ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report. All amounts in this report are in U.S. dollars, unless otherwise noted.

Overview

We are a biopharmaceutical company headquartered in Edison, New Jersey, focused primarily on the development of drug therapy for treatment of chronic fibrosis related diseases. The main therapeutic approach specifically targets the disease mechanism related to fibrosis as well as, inflammation and shows potential for the treatment of non-alcoholic steatohepatitis (“NASH”), hepatocellular carcinoma (“HCC”), viral hepatitis, and other fibrotic diseases. Our cyclophilin inhibitor, rencofilstat (formerly CRV431), is being developed to address multiple complex pathologies related to advanced fibrotic diseases. Rencofilstat is a pan cyclophilin inhibitor that targets multiple pathologic pathways involved in the progression of fibrosis. Preclinical studies with rencofilstat in NASH models demonstrated consistent reductions in liver fibrosis and additional reductions in inflammation and cancerous tumors in some studies. Rencofilstat additionally showed in vitro antiviral activity towards hepatitis B, C, and D viruses which also trigger liver disease. Preclinical studies also have shown potentially therapeutic activities of rencofilstat in experimental models of acute lung injury, kidney injury, platelet activation, and SARS-CoV-2 replication.

We have completed a Phase 1 program with rencofilstat in healthy subjects demonstrating safety, tolerability, and pharmacokinetics (PK). This Phase 1 program consisted of three different clinical trials with rencofilstat, administered orally once daily, including: 1) a Single Ascending Dose (SAD) study; 2) a Multiple Ascending Dose (MAD) study; 3) a Drug-Drug Interaction (DDI) study; and 4) a Food Effect Study. The SAD, MAD, and DDI studies were comprised of 32, 25, and 18 healthy subjects, respectively. Additionally, in the SAD study, 8 of the 32 subjects received placebo (24 received rencofilstat).

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Rencofilstat appeared to be well-tolerated in the Phase 1 program, and there were no serious adverse events (SAEs) reported. The few adverse events (AEs) observed were mild to moderate and mostly unrelated to study drug. The PK profile of each subject was characterized and rencofilstat blood exposures were similar to those levels needed to elicit efficacy in the preclinical studies.

We have also completed a Phase 2a, multi-center, single-blind, placebo-controlled study in NASH F2/F3 subjects dosed orally with rencofilstat once daily. All of the primary objectives for the study were met, including safety, tolerability, and PK endpoints. In addition, a number of NASH biomarkers, collagen degradation proteins, and transcriptomics were also collected and these results indicate early evidence of rencofilstat efficacy in NASH subjects. Based on screening procedures including laboratory (aspartate aminotransferase [AST]), imaging (FibroScan), and biomarkers (Pro-C3, ELF score), 47 presumed NASH F2/F3 subjects were enrolled into the trial and included in the safety date set. Subjects in an initial low dose cohort of 75 mg or matching placebo were enrolled and followed for 28 days on treatment with a 14-day safety follow-up observation period. A second subject group was then administered either 225 mg of rencofilstat or placebo and were followed 28 days on treatment followed by a 14-day safety follow up observation period. All subjects participating in the trial receiving either rencofilstat or placebo were evaluated for safety. In total 12 subjects completed dosing within the 75 mg rencofilstat cohort, with another 17 subjects completing 225 mg, and 14 subjects completing dosing in the matching placebo group. Three subjects in the 75 mg cohort and 1 subject on placebo terminated the trial before completion. Rencofilstat results indicated a dose response by reducing alanine aminotransferase (ALT) levels at 28 days as well as improving biomarkers currently used as non-invasive means of evaluating antifibrotic effects, including PRO-C3. With active daily dosing of 28 days and a subsequent 14-day follow up, rencofilstat was well tolerated in these NASH subjects with no SAEs or deaths reported.

Building on the results of the Phase 2a study in NASH subjects, a Phase 2b, randomized, multi-center, double-blind, placebo-controlled study to evaluate the efficacy and safety of rencofilstat in adult subjects with NASH and advanced liver fibrosis was initiated in August 2022. This Phase 2b clinical study is anticipated to enroll up to 336 biopsy confirmed F2/F3 NASH subjects to gain a better understanding of three different dosing levels of rencofilstat on multiple clinically relevant endpoints and biomarkers related to improvements in or halting the progression of further hepatic steatosis and fibrosis. The trial design will closely follow current FDA guidance on the development of NASH therapeutic agents, as the primary endpoint will be based on changes in paired liver biopsy samples after one year of three active drug dosing levels versus a matching placebo group. The second trial, a Phase 2, randomized, multi-center, open-label study to evaluate changes in hepatic function of rencofilstat in adult subjects with advanced F3 NASH was initiated in Q3 of 2022, which we expect to complete in Q2 of 2023. This phase 2 clinical trial enrolled 70 subjects with advanced NASH, and included a HepQuant Shunt procedure as the primary endpoint to allow a sensitive measure of each subject’s hepatic function from baseline to the end of 120 days dosing with rencofilstat. In addition to the HepQuant procedure, numerous NASH biomarkers are being collected to evaluate changes over the 120 days for each subject.

NASH is the form of liver disease that is triggered by what has come to be known as the “Western diet”, characterized especially by high-fat, high-sugar, and processed foods. Among the effects of a prolonged Western diet is fat accumulation in liver cells (steatosis) which is described as NAFLD and can predispose cells to injury. NAFLD may evolve into NASH when the fatty liver begins to progress through stages of cell injury, inflammation, fibrosis, and carcinogenesis. People who develop NASH typically have additional predisposing conditions such as diabetes and hypertension, but the exact biochemical events that trigger and maintain the progression are not well known. Many people in the early stages of disease do not have significant clinical symptoms and therefore are unaware that they have it. Once NASH is diagnosed, it is a major health concern as the liver often becomes fibrotic and puts individuals at increased risk of developing cirrhosis and other complications. Individuals with advanced liver fibrosis have significantly higher risk of developing liver cancer, although cancer may also arise in some patients before significant hepatitis or fibrosis. NASH is increasing worldwide at an alarming rate due to the spread of the Western diet, obesity, and other related conditions. Approximately 4-5% of the global population is estimated to have NASH, including the USA, and NASH is quickly becoming the most common reason for individuals requiring a liver transplant in the USA. Considering the serious outcomes linked to advancing NASH, the economic and social burden of the disease is enormous. There are no simple blood tests to diagnose or track the progression of NASH, and currently there are no drugs that are specifically approved to treat the disease.

HCC is a major type of liver cancer, accounting for approximately 85% - 90% of all cases. NASH, hepatitis viral infections, and alcohol consumption are all major causes of HCC. Globally, over 700,000 people die each year from liver cancer which is second only to lung cancer among all cancer-related deaths. The high mortality is due to the fact that only around half of all people who develop HCC (in developed countries) receive the diagnosis early enough to have an opportunity for therapeutic intervention. Additionally, recurrence rates are high, and current treatment options remain limited.

HCC is a type of cancer in which the tissue microenvironment plays a major role in its development. In most cases HCC is preceded by significant, long-term damage to liver cells, inflammation, and fibrosis. One-third of people with cirrhosis, a very advanced stage of liver disease, will eventually progress to HCC. The chronic injury to the liver leads to many genetic mutations that eventually lead to transformation of cells and formation of tumors. The noxious tissue microenvironment also

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promotes cancer by altering the function of immune cells and endothelial cells which form tumor-supporting blood vessels. These various events underscore the importance of halting liver injury and scarring as early and effectively as possible to prevent cancer development.

Artificial Intelligence (AI)

We have created a proprietary AI tool called, “AI-POWRTM to optimize the outcomes of our current clinical programs and to potentially identify novel indications for rencofilstat and possibly identify new targets and new drug molecules to broaden our pipeline.

AI-POWRTM is our acronym for Artificial Intelligence – Precision Medicine; Omics that include genomics, proteomics, metabolomics, transcriptomics, and lipidomics; World database access; and Response and clinical outcomes. AI-POWRTM allows for the selection of novel drug targets, biomarkers, and appropriate patient populations. AI-POWRTM is used to identify responders from big data sources using our multi-omics approach, while modelling inputs and scenarios to increase response rates. The components of AI-POWRTM include access to publicly available databases, and in-house genomic and multi-omic big data, processed via machine learning algorithms. We believe AI outputs will allow for improved response outcomes through enhanced patient selection, biomarker selection and drug target selection. We believe AI outputs will help identify responders a priori and reduce the need for large sample sizes through study design enrichment.

We intend to use AI-POWRTM to help identify which NASH patients will best respond to rencofilstat. It is anticipated that applying this proprietary platform to our drug development program will ultimately save time, resources, and money. In so doing, we believe that AI-POWRTM is a risk-mitigation strategy that should reap benefits all the way through from clinical trials to commercialization. The AI-POWRTM platform is continually updated with in-house and published data to further refine the accuracy of the neural network.

We believe that NASH is a heterogenous disease, and we need to have a better understanding of interactions among proteins, genes, lipids, metabolites, and other disease variables to help predict disease progression, regression, and responses to rencofilstat. All of this is further complicated by variable drug concentrations, patient traits and temporal factors. AI-POWRTM is designed to address many of the typical challenges in drug development, as we believe we can use our proprietary platform to shorten development timelines and increase the delta between placebo and treatment groups. AI-POWRTM will be used to drive our ongoing Phase 2b NASH program and identify additional potential indications for rencofilstat to expand our footprint in the cyclophilin inhibition therapeutic space.

Impact of COVID-19

The COVID-19 outbreak in the United States has caused significant business disruption. The extent of the impact of COVID-19 on our future operational and financial performance will depend on certain developments, including the impact on our clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. While there has not been a material impact on our consolidated financial statements for the year ended December 31, 2022, the extent to which COVID-19 may impact our future financial condition or results of operations is uncertain.

FINANCIAL OPERATIONS OVERVIEW

From inception through December 31, 2022, we have an accumulated deficit of $175.7 million and we have not generated any revenue from operations. We expect to incur additional losses to perform further research and development activities and do not currently have any commercial biopharmaceutical products. We do not expect to have such for several years, if at all.

Our product development efforts are in their early stages, and we cannot make estimates of the costs or the time they will take to complete. The risk of completion of any program is high because of the many uncertainties involved in bringing new drugs to market including the long duration of clinical testing, the specific performance of proposed products under stringent clinical trial protocols, the extended regulatory approval and review cycles, our ability to raise additional capital, the nature and timing of research and development expenses and competing technologies being developed by organizations with significantly greater resources.

RECENT ACCOUNTING PRONOUNCEMENTS

For detailed information regarding recently issued accounting pronouncements and the expected impact on our consolidated financial statements, see Note 3, "Recent Accounting Pronouncements" in the accompanying Notes to Consolidated Financial Statements.

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RESULTS OF OPERATIONS

Comparison of the Years ended December 31, 2022 and 2021:

Year EndedDecember 31,

Revenues $ — — $ —

Costs and Expenses:

Other income (expense):

We had no revenues during the years ended December 31, 2022 and 2021, respectively, because we do not have any commercial biopharmaceutical products and we do not expect to have such products for several years, if at all.

Research and development expenses for the years ended December 31, 2022 and 2021 were $33.3 million and $20.4 million, respectively. The increase of $12.9 million was primarily due to a $1.2 million increase in compensation cost due to an increase in headcount, a $5.2 million increase in clinical trial costs related to our current studies, an $8.7 million increase in Chemistry, Manufacturing, and Controls, or CMC, costs primarily for an increase in drug costs to support our clinical trials. This was offset by a decrease in consulting services of $2.0 million and a decrease in stock compensation of $0.5 million.

General and administrative expenses for the years ended December 31, 2022 and 2021 amounted to $10.3 million and $10.0 million, respectively. The increase of $0.3 million is primarily due to a $0.7 million increase in compensation cost due to an increase in headcount, a $0.1 million increase in insurance, and $1.1 million in consulting fees. This was offset by a decrease in miscellaneous taxes of $0.2 million, and stock compensation of $1.6 million related to vested options.

During the years ended December 31, 2022 and 2021, we recorded an income tax benefit of $2,883,849 and an income tax expense of $0, respectively. For 2022, our tax benefit was related to the sale of our state NOLs and Research and Development credits in prior years under the State of New Jersey’s Technology Business Tax Certificate Transfer Program.

Liquidity and Capital Resources

Sources of Liquidity

We have funded our operations through December 31, 2022 primarily through the issuance of convertible preferred stock, the issuance and sale of shares of our common stock, and subsequent issuances of shares of our common stock through at-the market offerings.

Future Funding Requirements

We have no products approved for commercial sale. To date, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, undertaking preclinical studies and clinical trials of our product candidate. As a result, we are not profitable and have incurred losses in each period since our inception in 2013. As of December 31, 2022, we had an accumulated deficit of $175.7 million. We expect to continue to incur significant losses for the foreseeable future. We anticipate that our expenses will increase substantially as we:

•pursue the clinical and preclinical development of our current product candidate;

•leverage our technologies to advance product candidates into preclinical and clinical development;

•seek regulatory approvals for our product candidate that successfully complete clinical trials, if any;

•attract, hire and retain additional clinical, quality control and scientific personnel;

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•establish our manufacturing capabilities through third parties and scale-up manufacturing to provide adequate supply for clinical trials and commercialization;

•expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company;

•expand and protect our intellectual property portfolio;

•establish a sales, marketing, medical affairs and distribution infrastructure to commercialize any products for which we may obtain marketing approval and intend to commercialize on our own or jointly;

•acquire or in-license other product candidates and technologies; and

•incur additional legal, accounting and other expenses in operating our business, including ongoing costs associated with operating as a public company.

Even if we succeed in commercializing our product candidate, we will continue to incur substantial research and development and other expenditures to potentially develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

We will require substantial additional financing and a failure to obtain this necessary capital could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations.

Since our inception, we have invested a significant portion of our efforts and financial resources in research and development activities for our non-replicating and replicating technologies and our product candidates derived from these technologies. Preclinical studies and clinical trials and additional research and development activities will require substantial funds to complete. We believe that we will continue to expend substantial resources for the foreseeable future in connection with the development of our current product candidates and programs as well as any future product candidates we may choose to pursue, as well as the gradual gaining of control over our required manufacturing capabilities and other corporate uses. These expenditures will include costs associated with conducting preclinical studies and clinical trials, obtaining regulatory approvals, and manufacturing and supply, as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any preclinical study or clinical trial is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our current or future product candidates.

Our future capital requirements depend on many factors, including:

•the scope, progress, results and costs of researching and developing our current and future product candidate and programs, and of conducting preclinical studies and clinical trials;

•the number and development requirements of other product candidates that we may pursue, and other indications for our current product candidate that we may pursue;

•the stability, scale and yields during the manufacturing process as we scale-up production and formulation of our product candidate for later stages of development and commercialization;

•the timing of, and the costs involved in, obtaining regulatory and marketing approvals and developing our ability to establish sales and marketing capabilities, if any, for our current and future product candidates we develop if clinical trials are successful;

•our ability to establish and maintain collaborations, strategic licensing or other arrangements and the financial terms of such agreements;

•the cost of commercialization activities for our current and future product candidates that we may develop, whether alone or with a collaborator;

•the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;

•the timing, receipt and amount of sales of, or royalties on, our future products, if any; and

A change in the outcome of any of these or other variables with respect to the development of any of our current and future product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will need additional funds to meet operational needs and capital requirements associated with such operating plans.

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The consolidated financial statements as of December 31, 2022 have been prepared under the assumption that we will continue as a going concern within one year after the financial statements are issued. Due to our accumulated deficit and our recurring and expected continuing losses from operations, we have concluded there is substantial doubt in our ability to continue as a going concern without additional capital becoming available to attain further operating efficiencies and, ultimately, to generate revenue. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We will be required to raise additional capital to continue the development and commercialization of our current product candidate 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, 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.

Cash Flows

The following table summarizes our cash flows for the following periods:

Year EndedDecember 31,

Net cash provided by (used in):

As of December 31, 2022, we had working capital of $48.6 million compared to working capital of $89.2 million as of December 31, 2021. The decrease of $40.6 million in working capital is primarily related to cash spend related to our clinical trials.

Operating Activities:

As of December 31, 2022, we had $51.2 million in cash. Net cash used in operating activities was $35.0 million for the year ended December 31, 2022 consisting primarily of our net loss of $42.2 million, adjusted for an increase in non-cash charges of $2.6 million primarily for stock-based compensation, and $1.9 million for goodwill impairment that was offset by a decrease in the fair value of contingent consideration of $0.4 million. Changes in working capital accounts had a positive impact of $3.0 million on cash primarily due to an increase in accounts payable and accrued expenses.

Net cash used in operating activities was $31.2 million for the year ended December 31, 2021 consisting primarily of our net loss of $32.7 million, adjusted for non-cash charges of $4.7 million primarily for stock-based compensation and an increase in the fair value of contingent consideration of $2.3 million. Changes in working capital accounts had a negative impact of $5.6 million on cash primarily due to an increase in prepaid research costs.

Investing Activities:

Net cash used in investing activities during the year ended December 31, 2022 was de minimis.

Net cash used in investing activities during the year ended December 31, 2021 was $0.1 million and was related to equipment purchases for research and development.

Financing Activities:

Net cash used in financing activities was $5.1 million for the year ended December 31, 2022 due primarily to the issuance of our Series F and Series G Convertible Redeemable Preferred Stock, net of issuance costs, and subsequent redemption of $3.1 million and a milestone payment of $2.0 million for related to the contingent consideration.

Net cash provided by financing activities was $82.0 million for the year ended December 31, 2021 due primarily to the issuance of common stock, net of issuance costs for our equity offering of $82.2 million in February 2021.

CRITICAL ACCOUNTING ESTIMATES

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United

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States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the assumptions and estimates associated with fair value of financial instruments, income taxes, contingencies, research and development, in-process research and development, and share-based payments have the greatest potential impact on our consolidated financial statements. We evaluate these estimates on an ongoing basis. Actual results could differ from those estimates under different assumptions or conditions, and any differences could be material. For further information on all of our significant accounting policies, see Note 3 of the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.

Fair Value of Financial Instruments

Financial instruments consist of cash, accounts payable, 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 contingent consideration. We record contingent consideration at fair value at the end of each reporting period.

Contingent consideration was related to the acquisition of Ciclofilin and recorded on June 10, 2016. The contingent consideration represented the acquisition date fair value of potential future payments, to be paid in cash and our common stock, upon the achievement of certain milestones and in 2016 was estimated based on a probability-weighted discounted cash flow model. Significant assumptions used to calculate the fair value of the contingent consideration include the discount rate, projected milestone achievement dates, and the probability of success.

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. Income tax expense for the years ended December 31, 2022 and 2021 are 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 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.

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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 December 31, 2022 and 2021, we had prepaid research and development costs of $4.7 million and $5.9 million, respectively.

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.

The annual, or interim (if events or changes in circumstances indicate that it is more likely than not that the asset is impaired), 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. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with the quantitative impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, we recognize a goodwill loss in an amount equal to any excess.

In-Process Research and Development

In-Process Research and Development ("IPR&D") acquired in a business combination is capitalized as indefinite-lived assets on our 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 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.

The annual, or interim if (events or changes in circumstances indicate that it is more likely than not that the asset is impaired), IPR&D impairment test is performed by comparing the fair value of the asset to the asset’s carrying amount. When testing indefinite-lived intangibles for impairment, we may assess qualitative factors for its indefinite-lived intangibles to determine whether it is more likely than not that the asset is impaired. Alternatively, we may bypass this qualitative assessment for our indefinite-lived intangible asset and perform the quantitative impairment test that compares the fair value of the indefinite-lived intangible asset with the asset’s carrying amount. 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.

We performed a quantitative assessment of IPR&D for the fiscal years 2022 and 2021 and determined that the asset was not impaired. There was no impairment of IPR&D for the years ended December 31, 2022 and 2021.

Share-based payments

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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 9 to the consolidated financial statements). We account for awards granted to employees that are in excess of what is available to grant as a liability and is recorded at fair value each reporting period in the consolidated financial statements.

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 common stock. 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.

OFF-BALANCE SHEET ARRANGEMENTS

We had no off-balance sheet arrangements as of December 31, 2022.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Consolidated Balance Sheets 55

Consolidated Statements of Operations 56

Consolidated Statements of Comprehensive Loss 57

Consolidated Statements of Changes in Stockholders’ Equity 58

Consolidated Statements of Cash Flows 59

Notes to the Consolidated Financial Statements 60

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

Hepion Pharmaceuticals, Inc.

Edison, New Jersey

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Hepion Pharmaceuticals, Inc. (“the Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt About the Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of In Process Research & Development Intangible Assets

As described in Notes 3 and 7 to the consolidated financial statements, the Company has in-process research and development (“IPR&D”) intangible assets of $3.2 million recorded as of December 31, 2022. The IPR&D intangible assets are indefinite lived and are not subject to amortization.Such assets are initially measured at their acquisition-date fair values and are subject to impairment testing at least annually until completion or abandonment of research and development efforts associated with the projects. The Company tests IPR&D assets for impairment in the fourth quarter of each year or more frequently if indicators of impairment are present.

We identified certain assumptions used in the valuation of IPR&D intangible assets in the impairment assessment as a critical audit matter.The principal consideration for our determination included the subjectivity and judgment used by

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management in determining the selection of a discount rate and the probability of success of research and development programs. Auditing these elements involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

•Utilizing personnel with specialized knowledge and skill with valuations to assist in: (i) assessing the reasonableness of the discount rate incorporated into the valuation model used by management, and (ii) testing the mathematical accuracy of the Company’s calculations.

•Assessing inputs and assumptions used by management to determine the probability of success of research and development programs by comparing to external market and industry data regarding clinical trial success rates.

Valuation of Contingent Consideration Liability

As described in Notes 3 and 5 to the consolidated financial statements, the Company has a contingent consideration liability of $2.5 million recorded as of December 31, 2022. The contingent consideration was recorded by the Company in connection with 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 the Company’s stock, to the Ciclofilin shareholders and Aurinia Pharmaceuticals Inc. upon the achievement of certain milestones and was estimated based on a probability-weighted discounted cash flow model utilizing, significant unobservable inputs.

We identified certain assumptions used in the valuation of the contingent consideration liability as a critical audit matter. The principal considerations for our determination included the subjectivity and judgment by management in determining the fair value estimate of the contingent consideration liability including a high degree of estimation uncertainty in evaluating the probability of success of milestone achievement and the projected milestone achievement dates. Auditing these elements involved significant and subjective auditor judgment in performing procedures to evaluate the fair value of the contingent consideration liability.

The primary procedures we performed to address this critical audit matter included:

•Corroborating with research and development personnel with regard to the current status of the clinical development of the Company’s product candidate used to support the projected milestone achievement dates.

•Testing management’s probability-weighted discounted cash flow model through evaluation of the appropriateness of the valuation method used, verifying the inputs to the discounted cash flow model to underlying source data and recalculating the results.

•Comparing inputs and assumptions used by management to determine the probability of success of milestone achievement to external market and industry data regarding clinical trial success rates.

Accounting for Convertible Redeemable Preferred Stock

As described in Note 4 to the consolidated financial statements, on November 8, 2022, the Company entered into a Stock Purchase Agreement with certain institutional investors for the private placement of 1.9 million shares of Series F Convertible Redeemable Preferred Stock and 100,000 shares of Series G Convertible Redeemable Preferred Stock of the Company. As redemption can be required based on the occurrence of redemption events that were considered not solely within the Company’s control, the Preferred Stock was recorded separately from stockholders’ equity as temporary equity. The shares had an aggregate stated value of $20 million and were redeemed for $21 million on December 18, 2022 in accordance with their terms, and therefore were no longer outstanding as of December 31, 2022.

We identified the accounting for issuance of the Series F and Series G Convertible Redeemable Preferred Stock as a critical audit matter. The principal considerations for our determination included the significant judgments and highly complex technical accounting guidance that are required in the determination of the scope of the applicable accounting guidance and appropriate balance sheet classification, including the identification and evaluation of embedded features potentially requiring bifurcation as derivatives. Auditing these elements involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

•Reviewing and analyzing i) the terms of the Preferred Stock Purchase Agreement to determine if all arrangement terms that may have an impact on accounting treatment were identified and ii) the completeness and accuracy of the Company’s technical accounting analysis.

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•Utilizing personnel with specialized knowledge and skills in the relevant technical accounting guidance to assist in: (i) evaluating management’s accounting for the Preferred Stock Purchase Agreement, and (ii) evaluating the embedded derivative features and the appropriate balance sheet classification of the Preferred Stock.

/s/ BDO USA, LLP

We have served as the Company’s auditor since 2013

Woodbridge, New Jersey

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HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31,

Assets

Current assets:

Liabilities and Stockholders’ Equity

Current liabilities:

Operating lease liabilities, non-current — 50,342

Commitments and contingencies (see Note 12)

Stockholders’ equity:

Accumulated other comprehensive loss (90,168) —

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

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HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Year EndedDecember 31,

Revenues $ — $ —

Costs and expenses:

Goodwill impairment loss 1,870,924 —

Other income (expense):

Change in fair value of contingent consideration 414,992 (2,310,000)

Income tax benefit (expense) 2,883,849 —

Deemed dividend (see Note 4) (3,137,500) —

Weighted average common shares outstanding:

Net loss per common share: (see Note 11)

Basic and diluted $ (0.59) $ (0.47)

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

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Consolidated Statements of Comprehensive Loss

Year EndedDecember 31,

Other comprehensive loss:

Foreign currency translation (90,168) —

Total other comprehensive loss (90,168) —

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

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HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Shares Amount Shares Amount Shares Amount

Conversion of preferred stock to common — — (11) (11,000) 101 — 11,000 — — —

Other comprehensive loss — — — — — — — (90,168) — (90,168)

Conversion of preferred stock to common — — (5) (5,000) 46 — 5,000 — — —

Issuance of common stock for milestone payment — — — — 4,317 — 5,008 — — 5,008

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

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HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Year EndedDecember 31,

Cash flows from operating activities:

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

Change in fair value of contingent consideration (414,992) 2,310,000

Changes in operating assets and liabilities:

Cash flows from investing activities:

Proceeds from disposal of property and equipment 2,266 —

Net cash used in investing activities (14,070) (130,405)

Cash flows from financing activities:

Proceeds from the issuance of common stock, net of issuance costs — 82,153,600

Repayment of debt financing — (176,585)

Contingent consideration milestone payment (2,000,000) —

Effect of exchange rates on cash (47,138) —

Supplementary disclosure of cash flow information:

Cash paid for interest $ 941 $ 2,024

Supplementary disclosure of non-cash financing activities:

Issuance of common stock in conjunction with milestone payment 5,008 —

Fair value of warrants issued to placement agent — 2,013,055

Adoption of new accounting standard — 11,672

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

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HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Business Overview

Hepion Pharmaceuticals, Inc. (we, our, or us) is a biopharmaceutical company headquartered in Edison, New Jersey, 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), is being developed to offer benefits to address multiple complex pathologies related to advanced liver disease. Rencofilstat is a cyclophilin inhibitor that targets multiple pathologic pathways involved in the progression of liver disease.

We are 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. 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 the scientific literature to have therapeutic effects in a variety of experimental models, including liver disease models.

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 rencofilstat 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 rencofilstat in October 2018 wherein we reached a major clinical milestone of positive data from a Phase I trial of rencofilstat in humans. This achievement triggered the first milestone payment, as stated in the May 26, 2016 acquisition agreement between us and Ciclofilin Pharmaceuticals, Inc. (“Ciclofilin”) (the “Merger Agreement") for the acquisition of Ciclofilin and we paid a related milestone payment of approximately $0.3 million to Aurinia Pharmaceuticals, Inc. ("Aurinia") and $0.7 million to the former Ciclofilin shareholders along with the issuance of 1,439 shares of our common stock with a fair value of $0.1 million, 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 $0.3 million and 603 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 rencofilstat in humans - 4,317 shares of common stock and $3.0 million, (ii) upon initiation of a Phase III trial of rencofilstat - $5.0 million, and (iii) upon acceptance by the FDA of a new drug application for rencofilstat - $8.0 million. In addition, on February 14, 2014, Ciclofilin had entered into a Purchase and Sale Agreement to acquire Aurinia’s entire interest in rencofilstat. This agreement contains future milestone payments payable by us based on clinical and marketing milestones of up to CAD $2.5 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 $0.5 million, 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 $2.0 million. 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 rencofilstat which is uncapped, (y) a royalty of 5.0% on license revenue from rencofilstat and (z) a payment equal to 30.0% of the proceeds from a Liquidity Event (as defined in the Purchase and Sale Agreement) with respect to Ciclofilin, of which approximately $0.2 million plus interest will be paid to Aurinia. The maximum obligation under both (y) and (z) is CAD $5.0 million.

The Merger Agreement was amended on January 14, 2022 for the following: (i) upon receipt of Phase II positive data from the first Phase II clinical trial of rencofilstat in NASH patients which has been achieved: (1) such number of validly issued, fully paid and non-assessable shares of our common stock equal to 7.5% of the issued and outstanding of our common stock on the Closing Date as defined in the original agreement, which 4,317 was issued in March 2022, and (2) a payment of $2.0 million, made in January 2022 to Ciclofilin shareholders, including a payment to our CEO of $0.8 million and other Hepion employees of $0.2 million, (ii) a payment of $1.0 million upon the positive read out of the first planned interim futility analysis of a Phase IIb clinical trial of rencofilstat in NASH patients, supporting the continuation of the Phase IIb trial. The original agreement required a $3.0 million payment upon receipt of Phase II positive data from a proof-of-concept clinical trial of CRV431, (iii) a payment of $5.0 million upon initiation of the first Phase III trial of rencofilstat in patients, where initiation occurs with first patient in the study dosed with study medication, which remains unchanged from the original agreement, (iv) a payment of $5.0 million upon the filing and acceptance by the U.S. Food and Drug Administration of the first new drug application for rencofilstat, which was $8.0 million in the original agreement; and (v) a payment of $8.0 million upon the regulatory approval by the U.S. Food and Drug Administration of the first new drug application for rencofilstat.

On June 17, 2019, we submitted an IND to the FDA to support initiation of our rencofilstat NASH clinical development program in the United States and received approval in July 2019. We completed dosing of rencofilstat in our

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HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

multiple ascending dose (“MAD’) clinical trial in September 2020.

On July 13, 2021, we announced positive topline results from our Phase 2a "Ambition" NASH clinical trial. All primary endpoints of the trial were met. This Phase 2a study confirmed rencofilstat tolerability and successfully elucidated drug dose range for the upcoming Phase 2b trial.

On September 13, 2021, we announced additional positive data from the Phase 2a Ambition trial and the initiation of the Phase 2b "Ascend" NASH clinical trial.

On November 20, 2020, we submitted an IND to the FDA to support initiation of a rencofilstat clinical development program in the United States for COVID-19. We received approval December 17, 2020, to conduct a COVID-19 clinical trial and are investigating potential sources of collaboration and/or funding for the trial. To date, we have not sourced funding yet.

On November 19, 2021 we submitted an IND to the FDA to support initiation of a rencofilstat clinical development program in the United States for the treatment of HCC and received approval on December 17, 2021.

On November 30, 2021, the FDA granted Fast Track designation for our lead drug candidate, rencofilstat, for the treatment of NASH. The FDA Fast Track designation allows sponsors to gain access to expedited drug approval reviews for medical conditions that are serious and potentially life-threatening, and where there is an unmet medical need. The program is also designed to facilitate drug development by making provisions for more frequent meetings with the FDA to discuss drug development plans, and Fast Track designation can lead to Accelerated Approval and/or Priority Review eligibility if certain criteria are met.

On June 20, 2022, the FDA granted Orphan Drug Designation to rencofilstat, a liver-targeting, orally administered, novel cyclophilin inhibitor, for the treatment of HCC. The FDA Orphan Drug Designation program provides orphan status to drugs or biologics intended for the prevention, diagnosis, or treatment of diseases that affect fewer than 200,000 people in the United States. Sponsors of medicines that are granted Orphan Drug Designation are entitled to certain incentives, including tax credits for qualified clinical trials, prescription drug user-fee exemptions, and potential seven-year marketing exclusivity upon FDA approval.

2.Basis of Presentation

Basis of presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

Principles of Consolidation

The accompanying 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 December 31, 2022, we had $51.2 million in cash, an accumulated deficit of $175.7 million, and working capital of $48.6 million. For the year ended December 31, 2022, cash used in operating activities was $35.0 million and we had a net loss of $42.2 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. We expect to continue to incur losses for the next several years as we expand our research, development and clinical trials of rencofilstat. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

These 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 consolidated financial statements without additional capital becoming available to attain further operating efficiencies and, ultimately, to generate revenue. The 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 our current product candidate and to continue to fund operations at the current cash expenditure levels. We cannot be certain

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HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

3. Summary of Significant Accounting Policies

Use of Estimates

The preparation of 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 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 most significant estimates include clinical trial costs and contingent consideration.

Cash

As of December 31, 2022 and 2021, the amount of cash was $51.2 million and $91.3 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:

•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, accounts payable, 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

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HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

contingent consideration, which is 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.

Property, equipment and depreciation

As of December 31, 2022 and 2021, we had $0.1 million and $0.2 million, 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 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 were no adjustments to the carrying value of property and equipment at December 31, 2022 or December 31, 2021.

Goodwill and In-Process Research & Development

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. We performed a quantitative assessment of goodwill for fiscal year 2021 and determined that the fair value of our reporting unit was in excess of its carrying value.

Interim Assessment of Goodwill

During the six months ended June 30, 2022, increases in interest rates, higher than expected inflation in the U.S., a reduction of value of associated companies developing drug therapy for NASH along with other macroeconomic factors impacted key assumptions used to value goodwill on our balance sheet. These facts and circumstances indicated that the fair value of our goodwill was less than its carrying amount at the reporting date, and therefore a quantitative fair value test was performed for the reporting unit.

We performed a trigger-based goodwill impairment test at June 30, 2022. We are a single reporting unit with an actively traded stock. As part of our impairment testing procedures for goodwill, we relied upon the observed equity premiums paid for a set of guideline merger and acquisition transactions. The application of a control premium to our closing stock price at June 30, 2022 led to an indication of fair value for our equity on a controlling, marketable basis that was less than its carrying value as of June 30, 2022. As a result, we recognized an impairment charge of $1.9 million during the three months ended June 30, 2022 as general and administrative costs in our condensed consolidated statement of operations.

In-Process Research and Development

In-Process Research and Development ("IPR&D") acquired in a business combination is capitalized as indefinite-lived assets on our consolidated balance sheets at the acquisition-date fair value. IPR&D relates to amounts that arose in connection with the acquisition of Ciclofilin. 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

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HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 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.

Income Taxes

We continue to maintain a full valuation allowance for our U.S and foreign net deferred tax assets. Income tax expense for the years ended December 31, 2022 and 2021 is related to our foreign operations.

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 2022. 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.

Contingencies

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Notes to Consolidated Financial Statements

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.

Researchand 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.

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 9). 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.

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 years ended December 31, 2022 and 2021. 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

For 2022, 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. The change in the functional currency for Hepion Research Corp. was applied on a prospective basis starting January 1, 2022. Prior to 2022, the functional and reporting currency of Hepion Pharmaceuticals, Inc., Hepion Research Corp. and ContraVir Research Inc. was the U.S. dollar. For 2022, the 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 $0.1 million at December 31, 2022. 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

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HEPION PHARMACEUTICALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

consolidated statements of operations. The impact of foreign exchange gains (losses) was $16,942 and $137,461 for the years ended December 31, 2022 and 2021, 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

On January 1, 2022, we adopted ASU No. 2021-04 ("ASU 2021-04), Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). The adoption of this standard did not have a material effect on our condensed consolidated financial statements and related disclosures.

4. 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 December 31, 2022, there were 85,581 shares outstanding. During the years ended December 31, 2022 and 2021, 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 88,928 common stock warrants that will expire in July 2023. As of December 31, 2022, there were 1,801 shares outstanding. During the year ended December 31, 2022, 5 shares of the Series C were converted into 46 shares of our common stock and during the year ended December 31, 2021, 11 shares of the Series C were converted into 101 shares 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 $1.55 per share (subject to adjustments upon the occurrence of certain dilutive events).

Series F and Series G Convertible Redeemable Preferred Stock

On November 8, 2022, we entered into a Stock Purchase Agreement ("SPA") with certain institutional investors for the private placement of 1,900,000 shares of our Series F Convertible Redeemable Preferred Stock (the “Series F Preferred Stock”) and 100,000 shares of our Series G Convertible Redeemable Preferred Stock (the “Series G Preferred Stock” and together with the Series F Preferred Stock, the “Preferred Stock”). The shares, which have since been redeemed in accordance with their terms described below, and are thus no longer outstanding as of December 31, 2022, had an aggregated stated value of $20.0 million. Under the terms of the SPA, each share of the Preferred Stock had a purchase price of $9.50, representing an original issue discount of 5% of the stated value. In connection with this offering, we recognized net proceeds of $17.9 million, net of offering costs of $1.1 million, and recognized a deemed dividend of $3.1 million. In connection with this transaction, we placed $21.0 million into an escrow account for any future redemption that consisted of the gross proceeds of $19.0 million and a portion of the redemption consideration of $2.0 million.

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Notes to Consolidated Financial Statements

The Preferred Stock was convertible, at the option of the holders and, in certain circumstances, by us, into shares of Common Stock at a conversion price of $1.00 per share. We have the option to redeem the Preferred Stock for cash at 105% of the stated value commencing on the date of the stockholder approval of the reverse stock split (or within 15 days subsequent under certain conditions). The holders of the Preferred Stock had the right to require us to redeem their shares of Preferred Stock for cash at 105% of the stated value of such shares commencing after the earlier of the receipt of stockholder approval of an amendment to our Restated Certificate of Incorporation to effect a reverse stock split and 60 days after the closing of the issuances of the Preferred Stock and until 90 days after such closing. As redemption can be required based on the occurrence of redemption events that were considered not solely within our control, the Preferred Stock was recorded separately from stockholders’ equity as temporary equity.

On December 18, 2022, the holders of all 1,900,000 shares of Series F Preferred Stock and 100,000 shares of Series G Preferred Stock exercised their right to cause us to redeem all such shares for $21.0 million, which represented a price equal to 105% of the stated value. The redemption of these shares was paid out of the escrow account noted above.

The Preferred Stock was recognized in accordance with ASC 480 “Distinguishing Liabilities from Equity”. Under ASC 480-10-S99-3A, we elected to accrete the changes in the redemption value over the period from the date of issuance until the earliest probable redemption date. The redemption contingency was considered met upon approval of the reverse stock split on December 15, 2022, at which time the Preferred Stock was adjusted to the full redemption value.

We incurred issuance costs of approximately $1.1 million in connection with the offering which was recorded as a reduction of the Preferred Stock value at issuance and accreted to the Preferred Stock until the redemption contingency was met upon which we recognized approximately $3.1 million in deemed dividends related to the Preferred Stock in our consolidated financial statements for the year ended December 31, 2022.

The following table presents the Series F and Series G Convertible Redeemable Preferred Stock activity for the year ended December 31, 2022:

Convertible Redeemable Preferred Stock

Preferred StockSeries F Preferred StockSeries G

Shares Amount Shares Amount

Balance at December 31, 2022 — $ — — $ —

The deemed dividend was recognized as a decrease in Additional Paid-in Capital during the year ended December 31, 2022.

Common Stock and Warrant Offering

In April 2017, and July 2018, we issued common stock and warrants in connection with public offerings. In April 2022, the remaining April 2017 warrants expired. Based on the terms of the July 2018 offering and warrant agreements, if we do not maintain an effective registration statement, which is outside of our control, we are obligated to deliver registered shares upon the exercise and settlement of the warrant. As a result of the aforementioned terms and in accordance with the guidance contained in ASC Topic 815-40, we determined that the April 2017 and July 2018 warrants issued in connection with these offerings were recorded as derivative liabilities upon issuance and marked to market on a quarterly basis in our consolidated statement of operations and comprehensive loss. In connection with the adoption of ASU 2020-06 in 2021, we reclassified the July 2018 warrants to equity.

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Notes to Consolidated Financial Statements

The following table sets forth the components of changes in our derivative financial instruments liability balance for the years ended December 31, 2022 and 2021:

Date Description Number of Warrants Outstanding Derivative Instrument Liability

Expiration of warrants (4,314) —

December 31, 2021 Balance of derivative financial instruments liability 10,714 —

Expiration of warrants (10,714) —

December 31, 2022 Balance of derivative financial instruments liability — $ —

Common Stock Offerings

On February 16, 2021, we entered into an underwriting agreement ("Underwriting Agreement") with ThinkEquity, a division of Fordham Financial Management, Inc., as the representative (the Representative") of the underwriters ("collectively, the Underwriters") listed therein, with respect to an underwritten public offering ("Offering") of 44,200,000 shares of our common stock, par value $0.0001, at a public offering price of $2.00 per share, which resulted in net proceeds to us of $82.1 million, after deducting underwriting discounts and commissions and offering expenses payable by us. We intend to use the net proceeds to fund our research and development activities and general corporate purposes, including working capital, operating expenses and capital expenditures. Upon closing of the Offering, we issued as to the Representative as compensation warrants to purchase 1,105,000 shares of common stock, or the Representative’s Warrants. The Representative’s Warrants will be exercisable at $2.50 per share. The Representative’s Warrants are exercisable at any time and from time to time, in whole or in part, during the four and one-half year period commencing 180 days from February 19, 2021. We determined that the Representative Warrants should be recorded in the consolidated financial statements as equity.

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 as of December 31, 2022 and 2021.

Fair Value Measurements at Reporting Date Using

Description Total (Level 1) (Level 2) (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 December 31, 2022 and 2021, the assumptions we used to calculate the fair value were as follows:

Assumptions

December 31,

Discount rate 8.5% 7.0%

Stock price n/a $1.14

Probability of success of milestone achievements 13 % — 40% 18 % — 100%

We completed the first segment of our Phase I clinical activities for rencofilstat in October 2018 wherein we reached a major clinical milestone of positive data from a Phase I trial of rencofilstat in humans. This achievement triggered the first

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Notes to Consolidated Financial Statements

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 $1.0 million and issued 1,439 shares of our common stock with a fair value of $0.1 million, representing 2.5% of our issued and outstanding common stock as of June 2016, to the Ciclofilin shareholders. As described in Note 1, the Merger Agreement was amended on January 14, 2022.

As of December 31, 2022, $0.4 million was classified as a current liability and $2.1 million as a non-current liability based upon management's best estimate using the latest available information. Management reviewed and updated the assumptions at December 31, 2022 for the amendment of the Merger Agreement and increased the discount rate based on comparable companies, increased the probability of success for milestone 2 and extended the projected achievement dates for milestones 3 and 4 based on new information.

The following table presents the change in fair value of the contingent consideration for the years ended December 31, 2022 and 2021.

Acquisition-related Contingent Consideration

Liabilities:

Change in fair value recorded in earnings 2,310,000

Change in fair value recorded in earnings (414,992)

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:

Estimated Useful Life (in years) December 31,2022 December 31,2021

Depreciation expense for the years ended December 31, 2022 and 2021 was $0.1 million and $0.1 million, respectively.

7. Indefinite-lived Intangible Assets and Goodwill

IPR&D

Our IPR&D asset consisted of the following at:

Indefinite-livedIntangible Asset

Changes during the year ended December 31, 2021 —

Changes during the year ended December 31, 2022 —

No impairment losses were recorded on IPR&D during the years ended December 31, 2022 and 2021.

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Notes to Consolidated Financial Statements

Goodwill

The table below provides a roll-forward of our goodwill balance:

Amount

Changes during the year ended December 31, 2021 —

Changes during the year ended December 31, 2022 (see Note 3) (1,870,924)

Goodwill balance at December 31, 2022 $ —

A $1.9 million impairment loss was recorded to goodwill during the year ended December 31, 2022. No impairment loss was recorded to goodwill during the year ended December 31, 2021.

8. Accrued Liabilities

Accrued expenses consist of the following:

December 31,

Payroll and related costs $ 838,683 $ —

9. Accounting for Share-Based Payments

On June 3, 2013, we adopted the 2013 Equity Incentive Plan (the “Plan”). Stock options granted under the Plan typically will vest after three years of continuous service from the grant date and will have a contractual term of ten 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 the option grant 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. As of December 31, 2022, the liability related to the awards was $1.9 million and has been included in accrued expenses in our consolidated balance sheet with the corresponding expense included in our consolidated statements of operations and comprehensive loss. At our annual meeting of stockholders in June 2022, shareholders voted against our 2021 Omnibus Equity Incentive Plan. Therefore, we will continue to account for this option grant as liability-classified until we receive stockholder approval to increase the available options to grant.

We classify stock-based compensation expense in our 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:

Year EndedDecember 31,

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Notes to Consolidated Financial Statements

A summary of stock option activity under the Plan is presented below:

Exercised — $ — - $ — $ — $ —

Forfeited — $ — - $ — $ — $ —

Exercised — $ — - $ — $ — $ —

Forfeited — $ — - $ — $ — $ —

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

Year EndedDecember 31,

Risk-free interest rate 3.98 % 1.35 %

Dividend yield — —

Expected term (in years) 6.0 5.9

The total fair value of awards vested during the year ended December 31, 2022 and 2021 was $4.2 million and $4.4 million, respectively.

As of December 31, 2022, the unrecognized compensation cost related to non-vested stock options outstanding, net of expected forfeitures, was $1.5 million to be recognized over a weighted-average remaining vesting period of approximately 0.80 years.

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.

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Notes to Consolidated Financial Statements

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. On April 1, 2016, we determined that we had sufficient history of issuing stock options and decreased our estimated forfeiture rate from 10%, which was based on the historical experience of our former parent, to 3%, which is our actual historical forfeiture rate. The forfeiture rate was 3% for the years ended December 31, 2022 and 2021. 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.

10. Income Taxes

We provide for income taxes under ASC 740, "Income Taxes" ("ASC 740"). Under ASC 740, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Our loss before income taxes was $45.1 million and $32.7 million for the years ended December 31, 2022 and 2021, respectively, and was generated entirely in the United States and Canada.

The income tax benefit for the year ended December 31, 2022 was $2.9 million and income tax expense for the year ended December 31, 2021 was $0. For 2022, our tax benefit 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. We plan to sell additional NOLs and credits under the same program in the future.

Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes.

The significant components of our deferred tax assets are comprised of the following:

As of December 31,

We have evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets. Based on our history of operating losses since inception, we have concluded that it is more likely than not that the benefit of our deferred tax assets will not be realized. Accordingly, we have provided a valuation allowance for substantially all deferred tax assets as of December 31, 2022 and 2021, including those related to Canada. We have recorded a net deferred tax liability of $0.4 million related to in-process research and development as a result of the acquisition of Ciclofilin.

The valuation allowance increased by $12.1 million and $8.8 million for the years ended December 31, 2022 and 2021, respectively, due primarily to the generation of net operating losses during these periods.

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Notes to Consolidated Financial Statements

A reconciliation of income tax benefit computed at the statutory federal income tax rate to income taxes as reflected in the consolidated financial statements is as follows:

Year EndedDecember 31,

U.S. statutory income tax rate 21.0 % 21.0 %

State income taxes, net of federal benefit 8.2 % 8.0 %

Sale of New Jersey tax benefits 6.4 % — %

Research and development credits 0.5 % 1.7 %

Contingent consideration 0.2 % (1.5) %

Foreign tax differential (0.7) % — %

Other (4.6) % (1.1) %

Valuation allowance (24.6) % (28.1) %

Effective tax rate 6.4 % — %

As of December 31, 2022 and 2021, we had U.S. federal and state net operating loss carryforwards of $117.6 million and $101.1 million, respectively, which may be available to offset future income tax liabilities and will begin to expire at various dates starting in December 2022. We also had federal and state research and development tax credit carryforwards of approximately $1.6 million as of December 31, 2022, which will begin to expire in December 2027.

Under the provisions of the Internal Revenue Code, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (“IRS”) 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 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 2022. 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 limited. Similar provisions of state tax law may also apply to limit the use of accumulated state tax attributes.

We file income tax returns in the United States, Canada and various state jurisdictions. Our federal income tax returns for the years 2018 and forward, and state income returns for the years 2017 and forward remain subject to examination by the IRS and state authorities. Our tax returns in Canada are also subject to examination.

We have approximately $1.6 million of undistributed earnings in Canada, which we continue to reinvest indefinitely, and therefore no withholding taxes related to its repatriation has been recorded.

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Notes to Consolidated Financial Statements

11. 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:

Year EndedDecember 31,

Basic and diluted net loss per common share 2022 2021

Numerator:

Preferred stock deemed dividend (3,137,500) —

Denominator:

Net loss per share of common stock—basic and diluted $ (0.59) $ (0.47)

The following outstanding securities at December 31, 2022 and 2021 have been excluded from the computation of basic and diluted weighted shares outstanding, as they would have been anti-dilutive:

Year EndedDecember 31,

Common shares issuable upon conversion of Series A preferred stock 3,184 3,184

Common shares issuable upon conversion of Series C preferred stock 16,599 16,645

Warrants – liability classified — 10,714

The liability and equity classified warrants disclosed above have been excluded from the computation of diluted earnings per share because the exercise price of the warrants exceeds the average market price of our common stock for the period they were outstanding.

12. Commitments and Contingencies

Contractual Obligations

In August 2014, we entered into a lease for corporate office space in Edison, New Jersey. In December 2017, we entered an amendment to the lease for corporate office space in Edison, New Jersey expanding the office footprint and extending the lease for an approximate 5-year period. This lease will expire on March 31, 2023. We are currently negotiating with the landlord to renew our lease. 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 is subsequently on a month-to-month basis.

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

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.

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Notes to Consolidated Financial Statements

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 December 31, 2022, the ROU assets were $0.1 million, the current lease liabilities were $0.1 million, and there were no non-current lease liabilities. The discount rate used to account for our operating leases under ASC 842 is our estimated incremental borrowing rate of 6.5%.

Rent expense for the years ended December 31, 2022 and 2021 was $0.3 million and $0.3 million, respectively.

For the years ended December 31, 2022 and 2021, the weighted average remaining term of our noncancelable operating leases is 0.25 years and 1.16 years, respectively.

Future minimum rental payments under our noncancelable operating leases at December 31, 2022 is as follows:

2024 and thereafter —

Present value adjustment (288)

Employment Agreements

We have employment agreements with certain employees which require the funding of a specific level of payments, if certain events, such as a change in control, termination without cause or retirement, occur.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a‐15(e) and 15d‐15(e) of the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a‐15 or Rule 15d‐15, as of December 31, 2022, our Principal Executive Officer and Principal Financial Officer have concluded that, due to the material weaknesses in our internal control over financial reporting noted below, our disclosure controls and procedures were not effective.

Management's Report on Internal Controls Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that:

•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and board of directors; and

•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). In connection with this assessment, we identified material weaknesses in internal control over financial reporting as of December 31, 2022. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Based on that evaluation, as of December 31, 2022, our principal executive officer and principal financial officer concluded that our internal controls and procedures are not effective, and that we have material weaknesses in our control environment and period end financial close and reporting process as described below.

•We identified a material weakness in our internal controls related to the proper design and implementation of control over formal review, approval, and evaluation of non-core, complex accounting transactions.

•We identified a material weakness in internal control related to the proper design and implementation of certain controls over income tax provision and management’s review of the income tax provision. We utilize a third-party to assist in the preparation of our tax provision. Specifically, we did not sufficiently design and implement controls related to the completeness and accuracy of certain aspects of the tax provision and the completeness and accuracy income tax disclosures.

Remediation of Material Weaknesses

We are committed to the remediation of the material weaknesses described above, as well as the continued improvement of our internal control over financial reporting. We plan on implementing several remedial actions to improve our internal controls, including:

•We are utilizing the services of external consultants for non-routine and\or technical accounting issues as they arise.

•Expanding and improving our review process for complex accounting transactions. We plan to further improve this process by enhancing access to accounting literature, identification of third-party professionals with whom to consult regarding complex accounting applications and consideration of additional staff with the requisite experience and training to supplement existing accounting professionals.

•Management, with the assistance of a third party, will perform an evaluation of the processes and procedures around our tax provision processes, internal control design gaps, and recommend process enhancements.

•Implementing enhancements and process improvements, including the design and implementation of well-defined controls and related control attributes regarding income tax provision and income tax disclosures.

•Developing a detailed timeline of the tax provision calculation, to ensure that sufficient time is allocated to complete the process as designed.

As we continue our evaluation and improve our internal control over financial reporting, management may identify and take additional measures to address control deficiencies. We cannot assure you that we will be successful in remediating the material weaknesses in a timely manner.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to exemptions provided to issuers that are non-accelerated filers as defined in Section 2(a) of the Securities Act of 1933.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our principal executive officer and principal financial officer concluded there were no such changes during the quarter ended December 31, 2022.

ITEM 9B. OTHER INFORMATION

None.

ITEM 9c. DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this item regarding our directors, executive officers and corporate governance will be included in our 2023 Proxy Statement and is incorporated herein by reference.

Item 11. Executive Compensation.

The information required by this item regarding executive compensation will be included in our 2023 Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item regarding security ownership of certain beneficial owners and management will be included in our 2023 Proxy Statement and is incorporated herein by reference.

Item 13. Certain Relationships, Related Person Transactions and Director Independence.

The information required by this item regarding certain relationships and related transactions and director independence will be included in our 2023 Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

The information required by this item regarding principal accounting fees and services will be included in our 2023 Proxy Statement and is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)Financial Statements

Reference is made to the Index to Consolidated Financial Statements of Hepion Pharmaceuticals, Inc. appearing on page 51 of this report.

(b)(2)Financial Statement Schedules

The schedules required to be filed by this item have been omitted because of the absence of conditions under which they are required, or because the required information is included in the consolidated financial statements or the notes thereto.

(b)EXHIBITS

ExhibitNumber Exhibit Description

21.1 List of Subsidiaries

23.1 Consent of BDO USA, LLP, Independent Registered Public Accounting Firm

24 Power of Attorney (included on signature page hereto)

101.INS XBRL Instance Document

HEPA US Equity

HEPA · 10-K · period ended 2022-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 9c. DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships, Related Person Transactions and Director Independence.

Item 14. Principal Accountant Fees and Services.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

HEPA US Equity☆

HEPA · 10-K · period ended 2022-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 9c. DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships, Related Person Transactions and Director Independence.

Item 14. Principal Accountant Fees and Services.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

HEPA US Equity