NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
Organization and Business
Cocrystal
Pharma, Inc. (“we”, the “Company” or “Cocrystal”), a clinical stage 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 viral replication inhibitors, 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, 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 September 30, 2022, the Company has primarily funded its operations through equity offerings.
In
September 2021, the Company opened a wholly owned foreign subsidiary in Australia named Cocrystal Pharma Australia, Ltd (“Cocrystal
Australia”) with the objective of operating clinical trials in Australia.
On
September 27, 2022, the Company filed a Certificate of Amendment to the Certificate of Incorporation (the “Amendment”)
with the Delaware Secretary of State to effect a reverse stock split of all outstanding shares of the Company’s common stock
at a ratio of one-for-12. At the Company’s 2022 Annual Meeting of Stockholders, holders of a majority of the outstanding
voting power approved an amendment to the Certificate of Incorporation of the Company to effect a reverse stock split of all
outstanding shares of our common stock at a ratio to be determined by the Board of Directors within a range of one-for-four through
one-for-12. Following such approval, The Board of Directors determined to
effect the reverse stock split at the ratio of one-for-12. The Amendment became effective October 11, 2022 and the effect of the
reverse stock split was reflected on the Nasdaq Stock Market.
On
October 18, 2022 the Company approved the issuance of an additional 20,841 shares of common stock to facilitate the rounding up of fractional
shares resulting from the above reverse stock split.
All
share and per share amounts have been retroactively restated to reflect the one-for-12 stock split
as if it occurred at the beginning of the earliest period presented.
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 U.S. GAAP 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, 2021 filed
on March 23, 2022 (“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 Pharma Australia Pty Ltd., RFS Pharma, LLC and Cocrystal Merger Sub, 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 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 U.S. financial institutions, which may, at times, exceed federally insured limits of $250,000 for each institution
where accounts are held. At September 30, 2022 and December 31, 2021, our primary operating accounts held approximately $42,056,000 and
$58,705,000, respectively, and our collateral account balance was $75,000 and $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.
Foreign
Currency Transactions
The
Company and its subsidiaries use the U.S. dollar as functional currency. Foreign currency transactions are initially measured and recorded
in the functional currency using the exchange rate on the date of the transaction. Foreign exchange gains and losses arising from settlement
of foreign currency transactions are recognized in profit and loss.
Cocrystal
Australia maintains its records in Australian dollars. The monetary assets and liabilities of Cocrystal Australia are remeasured into
the functional currency using the closing rate at the end of every reporting period. All nonmonetary assets and liabilities and related
profit and loss accounts are remeasured into the functional currency using the historical exchange rates. Profit and loss accounts, other
than those that are remeasured using the historical exchange rates, are remeasured into the functional currency using the average exchange
rate for the period. Foreign exchange gains and losses arising from the remeasurement into the functional currency is recognized in profit
and loss.
Fair
Value Measurements
FASB
Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value under
U.S. GAAP 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, 2022 and December 31, 2021, 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 leases payable 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
The
Company completed its annual impairment test in November 2021, and at that time determined the fair value of its reporting unit, as determined
utilizing both the Company’s Nasdaq market capitalization and an income approach analysis; exceeded the carrying value of the reporting
unit as of December 31, 2021; therefore, management did not consider the $19,092,000 of goodwill to be impaired.
The
Company uses judgement in assessing whether assets may have become impaired between annual impairment tests. The occurrence of a change
in circumstances, such as a continued decline in the market capitalization of the Company, would determine the need for impairment testing
between annual impairment tests. During the six months ended June 30, 2022, the Company saw a significant decrease in its price of common
stock resulting in an overall reduction in market capitalization and our recorded net book value exceeded our market capitalization as
of June 30, 2022. Pre-impairment, the carrying value of the reporting unit exceeded the market capitalization of the Company at June
30, 2022 and concluded that goodwill was impaired in its entirety and recorded a $19,092,000 non-cash impairment.
As
of September 30, 2022, the Company had no remaining goodwill.
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.
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, 2022, the Company assessed its income tax expense based on its projected future taxable income for the year ending December
31, 2022 and therefore recorded no amount for income tax expense for the nine months ended September 30, 2022. 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, 2021 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 SEC 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.
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):
Schedule of Antidilutive Securities Excluded from Calculations of Net Loss Per Share
| |
September 30, | |
| |
2022 | | |
2021 | |
Outstanding options to purchase common stock | |
| 350 | | |
| 206 | |
Warrants to purchase common stock | |
| 20 | | |
| 20 | |
Total | |
| 370 | | |
| 226 | |
Recent
Accounting Pronouncements
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50),
Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic
815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU
2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an
exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange
as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as
the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification
or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment
for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination
or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods
within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring
on or after the effective date. The adoption of ASU 2021-04 did not have any impact on the Company’s consolidated financial statement
presentation or disclosures.
Authoritative
guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public Accountants, and
the 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, 2022, and December 31, 2021, property and equipment consists of (in thousands):
Schedule of Property and Equipment
| |
September 30, 2022 | | |
December 31, 2021 | |
Lab equipment | |
$ | 1,618 | | |
$ | 1,557 | |
Finance lease right-of-use lab equipment | |
| 194 | | |
| 194 | |
Computer and office equipment | |
| 131 | | |
| 131 | |
Total property and equipment | |
| 1,943 | | |
| 1,882 | |
Less: accumulated depreciation and amortization | |
| (1,565 | ) | |
| (1,429 | ) |
Property and equipment, net | |
$ | 378 | | |
$ | 453 | |
Total
depreciation and amortization expense were approximately $47,000 and $137,000 for the three and
nine months ended September 30, 2022, which includes amortization expense of $7,000 and $20,000 for the three and nine months
ended September 30, 2022, respectively, related to assets under finance lease. 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:
Schedule of Accounts Payable and Accrued Expenses
| |
September 30, 2022 | | |
December 31, 2021 | |
Accounts payable | |
$ | 897 | | |
$ | 578 | |
Accrued compensation | |
| 165 | | |
| 104 | |
Accrued other expenses | |
| 316 | | |
| 615 | |
Total accounts payable and accrued expenses | |
$ | 1,378 | | |
$ | 1,297 | |
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
The
Company has 150,000,000 shares of common stock, $0.001 par value per share, authorized as of September 30, 2022 and December 31, 2021,
respectively. The Company had 8,143 shares issued and outstanding as of September 30, 2022 and December 31, 2021.
On
October 11, 2022, the Company effected a reverse stock split of all outstanding shares of the Company’s
common stock at a ratio of one-for-12. At the Company’s 2022 Annual Meeting of Stockholders, holders of a majority of the outstanding
voting power approved an amendment to the Certificate of Incorporation of the Company to effect a reverse stock split of all outstanding
shares of our common stock.
The
holders of common stock are entitled to one vote for each share of common stock held.
The
Company is party to the At-The-Market Offering Agreement, dated July 1, 2020 (“ATM 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. During
January 2021, the Company sold 85,833 shares of its common stock pursuant to the ATM Agreement for net proceeds of approximately $2,072,000.
There were no sales under the ATM Agreement during the nine months ended September 30, 2022.
On
May 4, 2021, the Company entered into an underwriting agreement with H.C. Wainwright & Co., LLC, pursuant to which the Company agreed
to issue and sell 2,166,667 shares of the Company’s common stock at a public offering price of $18.48 per share, less underwriting
discounts and commissions (the “Offering”). The Company received approximately $36.4 million in net proceeds from the Offering,
after deducting underwriting discounts and estimated offering expenses. The Offering closed on May 7, 2021.
6.
Stock Based Awards
Equity
Incentive Plans
The
Company adopted an equity incentive plan in 2007 (the “2007 Plan”). The 2007 Plan has expired and the Company no longer issues
any awards under the 2007 Plan. As of September 30, 2022, there are 425 of outstanding incentive stock options granted under the 2007
Plan that 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 833,333 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. On June 16, 2021, the Company’s stockholders voted to approve an amendment to the 2015 Plan to increase the number
of shares of common stock authorized for issuance under the 2015 Plan from 416,667 to 833,333 shares. As of September 30, 2022, 483,833
shares remain available for future grants under the 2015 Plan.
In
July 2021, the Compensation Committee of the Company’s Board of Directors granted a total of 86,417 stock options with a fair value
of $964,000 effective as of July 16, 2021. This follows action, taken by the Board in April 2021 and later by the stockholders in June
2021, to amend the Company’s 2015 Equity Incentive Plan. The Company granted the stock options to directors, executives, employees,
and consultants. The options are ten-year incentive stock options exercisable at $13.32 per share and vesting as follows: one-half vested on the one-year anniversary of the grant date and the remainder vest in eight equal quarterly instalments on the last day of
March, June, September and December, with the first such quarterly instalment having vested on September 30, 2022.
The
following table summarizes stock option transactions for the 2007 Plan and 2015 Plan, collectively, for the nine months ended September
30, 2022 (in thousands, except per share amounts):
Schedule of Share-based Compensation, Stock Options, Activity
| |
Number of Shares Available for Grant | | |
Total Options Outstanding | | |
Weighted Average Exercise Price | | |
Aggregate Intrinsic Value | |
Balance at December 31, 2021 | |
| 629 | | |
| 206 | | |
$ | 23.76 | | |
$ | - | |
Increase in authorized options | |
| - | | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Granted | |
| (158 | ) | |
| 158 | | |
| 5.04 | | |
| - | |
Expired | |
| 12 | | |
| (13 | ) | |
| 33.24 | | |
| - | |
Cancelled | |
| 1 | | |
| (1 | ) | |
| 15.36 | | |
| 9 | |
Balance at September 30, 2022 | |
| 484 | | |
| 350 | | |
$ | 15.36 | | |
$ | 9 | |
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. During the period ended September 30, 2022, the Company granted 158,000 stock options with
a fair value of $633,000. For the three and nine months ended September 30, 2022 and 2021, equity-based compensation expense recorded
was $216,000 and $696,000 and $205,000 and $502,000 respectively.
The
fair value of share option award is estimated using the Black-Scholes option pricing method based on the following weighted-average assumptions:
Schedule of Weighted Average Assumptions Used for Grants
| |
2022 | | |
2021 | |
| |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Risk-Free interest rate | |
| 1.64 | % | |
| 0.91 | % |
Expected dividend yield | |
| 0.00 | % | |
| 0.00 | % |
Expected volatility | |
| 87.81 | % | |
| 114.62 | % |
Expected term (in years) | |
| 4.8 | | |
| 5.8 | |
As
of September 30, 2022, there was approximately $1,210,000 of total unrecognized compensation expense related to non-vested stock options
that is expected to be recognized over a weighted average period of 1.3 years. For options granted and outstanding, there were 350,000
options outstanding which were fully vested or expected to vest, with an aggregate intrinsic value of $0, a weighted average exercise
price of $15.12 and weighted average remaining contractual term of 8.7 years at September 30, 2022. For vested and exercisable options,
outstanding shares totaled 131,500, with an aggregate intrinsic value of $0. These options had a weighted average exercise price of $27.48
per share and a weighted-average remaining contractual term of 7.4 years at September 30, 2022.
The
aggregate intrinsic value of outstanding and exercisable options at September 30, 2022 was calculated based on the closing price of the
Company’s common stock as reported on The Nasdaq Capital Market on September 30, 2022 of $3.48 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:
Schedule of Common Stock Reserved for Future Issuance
| |
| | |
| |
| |
September 30, 2022 | | |
September 30, 2021 | |
Stock options issued and outstanding | |
| 350 | | |
| 206 | |
Shares authorized for future option grants | |
| 484 | | |
| 629 | |
Warrants outstanding | |
| 20 | | |
| 20 | |
Total | |
| 854 | | |
| 855 | |
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, 2022 (in thousands):
Summary of Warrant Activity
| |
Warrants Accounted for as: Equity | | |
Warrants Accounted for as: Liabilities | | |
| |
| |
May 2018 Warrants | | |
October 2013 Warrants | | |
January 2014 Warrants | | |
Total | |
Outstanding, December 31, 2021 | |
| 7 | | |
| 2 | | |
| 11 | | |
| 20 | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Granted | |
| - | | |
| - | | |
| - | | |
| - | |
Expired | |
| - | | |
| - | | |
| - | | |
| - | |
Outstanding, September 30, 2022 | |
| 7 | | |
| 2 | | |
| 11 | | |
| 20 | |
Expiration date: | |
| 10/27/2022 | | |
| 10/24/2023 | | |
| 01/16/2024 | | |
| | |
Warrants
Classified as Liabilities
Liability-classified
warrants consist of warrants issued by Biozone Pharmaceuticals, Inc. (“Biozone”), the company’s predecessor, 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, 2022:
Schedule of Fair Value of Warrants Classified as Liabilities
| |
October 2013 Warrants | | |
January 2014 Warrants | |
| |
| | |
| |
Strike price | |
$ | 180.00 | | |
$ | 180.00 | |
Expected dividend yield | |
| 0.00 | % | |
| 0.00 | % |
Contractual term (years) | |
| 1.1 | | |
| 1.3 | |
Cumulative volatility | |
| 110.47 | % | |
| 112.04 | % |
Risk-free rate | |
| 0.01 | % | |
| 0.01 | % |
Value per warrants | |
$ | 0.00 | | |
$ | 0.00 | |
Fair value (in thousands) | |
$ | 0.00 | | |
$ | 0.00 | |
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, 2021:
| |
October 2013 Warrants | | |
January 2014 Warrants | |
| |
| | |
| |
Strike price | |
$ | 180.00 | | |
$ | 180.00 | |
Expected dividend yield | |
| 0.00 | % | |
| 0.00 | % |
Expected term (years) | |
| 1.8 | | |
| 2.0 | |
Cumulative volatility | |
| 129.65 | % | |
| 128.17 | % |
Risk-free rate | |
| 0.06 | % | |
| 0.08 | % |
Fair value (in thousands) | |
$ | 2 | | |
$ | 10 | |
The
Company estimates volatility using its own historical stock price volatility. 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
Sharp & Dohme Corp.
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 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.
Kansas
State University Research Foundation
Cocrystal
entered into a License Agreement with Kansas State University Research Foundation (the “Foundation”) 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, the Foundation 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 the Foundation 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.
9.
Commitments and Contingencies
Commitments
In
the ordinary course of business, the Company enters into non-cancellable 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 research and development laboratory space in Bothell, Washington under operating leases
that expire on August 31, 2024 and January 31, 2024, respectively. For operating leases, the weighted average discount rate is 7.2% and
the weighted average remaining lease term is 1.5 years.
The
following table summarizes the Company’s maturities of operating lease liabilities, by year and in aggregate, as of September 30,
2022 (in thousands):
Schedule
of Maturities of Operating Lease Liabilities
| |
| | |
2022 (excluding the nine months ended September 30, 2022) | |
$ | 61 | |
2023 | |
| 246 | |
2024 | |
| 58 | |
Thereafter | |
| - | |
Total operating lease payments | |
| 365 | |
Less: present value discount | |
| (19 | ) |
Total operating lease liabilities | |
$ | 346 | |
As
of September 30, 2022, the total operating lease liability of $346,000 is classified as $227,000 current operating lease liabilities
and $119,000 long term operating lease liabilities.
The
operating lease liabilities summarized above do not include variable common area maintenance (the “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, 2022 and 2021, approximately $69,000 and $58,000 of 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 had 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, 2021, the Company entered into a three-year lease extension with a limited liability company controlled by Dr. Phillip Frost,
a director and a principal stockholder of the Company (see Note 10 – Transactions with Related Parties). On an annualized basis,
straight-line rent expense is approximately $62,000, including fixed and estimable fees and taxes.
For
the nine months ended September 30, 2022 and 2021, operating lease expense, excluding short-term leases, finance leases and CAM charges,
totaled approximately $175,000 and $172,000, respectively, of which $47,000 for each period was to a related party.
Finance
Leases
In
November 2018, the Company entered into lease agreements to acquire lab equipment with 36 monthly payments of $1,000 payable through
November 21, 2021. In April 2020, the Company entered into lease agreements to acquire lab equipment with 36 monthly payments of $2,000
payable through March 31, 2023. For finance leases, the weighted average discount rate is 8.0% and the weighted average remaining lease
term is 0.5 years.
The
following table summarizes the Company’s maturities of finance lease liabilities, by year and in aggregate, as of September 30,
2022 (in thousands):
Schedule
of Maturities of Finance Lease Liabilities
| |
| | |
2022 (excluding the nine months ended September 30, 2022) | |
$ | 7 | |
2023 | |
| 7 | |
2024 | |
| - | |
Total finance lease payments | |
| 14 | |
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, 2022, total right-of-use lab equipment net of depreciation recognized under
finance leases is $40,000 and depreciation expense for the nine months ended September 30, 2022 was $12,000. As of December 31, 2021,
total right-of-use assets lab equipment exchanged for finance lease liabilities was $194,000 and accumulated depreciation for lab equipment
under finance leases was $143,000.
Phase
2a Clinical Trial
On
August 3, 2022 the Company engaged hVIVO, a subsidiary of London-based Open Orphan plc (AIM: ORPH), a rapidly growing specialist
contract research organization (CRO), to conduct a Phase 2a clinical trial with the Company’s novel, broad-spectrum, orally
administered antiviral influenza candidate. The Company paid a reservation fee of $1.7
million upon execution of the agreement, and the total estimated cost of the agreement (including the reservation fee) is
approximately $7.2
million.
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.
Liberty
Insurance Underwriters Inc. (“Liberty”) filed suit against us in federal court in Delaware seeking a declaratory
judgment that there was no insurance coverage for any settlement, judgment, or defense costs in the class and derivative litigation,
that the monies totaling approximately $1
million it paid to the Company in connection with an SEC investigation (which did not result in charges against us) were not covered
by insurance, and for recoupment of the monies already paid. We answered the complaint denying its material allegations and asserted
a counterclaim against Liberty for breach of contract, declaratory judgment, bad faith and violation of the Washington State
Consumer Protection Act, alleging among other things that Liberty wrongfully denied the Company’s claims for coverage of the
class and derivative litigations, and seeking money damages. In June 2022, the court granted Liberty’s motions for summary
judgment to Liberty and awarded Liberty $1,359,063
in damages. In July 2022, we filed an appeal and deposited $1,600,000
with the United State District Court for the District of Delaware as security pending our appeal. During the period ended
September 30, 2022, the Company recorded a legal judgment for this amount inclusive of estimated costs.
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 (“Pederson
I”). On September 13, 2018, the United States District Court granted the Company and its co-defendants’ motion to dismiss
Pederson’s amended complaint in Pederson I 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
of Pederson I affirmed in March 2020. Meanwhile, in July 2019, Lee Pederson had filed another lawsuit in the U.S. District Court in Minnesota
against co-defendants the Company, Dr. Frost, and Daniel Fisher (“Pederson II”). In his complaint in Pederson II, Pederson
alleged tortious interference by the Company and Dr. Frost with an alleged collaboration agreement between Mr. Pederson and Mr. Fisher.
On November 19, 2020 the Magistrate Judge recommended dismissal of Pederson II, and further recommended that Pederson be restricted from
filing any other actions in the District of Minnesota against defendants on the same or similar allegations as those in Pederson II,
and on January 4, 2021 the District Court Judge adopted those recommendations and ordered dismissal of Pederson II. On February 1, 2021
Pederson filed a Notice of Appeal from the order of dismissal of Pederson II in the Eighth Circuit. On February 8, 2022 the U.S. Court
of Appeals, Eighth Circuit, denied Pederson’s petition for rehearing en banc. On October 3, 2022, the U.S. Supreme Court denied Pederson’s petition for a writ of certiorari. We do not know
if Pederson will refile the lawsuit elsewhere.
COVID-19
COVID-19 did not have a material adverse effect on our operations, although
we experienced delays in our supply chain and with service partners as a result of the COVID-19 pandemic, including recent raw material
and test animal shortages affecting our research and development efforts. In the future, COVID-19 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 have been and may in the future be adversely impacted; |
|
● |
If
these third parties are and/or continue to be adversely 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, which has caused and may in the future cause material delays
in our research and development efforts; |
|
● |
We
have experienced and may experience in the future shortages of laboratory materials and other resources which impact our research
activities; and |
|
● |
As
a result of the continuing impact of the virus, including potential new variants, we may fail to get access to third party laboratories
which would impact our research activities. |
10.
Subsequent event
On
September 27, 2022, the Company filed a Certificate of Amendment to the Certificate of Incorporation (the “Amendment”)
with the Delaware Secretary of State to effect a reverse stock split of all outstanding shares of the Company’s common stock
at a ratio of one-for-12. At the Company’s 2022 Annual Meeting of Stockholders, holders of a majority of the outstanding
voting power approved an amendment to the Certificate of Incorporation of the Company to effect a reverse stock split of all
outstanding shares of our common stock at a ratio to be determined by the Board of Directors within a range of one-for-four through
one-for-12. Following such approval, The Board of Directors determined to
effect the reverse stock split at the ratio of one-for-12. The Amendment became effective October 11, 2022 and the effect of the
reverse stock split was reflected on the Nasdaq Stock Market.
On
October 18, 2022 the Company approved the issuance of an additional 20,841 shares of common stock to facilitate the rounding up of fractional
shares resulting from the above reverse stock split.
All
share and per share amounts have been retroactively restated to reflect the one-for-12 stock split
as if it occurred at the beginning of the earliest period presented.