Cocrystal Pharma, Inc. 10-K

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, 2021, the following key aspects of our business advanced: ● We raised a total of $38,505,000 in net proceeds from common-stock only public financings. ● We announced the completion of our research obligations under the Merck Collaboration Agreement. ● We applied for and were granted a license to conduct a phase 1 clinical trial in Australia on CC-42344, our influenza A lead product candidate. ● Our COVID-19 programs entered the preclinical phase, after reporting encouraging preliminary efficacy data. 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 $0 and $2,014,000 for the years ended December 31, 2021 and 2020, respectively. The decrease is due completion in 2020 of our research obligations under our Collaboration Agreement with Merck and resulting lack of further payments to us thereunder, as any remaining revenue will be dependent upon Merck’s efforts and to date no milestones have been reached and no royalty-bearing products have been developed since the Collaboration Agreement was executed in January 2019. For the year ended December 31, 2020 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 the Collaboration Agreement with Merck. We do not expect to generate any revenues in 2022, except to the extent we receive any milestone payments under our Collaboration Agreement. We had a net loss of $14,185,000 for the year ended December 31, 2021, compared to a net loss of $9,648,000 for the year ended December 31, 2020. The increase was primarily due to discovery costs related to COVID-19 and manufacturing costs related to the Influenza-A clinical trial. Our operating loss for the year ended December 31, 2021 was $14,221,000 compared to an operating loss of $9,586,000 in 2020. Research and Development Expense Research and development expenses consist primarily of compensation-related costs for our ten 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. 43 Total research and development expenses were $8,794,000 for the year ended December 31, 2021, compared with $6,034,000 for the year ended December 31, 2020. The increase of $2,760,000 was primarily due to increases in COVID-19 and influenza programs advancements, including in connection with the identification of preclinical leads for our COVID-19 programs, the preparation and submission of a pre-IND submission for CDI-45205, our lead COVID-19 product candidate, and the design, application and preparation for clinical trials including our Influenza A lead product candidate in Australia which trial commenced in the first quarter of 2022. We expect research and development expenses to increase in 2022 as we advance our seasonal influenza A (CC-42344) into clinical trials and progress our preclinical COVID-19 programs towards clinical development. 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 $5,427,000 for the year ended December 31, 2021, compared with $5,566,000 for the year ended December 31, 2020. This decrease of $139,000 was primarily due to reduced professional fees resulting from the conclusion of certain previously reported legal matters . In the ordinary course of business, the Company entered into non-cancellable 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 $4,000 for the year ended December 31, 2021, compared to $8,000 for the year ended December 31, 2020. The interest expense in 2021 and 2020 is related to lease agreements. Other Income/Expense Other income (expense), net, was $36,000 for the year ended December 31, 2021 compared with ($62,000) for the year ended December 31, 2020. Other income (expense), net for the year ended December 31, 2021 and 2020 primarily consisted of a gain of $49,000 and a loss of $54,000, respectively, recognized non-cash from increases and decreases 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 increases during a period, which occurred during the year ended December 31, 2021, 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, 2021, net cash used in operating activities was $12,719,000, compared to net cash used in operating activities of $9,830,000 for the year ended December 31, 2020. The increase in cash used in operating activities in 2021 as compared to 2020 was attributable to the reduction of revenue flow from our influenza A/B Collaboration Agreement with Merck by $2,014,000 and to the increase of operating costs related to applications and preparation for COVID-19 and Influenza-A clinical trials. For the year ended December 31, 2021, net cash used in investing activities netted to $52,000, which consisted of capital expenditures for lab equipment, software, and networking for our Lab located in Bothell, Washington. For the year ended December 31, 2020, our net cash used in investing activities consisted of $240,000. For the year ended December 31, 2021, net cash provided by financing activities was $38,466,000, compared to net cash provided by financing activities of $35,662,000 for the year ended December 31, 2020. Net cash generated by financing activities in 2021 and 2020 was the result of issuance common stock, net of finance lease payments. 44 The Company had approximately $55 million cash on hand on March 23, 2022. We expect that this cash balance will be sufficient to support the Company’s working capital needs through 2023. 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 raised a total of $38,505,000 in net proceeds from common-stock only public financings during the year ended December 31, 2021. Set forth below is a brief summary of each such financing. The Company is party to the At-The-Market Offering Agreement, dated July 1, 2020 (“ATM Agreement”) 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. In January 2021, the Company sold 1,030,000 shares of its common stock pursuant to the ATM Agreement for net proceeds of approximately $2,072,000. There were no sales under the ATM Agreement for the remainder of 2021. On May 4, 2021, the Company entered into an underwriting agreement with Wainwright pursuant to which the Company agreed to issue and sell 26,000,000 shares of the Company’s common stock at a public offering price of $1.54 per share, less underwriting discounts and commissions (the “Offering”). The Company received approximately $36.4 million in net proceeds from the Offering, after deducting underwriting discounts and estimated offering expenses. The Offering closed on May 7, 2021. 45 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, 2021, the Company recorded a net loss of approximately $14,185,000 and used approximately $12,719,000 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, preparation and commencement of clinical studies for certain product candidates in 2022, the anticipated completion of proof-of-concept animal study in our norovirus program, 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 and capital resources, 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 collaboration partners, CROs, CMOs, and on the national and global economy, including manufacturing and research delays arising from raw materials and labor shortages, supply chain disruptions and other business interruptions, the ability of our CROs to recruit volunteers for, and to proceed with, clinical trials, possible delays resulting from future lockdowns in Australia, 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, our and our collaboration partners’ technology and software performing as expected, 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, potential mutations in a virus we are targeting which may result in variants that are resistant to a product candidate we develop, 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. 46 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, 2021, 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 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. Goodwill We recorded goodwill in the RFS Pharma acquisition in 2014 that is subject to impairment testing. Impairment tests of goodwill are done annually on November 30 requiring substantial judgment and estimates. At December 31, 2021, the Company had goodwill of approximately $19,092,000 and determined that there was no impairment of goodwill based on our testing on November 30, 2021. 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.