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.
The
Company was formerly incorporated in Nevada under the name Biozone Pharmaceuticals, Inc. (“Biozone”). 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.”
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.
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 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 strategic alliances. Through December 31, 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. 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 earned income from
operations of $2,877,000 and incurred losses from operations of $
2,067
,000 in the
three months ended March 31, 2019 and 2018, respectively.
The
Company will need to continue obtaining adequate capital to fund its operations until it becomes profitable. 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 March 31, 2019 and December 31, 2018, our primary operating account held approximately
$8,571,000 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 March 31, 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):
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Cash
|
|
$
|
8,571
|
|
|
$
|
1,249
|
|
Restricted cash
|
|
|
50
|
|
|
|
29
|
|
Total cash and restricted cash shown in the statements of cash flows
|
|
$
|
8,621
|
|
|
$
|
1,278
|
|
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 (“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 March 31, 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
|
|
March 31, 2019
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash
|
|
$
|
8,621
|
|
|
$
|
8,621
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
$
|
8,621
|
|
|
$
|
8,621
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants potentially settleable in cash (Note 9)
|
|
$
|
163
|
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
163
|
|
Total liabilities
|
|
$
|
163
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
163
|
|
|
|
|
|
|
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 three months ended March
31, 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)
|
|
|
|
2019
|
|
|
2018
|
|
Balance, January 1,
|
|
$
|
263
|
|
|
$
|
569
|
|
Change in fair value of warrants potentially settleable in cash (Note 9)
|
|
|
(100
|
)
|
|
|
(21
|
)
|
Balance at March 31,
|
|
$
|
163
|
|
|
$
|
548
|
|
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 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 recently 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 (see
Note 10 – Licenses and Collaborations). This resulted in a $53,905,000 impairment in the fourth quarter of 2018. At March
31, 2019 and December 31, 2018, there was no in-process research and development on the Company’s condensed consolidated
balance sheets.
At
March 31, 2019 and December 31, 2018, the Company had goodwill of $65,195,000 included on the Company’s condensed consolidated
balance sheets.
Revenue
Recognition
The
Company recognizes revenue from research and development arrangements and grant income. 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 $5,078,000 in revenues on the condensed consolidated
statement of operations as consideration in exchange for conveyance of intellectual property rights of $4,368,000 and research
and development activities of $710,000, for the three months ended March 31, 2019, respectively, related to influenza A/B program.
In addition, included were research and development expenses for the first quarter of 2019 of approximately $755,000 reimbursable
by Merck under the terms of the Collaboration Agreement. The remaining receivable balance was recorded in accordance with ASC Topic
606,
Revenue from Contracts with Customers
and is expected to be recognized ratably over the subsequent seven quarters
and received in full. Management reviews accounts receivable regularly to determine, using the specific identification method,
if any receivable amounts will potentially be uncollectible and to estimate the amount of allowance for doubtful accounts necessary
to reduce accounts receivable to its estimated net realizable value.
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 March 31, 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 three months ended March 31, 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. 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 March 31,
2019:
In
the fourth quarter of 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 three months ended
March 31, 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 three months ended March 31, 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 in the first quarter of 2019. 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 March 31, 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 is 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 March 31, 2019 and December 31, 2018, property and equipment consists of (in thousands):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Lab equipment (excluding equipment under finance leases)
|
|
$
|
960
|
|
|
$
|
945
|
|
Finance lease right-of-use lab equipment obtained in exchange for finance lease liabilities
|
|
|
347
|
|
|
|
347
|
|
Computer and office equipment
|
|
|
85
|
|
|
|
75
|
|
Total property and equipment
|
|
|
1,392
|
|
|
|
1,367
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,006
|
)
|
|
|
(983
|
)
|
Property and equipment, net
|
|
$
|
386
|
|
|
$
|
384
|
|
Total
depreciation and amortization expense was $23,000 and $15,000 for the three months ended March 31, 2019 and 2018, which
includes amortization expense of $17,000 and $6,000 related to finance lease right-of-use lab equipment, respectively.
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%.
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 three months ended March 31, 2018.
5.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the following (in thousands) as of:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Accounts payable
|
|
$
|
441
|
|
|
$
|
616
|
|
Accrued compensation
|
|
|
98
|
|
|
|
78
|
|
Accrued other expenses
|
|
|
672
|
|
|
|
383
|
|
Total accounts payable and accrued expenses
|
|
$
|
1,211
|
|
|
$
|
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 March 31, 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 March 31, 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 $1.767 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 March 31, 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. 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 2,705,237 (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 March 31, 2019, 1,015,750
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 three months ended
March 31, 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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
143
|
|
|
|
(143
|
)
|
|
|
4.16
|
|
|
|
-
|
|
Balance at March 31, 2019
|
|
|
1,016
|
|
|
|
1,208
|
|
|
$
|
5.91
|
|
|
$
|
-
|
|
The
Company did not grant any options during the three months ended March 31, 2019, nor the three months ended March 31, 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 months ended March 31, 2019 and 2018, equity-based
compensation expense recorded was $33,000 and $105,000, respectively.
As
of March 31, 2019, there was approximately $1,519,000 of total unrecognized compensation expense related to non-vested stock options
that is expected to be recognized over a weighted average period of 1.9 years. For options granted and outstanding, there were
1,208,573 options outstanding which were fully vested or expected to vest, with an aggregate intrinsic value of $0, a weighted
average exercise price of $5.91, and weighted average remaining contractual term of 6.9 years at March 31, 2019. For vested and
exercisable options, outstanding shares totaled 374,822, with an aggregate intrinsic value of $0. These options had a weighted
average exercise price of $12.13 per share and a weighted-average remaining contractual term of 1.2 years at March 31, 2019.
The
aggregate intrinsic value of outstanding and exercisable options at March 31, 2019 was calculated based on the closing price of
the Company’s common stock as reported on The Nasdaq Capital Market on March 29, 2019 of $2.73 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:
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Stock options issued and outstanding
|
|
|
1,208
|
|
|
|
426
|
|
Shares authorized for future option grants
|
|
|
1,016
|
|
|
|
1,813
|
|
Convertible notes
|
|
|
-
|
|
|
|
247
|
|
Warrants outstanding
|
|
|
243
|
|
|
|
209
|
|
Total
|
|
|
2,467
|
|
|
|
2,695
|
|
9.
Warrants
The
following is a summary of activity in the number of warrants outstanding to purchase the Company’s common stock for the
three months ended March 31, 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, March 31, 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
three months ended March 31, 2018 (in thousands):
|
|
Warrants
Accounted for as:
Equity
|
|
|
Warrants
Accounted for as:
Liabilities
|
|
|
|
|
|
|
April 2013
Warrants
|
|
|
October 2013 Warrants
|
|
|
January 2014 Warrants
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
50
|
|
|
|
26
|
|
|
|
133
|
|
|
|
209
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, March 31, 2018
|
|
|
50
|
|
|
|
26
|
|
|
|
133
|
|
|
|
209
|
|
Expiration date:
|
|
|
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 March 31, 2019, 159,164 warrants are accounted for as liabilities and 84,211 warrants are accounted for as equity. As of
March 31, 2018, 159,164 warrants were accounted for as liabilities and 50,000 warrants were 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 March 31, 2019:
|
|
October 2013
Warrants
|
|
|
|
January 2014
Warrants
|
|
|
|
|
|
|
|
|
|
Strike price
|
|
$
|
15.00
|
|
|
|
$
|
15.00
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
|
0.00
|
%
|
Contractual term (years)
|
|
|
4.6
|
|
|
|
|
4.8
|
|
Cumulative volatility
|
|
|
88.49
|
%
|
|
|
|
88.65
|
%
|
Risk-free rate
|
|
|
2.20
|
%
|
|
|
|
2.20
|
%
|
The
fair value of the warrants classified as liabilities is estimated using the Black-Scholes option-pricing model with the following
inputs as of March 31, 2018:
|
|
October 2013
Warrants
|
|
|
|
January 2014
Warrants
|
|
|
|
|
|
|
|
|
|
Strike price
|
|
$
|
15.00
|
|
|
|
$
|
15.00
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
|
0.00
|
%
|
Contractual term (years)
|
|
|
5.6
|
|
|
|
|
5.8
|
|
Cumulative volatility
|
|
|
86.73
|
%
|
|
|
|
87.08
|
%
|
Risk-free rate
|
|
|
2.59
|
%
|
|
|
|
2.61
|
%
|
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
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
Emory
University
On
December 6, 2018, we notified Emory University (“Emory”) of the termination of our License Agreement with Emory, dated
March 7, 2013 (the “License Agreement”). The License Agreement covered patents and patent applications for hepatitis
C virus (“HCV”) inhibitors, which we no longer consider essential to our HCV program. As part of our HCV program,
we continue to focus our efforts on CC-31244, our HCV Non-Nucleoside Polymerase Inhibitor, in Phase 2a clinical trial. The Company
had the right to terminate the License Agreement at its sole discretion upon a 90 days’ prior written notice and upon payment
of all amounts due Emory under the License Agreement through the date of termination. No amounts are due under the License Agreement.
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.
Additional
to the upfront payment received, the Company recognized $1,078,000 in revenues on the condensed consolidated statement of operations
and recorded the same amount in accounts receivable on the condensed consolidated balance sheet, for the three months ended and
as of March 31, 2019, respectively, related to influenza A/B program research and development expenses for the first quarter of
2019 of approximately $755,000 reimbursable by Merck under the terms of the Collaboration Agreement within 45 days of period-end.
The remaining receivable balance was recorded in accordance with ASC Topic 606,
Revenue from Contracts with Customers
and is expected to be recognized ratably over the subsequent seven quarters and received in full. Management reviews accounts
receivable regularly to determine, using the specific identification method, if any receivable amounts will potentially be uncollectible
and to estimate the amount of allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable
value.
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.
The
following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands, except per share
amounts) for the three months ended:
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
2,971
|
|
|
$
|
(1,553
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic
|
|
|
30,337
|
|
|
|
24,384
|
|
Adjustment for dilutive effects of warrants, outstanding and in-the-money
|
|
|
26
|
|
|
|
-
|
|
Adjustment for dilutive effects of options, exercisable and in-the-money
|
|
|
8
|
|
|
|
-
|
|
Weighted average number of common shares outstanding, diluted
|
|
|
30,371
|
|
|
|
24,384
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
0.10
|
|
|
$
|
(0.06
|
)
|
Net income (loss) per common share, diluted
|
|
$
|
0.10
|
|
|
$
|
(0.06
|
)
|
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):
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Outstanding options to purchase common stock
|
|
|
1,200
|
|
|
|
426
|
|
Warrants to purchase common stock
|
|
|
217
|
|
|
|
209
|
|
Notes payable convertible to common stock
|
|
|
-
|
|
|
|
247
|
|
Total
|
|
|
1,417
|
|
|
|
882
|
|
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 4.5 years.
The
following table summarizes the Company’s maturities of operating lease liabilities, by year and in aggregate, as of March
31, 2019 (in thousands):
2019 (excluding the three months ended March 31, 2019)
|
|
$
|
165
|
|
2020
|
|
|
225
|
|
2021
|
|
|
213
|
|
2022
|
|
|
178
|
|
2023
|
|
|
183
|
|
Thereafter
|
|
|
15
|
|
Total operating lease payments
|
|
|
979
|
|
Less: present value discount
|
|
|
(161
|
)
|
Total operating lease liabilities
|
|
$
|
818
|
|
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 three months ended March 31, 2019 and 2018, approximately $16,000 and $17,000 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 March 31, 2019, right-of-use assets obtained in exchange for operating lease liabilities and amortization expense recognized
for operating leases was $833,000 and $31,000, respectively. For the three months ended March 31, 2019 and 2018, operating lease
expense, excluding short-term leases, finance leases and CAM charges, totaled approximately $43,000 and $42,000, respectively.
Additionally, the Company recognized short-term operating lease expense of $12,000 during the three months ended March 31, 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 1.4 years.
The
following table summarizes the Company’s maturities of finance lease liabilities, by year and in aggregate, as of March
31, 2019 (in thousands):
2019 (excluding the three months ended March 31, 2019)
|
|
$
|
174
|
|
2020
|
|
|
106
|
|
2021
|
|
|
15
|
|
Total finance lease payments
|
|
|
295
|
|
Less: present value discount
|
|
|
(16
|
)
|
Total finance lease liabilities
|
|
$
|
279
|
|
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 March 31, 2019, total right-of-use lab equipment and accumulated depreciation
recognized under finance leases is $347,000 and $23,000, respectively, and depreciation expense for the three months ended March
31, 2019 was $17,000. 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
March 31, 2019, the aggregate outstanding balance of finance lease liabilities, current and long-term, is $279,000 and the Company
expects to pay future interest charges of $16,000 over the remaining finance lease terms. For the three months ended March 31,
2019, the Company paid $52,000 and $6,000 in principal and interest, respectively, totaling financing cash out flows of $58,000
for amounts included in the measurement of lease liabilities for finance leases and added back to net income the $6,000 of interest
expense under cash flows from operating activities. The Company had no leases considered to be finance leases as of March 31,
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, Anthony Pepe, individually and on behalf of a class, filed with the United States District Court for the District
of New Jersey 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. 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. Pepe also alleges violation of other sections of the Exchange Act by the defendants named in the
complaint other than the Company. Pepe seeks damages, pre-judgment and post-judgment interest, reasonable attorneys’ fees,
expert fees and other costs.
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.
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.
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 was $0 and $11,000 for the three months ended March 31, 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
$14,000 and $0 for the three months ended March 31, 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 March 31, 2019 and December 31, 2018, no amounts remain in convertible notes
payable due to related parties.
14.
Subsequent Events
The
Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that there have
been no events that have occurred that would require adjustments to our disclosures in the condensed consolidated financial statements
.