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 our year ended December 31, 2023, the following key aspects of our business advanced: Pandemic and Seasonal Influenza A ● Our novel oral PB2 inhibitor, CC-42344, has shown excellent antiviral activity against influenza A strains including pandemic and seasonal strains, as well as strains resistant to Tamiflu® and Xofluza®. ● In March 2022 enrollment was initiated in a randomized, double-blind, placebo-controlled Phase 1 study of CC-42344, which was conducted in Australia. In December 2023, we reported favorable safety and tolerability results from a Phase 1 study of CC-42344 for the treatment of both pandemic and seasonal influenza A. ● In October 2023 we announced receipt of authorization from the United Kingdom Medicines and Healthcare Products Regulatory Agency (MHRA) to initiate a Phase 2a human challenge trial with its broad-spectrum, oral PB2 inhibitor CC-42344 as a potential treatment for pandemic and seasonal influenza A. In December 2023 we announced achievement of first-patient-in for the Phase 2a human challenge clinical trial. Clinical results are expected in 2024. 42 ● Preclinical development is progressing with an inhaled formulation of CC-42344 as a treatment and prophylaxis for influenza A. Pandemic and Seasonal Influenza A/B Program ● Novel inhibitors effective against both influenza strains A and B have been identified and are in the preclinical stage. Oral Protease Inhibitor CDI-988 ● A novel, broad-spectrum pan-viral 3CL protease inhibitor antiviral drug candidate CDI-988 for clinical development as an oral treatment for SARS-CoV-2 and norovirus. ● Conducting randomized, double-blind, placebo-controlled Phase 1 study of CDI-988 is approved by Australia Human Research Ethics Committees (HREC). The study is designed to access the safety, tolerability and pharmacokinetics of CDI-988. ● In September 2023 we announced dosing of the first subjects in the Phase 1 clinical trial with oral, first-in-class pan-norovirus and pan-coronavirus 3CL protease inhibitor CDI-988. Replication Inhibitors ○ We are using our proprietary structure-based drug discovery platform technology to discover replication inhibitors for orally administered therapeutic and prophylactic treatments for SARS-CoV-2. Replication inhibitors hold potential to work with protease inhibitors in a combination therapy regimen. Results of Operations 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. Total research and development expenses were $15,169,000 for the year ended December 31, 2023, compared with $12,392,000 for the year ended December 31, 2022. The increase of $2,777,000 was primarily due to advancing our influenza lead candidate CC-42344 through a Phase 1 trial and preparation for a Phase 2a clinical trial planned for 2023, as well as advancing our lead COVID-19 clinical oral candidate CDI-988 in preparation for a Phase 1 clinical trial planned for 2023. General and Administrative Expense General and administrative expenses include 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 $5,990,000 for the year ended December 31, 2023, compared with $ 5,745,000 for the year ended December 31, 2022. This increase of $245,000 was primarily due professional fees and litigation. In the ordinary course of business, the Company entered into non-cancellable related party leases for its facilities (see Note 14 – Transactions with Related Parties in the Consolidated Financial Statements). 43 Goodwill Impairment During the six months ended June 30, 2022, the Company saw a significant decrease in its price of common stock resulting in an overall reduction in market capitalization and our recorded net book value exceeded our market capitalization as of June 30, 2022. Pre-impairment, the carrying value of the reporting unit exceeded the market capitalization of the Company at June 30, 2022 and concluded that goodwill was impaired in its entirety and recorded during the second quarter ended June 30, 2022 a $19,092,000 non-cash impairment. As of December 31, 2023 and 2022, the Company had no remaining goodwill. Legal Settlement In July 2022, the Company filed a legal appeal and deposited $1.6 million with the United State District Court for the District of Delaware as security during pending our appeal. During the second quarter ended June 30, 2022, the Company recorded a legal judgement for this amount inclusive of estimated costs. During the third quarter of 2023, the Company received a $1.6 million refund from the registry of the court reflecting the recovery of funds following a successful appeal in the Company’s litigation with an insurer. During November 2023, a settlement agreement was executed and the insurer paid the Company an additional $1.0 million. There is no further litigation with the insurer following the settlement. See “Item 3. Legal Proceedings” for more information Total other Income/Expense Total other income was $575,000 for the year ended December 31, 2023, compared to total other expense of $8,000 for the year ended December 31, 2022. This increase of $583,000 was primarily due to interest income discussed below. Interest income was $640,000 for the year ended December 31, 2023, compared to interest expense of $2,000 for the year ended December 31, 2022. The interest income in 2023 was related to interest earned from cash held in banks and deposits with court registry and the expense in 2022 was related to finance lease agreements. We also had foreign exchange loss of $65,000 and $18,000 for the years ended December 31, 2023 and 2022, respectively, related to currency exchange rate measurements with regards to our Australian operations. Net Loss We had a net loss of $17,984,000 for the year ended December 31, 2023, compared to a net loss of $38,837,000 for the year ended December 31, 2022. This decrease of $20,853,000 was primarily due to a $19,092,000 non-cash impairment-loss of goodwill in 2022 and offset by increases in research and development expenses in 2023 due transition from clinical trial phase I to phase II of our CC-42344 product, and compensated by the increase efforts in the initiation of clinical trial phase I for CDI-988 and other product candidates. 44 Liquidity and Capital Resources For the year ended December 31, 2023, net cash used in operating activities was $14,666,000, compared to net cash used in operating activities of $21,435,000 for the year ended December 31, 2022. The decrease in cash used in operating activities in 2023 as compared to 2022 was attributable to the decrease of operating costs related to our COVID-19 and influenza-A clinical trials. For the year ended December 31, 2023, net cash used in investing activities netted to $118,000, which consisted of capital expenditures for lab equipment, software, and networking for our Lab located in Bothell, Washington. For the year ended December 31, 2022, our net cash used in investing activities consisted of $74,000. For the year ended December 31, 2023, net cash provided by financing activities was $3,993,000, compared to net cash used by financing activities of $27,000 for the year ended December 31, 2022. Net cash provided by financing activities in 2023 was result of a raise of $4,000,000 in a private placement sale of common stock., We expect that our reported cash balance will be sufficient to support the Company’s working capital needs for the 12 months following the filing of this Report. 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 have 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. Because we have an influenza A product candidate that is currently in a Phase 2a clinical trial and a pan-viral coronavirus & norovirus product candidate that is currently in a Phase 1 clinical trial we may need to raise additional capital to support our operations or form partnerships and collaborative alliances. Such funding may not be available to us on acceptable terms, or at all. 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 $2.1 million. There have been no sales under the ATM Agreement since then. 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, commencement and advancement of clinical studies for certain product candidates in 2024, our expectations with respect to market opportunities for certain product candidates and our plans regarding further clinical development of such product candidates, our search for collaboration partners following the termination of agreements with Merck and KSURF, our expectations regarding future operating results, statement regarding the suitability and adequacy of our properties and capital resources, 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 inflation, the possibility of recession, interest rate increases and the conflicts in Ukraine and Israel on our Company, our collaboration partners, and on the U.S., U.K., Australia and global economy, including manufacturing and research delays arising from raw materials and labor shortages, supply chain disruptions and other business interruptions including any adverse impacts on our ability to obtain raw materials and test animals as well as similar problems with our vendors and our current and any future CROs and CMOs, the results of the studies for CC-42344 and CDI-988, the ability of our CROs to recruit volunteers for, and to proceed with, clinical studies, our and our collaboration partners’ technology and software performing as expected, financial difficulties experienced by certain partners, the results of future preclinical and clinical trials, general risks arising from clinical trials, receipt of regulatory approvals, regulatory changes, development of effective treatments and/or vaccines by competitors, including as part of the programs financed by the U.S. government, and potential mutations in a virus we are targeting which may result in variants that are resistant to a product candidate we develop. 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, 2023, 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. 45 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. 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.