs.
- Consider dilution from the 2018 equity offering, outstanding options and 317,562 warrants exercisable at $5.00 per share through March 15, 2020.