Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2020

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                           to                           

Commission File Number 001-36856

A picture containing drawing

Description automatically generated

HEPION PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

    

46-2783806
(I.R.S. Employer
Identification Number)

399 Thornall Street, First Floor
Edison, New Jersey 08837

(Address of Principal Executive Offices)

(732) 902-4000

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

HEPA

The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:

Large accelerated filer

Accelerated filer

Non-accelerated filer 

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

The number of shares of the registrant’s Common Stock outstanding as of November 10, 2020 was 9,025,153.


Table of Contents

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for Hepion Pharmaceuticals, Inc. may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are characterized by future or conditional verbs such as “may,” “will,” “expect,” “intend,” “anticipate,” believe,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Factors that may cause such differences include, but are not limited to, those discussed under Item 1A. Risk Factors and elsewhere in the audited condensed consolidated financial statements as of and for the year ended December 31, 2019 contained in the Company’s Annual Report on Form 10-K and 10-K/A filed with the Securities and Exchange Commission. These factors include the uncertainties associated with product development, the risk that products that appeared promising in early clinical trials do not demonstrate safety and efficacy in larger-scale clinical trials, the risk that we will not obtain approval to market our products, the risks associated with dependence upon key personnel and the need for additional financing. We do not assume any obligation to update forward-looking statements as circumstances change and thus you should not unduly rely on these statements. Cautionary Note Regarding Forward-Looking Statements.

1


Table of Contents

HEPION PHARMACEUTICALS, INC.

FORM 10-Q

TABLE OF CONTENTS

Page

PART I—FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (unaudited):

3

Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019

4

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019

5

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

PART II—OTHER INFORMATION

Item 1A.

Risk Factors

35

Item 6.

Exhibits

35

SIGNATURES

36

2


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

September 30, 

December 31, 

    

2020

    

2019 (1)

Assets

Current assets:

Cash

$

13,711,334

$

13,922,972

Prepaid expenses

 

641,157

 

465,693

Total current assets

 

14,352,491

 

14,388,665

Property and equipment, net

 

45,476

 

57,166

Right-of-use assets

614,193

797,913

In-process research and development

3,190,000

3,190,000

Goodwill

1,870,924

1,870,924

Other assets

 

290,604

 

306,880

Total assets

$

20,363,688

$

20,611,548

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$

1,296,545

$

491,557

Accrued expenses

 

2,384,133

 

851,202

Operating lease liabilities, current

275,296

266,696

Total current liabilities

 

3,955,974

 

1,609,455

Contingent consideration

2,560,000

2,430,000

Long-term debt

176,585

Deferred tax liability

409,022

409,022

Operating lease liabilities, non-current

358,470

540,751

Derivative financial instruments, at estimated fair value—warrants

 

30,831

 

5,623

Total liabilities

 

7,490,882

 

4,994,851

Commitments and contingencies (Note 11)

Stockholders’ equity:

Series A convertible preferred stock, stated value $10 per share, 85,581 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively.

855,808

855,808

Series C convertible preferred stock, stated value $1,000 per share, 1,817 and 1,827 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively.

856,320

861,033

Common stock—$0.0001 par value per share; 120,000,000 shares authorized, 9,025,153 and 3,760,255 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively.

 

901

 

375

Additional paid in capital

 

110,309,541

 

97,651,006

Accumulated deficit

 

(99,149,764)

 

(83,751,525)

Total stockholders’ equity

 

12,872,806

 

15,616,697

Total liabilities and stockholders’ equity

$

20,363,688

$

20,611,548

(1) See Note 2

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2020

    

2019

    

2020

    

2019

 

Revenues

$

$

$

$

Costs and expenses:

Research and development

 

3,782,505

 

846,453

 

9,370,176

 

2,120,152

General and administrative

 

2,448,489

 

1,064,081

 

5,823,169

 

3,407,650

Total operating expenses

6,230,994

1,910,534

15,193,345

5,527,802

Loss from operations

 

(6,230,994)

 

(1,910,534)

 

(15,193,345)

 

(5,527,802)

Other income (expense):

Change in fair value of debt

(22,197)

(175,992)

Interest expense

(16,159)

(15,354)

(16,159)

(555,441)

Change in fair value of derivative instruments—warrants and contingent consideration

 

(46,433)

 

128,402

 

(155,208)

 

473,929

Loss before income taxes

 

(6,293,586)

 

(1,819,683)

 

(15,364,712)

 

(5,785,306)

Income tax benefit (expense)

62,044

(33,527)

961,014

Net loss

(6,231,542)

(1,819,683)

(15,398,239)

(4,824,292)

Deemed dividend (see Note 5)

(5,287)

(8,460)

(5,287)

(5,444,826)

Net loss attributable to common shareholders

$

(6,236,829)

$

(1,828,143)

$

(15,403,526)

$

(10,269,118)

Weighted average common shares outstanding:

Basic and diluted

9,025,139

3,453,628

7,294,790

1,532,927

Net loss per common share: (see Note 10)

Basic and diluted

$

(0.69)

$

(0.53)

$

(2.11)

$

(6.70)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

Preferred Stock

Preferred Stock

Additional

Total

Series A

Series C

Common Stock

Paid in

Accumulated

Stockholders'

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balance at December 31, 2019

85,581

$

855,808

1,827

$

861,033

3,760,255

$

375

$

97,651,006

$

(83,751,525)

$

15,616,697

Net loss

(4,226,617)

(4,226,617)

Stock-based compensation expense

8,246

8,246

Issuance of common stock, net

2,311,867

231

6,788,234

6,788,465

Warrant exercises

2,000

12,000

12,000

Balance at March 31, 2020

85,581

855,808

1,827

861,033

6,074,122

606

104,459,486

(87,978,142)

18,198,791

Net loss

(4,940,080)

(4,940,080)

Stock-based compensation expense

4,123

4,123

Issuance of common stock, net

2,950,939

295

4,460,054

4,460,349

Balance at June 30, 2020

85,581

855,808

1,827

861,033

9,025,061

901

108,923,663

(92,918,222)

17,723,183

Net loss

(6,231,542)

(6,231,542)

Stock-based compensation expense

1,381,165

1,381,165

Conversion of preferred stock to common

(10)

(10,000)

92

10,000

Accretion of discount

5,287

(5,287)

Balance at September 30, 2020

85,581

$

855,808

1,817

$

856,320

9,025,153

$

901

$

110,309,541

$

(99,149,764)

$

12,872,806

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

Preferred Stock

Preferred Stock

Preferred Stock

Preferred Stock

Additional

Total

 

    

Series A

Series C

Series D

Series E

Common Stock

    

Paid in

    

Accumulated

    

Stockholders’

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

Shares

    

Amount

    

Capital

   

Deficit

   

Equity 

  

Balance at December 31, 2018

 

85,581

$

855,808

 

1,974

$

930,311

  

$

$

    

247,013

  

$

25

  

$

76,652,839

  

$

(76,714,187)

  

$

1,724,796

  

Net loss

 

 

 

 

  

  

 

  

 

  

 

(1,983,711)

  

 

(1,983,711)

  

Stock-based compensation expense

 

 

 

 

  

  

 

  

 

17,506

  

 

  

 

17,506

  

Conversion of preferred stock to common

 

 

 

(46)

 

(46,000)

  

424

  

 

  

 

46,000

  

 

  

 

  

Accretion of discount

 

 

 

24,321

  

  

 

  

 

(24,321)

  

 

  

 

Issuance of common stock, private placement

 

 

 

 

  

47,429

  

 

5

  

 

486,278

  

 

  

 

486,283

  

Issuance of common stock, debt redemption

 

 

 

 

  

11,882

  

 

1

  

 

149,917

  

 

  

 

149,918

  

Balance at March 31, 2019

 

85,581

855,808

 

1,928

908,632

  

306,748

  

31

  

77,328,219

  

(78,697,898)

  

394,792

  

Net loss

 

 

 

 

  

  

 

  

 

  

 

(1,020,899)

  

 

(1,020,899)

  

Stock-based compensation expense

 

 

 

 

  

  

 

  

 

17,133

  

 

  

 

17,133

  

Issuance of preferred stock

 

 

 

 

  

521

312,600

10,570

6,976,201

  

 

  

 

3,802,201

  

 

  

 

11,091,002

  

Conversion of preferred stock to common

 

 

 

(85)

 

(85,000)

  

(521)

(521,000)

(10,570)

(10,570,002)

1,824,473

  

 

182

  

 

11,175,820

  

 

  

 

  

Offering costs

 

 

 

 

  

(29,526)

(472,311)

  

 

  

 

(536,787)

  

 

  

 

(1,038,624)

  

Placement agent warrants

 

 

 

  

(48,250)

(244,895)

  

 

  

 

293,145

  

 

  

 

Beneficial conversion feature

 

 

 

  

(186,692)

(581,350)

  

 

  

 

768,042

  

 

  

 

Accretion of beneficial conversion feature

 

 

 

  

186,692

581,350

  

 

  

 

(768,042)

  

 

  

 

Accretion of discount

 

 

 

44,941

  

286,176

4,311,007

  

 

  

 

(4,642,124)

  

 

  

 

Issuance of common stock, net

 

 

 

 

  

1,031,071

  

 

103

  

 

5,844,421

  

 

  

 

5,844,524

  

Issuance of common stock, private placement

 

 

 

 

  

  

 

  

 

330

  

 

  

 

330

  

Issuance of common stock, debt redemption

 

 

 

 

  

42,439

  

 

4

  

 

400,059

  

 

  

 

400,063

  

Warrant exercises

 

 

 

 

  

248,877

  

 

25

  

 

2,090,542

  

 

  

 

2,090,567

  

Balance at June 30, 2019

 

85,581

855,808

 

1,843

868,573

  

3,453,608

  

345

  

95,772,959

  

(79,718,797)

  

17,778,888

  

Net loss

 

 

 

 

  

  

 

  

 

  

 

(1,819,682)

  

 

(1,819,682)

  

Stock-based compensation expense

 

 

 

 

  

  

 

  

 

17,129

  

 

  

 

17,129

  

Conversion of preferred stock to common

 

 

 

(16)

 

(16,000)

  

147

  

 

  

 

16,000

  

 

  

 

  

Accretion of discount

 

 

 

8,460

  

  

 

  

 

(8,460)

  

 

  

 

Balance at September 30, 2019

 

85,581

$

855,808

 

1,827

$

861,033

  

$

$

3,453,755

  

$

345

  

$

95,797,628

  

$

(81,538,479)

  

$

15,976,335

  

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended

September 30, 

    

2020

    

2019

Cash flows from operating activities:

Net loss

$

(15,398,239)

$

(4,824,292)

Adjustments to reconcile net loss to net cash used in operating activities:

Stock-based compensation

1,393,534

51,768

Depreciation and amortization

 

20,933

 

20,196

Change in fair value of derivative instrument-warrants

 

25,208

(403,928)

Change in fair value of contingent consideration

130,000

(70,000)

Change in fair value of debt

175,992

Amortization of debt discount recorded as interest expense

486,608

Non-cash interest for shares issued for debt redemption payments

49,732

Changes in operating assets and liabilities:

Accounts payable and accrued expenses

2,337,919

(425,992)

Prepaid expenses and other assets

 

(149,149)

 

(184,962)

Net cash used in operating activities

 

(11,639,794)

 

(5,124,878)

Cash flows from investing activities:

Purchase of property and equipment

 

(11,437)

 

(45,336)

Proceeds from disposal of property and equipment

2,194

Net cash used in investing activities

 

(9,243)

 

(45,336)

Cash flows from financing activities:

Proceeds from the issuance of common stock, net of issuance costs

11,248,814

5,844,530

Proceeds from the issuance of Series D and warrants, net of issuance costs

403,120

Proceeds from the issuance of Series E and warrants, net of issuance costs

9,649,258

Proceeds from the exercise of warrants

12,000

2,090,567

Proceeds from debt financing

 

176,585

 

1,250,000

Repayment of debt financing

(1,250,000)

Repayment of convertible debt

(785,744)

Net cash provided by financing activities

11,437,399

17,201,731

Net (decrease) increase in cash

 

(211,638)

 

12,031,517

Cash at beginning of period

 

13,922,972

 

2,832,429

Cash at end of period

$

13,711,334

$

14,863,946

Supplementary disclosure of cash flow information:

Cash paid for interest

$

$

26,756

Supplementary disclosure of non-cash financing activities:

Conversion of Series C convertible preferred stock (part of Series C deemed dividend)

$

10,000

$

147,000

Conversion of Series D convertible preferred stock

521,000

Conversion of Series E convertible preferred stock

10,570,002

Accretion of Series C preferred stock discount upon conversion

5,287

4,674,905

Beneficial conversion factor of preferred stock accreted as deemed dividend

768,042

Issuance of common stock for debt redemption

500,248

Adoption of lease accounting

642,405

Warrants issued to placement agent

293,145

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Business Overview

Hepion Pharmaceuticals, Inc. (we, our, or us) is a biopharmaceutical company headquartered in Edison, New Jersey, focused on the development of pleiotropic drug therapy for treatment of chronic liver disease. This therapeutic approach targets fibrosis and hepatocellular carcinoma (“HCC”) associated with non-alcoholic steatohepatitis (“NASH”), viral hepatitis, and other liver diseases. Our cyclophilin inhibitor, CRV431, is being developed to offer benefits to address these multiple complex pathologies. CRV431 is a cyclophilin inhibitor that targets multiple biochemical pathways involved in the progression of liver disease. Preclinical studies with CRV431 in NASH models demonstrated consistent reductions in liver inflammation, fibrosis, and cancerous tumors. CRV431 additionally shows antiviral activity towards hepatitis B, C, and D viruses which also trigger liver disease.

On July 18, 2019, we filed a certificate of amendment (the “Certificate of Amendment”) to our certificate of incorporation (the “Certificate”) to change our name from “ContraVir Pharmaceuticals, Inc.” to “Hepion Pharmaceuticals, Inc.” The name change became effective as of July 18, 2019.

We are developing CRV431 as our lead molecule. CRV431 is a cyclophilin inhibitor that targets specific isomerases that play an important role in protein folding in health and in disease. To date, in vitro and/or in vivo studies have demonstrated reductions in HBV DNA, HBsAg, HBeAg, inhibition of virus uptake (NTCP transport inhibition), and stimulation of innate immunity. Importantly, in vivo studies in a NASH model of fibrosis and HCC have repeatedly demonstrated CRV431 reduces fibrosis scores and overall liver tumor burden. Hence, CRV431 is a pleiotropic molecule that may not only treat liver disease but may also serve to reduce important risk factors (e.g., HBV) for developing the disease. We have completed a Phase 1 study with CRV431 demonstrating safety, tolerability, and pharmacokinetics (PK). We are currently conducting a Phase 2a study in NASH patients with fibrosis scores of F2 and F3. The first dosing cohort of 75 mg CRV431 once daily orally is underway.

CRV431

On May 10, 2018, we submitted an Investigational New Drug Application (“IND”) to the U.S. Food and Drug Administration (“FDA”) to support initiation of our CRV431 HBV clinical development program in the United States and received approval in June 2018. We completed the first segment of our Phase 1 clinical activities for CRV431 in October 2018 wherein we reached a major clinical milestone of positive data from a Phase I trial of CRV431 in humans. This achievement triggered the first milestone payment, as stated in the Merger Agreement for the acquisition of Ciclofilin Pharmaceuticals, Inc. (“Ciclofilin”) and we paid a related milestone payment of approximately $346,000 to Aurinia Pharmaceuticals, Inc. ("Aurinia") and $654,000 to the former Ciclofilin shareholders along with the issuance of 1,439 shares of our common stock with a fair value of $55,398, representing 2.5% of our issued and outstanding common stock as of June, 2016, to the former Ciclofilin shareholders. Our CEO is a former Ciclofilin shareholder and received approximately $274,000 and 603 shares of common stock and Petrus Wijngaard, a director of our company, received $2,805 and 6 shares of common stock.

 Additional milestone payments could potentially be payable to the former Ciclofilin shareholders pursuant to the Ciclofilin Merger Agreement as follows: (i) upon receipt of Phase II positive data from a proof of concept clinical trial of CRV431 in humans - 4,317 shares of common stock and $3,000,000, (ii) upon initiation of a Phase III trial of CRV431 - $5,000,000, and (iii) upon acceptance by the FDA of a new drug application for CRV431 - $8,000,000. In addition, on February 14, 2014, Ciclofilin had entered into a Purchase and Sale Agreement to acquire Aurinia’s entire interest in CRV431. This agreement contains future milestone payments payable by us based on clinical and marketing milestones of up to CAD $2.45 million. The milestone payments payable to the former Ciclofilin shareholders will be subject to offset by certain of the clinical and marketing milestone payments payable to Aurinia as follows: (a) the payments to the former Ciclofilin shareholders pursuant to (ii) above would be offset by payment to Aurinia of CAD $450,000, and (b) the payments to the former Ciclofilin shareholders pursuant to (iii) above would be subject to offset by payment to Aurinia of up to CAD $2,000,000. In addition to the above clinical and milestone payments, the Aurinia Agreement provides for the following additional contingent payment obligations: (x) a royalty of 2.5% on net sales of CRV431 which is uncapped, (y) a royalty of 5% on license revenue from CRV431 and (z) a payment equal to 30% of the proceeds from a Liquidity Event (as defined in the Purchase and Sale Agreement) with respect to Ciclofilin, of which

8


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

approximately $150,000 plus interest will be paid to Aurinia. The maximum obligation under both (y) and (z) is CAD $5,000,000.

On June 17, 2019, we submitted an IND to the FDA to support initiation of our CRV431 NASH clinical development program in the United States and received approval in July 2019. We completed dosing of CRV431 in our multiple ascending dose (“MAD”) clinical trial in September 2020.

2. Basis of Presentation and Going Concern

These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim reporting. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary to present fairly our interim financial information. The consolidated balance sheet as of December 31, 2019 was derived from the audited annual consolidated financial statements but does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2019 contained in our Annual Report on Form 10-K.

Principles of Consolidation

The accompanying condensed consolidated financial statements include our accounts and the accounts of our subsidiaries, Contravir Research Inc. and Hepion Research Corp, which conduct their operations in Canada. All intercompany balances and transactions have been eliminated in consolidation.

Correction of Immaterial Errors

In connection with the preparation of our unaudited condensed consolidated financial statements as of and for the period ended September 30, 2020 and 2019, we determined that a revision was required to correct misstatements associated with the classification of certain income tax balances and misstatements related to certain of our income tax disclosures as of and for the year ended December 31, 2019. This resulted in corrections to both the December 31, 2019 consolidated financial statements and certain income tax note disclosures.

We corrected the consolidated financial statement presentation as follows: (a) a reclassification of $174,949 for our Canadian deferred tax asset and a corresponding increase of $174,949 to the deferred tax asset valuation allowance (and corresponding correction to income tax disclosure) netting to $0; (b) a reclassification and true ups of $178,941 of prepaid taxes related to our Canadian subsidiary; (c) adjustments to reclassify balances from our Canadian deferred tax asset as an offset to our unrecognized tax position (and corresponding correction to income tax disclosure) in the net amount of $357,566 (inclusive of an opening balance tax withholding accrual); (d) the accrual of a withholding tax and related penalties and interest of $250,255 and corresponding impact to income taxes related to our Canadian subsidiary (adjusted through beginning of year accumulated deficit and stockholders’ equity); (e) reclassifications of $390,270 to correct Canadian deferred tax balances that were incorrectly netted with U.S. deferred tax balances; and (f) the related impact to income tax expense for the establishment of the deferred tax asset valuation allowance and other Canadian tax true-ups in the total net amount of $318,640.

We also corrected certain amounts in the income tax note disclosure related to the following: (a) an overstatement of $324,172 to the Stock Compensation & Other deferred tax asset; (b) an understatement of $162,619 in the Federal NOL; (c) an understatement of $37,406 in the State NOL; (d) an overstatement of research and development credits of $143,361; and (d) Corresponding corrections in the net amount of $122,762 were also made in Deferred tax asset valuation allowance within the disclosures in the associated income tax disclosure of deferred tax assets and liabilities.

The above corrections had no impact on the previously reported amounts of consolidated cash flows from operating, investing, or financing activities. We assessed the materiality of the misstatements both quantitatively and qualitatively and determined the correction of these errors to be immaterial to all prior consolidated financial statements taken as a whole and, therefore, amending previously filed reports to correct the errors was not required.

9


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following tables present the amounts as reported, net correction adjustments, and corrected amounts for items affected by the corrections for the year ended December 31, 2019:

Year ended December 31, 2019

As
reported

Net
adjustments

To be
reported

Accumulated deficit - beginning of year

$

(76,463,932)

$

(250,255)

$

(76,714,187)

Total stockholders' equity - beginning of year

$

1,975,051

$

(250,255)

$

1,724,796

Other assets

$

127,939

$

178,941

$

306,880

Total assets

$

20,432,607

$

178,941

$

20,611,548

Accrued expenses

$

493,636

$

357,566

$

851,202

Total current liabilities

$

1,251,889

$

357,566

$

1,609,455

Deferred tax liability

$

18,752

$

390,270

$

409,022

Total liabilities

$

4,247,015

$

747,836

$

4,994,851

Accumulated deficit

$

(83,182,630)

$

(568,895)

$

(83,751,525)

Total stockholders' equity

$

16,185,592

$

(568,895)

$

15,616,697

Total liabilities and stockholders' equity

$

20,432,607

$

178,941

$

20,611,548

Income taxes

$

1,227,322

$

(318,640)

$

908,682

Net loss

$

(6,718,698)

$

(318,640)

$

(7,037,338)

Net loss attributable to common shareholders

$

(12,161,645)

$

(318,640)

$

(12,480,285)

Net loss per common share - basic and diluted

$

(5.95)

$

$

(6.11)

The following tables present the amounts as reported, net correction adjustments, and corrected amounts for note disclosures affected by the corrections for the year ended December 31, 2019:

Year ended December 31, 2019

As
reported

Net
adjustments

To be
reported

Federal net operating loss (“NOL”)

$

16,650,007

$

162,619

$

16,812,626

State NOL

2,401,609

37,406

2,439,015

Research and development credits

1,493,666

(143,361)

1,350,305

Lease liability

242,234

242,234

Stock compensation & other

1,213,339

(324,172)

889,167

Deferred tax asset valuation allowance

(20,823,235)

(122,762)

(20,945,997)

Total deferred tax asset

1,177,620

(390,270)

787,350

Deferred tax liability (In-Process R&D)

(957,000)

(957,000)

Right-of-use asset

(239,372)

(239,372)

Total deferred tax liability

(1,196,372)

(1,196,372)

Net deferred tax liability

$

(18,752)

$

(390,270)

$

(409,022)

In addition, certain disclosures of gross NOLs that are included in the Income Tax Note disclosure in our 2019 Annual Report on Form 10-K are updated as follows to reflect changes to the 2019 gross NOLs and an update to the uncertain tax position as a result of the addition corrections above.

As of December 31, 2019 and 2018, we had U.S. federal and state net operating loss carryforwards of $107.3 million and $102.8 million, respectively, which may be available to offset future income tax liabilities and will begin to expire at various dates starting in December 2037. We also had federal and state research and development tax credit carry forwards of approximately $1.2 million as of December 31, 2019, which will begin to expire in December 2027.

We had an unrecognized tax position of $283,600, a corresponding accrual for penalties and interest in the amount of $148,400, as a component of income tax expense, accrued through December 31, 2019 and an unrecognized

10


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

tax position of $185,400 and a corresponding accrual for penalties and interest of $64,800, respectively, as of December 31, 2018. There are no amounts included in the unrecognized tax benefit at December 31, 2019 that will impact the effective rate if recognized. We expect that the entire amount of the unrecognized tax benefit to be reduced to $0 in the next 12 months.

Going Concern

As of September 30, 2020, we had $13.7 million in cash, we had an accumulated deficit of $99.1 million, and we had working capital of $10.4 million. For the nine months ended September 30, 2020, cash used in operating activities was $11.6 million, and for the three and nine months ended September 30, 2020, we had a net loss of $6.2 million and $15.4 million, respectively. We have not generated revenue to date and have incurred substantial losses and negative cash flows from operations since our inception. We have historically funded our operations through issuances of convertible debt, common stock and preferred stock. We expect to continue to incur losses for the next several years as we expand our research, development and clinical trials of CRV431. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

These condensed consolidated financial statements have been prepared under the assumption that we will continue as a going concern. Due to our recurring and expected continuing losses from operations, we have concluded there is substantial doubt in our ability to continue as a going concern within one year of the issuance of these condensed consolidated financial statements without additional capital becoming available to attain further operating efficiencies and, ultimately, to generate revenue. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We will be required to raise additional capital within the next year to continue the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are unable to raise additional capital when required or on acceptable terms, we may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize on unfavorable terms.

COVID-19 Pandemic

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on our financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation and its impact on our financial condition, liquidity, operations, suppliers, industry, and workforce.  

While we have not experienced delays to date, we may experience delays in the conduct of clinical testing of our product candidate. We do not know whether planned clinical trials will begin on time, will need to be redesigned or will be completed on schedule, if at all. The COVID-19 pandemic may affect the operations of the FDA and other health authorities, which could result in delays of reviews and approvals, including with respect to our product candidate. The evolving COVID-19 pandemic is also likely to directly or indirectly impact the pace of enrollment in our CRV431 clinical trials for at least the next several months and possibly longer as patients may avoid or may not be able to travel to healthcare facilities and physicians' offices unless due to a health emergency. Clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a clinical trial, in securing clinical

11


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

trial agreements with prospective sites with acceptable terms, in obtaining institutional review board approval to conduct a clinical trial at a prospective site, in recruiting patients to participate in a clinical trial, related to the COVID-19 pandemic, or in obtaining sufficient supplies of clinical trial materials. Any delays in completing our clinical trials will increase our costs, slow down our product development, timeliness and approval process and delay our ability to generate revenue.

The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change and we do not yet know the full extent of potential delays or impacts on our business, financing or clinical trial activities or on healthcare systems or the global economy as a whole. Although we cannot estimate the length or gravity of the impact of the COVID-19 outbreak nor estimate the potential impact to our fiscal year 2020 financial statements at this time, if the pandemic continues, it could have a material adverse effect on our results of future operations, financial position, liquidity, and capital resources, and those of the third parties on which we rely in fiscal year 2020.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), as amended on June 5, 2020 by the Paycheck Protection Program (“PPP”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. On April 13, 2020, we were granted a loan (the “Loan”) from JPMorgan Chase Bank, N.A. in the aggregate amount of $176,585, pursuant to the PPP under Division A, Title I of the CARES Act. We are continuing to evaluate and examine the impacts the CARES Act may have on our business, results of operations, financial condition or liquidity.

 The Loan, which was in the form of a Note dated April 13, 2020 issued by us, matures on April 13, 2022 and bears interest at a rate of 0.98% per annum, payable monthly commencing on November 13, 2020. The Note may be prepaid by us at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, rent and utilities. We intend to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. We believe that we have properly satisfied all eligibility requirements for the PPP loan and we intend to comply with the loan forgiveness provisions in the legislation; however, there can be no assurance that we will obtain full forgiveness of the loan based on the legislation. The PPP Loan is reflected in the condensed consolidated balance sheet as long-term debt based upon the terms and conditions of the Loan agreement.

3. Summary of Significant Accounting Policies

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Changes in estimates and assumptions are reflected in reported results in the period in which they become known. Actual results could differ from those estimates.

Our significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2019 included in our Form 10-K. Since the date of such consolidated financial statements, there have been no changes to our significant accounting policies.

Cash

As of September 30, 2020 and December 31, 2019, cash was $13.7 million and $13.9 million, respectively, consisting of checking accounts held at U.S. and Canadian commercial banks. Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced losses related to these balances.

12


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Fair Value of Financial Instruments

Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.

ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a three-tier fair value hierarchy that distinguishes among the following:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we can access.
Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Financial instruments consist of cash and accounts payable, long-term debt, derivative instruments — warrants and contingent consideration. These financial instruments are stated at their respective historical carrying amounts, which approximate fair value due to their short-term nature, except for derivative instruments — warrants and contingent consideration, which were marked to market at the end of each reporting period. See Note 5 for additional information of the fair value of the derivative liabilities. We recorded contingent consideration from the 2016 acquisition of Ciclofilin, which is required to be carried at fair value. See Note 6 for additional information on the fair value of the contingent consideration.

Derivative Financial Instruments

We have issued common stock warrants in connection with the execution of certain equity financings. The fair value of the warrants, which were deemed to be derivative instruments based on certain contingent put features, was recorded as a derivative liability under the provisions of ASC Topic 815 Derivatives and Hedging (“ASC 815”) upon issuance. Subsequently, the liability is adjusted to fair value as of the end of each reporting period and the changes in the fair value of derivative liabilities are recorded in the statements of operations under the caption “Change in fair value of derivative financial instruments—warrants.” See Note 5 for additional information.

The fair value of the warrants, issued in connection with the October 2015, April 2016, and April 2017 common stock offerings were deemed to be derivative instruments due to certain contingent put features, was determined using the Black-Scholes option pricing model, deemed to be an appropriate model due to the terms of the warrants issued, including a fixed term and exercise price.

The warrants, issued in connection with the July 2018 Rights Offering (See Note 5) are deemed to be derivative instruments since if we do not maintain an effective registration statement, we are obligated to deliver registered shares upon exercise and settlement of the warrant because there are further registration and prospectus delivery requirements that are outside our control. Therefore, the fair value of the warrants was determined using the Black-Scholes option pricing model, deemed to be an appropriate model due to the terms of the warrants issued, including a fixed term and exercise price.

13


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The fair value of warrants was affected by changes in inputs to the Black-Scholes option pricing model including our stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. This model uses Level 3 inputs, including stock price volatility, in the fair value hierarchy established by ASC 820 Fair Value Measurement. At September 30, 2020 and December 31, 2019, the fair value of all warrants was $30,831 and $5,623, respectively, which are classified as a long-term derivative liability on our condensed consolidated balance sheets.

Property, equipment and depreciation

As of September 30, 2020 and December 31, 2019, we had $45,476 and $57,166, respectively, of property and equipment, consisting primarily of lab equipment, computer equipment, furniture and fixtures. Expenditures for additions, renewals and improvements will be capitalized at cost. Depreciation will generally be computed on a straight-line method based on the estimated useful lives of the related assets. The estimated useful lives of the depreciable assets are 3 to 5 years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the remaining term of the lease, whichever is shorter. Depreciation expense for the three months ended September 30, 2020 and 2019 was $7,204 and $7,268, respectively, and was $20,933 and $20,196 for the nine months ended September 30, 2020 and 2019, respectively. Expenditures for repairs and maintenance are charged to operations as incurred. We will periodically evaluate whether current events or circumstances indicate that the carrying value of our depreciable assets may not be recoverable. There were no adjustments to the carrying value of property and equipment at September 30, 2020 or December 31, 2019.

Goodwill and In-Process Research & Development

In accordance with ASC Topic 350, Intangibles — Goodwill and Other (“ASC Topic 350”), goodwill and acquired IPR&D are determined to have indefinite lives and, therefore, are not amortized. Instead, they are tested for impairment annually, in our fourth quarter, and between annual tests if we become aware of an event or a change in circumstances that would indicate the carrying value may be impaired.

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.

The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. We adopted ASU 2017-04 on January 1, 2020, and the adoption of this standard did not have a material effect on our condensed consolidated financial statements.

Goodwill relates to amounts that arose in connection with the acquisition of Ciclofilin. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired when accounted for using the acquisition method of accounting for business combinations. As a result of the COVID-19 pandemic, we performed a qualitative assessment of goodwill and determined that it was not more likely than not that the fair value of our reporting was less than its carrying value. There was no impairment of goodwill for the nine months ended September 30, 2020 and 2019.

IPR&D acquired in a business combination is capitalized as indefinite-lived assets on our condensed consolidated balance sheets at the acquisition-date fair value. Once the project is completed, the carrying value of the IPR&D is reclassified to other intangible assets, net and is amortized over the estimated useful life of the asset. Post-acquisition research and development expenses related to the IPR&D projects are expensed as incurred. The projected discounted cash flow models used to estimate the fair values of our IPR&D assets, acquired in connection with the Ciclofilin acquisition, reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset, including: (i) probability of successfully completing clinical trials and obtaining

14


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

regulatory approval; (ii) market size, market growth projections, and market share; (iii) estimates regarding the timing of and the expected costs to advance clinical programs to commercialization; (iv) estimates of future cash flows from potential product sales; and (v) a discount rate. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The use of different inputs and assumptions could increase or decrease our estimated discounted future cash flows, the resulting estimated fair values and the amounts of related impairments, if any.

If IPR&D becomes impaired or is abandoned, the carrying value of the IPR&D is written down to the revised fair value with the related impairment charge recognized in the period in which the impairment occurs. If the carrying value of the asset becomes impaired as the result of unfavorable data from any ongoing or future clinical trial, changes in assumptions that negatively impact projected cash flows, or because of any other information regarding the prospects of successfully developing or commercializing our programs, we could incur significant charges in the period in which the impairment occurs.

As a result of the COVID-19 pandemic, we performed a qualitative assessment of IPR&D and determined that it was not more likely than not that the asset was impaired. There was no impairment of IPR&D for the nine months ended September 30, 2020 and 2019.

Income Taxes

We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in the results of operations in the period that includes the enactment date. We reduce the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that we will not realize some or all of the deferred tax asset. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is “more-likely-than-not” that the position will be sustained upon examination. Potential interest and penalties associated with unrecognized tax positions are recognized in income tax expense.

In April 2019, we transferred New Jersey state net operating loss tax credits and received approximately $1.0 million in connection with the sale of the state net operating losses to a third party recorded as an income tax benefit in the consolidated statement of operations. We received approval for the sale of net operating losses through participation in the New Jersey Technology Business Tax Certificate Transfer (NOL) Program. We continue to maintain a full valuation allowance for our U.S net deferred tax assets. The current period income tax expense is related to our foreign operations.

Contingencies

In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of our business that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and tax matters. In accordance with ASC Topic 450, Accounting for Contingencies, (“ASC 450”), we record accruals for such loss contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. In accordance with this guidance, we do not recognize gain contingencies until realized.

Research and Development

Research and development costs, which include expenditures in connection with an in-house research and development laboratory, salaries and staff costs, application and filing for regulatory approval of proposed products, purchased in-process research and development, license costs, regulatory and scientific consulting fees, as well as contract research, insurance and FDA consultants, are accounted for in accordance with ASC Topic 730, Research and

15


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Development, (“ASC 730”). Also, as prescribed by this guidance, patent filing and maintenance expenses are considered legal in nature and therefore classified as general and administrative expense, if any.

We do not currently have any commercial biopharmaceutical products and do not expect to have such for several years, if at all. Accordingly, our research and development costs are expensed as incurred. While certain of our research and development costs may have future benefits, our policy of expensing all research and development expenditures is predicated on the fact that we have no history of successful commercialization of product candidates to base any estimate of the number of future periods that would be benefited.

Also as prescribed by ASC 730, non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts would be recognized as an expense. At September 30, 2020 and December 31, 2019, we had prepaid research and development costs of $0.5 million and $0.4 million, respectively.

Share-based payments

ASC Topic 718 “Compensation—Stock Compensation” (“ASC 718”) requires companies to measure the cost of employee and non-employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. Generally, we issue stock options with only service-based vesting conditions and record the expense for awards using the straight-line method.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The estimated expected stock volatility is based on the historical volatility of our own traded stock price. The expected term of stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.

Foreign Exchange

The functional currency of Hepion Pharmaceuticals, Inc. and ContraVir Research Inc. is the U.S. dollar. The functional currency of Hepion Research Corp. is the Canadian dollar. Our reporting currency is the U.S. dollar. The assets and liabilities of Ciclofilin are translated into U.S. dollars using period-end exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Unrealized foreign currency translation adjustments are deferred in accumulated other comprehensive loss, a separate component of shareholders’ equity. The amount of currency translation adjustment was immaterial at September 30, 2020 and December 31, 2019.

Transactions in foreign currencies are remeasured into the functional currency of the relevant subsidiaries at the exchange rate in effect at the date of the transaction. Any monetary assets and liabilities arising from these transactions are translated into the functional currency at exchange rates in effect at the balance sheet date or on settlement. Resulting gains and losses are recorded in other foreign exchange (gain) loss within the consolidated statements of operations. The impact of foreign exchange gains (losses) was immaterial at September 30, 2020 and December 31, 2019.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker views our operations and manages the business in one segment.

16


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Net loss per share

Basic and diluted net loss per share is presented in conformity with ASC Topic 260, Earnings per Share, (“ASC 260”) for all periods presented. In accordance with this guidance, basic and diluted net loss per common share was determined by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding during the period.

4. Recent Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). This guidance will be effective for us in the first quarter of 2021 on a prospective basis, and early adoption is permitted. We are currently evaluating the impact of the new guidance on our condensed consolidated financial statements.

In August of 2018, the FASB issued ASU 2018-13 — Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends disclosure requirements on fair value measurements in Topic 820. This amendment modifies the valuation process of fair value measurements by removing the disclosure requirements for the valuation processes for Level 3 fair value measurements, clarifying the timing of the measurement uncertainty disclosure, and including the changes in unrealized gains and losses for recurring Level 3 fair value measurements in other comprehensive income if held at the end of the reporting period. It also allows the disclosure of other quantitative information in lieu of the weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and should be applied prospectively for the most recent period presented in the initial fiscal year of adoption. We adopted this standard on January 1, 2020 and the impact that this guidance had on our condensed consolidated financial statements was immaterial.

5. Stockholders’ Equity and Derivative Liability — Warrants

Series A Convertible Preferred Stock

On October 14, 2014, our Board of Directors authorized the sale and issuance of up to 1,250,000 shares of Series A Convertible Preferred Stock (the “Series A”). All shares of the Series A were issued between October 2014 and February 2015. Each share of the Series A is convertible at the option of the holder into the number of shares of common stock determined by dividing the stated value of such share by the conversion price that is subject to adjustment. As of September 30, 2020, there were 85,581 shares outstanding. During the nine months ended September 30, 2020, no shares of the Series A were converted.

Series C Convertible Preferred Stock Issuance

On July 3, 2018, we completed a rights offering pursuant to our effective registration statement on Form S-1. We offered for sale units in the rights offering and each unit sold in connection with the rights offering consisted of 1 share of our Series C Convertible Preferred Stock, or Series C, and common stock warrants (the “Rights Offering”). Upon completion of the offering, pursuant to the rights offering, we sold an aggregate of 10,826 units at an offering price of $1,000 per unit comprised of 10,826 shares of Series C and 88,928 common stock warrants. As of September 30, 2020, there were 1,817 shares outstanding. During the nine months ended September 30, 2020, 10 shares of the Series C were converted into 92 shares of our common stock.

Common Stock and Warrant Offering

On October 7, 2015, we entered into an underwriting agreement related to the public offering and sale of 8,929 shares of common stock and warrants to purchase up to 5,357 shares of common stock, at a fixed combined price to the public of $1,680 under our prior shelf registration statement on Form S-3. The shares of common stock and warrants were issued separately on October 13, 2015. The warrants were immediately exercisable and will be exercisable for a period of five years from the date of issuance at an exercise price of $2,380.00 per share. There is not, nor is there expected to be, any trading market for the warrants issued in the offering contemplated by the Underwriting Agreement.

17


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The gross proceeds to us were $15.0 million, before deducting the underwriting discount and other offering expenses payable by us of approximately $1.5 million. If the warrants were exercised in full, we would receive additional proceeds of approximately $12.8 million.

If we consummate any merger, consolidation, sale or other reorganization event in which our common stock is converted into or exchanged for securities, cash or other property (“Fundamental Transaction”), then we shall pay at the holder’s option, exercisable at any time commencing on the occurrence or the consummation of the Fundamental Transaction and continuing for 90 days, an amount of cash equal to the value of the remaining unexercised portion of the warrant as determined in accordance with the Black-Scholes option pricing model on the date of such Fundamental Transaction. As a result of these terms, in accordance with the guidance contained in ASC Topic 815-40, we have determined that the warrants issued in connection with this financing transaction must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis in our condensed consolidated statements of operations. Upon the issuance of these warrants, the fair value of approximately $4.4 million was recorded as derivative financial instruments liability-warrants. “Refer to Note 6”.

The fair value of these liability classified warrants was estimated using the Black-Scholes option pricing model. Other than for the fair value of common stock, we developed our own assumptions for use in the Black-Scholes option pricing model that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of our common stock, our stock price volatility (stock price volatility of comparable companies prior to 2020), the contractual term of the warrants, risk free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement. The following assumptions were used to measure the warrants at issuance and to remeasure the liability as of September 30, 2020 and December 31, 2019:

    

September 30, 

    

December 31, 

 

2020

2019

Price of Hepion common stock

$

3.11

$

5.36

Expected warrant term (years)

 

0.03

years

 

0.78

years

Risk-free interest rate

0.22

%  

1.66

%

Expected volatility

136

%  

72

%

Dividend yield

 

On April 4, 2016, we closed a public offering of 8,803 shares of our common stock and warrants to purchase up to 4,401 shares of common stock, at a fixed combined price to the public of $795.20 under our prior shelf registration statement on Form S-3. The warrants were immediately exercisable and will be exercisable for a period of five years from the date of issuance at an exercise price of $952.00 per share. The gross proceeds to us were $7.0 million, before deducting the underwriting discount and other offering expenses payable by us of approximately $0.7 million. If the warrants were exercised in full, we would receive additional proceeds of approximately $4.2 million.

If we consummate any merger, consolidation, sale or other reorganization event in which our common stock is converted into or exchanged for securities, cash or other property (“Fundamental Transaction”), then we shall pay at the holder’s option, exercisable at any time commencing on the occurrence or the consummation of the Fundamental Transaction and continuing for 90 days, an amount of cash equal to the value of the remaining unexercised portion of the warrant as determined in accordance with the Black-Scholes option pricing model on the date of such Fundamental Transaction. As a result of these terms, in accordance with the guidance contained in ASC Topic 815-40, we have determined that the warrants issued in connection with this financing transaction must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis in our condensed consolidated statement of operations. Upon the issuance of these warrants, the fair value of approximately $1.5 million was recorded as derivative financial instruments liability-warrants. “Refer to Note 6”.

The fair value of these liability classified warrants was estimated using the Black-Scholes option pricing model. Other than for the fair value of common stock, we developed our own assumptions for use in the Black-Scholes option pricing model that do not have observable inputs or available market data to support the fair value. This method of

18


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

valuation involves using inputs such as the fair value of our common stock, our stock price volatility (stock price volatility of comparable companies prior to 2020), the contractual term of the warrants, risk free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement. The following assumptions were used to measure the warrants at issuance and to remeasure the liability as of September 30, 2020 and December 31, 2019:

     

September 30, 

    

December 31, 

 

2020

2019

Price of Hepion common stock

$

3.11

$

5.36

Expected warrant term (years)

 

0.51

years

 

1.26

years

Risk-free interest rate

0.22

%

1.66

%

Expected volatility

126

%

75

%

Dividend yield

 

 

On April 25, 2017, we closed a public offering of 21,429 shares of our common stock and warrants to purchase up to 10,714 shares of common stock, at a fixed combined price to the public of $560.00 under our prior shelf registration statement on Form S-3. The warrants are immediately exercisable and will be exercisable for a period of five years from the date of issuance at an exercise price of $700.00 per share. The gross proceeds to us were $12.0 million, before deducting the underwriting discount and other offering expenses payable by us of approximately $0.5 million. If the warrants were exercised in full, we would receive additional proceeds of approximately $7.5 million.

If we consummate any merger, consolidation, sale or other reorganization event in which our common stock is converted into or exchanged for securities, cash or other property (“Fundamental Transaction”), then we shall pay at the holder’s option, exercisable at any time commencing on the occurrence or the consummation of the Fundamental Transaction and continuing for 90 days, an amount of cash equal to the value of the remaining unexercised portion of the warrant as determined in accordance with the Black-Scholes option pricing model on the date of such Fundamental Transaction. As a result of these terms, in accordance with the guidance contained in ASC Topic 815-40, we have determined that the warrants issued in connection with this financing transaction must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis in our condensed consolidated statement of operations and comprehensive loss. Upon the issuance of these warrants, the fair value of approximately $4.0 million was recorded as derivative financial instruments liability-warrants. “Refer to Note 6”.

The fair value of these liability classified warrants were estimated using the Black-Scholes option pricing model. Other than for the fair value of common stock, we developed our own assumptions for use in the Black-Scholes option pricing model that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of our common stock, our stock price volatility (stock price volatility of comparable companies prior to 2020), the contractual term of the warrants, risk free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement.

The following assumptions were used to measure the warrants at issuance and to remeasure the liability as of September 30, 2020 and December 31, 2019:

    

September 30, 

    

December 31, 

 

2020

2019

Price of Hepion common stock

$

3.11

$

5.36

Expected warrant term (years)

 

1.56

years

 

2.31

years

Risk-free interest rate

 

0.22

%  

 

1.66

%

Expected volatility

 

116

%  

 

69

%

Dividend yield

 

 

The warrants, issued in connection with the July 2018 Rights Offering are deemed to be derivative instruments since if we do not maintain an effective registration statement, we are obligated to deliver registered shares upon exercise and settlement of the warrant because there are further registration and prospectus delivery requirements that are outside

19


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

of our control. Therefore, the fair value of the warrants was determined using the Black-Scholes option pricing model, deemed to be an appropriate model due to the terms of the warrants issued, including a fixed term and exercise price.

The fair value of these liability classified warrants were estimated using the Black-Scholes option pricing model. Other than for the fair value of common stock, we developed our own assumptions for use in the Black-Scholes option pricing model that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of our common stock, our stock price volatility (stock price volatility of comparable companies prior to 2020), the contractual term of the warrants, risk free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement.

The following assumptions were used to measure the warrants at issuance and to remeasure the liability as of September 30, 2020 and December 31, 2019:

    

September 30, 

    

December 31, 

    

2020

2019

Price of Hepion common stock

$

3.11

$

5.36

Expected warrant term (years)

 

2.75

years

 

3.50

years

Risk-free interest rate

 

0.22

%  

 

1.66

%  

Expected volatility

 

118

%  

 

65

%  

Dividend yield

 

 

The following table sets forth the components of changes in our derivative financial instruments liability balance for the nine months ended September 30, 2020:

Number of

Derivative

Warrants

Instrument

Date

    

Description

    

Outstanding

    

Liability

December 31, 2019

 

Balance of derivative financial instruments liability

 

107,998

 

$

5,623

Change in fair value of warrants for the nine months ended September 30, 2020

25,208

September 30, 2020

Balance of derivative financial instruments liability

107,998

$

30,831

Common Stock Offering

On February 12, 2020, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR, Inc., as agent (“B. Riley FBR”), pursuant to which we may offer and sell, from time to time, through B. Riley FBR, shares of our common stock, par value $0.0001 per share (the “Common Stock”), having an aggregate offering price of up to $7,000,000 (the “Shares”).

The offer and sale of the Shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus (File No. 333-229534) filed by us with the Securities and Exchange Commission (the “SEC”) on February 6, 2019, as amended on February 13, 2019, and declared effective by the SEC on February 19, 2019, as supplemented by a prospectus supplement dated February 12, 2020 and filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”). Also, on March 27, 2020, we filed a prospectus supplement to the Form S-3 (File No. 333-229534) pursuant to which we may offer and sell an additional $4.6 million.

As of September 30, 2020, under the Sales Agreement we sold 5,262,806 shares of our common stock resulting in net proceeds of $11.2 million from the “at the market offerings”.

Pursuant to the Sales Agreement, B. Riley FBR may sell the Shares by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act, including sales made by means of ordinary brokers’ transactions, including on The Nasdaq Capital Market, at market prices or as otherwise agreed with B. Riley FBR. B. Riley FBR will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the Shares from time to time, based upon instructions from us, including any price or size limits or other customary parameters or conditions we may impose.

20


Table of Contents

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

6. Fair Value Measurements

The following table presents our liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy at September 30, 2020 and December 31, 2019.

Quoted Prices in

Significant

Active Markets for

Other

Significant

 Identical Assets

Observable

Unobservable

and Liabilities

Inputs

Inputs

Description

    

Fair value

    

(Level 1)

    

(Level 2)

    

(Level 3)

As of September 30, 2020:

Contingent consideration

$

2,560,000

$

$

$

2,560,000

Derivative liabilities related to warrants

$

30,831

$

$

$

30,831

As of December 31, 2019:

Contingent consideration

$

2,430,000

$

$

$

2,430,000

Derivative liabilities related to warrants

$

5,623

$

$

$

5,623

The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities- warrants in our condensed consolidated statement of operations. See Note 5 for a rollforward of the derivative liability for the nine months ended September 30, 2020. The financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, we review the assets and liabilities that are subject to ASC 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

Contingent consideration was recorded for the acquisition of Ciclofilin Pharmaceuticals, Inc. (Ciclofilin) on June 10, 2016. The contingent consideration represented the acquisition date fair value of potential future payments, to be paid in cash and our stock, upon the achievement of certain milestones and was estimated based on a probability-weighted discounted cash flow model utilizing a discount rate of 6.5% and a stock price of $19.60. We completed the first segment of our Phase 1 clinical activities for CRV431 in October 2018 wherein we reached a major clinical milestone of positive data from a Phase I trial of CRV431 in humans. This achievement triggered the first milestone payment, as stated in the Merger Agreement for the acquisition of Ciclofilin and in the fourth quarter of 2018, we paid a related milestone payment of $1,000,000 and issued 1,439 shares of our common stock with a fair value of $55,398, representing 2.5% of our issued and outstanding common stock as of June, 2016, to the Ciclofilin shareholders. As of September 30, 2020, due to the uncertainty in the timing of the clinical development of the associated product candidate, the entire balance is classified as a non-current liability.

The following table presents the change in fair value of the contingent consideration for the nine months ended September 30, 2020.