NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Business
Cocrystal
Pharma, Inc. (“we”, the “Company” or “Cocrystal”), a biopharmaceutical company incorporated
in Delaware, has been developing novel technologies and approaches to create first-in-class or 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 inhibiting viral replication, we plan to leverage our infrastructure and expertise in these areas.
The
Company’s activities since inception have principally consisted of acquiring product and technology rights, raising capital,
performing research and development and conducting clinical trials. 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 September 30, 2020, the Company has primarily
funded its operations through equity offerings and strategic partnerships, including collaboration with Merck Sharp & Dohme
Corp. (“Merck”).
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, 2019 filed on March 27, 2020 (“Annual Report”).
Principles
of Consolidation
The
consolidated financial statements include the accounts of Cocrystal Pharma, Inc. and its wholly owned subsidiaries: 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 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 consolidated financial statements and accompanying notes. The significant
estimates in the Company’s 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. However, if future results are not consistent with
our estimates and assumptions, including as a result of the COVID-19 global pandemic, then we may be exposed to an impairment
charge, which could be material. 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 U.S. financial institutions, which may, at times, exceed federally insured limits of $250,000 for each
institution accounts are held. At September 30, 2020 and December 31, 2019, our primary operating account held approximately $31,781,000
and $7,418,000, respectively, and our collateral account balance was $50,000 at a different institution. The Company has not experienced
any losses in such accounts and believes it is not exposed to significant risks thereof.
As
of September 30, 2020, 100% of our revenue and receivables are from one customer, Merck Sharp & Dohme Corp.
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 and restricted cash as Level 1 fair value measurements. The Company categorizes its warrants
potentially settleable in cash as Level 2 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 7 – Warrants.
At
September 30, 2020 and December 31, 2019, the carrying amounts of financial assets and liabilities, such as cash, accounts receivable,
other assets, and accounts payable and accrued expenses approximate their fair values due to their short-term nature. The carrying
values of notes payable and lease liabilities approximate their fair values due to the fact that the interest rates on these obligations
are based on prevailing market interest rates.
The
Company’s derivative liabilities are considered Level 2 measurements.
Goodwill
In
November 2014, goodwill was recorded in connection with the acquisition of RFS Pharma.
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.
At
September 30, 2020, the Company had goodwill of $19,092,000. The Company previously completed its annual impairment test in November
2019, and at that time determined the fair value of its reporting unit, under both the Company’s Nasdaq market capitalization
and an income approach analysis; both methods were less than the carrying value as of December 31, 2019; therefore, management
considered goodwill to be impaired. This resulted in a $46,103,000 impairment in 2019. The Company plans to conduct its next annual
impairment test in November 2020.
Based
on management’s assessment on September 30, 2020, no further impairment of Goodwill is required.
Long-Lived
Assets
The
Company regularly reviews the carrying value and estimated lives of its long-lived assets, including property and equipment, to
determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. The
determinants used for this evaluation include management’s estimate of the asset’s ability to generate positive income
from operations and positive cash flow in future periods as well as the strategic significance of the assets to the Company’s
business objective. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying amount
over the asset’s fair value.
Research
and Development Expenses
All
research and development costs are expensed as incurred.
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.
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.
On
January 2, 2019, the Company entered into an Exclusive License and Research Collaboration Agreement (the “Collaboration
Agreement”) with 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.
Revenue
recorded for the three and nine months ended September 30, 2020 was $489,000 and $1,504,000 respectively, compared with $492,000
and $6,162,000 for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020, accounts receivable
of $581,000 was due from Merck.
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, 2020, the Company assessed its income tax expense based on its projected future taxable income for the year ended
December 31, 2020 and therefore recorded no amount for income tax expense for the nine months ended September 30, 2020. 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, 2019 for more information.
Franchise
Taxes
As
of June 30, 2020, the Company amended its franchise tax filed for 2018 period, which the result is a credit balance of $126,000.
The Company recognized $51,000 as expense for the period from January 1, 2020 through September 30, 2020; the balance of $75,000
is recorded as prepaid expense to be amortized until September 30, 2021. Franchise taxes are included in the general and administrative
expenses.
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 Estimating Expected Term. The risk-free interest rate is estimated using comparable
published federal funds rates.
Share
Issuance Costs
The
Company accounts for direct and incremental costs related to the issuance of its capital stock as a reduction in the proceeds
from such issuances. In the case, the Company incurs certain expenses related to the offering of equity security, the Company
complies with the requirements of FASB 340-10-S99-1with regards to offering costs.
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.
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 number of potential common shares excluded from the calculations of net loss per diluted share
because their inclusion would be anti-dilutive (in thousands):
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Outstanding options to purchase common stock
|
|
|
1,801
|
|
|
|
931
|
|
Warrants to purchase common stock
|
|
|
243
|
|
|
|
243
|
|
Total
|
|
|
2,044
|
|
|
|
1,174
|
|
Recent
Accounting Pronouncements
In
August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible
instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting
the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as
compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded
conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and
that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial
premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope
exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06
will be effective January 1, 2024, for the Company. Early adoption is permitted, but no earlier than January 1, 2021, including
interim periods within that year. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated
financial statements, but currently does not believe ASU 2020-06 will have a significant impact on the Company’s accounting
for its convertible debt instruments as they are not considered indexed to the Company’s own stock. The effect will largely
depend on the composition and terms of the financial instruments at the time of adoption.
In
June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC
326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts
and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss”
model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the
standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting
period in which the guidance is effective. The standard is effective for interim and annual reporting periods beginning after
December 15, 2019. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s financial position,
results of operations, and cash flows.
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 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, 2020, and December 31, 2019, property and equipment consists of (in thousands):
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Lab equipment
|
|
$
|
1,498
|
|
|
$
|
1,073
|
|
Finance lease right-of-use lab equipment obtained in exchange for finance lease liabilities
|
|
|
119
|
|
|
|
347
|
|
Computer and office equipment
|
|
|
120
|
|
|
|
92
|
|
Total property and equipment
|
|
|
1,737
|
|
|
|
1,512
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,102
|
)
|
|
|
(1,081
|
)
|
Property and equipment, net
|
|
$
|
635
|
|
|
$
|
431
|
|
Total
depreciation and amortization expense was $44,000 and $112,000 for the three and nine months ended September 30, 2020, which includes
amortization expense of $6,000 and $38,000 related to finance lease right-of-use lab equipment, respectively. For additional finance
leases information, refer to Note 9 – Commitments and Contingencies.
4.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the following (in thousands) as of:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Accounts payable
|
|
$
|
1,485
|
|
|
$
|
1,511
|
|
Accrued compensation
|
|
|
183
|
|
|
|
83
|
|
Accrued other expenses
|
|
|
682
|
|
|
|
405
|
|
Total accounts payable and accrued expenses
|
|
$
|
2,350
|
|
|
$
|
1,999
|
|
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.
5.
Common Stock
As
of September 30, 2020, the Company has authorized 100,000,000 shares of common stock, $0.001 par value per share. The Company
had 68,563,512 and 35,150,000 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively.
The
holders of common stock are entitled to one vote for each share of common stock held.
On
January 29, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which
the Company agreed to sell and issue, in a registered direct offering, 3,492,063 shares of common stock at a purchase price per
share of $0.63 for aggregate net proceeds to the Company of approximately $1.5 million, after deducting fees payable to the placement
agent and other estimated offering expenses payable by the Company. The Company closed the offering on January 31, 2020.
On
February 27, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to
which the Company agreed to sell and issue, in a registered direct offering, 8,461,540 shares of common stock at a purchase price
per share of $1.30 for aggregate net proceeds to the Company of approximately $10.1 million, after deducting fees payable to the
placement agent and other estimated offering expenses payable by the Company. The Company closed the offering on February 28,
2020.
On
March 9, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which
the Company agreed to sell and issue, in a registered direct offering, 5,037,038 shares of common stock at a purchase price per
share of $1.35 for aggregate net proceeds to the Company of approximately $5.0 million, after deducting fees payable to the placement
agent, lock-up settlement fee and other estimated offering expenses payable by the Company. The Company closed the offering on
March 10, 2020.
On
June 2, 2020, the Company provided written notice to A.G.P./Alliance Global Partners (“AGP”) of its election to terminate
the Amended and Restated Equity Distribution Agreement, dated October 30, 2019, by and between the Company and AGP, as amended
on January 29, 2020 (the “AGP Agreement”). The termination of the AGP Agreement was effective June 3, 2020.
On
July 1, 2020, the Company entered into an At-The-Market Offering Agreement with H.C. Wainwright & Co., LLC (“Wainwright”),
pursuant to which the Company may issue and sell over time and from time to time, to or through Wainwright, up to $10,000,000
of shares of the Company’s common stock. The Company has not sold any shares pursuant to this ATM during the nine months
ended September 30, 2020.
On August 31, 2020, the Company closed
an underwritten public offering of its common stock totaling 16,422,813 shares at public offering price of $1.05 per share sold
to Wainwright for net proceeds of approximately $15.6 million, after deducting fees payable to the placement agent and other offering
expenses payable by the Company. The 16,422,813 shares of common stock sold in the offering includes 2,137,098 shares
pursuant to Wainwright’s partial exercise of its over-allotment option to purchase additional shares of common stock, pursuant
to the Amended and Restated Underwriting Agreement, dated as of August 26, 2020, between the Company and Wainwright.
6.
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 September 30,
2020, 2,718,020 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, 2020 (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, 2019
|
|
|
3,588
|
|
|
|
931
|
|
|
$
|
4.14
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
(878
|
)
|
|
|
878
|
|
|
|
1.33
|
|
|
|
|
_
|
Cancelled
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
2.94
|
|
|
|
-
|
|
Balance at September 30, 2020
|
|
|
2,718
|
|
|
|
1,801
|
|
|
|
2.78
|
|
|
|
|
_
|
The
Company accounts for share-based awards to employees and nonemployee 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, 2020 and
2019, equity-based compensation expense recorded was $237,000 and $463,000, and $108,000 and $253,000, respectively.
During
the nine months ended September 30, 2020 the Company granted stock options to officers, directors, employees and consultants to
purchase a total of 878,000 shares of common stock. The options have an exercise price of $1.33 per share, expire in ten years,
and vest as follows: one half vests on the one year anniversary of the grant date and the remainder will vest in eight equal quarterly
increments with the first such quarterly increment vesting on September 30, 2021. The total fair value of these options at the
grant date was approximately $944,000 using the Black-Scholes Option pricing model.
The
fair value of share option award is estimated using the Black-Scholes option pricing method based on the following weighted-average
assumptions:
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Risk-free interest rate
|
|
|
0.43
|
%
|
|
|
2.99
|
%
|
Average expected term (years)
|
|
|
5.9
|
|
|
|
6.1
|
|
Expected volatility
|
|
|
107.45
|
%
|
|
|
90.00
|
%
|
Expected dividend yield
|
|
|
0.00
|
|
|
|
0.00
|
|
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the
expected term of the share option award; the expected term represents the weighted-average period of time that share option awards
granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior;
the expected volatility is based upon historical volatility of the Company’s common stock; and the expected dividend yield
is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future.
As
of September 30, 2020, there was approximately $1,661,000 of total unrecognized compensation expense related to non-vested stock
options that is expected to be recognized over a weighted average period of 8.5 years. For options granted and outstanding, there
were 515,564 options outstanding which were fully vested or expected to vest, with an aggregate intrinsic value of $0, a weighted
average exercise price of $2.77, and weighted average remaining contractual term of 6.8 years at September 30, 2020. For vested
and exercisable options, outstanding shares totaled 515,564, with an aggregate intrinsic value of $0. These options had a weighted
average exercise price of $5.24 per share and a weighted-average remaining contractual term of 6.8 years at September 30, 2020.
The
aggregate intrinsic value of outstanding and exercisable options at September 30, 2020 was calculated based on the closing price
of the Company’s common stock as reported on The Nasdaq Capital Market on September 30, 2020 of $0.93 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, 2020
|
|
|
September 30, 2019
|
|
Stock options issued and outstanding
|
|
|
1,801
|
|
|
|
931
|
|
Shares authorized for future option grants
|
|
|
2,718
|
|
|
|
3,588
|
|
Warrants outstanding
|
|
|
243
|
|
|
|
243
|
|
Total
|
|
|
4,762
|
|
|
|
4,762
|
|
7.
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, 2020 (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, 2019
|
|
|
84
|
|
|
|
26
|
|
|
|
133
|
|
|
|
243
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2020
|
|
|
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, 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
|
|
|
|
|
|
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, 2020:
|
|
October 2013
Warrants
|
|
|
January 2014
Warrants
|
|
|
|
|
|
|
|
|
Strike price
|
|
$
|
15.00
|
|
|
$
|
15.00
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Contractual term (years)
|
|
|
3.1
|
|
|
|
3.3
|
|
Cumulative volatility
|
|
|
116.46
|
%
|
|
|
114.97
|
%
|
Risk-free rate
|
|
|
0.15
|
%
|
|
|
0.17
|
%
|
Value
|
|
$
|
0.21
|
|
|
$
|
0.23
|
|
The
fair value of the warrants classified as liabilities is estimated using the Black-Scholes option-pricing model with the following
inputs as of December 31, 2019:
|
|
October 2013
Warrants
|
|
|
January 2014
Warrants
|
|
|
|
|
|
|
|
|
Strike price
|
|
$
|
15.00
|
|
|
$
|
15.00
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Contractual term (years)
|
|
|
3.8
|
|
|
|
4.0
|
|
Cumulative volatility
|
|
|
89.59
|
%
|
|
|
90.58
|
%
|
Risk-free rate
|
|
|
1.67
|
%
|
|
|
1.68
|
%
|
Value
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
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.
8.
Licenses and Collaborations
Merck
On
January 2, 2019, the Company entered into an Exclusive License and Research Collaboration Agreement (the “Collaboration
Agreement”) with Merck to discover and develop certain proprietary influenza A/B antiviral agents. Under the terms of the
Collaboration Agreement, Merck funds 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
in 2019 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.
The
Company recognized $1,504,000 in revenues on the condensed consolidated statement of operations for the nine months ended September
30, 2020 related to influenza A/B program research and development expenses for the first nine months of 2020.
Kansas
State University Research Foundation
Cocrystal
entered into a License Agreement with Kansas State University Research Foundation (“KSURF”) on February 18, 2020 to
further develop certain proprietary broad-spectrum antiviral compounds for the treatment of Norovirus and Coronavirus infections.
Pursuant
to the terms of the License Agreement, KSURF granted the Company an exclusive royalty bearing license to practice under certain
patent rights, under patent applications covering antivirals against coronaviruses, caliciviruses, and picornaviruses, and related
know-how, including to make and sell therapeutic, diagnostic and prophylactic products.
The
Company agreed to pay KSURF a one-time non-refundable license initiation fee of $80,000 under the License Agreement, and annual
license maintenance fees. The Company also agreed to make certain future milestone payments, dependent upon the progress of clinical
trials, regulatory approvals, and initiation of commercial sales in the United States and certain countries outside the United
States.
On
April 19, 2020, the Company entered into a second License Agreement with KSURF in addition to the License Agreement entered into
in February 2020.
Pursuant
to the terms of the second License Agreement, KSURF granted the Company an exclusive royalty bearing license to practice under
certain patent rights under patent applications covering antivirals against coronaviruses, caliciviruses, and picornaviruses,
and related know-how, including to make and sell therapeutic, diagnostic and prophylactic products.
The
Company agreed to pay KSURF a one-time non-refundable license initiation fee and annual license maintenance fees. The Company
also agreed to make certain future milestone payments, dependent upon the progress of clinical trials, regulatory approvals, and
initiation of commercial sales in the United States and certain countries outside the United States.
9.
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 10 – Transactions with Related Parties). 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 3.1 years.
The
following table summarizes the Company’s maturities of operating lease liabilities, by year and in aggregate, as of September
30, 2020 (in thousands):
2020 (excluding the nine months ended September 30, 2020)
|
|
$
|
57
|
|
2021
|
|
|
213
|
|
2022
|
|
|
178
|
|
2023
|
|
|
183
|
|
Thereafter
|
|
|
15
|
|
Total operating lease payments
|
|
|
646
|
|
Less: present value discount
|
|
|
(77
|
)
|
|
|
|
|
|
Total operating lease liabilities
|
|
$
|
569
|
|
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, 2020 and 2019, approximately $54,000 and $60,000 of variable lease
expense (CAM) was included in general and administrative operating expenses on the condensed consolidated statements of operations.
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 10 – 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. As of September 30, 2020, operating lease rights include $51,000 and operating lease
liabilities include $53,000 relating to this lease.
For
the nine months ended September 30, 2020 and 2019, operating lease expense, excluding short-term leases, finance leases and CAM
charges, totaled approximately $171,000 and $169,000, respectively, of which $44,000 and $43,000 in each period was to a related
party.
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; in September 2020 the
Company entered into a new lease agreement to acquire lab equipment with 36 payments of $2,000 monthly payable through April 16,
2023. For finance leases, the weighted average discount rate is 8.0% and the weighted average remaining lease term is 3.4 years.
The
following table summarizes the Company’s maturities of finance lease liabilities, by year and in aggregate, as of September
30, 2020 (in thousands):
2020 (excluding the nine months ended September 30, 2020)
|
|
$
|
11
|
|
2021
|
|
|
44
|
|
2022
|
|
|
29
|
|
2023
|
|
|
7
|
|
Total finance lease payments
|
|
|
91
|
|
Less: present value discount
|
|
|
(7
|
)
|
Total finance lease liabilities
|
|
$
|
84
|
|
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, 2020, total right-of-use lab equipment and accumulated depreciation
recognized under finance leases is $119,000 and $21,000, respectively, and depreciation expense for the nine months ended September
30, 2020 was $38,000. As of December 31, 2019, total right-of-use assets lab equipment exchanged for finance lease liabilities
was $347,000 and accumulated depreciation for lab equipment under finance leases was $75,000.
At
September 30, 2020, the aggregate outstanding balance of finance lease liabilities, current and long-term, is $84,000 and the
Company expects to pay future interest charges of $7,000 over the remaining finance lease terms. At December 31, 2019, the aggregate
outstanding balance of finance lease liabilities, current and long-term, was $117,000 and the Company expects to pay future interest
charges of $4,000 over the remaining finance lease terms. For the nine months ended September 30, 2020, the Company paid $107,000
and $6,000 in principal and interest, respectively, totaling financing cash out flows of $113,000, net of interest expense, for
amount included in the measurement of lease liabilities for finance leases. 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.
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
July 2, 2020, the Company negotiated and executed term sheets with respect to the proposed settlement of the class action, the
derivative lawsuit discussed above, and two related derivative actions. The term sheets are subject to approval by the court.
As of September 30, 2020, the Company agreed to pay $450,000 for its share of the total proposed class action settlement. The
final settlement hearing for the class action and derivative lawsuits is scheduled for December 16, 2020.
As
for the settlement of the derivative lawsuits, the Company agreed to make certain corporate governance changes. On September
22, 2020, United States District Court for the District of New Jersey, where one of the derivative actions was pending,
entered an order preliminarily approving the Stipulation and Agreement of Settlement, dated August 20, 2020 (the
“Stipulation”) by and among the plaintiffs in the derivative actions, the Company as the nominal defendant, and
defendants, including certain of the Company’s current and former directors and officers. The settlement as documented
in the Stipulation covers all three derivative actions and is subject to the approval of the Court. The proposed settlement
requires that certain defendants named in the Stipulation, other than the Company, pay the plaintiffs’ attorneys’
fees and expenses in the amount of $275,000, and that the Company adopt within 60 days of the final approval of the
settlement by the Court certain corporate governance enhancements.
Liberty
Insurance Underwriters Inc. filed suit against us in federal court in Delaware seeking a declaratory judgment that it is not liable
to defend us in the class and derivative litigation. The insurance company also is claiming it is entitled to recover $1 million
it advanced to us in connection with a prior SEC investigation, of which the Company disagrees with the insurance company position.
We have retained counsel to defend us which has filed an answer to the complaint.
In
November 2017, Lee Pederson, a former Biozone lawyer, filed a lawsuit in the U.S. District Court in Minnesota against co-defendants
the Company, Dr. Phillip Frost, OPKO Health, Inc. and Brian Keller alleging that defendants engaged in wrongful conduct related
to Biozone, including causing Biozone to enter into an allegedly improper licensing agreement and engaged in alleged market manipulation.
On September 13, 2018, the United States District Court granted the Company and its co-defendants’ motion to dismiss Pederson’s
amended complaint for lack of personal jurisdiction in Minnesota. On October 11, 2018, Pederson filed a notice of appeal with
the United States Court of Appeals for the Eighth Circuit. The plaintiff’s appeal was denied and the dismissal affirmed.
In July 2019, Lee Pederson filed another lawsuit in the U.S. District Court in Minnesota against co-defendants the Company, Dr.
Frost, and Daniel Fisher. In his complaint, Pederson alleges tortious interference by the Company and Dr. Frost with an alleged
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. This lawsuit had previously been stayed by the court, pending disposition of Pederson’s
first lawsuit. With that first lawsuit having been dismissed and appeal denied, the stay was lifted, and the Company was served
in July 2020 with the complaint initiating that second lawsuit. The Company is reviewing the complaint with counsel. On October
14, 2020, the Company and co-defendants’ motions for, among other things, dismissal for lack of personal jurisdiction in
that second lawsuit were heard by the court, and the Company and co-defendants are awaiting a ruling from the trial court.
On
May 19, 2020, A.G.P./Alliance Global Partners (“AGP”), which had previously acted as the Company’s underwriter,
placement agent and sales agent in connection with the Company’s registered and exempt equity offerings, filed a lawsuit
against the Company in the United States District Court for the Southern District of New York alleging violation of a lock-up
provision under the Placement Agent Agreement, dated January 28, 2020 (the “Placement Agent Agreement”), by and between
the Company and AGP. AGP seeks (i) damages estimated in the complaint to be in excess of $1 million and attorneys’ fees,
and (ii) declaratory relief. The Company has filed a motion to dismiss the complaint.
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.
COVID-19
Our
administrative and finance activities are fully functional out of our Miami, Florida location and our research laboratory in Bothell,
Washington remains open for essential operations while meeting COVID-19 quarantine challenges. Our scientists are also able to
continue working on site and remotely and we remain committed to meeting our corporate and development milestones throughout the
year. We have experienced delays in our supply chain and with service partners as a result of the COVID-19 pandemic. Also because
of the unknown impact from the COVID-19 pandemic, it may have unanticipated material adverse effects on us in a number of ways
including:
|
●
|
If
our scientists and other personnel (or their family members) are infected with the virus, it may hamper our ability to engage
in ongoing research activities;
|
|
●
|
Similarly,
we rely on third parties who can be similarly impacted;
|
|
●
|
If
these third parties are affected by COVID-19, they may focus on other activities which they may devote their limited time
to other priorities rather than to our joint research;
|
|
●
|
We
may experience a shortage of laboratory materials which would impact our research activities;
|
|
●
|
As
a result of the continuing impact of the virus, we may fail to get access to third party laboratories which would impact our
research activities; and
|
|
●
|
We
may sustain problems due to the serious short-term and possible longer term serious economic disruptions as our economy faces
unprecedented uncertainty.
|
10.
Transactions with Related Parties
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
$44,000 and $42,000 for the nine months ended September 30, 2020 and 2019, respectively.