Hepion Pharmaceuticals Inc

1. Business Overview

Hepion Pharmaceuticals, Inc. (we, our, or us) is a biopharmaceutical company headquartered in Edison, New Jersey, that was previously focused on the development of drug therapy for treatment of chronic liver diseases. This therapeutic approach targets fibrosis, inflammation, and shows potential for the treatment of hepatocellular carcinoma (“HCC”) associated with non-alcoholic steatohepatitis (“NASH”), viral hepatitis, and other liver diseases. Our cyclophilin inhibitor, rencofilstat (formerly CRV431), was being developed to offer benefits to address multiple complex pathologies related to the progression of liver disease.

We were developing rencofilstat as our lead molecule. Rencofilstat is a compound that binds and inhibits the function of a specific class of isomerase enzymes called cyclophilins that regulate protein folding, in addition to other activities. Many closely related isoforms of cyclophilins exist in humans. Cyclophilins A, B, and D are the best characterized cyclophilin isoforms. Inhibition of cyclophilins has been shown in scientific literature to have therapeutic effects in a variety of experimental models, including liver disease models.

We have completed a number of Phase 1 and Phase 2 clinical trials. In May 2023, we announced that our Phase 2a study (“ALTITUDE-NASH”) met its primary endpoint by demonstrating improved liver function and was well tolerated after four months of treatment with once daily oral rencofilstat administered to NASH subjects with stage 3 or greater fibrosis. All additional secondary efficacy and safety endpoints were also met. These observations provide further evidence that builds on previous findings from a shorter 28-day Phase 2a (“AMBITION”) trial. Taken together, the AMBITION and ALTITUDE-NASH trials reinforced rencofilstat’s direct antifibrotic mode of action and increase our confidence level that we anticipated observing fibrosis reductions in our 12-month Phase 2b (“ASCEND-NASH”) clinical trial.

In June 2023, we announced that the Data and Safety Monitoring Board (“DSMB”) met to review the current data for the ASCEND-NASH 2b study and issued a “study may proceed without modification” clearance. This, the first planned DSMB meeting, occurred on schedule, and all labs, electrocardiogram’s, adverse events, and protocol deviations were reviewed, focusing on any potential safety signals from the placebo-controlled trial.

In December 2023, our board of directors approved a strategic restructuring plan to preserve capital by reducing operating costs. We incurred a one-time restructuring charge of approximately $0.7 million in the fourth quarter of 2023. Additionally, we have a process to explore a range of strategic and financing alternatives focused on maximizing stockholder value within the current financial environment and NASH drug development landscape. On April 19, 2024, we announced that we have begun wind-down activities in our ASCEND-NASH clinical trial.

2. Basis of Presentation

Basis of Presentation

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, 2023, 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, 2023, contained in our Annual Report on Form 10-K filed with the SEC on April 16, 2024.

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.

Going Concern

As of June 30, 2024, we had $2.1 million in cash, an accumulated deficit of $231.4 million, and working capital of $4.5 million. For the six months ended June 30, 2024, cash used in operating activities was $14.5 million and we had a net loss of $6.8 million. 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. Our ability to continue operations after our current cash resources are exhausted depends on future events outside of our control, including our ability to obtain additional financing or to achieve profitable operations, as to which no assurances can be given. If adequate additional funds are not available when required, or if our announced merger agreement (see Note 11) is unsuccessful, management may need to curtail planned operations to conserve cash until sufficient additional capital can be raised. There can be no assurances that such a plan would be successful.

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 us. The 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 few months to continue to fund operations. 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) seek collaborators for our product candidates on terms that are less favorable than might otherwise be available; or (ii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize on unfavorable terms.

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, 2023, included in our Annual Report on Form 10-K. Since the date of such consolidated financial statements, there have been no changes to our significant accounting policies.

Cash

As of June 30, 2024 and December 31, 2023, cash was $2.1 million and $14.8 million, respectively, consisting of checking accounts held at U.S. and Canadian commercial banks. At certain times, our cash balances with any one financial institution may exceed Federal Deposit Insurance Corporation insurance limits. We believe it mitigates our risk by depositing our cash balances with high credit, quality financial institutions. We have never experienced losses related to these balances.

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:

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, accounts payable, contingent consideration and derivative financial instruments. Cash and accounts payable are stated at their respective historical carrying amounts, which approximate fair value due to their short-term nature. Contingent consideration, and derivative financial instruments are recorded at fair value at the end of each reporting period. We recorded contingent consideration from the 2016 acquisition of Ciclofilin, which is required to be carried at fair value. See Note 5 for additional information on the fair value of the contingent consideration and derivative financial instruments.

Property, equipment and depreciation

As of June 30, 2024 and December 31, 2023, we had $0 and $29,487, respectively, of property and equipment, consisting primarily of lab equipment, computer equipment, and 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 years to 7 years. 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 wereno adjustments to the carrying value of property and equipment at June 30, 2024 or December 31, 2023.

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.

We continue to maintain a full valuation allowance for our U.S and foreign net deferred tax assets.

Under the provisions of the Internal Revenue Code, the net operating loss (NOL) and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, respectively, as well as similar state tax provisions. This could limit the amount of tax attributes that we can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on our value immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The utilization of these NOLs is subject to limitations based on past and future changes in our ownership pursuant to Section 382. We completed a Section 382 study of transactions in our stock through December 31, 2021 and concluded that we have experienced ownership changes since inception that we believe under Section 382 and 383 of the Internal Revenue Code will result in limitations on our ability to use certain pre-ownership change NOLs and credits. We are not aware of any ownership changes in 2024 or 2023. In addition, we may experience subsequent ownership changes as a result of future equity offerings or other changes in the ownership of our stock, some of which are beyond our control. As a result, the amount of the NOLs and tax credit carryforwards presented in our consolidated financial statements could be further limited. Similar provisions of state tax law may also apply to limit the use of accumulated state tax attributes.

The income tax benefit for the three and six months ended June 30, 2024 was $0 and $3.0 million, respectively. The $3 million tax benefit from the six months ended June 30, 2024 was related to the sale of our state NOLs related to prior years under the State of New Jersey’s Technology Business Tax Certificate Transfer Program. There wasno income tax expense or benefit for the three and six months ended June 30, 2023.

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 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 June 30, 2024 and December 31, 2023, we had prepaid research and development costs of $1.7 million and $2.5 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 (see Note 8). We account for awards granted to employees that are in excess of what is available to grant as a liability recorded at fair value each reporting period in the consolidated financial statements (see Note 7).

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.

ASC 718 allows for the election of forfeitures to be estimated at the time of grant and revised if necessary, in subsequent periods if actual forfeitures differ from those estimates. Our actual historical forfeiture rate of 3% was used for the three months ended June 30, 2024 and 2023. We will continue to analyze the forfeiture rate on at least an annual basis or when there are any identified triggers that would justify immediate review.

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. Assets and liabilities of Hepion Research Corp. 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 $(53,822) and $(78,779) at June 30, 2024 and December 31, 2023, respectively. 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 general and administrative expense within the consolidated statements of operations. The impact of foreign exchange losses (gains) was $77,134 and $30,661 for the three months ended June 30, 2024 and 2023, respectively, and was $52,404 and $56,095 for the six months ended June 30, 2024 and 2023, respectively.

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.

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 applicable to common stockholders by the weighted-average common shares outstanding during the period.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that will have a material effect on our condensed consolidated financial statements for the three months ended June 30, 2024.

4. Stockholders’ Equity

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 June 30, 2024, there were 85,581 shares outstanding. During the six months ended June 30, 2024 and 2023, no shares of the Series A were converted. If we sell common stock or equivalents at an effective price per share that is lower than the conversion price, the conversion price may be reduced to the lower conversion price. The Series A will be automatically convertible into common stock in the event of a fundamental transaction as defined in the offering.

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 4,446 common stock warrants that expired in July 2023. As of June 30, 2024, there were 1,688 shares of Series C outstanding. During the six months ended June 30, 2024, no shares of the Series C were converted into shares of our common stock and during the six months ended June 30, 2023,1 share of the Series C was converted into 1 share of our common stock. Each share of Series C is convertible into common stock at any time at the option of the holder thereof at the conversion price then in effect. The conversion price for the Series C is determined by dividing the stated value of $1,000 per share by $0.08 per share (subject to adjustments upon the occurrence of certain dilutive events).

Common Stock and Warrant Offering

On September 28, 2023, we entered into a securities purchase agreement with an institutional investor for the purchase and sale of 400,000 shares of our common stock (or common stock equivalents in lieu thereof) at a purchase price of $5.10 per share and pre-funded warrants to purchase up to 580,393 shares at a offering price of $5.09 in a registered direct offering priced at-the-market under Nasdaq rules. In addition, in a concurrent private placement, we issued to the investor unregistered Series A Warrants to purchase up to an aggregate of 980,393 shares of common stock and Series B Warrants to purchase up to an aggregate of 980,393 shares of common stock. The Series A and Series B Warrants will have an exercise price of $4.85 per share, will be exercisable immediately following the date of issuance and will expire in 5 years and 1.5 years, respectively. The closing of the registered direct offering and the concurrent private placement was on October 3, 2023. We received gross proceeds of $5.0 million, before deducting the underwriting discount and other offering expenses of approximately $0.5 million that was recorded as general and administrative costs in our consolidated statement of operations. All of the pre-funded warrants were exercised in the fourth quarter of 2023.

We used the guidance in ASC 480, Distinguishing Liabilities from Equity, (“ASC 480”), ASC 815-40, Derivatives and Hedging (“ASC 815-40”) and ASC 260, Earnings Per Shares (“ASC 260”) to determine the accounting classification for the warrants.

Based on this evaluation, we determined that the Warrants are not indexed to our own stock and are precluded from being classified within equity. Therefore, the Warrants were classified as a liability on the balance sheet, initially recorded at fair value, and then subsequently will be carried at fair value with changes in fair value recognized in the income statement.

Upon the issuance of the warrants, the fair value of the warrants was determined to be approximately $8.9 million resulting in no residual to allocate to equity and, further, with the excess of the fair value over the proceeds received was recorded as a day one loss of $3.9 million that was recorded to “Change in fair value of contingent consideration and derivative financial instruments” in the consolidated statement of operations.

On February 16, 2024, the Company entered into an agreement with a current warrant holder to exercise the outstanding Series B Warrants (the “Series B Warrant Agreement”). Pursuant to the terms of the Series B Warrant Agreement, the holder agreed to exercise the Series B Warrant in full and purchase a total of 980,393 shares of common stock at a reduced price of $2.10 per share, generating total gross cash proceeds of $2,058,825.

The Company accounted for this transaction as a modification and settlement of the Series B Warrant liability. As such, the Company first recognized a gain of $286,007 as a result of the change in fair value of the Series B Warrant immediately prior to the modification. As the modified Series B Warrant was immediately exercisable, the post-modification fair value was determined to be the intrinsic value of the Series B Warrant at the date of the modification. Therefore, the change in fair value on the date of the modification prior to the modification compared to the fair value on the date of the modification after the modification, but prior to exercise was determined to be $601,224, which was recorded as an inducement charge, within other expenses in the Company’s consolidated statement of operations. The Company then subsequently reclassified the liability into equity upon settlement.

As part of the transaction, the Company incurred equity issuance costs of $209,118 related to advisory and legal fees directly attributable to the issuance of the common stock from the Series B Warrant Agreement, which were recorded against additional paid-in-capital.

In connection with the offering, the Company agreed to amend, effective upon the closing of this offering, the terms of the October 2023 Series A common stock purchase warrant held by a purchaser in the offering to reduce the exercise price thereof to $1.91 per share and to extend the expiration date to February 2029. All of the other terms of the October 2023 Series A common stock purchase warrant will remain unchanged.

The Company accounted for this transaction as a modification of the Series A Warrant liability. As such the Company first recognized a gain of $669,466 as a result of the change in fair value of the Series A Warrant immediately prior to the modification. As a result of the modification, the change in fair value on the date of the modification prior to the modification compared to the fair value on the date of the modification after the modification, but prior to exercise was an fair value of $346,869, which was recorded as an inducement expense, due to the modification being a result of the Series B Warrant Agreement, and is recorded within the Company’s consolidated statement of operations.

Additionally, as part of the Series B Warrant Agreement, we issued to the investor unregistered Series B-1 Warrants to purchase up to an aggregate of 735,295 shares of common stock and Series B-2 Warrants to purchase up to an aggregate of 735,295 shares of common stock, collectively the “New Warrant Shares”. The Series B-1 and Series B-2 Warrants will have an exercise price of $1.91 per share, will be exercisable immediately following the date of issuance and will expire in 5 years and 1.5 years, respectively. The grant date value of the New Warrant Shares issued of $2,821,000 was recorded as inducement expense within other expenses in the Company’s consolidated statement of operations.

The fair value of these liability classified warrants was estimated using the Black-Scholes option pricing model. This method of valuation involves using inputs such as the fair value of our common stock, historical volatility, 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 2 measurement (see Note 5). The following assumptions were used to measure the Series A and Series B Warrants at modification and to remeasure the liability as of June 30, 2024 and December 31, 2023 and to measure Series B-1 and B-2 at issuance and to remeasure the liability as of June 30, 2024.

The following table sets forth the components of changes in our derivative financial instruments liability balance for the six months ended June 30, 2024.

5. 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 June 30, 2024 and December 31, 2023.

The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities- warrants in our consolidated statement of operations. See Note 4 for a rollforward of the derivative liability for six months ended June 30, 2024. 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.

At June 30, 2024 and December 31, 2023, the assumptions we used to calculate the fair value were as follows:

As of June 30, 2024, $0 was recorded as a current liability and as non-current liability based upon management’s best estimate using the latest available information. Management reviewed and updated the assumptions at June 30, 2024 and reduced the contingent consideration to $0 because the projected milestones upon which the liability was based will not be achieved.

The following table presents the change in fair value of the contingent consideration for the six months ended June 30, 2024.

6. Property and Equipment, net

Property and equipment are stated at cost and depreciated using the straight-line method, based on useful lives as follows:

Depreciation expense for the three months ended June 30, 2024 and 2023 was $0 and $18,328, respectively, and was $30,758 and $36,366 for the six months ended June 30, 2024 and 2023, respectively

7. Accrued Liabilities

Accrued liabilities consist of the following:

At December 31, 2023, other accrued expenses includes approximately $0.7 million for restructuring costs. In December 2023, the board of directors approved a strategic restructuring plan to preserve capital by reducing operating costs. The restructuring costs of approximately $0.7 million are related to severance amounts due to members of our clinical team and were recorded to research and development costs in the consolidated statement of operations at December 31, 2023. As part of this process, we formally communicated the termination of employment to 6 employees and terminated noneof the employees during 2023. In addition, during the three months ended March 31, 2024, we formally communicated the termination of employment to 6 additional employees and terminated 12 employees. We incurred further restructuring costs of less than $0.1 million during the six months ended June 30, 2024. As of June 30, 2024, the restructuring plan was completed and there were no additional accruals.

8. Accounting for Share-Based Payments

On June 3, 2013, we adopted the 2013 Equity Incentive Plan (the 2013 Plan), which expired in June 2023 and we are no longer making grants under it. Stock options granted under the 2013 Plan typically vest after three years of continuous service from the grant date and will have a contractual term often years. We granted options during the three months ended June 30, 2022 and 2021, and at the time that these grants were made, we did not have any options available for grant under the Plan. We accounted for these option grants as liability-classified awards requiring us to measure the fair value of the awards each reporting period since there were not enough shares available at the time of the grant. In April 2023, with the approval of the 2023 Plan, these awards are no longer accounted for as liability-classified and the cumulative liability of $3.0 million was recorded to additional paid-in capital.

In April 2023, our board of directors approved the 2023 Omnibus Equity Incentive Plan (the 2023 Plan), which became effective in June 2023 upon stockholder approval. The 2023 Plan allows for the grant of up to 500,000 awards for the purpose of attracting, motivating and retaining employees (including officers), non-employee directors and non-employee consultants. On March 6, 2024 pursuant to the 2023 Plan, we granted 50,000 RSUs with a fair value of $2.29 per share, which vest upon the earlier of (i)one year after date of grant or (ii) change of control of the Company. In addition, during the three months ended March 31, 2024, the Company granted 340,000 options with a term of 2 to 10 years that were vested upon issuance. Subsequent to the grant of these options, we had 110,000 awards available for grant from the 2023 Plan. There wereno grants for the three months ended June 30, 2024.

We classify stock-based compensation expense in our condensed consolidated statement of operations in the same way the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified. We recorded stock-based compensation expense as follows:

A summary of stock option activity under the 2013 Plan and 2023 Plan is presented as follows:

The total fair value of awards vested during the six months ended June 30, 2024 and 2023 was $0.7 million and $2.2 million, respectively.

As of June 30, 2024, the unrecognized compensation cost related to non-vested stock options outstanding, net of expected forfeitures, was $0.0 million.

The following assumptions are used in the Black-Scholes valuation model to estimate the fair value of stock option awards when granted to employees.

Stock price—The stock price used is the closing price of our common stock on the day prior to the grant date.

Risk-free interest rate—Based on the daily yield curve rates for U.S. Treasury obligations with maturities which correspond to the expected term of our stock options.

Dividend yield—We have not paid any dividends on our common stock since inception and do not anticipate paying dividends on our common stock in the foreseeable future.

Expected volatility—We base expected volatility on the trading price of our common stock.

Expected term—The expected option term represents the period that stock-based awards are expected to be outstanding based on the simplified method provided in SAB No. 107, which SAB No. 107, options are considered to be “plain vanilla” if they have the following basic characteristics: (i) granted “at-the-money”; (ii) exercisability is conditioned upon service through the vesting date; (iii) termination of service prior to vesting results in forfeiture; (iv) limited exercise period following termination of service; and (v) options are non-transferable and non-hedgeable.

SAB No. 110*, Share-Based Payment*, (“SAB No. 110”) expresses the views of the Staff of the SEC with respect to extending the use of the simplified method, as discussed in SAB No. 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with ASC 718. For the expected term, we have “plain-vanilla” stock options, and therefore used a simple average of the vesting period and the contractual term for options granted as permitted by SAB No. 107.

Forfeitures—ASC 718 allows for the election of forfeitures to be estimated at the time of grant and revised if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the years ended December 31, 2023 and 2022, we determined that 3% is our forfeiture rate based on historical experience. We will continue to analyze the forfeiture rate on at least an annual basis or when there are any identified triggers that would justify immediate review.

9. Loss per Share

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.

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:

In connection with series B warrants exercise (see Note 4),326,000 warrants that were exercised during the quarter ended March 31, 2024 were not yet issued as common stock and are held by the Company in abeyance, were included in the Company’s calculation of basic and diluted loss per share. The shares of common stock held by the Company in abeyance are considered outstanding for the purposes of computing earnings per share, as these shares may be issued for little or no consideration, are fully vested, and are exercisable after the original issuance date.

The 326,000 warrants that were exercised during the quarter ended March 31, 2024 were issued as common stock in June 2024.

The following outstanding securities at June 30, 2024 and 2023 have been excluded from the computation of basic and diluted weighted shares outstanding, as they would have been anti-dilutive due to net loss:

The strike prices for the equity classified warrant ranges from $37.50- $50.00 each and the expiration dates are in 2025 and 2026.

10. Commitments and Contingencies

Legal Proceedings

We are involved in various legal proceedings. Significant judgment is required to determine both the likelihood and the estimated amount of a loss related to such matters. Additionally, while any litigation contains an element of uncertainty, we have at this time no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on our consolidated financial condition or results of operations.

Leases

In July 2014, we entered into a lease for corporate office space in Edison, New Jersey (“Edison Lease”). In July 2017, we entered into the first amendment to the Edison Lease expanding the office footprint and extending the Edison Lease for an approximate 5-year period that ended on March 31, 2023. In August 2023, we signed a second amendment to the Edison Lease in which we reduced our corporate office space and extended the lease for a period of 2.3 years ending July 31, 2025.

In October 2019, we entered into a 3-year lease for office and research laboratory space in Edmonton, Canada, which expired on September 30, 2022 and we leased this space on a month-to-month basis until December 31, 2023.

We account for leases in accordance with ASC Topic 842,Leases, (“ASC 842”). We determine if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified property or equipment for a period in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property and equipment), and (2) the customer has the right to control the use of the identified asset.

Operating leases where we are the lessee are included under the caption “Right of Use Assets” (“ROU”) on our consolidated balance sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. Key estimates and judgments include how we determine (1) the discount rate used to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

As of June 30, 2024, our ROU asset was $0.2 million, the current lease liability was $0.2 million, and the long-term lease liability was $0.0 million. An estimated incremental borrowing rate of 14.9% was used to account for the second amendment of the Edison Lease. For the first amendment of the Edison Lease, an incremental borrowing rate 6.50% was used.

Rent expense for the three months ended June 30, 2024 and 2023 was $0.1 million and $0.1 million, respectively, and was $0.1 million and $0.2 million for the six months ended June 30, 2024 and 2023, respectively. At June 30, 2024, the weighted average remaining term of our noncancelable operating leases is 1.0 year.

Future minimum rental payments under our noncancelable operating lease at June 30, 2024 is as follows:

Employment Agreements

We have an employment agreement with one employee which requires the funding of a specific level of payment, if certain events, such as a change in control, termination without cause or retirement, occur.

11. Subsequent Events

On July 19, 2024, Hepion Pharmaceuticals, Inc., a Delaware corporation (the “Company”), Pharma Two B Ltd., a company organized under the laws of the State of Israel (“Parent”), and Pearl Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Parent (“Merger Sub”), entered into an Agreement and Plan of Merger to which, among other things, on the terms and subject to the conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as an indirect wholly owned subsidiary of Parent. Merger Sub is a newly incorporated Delaware corporation and a wholly owned, direct subsidiary of P2B HoldCo, Inc., a Delaware corporation (“Holdco”). Holdco is a wholly owned, direct subsidiary of P2B Topco, Inc., a Delaware corporation (“Topco”). Topco is a wholly owned, direct subsidiary of Parent. Each of Merger Sub, Holdco and Topco were formed for purposes of consummating the transactions contemplated by the Merger Agreement and the other Transaction Agreements (as defined in the Merger Agreement).

On July 19, 2024, Pharma Two B entered into the PIPE Agreements with certain investors, including existing investors of Pharma Two B, pursuant to which the investors agreed to purchase, in the aggregate, $11.5 million in shares of the combined company ordinary shares. The closing of the PIPE Investment is conditioned upon the closing of the Merger, as well as certain other conditions such that the ordinary shares of the combined company issued in the PIPE Investment will result in dilution to all securityholders of the combined company (i.e., both former Company securityholders and Pharma Two B securityholders). On the Closing Date (as defined in the Merger Agreement), subject to obtaining Parent’s shareholder approval and the Company’s stockholder approval, immediately prior to the Effective Time (as defined below) and prior to the consummation of any of the transactions contemplated by the PIPE Agreements (as defined in the Merger Agreement), the following actions shall take place or be effected: (A) the Company shall cause all of its issued capital stock which is not in the form of the Company’s common stock, par value $0.0001 per share (“Common Stock”) to be converted into shares of Common Stock in accordance with the Company’s organizational documents, and shall further cause any convertible instruments, including but not limited to warrants, to be converted into shares of Common Stock; and (B) (i) each Ordinary A Share of Parent, nominal value NIS 1 (“Parent Ordinary A Share”), Ordinary B Share of Parent, nominal value NIS 1 (“Parent Ordinary B Share”), and each of the outstanding classes of Parent’s preferred shares (collectively, the “Parent Preferred Share”) that is issued and outstanding immediately prior to the Effective Time shall be automatically converted into such number of Parent’s ordinary shares per the terms of the Merger Agreement; (ii) the amended and restated articles of association of Parent shall be adopted and become effective; (iii) each of Parent’s ordinary shares, issued and outstanding immediately prior to the Effective Time (including each of Parent’s ordinary shares that are issued upon the conversion of Parent Ordinary A Shares, Parent Ordinary B Shares and Parent Preferred Shares pursuant to clause (i) above), shall be split into such number of Parent’s ordinary shares as shall be necessary for purposes of the closing of the Merger (the “Closing”) and the initial listing of Parent’s ordinary shares on Nasdaq (the “Share Split”); provided that no fraction of a Parent’s ordinary share will be issued by virtue of the Share Split, and each of Parent’s shareholders that would otherwise be so entitled to a fraction of Parent’s ordinary shares (after aggregating all fractional Parent’s ordinary shares that otherwise would be received by such Parent’s shareholder) shall instead be entitled to receive such number of Parent’s ordinary shares to which such Parent’s shareholder would otherwise be entitled, rounded to the nearest whole number; and (iv) any outstanding options and warrants of Parent issued and outstanding immediately prior to the Effective Time shall be adjusted immediately upon the Share Split to give effect to the foregoing transactions, provided that to the extent such adjustment would result in (x) a fraction of share being subject to any outstanding stock option or warrant, such share shall be rounded down to the nearest whole share or (y) the exercise price of an option being a fraction of a cent, the exercise price will be rounded up to the nearest whole cent.

The Merger is expected to be consummated in the fourth quarter of 2024. The obligation of the parties to consummate the Merger is subject to various conditions, including, but not limited to: (i) adoption of the Merger Agreement and the approval of the Merger and the other Transactions by the required portion of the Company’s stockholders as determined in accordance with applicable law and the Company’s organizational documents; (ii) adoption of the Merger Agreement and the approval of the Merger and the other Transactions by Parent’s shareholders, as determined in accordance with applicable law and Parent’s organizational documents (iii) the absence of any judgment, order or law prohibiting the consummation of the Merger; (iv) upon the Closing, the approval for listing on Nasdaq of Parent’s ordinary shares to be issued in connection with the Closing of the Merger; (v) the effectiveness of the Registration Statement (as defined below) to be filed by Parent with the SEC with respect to Parent’s ordinary shares that constitute the Merger Consideration, (vi) the SPA (as defined below) shall be in full force and effect and concurrently with the Closing cash proceeds of not less than $8,600,000 (eight million six hundred thousand) shall have been received by Parent in connection with the consummation of the transactions contemplated by such SPA, (vii) the parties shall take all necessary action so that immediately after the Effective Time, the post-Closing board of directors of Parent (the “Post-Closing Parent Board”) shall be comprised of seven directors; whereby (a) Parent shall have the right to designate (i) three members to the Post-Closing Parent Board and (ii) two industry experts that shall qualify as independent directors (as defined under the Nasdaq listing rules); and (b) the Company shall have the right to designate two members to the Post-Closing Parent Board, (viii) Parent shall file a notice with the Israel Innovation Authority (the “IIA”) in accordance with applicable law and obtain the unconditional approval of the IIA to consummate the Transactions, (ix) the accuracy of the representations and warranties of the parties in the Merger Agreement (subject to customary materiality qualifiers except to the extent provided in the Merger Agreement); (x) each party’s performance in all material respects of its covenants and obligations contained in the Merger Agreement and (xi) the absence of a Material Adverse Effect. Following the execution of the Merger Agreement, Holdco, in its capacity as the sole stockholder of Merger Sub, executed and delivered to the Company a written consent approving the Merger Agreement and the Merger, thereby providing all required stockholder approvals for the Merger. No further action by holders of the Common Stock is required to complete the Merger.

Concurrently with the Merger, on July 19, 2024, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain purchasers pursuant to which the Company sold an aggregate of $2.9 million in principal amount of the Company’s Original Issue Discount Senior Unsecured Nonconvertible Notes (the “Notes”). The Notes are due on the earlier of: (i)December 31, 2024, (ii) the date of the closing of the Merger, (iii) the date that the Merger is terminated pursuant to the terms of the Merger Agreement, or (iv) such earlier date as the Notes are required or permitted to be repaid as provided in the Note, as may be extended at the option of the holder of the Note as described in the Note. The principal amount of the note was discounted by $400,000 (discount rate of 13.8%), fees and expenses of $245,000, and a loan of $600,000 to Pharma Two B, bringing total net cash proceeds to the Company of $1,655,000.

In addition, pursuant to the SPA, the Company issued to the purchasers an aggregate 1,159,245 shares of Common Stock.

On August 5, 2024, John Cavan, the interim Chief Executive Officer and Chief Financial Officer left the Company for personal reasons. In connection therewith, Mr. Cavan will be paid, according to his employment contract, a severance payment of $300,000. On August 6, 2024, John Brancaccio, the Company’s Executive Chairman was appointed the Interim Chief Executive Officer and Interim Chief Financial Officer of the Company.