Cocrystal Pharma, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock is traded on The Nasdaq Capital Market (“Nasdaq”) under the symbol “COCP”. As of March 15, 2021, there were approximately 207 holders of record of our common stock. Dividend Policy We have not declared nor paid any cash dividend on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business, and we do not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers significant. Our ability to pay cash dividends is governed by applicable provisions of Delaware law. Unregistered sales of equity securities All unregistered sales of our equity securities during the period covered by this Annual Report on Form 10-K have been previously reported. Item 6. Selected Financial Data As a smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are not required to include information otherwise required by this item. 41 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements included elsewhere in this report. Company Overview We develop novel medicines for use in the treatment of human viral diseases. Cocrystal has been developing novel technologies and approaches to create first-in-class and best-in-class antiviral drug candidates since 2008. Our focus is to pursue the development and commercialization of broad-spectrum antiviral drug candidates that will transform the treatment and prophylaxis of viral diseases in humans. By concentrating our research and development efforts on viral replication inhibitors, we plan to leverage our infrastructure and expertise in these areas. During fiscal year ended December 31, 2020, the following key aspects of our business advanced: ● We entered into two license and collaboration agreements with KSURF to further discover and develop certain proprietary broad-spectrum antiviral compounds. ● We selected lead compound CDI-45205 for further development against coronavirus. ● We received $2,102,000 from Merck in payments under the Collaboration Agreement. ● We raised a total of $35,783,000 in net proceeds from common-stock only public financings. ● We settled the previously disclosed class action and three related derivative actions. See “Part I. Item 3. Legal Proceedings” for more information on these legal proceedings and the settlement. ● CC-42344, influenza A preclinical lead, showed excellent preclinical antiviral activity against influenza A strains, including avian pandemic strains, oseltamivir-resistant, baloxavir-resistant strains, and has a favorable pharmacokinetic profile. We are currently conducting the remaining preclinical IND enabling activities and plan to initiate a Phase 1 study during 2021. ● We completed all research obligations under the Merck exclusive worldwide license and collaboration agreement, and Merck is now solely responsible for further development of the influenza A/B antiviral compounds that were discovered using Cocrystal’s unique structure-based technologies and Nobel Prize-winning expertise. Results of Operations Revenues, Operating Loss and Net Loss As stated above, we are focused on research and development of novel medicines for use in the treatment of human viral diseases. We had revenue of $2,014,000 and $6,564,000 for the years ended December 31, 2020 and 2019, respectively. The decrease resulted primarily from the receipt in January 2019 of the upfront payment of $4,000,000 under the Collaboration Agreement. For the years ended December 31, 2020 and 2019 our revenues consisted of collaboration revenue, including payments for research and development activities related to our influenza A/B program and program expense reimbursements, under our Collaboration Agreement with Merck. For the year ended December 31, 2019, the collaboration revenue also included consideration in exchange for conveyance of intellectual property rights at the signing of the agreement. We do not expect to generate any revenues in 2021, except to the extent we receive any milestone payments under our Collaboration Agreement. We had a net loss of $9,648,000 for the year ended December 31, 2020, compared to a net loss of $48,169,000 for the year ended December 31, 2019. The decrease was primarily due to a $46,103,000 goodwill impairment charge recorded for the year ended December 31, 2019. Our operating loss for the year ended December 31, 2020 was $9,586,000 compared to an operating loss of $48,406,000 in 2019. The operating loss for 2019 included the non-cash impairment charge of $46,103,000 on our intangible goodwill asset. Research and Development Expense Research and development expenses consist primarily of compensation-related costs for our eight employees dedicated to research and development activities and for our Scientific Advisory Board members, as well as lab supplies, lab services, and facilities and equipment costs. 42 Total research and development expenses were $6,307,000 for the year ended December 31, 2020, compared with $4,004,000 for the year ended December 31, 2019. This year over year decrease in research and development expenditures was primarily due to the completion of our HCV phase 2 clinical trial and expense reimbursements resulting from our Collaboration Agreement with Merck. We expect research and development expenses to increase in 2021 due to advancing our coronavirus and norovirus programs. General and Administrative Expense General and administrative expense includes compensation-related costs for our employees dedicated to general and administrative activities, legal fees, audit and tax fees, consultants and professional services, and general corporate expenses. General and administrative expenses were $5,293,000 for the year ended December 31, 2020, compared with $4,863,000 for the year ended December 31, 2019. This increase of $430,000 was primarily due to professional fees associated with litigation matters and insurance increases. We anticipate professional fees will be reduced in the second quarter of 2021 as a result of settling the class action litigation discussed in Part I. Item 3. Legal Proceedings within this Form 10-K. In the ordinary course of business, the Company entered into non-cancelable related party leases for its facilities (see Note 13 – Transactions with Related Parties in the following Consolidated Financial Statements). Interest Income/Expense Interest expense was $8,000 for the year ended December 31, 2020, compared to $19,000 for the year ended December 31, 2019. The interest expense in 2020 and 2019 is related to lease agreements. Other Income/Expense Other income (expense), net, was ($62,000) for the year ended December 31, 2020 compared with $237,000 for the year ended December 31, 2019. Other income (expense), net for the year ended December 31, 2020 and 2019 primarily consisted of a loss of ($54,000) and a gain of $256,000, respectively, recognized from decreases and increases in the fair value of our derivative liabilities as our stock price fluctuated. Under accounting principles generally accepted in the United States, we record other income or expense for the change in fair value of our outstanding warrants that are accounted for as liabilities during each reporting period. If the value of the warrants decreases during a period, which occurred during the year ended December 31, 2020, we record other income. The fair value of our outstanding warrants is inversely related to the fair value of the underlying common stock; as such, a decrease in the fair value of our common stock during a given period generally results in other income while an increase in the fair value of our common stock generally results in other expense. Liquidity and Capital Resources For the year ended December 31, 2020, net cash used in operating activities was $9,830,000, compared to net cash used in operating activities of $1,563,000 for the year ended December 31, 2019. The increase in cash used in operating activities in 2020 as compared to 2019 was attributable to the reduction of revenue flow from our influenza A/B Collaboration Agreement with Merck by $4,550,000. For the year ended December 31, 2020, net cash used in investing activities netted to $240,000, which consisted of capital expenditures for lab equipment, software, and networking for our Lab located in Bothell, Washington. For the year ended December 31, 2019, our net cash used in investing activities consisted of $145,000. For the year ended December 31, 2020, net cash provided by financing activities was $35,662,000, compared to net cash provided by financing activities of $6,424,000 for the year ended December 31, 2019. Net cash generated by financing activities in 2020 and 2019 was the result of issuance common stock, net of finance lease payments. 43 The Company had approximately $33.5 million cash on hand on March 15, 2021. We expect that this cash balance will be sufficient to support the Company’s working capital needs for at least the next 21 months. Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is capital-intensive. As a rule, research and development expenses increase substantially as a company advances a product candidate toward clinical programs. Historically, we financed our operations with the proceeds from public and private equity and debt offerings, including additional investments by certain existing stockholders, and entered into strategic partnerships and collaborations for the research, development and commercialization of product candidates. We currently have one hepatitis C product candidate that has completed a Phase 2a clinical trial and have secured funding of the research and development of influenza A/B product candidates under our Collaboration Agreement with Merck. Additionally, we expect that in the long term in case of successful development and commercialization of one or more influenza A/B antiviral agents under the Collaboration Agreement we will be eligible to receive certain milestone payments up to a total of $156 million, including payments associated with the successful product development and attainment of certain U.S. and EU regulatory approvals for the developed products and sales volume and royalties on net sales of the products. See “Item 1 – Business – Collaborations – Merck Collaboration.” However, in order to conduct research and development of our other product candidates, including our potential COVID-19 therapy, we may need to raise additional capital to support our operations or form partnerships, in addition to our existing collaborative alliances. Such funding or partnerships may not be available to us on acceptable terms, or at all. In addition, as we advance our Coronavirus program we expect that we will be required to make certain milestone payments of up to approximately $7.3 million to KSURF under our two license agreements with KSURF. See “Item 1 – Business – Collaborations – Kansas State University Research Foundation” for more information about these license agreements. We have raised a total of $35,783,000 in net proceeds from common-stock only public financings during the year ended December 31, 2020. Set forth below is a brief summary of each such financing. On January 29, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering, 3,492,063 of the Company’s shares of common stock, par value $0.001 at a purchase price per share of $0.63 for aggregate net proceeds to the Company of approximately $1,500,000, after deducting fees payable to the placement agent and other estimated offering expenses payable by the Company. The Company closed the offering on January 31, 2020. On February 27, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering, 8,461,540 of the Company’s shares of common stock, par value $0.001 at a purchase price per share of $1.30 for aggregate net proceeds to the Company of approximately $10,100,000, after deducting fees payable to the placement agent and other estimated offering expenses payable by the Company. The Company closed the offering on February 28, 2020. On March 9, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering, 5,037,038 of the Company’s shares of common stock, par value $0.001 at a purchase price per share of $1.35 for aggregate net proceeds to the Company of approximately $5,000,000, after deducting fees payable to the placement agent and other estimated offering expenses payable by the Company. The Company closed the offering on March 10, 2020. On July 1, 2020, the Company entered into an At-The-Market Offering Agreement (“ATM”) with H.C. Wainwright & Co., LLC (“Wainwright”), pursuant to which the Company may issue and sell over time and from time to time, to or through Wainwright, up to $10,000,000 of shares of the Company’s common stock. We have sold 2,905,243 shares of common stock under the ATM and received net proceeds of approximately $5,693,000. On August 31, 2020, the Company closed an underwritten public offering of its common stock totaling 16,422,813 shares at public offering price of $1.05 per share sold to Wainwright for net proceeds of approximately $15.6 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company. The 16,422,813 shares of common stock sold in the offering includes 2,137,098 shares pursuant to Wainwright’s partial exercise of its over-allotment option to purchase additional shares of common stock, pursuant to the Amended and Restated Underwriting Agreement, dated as of August 26, 2020, between the Company and Wainwright. 44 The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses and negative operating cash flows since inception. For the year ended December 31, 2020, the Company recorded a net loss of approximately $9,648,000 and used approximately $9,830,000 of cash in operating activities. Cautionary Note Regarding Forward Looking Statements This Annual Report includes forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, including statements regarding our plans for the future development of preclinical and clinical drug candidates, our expectations regarding future characteristics of the product candidates we develop, the expected time of achieving certain value driving milestones in our programs, including the planned initiation of the Phase 1 Influenza A study in the third quarter of 2021, the expected development of additional COVID-19 replication inhibitors in 2021, the anticipated completion of proof-of-concept animal study in our norovirus program in the first half of 2021, our expectations with respect to HCV market opportunity and our plans regarding further clinical development of CC-31244, the expected future results of our collaboration with Merck pursuant to the Collaboration Agreement, including potential receipt of milestone payments and royalties, our expectations related to our collaborations with KSURF, HitGen and InterX, our expectations regarding future operating results, statement regarding the suitability and adequacy of our properties, anticipated payments under the license agreements with KSURF, and our future liquidity. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include the risks and uncertainties arising from the impact of the COVID-19 pandemic on our Company, our partners, and on the national and global economy, including supply chain disruptions and other business interruptions, our ability to proceed with our programs, our continued collaboration with Merck and achievement by Merck of certain milestones under the Collaboration Agreement, our ability to successfully identify, enter into and maintain additional strategic collaborations for further development of our product candidates, financial difficulties experienced by certain partners, future results of planned research and, if successful, clinical trials, general risks arising from clinical trials, receipt of regulatory approvals, development of effective treatments and/or vaccines by competitors, including as part of the programs financed by the U.S. government, and any additional costs related to unfavorable future outcome of pending litigation or any unanticipated claims. Further information on such uncertainties and risks is contained in the “Risk Factors” in Item 1A of this this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see “Item 1A – Risk Factors” and our other filings with the SEC. Critical Accounting Policies and Estimates Our management’s 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 U.S. Generally Accepted Accounting Principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates. While our significant accounting policies are more fully described in the accompanying notes to the consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2020, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our consolidated financial statements. Stock-Based Compensation We account for stock options related to our equity incentive plans under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718 which requires the recognition of the fair value of stock-based compensation. The fair value of stock options is estimated using a Black-Scholes option valuation model. This model requires the input of subjective assumptions including expected stock price volatility, expected life and estimated forfeitures of each award. The fair value of equity-based awards is amortized ratably over the requisite service period of the award. Due to the limited amount of historical data available to us, particularly with respect to stock-price volatility, employee exercise patterns and forfeitures, actual results could differ from our assumptions. 45 Fair Value of Warrants Warrants are recorded either as equity instruments or derivative liabilities. In the case of warrants recorded as liabilities, they are recorded at their estimated fair value at the date of issuance. Subsequent changes in estimated fair value are recorded in other income (expense) in the Company’s statement of operations in each subsequent period. The warrants are measured at estimated fair value using the Black Scholes valuation model, which is based, in part, upon inputs for which there is little or no observable market data, requiring the Company to develop its own assumptions. Inherent in this model are assumptions related to expected stock price volatility, expected life, risk-free interest rate and dividend yield. We estimate the volatility of our common stock at the date of issuance, and at each subsequent reporting period, based on a combination of the historical implied volatility of our own stock price and that of a group of comparable companies, that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the measurement date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on our historical rate, which we anticipate to remain at zero. The assumptions used in calculating the estimated fair value of the warrants represent our best estimates. However, these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different. Goodwill We recorded $65,195,000 of goodwill in the RFS Pharma acquisition in 2014 that is subject to impairment testing. This goodwill primarily represents the amount initially recorded as a deferred tax liability in the RFS Pharma acquisition, which was required as the goodwill recorded for book purposes is not tax deductible based on the structure of the acquisition. Impairment tests of goodwill are done annually on November 30 requiring substantial judgment and estimates. We completed our annual goodwill impairment tests for November 30, 2019 and determined that there was a $46,103,000 impairment of goodwill. There was no impairment of goodwill based on our testing on November 30, 2020. Recently Issued Accounting Standards See discussion in Note 2 to the consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable.