CervoMed 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 trades publicly on the Nasdaq Capital Market under the symbol “DFFN.” Holders As of March 15, 2021, there were 353 record holders of our common stock. This does not include beneficial owners of our common stock whose stock is held in nominee or “street name”. Dividends To date, we have not declared or paid any cash dividends on our common stock and do not intend to do so in the near future. Securities Authorized for Issuance Under Equity Compensation Plans The information set forth in Part III — Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Annual Report is incorporated herein by reference to the extent required by Item 201(d) of Regulation S-K. Recent Unregistered Sales of Equity Securities and Use of Proceeds None Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. ITEM 6. SELECTED FINANCIAL DATA The information required by Item 6 of Form 10-K has been omitted from this Annual Report pursuant to the amendments to Regulation S-K adopted by the SEC on November 19, 2020. 37 ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction This discussion and analysis contains information related to historical and prospective events intended to enable you to assess our business, financial condition, and results of operations. The information contained in this discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Annual Report, as well as the risks and uncertainties discussed in Part I – Item 1A. Risk Factors of this Annual Report. Diffusion Pharmaceuticals: Enhancing Oxygen, Fueling Life We are an innovative biopharmaceutical company developing novel therapies that enhance the body’s ability to deliver oxygen to the areas where it is needed most. Our lead product candidate, TSC, is being developed to enhance the diffusion of oxygen to tissues with low oxygen levels, also known as hypoxia, a serious complication of many of medicine’s most intractable and difficult-to-treat conditions. In addition to TSC, our product candidate DFN-529, a novel, allosteric PI3K/Akt/mTOR pathway inhibitor, is in early-stage development. We previously completed two Phase 1 clinical trials evaluating DFN-529 in age-related macular degeneration. DFN-529 was also previously in preclinical development in oncology, specifically GBM. Highlights from 2020 and Early 2021 ● Board & Management Additions and Changes - During the second half of 2020, our leadership team changed significantly. We appointed our new chief executive officer, Robert J. Cobuzzi, Jr., Ph.D., and our new general counsel, William Elder, in September 2020, followed by our new chief medical officer, Christopher Galloway, M.D., in October 2020. We also welcomed a new director, Jane Hollingsworth, to our Board in August 2020. Dr. Cobuzzi joined the Board in January 2020. ● Initiation and Completion of TSC COVID Trial - In September 2020, we announced the dosing of the first two patients in our TSC COVID Trial evaluating TSC in hospitalized COVID-19 patients at the NIID in Bucharest, Romania. On February 9, 2021, we completed dosing of the twenty-fourth and final patient in the TSC COVID Trial. No dose-limiting toxicities or serious adverse events were observed among any patients in the study, including those who received the highest dose of 1.5 mg/kg every 6 hours. Evaluation of secondary endpoint data is ongoing and we anticipate this data will be available early in the second quarter of 2021. ● February 2021 Equity Offering - During the first quarter of 2021, we completed the February 2021 Offering resulting in aggregate gross net proceeds to the Company of approximately $34.5 million, before deducting underwriting discounts and commissions and offering expenses payable by us. In addition, during the period from January 1, 2021 through March l5, 2021, certain holders of warrants to purchase common stock cash exercised such warrants resulting in aggregate net proceeds to the Company of approximately $2.2 million. As a result, combined with our cash and cash equivalents as of December 31, 2020 of $18.5 million, we expect that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditures (including our planned clinical trials) through 2023. Our Strategic Priorities for 2021 Since the founding of Diffusion LLC, we have been focused on the development of TSC for the treatment of hypoxia and as a platform to enhance standard-of-care treatment for conditions complicated by hypoxia. Prior to 2020, these efforts generated a substantial amount of data related to TSC, including data related to chemistry, manufacturing, and controls, preclinical safety and/or efficacy data in a wide array of experimental models, single dose safety, tolerability, and pharmacokinetic data, and clinical data and other information related to TSC's potential as a supplement to standard-of-care treatment in GBM, peripheral artery disease, and stroke. In March 2020, the COVID-19 pandemic accelerated in the U.S. resulting in numerous delays and other challenges for biopharmaceutical companies conducting clinical studies in indications not related to COVID-19, including our TSC Stroke Trial. In early April 2020, we announced plans to initiate a clinical research program to evaluate TSC in patients with COVID-19 due to the anticipated persistence of the COVID-19 pandemic coupled with our belief in the potential of TSC to improve low tissue oxygen levels, a common symptom and complicating factor in the treatment of COVID-19. We believe this decision was both opportunistic and a natural extension of the previous development work conducted with TSC, and in September 2020 we commenced the TSC COVID Trial. 38 In November 2020, we announced that, following changes to our management team in the prior two months, we had initiated a thorough review of our then-existing development program for TSC and commenced plans to modify the program with the intent of accomplishing two principal strategic objectives: • To optimize the clinical dose and dosing frequency for TSC. • To evaluate TSC in clinical models designed to establish proof of concept for improvement in oxygenation. The completion of the TSC COVID Trial in February 2021 provided the first multiple daily dose safety and tolerability data for TSC. We expect corresponding pharmacokinetic and other secondary endpoint data from this trial to be available early in the second quarter of 2021. Obtaining these data represents the first, major step in our ongoing efforts to implement our modified development strategy, intended to strategically gap-fill, supplement, and expand on our past development work in TSC, with the ultimate goal of maximizing the probability of regulatory approval and, if TSC is approved, commercial success. During the next twelve months, we intend to continue to execute our strategy and accomplish the following principal, strategic objectives, all of which we expect to be able to fund with cash-on-hand: • Complete the TSC Oxygenation Trials – As described in more detail under the heading — Our Anticipated Next Steps in the TSC Development Program: The TSC Oxygenation Trials , the next phase in our development plan is to evaluate TSC's effects in clinical models of oxygenation in an effort to establish a dose-response relationship. We expect to commence the TSC TCOM Trial before the end of March 2021 with data expected in the second quarter of 2021, and we intend to commence both the TSC DLCO Trial and TSC Induced Hypoxia Trial in the third quarter of 2021 with data expected from each study expected within two months of their respective completion. • Initiate Phase 2 Trial of TSC in Hypoxia-related Indication – We believe positive data from one or more of the three TSC Oxygenation Trials would provide definitive evidence of TSC's enhancement of oxygenation, whether through increased uptake in the lungs, enhanced delivery, increased utilization at the tissue level, or some combination thereof. Positive data from any of these studies, if obtained, will guide the subsequent steps of our development strategy focused on demonstrating the clinical and therapeutic benefits of TSC in relevant patient populations on the hypoxia continuum. In particular, if successful in one or more of the three TSC Oxygenation Trials, we intend to initiate a Phase 2, controlled, clinical outcome study evaluating TSC in one or more appropriate hypoxia-related indications, which we refer to as our Planned Phase 2 Hypoxia-related Indication Trial, by the first quarter of 2022. • Continue to Improve Our Efficiency and Effectiveness – This will include evaluating, refining, and improving our policies, procedures, and processes related to chemistry, manufacturing, and controls, quality assurance, information technology, intellectual property, human capital, and other areas, including as described in more detail under the headings, — Products, Product Development, and Our Competition and — Our People and Human Capital Resources in Part I – Item 1. Business of this Annual Report. Our Anticipated Next Steps in the TSC Development Program: The TSC Oxygenation Trials Following completion of the TSC COVID Trial in February 2021, the next step we have planned in the development of TSC is the design and execution of a trilogy of clinical studies using short-term, experimental models to evaluate the clinical effects of TSC on oxygenation. As of March 15, 2021, TSC has been administered to more than 180 subjects in our clinical trials. Data from these clinical trials have contributed significantly to our understanding of the safety, tolerability, and pharmacokinetics of TSC. In addition, post hoc analyses of two of our prior studies involving patients with peripheral artery disease with claudication and unresected GBM tumors have provided preliminary signals suggesting TSC's effect on oxygenation. However, neither of these studies was statistically powered to formally evaluate efficacy, and we therefore believe that further, robust clinical development of TSC requires a prospective exploration of the relationship between the level of exposure (dose) and response (change in oxygenation). 39 To this end, we plan to execute the three, short-term TSC Oxygenation Trials during 2021, each of which we expect to conduct in the U.S. and fund with cash-on-hand. We believe positive data from any or more of the three TSC Oxygenation Trials would provide evidence of a definitive effect of TSC on oxygenation, whether through increased uptake in the lungs, enhanced delivery, increased utilization at the tissue level, or some combination thereof. Positive data from any of these studies, if obtained, will also guide the subsequent steps of our development strategy focused on demonstrating the clinical and therapeutic benefits of TSC in relevant patient populations across the hypoxia continuum. Assuming success in one or more of the three TSC Oxygenation Trials, we expect to identify and announce the specific, hypoxia-related indications we will target in advancing TSC's development in the fourth quarter of 2021 and intend to initiate our Planned Phase 2 Hypoxia-related Indication Trial in the first quarter of 2022. Financial Summary As of December 31, 2020, we had a cash and cash equivalents balance of $18.5 million. We have incurred operating losses since inception, have not generated any product sales revenue, and have not achieved profitable operations. We incurred net losses of $14.2 million and $11.8 million for the years ended December 31, 2020 and 2019, respectively. To date, we have funded our operations and short-term liquidity needs primarily through the issuance and sale of common stock, warrants to purchase common stock, convertible debt, and convertible preferred stock. We expect to continue funding our operations through similar means for the foreseeable future, assuming the availability of additional capital, though we may enter into strategic partnerships or other alternative transactions in order to fund our ongoing capital requirements. 40 Our accumulated deficit as of December 31, 2020, was $105.9 million and we expect to continue to incur substantial losses in future periods for the foreseeable future. We also anticipate that our operating expenses will increase substantially as we continue to advance the development of TSC, including any costs related to: • our ongoing and planned clinical trials, including the ongoing and planned TSC Oxygenation Trials and our Planned Phase 2 Hypoxia-related Indication Trial; • any additional studies we may undertake, including other preclinical and clinical studies to support the filing of any NDA with the FDA; • other research, development, and manufacturing activities designed to develop and optimize formulation, manufacturing processes, dosage, dose forms, and other characteristics prior to • regulatory approval; • the maintenance, expansion, and protection our global intellectual property portfolio; • the hiring of additional clinical, manufacturing, scientific, sales, or other personnel; and • investments in operational, financial, and management information systems. We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of TSC, including the TSC TCOM Trial, the TSC VO2 Trial, and the TSC DLCO Trial. We expect that our existing cash and cash equivalents as of December 31, 2020, combined with the $36.7 million of aggregate gross proceeds received by the Company in connection with the completion of the February 2021 Offering (before deducting underwriting discounts and commissions and offering expenses payable by us) and the exercise of certain warrants to purchase common stock during the first quarter of 2021 prior to the date of this Annual Report, will enable us to fund our operating expenses and capital expenditure requirements, including expected costs related to the planned TSC Oxygenation Trials and our Planned Phase 2 Hypoxia-related Indication Trial through 2023. Financial Operations Overview Revenues We have not yet generated any revenue from product sales. We do not expect to generate revenue from product sales for the foreseeable future. Research and Development Expense R&D expenses include, but are not limited to, third-party CRO arrangements and employee-related expenses, including salaries, benefits, stock-based compensation, and travel expense reimbursement. R&D activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical studies. As we advance our product candidates, we expect the amount of R&D costs will continue to increase for the foreseeable future. R&D costs are charged to expense as incurred. General and Administrative Expense G&A expenses consist principally of salaries and related costs for executive and other personnel, including stock-based compensation, other employee benefit costs, expenses associated with investment bank and other financial advisory services, and travel expenses. Other G&A expenses include, facility-related costs, communication expenses and professional fees for legal, patent prosecution and maintenance, consulting, accounting, and other professional services. Interest Income Interest income consists of interest earned from our cash and cash equivalents. 41 Income Tax Benefit (Expense) We recognize income tax benefit to utilize indefinite deferred tax liabilities as a source of income against indefinite lived portions of our deferred tax assets. Our NOLs 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 a greater than 50.0% cumulative change in the ownership interest of significant stockholders over a three year period, as defined under Sections 382 and 383 of the Internal Revenue Code as well as similar state provisions. These limitations may, in certain cases, limit the amount of income tax benefit that can be utilized annually to offset taxable income or tax liabilities in future periods. The amount of the annual limitation is determined based on the Company’s value immediately prior to the ownership change, and subsequent ownership changes may further affect the limitation in future years. In 2019, due to the significant changes to our stockholder base as a result of the equity financing we completed during that year, we performed an analysis under Section 382 of the Internal Revenue Code and, as a result, reduced the magnitude of our NOL carryforwards to account for the ownership changes. In addition, the cumulative benefit of our NOLs was remeasured, resulting in tax expense recognized during the year ended December 31, 2019. We have not yet performed an analysis to determine whether or not ownership changes that have occurred in year ended December 31, 2020 give rise to any further limitations. Critical Accounting Policies Certain of our critical accounting policies require estimates that involve the application of significant judgment by management in selecting the appropriate assumptions in determining the estimate. By their nature, these judgments are subject to an inherent degree of uncertainty. We develop these judgments based on our historical experience, terms of existing contracts, our observance of trends in the industry, and information available from other outside sources, as appropriate. Actual results may differ from these judgments under different assumptions or conditions. Different, reasonable estimates could have been used for the current period. Additionally, changes in accounting estimates are reasonably likely to occur from period to period. Both of these factors could have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations. We believe the accounting policies described below are among the most critical to aid in fully understanding and evaluating our financial statements, as they require estimates which involve our most subjective or complex judgments. Intangible Assets Our sole intangible asset as of December 31, 2020 consisted of DFN-529, which was acquired in 2016 pursuant to our merger with RestorGenex Corporation and is accounted for as an IPR&D intangible asset. The fair value of the IPR&D asset was determined as of the acquisition date using the cost approach, often referred to as current replacement cost, which establishes a value based on the cost of reproducing or replacing the asset. The cost approach was chosen as we were not able to estimate an income stream attributable to the IPR&D asset, given the fact that the related products had only completed limited preclinical and clinical trials and the timeline to commercial viability, if the FDA approval process were to be successful, is uncertain, would take a number of years, and the costs would be significant. As the development efforts for DFN-529 continue, based on the facts and circumstances at the time of a future valuation for the purposes of assessing impairment, it is possible that the value for the IPR&D asset could be substantially reduced or eliminated, which could result in a maximum pre-tax charge to operations equal to the current carrying value of the asset, or $8.6 million as of December 31, 2020. We most recently tested the IPR&D intangible asset for impairment on October 1, 2020, which is our annual impairment testing date. In addition to our annual impairment testing, upon the occurrence of certain triggering events, we may determine that an interim IPR&D impairment analysis is warranted. There was no impairment to the IPR&D asset during the years ended December 31, 2020 and 2019. 42 Results of Operations for Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 The following table summarizes our results of operations for the years ended December 31, 2020 and 2019: Year ended December 31, 2020 2019 Change Operating expenses: Research and development $ 9,427,667 $ 6,619,597 $ 2,808,070 General and administrative 6,444,109 4,834,284 1,609,825 Depreciation 103,168 97,915 5,253 Loss from operations (15,974,944 ) (11,551,796 ) 4,423,148 Interest income 114,257 85,302 28,955 Loss from operations before income taxes (15,860,687 ) (11,466,494 ) (4,394,193 ) Income tax benefit (expense) 1,675,381 (332,885 ) 2,008,266 Net loss $ (14,185,306 ) $ (11,799,379 ) $ (2,385,927 ) Research and development expenses were $9.4 million during the year ended December 31, 2020 compared to $6.6 million during the year ended December 31, 2019, an increase of 42.4%. A significant portion of this increase was attributable to the TSC COVID Trial, which was initiated in September 2020, and our related ramp-up, including a $1.1 million increase in manufacturing costs and a $2.2 million increase in clinical trial and other related R&D expenses. Other R&D costs, including share based compensation, also increased by $0.3 million. These increases were slightly offset by decreases of $0.3 million and $0.2 million related to the wind-down of our TSC GBM Trial and our TSC Stroke Trial, respectively and a decrease in salaries and wages expenses of $0.3 million. General and administrative expenses were $6.4 million during the year ended December 31, 2020 compared to $4.8 million during the year ended December 31, 2019, an increase of 33.3%. The increase in G&A expense was primarily due to a $0.7 million increase in professional fees and a $0.9 million increase in salaries, wages, and stock-based compensation expense, including non-recurring expenses related to the retirement, resignation, and separation of our former Chief Executive Officer in the third quarter of 2020. Interest income increased slightly for the year ended December 31, 2020 compared to the year ended December 31, 2019 on an absolute basis due to our having a larger cash and cash equivalents balance and therefore earning more interest during the year ended December 31, 2020 compared to the year ended December 31, 2019. For the year ended December 31, 2020, we recognized an income tax benefit of $1.7 million to reflect the utilization of indefinite deferred tax liabilities as a source of income against indefinite lived portions of the our deferred tax assets. As a result of a deemed change in ownership under the provisions of Section 382 of the Tax Code, the cumulative benefit of our NOLs was remeasured during 2019 resulting in the reversal of an income tax benefit of $0.4 million recorded in 2018. Accordingly, net of a $0.1 million benefit related to losses incurred during the year, we recognized an income tax expense of $0.3 million for the year ended December 31, 2019. Liquidity and Capital Resources Working Capital The following table summarizes our working capital as of December 31, 2020 and 2019: December 31, 2020 2019 Cash and cash equivalents $ 18,515,595 $ 14,177,349 Prepaid expenses, deposits and other assets 260,825 472,464 Total current liabilities 2,435,783 1,721,421 Working capital $ 16,340,637 $ 12,928,392 We expect to continue to incur net losses for the foreseeable future. We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of TSC and our other product candidates, included the TSC Oxygenation Studies and our Planned Phase 2 Hypoxia-related Indication Trial, through 2023. 43 Cash Flows The following table sets forth our cash flows for the years ended December 31, 2020 and 2019: December 31, Net cash (used in) provided by: 2020 2019 Operating activities $ (13,552,628 ) $ (9,858,375 ) Financing activities 17,890,875 16,044,552 Net increase in cash and cash equivalents $ 4,338,247 $ 6,186,177 Operating Activities For the year ended December 31, 2020, net cash used in operating activities increased $3.7 million, or 37.5%, compared to the year ended December 31, 2019. Net cash used in operating activities of $13.6 million during the year ended December 31, 2020 was primarily attributable to our net loss of $14.2 million and a $1.7 million change in deferred income taxes. This amount was offset by our net change in operating assets and liabilities of $1.5 million, and non-cash charges comprised of $0.7 million of stock-based compensation expense and depreciation expense of $0.1 million. Net cash used in operating activities of $9.9 million during the year ended December 31, 2019 was primarily attributable to our net loss of $11.8 million and a $0.3 million change in deferred income taxes. This amount was offset by our net change in operating assets and liabilities of $1.0 million, and non-cash charges comprised of $0.5 million of stock-based compensation expense and depreciation expense of $0.1 million. Investing Activities Cash flows from investing activities represent our sources and uses of cash from our investments, including purchases and sales of equipment and other assets. During each of the years ended December 31, 2020 and 2019, we had no such cash flows. Financing Activities For the year ended December 31, 2020, net cash provided by financing activities increased $1.8 million, or 11.5%, compared to the year ended December 31, 2019. Net cash provided by financing activities of $17.9 million during the year ended December 31, 2020 was primarily attributable to the $10.8 million in proceeds (net of underwriting discounts and commissions payable by us) received in connection with the May 2020 Offering and $8.0 million in proceeds received in connection with the exercise of common stock warrants stock during the year. These cash inflows were offset in part by the payment of $1.0 million in additional financing costs. Net cash provided by financing activities of $16.0 million during the during the year ended December 31, 2019 was primarily attributable to the $12.3 million in aggregate proceeds (net of underwriting discounts and commissions payable by us) received in connection with the May 2019 Offering, the November 2019 Offering, and the December 2019 Offering and $3.9 million in proceeds received in connection with the exercise of common stock warrants during the year. These cash inflows were offset in part by the payment of $0.2 million in additional financing costs. 44 Capital Requirements We expect to continue to incur substantial expenses and generate significant operating losses as we continue to pursue our business strategy of developing TSC. Our operations have consumed substantial amounts of cash since inception and we expect to continue to spend substantial amounts of cash to advance the clinical development of TSC, DFN-529, and our other product candidates. As of the date of this Annual Report, most our cash resources for clinical development are dedicated to our ongoing and planned TSC Oxygenation Trials and our Planned Phase 2 Hypoxia-related Indication Trial. While we believe we have adequate cash resources to continue operations through 2023, we anticipate that we will need additional funding in order to complete development of TSC which, if available, could be obtained through additional capital raising transactions, entry into strategic partnerships or collaborations, or alternative financing arrangements. As of December 31, 2020, we did not have any credit facilities in place under which we could borrow funds or any other sources of committed capital. In the future, we may seek to raise additional funds through various sources. However, we can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or be on terms acceptable to us. This risk may increase if economic and market conditions deteriorate. If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify, or delay the development of TSC or our product candidates, or we may need to obtain funds through collaborations or otherwise on terms that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. If we are unable to raise adequate additional capital as and when required in the future, we could be forced to cease development activities and terminate our operations, and you could experience a complete loss of your investment. To the extent that we raise additional capital in the future through the sale of our common stock or securities convertible or exchangeable for common stock such as common stock warrants, convertible preferred stock, or convertible debt instruments, the interests of our current stockholders may be diluted or otherwise impacted. In particular, specific rights granted to future holders of preferred stock or convertible debt securities may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC that have or are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements. Recently Issued Accounting Pronouncements The information in Note 3, Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements set forth in Part II — Item 8 — Financial Statements of this Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK As a "smaller reporting company" (as such term is defined in Rule 12b-2 of the Exchange Act), we are not required to provide the information described in Item 305 of Regulation S-K and, accordingly, the information required by Item 6 of Form 10-K has been omitted from this Annual Report. 45