Business Context and Reporting Period
The provided filing is Aerpio Pharmaceuticals, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017, not a filing under the requested company name, Whitehawk Therapeutics, Inc. Aerpio is a clinical-stage biopharmaceutical company developing treatments for ocular disease, principally AKB-9778 for diabetic retinopathy. The company completed a reverse merger on March 15, 2017, changed its name from Zeta Acquisition Corp. II to Aerpio Pharmaceuticals, Inc., and began trading on the OTCQB under “ARPO” on August 8, 2017.
Because the merger was accounted for as a reverse acquisition, historical comparative periods primarily reflect Aerpio’s operations. The company had no approved products and had not generated product revenue.
Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | No product revenue; grant income was $11,239 in 2017 versus $80,954 in 2016 | No product revenue; grant income was $46,896 in 2017 versus $89,624 in 2016 |
| Research and development expense | $3.2 million versus $2.9 million | $5.4 million versus $5.9 million |
| General and administrative expense | $2.4 million versus $1.5 million | $4.9 million versus $2.7 million |
| Total operating expenses | $5.6 million versus $4.4 million | $10.3 million versus $8.6 million |
| Net loss | $5.5 million versus $4.4 million | $10.5 million versus $8.6 million |
| Net loss attributable to common stockholders per share | $0.21 loss versus $6.30 loss | $0.70 loss versus $13.33 loss |
| Net cash used in operating activities | Not separately provided for the quarter | $10.3 million versus $7.8 million |
Margins are not meaningful because the company had no product revenue and operated at a loss. Accumulated deficit was $97.7 million at June 30, 2017, compared with $86.2 million at December 31, 2016.
Cash and cash equivalents were $28.8 million at June 30, 2017, compared with $1.6 million at December 31, 2016. Short-term investments were $50,000 at both dates. Total assets were $29.8 million. Accounts payable and accrued expenses were $1.9 million. No convertible notes remained outstanding at June 30, 2017 because the notes and accrued interest converted into common stock in connection with the merger.
Financing activities provided $37.5 million during the first six months of 2017, principally from the March private placement. The company sold 8,049,555 shares at $5.00 per share for gross proceeds of approximately $40.2 million and net proceeds of approximately $37.2 million. It also issued warrants to purchase 317,562 shares at $5.00 per share, expiring March 15, 2020.
Material Changes Versus the Prior Comparable Period
- Quarterly research and development expense increased 9.1%, primarily because of preparation for and initiation of the AKB-9778 Phase 2b diabetic retinopathy trial and approximately $2.0 million of clinical drug product costs.
- Six-month research and development expense decreased 7.9%, reflecting lower spending on pipeline programs that more than offset increased AKB-9778 spending.
- General and administrative expense increased 63.8% for the quarter and 83.7% for the six months, driven by personnel, legal, accounting, insurance, transaction-related costs and expenses of operating as a public company.
- Quarterly net loss increased from $4.4 million to $5.5 million; six-month net loss increased from $8.6 million to $10.5 million.
- Cash increased substantially following the March 2017 equity offering, while debt and redeemable convertible preferred stock were eliminated through conversion into common stock.
- Shares outstanding increased to 27,070,038 at June 30, 2017 from 1,240,925 at December 31, 2016, largely reflecting the merger, security conversions and equity offering. The per-share loss comparison is therefore significantly affected by the change in capital structure.
Guidance, Outlook, Risks and Unusual Items
Management expected the existing cash and cash equivalents and short-term investments to fund planned operations into the first quarter of fiscal 2019. The company stated that additional financing would be required to advance clinical programs, conduct additional trials and commercialize any approved products. Potential funding sources included equity or debt financing, collaborations, licensing arrangements and business combinations.
In June 2017, the company initiated the TIME-2b Phase 2b trial of AKB-9778. The double-masked, placebo-controlled trial was planned to enroll 150 patients randomized among once-daily dosing, twice-daily dosing and placebo for 12 months. AKB-4924 had completed a Phase 1a trial, while ARP-1536 remained in preclinical development; further development of these programs was subject to additional funding or partnering.
- The company expects continuing significant operating losses and increasing expenses, particularly for clinical development, personnel and public-company compliance.
- AKB-9778 is the principal clinical asset, creating substantial concentration risk. The company had not agreed with the FDA on a Phase 3 development program.
- Clinical development risks include enrollment delays, inconclusive efficacy, adverse events, regulatory requests for additional studies, manufacturing issues and failure to obtain approvals.
- The company relies on contract research organizations and third-party manufacturers and had no internal manufacturing facilities.
- Commonly observed drug-related adverse events reported for AKB-9778 included dizziness and asymptomatic decreases in blood pressure.
- At June 30, 2017, management concluded that disclosure controls and procedures were not effective because of a material weakness involving review and approval controls over financial information and inadequate segregation of duties. Management stated that remediation efforts were underway.
- The company had no material legal proceedings and no off-balance-sheet arrangements. Non-cancelable operating lease obligations totaled $105,735 as of June 30, 2017.
- The company’s common stock traded on the OTCQB rather than a national exchange, creating potential liquidity and volatility risks.
Investor Verification Items
- Verify the issuer identity: the supplied filing names Aerpio Pharmaceuticals, Inc., while the request identifies Whitehawk Therapeutics, Inc.
- Confirm the effect of the March 2017 reverse merger, the 2.3336572-to-1 exchange ratio, the share cancellation and the March private placement on historical share counts and per-share results.
- Assess whether the reported cash runway into the first quarter of fiscal 2019 remains adequate under actual clinical-trial spending and whether additional financing is required sooner.
- Track enrollment, safety and efficacy results for the TIME-2b Phase 2b trial and any subsequent FDA guidance regarding Phase 3 requirements.
- Review remediation of the material weakness in internal control over financial reporting and subsequent auditor or management conclusions.
- Evaluate dilution from the 317,562 warrants, approximately 899,000 outstanding options, the 2017 equity incentive plan and any future financing.
- Confirm the status of intellectual-property rights, third-party manufacturing capacity and potential partnering plans for AKB-4924 and ARP-1536.