SEC Form 10-Q Summary
Filing identity: The supplied filing is for Aerpio Pharmaceuticals, Inc., not Whitehawk Therapeutics, Inc. It covers the quarterly and six-month periods ended June 30, 2018, and was filed August 14, 2018. Aerpio was a smaller reporting company and emerging growth company.
Business Context and Reporting Period
Aerpio was a clinical-stage biopharmaceutical company focused on ocular disease. Its lead candidate was AKB-9778, a Tie2 pathway activator under development for non-proliferative diabetic retinopathy. Other programs included AKB-4924, licensed to Gossamer Bio for inflammatory bowel disease, and ARP-1536, which remained in preclinical development.
The filing reports unaudited consolidated results for the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| License revenue | $1.3 million; $0 in 2017 | $1.3 million; $0 in 2017 |
| Research and development expense | $4.2 million vs. $3.2 million | $8.3 million vs. $5.4 million |
| General and administrative expense | $3.1 million vs. $2.4 million | $6.6 million vs. $4.9 million |
| Total operating expenses | $7.4 million vs. $5.6 million | $14.8 million vs. $10.3 million |
| Operating loss | $6.0 million vs. $5.6 million | $13.5 million vs. $10.3 million |
| Net loss | $6.0 million vs. $5.5 million | $13.4 million vs. $10.5 million |
| Net loss per share | $0.22 vs. $0.21 | $0.49 vs. $0.70 |
Revenue consisted solely of amortization of the $20.0 million upfront payment under the Gossamer license agreement. The payment was recognized ratably over a 90-day transition period beginning June 25, 2018; $18.7 million remained deferred at June 30, 2018 and was expected to be recognized in the third quarter of 2018.
Reported operating margins were approximately negative 453% for the quarter and negative 1,014% for the six-month period, reflecting minimal revenue relative to continuing development costs. No meaningful gross margin was reported because the filing does not present cost of revenue.
At June 30, 2018, cash and cash equivalents were $68.8 million, compared with $20.3 million at December 31, 2017. Total current assets were $69.4 million and current liabilities were $21.6 million, including $18.7 million of deferred revenue. Stockholders’ equity was $47.9 million and accumulated deficit was $122.0 million.
The company had no outstanding convertible debt at June 30, 2018; prior secured convertible notes had converted into common stock in connection with the 2017 merger. The company had $366,957 of future non-cancelable operating lease payments.
Material Changes Versus the Prior Comparable Period
- Revenue increased from zero to $1.3 million in both the quarterly and year-to-date periods because of the Gossamer license.
- Quarterly research and development expense increased 33%, primarily from ongoing Phase 2 clinical work for AKB-9778 and clinical operations for AKB-4924. Six-month research and development expense increased 52%.
- Quarterly general and administrative expense increased 30%, and six-month expense increased 34%, primarily due to higher personnel and stock-based compensation costs.
- Six-month net loss increased from $10.5 million to $13.4 million, although loss per share improved from $0.70 to $0.49 because of the larger share base.
- The company completed a June 2018 public offering of 11,688,000 shares, generating approximately $41.9 million of net proceeds. An additional $6.2 million was received after quarter-end from the underwriters’ overallotment.
- Shares outstanding increased to 38.8 million at June 30, 2018 from 27.1 million at December 31, 2017; 40.6 million were outstanding as of August 14, 2018.
- Stock-based compensation increased to $2.0 million for the first six months from $0.3 million in the prior-year period.
License Transaction, Outlook, and Risks
On June 24, 2018, Aerpio granted Gossamer an exclusive, sublicensable worldwide license to develop and commercialize AKB-4924 and related products. Gossamer assumed responsibility for development and commercialization and was obligated to use commercially reasonable efforts in specified jurisdictions. Aerpio remained eligible for development, commercial, and sales milestones and tiered royalties ranging from high-single-digit to mid-teens percentages, subject to customary reductions. Future milestones and royalties were fully constrained and had not been recognized.
Management stated that the $68.8 million cash balance at June 30, 2018 was expected to fund currently planned operations through the first quarter of fiscal 2020. The company also stated that it expected continued operating losses and would need additional funding to advance clinical programs and commercialize products. Additional financing might include equity, licensing, collaborations, debt, or business combinations, but might not be available on acceptable terms or at all.
The company’s Phase 2b TIME-2b trial of AKB-9778 was ongoing with 167 patients enrolled. Management planned to initiate a Phase 1b topical-eye-drop trial for glaucoma and ocular hypertension in the second quarter of 2019. These plans were forward-looking and subject to clinical, regulatory, financing, and commercialization risks.
The filing states that the financial statements were prepared on a going-concern basis despite substantial recurring losses and dependence on future financing. Principal risks included clinical-trial failure, regulatory approval uncertainty, competition, intellectual-property protection, dependence on strategic collaborators, potential termination of the Gossamer agreement, and the possibility that an active trading market for the recently Nasdaq-listed common stock might not develop or be sustained.
Cash Flow and Liquidity
- The financial statements report six-month net cash provided by operating activities of $6.6 million, driven primarily by the $18.7 million increase in deferred revenue, partially offset by the $13.4 million net loss.
- Net cash provided by financing activities was $41.9 million, primarily from the June equity offering.
- Net cash used in investing activities was $8,498.
- The statement of cash flows reports a $48.5 million increase in cash during the six months, resulting in $68.8 million of ending cash.
- The MD&A cash-flow summary presents different amounts—$18.7 million of operating cash flow, $38.8 million of financing cash flow, and a $57.5 million increase. The filing text does not clearly reconcile this discrepancy with the audited presentation and should be verified against the filed financial statements and XBRL data.
Important Facts for Investors to Verify
- Confirm the issuer’s identity: the supplied document is Aerpio Pharmaceuticals, Inc., not Whitehawk Therapeutics, Inc.
- Reconcile the conflicting cash-flow figures in the financial statements and MD&A.
- Verify the timing and remaining deferred-revenue recognition from the $20.0 million Gossamer upfront payment.
- Assess the sustainability of liquidity after excluding deferred revenue and considering the company’s recurring operating losses.
- Review the Gossamer agreement’s milestone, royalty, exclusivity, termination, and change-of-control provisions.
- Evaluate clinical and regulatory status for AKB-9778, including the ongoing TIME-2b trial and planned glaucoma study.
- Consider dilution from the 2018 equity offering, the overallotment shares, outstanding options, restricted stock, and 317,562 warrants.
- Review the company’s going-concern disclosure and stated need for additional financing.