Business Context and Reporting Period
The provided filing is Aerpio Pharmaceuticals, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2017, not a filing identified as Whitehawk Therapeutics, Inc. Aerpio is a clinical-stage biopharmaceutical company developing treatments for ocular disease. Its lead candidate, AKB-9778, targets diabetic retinopathy; AKB-4924 targets inflammatory bowel disease and ARP-1536 is an ocular-disease candidate in preclinical development.
On March 15, 2017, the company completed a reverse merger with Aerpio Therapeutics, changed its name from Zeta Acquisition Corp. II to Aerpio Pharmaceuticals, converted preferred stock and convertible notes into common stock, and completed a private placement. The financial statements reflect reverse-acquisition accounting, with historical periods representing Aerpio’s operations.
Financial Condition and Results
| Metric | Q1 2017 | Q1 2016 | Change or period-end balance |
|---|---|---|---|
| Revenue | $0 | $0 | No product revenue since inception |
| Research and development expense | $2.3 million | $3.0 million | Down 24.6% |
| General and administrative expense | $2.5 million | $1.2 million | Up 105.9%, primarily merger-related legal and accounting costs |
| Total operating expenses | $4.8 million | $4.2 million | Up 13.2% |
| Net loss | $5.0 million | $4.2 million | Loss increased by $0.8 million |
| Net loss attributable to common stockholders | $5.9 million | $5.2 million | Includes preferred-stock accretion of $0.9 million in 2017 |
| Basic and diluted loss per share | $1.06 loss | $7.07 loss | Share count increased substantially after the merger and financing |
| Cash flow from operating activities | $3.9 million used | $3.9 million used | Comparable operating cash burn |
| Cash and cash equivalents | $35.1 million | — | March 31, 2017 balance; $1.6 million at December 31, 2016 |
| Cash and short-term investments | $35.2 million | — | March 31, 2017 balance |
| Accumulated deficit | $92.2 million | — | March 31, 2017 balance |
| Debt | $0 convertible notes outstanding | — | Convertible notes and accrued interest converted into common stock on March 15, 2017 |
Net financing cash flow was $37.5 million, including approximately $37.2 million of net proceeds from the sale of 8,049,555 common shares at $5.00 per share and approximately $0.3 million from additional convertible notes. The company had 27,049,555 common shares outstanding at March 31, 2017 and 27,075,284 shares outstanding as of May 10, 2017.
Material Changes Versus the Prior Comparable Period
- Research and development spending declined because 2016 toxicology and other development activities were completed, while spending increased for formulation work and preparation for the planned AKB-9778 diabetic-retinopathy trial.
- General and administrative expense more than doubled because of legal, accounting, and other costs associated with the reverse merger and becoming a public company.
- Interest expense increased to $0.3 million from nominal interest income in the prior-year quarter, primarily due to the secured convertible notes. Those notes were subsequently converted into common stock.
- Cash increased by $33.5 million during the quarter, primarily from the March private placement.
- Redeemable convertible preferred stock of $73.8 million at December 31, 2016 was converted into common stock. Stockholders’ equity consequently increased from a deficit of $86.2 million to positive equity of $33.3 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to initiate a 12-month, double-blind Phase 2b trial of AKB-9778 in diabetic retinopathy during the second quarter of 2017.
- Based on current plans, management expected cash and cash equivalents to fund planned operations into the first quarter of fiscal 2019. The company stated that additional financing will be required to advance clinical programs and commercialize products, and financing may be unavailable or dilutive.
- The company expects continuing operating losses and increasing expenses as it advances clinical programs, adds personnel, and incurs public-company costs. It has never generated product revenue and does not expect product revenue in the foreseeable future.
- AKB-9778 is the primary clinical program, creating significant concentration risk. Clinical, regulatory, manufacturing, enrollment, intellectual-property, reimbursement, and commercialization risks could delay or prevent approval and commercialization.
- Further development of AKB-4924 and ARP-1536 was subject to additional funding or strategic partnerships.
- The company reported that disclosure controls and procedures were not effective because of a material weakness involving review and approval controls over financial information and insufficient segregation of duties. Management was taking remediation steps.
- Outstanding warrants covered 317,562 common shares at a $5.00 exercise price and expire March 15, 2020. Investors in the March offering received specified anti-dilution protections.
- The company had approximately $2.9 million of contractual commitments, including research and development commitments and operating-lease obligations, based on the disclosed commitment schedule.
- No material legal proceedings were reported. The filing states that there were no off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Confirm the entity covered by the filing: the supplied document is for Aerpio Pharmaceuticals, Inc., whereas the request identifies Whitehawk Therapeutics, Inc.
- Verify the timing, enrollment, design, and results of the planned AKB-9778 Phase 2b diabetic-retinopathy trial.
- Assess whether the stated cash runway into the first quarter of fiscal 2019 remains supportable under updated spending and clinical assumptions.
- Review subsequent financing, partnership, clinical, regulatory, and merger-related filings for developments after March 31, 2017.
- Evaluate remediation of the material weakness in internal control over financial reporting.
- Review dilution from the March offering, converted notes and preferred stock, warrants, stock options, the 2017 incentive plan, and anti-dilution provisions.
- Confirm the status of the company’s resale registration statement and the liquidity of its common stock following the reverse merger.