Notes
to the Condensed Consolidated Financial Statements
(unaudited)
(in
thousands, except per share data)
Note
1- Organization and Significant Accounting Policies
Overview
Cocrystal
Pharma, Inc. (“the Company”) has been developing novel technologies and approaches to create first-in-class and best-in-class
antiviral drug candidates since its initial funding in 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.
The
Company was formerly incorporated in Nevada under the name Biozone Pharmaceuticals, Inc. On January 2, 2014, Biozone Pharmaceuticals,
Inc. sold substantially all of its assets to MusclePharm Corporation (“MusclePharm”), and, on the same day, merged
with Cocrystal Discovery, Inc. in a transaction accounted for as a reverse merger. Following the merger, the Company assumed Cocrystal
Discovery, Inc.’s business plan and operations. On March 18, 2014, the Company reincorporated in Delaware under the name
Cocrystal Pharma, Inc.
Effective
November 25, 2014, Cocrystal Pharma, Inc. and affiliated entities completed a series of merger transactions as a result of which
Cocrystal Pharma, Inc. merged with RFS Pharma, LLC, a Georgia limited liability company (“RFS Pharma”). We refer to
the surviving entity of this merger as “Cocrystal” or the “Company.”
Cocrystal
is a biotechnology company that develops novel medicines for use in the treatment of human viral diseases. Cocrystal has developed
proprietary structure-based drug design technology and antiviral nucleoside chemistry to create antiviral drug candidates. Our
focus is to pursue the development and commercialization of broad-spectrum antiviral drug candidates that will transform the treatment
and prophylaxis of hepatitis C, influenza, and norovirus. By concentrating our research and development efforts on viral replication
inhibitors, we plan to leverage our infrastructure and expertise in these areas.
The
Company operates in only one segment. Management uses cash flow as the primary measure to manage its business and does not segment
its business for internal reporting or decision-making.
The
Company’s activities since inception have consisted principally of acquiring product and technology rights, raising capital,
and performing research and development. Successful completion of the Company’s development programs, obtaining regulatory
approvals of its products and, ultimately, the attainment of profitable operations is dependent on future events, including, among
other things, its ability to access potential markets, secure financing, develop a customer base, attract, retain and motivate
qualified personnel, and develop strategic alliances. Through June 30, 2018, the Company has primarily funded its operations through
equity offerings.
The
Company’s historical operating results indicate substantial doubt exists related to the Company’s ability to continue
as a going concern. As of June 30, 2018, the Company had an accumulated deficit of $140,940. During the three and six month period
ended June 30, 2018, the Company had a loss from operations of $2,132 and $4,202, respectively. Cash used in operating activities
was approximately $4,171 for the six months ended June 30, 2018. The Company has not yet established an ongoing source of revenue
sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as
a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. The
Company can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs,
or that any such financing will be obtainable on acceptable terms. If the Company is unable to obtain adequate capital, it could
be forced to cease operations or substantially curtail its drug development activities. The Company expects to continue to incur
substantial operating losses and negative cash flows from operations over the next several years during its pre-clinical and clinical
development phases.
In July 2018, the Company entered into an
Equity Distribution Agreement (the “Distribution Agreement”) with Ladenburg Thalmann & Co. Inc. (“Ladenburg”),
Barrington Research Associates, Inc. (“Barrington”), and AGP (AGP, Ladenburg and Barrington, together the “Sales
Agents”), pursuant to which and at the Company’s sole discretion, may issue and sell over time and from
time to time, to or through the Sales Agents, up to $10,000,000 of shares of the Company’s common stock. The Sales Agents
will use commercially reasonable efforts to sell on our behalf all of the shares requested to be sold by the Company, consistent
with their normal trading and sales practices, subject to the terms of the Distribution Agreement. As of the filing date of this
report, we have not sold any shares of common stock under the Distribution Agreement.
If
we are able to raise at least $2 million from the efforts of the Sales Agents under the Distribution Agreement, we believe we
will have sufficient capital to fund operations for more than 12 months.
On January 18, 2018, the Board of Directors of the Company filed an amendment (the “Amendment”)
with the Delaware Secretary of State to affect a one-for-thirty reverse split (the “Reverse Stock Split”) of the Company’s
class of Common Stock. The Amendment took effect on January 24, 2018. The Reverse Stock Split did not change the authorized number
of shares of Common Stock. Pursuant to the terms of the Company’s previously outstanding convertible notes (See Note 3 -
Convertible Notes Payable), its options and warrants have been proportionately adjusted to reflect the Reverse Stock Split, and,
pursuant to their terms, a proportionate adjustment was made to the per share exercise price and number of shares issuable under
all of the Company’s outstanding stock options, convertible notes and warrants to Common Stock, and the number of shares
reserved for issuance pursuant to the Company’s equity compensation plans have been reduced proportionately.
All
per share amounts and number of shares in the consolidated financial statements and related notes have been retroactively restated
to reflect the Reverse Stock Split.
Segments
The
Company operates in only one segment. Management uses cash flow as the primary measure to manage its business and does not segment
its business for internal reporting or decision-making.
Basis
of Presentation and Significant Accounting Policies
The
accompanying condensed consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange
Commission (“SEC”). Certain information and footnote disclosures, normally included in annual financial statements
prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), have been condensed or omitted
pursuant to those rules and regulations. We believe disclosures made are adequate to make the information presented not misleading.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to fairly state the financial
position, results of operations and cash flows with respect to the interim condensed consolidated financial statements have been
included. The results of operations for the interim periods are not necessarily indicative of the results of operations for the
entire fiscal year. All intercompany accounts and transactions have been eliminated in consolidation. Reference is made to the
audited annual financial statements of Cocrystal Pharma, Inc. included in our Annual Report on Form 10-K for the year ended December
31, 2017 filed on March 21, 2018 (“Annual Report”), which contain information useful to understanding the Company’s
business and financial statement presentations. The condensed consolidated balance sheet as of December 31, 2017 was derived from
the Company’s most recent audited financial statements, but does not include all disclosures required by GAAP for a year-end
balance sheet. Our significant accounting policies and practices are presented in Note 2 to the financial statements included
in the Form 10-K.
Use
of Estimates
Preparation
of the 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 financial statements
and the reported amounts of expenses during the reporting period. We continually evaluate estimates used in the preparation of
the condensed consolidated financial statements for reasonableness. Appropriate adjustments, if any, to the estimates used are
made prospectively based upon such periodic evaluation. The significant areas of estimation include determining the deferred tax
valuation allowance, estimating accrued clinical expenses, the inputs in determining the fair value of the in-process research
and development (“IPR&D”) and goodwill as part of the annual impairment analysis, the inputs in determining the
fair value of equity-based awards and warrants issued as well as the values ascribed to assets acquired and liabilities assumed
in business combinations. Actual results may differ from estimates made.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash
equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits.
The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash.
Risks
and Uncertainties
The
Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s
future operating results and cause actual results to vary materially from expectations include, but are not limited to, rapid
technological change, regulatory approvals, competition from current treatments and therapies and larger companies, protection
of proprietary technology, strategic relationships and dependence on key individuals.
Products
developed by the Company will require approvals from the U.S. Food and Drug Administration (the “FDA”) and other international
regulatory agencies prior to commercial sales in their respective markets. The Company’s products may not receive the necessary
clearances and if they are denied clearance, clearance is delayed or the Company is unable to maintain clearance, the Company’s
business could be materially adversely impacted.
Property
and Equipment
Property
and equipment, which consists of lab equipment, computer equipment, and office equipment, are stated at cost and depreciated over
the estimated useful lives of the assets (three to five years) using the straight-line method.
Goodwill
and In-Process Research and Development
The
Company’s intangible assets determined to have indefinite useful lives including in-process research and development (“IPR&D”)
and goodwill, are tested for impairment annually, or more frequently if events or circumstances indicate that the assets might
be impaired. Such circumstances could include but are not limited to: (1) a significant adverse change in legal factors or in
business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator.
Goodwill
represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired
in a business combination. IPR&D acquired in a business combination is capitalized as an intangible asset and tested for impairment
at least annually until commercialization, after which time the IPR&D is amortized over its estimated useful life.
The
Company has established November 30
th
as the date for its annual impairment test of goodwill and IPR&D, unless
indicators of impairment exist at interim periods.
The
impairment test of goodwill requires us to compare the estimated fair value of the reporting unit to its carrying value. If the
carrying value of the reporting unit is lower than its estimated fair value, no further evaluation is required. If the carrying
value of the reporting unit exceeds its estimated fair value, an impairment charge is recorded for that excess, limited to the
total amount of goodwill allocated to that reporting unit.
The
indefinite-life intangible asset impairment test consists of a comparison of the fair value of the indefinite-life intangible
asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal
to that excess. If the fair value exceeds its carrying amount, the indefinite-life intangible asset is not considered impaired.
As of June 30, 2018, the Company had a goodwill
balance of $65 million. The Company’s annual impairment assessment date is November 30, 2017. The decline in the Company’s
market capitalization during the quarter ended June 30, 2018 was identified as an indicator of possible impairment and resulted
in the Company performing an interim assessment for goodwill impairment. The Company engaged an outside valuation firm to assist
management with performing the assessment as of June 30, 2018. The results of management’s assessment
were that the Company’s fair market value exceeded its book value by approximately $25 million as of June 30, 2018.
As a result, the Company concluded that its goodwill was not impaired as of June 30, 2018.
Long-Lived
Assets
The
Company regularly reviews the carrying value and estimated lives of all of its long-lived assets, including property and equipment,
to determine whether indicators of impairment may exist, which warrant adjustments to the carrying values or estimated useful
lives. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate
positive income from operations and positive cash flow in future periods as well as the strategic significance of the assets to
the Company’s business objective. Should an impairment exist, the impairment loss would be measured based on the excess
of the carrying amount over the asset’s fair value.
Mortgage
Note Receivable
As
discussed in Note 8 – Mortgage Note Receivable, the Company’s mortgage note receivable was collected in full
during the three months ended March 31, 2018.
The
Company recorded its mortgage note receivable at the amount advanced to the borrower, which included the stated principal amount
and certain loan origination and commitment fees that are recognized over the term of the mortgage note. Interest income was accrued
as earned over the term of the mortgage note. The Company evaluated the collectability of both interest and principal of the note
to determine whether it is impaired. The note would have been considered to be impaired if, based on current information and events,
the Company determined that it was probable that it would be unable to collect all amounts due according to the existing contractual
terms. Upon determination that the note was impaired, the amount of loss would have been calculated by comparing the recorded
investment to the value determined by discounting the expected future cash flows at the note’s effective interest rate or
to the fair value of the Company’s interest in the underlying collateral, less the cost to sell.
Research
and Development Expenses
All
research and development costs are expensed as incurred.
Income
Taxes
The
Company accounts for income taxes under the asset and liability method. 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
enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization
of deferred tax assets is dependent upon future taxable income. A valuation allowance is recognized if it is more likely than
not that some portion or all of a deferred tax asset will not be realized based on the weight of available evidence, including
expected future earnings. The Company recognizes an uncertain tax position in its financial statements when it concludes that
a tax position is more likely than not to be sustained upon examination based solely on its technical merits. Only after a tax
position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured
as the largest amount of benefit that is more likely than not to be realized upon effective settlement. This is determined on
a cumulative probability basis. The full impact of any change in recognition or measurement is reflected in the period in which
such change occurs. The Company elects to accrue any interest or penalties related to income taxes as part of its income tax expense.
Stock-Based
Compensation
The
Company recognizes compensation expense using a fair-value-based method for costs related to stock-based payments, including stock
options. The fair value of options awarded to employees is measured on the date of grant using the Black-Scholes option pricing
model and is recognized as expense over the requisite service period on a straight-line basis.
Use
of the Black-Scholes option pricing model requires the input of subjective assumptions including expected volatility, expected
term, and a risk-free interest rate. The Company estimates volatility using a blend of its own historical stock price volatility
as well as that of market comparable entities since the Company’s common stock has limited trading history and limited observable
volatility of its own. The expected term of the options is estimated by using the Securities and Exchange Commission Staff Bulletin
No. 107’s
Simplified Method for Estimate Expected Term
. The risk-free interest rate is estimated using comparable
published federal funds rates.
Convertible
Notes Payable
The
Company accounts for convertible notes payable (when it has determined that the embedded conversion options should not be bifurcated
from their host instruments) in accordance with ASC 470-20,
Debt with Conversion and Other Options
. Accordingly, the Company
records, when necessary, discounts to convertible notes payable for the intrinsic value of conversion options embedded in debt
instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note
transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over
the term of the related debt to their earliest date of redemption. The Company determined that the embedded conversion options
in its issued convertible notes payable do not meet the definition of a derivative liability.
Common
Stock Purchase Warrants and Other Derivative Financial Instruments
We
classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement
or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our
own stock as defined in ASC 815-40,
Contracts in Entity’s Own Equity
. We classify as assets or liabilities any contracts
that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event
is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement
or net-share settlement). We assess classification of our common stock purchase warrants and other freestanding derivatives at
each reporting date to determine whether a change in classification between assets and liabilities is required.
Recent
Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02,
Leases
(Topic 842). ASU 2016-02 impacts any entity that enters into a lease with some specified scope exceptions.
This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on
the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the statement of operations. The guidance updates and supersedes
Topic 840,
Leases
. For public entities, ASU 2016-02 is effective for fiscal years, and interim periods with those years,
beginning after December 15, 2018, and early adoption is permitted. A modified retrospective transition approach is required for
leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements,
with certain practical expedients available. The Company has not yet implemented this guidance. However, based on the Company’s
current operating lease arrangements, the Company does not expect the adoption of this standard to have a material impact on its
financial statements based upon current obligations.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows
(Topic 230): Restricted Cash (“ASU No. 2016-18”).
The guidance requires that an explanation is included in the cash flow statement of the change in the total of (1) cash, (2) cash
equivalents, and (3) restricted cash or restricted cash equivalents. The ASU also clarifies that transfers between cash, cash
equivalents and restricted cash or restricted cash equivalents should not be reported as cash flow activities and requires the
nature of the restrictions on cash, cash equivalents, and restricted cash or restricted cash equivalents to be disclosed. For
public companies, the standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017 with earlier application permitted. We early adopted ASU 2016-18 at December 31, 2017 and disclosure revisions
have been made for the years presented on the Consolidated Statements of Cash Flows. All prior periods have been adjusted.
In
January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
. The guidance in ASU 2017-04 eliminates
the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment.
Under the new guidance, the reporting unit’s fair value is compared to its carrying amount. If the carrying amount exceeds
the fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s
fair value. The guidance is effective for annual or any interim goodwill impairment tests in the year beginning January 1, 2020.
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The Company adopted this standard as of January 1, 2017 and there was no impact to its consolidated financial statements.
In
March 2018, the FASB issued ASU No. 2018-05,
Income Taxes
(Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 118. The amendments in this Update add various Securities and Exchange Commissions (“SEC”)
paragraphs pursuant to the issuance of SEC Accounting Bulleting No. 118, Income Tax Accounting Implications of the Tax Cuts and
Jobs Act (“Act”) (“SAB 118”). The SEC issued SAB 118 of the Act in the period of enactment. SAB 118 allows
disclosure that timely determination of some or all of the income tax effects from the Act are incomplete by the due date of the
financial statements and if possible provide a reasonable estimate. The Company has provided a reasonable estimate in the notes
to the consolidated financial statements. See Note 9. Income Taxes.
In
June 2018, the FASB issued ASU No. 2018-07,
Compensation – Stock Compensation: Improvements to Nonemployee Share-Based
Payment Accounting
(Topic 718). The guidance in ASU 2018-07 simplifies the accounting for nonemployee share-based payment
transactions by expanding the scope of ASC Topic 718, Compensation – Stock Compensation, to include share-based payment
transactions for acquiring goods and services from nonemployees. Under the new guidance, most of the guidance on stock compensation
payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The guidance is
effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual
reporting periods, with early adoption permitted. The company is currently evaluating the potential impact of this accounting
standard. The Company does not expect the adoption of this standard will have a material impact to its consolidated financial
statements.
Note
2 – Fair Value Measurements
FASB
Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value
under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under
ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the
use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first
two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
|
Level
1 — quoted prices in active markets for identical assets or liabilities.
|
|
Level
2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the
measurement date.
|
|
Level
3 — significant unobservable inputs that reflect management’s best estimate of what market participants would
use to price the assets or liabilities at the measurement date.
|
The
Company categorizes its cash equivalents as Level 1 fair value measurements. The Company categorizes its warrants potentially
settleable in cash as Level 3 fair value measurements. The warrants potentially settleable in cash are measured at fair value
on a recurring basis and are being marked to fair value at each reporting date until they are completely settled or meet the requirements
to be accounted for as component of stockholders’ equity. The warrants are valued using the Black-Scholes option-pricing
model as discussed in Note 5 below.
The
following table presents a summary of fair values of assets and liabilities that are re-measured at fair value at each balance
sheet date as of June 30, 2018 and December 31, 2017, and their placement within the fair value hierarchy as discussed above (in
thousands):
|
|
|
|
|
Quoted
Prices in
Active
Markets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
Description
|
|
June
30, 2018
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,870
|
|
|
$
|
6,870
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
assets
|
|
$
|
6,870
|
|
|
$
|
6,870
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
potentially settleable in cash
|
|
$
|
288
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
288
|
|
Total
liabilities
|
|
$
|
288
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
288
|
|
|
|
|
|
|
Quoted
Prices in
Active
Markets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
Description
|
|
December
31, 2017
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
777
|
|
|
$
|
777
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
assets
|
|
$
|
777
|
|
|
$
|
777
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
potentially settleable in cash
|
|
$
|
569
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
569
|
|
Total
liabilities
|
|
$
|
569
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
569
|
|
The
Company has not transferred any financial instruments into or out of Level 3 classification during the six months ended June 30,
2018 or 2017. A reconciliation of the beginning and ending Level 3 liabilities for the six months ended June 30, 2018 and 2017
is as follows (in thousands):
|
|
Fair
Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
June
30, 2018
|
|
|
|
June
30, 2017
|
|
Balance,
January 1,
|
|
$
|
569
|
|
|
$
|
1,476
|
|
Change
in fair value of warrants
|
|
|
(281
|
)
|
|
|
(769
|
)
|
Balance
at June 30,
|
|
$
|
288
|
|
|
$
|
707
|
|
Note
3 – Convertible Notes Payable
On
November 24, 2017, the Company entered into a Securities Purchase Agreement with two accredited investors, including the Company’s
Chairman of the Board, pursuant to which the Company sold an aggregate principal amount of $1,000,000 of its 8% convertible notes
(“Nov 2017 Notes”) due November 24, 2019. At the option of the Purchaser, the Nov 2017 Notes were convertible at $8.10
per share. In the event the Company completed a financing in which the Company receives at least $10,000,000 in gross proceeds
and issued common stock or common stock equivalents to the investor (a “Financing”) or there is a change of control
of the Company (or sale of substantially all of the Company’s assets), the outstanding principal amount of the Nov 2017
Notes would automatically convert. Upon the closing of a Financing, the conversion price of the Nov 2017 Notes shall be the lesser
of (i) $8.10 per share or (ii) the price per share of the securities sold in the Financing.
On
January 31, 2018, the Company, entered into a Securities Purchase Agreement (the “SPA”) with OPKO Health, Inc. (the
“Purchaser”), pursuant to which the Company borrowed $1,000,000 from the Purchaser in exchange for issuing the Purchaser
an 8% Convertible Note (the “Note”) due January 31, 2020. At the option of the Purchaser, the Note was convertible
at $8.10 per share. In the event the Company completed a financing in which the Company receives at least $10,000,000 in gross
proceeds and issues common stock or common stock equivalents to the investor (a “Financing”) or there is a change
of control of the Company (or sale of substantially all of the Company’s assets), the outstanding principal amount of the
Note would automatically convert. Upon the closing of a Financing, the conversion price of the Note shall be the lesser of (i)
$8.10 per share and (ii) the price per share of the securities sold in the Financing.
The
Company evaluated the embedded conversion features within the above convertible notes under ASC 815-15 and ASC 815-40 to determine
if they required bifurcation as a derivative instrument. The Company determined the embedded conversion features do not meet the
definition of a derivative liability, and therefore, do not require bifurcation from the host instrument. In addition, the down-round
provision under which the conversion price could be affected by future equity offerings, qualified for a scope exception from
derivative accounting with the Company’s early adoption of ASU 2017-11,
Simplifying Accounting for Certain Financial
Instruments with Characteristics of Liabilities and Equity
, during the year ended December 31, 2017. Since the embedded conversion
features were not considered derivatives, the convertible notes were accounted for accordance with ASC 470-20,
Debt with Conversion
and Other Options
.
Although
the gross proceeds in the recent public offering were not $10 million, in May 2018, the Company issued a total of 1,085,105 of
common stock upon conversion of all of the outstanding 8% convertible notes payable at $1.90 per share, which was the offering
price in our recently closed public offering. The number of shares was based on the aggregate amount of the principal and accrued
interest of $2,062,000 as of the date of the conversion. The conversion was approved by disinterested members of our Board of
Directors.
Note
4 – Stockholders’ equity
The
Company has authorized up to 800 million shares of common stock at June 30, 2018, $0.001 par value per share, and had 29,923,076
shares issued and outstanding as of June 30, 2018. Subsequently on August 6, 2018, the Company held its 2018 Annual Meeting
of Shareholders and voted to reduce the number of shares of common stock, $0.001 par value per share, authorized from 800 million
to 100 million shares.
On
January 18, 2018, the Board of Directors of the Company filed an amendment (the “Amendment”) with the Delaware Secretary
of State to effect a one-for-thirty reverse split of the Company’s class of Common Stock. The Amendment took effect on January
24, 2018. No fractional shares will be issued or distributed as a result of the Amendment. There was no change in the par value
of our common stock.
On
May 3, 2018, the Company closed a public offering for gross proceeds and net proceeds of approximately $8 million and $7.7 million,
respectively. The Company sold 4,210,527 shares of common stock to the underwriter at approximately $1.767 per share, which the
underwriter sold to the public at $1.90 per share, and issued the underwriter a warrant to purchase 84,211 shares of common stock
at $2.09 per share over a four year period beginning October 27, 2018. On May 14, 2018, the underwriter exercised the option to
purchase an additional 225,000 shares of common stock solely to cover overallotments. As of June 30, 2018, the underwriter has
no further option to purchase additional shares.
On
May 21, 2018, the Company issued a total of 1,085,105 of common stock upon conversion of all of our outstanding 8% convertible
notes. See Note 3 - Convertible Notes Payable.
Shares
of common stock authorized for future issuance are as follows as of June 30, 2018 (in thousands):
|
|
As
of
June 30, 2018
|
|
Stock
options issued and outstanding
|
|
|
426
|
|
Authorized
for future option grants
|
|
|
1,813
|
|
Warrants
outstanding
|
|
|
243
|
|
Total
|
|
|
2,482
|
|
Note
5 – Warrants
The
following is a summary of activity in the number of warrants outstanding to purchase the Company’s common stock for the
six months ended June 30, 2018 (in thousands):
|
|
Warrants
accounted for as:
Equity
|
|
|
Warrants
accounted for as:
Liabilities
|
|
|
|
|
|
|
May
2018
warrants
|
|
|
April
2013
warrants
|
|
|
October
2013
Series A
warrants
|
|
|
January
2014
warrants
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2017
|
|
-
|
|
|
50
|
|
|
26
|
|
|
133
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
Issued
|
|
84
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
84
|
|
Warrants
Expired
|
|
-
|
|
|
(50
|
)
|
|
-
|
|
|
-
|
|
|
(50
|
)
|
Warrants
exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding,
June 30, 2018
|
|
84
|
|
|
-
|
|
|
26
|
|
|
133
|
|
|
243
|
|
Expiration
date
|
|
October
27, 2022
|
|
|
April
25, 2018
|
|
|
October
24, 2023
|
|
|
January
16, 2024
|
|
|
|
|
Warrants
consist of warrants potentially settleable in cash, which are liability-classified warrants, and equity-classified warrants.
Warrants
classified as liabilities
Liability-classified
warrants consist of warrants issued in connection with equity financings in October 2013 and January 2014. The outstanding warrants
are potentially settleable in cash and were determined not to be indexed to the Company’s own stock and are therefore accounted
for as liabilities.
The
estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. Any decrease
or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the consolidated
statement of comprehensive loss as changes in fair value of derivative liabilities. The fair value of the warrants classified
as liabilities is estimated using the Black-Scholes option-pricing model with the following inputs as of June 30, 2018:
|
|
October
2013
warrants
|
|
|
January
2014
warrants
|
|
|
|
|
|
|
|
|
Strike
price
|
|
$
|
15.00
|
|
|
$
|
15.00
|
|
|
|
|
|
|
|
|
|
|
Expected
term (years)
|
|
|
5.32
|
|
|
|
5.55
|
|
Cumulative
volatility %
|
|
|
88.17
|
%
|
|
|
88.59
|
%
|
Risk-free
rate %
|
|
|
2.74
|
%
|
|
|
2.75
|
%
|
The
Company’s expected volatility is based on a combination of the Company’s own historical volatility and the implied
volatilities of similar publicly traded entities given that the Company has limited history of its own observable stock price.
The expected life assumption is based on the remaining contractual terms of the warrants. The risk-free rate is based on the zero
coupon rates in effect at the balance sheet date. The dividend yield used in the pricing model is zero, because the Company has
no present intention to pay cash dividends.
Warrants
classified as equity
Warrants
that were recorded in equity at fair value upon issuance, and are not reported as liabilities on the balance sheet, are included
in the above table which shows all warrants.
Note
6 – Stock-based compensation
The
Company recorded approximately $107,000 and $212,000 of stock-based compensation related to employee stock options for the three
and six months ended June 30, 2018 and $54,000 and $268,000 for the three and six months ended June 30, 2017, respectively. As
of June 30, 2018, there was $334,000 of unrecognized compensation cost related to outstanding options that is expected to be recognized
as a component of the Company’s operating expenses over a weighted average period of 0.8 years.
As
of June 30, 2018, an aggregate of 2,239,000 shares of common stock were reserved for issuance under the Company’s Equity
Incentive Plans, including 426,000 shares subject to outstanding common stock options granted under the plan and 1,813,000 shares
available for future grants. The administrator of the plan determines the times when an option may become exercisable at the time
of grant. Vesting periods of options granted to date have not exceeded five years. The options generally will expire, unless previously
exercised, no later than ten years from the grant date. The Company is using unissued shares for all shares issued for options
and restricted share awards.
The
following schedule presents activity in the Company’s outstanding stock options for the six months ended June 30, 2018 (in
thousands, except per share amounts):
|
|
|
Number
of
Shares
available
for Grant
|
|
|
Total
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance
at December 31, 2017
|
|
|
|
1,656
|
|
|
|
711
|
|
|
$
|
8.39
|
|
|
$
|
1,640
|
|
Exercised
|
|
|
|
-
|
|
|
|
(128
|
)
|
|
|
1.45
|
|
|
|
-
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
|
157
|
|
|
|
(157
|
)
|
|
|
3.01
|
|
|
|
-
|
|
Balance
at June 30, 2018
|
|
|
|
1,813
|
|
|
|
426
|
|
|
$
|
12.44
|
|
|
$
|
1,192
|
|
As
of June 30, 2018, options to purchase 425,637 shares of common stock, with an aggregate intrinsic value of $57,000, were outstanding
that were fully vested or expected to vest with a weighted average remaining contractual term of 2.8 years. As of June 30, 2018,
options to purchase 411,052 shares of common stock, with an intrinsic value of 57,000 were exercisable with a weighted average
exercise price of $11.64 per share and a weighted average remaining contractual term of 2.6 years. The aggregate intrinsic value
of outstanding and exercisable options at June 30, 2018 was calculated based on the closing price of the Company’s common
stock as reported on the NASDAQ markets on June 29, 2018 of $3.66 per share less the exercise price of the options. The aggregate
intrinsic value is calculated based on the positive difference between the closing fair market value of the Company’s common
stock and the exercise price of the underlying options.
Note
7 – Net Loss per Share
The
Company accounts for and discloses net loss per common share in accordance with FASB ASC Topic 260,
Earnings Per Share
.
Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number
of common shares outstanding. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders
by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common
shares for all potential dilutive common shares outstanding. Potential common shares consist of shares issuable upon the exercise
of stock options and warrants. Because the inclusion of potential common shares would be anti-dilutive for the three and six months
ended June 30, 2018, diluted net loss per common share is the same as basic net loss per common share for these two periods.
The
following table sets forth the number of potential common shares excluded from the calculations of net loss per diluted share
because their inclusion would be anti-dilutive (in thousands):
|
|
For
the three months ended
June 30
|
|
|
For
the six months ended
June 30
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Options
to purchase common stock
|
|
|
426
|
|
|
|
768
|
|
|
|
426
|
|
|
|
768
|
|
Warrants
to purchase common stock
|
|
|
243
|
|
|
|
209
|
|
|
|
243
|
|
|
|
209
|
|
Total
|
|
|
669
|
|
|
|
977
|
|
|
|
669
|
|
|
|
977
|
|
Note
8 - Mortgage Note Receivable
In
June 2014, the Company acquired a mortgage note from a bank for $2,626,290 which was collateralized by, among other things, the
underlying real estate and related improvements. The property subject to the mortgage was owned by an entity managed by Daniel
Fisher, one of the founders of Biozone, the property was also under lease to MusclePharm. The mortgage note had a maturity date
of August 1, 2032 and bears an interest rate of 7.24%.
Shortly
thereafter in 2014, Daniel Fisher and his affiliate, 580 Garcia Properties LLC (the primary obligor of the note), brought multiple
lawsuits against the Company involving its predecessors and subsidiaries. The lawsuits were later settled and the complaints dismissed,
without the Company making any payments to either Mr. Fisher or 580 Garcia Properties LLC. At the time of the note’s acquisition,
580 Garcia Properties LLC was delinquent in its obligation to make monthly payments. In December 2015, the Company proceeded in
accordance with rights of a secured real estate creditor under California law, to initiate private foreclosure proceedings. During
2017, the court enjoined the Company from proceeding with the foreclosure sale pending further developments in the litigation.
In
February 2018, the Company, Daniel Fisher, and 580 Garcia Properties LLC resolved all outstanding claims and disputes. As part
of this settlement, the Company received a payment of $1.4 million in exchange for the release of the aforementioned note and
deed of trust.
N
ote
9 – Income Taxes
Deferred
income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between
the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount
of deferred tax assets that, based on available evidence, are not expected to be realized.
As
a result of the Company’s cumulative losses, management has concluded that a full valuation allowance against the Company’s
net deferred tax assets is appropriate. The Company has recorded a net deferred tax liability of $12,609,000 as of June 30, 2018
and $13,582,000 December 31, 2017, which is related to acquired in-process research and development considered to be an indefinite-lived
intangible.
The
Company’s effective income tax rate was 25% and 0% for the six-months ended June 30, 2018 and June 30, 2017, respectively.
The primary driver of the effective tax rate for the six months ended June 30 2018 is the 21% federal tax rate for corporations
(see discussion below). The primary driver of the effective tax rate for the six months ended June 30, 2017 is the valuation allowance
offsetting the Company’s net deferred tax assets.
Management
assesses its deferred tax assets quarterly to determine whether all or any portion of the asset is more likely than not unrealizable
under ASC 740. The Company is required to establish a valuation allowance for any portion of the asset that management concludes
is more likely than not to be unrealizable. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences become deductible. The Company’s assessment
considers all evidence, both positive and negative, including the nature, frequency and severity of any current and cumulative
losses, taxable income in carryback years, the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected
future taxable income in making this assessment.
FASB
ASC Topic 740,
Income Taxes
(“ASC 740”), prescribes a recognition threshold and a measurement criterion for
the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those
benefits to be recognized, a tax position must be considered more likely than not to be sustained upon examination by taxing authorities.
The Company records interest and penalties related to uncertain tax positions as a component of the provision for income taxes.
As of June 30, 2018 and December 31, 2017, the Company had no gross unrecognized tax benefits.
The
Company currently files income tax returns in the United States federal and various state jurisdictions. The Company is not currently
under examination in any jurisdiction.
In
December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the
Internal revenue Code including a permanent reduction to the US corporate statutory rate from 35% to 21% effective for tax years
beginning after December 31, 2017. In accordance with ASU 2018-05 and SAB 118, the Company recognized the provisional tax impacts
to the re-measurement of our deferred tax assets and liabilities during the year ended December 31, 2017. As of June 30, 2018,
we have not made any additional measurement-period adjustments related to these items. Such adjustments may be necessary in future
periods due to, among other things, the significant complexity of the Act and anticipated actions the Company may take as a result
of the Act. We are continuing to gather information and assess the application of the Act and expect to complete our analysis
with the filing of our 2017 income tax returns.
Note
10 - Contingencies
From
time to time, the Company is a party to, or otherwise involved in, legal proceedings arising in the normal course of business.
As of the date of this report, except as described below, the Company is not aware of any proceedings, threatened or pending,
against it which, if determined adversely, would have a material effect on its business, results of operations, cash flows or
financial position.
Note
11 - Transactions with Related Parties
Since
November 2014, the Company has leased its Tucker, Georgia facility from a limited liability company owned by one of Cocrystal’s
directors and principal shareholder, Dr. Raymond Schinazi. Currently, this facility is being leased on a month-to-month basis.
On an annualized basis, rent expense for this location would be approximately $44,000. The total rent expense was $22,000 and
$111,000 for the six months ended June 30, 2018 and 2017, respectively.
Note
12 – Subsequent Events
Equity
Distribution Agreement
On
July 19, 2018, Cocrystal Pharma, Inc. (the “Company”) entered into an Equity Distribution Agreement (the “Distribution
Agreement”) with Ladenburg Thalmann & Co. Inc. (“Ladenburg”), Barrington Research Associates, Inc. (“Barrington”),
and A.G.P./Alliance Global Partners (“AGP,” and together with Ladenburg and Barrington, the “Sales Agents”),
pursuant to which the Company may issue and sell over time and from time to time, to or through the Sales Agents, up to $10,000,000
of shares of the Company’s common stock (the “Shares”). Sales of the Shares, if any, may be made in negotiated
transactions or transactions that are deemed to be an “at-the-market offering”.