NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Business
Cocrystal
Pharma, Inc. (“we”, the “Company” or “Cocrystal”), a clinical stage biopharmaceutical 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.
On
January 18, 2018, the Company’s Board of Directors (the “Board”) 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 then outstanding convertible notes (see Note 7 –
Convertible Notes Payable), its options and warrants have been proportionately adjusted to reflect the Reverse Stock Split. A
proportionate adjustment was made to the per share exercise price, number of shares issued, and shares reserved for issuance under
all of the Company’s equity compensation plans.
All
per share amounts and number of shares in the condensed consolidated financial statements and related notes presented have been
retroactively restated to reflect the Reverse Stock Split.
The
Company’s activities since inception have principally consisted of acquiring potential 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 and maintain strategic alliances. Through December 31, 2018, the Company has primarily funded
its operations through equity offerings.
On
January 31, 2019, the Company received an upfront non-refundable payment of $4,000,000 and anticipates future payments for employees
and research expense reimbursements over the term of our collaboration with Merck Sharp & Dohme Corp. (“Merck”),
effective January 2, 2019 (refer to Note 10 – Licenses and Collaborations).
The
Company’s historical operating results indicate substantial doubt exists related to the Company’s ability to continue
as a going concern. The Company has no pharmaceutical products approved for sale, has not generated any revenues to date from
pharmaceutical product sales, and has incurred significant operating losses since inception. The Company has incurred losses from
operations of $481,000 and $6,621,000 in the nine months ended September 30, 2019 and 2018,
respectively, and incurred losses from operations of $1,808,000 and $2,419,000 in the three months ended September 30,
2019 and 2018, respectively.
The
Company will need to continue obtaining adequate capital to fund its operations until it becomes profitable on a consistent basis.
The Company can give no assurances that the additional capital it is able to raise, 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 incurring
substantial operating losses and negative cash flows from operations over the next several years during its pre-clinical and clinical
development phases. The accompanying financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts and the classification of liabilities should the Company be unable to continue as a going concern.
2.
Basis of Presentation and Significant Accounting Policies
Basis
of Presentation
The
accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted
accounting principles (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10
of Regulation S-X set forth by the Securities and Exchange Commission (“SEC”). They do not include all of the information
and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The
results of operations for the interim periods presented are not necessarily indicative of the results of operations for the entire
fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s
annual report on Form 10-K for the year ended December 31, 2018 filed on April 1, 2019 (“Annual Report”).
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of Cocrystal Pharma, Inc. and its wholly owned subsidiaries:
RFS Pharma, LLC, Cocrystal Discovery, Inc., Cocrystal Merger Sub, Inc., Baker Cummins Corp. and Biozone Laboratories, Inc. Intercompany
transactions and balances have been eliminated.
Segments
The
Company operates in only one segment. Management uses cash flows as the primary measure to manage its business and does not segment
its business for internal reporting or decision-making.
Use
of Estimates
Preparation
of the Company’s condensed consolidated financial statements in conformance with U.S. GAAP requires the Company’s
management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses, and
the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and accompanying
notes. The significant estimates in the Company’s condensed consolidated financial statements relate to the valuation of
equity awards and derivative liabilities, recoverability of deferred tax assets, estimated useful lives of fixed assets, and forecast
assumptions used in the valuation of intangible assets and goodwill. The Company bases estimates and assumptions on historical
experience, when available, and on various factors that it believes to be reasonable under the circumstances. The Company evaluates
its estimates and assumptions on an ongoing basis, and its actual results may differ from estimates made under different assumptions
or conditions.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash deposited
in accounts held at two United States financial institutions, which may, at times, exceed federally insured limits of $250,000
for each institution where accounts are held. At September 30, 2019 and December 31, 2018, our primary operating account held
approximately $5,994,000 and $2,723,000 and our collateral account balance held at a different institution was $50,000 and $29,000,
respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risks
thereof.
Cash
and Restricted Cash
The
Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to
be cash equivalents, and the Company held no cash equivalents as of September 30, 2019 and 2018, nor as of December 31, 2018.
The
following table provides a reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Cash
|
|
$
|
5,994
|
|
|
$
|
4,684
|
|
Restricted cash
|
|
|
50
|
|
|
|
29
|
|
Total cash and restricted cash shown in the statements of cash flows
|
|
$
|
6,044
|
|
|
$
|
4,713
|
|
Restricted
cash represents amounts pledged as collateral for financing arrangements that are currently limited to the issuance of business
credit cards. The restriction will end upon the conclusion of these financing arrangements.
Leases
Prior
to January 1, 2019, the Company accounted for leases under Accounting Standards Codification (“ASC”) 840, Accounting
for Leases. Effective from January 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity
to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified
retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior
to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods.
The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease right-of-use assets and lease liabilities
of approximately $833,000 and did not result in a cumulative-effect adjustment to accumulated deficit.
Fair
Value Measurements
FASB
Accounting Standards Codification 820 (“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 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 9 – Warrants.
The
following tables present a summary of fair values of assets and liabilities that are re-measured at fair value at each balance
sheet date presented as of September 30, 2019 and December 31, 2018, 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
|
|
September 30, 2019
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash
|
|
$
|
6,044
|
|
|
$
|
6,044
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
$
|
6,044
|
|
|
$
|
6,044
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants potentially settleable in cash (Note 9)
|
|
$
|
90
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
90
|
|
Total liabilities
|
|
$
|
90
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
90
|
|
|
|
|
|
|
Quoted
Prices in
Active
Markets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
Description
|
|
December 31, 2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash
|
|
$
|
2,752
|
|
|
$
|
2,752
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
$
|
2,752
|
|
|
$
|
2,752
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants potentially settleable in cash (Note 9)
|
|
$
|
263
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
263
|
|
Total liabilities
|
|
$
|
263
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
263
|
|
The
Company has not transferred any financial instruments into or out of Level 3 classification during the nine months ended September
30, 2019 and 2018. A reconciliation of the beginning and ending Level 3 liabilities is as follows (in thousands):
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Balance, January 1,
|
|
$
|
263
|
|
|
$
|
569
|
|
Change in fair value of warrants potentially settleable in cash (Note 9)
|
|
|
(173
|
)
|
|
|
(410
|
)
|
Balance at September 30,
|
|
$
|
90
|
|
|
$
|
159
|
|
Goodwill
and In-Process Research and Development
We
account for business combinations using the acquisition method, recording the acquisition-date fair value of total consideration
over the acquisition-date fair value of net assets acquired as goodwill. Acquisition-related costs, including banking, legal,
accounting, valuation, and other similar costs, are expensed in the periods in which the costs are incurred and included in loss
from operations in the condensed consolidated financial statements. The results of operations of the acquired business are included
in the condensed consolidated financial statements from the acquisition date.
In
November 2014, goodwill and intangible assets for in-process research and development were recorded in connection with the acquisition
of RFS Pharma, and have represented a series of awarded patents, filed patent applications and an in-process research programs
acquired related to Hepatitis C compound development.
We
evaluate indefinite-lived intangible assets and goodwill for impairment annually, as of November 30, or more frequently when events
or circumstances indicate that impairment may have occurred. As part of the impairment evaluation, we may elect to perform an
assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value
of the indefinite-lived intangible asset or the reporting unit (for goodwill) is less than its carrying value, we then would proceed
with the quantitative impairment test to compare the fair value to the carrying value and record an impairment charge if the carrying
value exceeds the fair value.
Fair
value is typically estimated using an income approach based on the present value of future discounted cash flows. The significant
estimates in the discounted cash flow model primarily include the discount rate, and rates of future revenue and expense growth
and/or profitability of the acquired assets. In performing the impairment test, the Company considered, among other factors, the
Company’s intention for future use of acquired assets, analyses of historical financial performance and estimates of future
performance of Cocrystal’s product candidates.
In-process
research and development assets are accounted for as indefinite-lived intangible assets and maintained on the balance sheet until
either the underlying project is completed, or the asset becomes impaired. If the project is completed, the carrying value of
the related intangible assets are amortized to cost of sales over the remaining estimated life of the asset(s), beginning in the
period in which the project is completed. If the intangible asset becomes impaired or the related project is abandoned, the carrying
value of the underlying intangible asset is written down to its fair value and an impairment charge is recorded in the period
in which the impairment occurs and included in operating expenses under research and development within the relative condensed
consolidated statement of operations.
The
Company has a lead compound, CC-31244, for its Hepatitis C program, which was created at the Company’s labs in Bothell,
Washington, and was not part of the acquisition from RFS Pharma. In 2016, the Company initiated and completed a Phase 1A trial
with compound CC-31244 and began a Phase 1B trial with CC-31244 that was completed in 2017.
In
2018, the Company began a Phase 2A clinical trial with CC-31244 and released interim results in January 2019. In late 2018, the
Company concluded that given the success of CC-31244 in clinical trials, the Hepatitis C program would move forward solely with
CC-31244 without any of the compounds acquired from RFS Pharma. As part of this decision, the Company abandoned all remaining
in process research and development intangible assets recognized by the Company and thereafter, terminated its license with Emory
University on December 6, 2018. This resulted in a $53,905,000 impairment in the fourth quarter of 2018. At September 30, 2019
and December 31, 2018, there was no in-process research and development on the Company’s condensed consolidated balance
sheets.
At
September 30, 2019 and December 31, 2018, the Company had goodwill of $65,195,000 respectively included on the Company’s
condensed consolidated balance sheets. The Company has experienced a decrease in the stock price that has resulted in a possible
goodwill impairment indicator. Since the Company stock has a history of volatility and low trading volume management will continue
to monitor the goodwill for impairment and perform procedures on November 30, 2019.
Revenue
Recognition
The
Company recognizes revenue from research and development arrangements. In accordance with Accounting Standards Codification (“ASC”)
Topic 606–Revenue from Contracts with Customers (“Topic 606”), revenue is recognized when a customer
obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company
expects to be entitled to receive in exchange for these goods and services.
On
January 2, 2019, the Company entered into an Exclusive License and Research Collaboration Agreement (the “Collaboration
Agreement”) with Merck Sharp & Dohme Corp. (“Merck”) to discover and develop certain proprietary influenza
A/B antiviral agents. Under the terms of the Collaboration Agreement, Merck will fund research and development for the program,
including clinical development, and will be responsible for worldwide commercialization of any products derived from the collaboration.
As a result of this agreement, the Company recognized $4,368,000 in revenues as consideration in exchange for conveyance of intellectual
property rights at the signing of the agreement and also receives revenues for reimbursement of research and development activities
related to its influenza A/B program. Research and development expenses reimbursed by Merck and recognized as revenue for the
three and nine months ended September 30, 2019 were $492,000 and $1,794,000, respectively.
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.
As
of September 30, 2019, the Company assessed its income tax expense based on its projected future taxable income for the year ended
December 31, 2019 and therefore recorded no amount for income tax expense for the nine months ended September 30, 2019. In addition,
the Company has significant deferred tax assets available to offset income tax expense due to net operating loss carry forwards
which are currently subject to a full valuation allowance based on the Company’s assessment of future taxable income. Refer
to our Annual Report on Form 10-K for the year ended December 31, 2018 for more information.
Stock-Based
Compensation
The
Company recognizes compensation expense using a fair value-based method for costs related to stock-based payments, including stock
options in accordance with ASC 718. 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.
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
The
following are new FASB Accounting Standards Updates (“ASUs”) that have been adopted by the Company as of September
30, 2019:
In
2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”), which had no
impact on our consolidated financial statements and related footnote disclosures as of and for the year ended December 31, 2018
included in our Annual Report on Form 10-K. In January 2019, the Company recognized collaboration revenue in accordance with Topic
606 as presented in the condensed consolidated statement of operations for the nine months ended September 30, 2019.
In
November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic
808 and Topic 606. This ASU provides guidance on whether certain transactions between collaborative arrangement participants
should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context
of a unit of account. Accordingly, this amendment added unit of account guidance in Topic 606 when an entity is assessing whether
the collaborative arrangement, or a part of the arrangement, is within the scope of Topic 606. In addition, the amendment provides
certain guidance on presenting the collaborative arrangement transaction together with Topic 606. ASU 2018-18 is effective for
fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and early adoption is permitted.
This ASU is to be applied retrospectively to the date of initial application of Topic 606. The Company adopted ASU 2018-18, in
the fourth quarter of 2018, which had no impact on our consolidated financial statements included in our Annual Report on Form
10-K for the year ended December 31, 2018, nor in the Company’s condensed consolidated financial statements as reported
on this Form 10-Q for the nine months ended September 30, 2019.
In
February 2016, the FASB issued ASU No. 2016-02, Leases, subsequently amended by ASU No. 2018-01, ASU No. 2018-10 and ASU
No. 2018-11 (collectively, “ASC 842”), which requires lessees to recognize most leases on their balance sheets as
a right-of-use (“ROU”) asset with a corresponding lease liability. Additional qualitative and quantitative disclosures
are also required. The Company adopted the standard effective January 1, 2019 using the cumulative-effect adjustment transition
method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented.
The Company adopted the following practical expedients and elected the following accounting policies related to this standard
update, a.) the option to not reassess prior conclusions related to the identification, classification and accounting for initial
direct costs for leases that commenced prior to January 1, 2019, b.) short-term lease accounting policy election allowing lessees
to not recognize ROU assets and liabilities for leases with a term of 12 months or less, and c.) the option to not separate lease
and non-lease components for certain equipment lease asset categories. Adoption of ASC 842 resulted in the initial recognition
of operating lease right-of-use assets and corresponding lease liabilities of approximately $833,000 on the Company’s consolidated
balance sheet. The Company’s accounting for finance leases (previously referred to as capital leases under ASC 840) remained
substantially unchanged. The standard did not materially impact operating results or liquidity. Disclosures related to the amount,
timing and uncertainty of cash flows arising from leases are included in Note 12 – Commitments and Contingencies.
The
following are new FASB Accounting Standards Updates that have not been adopted by the Company as of September 30, 2019, and contain
detail regarding the effective dates:
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value
measurements as part of its disclosure framework project. The standard is effective for all entities for financial statements
issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted.
The Company is currently assessing this ASU and has not yet determined the impact ASU 2018-13 may have on its condensed consolidated
financial statements.
Other
recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission (“SEC”) did not, or are not expected to, have a material
impact on the Company’s condensed consolidated financial statements and related disclosures.
3.
Property and Equipment
Property
and equipment are recorded at cost and depreciated over the estimated useful lives of the underlying assets (three to five years)
using the straight-line method. As of September 30, 2019, and December 31, 2018, property and equipment consists of (in
thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Lab equipment (excluding equipment under finance leases)
|
|
$
|
1,073
|
|
|
$
|
945
|
|
Finance lease right-of-use lab equipment obtained in exchange for finance lease liabilities
|
|
|
347
|
|
|
|
347
|
|
Computer and office equipment
|
|
|
92
|
|
|
|
75
|
|
Total property and equipment
|
|
|
1,512
|
|
|
|
1,367
|
|
Less: accumulated depreciation and amortization
|
|
|
1,053
|
|
|
|
(983
|
)
|
Property and equipment, net
|
|
$
|
459
|
|
|
$
|
384
|
|
Total
depreciation and amortization expense were $24,000 and $69,000 for the three and nine months ended September 30, 2019, which includes
amortization expense of $17,000 and $52,000 related to finance lease right-of-use lab equipment, respectively. Total depreciation
and amortization expense were $11,000 and $40,000 for the three and nine months ended September 30, 2018, respectively, and included
no amortization expense for finance lease right-of-use assets. For additional finance leases information, refer to Note 12 –
Commitments and Contingencies.
4.
Mortgage Note Receivable
In
June 2014, the Company acquired a mortgage note from a bank for approximately $2,626,000 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 and his affiliate, 580 Garcia Properties LLC (the primary obligor of the note). The mortgage note had an original
maturity date of August 1, 2032 and bore 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 $1,400,000 in exchange for the release of the mortgage note and deed of
trust, resulting in a net gain of $106,000 for disposal of the mortgage note receivable reflected in the condensed consolidated
statement of operations for the nine months ended September 30, 2018.
5.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the following (in thousands) as of:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Accounts payable
|
|
$
|
1092
|
|
|
$
|
616
|
|
Accrued compensation
|
|
|
138
|
|
|
|
78
|
|
Accrued other expenses
|
|
|
460
|
|
|
|
383
|
|
Total accounts payable and accrued expenses
|
|
$
|
1,690
|
|
|
$
|
1,077
|
|
Accounts
payable and accrued other expenses contain unpaid general and administrative expenses and costs related to research and development
that have been billed and estimated unbilled, respectively, as of period-end.
6.
Common Stock
As
of September 30, 2019, the Company has authorized 100,000,000 shares of common stock, $.001 par value per share. The Company had
31,620,646 and 29,938,363 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively. The holders
of common stock are entitled to one vote for each share of common stock held.
On
January 18, 2018, the Company effected the Reverse Stock Split. See Note 1.
On
May 3, 2018, the Company closed a public offering for gross proceeds and net proceeds of approximately $8,428,000 and $7,684,000,
respectively. The Company sold 4,210,527 shares of common stock to the underwriter at approximately $1.77 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 September 30, 2019, the underwriter
has no further option to purchase additional shares.
On
March 13, 2019, the Company closed a private placement of 1,602,283 shares of its common stock and received gross proceeds of
$4,182,000, before deducting offering expenses and commissions, resulting in net proceeds of approximately $3,584,000.
On
March 20, 2019, the Company by written notice suspended at-the-market sales of its common stock pursuant to the Distribution Agreement,
dated July 19, 2018 by and among the Company, Ladenburg, Barrington, and AGP. In December 2018, Ladenburg terminated its role
as a party. The Company also terminated the engagement of Barrington as a sales agent under the Distribution Agreement effective
March 21, 2019. The Distribution Agreement remains in place with respect to AGP, subject to the suspension of sales discussed
above until further notice is provided by the Company to AGP. In January 2019, we sold 80,000 shares of common stock under the
Distribution Agreement and received net proceeds of approximately $344,000.
7.
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.
On
November 24, 2017 and January 31, 2018, the Company entered into securities purchase agreements with two investors, including
the Company’s former Chairman of the Board, pursuant to which the company sold an aggregate principal of $1,000,000, and
OPKO Health Inc., a related party, (collectively, the “Purchasers”), pursuant to which the Company sold an additional
$1,000,000, of its 8% convertible notes (collectively, “Convertible Notes”) due on November 24, 2019 and January 31,
2020, respectively.
The
Convertible Notes, with accrued interest, were convertible into common stock for $8.10 per share at the option of the Purchasers.
In the event the Company completed a financing in which the Company received 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 Convertible Notes would
automatically convert. Upon the closing of a Financing, the conversion price of the Convertible Notes shall be the lesser of (i)
$8.10 per share or (ii) the price per share of the securities sold in the Financing.
The
Company evaluated the embedded conversion features within the 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 in accordance with ASC 470-20, Debt with
Conversion and Other Options.
In
May 2018, the Company completed a financing and issued a total of 4,435,527 shares of common stock at $1.90 per share, for gross
proceeds and net proceeds of $8,428,000 and $7,680,000, respectively. Although the total gross financing amount did not contractually
effectuate the conversion feature of the Convertible Notes’ securities purchase agreements, the Company allowed Purchasers
to convert the Convertible Notes to common stock at the $1.90 per share price of the May 2018 financing. All outstanding 8% convertible
notes were converted to shares of common stock in May 2018 at the aggregate amount of the principal and accrued interest of for
approximately $2,062,000 as of the date of conversion, for a total of 1,085,105 common shares issued. The conversion was approved
by disinterested members of the Company’s Board of Directors.
8.
Stock Based Awards
Equity
Incentive Plans
The
Company adopted an equity incentive plan in 2007 (the “2007 Plan”) under which 1,786,635 shares of common stock had
been reserved for issuance to employees and nonemployee directors and consultants of the Company. The Company no longer issues
any awards under the 2007 Plan. Holders of outstanding incentive stock options granted under the 2007 Plan are eligible to purchase
shares of the Company’s common stock at an exercise price equal to no less than the fair market value of such stock on the
date of grant. The maximum term of options granted under the 2007 Plan was ten years.
The
Company adopted a second equity incentive plan in 2015 (the “2015 Plan”) under which, as amended, 5,000,000 (including
1,038,570 initially transferred from the 2007 Plan) shares of common stock have been reserved for issuance to employees, and nonemployee
directors and consultants of the Company. Recipients of incentive stock options granted under the 2015 Plan shall be eligible
to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value
of such stock on the date of grant. The maximum term of options granted under the 2015 Plan is ten years. As of September 30,
2019, 3,588,377 options remain available for future grants under the 2015 Plan.
The
following table summarizes stock option transactions for the 2007 Plan and 2015 Plan, collectively, for the nine months ended
September 30, 2019 (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, 2018
|
|
|
873
|
|
|
|
1,351
|
|
|
$
|
5.73
|
|
|
$
|
788
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
2,295
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
420
|
|
|
|
(420
|
)
|
|
|
9.24
|
|
|
|
-
|
|
Balance at September 30, 2019
|
|
|
3,588
|
|
|
|
931
|
|
|
$
|
4.14
|
|
|
$
|
-
|
|
On
June 21, 2019, the Company held its annual shareholder meeting and voted to increase the number of shares reserved and available
for grant under the amended 2015 Plan by 2,294,762 shares of common stock. No options were granted during the nine months ended
September 30, 2019, nor the nine months ended September 30, 2018.
The
Company accounts for share-based awards to employees and nonemployees directors and consultants in accordance with the provisions
of ASC 718, Compensation—Stock Compensation., and under the recently issued guidance following FASB’s pronouncement,
ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
Under ASC 718, and applicable updates adopted, share-based awards are valued at fair value on the date of grant and that fair
value is recognized over the requisite service, or vesting, period. The Company values its equity awards using the Black-Scholes
option pricing model, and accounts for forfeitures when they occur. For the three and nine months ended September 30, 2019 and
2018, equity-based compensation expense recorded was $108,000 and $120,000, and $253,000 and $332,000, respectively.
As
of September 30, 2019, there was approximately $1,277,000 of total unrecognized compensation expense related to non-vested
stock options that is expected to be recognized over a weighted average period of 1.6 years. For options granted and outstanding,
there were 930,708 options outstanding which were fully vested or expected to vest, with an aggregate intrinsic value of $0, a
weighted average exercise price of $4.14, and weighted average remaining contractual term of 8.3 years at September 30, 2019.
Of those outstanding, vested and exercisable options totaled 319,458 options, with an aggregate intrinsic value of $0. These options
had a weighted average exercise price of $6.75 per share and a weighted-average remaining contractual term of 6.9 years at September
30, 2019.
The
aggregate intrinsic value of outstanding and exercisable options at September 30, 2019 was calculated based on the closing price
of the Company’s common stock as reported on The Nasdaq Capital Market on June 28, 2019 of $2.35 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.
Common
Stock Reserved for Future Issuance
The
following table presents information concerning common stock available for future issuance (in thousands) as of:
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Stock options issued and outstanding
|
|
|
931
|
|
|
|
426
|
|
Shares authorized for future option grants
|
|
|
3,588
|
|
|
|
1,813
|
|
Warrants outstanding
|
|
|
243
|
|
|
|
243
|
|
Total
|
|
|
4,762
|
|
|
|
2,482
|
|
9.
Warrants
The
following is a summary of activity in the number of warrants outstanding to purchase the Company’s common stock for the
nine months ended September 30, 2019 (in thousands):
|
|
Warrants
Accounted for as:
Equity
|
|
|
Warrants
Accounted for as:
Liabilities
|
|
|
|
|
|
|
May 2018
Warrants
|
|
|
October 2013
Warrants
|
|
|
January 2014
Warrants
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
84
|
|
|
|
26
|
|
|
|
133
|
|
|
|
243
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2019
|
|
|
84
|
|
|
|
26
|
|
|
|
133
|
|
|
|
243
|
|
Expiration date:
|
|
|
October 27, 2022
|
|
|
|
October 24, 2023
|
|
|
|
January 16, 2024
|
|
|
|
|
|
The
following is a summary of activity in the number of warrants outstanding to purchase the Company’s common stock for the
nine months ended September 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, September 30, 2018
|
|
|
84
|
|
|
|
-
|
|
|
|
26
|
|
|
|
133
|
|
|
|
243
|
|
Expiration date
|
|
|
October 27, 2022
|
|
|
|
April 25, 2018
|
|
|
|
October 24, 2023
|
|
|
|
January 16, 2024
|
|
|
|
|
|
Warrants
consist of equity-classified warrants and warrants with the potential to be settled in cash, which are liability-classified warrants.
As of September 30, 2019, and 2018, 159,164 warrants are accounted for as liabilities and 84,211 warrants are accounted for as
equity.
Warrants
Classified as Equity
Equity-classified
warrants consist of stand-alone warrants with rights to buy shares of the Company at a pre-designated price on or before the date
of expiration, irrespective of the market price. These purchase warrants are not attached to any debt or equity instruments, thus
considered freestanding, and there are no circumstances under ASC 815 that require the warrants to be classified as liabilities
or as derivatives. Thus, our May 2018 warrants will be classified as equity, and their value will be carried in the additional
paid-in capital account in the stockholders’ equity section of the balance sheet.
These
warrants were granted to the underwriters and investment brokers for services provided related to the Company’s May 2018
equity financing, and collectively grant the right to buy 84,211 shares of our stock at $2.09 per share for up to four years until
expiration from the commencement date of October 27, 2018.
Warrants
Classified as Liabilities
Liability-classified
warrants consist of warrants issued by Biozone in connection with equity financings in October 2013 and January 2014, which were
assumed by the Company in connection with its merger with Biozone in January 2014. Warrants accounted for as liabilities have
the potential to be settled in cash or are not indexed to the Company’s own stock.
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 condensed
consolidated statement of operations 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 September 30, 2019:
|
|
October 2013
Warrants
|
|
|
January 2014
Warrants
|
|
|
|
|
|
|
|
|
Strike price
|
|
$
|
15.00
|
|
|
$
|
15.00
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Contractual term (years)
|
|
|
4.10
|
|
|
|
4.30
|
|
Cumulative volatility
|
|
|
89.59
|
%
|
|
|
88.08
|
%
|
Risk-free rate
|
|
|
1.58
|
%
|
|
|
1.74
|
%
|
The
fair value of the warrants classified as liabilities is estimated using the Black-Scholes option-pricing model with the following
inputs as of September 30, 2018:
|
|
October 2013
warrants
|
|
|
January 2014
warrants
|
|
|
|
|
|
|
|
|
Strike price
|
|
$
|
15.00
|
|
|
$
|
15.00
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected term (years)
|
|
|
5.07
|
|
|
|
5.30
|
|
Cumulative volatility %
|
|
|
87.95
|
%
|
|
|
87.99
|
%
|
Risk-free rate %
|
|
|
2.73
|
%
|
|
|
2.74
|
%
|
As
of the third quarter in 2019, the Company’s available historical market prices and price volatility exceeded the remaining
contractual terms of outstanding warrants accounted for as liabilities. Therefore, as of September 30, 2019, the Company calculated
the cumulative volatility percentage used in the Black-Scholes option-pricing model based on its own historical price volatility.
In prior periods, including as of September 30, 2018, the Company estimated 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 had limited trading history
and limited observable volatility of its own. 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.
10.
Licenses and Collaborations
Merck
Sharp & Dohme Corp.
On
January 2, 2019, the Company entered into an Exclusive License and Research Collaboration Agreement (the “Collaboration
Agreement”) with Merck Sharp & Dohme Corp. (“Merck”) to discover and develop certain proprietary influenza
A/B antiviral agents. Under the terms of the Collaboration Agreement, Merck will fund research and development for the program,
including clinical development, and will be responsible for worldwide commercialization of any products derived from the collaboration.
Cocrystal received an upfront payment of $4,000,000 and is eligible to receive payments related to designated development, regulatory
and sales milestones with the potential to earn up to $156,000,000, as well as royalties on product sales. Merck can terminate
the Collaboration Agreement at any time prior to the first commercial sale of the first product developed under the Collaboration
Agreement, in its sole discretion, without cause.
As
a result of this agreement, the Company recognized revenue of $4,368,000 as consideration in exchange for conveyance of intellectual
property rights at the time of the agreement signing in accordance with ASC Topic 606, Revenue from Contracts with Customers,
which included the $4,000,000 milestone upfront payment, since received and recognized as collaboration revenues during the
first quarter of 2019.
Research
and development expenses related to our influenza A/B program which are reimbursable by Merck within 45 days of period-end under
the terms of the Collaboration Agreement and recognized as collaboration revenue were $492,000 and $1,794,000 for the three and
nine months ended September 30, 2019, respectively. Total revenue of $6,162,000 included in the condensed consolidated
statement of operations for the nine months ended September 30, 2019 is related to this Collaboration Agreement. As of September
30, 2019, $768,000 is due from Merck under these agreements.
National
Institute of Health
Cocrystal
has two Public Health Biological Materials License Agreements with the National Institute of Health. The original License Agreements
were dated August 31, 2010 and amended on November 6, 2013. The materials licensed are being used in Norovirus assays to screen
potential antiviral agents in our library.
11.
Net Income (Loss) per Share
The
Company accounts for and discloses net income (loss) per common share in accordance with FASB ASC Topic 260, Earnings Per Share.
Basic income (loss) per common share is computed by dividing income (loss) attributable to common stockholders by the weighted
average number of common shares outstanding. Diluted net income (loss) per common share is computed by dividing net income (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 stock for all potential dilutive common shares outstanding. Potential common shares consist
of shares issuable upon the exercise of stock options and warrants and the conversion of convertible notes payable.
12.
Commitments and Contingencies
Commitments
In
the ordinary course of business, the Company enters into non-cancelable leases to purchase equipment and for its facilities, including
related party leases (see Note 13 – Transactions with Related Parties). As per Note 2, leases are accounted for as operating
leases or finance leases, in accordance with ASC 842, Leases.
Operating
Leases
The
Company leases office space in Miami, Florida and laboratory space in Bothell, Washington under operating leases that expire on
August 31, 2021 and January 31, 2024, respectively. The Company recently signed an amendment to the Bothell, Washington lease
agreement by extending the lease term for a period of sixty months from February 2019 through January 2024. For operating leases,
the weighted average discount rate is 8.0% and the weighted average remaining lease term is 4.2 years.
The
following table summarizes the Company’s maturities of operating lease liabilities, by year and in aggregate, as of September
30, 2019 (in thousands):
2019 (excluding the nine months ended September 30, 2019)
|
|
$
|
55
|
|
2020
|
|
|
226
|
|
2021
|
|
|
213
|
|
2022
|
|
|
178
|
|
2023
|
|
|
183
|
|
Thereafter
|
|
|
15
|
|
Total operating lease payments
|
|
|
870
|
|
Less: present value discount
|
|
|
(130
|
)
|
Total operating lease liabilities
|
|
$
|
740
|
|
The
operating lease liabilities summarized above do not include variable common area maintenance (CAM) charges, which are contractual
liabilities under the Company’s Bothell, Washington lease. CAM charges for the Bothell, Washington facility are calculated
annually based on actual common expenses for the building incurred by the lessor and proportionately billed to tenants based on
leased square footage. For the nine months ended September 30, 2019 and 2018, approximately $60,000 and $49,000 of variable lease
expense (CAM) was included in general and administrative operating expenses on the condensed consolidated statements of operations,
respectively.
The
minimum lease payments above include the amounts that would be paid if the Company maintains its Bothell lease for the five-year
term, starting February 2019. The Company has the right to terminate this lease after three years on January 31, 2022, by giving
prior notice at least nine months before the early termination date and by paying a termination fee equal to the sum of unamortized
leasing commissions and reimbursement for tenant improvements provided by the landlord amortized at 8.0% over the extended term.
On
September 1, 2018, the Company entered into a lease agreement with a limited liability company controlled by Dr. Phillip Frost,
a director and a principal shareholder of the Company (see Note 13 – Transactions with Related Parties). The lease term
is three years with an optional three-year extension. On an annualized basis, straight-line rent expense is approximately $58,000,
including fixed and estimable fees and taxes.
The
offices and laboratory spaces in Tucker, Georgia were leased from a limited liability company owned by one of Cocrystal’s
former directors, Dr. Raymond Schinazi and previously leased on a month to month basis (see Note 13 – Transactions with
Related Parties). The Company closed its offices and laboratory in Tucker, Georgia, and the final lease-related payment was made
in October 2018.
As
of September 30, 2019, right-of-use assets obtained in exchange for operating lease liabilities and amortization expense recognized
for operating leases was $833,000 and $114,000 respectively. For the nine months ended September 30, 2019 and 2018, operating
lease expense, excluding short-term leases, finance leases and CAM charges, totaled approximately $169,000 and $129,000, respectively.
Additionally, the Company recognized short-term operating lease expense of $9,000 during the nine months ended September 30, 2019,
and cash paid for amounts included in the measurement of lease liabilities for operating leases as operating cash out flows in
the same period.
Finance
Leases
In
November 2018, the Company entered into two lease agreements to acquire lab equipment with 18 monthly payments of $18,000 payable
through May 27, 2020 and 36 monthly payments of $1,000 payable through November 21, 2021, respectively. For finance leases, the
weighted average discount rate is 8.0% and the weighted average remaining lease term is 1.1 years.
The
following table summarizes the Company’s maturities of finance lease liabilities, by year and in aggregate, as of September
30, 2019 (in thousands):
2019 (excluding the nine months ended September 30, 2019)
|
|
$
|
58
|
|
2020
|
|
|
106
|
|
2021
|
|
|
15
|
|
Total finance lease payments
|
|
|
179
|
|
Less: present value discount
|
|
|
(7
|
)
|
Total finance lease liabilities
|
|
$
|
172
|
|
The
leased lab equipment is depreciable over five years and is presented net of accumulated depreciation on the condensed consolidated
balance sheets under property and equipment. As of September 30, 2019, total right-of-use lab equipment and accumulated depreciation
recognized under finance leases is $347,000 and $58,000, respectively, and depreciation expense for the nine months ended September
30, 2019 was $52,000. As of December 31, 2018, total right-of-use assets exchanged for finance lease liabilities was $347,000
and accumulated depreciation for lab equipment under finance leases was $6,000.
At
September 30, 2019, the aggregate outstanding balance of finance lease liabilities, current and long-term, is $172,000 and the
Company expects to pay future interest charges of $7,000 over the remaining finance lease terms. For the nine months ended September
30, 2019, the Company paid $159,000 and $16,000 in principal and interest, respectively, totaling financing cash out flows of
$175,000 for amounts included in the measurement of lease liabilities for finance leases and added back to net income the $16,000
of interest expense under cash flows from operating activities. The Company had no leases considered to be finance leases as of
September 30, 2018.
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.
On
September 20, 2018, a class action lawsuit was filed with the United States District Court for the District of New Jersey as a
complaint against the Company, certain current and former executive officers and directors of the Company and the other defendants
named therein for violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Additionally, the complaint
alleges that certain current and former executive officers of the Company violated Section 20(a) of the Exchange Act. The class
consists of the persons and entities who purchased the Company’s common stock during the period from September 23, 2013
through September 7, 2018. The plaintiff seeks damages, pre-judgment and post-judgment interest, reasonable attorneys’ fees,
expert fees and other costs. On June 25, 2019, the plaintiffs in the class action lawsuit filed an amended class action complaint.
On
January 16, 2019, Ms. Susan Church, a stockholder of the Company, filed with the United States District Court for the Western
District of Washington a derivative suit against certain current and former executive officers and directors of the Company alleging
breach of fiduciary duties, unjust enrichment, waste of corporate assets, and violations of the rules governing proxy solicitation.
Church seeks, among other things, money damages, disgorgement of profits from alleged wrongful conduct, including cash bonuses,
pre-judgment and post-judgment interest, reasonable attorneys’ fees, expert fees and other costs. The attorneys have agreed
to a stay of the derivative suit pending resolution of the class action.
On
September 7, 2018, the SEC filed with the United States District Court for the Southern District of New York a complaint against
Dr. Philip Frost, a director and principal stockholder of the Company, a trust Dr. Frost controls and OPKO Health, Inc., a stockholder
of the Company, of which Dr. Frost is the Chief Executive Officer, as well as other defendants named therein. On January 10, 2019,
the District Court entered final judgments against these defendants on their consent without admitting or denying the allegations
set forth in the complaint. Dr. Frost was permanently enjoined from violating a certain anti-fraud provision of the Securities
Act of 1933, future violations of Section 13(d) of the Exchange Act and Rule 13d-1(a) thereunder and participating in penny stock
offerings subject to certain exceptions.
In
November 2017, Lee Pederson, a former Biozone lawyer, filed a lawsuit in Minnesota against co-defendants the Company, Dr. Phillip
Frost, OPKO Health, Inc. and Brian Keller for various allegations. On September 13, 2018, the United States District Court granted
the Company and its co-defendants’ motion to dismiss Pederson’s amended complaint. On October 11, 2018, Pederson filed
a notice of appeal with the United States Court of Appeals for the Eighth Circuit.
On
July 8, 2019, Mr. Pederson filed a lawsuit in the U.S. District Court in Minnesota against the Company, Dr. Frost and Mr. Daniel
Fisher. See Note 4 for information on Mr. Fisher. While the Company, to its knowledge, has not been served, it has obtained a
copy of the complaint. In his complaint, Pederson alleges tortious interference by the Company and Dr. Frost with the collaboration
agreement between Mr. Pederson and Mr. Fisher. Mr. Pederson seeks damages in the amount of $800,000 or such other amount as may
be determined at trial.
While
the Company intends to defend itself vigorously from the claims in the aforementioned disputes, it is unable to predict the outcome
of these legal proceedings. Any potential loss as a result of these legal proceedings cannot be reasonably estimated. As a result,
the Company has not recorded a loss contingency for any of the aforementioned claims.
We
were recently notified that our insurance company has initially declined to cover the class action and related derivative action
described above. The insurance company had previously delayed reimbursing our legal fees related to the SEC subpoena we received
in 2015 requesting information, but ultimately paid us that sum and never declined coverage. We have retained specialized insurance
legal counsel to analyze and strategize our options. While we cannot quantify the amount of litigation costs, they are likely
to be material as would be any adverse judgment or settlement amount.
13.
Transactions with Related Parties
Beginning
November 2014 to October 2018, the Company leased its Tucker, Georgia facility from a limited liability company owned by one of
Cocrystal’s former directors and principal shareholder, Dr. Raymond Schinazi. As of October 2018, the Company cancelled
the leasing arrangement and closed its office and research lab in Tucker, Georgia. Total rent and other expenses paid in connection
with this lease were $0 and $33,000 for the nine months ended September 30, 2019 and 2018, respectively.
In
September 2018, the Company leased administrative offices from a limited liability company owned by one of the Company’s
directors and principal shareholder, Dr. Phillip Frost. The operating lease term is three years with an optional three-year extension.
On an annualized basis, straight-line lease expense, including taxes and fees, for this location is approximately $58,000. In
September 2018, the Company paid a lease deposit of $4,000 and total amounts paid in connection with this operating lease were
$42,000 and $5,000 for the nine months ended September 30, 2019 and 2018, respectively.
As
further explained in Note 7 – Convertible Notes Payable, on November 24, 2017, the Company entered into a securities purchase
agreement with a company significantly owned by the Company’s former Chairman of the Board and principal shareholder, Dr.
Schinazi, pursuant to which the Company sold a principal amount of $500,000 of 8% convertible notes due November 24, 2019. On
January 31, 2018, the Company entered into a securities purchase agreement with OPKO Health, Inc. (the “Purchaser”),
a Company affiliated with Dr. Frost, pursuant to which the Company borrowed $1,000,000 from the Purchaser in exchange for issuing
the Purchaser an 8% convertible note due January 31, 2020.
All
8% convertible notes, including accrued interest, were converted to common stock shares in May 2018 at $1.90 per share. Dr. Schinazi’s
affiliated Company received 273,367 shares for its 8% convertible notes balance of approximately $519,000, and OPKO Health, Inc.,
affiliated with Dr. Frost, received 538,544 shares for its 8% convertible notes balance of approximately $1,023,000 upon conversion.
In the condensed consolidated balance sheets, as of September 30, 2019 and December 31, 2018, no amounts remain in convertible
notes payable due to related parties.
14.
Subsequent Events
On
November 4, 2019, we closed a public offering receiving gross proceeds of approximately $3 million and net proceeds of $2.6 million.
We sold 3,529,412 shares of common stock to the underwriter at approximately $0.79 per share which the underwriter sold to the
public at $0.85 per share. The underwriter has a 45 day option to purchase an additional 529,411 shares of common stock solely
to cover overallotments.