UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended SeptemberJune 30, 20172020

 

OR

 

[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission file number: 000-55158001-38418

 

COCRYSTAL PHARMA, INC.

(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)

 

Delaware 35-2528215

(State or Other Jurisdiction of

(I.R.S. Employer
Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

1860 Montreal Road
Tucker, Georgia19805 North Creek Parkway Bothell, WA 3008498011
(Address of Principal Executive Offices)Office) (Zip Code)

 

Registrant’s telephone number, including area code: (678)-892-8800(786) 459-1831

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b212b-2 of the Exchange Act. (Check one):

 

Large accelerated filer[  ]Accelerated filer [X][  ]
Non-accelerated filer[  ]X]Smaller reporting company[  ]X]
(Do not check if a smaller reporting company)
Emerging growth company[  ]

 

If an emerging growth company, indicate by checkmarkcheck mark if the registrant has elected not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the SecuritiesExchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each ClassTrading Symbol(s)Name of each exchange on which registered
Common StockCOCP

The Nasdaq Stock Market LLC

(The Nasdaq Capital Market)

As of November 4, 2017,August, 6, 2020, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 728,238,508.52,140,699.

 

 

 

 

 

 

COCRYSTAL PHARMA, INC.

 

FORM 10-Q FOR THE QUARTER ENDED SeptemberJUNE 30, 20172020

 

INDEX

 

Part I - FINANCIAL INFORMATIONF-1
Item 1. Financial Statements (Unaudited)F-1
Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016F-1
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine months ended September 30, 2017 and 2016OperationsF-2
Condensed Consolidated StatementStatements of Stockholders’ Equity for the Nine Months Ended September 30, 2017F-3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016F-4
Notes to the Condensed Consolidated Financial StatementsF-5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations13
Item 3. Quantitative and Qualitative Disclosures About Market Risk57
Item 4. Controls and Procedures57
Part II - OTHER INFORMATION6
Item 1. Legal Proceedings68
Item 1.A. Risk Factors69
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds69
Item 3. Defaults Upon Senior Securities69
Item 4. Mine Safety Disclosures69
Item 5. Other69
Item 6. Exhibits69
SIGNATURES711

 

i

 

 

Part I – FINANCIAL INFORMATION

Cocrystal Pharma, Inc.

COCRYSTAL PHARMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)thousands, except per share data)

 

 September 30, 2017 December 31, 2016  June 30, 2020 December 31, 2019 
 (unaudited)    (unaudited)   
Assets                
Current assets:                
Cash and cash equivalents $1,345  $3,640 
Cash $19,315  $7,418 
Restricted cash  50   50 
Accounts receivable  -   21   592   644 
Prepaid expenses and other current assets  240   517   145   169 
Mortgage note receivable, current portion  1,294   1,294 
Total current assets  2,879   5,472   20,102   8,281 
        
Property and equipment, net  243   280   660   431 
Deposits  31   31   35   50 
In process research and development  53,905   53,905 
Operating lease right-of-use assets, net (including $64 to related party)  589   677 
Goodwill  65,195   65,195   19,092   19,092 
Total assets $122,253  $124,883  $40,478  $28,531 
        
Liabilities and stockholders’ equity                
Current liabilities:                
Accounts payable and accrued expenses $901  $563  $2,640  $1,999 
Current maturities of finance lease liabilities  39   103 
Current maturities of operating lease liabilities (including $59 to related party)  187   177 
Derivative liabilities  855   1,476   77   7 
Total current liabilities  1,756   2,039   2,943   2,286 
Long-term liabilities        
Deferred rent  37   63 
Deferred tax liability  20,462   20,462 
Long-term liabilities:        
Finance lease liabilities  54   14 
Operating lease liabilities (including $40 to related party)  426   523 
Total long-term liabilities  20,499   20,525   480   537 
        
Total liabilities  22,255   22,564   3,423   2,823 
        
Commitments and contingencies                
        
Stockholders’ equity:                
Common stock, $0.001 par value; 800,000 shares authorized; 728,239 and 714,032 issued and outstanding as of September 30, 2017 and December 31, 2016, respectively  728   714 
Common stock, $0.001 par value; 100,000 shares authorized as of June 30, 2020 and December 31, 2019; 52,141 and 35,150 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively  53   36 
Additional paid-in capital  242,510   239,035   277,747   260,932 
Accumulated deficit  (143,240)  (137,430)  (240,745)  (235,260)
Total stockholders’ equity  99,998   102,319   37,055   25,708 
        
Total liabilities and stockholders’ equity $122,253  $124,883  $40,478  $28,531 

 

TheSee accompanying notes are an integral part of these Condensed Consolidated Financial Statements.to condensed consolidated financial statements.

 

F-1

 

 

Cocrystal Pharma, Inc.COCRYSTAL PHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSOPERATIONS

(unaudited)

(in thousands)thousands, except per share data)

 

  

Three months ended

September 30,

  

Nine months ended

September 30,

 
   2017   2016   2017   2016 
Operating expenses            
Research and development $1,393  $2,093  $

4,718

  $7,803 
General and administrative  717   (199)  

1,712

   3,630 
Total operating expenses  2,110   1,894   6,430   11,433 
                 
Loss from operations  (2,110)  (1,894)  (6,430)  (11,433)
                 
Other income (expense)                
Interest income (expense), net  (2)  51   (1)  141 
Change in fair value of derivative liabilities  (148)  (38)  621   2,173 
Other income (expense), net  -   -   -   (1)
Total other income (expense), net  (150)  13   620   2,313 
                 
Loss before income taxes  (2,260)  (1,881)  (5,810)  (9,120)
                 
Income tax expense  -   -   -   - 
                 
Net loss and comprehensive loss $(2,260) $(1,881) $(5,810) $(9,120))
                 
Net loss per common share:                
Loss per share, basic $(0.00) $(0.00) $(0.01) $(0.01)
Weighted average common shares outstanding, basic  728,032   707,478   720,284   702,634 
                 
Loss per share, fully diluted $(0.00) $(0.00) $(0.01) $(0.02)
Weighted average common shares outstanding, diluted  728,032   707,478   720,284   703,417 
  Three months ended
June 30,		  Six months ended
June 30,		 
  2020  2019  2020  2019 
             
Revenues:                
Collaboration revenue $554  $592  $1,015  $5,670 
   554   592   1,015   5,670 
Operating expenses:                
Research and development  1,976   1,091   3,259   1,969 
General and administrative  2,028   1,051   3,167   2,374 
Total operating expenses  4,004   2,142   6,426   4,343 
                 
Income (loss) from operations  (3,450)  (1,550)  (5,411)  1,327 
                 
Other (expense) income:                
Interest expense, net  (2)  (5)  (4)  (11)
Change in fair value of derivative liabilities  (43)  40   (70)  140 
Total other income, net  (45)  35   (74)  129 
Net income (loss) $(3,495) $(1,515) $(5,485) $1,456 
                 
Net income (loss) per common share, basic and diluted $(0.07) $(0.05)  (0.12)  0.05 
Weighted average number of common shares outstanding, basic  

52,141

   

31,621

   

46,930

   

30,986

 
Weighted average number of common shares outstanding, diluted  52,141   31,621   46,930   31,006 

 

TheSee accompanying notes are an integral part of these Condensed Consolidated Financial Statements.to condensed consolidated financial statements.

 

F-2

 

 

Cocrystal Pharma, Inc.COCRYSTAL PHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

 

  Common Stock  Additional  Accumulated  Total Stockholders’ 
  Shares  Amount  Paid in capital  Deficit  Equity 
Balance as of December 31, 2016  714,032  $714  $239,035  $(137,430) $102,319 
                     
Exercise of common stock options  1,707   2   78   -   80 
Stock-based compensation  -   -   409   -   409 
Sale of common shares  12,500   12   2,988   -   3,000 
Net loss  -   -   -   (5,810)  (5,810)
Balance as of September 30, 2017  728,239  $728  $242,510  $(143,240) $99,998 
  Common Stock  Additional
Paid-in		  Accumulated  Total
Stockholders’		 
  Shares  Amount  Capital  Deficit  Equity 
Balance as of December 31, 2019  35,150  $36  $260,932  $(235,260) $  25,708 
Stock-based compensation  -   -   107   -   107 
Sale of common stock, net of transaction costs  16,991   17   16,589   -   16,606 
Net loss  -   -   -   (1,990)  (1,990)
Balance as of March 31, 2020  52,141  $53  $277,628  $(237,250) $40,431 
Stock-based compensation  -   -   119   -   119 
Net loss  -   -   -   (3,495)  (3,495)
Balance as of June 30, 2020  52,141  $53  $277,747  $(240,745) $37,055 

  Common Stock  Additional
Paid-in		  Accumulated  Total
Stockholders’		 
  Shares�� Amount  Capital  Deficit  Equity 
Balance as of December 31, 2018  29,938  $30  $253,949  $(187,091) $  66,888 
Stock-based compensation  -   -   33   -   33 
Sale of common stock, net of transaction costs  1,683   2   3,926   -   3,928 
Net income  -   -   -   2,971   2,971 
Balance as of March 31, 2019  31,621   32   257,908   (184,120)  73,820 
Stock-based compensation  -   -   113   -   113 
Net loss  -   -   -   (1,515)  (1,515)
Balance as of June 30, 2019  31,621  $32  $258,021  $(185,635) $72,418 

 

TheSee accompanying notes are an integral part of these Condensed Consolidated Financial Statements.to condensed consolidated financial statements.

 

F-3

 

 

Cocrystal Pharma, Inc.COCRYSTAL PHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

  Nine months ended
September 30,		 
  2017  2016 
Net loss $(5,810) $(9,120)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation  77   159 
Stock-based compensation  409   297 
Change in fair value of derivative liabilities  (621)  (2,173)
Change in deferred rent  (14)  (7)
Changes in operating assets and liabilities:        
Accounts receivable  21   16 
Prepaid expenses and other current assets  277   (184)
Accounts payable and accrued expenses  338   (1,342)
Net cash used in operating activities  (5,323)  (12,354)
         
Investing activities        
Purchase of fixed assets  (40)  (49)
Long-term deposits  (12)  (23)
Principal payments received on mortgage note receivable      40 
Net cash used in investing activities  (52)  (32)
         
Financing activities        
Proceeds from issuance of common stock and warrants  3,000   9,013 
Proceeds from exercise of stock options  80   3 
Net cash provided by financing activities  3,080   9,016 
         
Net decrease in cash and cash equivalents  (2,295)  (3,370)
Cash and cash equivalents at beginning of period  3,640   9,276 
Cash and cash equivalents at end of period $1,345  $5,906 
         
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Cashless exercise of warrants $-  $35 

  Six months ended
June 30,		 
  2020  2019 
       
Operating activities:        
Net income (loss) $(5,485) $1,456 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:        
Depreciation and amortization expense  68   45 
Operating lease expense  88   72 
Stock-based compensation  226   146 
Interest expense, net  -   11 
Payments on operating lease liabilities  (87)  (53)
Gain on settlement of mortgage note receivable  -   - 
Change in fair value of derivative liabilities  70   (140)
Deferred income tax benefit  -   - 
Changes in operating assets and liabilities:        
Accounts receivable  52   (914)
Prepaid expenses and other current assets  24   96 
Deposits  15   (10)
Accounts payable and accrued expenses  641   284 
Deferred rent  -   (3)
Net cash provided by (used in) operating activities  (4,388)  990 
         
Investing activities:        
Purchases of property and equipment  (220)  (29)
Proceeds from settlement of mortgage note receivable  -   - 
Net cash (used in) provided by investing activities  (220)  (29)
         
Financing activities:        
Payments on finance lease liabilities  (101)  (117)
Proceeds from sale of common stock, net of transaction costs  16,606   3,928 
Net cash provided by financing activities  16,505   3,811 
         
Net increase in cash and restricted cash  11,897   4,772 
Cash and restricted cash at beginning of period  7,468   2,752 
Cash and restricted cash at end of period $19,365  $7,524 
         
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:        
Recognition of finance lease right-of-use asset and liability $77  $- 
Recognition of operating lease right-of-use assets and operating lease liabilities upon adoption of ASC Topic 842, Leases $-  $833 

 

TheSee accompanying notes are an integral part of these Condensed Consolidated Financial Statements.to condensed consolidated financial statements.

 

F-4

 

 

Cocrystal Pharma, Inc.

Notes to the Condensed Consolidated Financial StatementsCOCRYSTAL PHARMA, INC.

September 30, 2017

(unaudited)

 

Note 1- Organization and Significant Accounting PoliciesNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company1. Organization and Business

 

Cocrystal Pharma, Inc. (“we”, the Company”“Company” or “Cocrystal”) is, a biotechnologybiopharmaceutical company that developsincorporated in Delaware, has been developing novel medicines for use in the treatment of human viral diseases. Cocrystal has developed proprietary structure-based drug design technologytechnologies and antiviral nucleoside chemistryapproaches to create first-in-class or best-in-class antiviral drug candidates.candidates since its initial funding in 2008. Our focus is to pursue the development and commercialization of broad-spectrum antiviral drug candidates designed tothat will transform the treatment and/orand prophylaxis of hepatitis C virus, influenza virus and norovirus.viral diseases in humans. By concentrating our research and development efforts on inhibiting viral replication, inhibitors, we plan to leverage our infrastructure and expertise in these areas.

 

Cocrystal Pharma, Inc. was formerly incorporated in Nevada under the name Biozone Pharmaceuticals, Inc. On January 2, 2014, Biozone Pharmaceuticals, Inc. sold substantially all of its assets to MusclePharm Corporation (“MusclePharm”), and, on the same day, merged with Cocrystal Discovery, Inc. (“Discovery”) in a transaction accounted for as a reverse merger. Following the merger, the Company assumed Discovery’s business plan and operations. On March 18, 2014, the Company reincorporated in Delaware under the name Cocrystal Pharma, Inc.

Effective November 25, 2014, Cocrystal Pharma, Inc. and affiliated entities completed a series of merger transactions as a result of which Cocrystal Pharma, Inc. merged with RFS Pharma, LLC, a Georgia limited liability company (“RFS Pharma”). We refer to the surviving entity of this merger as “Cocrystal” or the “Company.”

The Company operates in only one segment. Management uses cash flow as the primary measure to manage its business and does not segment its business for internal reporting or decision-making.

The Company’s activities since inception have principally consisted principally of acquiring product and technology rights, raising capital, and performing research and development. Successful completion of the Company’s development programs, obtaining regulatory approvals of its products and, ultimately, achievingthe attainment of profitable operations areis dependent on future events, including, among other things, its ability to access potential markets, securingsecure financing, attracting, retainingdevelop a customer base, attract, retain and motivatingmotivate qualified personnel, and developingdevelop strategic alliances. Through SeptemberJune 30, 2017,2020, the Company has primarily funded its operations through equity offerings.

 

As of September 30, 2017, the Company had an accumulated deficit of $143.2 million. During the three and nine month periods ended September 30, 2017, the Company had losses from operations of $2.1 million and $6.4 million, respectively. Cash used in operating activities was approximately $5.3 million for the nine months ended September 30, 2017. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. The Company can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs, or that any such financing will be obtainable on acceptable terms. If the Company is unable to obtain adequate capital, it could be forced to cease operations or substantially curtail its drug development activities. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. The Company expects to continue to incur substantial operating losses and negative cash flows from operations over the next several years during its pre-clinical and clinical development phases.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S.United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theyS-X set forth by the Securities and Exchange Commission (“SEC”). They do not include all of the information and footnotesnotes required by U.S. GAAPgenerally accepted accounting principles for complete financial statement presentation.statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments)accruals) considered necessary for a fair presentation of the financial position,have been included. The results of operations and cash flows for the interim periods presented. Operating results for the nine month period ended September 30, 2017presented are not necessarily indicative of the results that may be expectedof operations for the year ending December 31, 2017 or any future interim periods. All intercompany accounts and transactions have been eliminated in consolidation.

 F-5

These unaudited condensed financial statements should be read in conjunction withentire fiscal year. For further information, refer to the auditedconsolidated financial statements and footnotes thereto included in the Cocrystal Pharma, Inc. Annual ReportCompany’s annual report on Form 10-K for the year ended December 31, 2016 as2019 filed with the U.S. Securities and Exchange Commissionon March 27, 2020 (“SEC”Annual Report”). The accompanying condensed consolidated balance sheet as

Principles of September 30, 2017 has been derived from the audited financial statements as of that date, but does not include all of the information and notes required by GAAP.  Consolidation

The Company has evaluated subsequent events after the balance sheet date of September 30, 2017 through the date it has filed these unaudited condensed consolidated financial statements withinclude the SECaccounts of Cocrystal Pharma, Inc. and has disclosed all events orits wholly owned subsidiaries: Cocrystal Discovery, Inc., Cocrystal Merger Sub, Inc., Baker Cummins Corp. and Biozone Laboratories, Inc. Intercompany transactions that would require recognition or disclosures in these unaudited condensed consolidated financial statements.and balances have been eliminated.

 

Our significant accounting policiesSegments

The Company operates in only one segment. Management uses cash flows as the primary measure to manage its business and practices are presented in Note 2 to the financial statements included in the Form 10-K.does not segment its business for internal reporting or decision-making.

 

Use of Estimates

 

The preparationPreparation of the Company’s consolidated financial statements in conformityconformance with U.S. GAAP requires the Company’s management to make estimates and assumptions that affectimpact the reported amounts of assets, liabilities, revenues and liabilitiesexpenses, and the disclosure of contingent assets and liabilities atin the date of theCompany’s consolidated financial statements and accompanying notes. The significant estimates in the reported amountsCompany’s consolidated financial statements relate to the valuation of expenses duringequity awards and derivative liabilities, recoverability of deferred tax assets, estimated useful lives of fixed assets, and forecast assumptions used in the reporting period. Actualvaluation 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 those estimates.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,Leases(Topic 842). ASU 2016-02 impacts any entity that enters into a lease with some specified scope exceptions. This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financeestimates made under different assumptions or operating, with classification affecting the pattern of expense recognition in the statement of operations. The guidance updates and supersedes Topic 840,Leases. For public entities, ASU 2016-02 is effective for fiscal years, and interim periods with those years, beginning after December 15, 2018, and early adoption is permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has not yet implemented this guidance. However, based on the Company’s current operating lease arrangements, the Company does not expect the adoption of this standard to have a material impact on its financial statements based upon current obligations.

In March 2016, the FASB issued ASU No. 2016-09,Compensation—Stock Compensation (Topic 718). This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The Company adopted this standard as of January 1, 2017. The Company has elected to adopt the provisions of ASU No. 2016-09 that allow for stock option forfeitures to be recorded as they occur; however, adoption of this provision had no impact on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15,Statement of Cash Flows (Topic 230). This standard addresses the classification of eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04,Intangibles - Goodwill and Other (Topic 350). This standard simplifies how an entity is required to test for goodwill impairment. ASU 2017-04 will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted after January 1, 2017. We are currently evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.conditions.

 

 F-6F-5

 

 

Concentrations of Credit Risk

In July 2017,

Financial instruments that potentially subject the FASB issued ASU 2017-11,AccountingCompany 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 Certain Financial Instruments with Down Round Featureseach institution accounts are held. At June 30, 2020 and Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic EntitiesDecember 31, 2019, our primary operating account held approximately $19,315,000 and Certain Mandatorily Redeemable Noncontrolling Interests with$7,418,000, respectively, and our collateral account balance was $50,000 at a Scope Exception. Part I of this ASU addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of future equity offerings. Current accounting guidance requires financial instruments with down round features to be accounted for at fair value. Part II of the Update applies only to nonpublic companies and is therefore not applicable to the Company. The amendments in Part I of the Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. This Update is effective for public entities for fiscal years beginning after December 15, 2018. Early adoption is permitted.different institution. The Company has not yet determined whenexperienced any losses in such accounts and believes it will adopt the provisionsis not exposed to significant risks thereof.

As of this UpdateJune 30, 2020, 100% of our revenue and has not yet determined the impact on its consolidated financial statements upon adoption.receivables are from one customer, Merck Sharp & Dohme Corp. (“Merck”).

 

Note 2 – Fair Value Measurements

 

FASB Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

Level 1 — quoted prices in active markets for identical assets or liabilities.

Level 2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.

Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.

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 categorizedcategorizes its cash equivalentsand restricted cash as Level 1 fair value measurements. The Company categorizedcategorizes its warrants potentially settleable in cash as Level 32 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-pricingoption pricing model as discussed in Note 4 below.7 – Warrants.

At June 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.

 

F-6

At June 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 at June 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 six months ended June 30, 2020 was $554,000 and $1,015,000, respectively, compared with $592,000 and $5,670,000 for the three and six months ended June 30, 2019, respectively. As of June 30, 2020, accounts receivable of $592,000 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.

F-7

As of June 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 six months ended June 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.

Stock-Based Compensation

The Company recognizes compensation expense using a fair value-based method for costs related to stock-based payments, including stock options. The fair value of options awarded to employees is measured on the date of grant using the Black-Scholes option pricing model and is recognized as expense over the requisite service period on a straight-line basis.

Use of the Black-Scholes option pricing model requires the input of subjective assumptions including expected volatility, expected term, and a risk-free interest rate. The Company estimates volatility using a blend of its own historical stock price volatility as well as that of market comparable entities since the Company’s common stock has limited trading history and limited observable volatility of its own. The expected term of the options is estimated by using the Securities and Exchange Commission Staff Bulletin No. 107’s Simplified Method for Estimate Expected Term. The risk-free interest rate is estimated using comparable published federal funds rates.

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.

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 computation of basic and diluted net income (loss) per common share (in thousands, except per share amounts) for the three months ended:

  June 30, 2020  June 30, 2019 
Numerator:        
Net income (loss) attributable to common stockholders $(5,485) $1,456 
Denominator:        
Weighted average number of shares outstanding, basic  46,930   30,986 
Adjustment for dilutive effects of warrants, outstanding and in-the-money  -   20 
Adjustment for dilutive effects of options, exercisable and in-the-money  -   - 
Weighted average number of common shares outstanding, diluted  46,930   31,006 
Net income (loss) per common share, basic $(0.12) $0.05 
Net income (loss) per common share, diluted $(0.12) $0.05 

F-8

 

 

The following table presents a summarysets forth the number of fair valuespotential common shares excluded from the calculations of assets and liabilities that are re-measured at fair value at each balance sheet date as of September 30, 2017 and December 31, 2016, andnet loss per diluted share because their placement within the fair value hierarchy as discussed aboveinclusion would be anti-dilutive (in thousands):

 

    

Quoted

Prices in

Active

Markets

  

Significant

Other

Observable

Inputs

  

Unobservable

Inputs

 
Description September 30, 2017  (Level 1)  (Level 2)  (Level 3) 
Assets:                
Cash and cash equivalents $1,345  $1,345  $       -  $         - 
Total assets $1,345  $1,345  $-  $- 
                 
Liabilities:                
Warrants potentially settleable in cash $855  $-  $-  $855 
Total liabilities $855  $-  $-  $855 

    Quoted Prices in Active Markets  

Significant

Other
Observable Inputs

  Unobservable Inputs 
Description December 31, 2016  (Level 1)  (Level 2)  (Level 3) 
Assets:                
Cash and cash equivalents $3,640  $3,640  $     -  $        - 
Total assets $3,640  $3,640  $-  $- 
                 
Liabilities:                
Warrants potentially settleable in cash $1,476  $-  $-  $1,476 
Total liabilities $1,476  $-  $-  $1,476 
  June 30, 
  2020  2019 
Outstanding options to purchase common stock  1,801   988 
Warrants to purchase common stock  243   243 
Total  2,044   1,231 

 

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). The Company has not transferred anystandard significantly changes how entities will measure credit losses for most financial instruments into or out of Level 3 classification duringassets, 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 nine months ended September 30, 2017 or 2016. A reconciliationstandard’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 ending Level 3 liabilities forannual reporting periods beginning after December 15, 2019. The adoption of ASU 2016-13 is not expected to have a material impact on the nine months ended September 30, 2017Company’s financial position, results of operations, and 2016 is as follows:cash flows.

 

  

Fair Value Measurements
Using Significant Unobservable

Inputs
(Level 3)

 
  September 30, 2017  September 30, 2016 
Balance, January 1, $1,476  $4,115 
Estimated fair value of warrants exchanged for common shares  -   (35)
Change in fair value of warrants  (621)  (2,173)
Balance at September 30, 2017 and 2016 $855  $1,907 

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.

 

Note 3 – Stockholders’ equity3. 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 June 30, 2020, and December 31, 2019, property and equipment consists of (in thousands):

  June 30, 2020  December 31, 2019 
Lab equipment $1,478  $1,073 
Finance lease right-of-use lab equipment obtained in exchange for finance lease liabilities  118   347 
Computer and office equipment  120   92 
Total property and equipment  1,716   1,512 
Less: accumulated depreciation and amortization  (1,056)  (1,081)
Property and equipment, net $660  $431 

Total depreciation and amortization expense was $36,000 and $68,000 for the three and six months ended June 30, 2020, which includes amortization expense of $15,000 and $32,000 related to finance lease right-of-use lab equipment, respectively. Total depreciation and amortization expense were $22,000 and $45,000 for the three and six months ended June 30, 2019, which includes amortization expense of $18,000 and $35,000 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:

  June 30, 2020  December 31, 2019 
Accounts payable $832  $1,511 
Accrued compensation  160   83 
Accrued other expenses  1,648   405 
Total accounts payable and accrued expenses $2,640  $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.

F-9

5. Common Stock — The

As of June 30, 2020, the Company has authorized up to 800,000,000100,000,000 shares of common stock, $0.001 par value per share,share. The Company had 52,140,699 and had 728,238,50735,150,058 shares issued and outstanding as of SeptemberJune 30, 2017.2020 and December 31, 2019, respectively.

The holders of common stock are entitled to one vote for each share of common stock held.

 

On April 20, 2017,January 29, 2020, the Company closed on proceeds of $3,000,000entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell and issue, in a privateregistered 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 12,500,000common 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.

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 priceshares of $0.24 per share to three accredited investors, which included Chairman Dr. Raymond F. Schinazi and OPKO Health, Inc., of which the Company’s director Dr. Phillip Frostcommon 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 Chairman and Chief Executive Officer.ten years. As of June 30, 2020, 2,718,020 options remain available for future grants under the 2015 Plan.

 

 F-8F-10

 

 

The following table summarizes stock option transactions for the 2007 Plan and 2015 Plan, collectively, for the six months ended June 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   167 
Cancelled  8   (8)  2.94   - 
Balance at June 30, 2020  2,718   1,801   2.78   167 

SharesThe 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 six months ended June 30, 2020 and 2019, equity-based compensation expense recorded was $119,000 and $226,000, and $113,000 and $146,000, respectively.

During the six months ended June 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:

  Six Months Ended June 30, 
  2020  2019 
Risk-free interest rate  0.43%  2.9%
Average expected term (years)  5.9   6.1 
Expected volatility  107.45%  90.0%
Expected dividend yield  -   - 

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 June 30, 2020, there was approximately $1,898,000 of total unrecognized compensation expense related to non-vested stock authorizedoptions that is expected to be recognized over a weighted average period of 8.7 years. For options granted and outstanding, there were 464,627 options outstanding which were fully vested or expected to vest, with an aggregate intrinsic value of $0, a weighted average exercise price of $5.51, and weighted average remaining contractual term of 6.9 years at June 30, 2020. For vested and exercisable options, outstanding shares totaled 464,627, with an aggregate intrinsic value of $0. These options had a weighted average exercise price of $5.51 per share and a weighted-average remaining contractual term of 6.9 years at June 30, 2020.

The aggregate intrinsic value of outstanding and exercisable options at June 30, 2020 was calculated based on the closing price of the Company’s common stock as reported on The Nasdaq Capital Market on June 30, 2020 of $1.52 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 as follows as of September 30, 2017 (in thousands): as of:

 

  June 30, 2020  June 30, 2019 
Stock options issued and outstanding  1,801   989 
Shares authorized for future option grants  2,718   3,530 
Warrants outstanding  243   243 
Total  4,762   4,762 

As of
September 30, 2017
Stock options issued and outstanding21,344
Authorized for future option grants49,668
Warrants outstanding6,275
Total77,287F-11

 

The common stock authorized for future option grants was not reserved by the Company. The Company currently does not have enough common stock authorized to issue all the options authorized by the Company for future grants.

 

Note 4 –7. Warrants

 

The following is a summary of activity in the number of warrants outstanding to purchase the Company’s common stock for the ninesix months ended SeptemberJune 30, 20172020 (in thousands):

 

  

Warrants accounted for

as: Equity

  

Warrants accounted for as:

Liabilities

 
  April 2013
warrants		  October 2013
Series A
warrants		  January 2014
warrants		  Total 
             
Outstanding, December 31, 2016  1,500   775   4,000   6,275 
                 
Warrants expired  -   -   -   - 
Warrants exercised  -   -   -   - 
Outstanding, September 30, 2017  1,500   775   4,000   6,275 
Expiration
date		  

April 25, 2018

   October 24, 2023   January 16, 2024     
  

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, June 30, 2020  84   26   133   243 
Expiration date:  October 27, 2022   October 24, 2023   January 16, 2024     

 

Warrants consistThe following is a summary of activity in the number of warrants potentially settleable in cash, which are liability-classified warrants, and equity-classified warrants.outstanding to purchase the Company’s common stock for the six months ended June 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, June 30, 2019  84   26   133   243 
Expiration date:  October 27, 2022   October 24, 2023   January 16, 2024     

 

Warrants classifiedClassified as liabilitiesLiabilities

 

Liability-classified warrants consist of warrants issued by Biozone in connection with equity financings in October 2013 and January 2014, and potentially settleablewhich 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 and were determinedor are not to be indexed to the Company’s own stock and are therefore accounted for as liabilities.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 comprehensive lossoperations as changes in fair value of derivative liabilities.

The Company’s expected volatility is based on a combination of implied volatilities of similar publicly traded entities given that the Company has limited history of its own observable stock price. The expected life assumption is based on the remaining contractual terms of the warrants. The risk-free rate is based on the zero coupon rates in effect at the balance sheet date. The dividend yield used in the pricing model is zero, because the Company has no present intention to pay cash dividends.

 F-9

 

The fair value of the warrants classified as liabilities is estimated using the Black-Scholes option-pricing model with the following inputs as of SeptemberJune 30, 2017:2020:

 

  October 2013 warrants  January 2014 warrants 
       
Strike price $0.50  $0.50 
         
Expected term (years)  6.1   6.3 
Cumulative volatility %  88.00%  89.00%
Risk-free rate %  2.11%  2.12%
  October 2013
Warrants		  January 2014
Warrants		 
       
Strike price $15.00  $15.00 
Expected dividend yield  0.00%  0.00%
Contractual term (years)  3.3   3.5 
Cumulative volatility  113.56%  110.85%
Risk-free rate  0.23%  0.24%
Value $0.48  $0.49 

 

The Company’s expectedfair 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 is based onusing a combinationblend of implied volatilities of similar publicly traded entitiesits own historical stock price volatility as well as includingthat of market comparable entities since the Company's ownCompany’s common stock volatility, given that the Company has limited trading history and limited observable volatility of its own observable stock price.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.

 

Warrants classified as equity8. Licenses and Collaborations

 

Warrants that were recordedMerck

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 equity2019 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 fair value upon issuance, and are not reported as liabilitiesany 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 $1,015,000 in revenues on the balance sheet, are includedcondensed consolidated statement of operations for the six months ended June 30, 2020 related to influenza A/B program research and development expenses for the first six 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 above table which shows all warrants.United States and certain countries outside the United States. See Note 11, Subsequent Events with respect to another License Agreement with KSURF.

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 510 – Stock-based compensationTransactions with Related Parties). Leases are accounted for as operating leases or finance leases, in accordance with ASC 842, Leases.

Operating Leases

 

The Company recorded approximately $142,000leases office space in Miami, Florida and $409,000laboratory 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 stock-based compensation related to employee stock optionssixty 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 3.3 years.

The following table summarizes the Company’s maturities of operating lease liabilities, by year and in aggregate, as of June 30, 2020 (in thousands):

2020 (excluding the six months ended June 30, 2020) $114 
2021  213 
2022  178 
2023  183 
Thereafter  15 
Total operating lease payments  703 
Less: present value discount  (88)
     
Total operating lease liabilities $613 

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 six months ended June 30, 2020 and 2019, approximately $41,000 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 andyears on January 31, 2022, by giving prior notice at least nine months endedbefore 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 30, 2017. 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 June 20, 2020, operating lease rights include $64,000 and operating lease liabilities include $99,000 relating to this lease.

For the three and ninesix months ended SeptemberJune 30, 2016, stock option2020 and 2019, operating lease expense, excluding short-term leases, finance leases and CAM charges, totaled approximately $149,000 and $100,000, respectively, of which $29,000 in each period was to a ($1,138,000) and $297,000, respectively. During the third quarter of 2016,related party.

Finance Leases

In November 2018, the Company reversed $1,392,000entered 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 stock option expenses relatedJune 2020 the Company entered into a new lease agreement to non-vested options issued to two executives that leftacquire lab equipment with 36 payments of $2,000 monthly payable through April 16, 2023. For finance leases, the organization. Expense forweighted average discount rate is 8.0% and the weighted average remaining employees were only $254,000, resultinglease term is 4.2 years.

The following table summarizes the Company’s maturities of finance lease liabilities, by year and in aggregate, as of June 30, 2020 (in thousands):

2020 (excluding the six months ended June 30, 2020) $22 
2021  44 
2022  29 
2023  7 
Total finance lease payments  102 
Less: present value discount  (9)
Total finance lease liabilities $93 

The leased lab equipment is depreciable over five years and is presented net of accumulated depreciation on the negative stock optioncondensed consolidated balance sheets under property and equipment. As of June 30, 2020, total right-of-use lab equipment and accumulated depreciation recognized under finance leases is $120,000 and $16,000, respectively, and depreciation expense for the three months ended SeptemberJune 30, 2016.2020 was $15,000. 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.

 

AsAt June 30, 2020, the aggregate outstanding balance of Septemberfinance lease liabilities, current and long-term, is $93,000 and the Company expects to pay future interest charges of $10,000 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 six months ended June 30, 2017, there was $643,0002020, the Company paid $101,000 and $4,000 in principal and interest, respectively, totaling financing cash out flows of unrecognized compensation cost related to outstanding options that is expected to be recognized as a component$105,000, net of the Company’s operating expenses over a weighted average period of 1.50 years.

The administrator of the Company’s stock option plans determines the times when an option may become exercisable at the time of grant. Vesting periods of options granted to date have not exceeded five years. The options generally will expire, unless previously exercised, no later than ten years from the grant date. The Company is using unissued sharesinterest expense, for all shares issued for options and restricted share awards.

 F-10

The following schedule presents activityamount included in the Company’s outstanding stock optionsmeasurement of lease liabilities for finance leases. For the ninesix months ended SeptemberJune 30, 2017 (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, 2016  48,368   24,351  $0.30  $5,457 
Exercised  -   (1,707)  0.05   - 
Granted  -   -   -   - 
Cancelled  1,300   (1,300)  0.96     
Balance at September 30, 2017  49,668   21,344  $0.28  $2,874 

As2019, the Company paid $105,000 and $11,000 in principal and interest, respectively, totaling financing cash out flows of September 30, 2017, options$116,000 for amounts included in the measurement of lease liabilities for finance leases and added back to purchase 21,344,222 sharesnet income the $11,000 of common stock, with an aggregate intrinsic value of $2,874,000, were outstanding that were fully vested or expected to vest with a weighted average remaining contractual term of 4.1 years. As of September 30, 2017, options to purchase 20,464,222 shares of common stock with a weighted average exercise price of $0.24 per share and a weighted average remaining contractual term of 3.6 years were fully vested with an intrinsic value of $2,874,000.

The aggregate intrinsic value of outstanding and exercisable options at September 30, 2017 was calculated based on the closing price of the Company’s common stock as reported on the OTCQB market on September 29, 2017 of $0.27 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.interest expense under cash flows from operating activities.

 

Note 6 – Net Loss per Share

The Company accounts for and discloses net loss per common share in accordance with FASB ASC Topic 260,Earnings Per ShareContingencies. Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants. 

The following table sets forth the number of potential common shares excluded from the calculations of net loss per diluted share because their inclusion would be anti-dilutive (in thousands):

  For the three months ended
September 30		  For the nine months ended
September 30		 
  2017  2016  2017  2016 
Options to purchase common stock  21,344   24,651   21,344   24,651 
Warrants to purchase common stock  6,275   -   6,275   783 
Total  27,619   24,651   27,619   25,434 

Note 7 - Mortgage Note Receivable

In June 2014, the Company acquired a mortgage note from a bank for $2,626,290 which is collateralized by, among other things, the underlying real estate and related improvements. The property subject to the mortgage is owned by an entity managed by Daniel Fisher, one of the founders of Biozone, and to the Company’s knowledge, is currently being occupied by Flavor Producers, Inc. in an instance where that company is not currently making rent payments. At September 30, 2017, the carrying amount of the mortgage note receivable was $1,294,000, consisting entirely of principal. The mortgage note has a maturity date of August 1, 2032 and bears an interest rate of 7.24%.

 F-11

In 2014, Daniel Fisher and his affiliate, 580 Garcia Properties LLC, brought multiple lawsuits against the Company involving its predecessors and subsidiaries. The lawsuits have been settled and the complaints initiating them dismissed, without the Company making any payments to either Mr. Fisher or 580 Garcia Properties LLC. In addition, the mortgage note discussed above is a promissory note secured by a deed of trust under which 580 Garcia Properties LLC is the primary obligor. As of the time of the acquisition by the Company of the promissory note, 580 Garcia Properties LLC, was delinquent in its obligation to make certain monthly payments thereunder. Consequently, in December 2015, the Company issued notice of default letters to 580 Garcia Properties LLC, Daniel Fisher, and Sharon Fisher for said delinquencies, and proceeded in accordance with rights of a secured real estate creditor under California law, to initiate private foreclosure proceedings respecting the property, to foreclose under the promissory note secured by the deed of trust. A foreclosure sale was set in accordance with California law for January 27, 2017. Prior to the date of this foreclosure sale, Mr. Fisher filed a motion where he sought among other things an order of the court enjoining the foreclosure sale, alleging wrongdoing by the Company and Biozone Pharmaceuticals, Inc. and others that Mr. Fisher claims the Company has direct responsibility over. The court in the Fisher/Biozone Lawsuit heard oral argument on Mr. Fisher’s motion on March 2, 2017. On March 23, 2017, the court ordered further briefing by March 30, 2017 on the issue of whether to enjoin the foreclosure sale. On April 5, 2017, the court in the Fisher/Biozone Lawsuit entered a preliminary injunction barring the foreclosure sale until further order, and since that time the Company has engaged in settlement discussions with Mr. Fisher and 580 Garcia Properties LLC and others, to discuss an overall resolution of Fisher/Biozone claims of money damages allegedly caused to it by the transfer of occupants at the property, and Company efforts to either bring the promissory note to a performing status or to otherwise monetize the Company’s rights under the promissory note. The Company cannot offer any assurances as to when, or if, any settlement will be achieved, and the court has scheduled case management conferences to consider further proceedings, with the next case management conference set for November 30, 2017.

Because the Company intended to foreclose on the property and foreclosure was probable, in December 2016 the Company recognized an impairment on the mortgage note receivable of $1,176,000 to adjust the carrying value of the note to its fair value. The fair value of the note was determined by reference to the estimated fair value of the underlying property, which was determined based on analysis of comparable properties and recent market data. Furthermore, as a result of the Company’s plan to divest of this asset within the next twelve months, we are no longer recording interest income and the asset was reclassified from long-term to current at December 31, 2016.

Note 8 – Income Taxes

 

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

As a result of the Company’s cumulative losses, management has concluded that a full valuation allowance against the Company’s net deferred tax assets is appropriate. The Company has recorded a net deferred tax liability of $20,462,000 as of September 30, 2017 and December 31, 2016 as it has not considered the deferred tax liability, which is related to acquired in-process research and development, to be a future source of taxable income in evaluating the need for a valuation allowance against its deferred tax assets due to the in-process research and development asset being considered an indefinite-lived intangible asset.

FASB ASC Topic 740,Income Taxes (“ASC 740”), prescribes a recognition threshold and a measurement criterion for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be considered more likely than not to be sustained upon examination by taxing authorities. The Company records interest and penalties related to uncertain tax positions as a component of the provision for income taxes. As of September 30, 2017 and December 31, 2016, the Company had no unrecognized tax benefits.

The Company currently files income tax returns in the United States federal and various state jurisdictions. The Company is not currently under examination in any jurisdiction.

 F-12

Note 9 - Contingencies

As a publicly traded company, fromFrom time to time, the Company may beis a party to, or otherwise involved in, legal proceedings and inquiries from regulators 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.

 

In June 2014,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, acquiredcertain 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 mortgage note fromstockholder of the Company, filed with the United States District Court for the Western District of Washington a bank, which is collateralized by,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.

In June 2020, the underlying real estateCompany negotiated and related improvements. At September 30, 2017,executed term sheets with respect to the carrying amountproposed settlement of the mortgage note receivableclass action and the derivative lawsuit discussed above. The term sheets are subject to approval by the court. As of June 30, 2020, the Company agreed to pay $450,000 for its share of the total proposed class action settlement and as for the derivative lawsuit agreed to make certain corporate governance changes.

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 Minnesota against co-defendants the Company, Dr. Phillip Frost, OPKO Health, Inc. and Brian Keller for various allegations. On September 13, 2018, the United States District Court granted the Company and its co-defendants’ motion to dismiss Pederson’s amended complaint. On October 11, 2018, Pederson filed a notice of appeal with the United States Court of Appeals for the Eighth Circuit. The plaintiff’s appeal was $1,294,000, consisting entirelydenied and the dismissal affirmed. In July 2019, Lee Pederson filed another lawsuit in Minnesota against co-defendants the Company, Dr. Frost, and Daniel Fisher for various allegations. That lawsuit had previously been stayed by the court, pending disposition of principal.Pederson’s first lawsuit. With that first lawsuit having been disposed of and the second lawsuit thus no longer stayed, the Company was served in July 2020 with the complaint initiating that second lawsuit and is reviewing the complaint with counsel.

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 currently inunable to predict the outcome of these legal proceedings. Any potential loss as a result of these legal proceedings regardingcannot be reasonably estimated. As a result, the mortgage note receivable and collateralized real estate (see Note 7).Company has not recorded a loss contingency for any of the aforementioned claims.

 

Note 10 -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

 

Since November 2014,In September 2018, the Company has leased its Tucker, Georgia facilityadministrative offices from a limited liability company owned by one of Cocrystal’sthe Company’s directors and principal shareholder, Dr. Raymond Schinazi.Phillip Frost. The annualoperating 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 is estimated to be $233,000. The presentdeposit of $4,000 and total amounts paid in connection with this operating lease expiredwere $34,000 and $28,000 for the six months ended June 30, 20172020 and the Company is currently on a month-to-month term. The total rent expense was $51,000 and $162,000 for the three and nine months ended September 30, 2017 and $59,000 and $177,000 for the three and nine months ended 2016,2019, respectively.

 

Emory University: The Company has an exclusive license from Emory University for use of certain inventions and technology related to inhibitors of HCV that were jointly developed by Emory and Company employees. The License11. Subsequent Events

Entry into a Material Definitive Agreement is dated March 7, 2013 wherein Emory agrees to add to the Licensed Patents and Licensed Technology Emory’s rights to any patent, patent application, invention, or technology application that is based on technology disclosed within three (3) years of March 7, 2013. The agreement includes payments due to Emory ranging from $40,000 to $500,000 based on successful achievement of certain drug development milestones. Additionally, the Company may have royalty payments at 3.5% of net sales due to Emory with a minimum in year one of $25,000 and increase to $400,000 in year five upon product commercialization. One of the Company’s Directors, Dr. Raymond Schinazi, is also a faculty member at Emory University and may share in these royalty payments with Emory.

 

On February 2, 2016, theJuly 1, 2020 Company entered into an agreementAt-The-Market Offering Agreement with Duke University and Emory UniversityH.C. Wainwright & Co., LLC (“Wainwright”), pursuant to license various patents and know-how to use CRISPR/Cas9 technologies for developing a possible cure for hepatitis B virus (HBV) and human papilloma virus (HPV). On September 25, 2017 (“Termination Date”),which the Company mutually terminatedmay issue and sell over time and from time to time, to or through Wainwright, up to $10,000,000 of shares of the agreement with Duke University and there are no further rights or obligations under this license agreement after the Termination Date.Company’s common stock.

 F-13

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Cocrystal Pharma, Inc. (the “Company” or “Cocrystal”) is a clinical stage biotechnology company workingseeking to discover and develop novel medicinesantiviral therapeutics as treatments for use in the treatment of humanserious and/or chronic viral diseases. Cocrystal has developed proprietaryWe employ unique structure-based drug design technologytechnologies and antiviral nucleoside chemistryNobel Prize winning expertise to create first-in-classfirst- and best-in-class antiviral drug candidates. Our focus isdrugs. These technologies are designed to pursue the developmentefficiently deliver small molecule therapeutics that are safe, effective and commercialization of broad-spectrumconvenient to administer. We have identified promising preclinical and early clinical stage antiviral drug candidates that will transform the treatment and/or prophylaxis of hepatitiscompounds for unmet medical needs including Influenza Virus, Coronavirus, Hepatitis C virus norovirus,(“HCV”), and influenza virus. By concentrating our research and development efforts on viral replication inhibitors, we plan to leverage our infrastructure and expertise in these areas.Norovirus infections.

 

HighlightsImpact of COVID-19 Pandemic

A novel strain of coronavirus which causes COVID-19 continues to spread and severely impact the economy of the United States and other countries around the world. We are committed to being a part of the coordinated public and private sector response to this unprecedented challenge.

We have put preparedness plans in place at our facilities to maintain continuity of operations, while also taking steps to keep visitors and employees healthy and safe. In line with recommendations to reduce large gatherings and increase social distancing, we have, where practical, transitioned many office-based colleagues to a remote work environment.

The consequences of the COVID-19 pandemic and the impact on the national and global economy continues to evolve and the full extent of the impact is uncertain as of the date of this filing.

Research and Development Update

 

During the last ninesix months ended June 30, 2020, the Company focused its research and development efforts primarily in threefour areas:

 

●

Hepatitis C.Our Hepatitis C Virus (“HCV”) Non-Nucleoside Polymerase Inhibitor CC-31244, is a potential best-in-class pan-genotypic inhibitor of NS5B polymerase for the treatment of hepatitis C infection. It has the potential to be an important component in an all-oral ultra-short HCV combination therapy. CC-31244 showed an acceptable safety profile in both healthy volunteers and HCV-infected patients. There were no serious adverse events or discontinuations due to adverse events. The mean HCV viral load reduction was 3 logs at 48 hours and a sustained post-treatment antiviral effect after seven days of treatment. The Company is in partnership discussions for further clinical development of CC-31244.

Influenza

On January 2, 2019, we entered into an Exclusive License and Research Collaboration Agreement (the “Collaboration Agreement”) with Merck Sharp & Dohme Corp. (“Merck”) to discover and develop certain proprietary influenza A/B antiviral agents.

Under the terms of the Collaboration Agreement, Merck is funding research and development for the program at Cocrystal and Merck, including clinical development at Merck, and Merck is responsible for worldwide commercialization of any products derived from the collaboration. The Company received an upfront payment of $4,000,000 and is eligible to receive milestone 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. The Collaboration Agreement operates under a Research Operating Plan (ROP) which includes goals for both organizations. The Company achieved its anticipated goals in 2019 and H1 2020.

We have several preclinical candidates under development for the treatment of influenza infection. CC-42344, a novel PB2 inhibitor, has been selected as a preclinical lead. This candidate binds to a highly conserved PB2 site of influenza polymerase complex (PB1: PB2: PA) and exhibits a novel mechanism of action. CC-42344 showed excellent preclinical antiviral activity against influenza A strains, including avian pandemic strains and oseltamivir-resistant strains, and has a favorable pharmacokinetic profile. We are currently conducting additional preclinical IND enabling activities and plan to initiate a Phase 1 study during 2021.

Coronavirus

During the six months ended June 30, 2020, the Company initiated a coronavirus program targeting the SARS-CoV-2 virus that is responsible for the COVID-19 pandemic. There is currently no specific vaccine or antiviral treatment available for COVID-19, although there are certain drugs that may offer relief and the federal government has funded ongoing vaccine research. Remdesivir is currently used for the treatment of hospitalized patients with severe COVID-19 symptoms pursuant to an emergency use authorization granted by the U.S. Food and Drug Administration (“FDA”).

The Company is currently advancing its Coronavirus program leveraging the rights to preclinical leads from its License Agreements with KSURF to further develop certain proprietary broad-spectrum antiviral compounds for the treatment of coronavirus infections (COVID-19). Cocrystal intends to pursue research and development of these antiviral compounds for coronavirus, including preclinical and clinical development. The Company’s recent additional License Agreement from KSURF significantly expands and further advances its COVID-19 program by providing additional novel anti-coronavirus compounds for further development.

We initiated preclinical studies in our COVID-19 program during the second quarter and plan to identify additional replication inhibitors utilizing our proprietary platform technology during the third quarter of this year. The Company anticipates the selection of its lead preclinical molecule in the fourth quarter of 2020.

●

Influenza.We have several preclinical candidates under development for the treatment of influenza infection. CC-42344, a novel PB2 inhibitor, has been selected as a preclinical lead. This candidate binds to a highly conserved PB2 site of influenza polymerase complex (PB1: PB2: PA), and exhibits a novel mechanism of action. CC-42344 showed excellent antiviral activity against influenza A strains, including avian pandemic strains and Tamiflu resistant strains, and has favorable pharmacokinetic profiles. We have initiated Investigational New Drug (“IND”) enabling studies this year.

●

Norovirus Infections.We continue to identify and develop nucleoside and non-nucleoside polymerase inhibitors.

  

1

Hepatitis C

 

CC-31244, our HCV Non-Nucleoside Polymerase Inhibitor (“NNI”), is a potential best-in-class pan-genotypic inhibitor of NS5B polymerase for the treatment of HCV infection. It has the potential to be an important component in an all-oral ultra-short HCV combination therapy. The Company filed an Investigational New Drug (“IND”) application with the FDA on February 28, 2018 and received notice from the FDA on March 29, 2018 that its IND was now open and the Company was cleared to initiate its Phase 2a clinical study evaluating CC-31244 for the treatment of HCV infected individuals.

In June 2018, the Company began enrollment in and initiation of patient dosing in its Phase 2a clinical study evaluating CC-31244 for the treatment of HCV infected individuals and completed the enrollment in September 2018. The Phase 2a open-label study was designed to evaluate the safety, tolerability and preliminary efficacy of CC-31244 in combination with Epclusa, an approved twelve-week HCV drug. Patients were treated with CC-31244 and Epclusa for two weeks and then Epclusa alone for an additional four weeks for a total of six weeks.

On January 22, 2019 the Company announced safety and preliminary efficacy data for the Phase 2a study. All subjects had completed the six-week treatment regimen. The treatment was well tolerated with no study discontinuations due to adverse events. Eight of 12 subjects achieved the primary efficacy endpoint of sustained virologic response at 12 weeks after completion of treatment (SVR12). SVR12 is defined as undetectable virus in blood 12 weeks after completion of treatment and is considered a virologic cure. The eight subjects that achieved SVR12 had significantly higher frequencies of terminally differentiated effector memory CD8+ T cells compared with the four that relapsed at both baseline and at end-of-6-week treatment. The trial and the final study report have been completed.

In October 2018, the Company signed a Clinical Trial Agreement for an investigator-initiated study with the Humanity & Health Research Centre (“HHRC”) in Hong Kong, China. Due to unrest in Hong Kong and the coronavirus pandemic, the clinical trial agreement has been terminated effective March 24, 2020.

The Company is in partnership discussions for further clinical development of CC-31244. There can be no assurances that any discussions will result in a partnership.

Norovirus Infections

We continue to identify and develop inhibitors of replication using the Company’s proprietary structure-based drug design technology platform. Cocrystal recently entered into License Agreements with the KSURF to further develop certain proprietary broad-spectrum antiviral compounds for humans to treat Norovirus and Coronavirus infections. Preclinical activities for our Norovirus program are currently under way. The Company expects to complete its proof-of-concept animal model study in the fourth quarter of 2020.

 

Results of Operations for the Three and Nine monthsSix Months Ended SeptemberJune 30, 20172020 compared to the Three and Nine monthsSix Months Ended SeptemberJune 30, 20162019

 

Revenue

Revenue recorded for the three and six months ended June 30, 2020 was $554,000 and $1,015,000, respectively, compared with $592,000 and $5,670,000 for the three and six months ended June 30, 2019, respectively. The revenue for the six months ended June 30, 2019 included $4,368,000 as consideration in exchange for conveyance of intellectual property rights at the signing of the Merck Collaboration Agreement executed on January 2, 2019. Currently, reimbursement of research and development expenses under the Collaboration Agreement is our only source of revenue.

4

Research and Development Expense

 

Research and development expense consistsconsist primarily of compensation-related costs for our employees dedicated to research and development activities and for our Scientific Advisory Board members, as well as lab supplies, lab services, and facilities and equipment costs. We expectcosts related to our research and development expenses to increase in future periods asprograms. During the first quarter of 2020, we expand our clinical and pre-clinical development activities.initiated a Coronavirus program targeting the SARS-CoV-2 virus that is responsible for the COVID-19 pandemic. There is currently no approved specific vaccine or antiviral treatment available for COVID-19.

 

Total research and development expenses were approximately $1,393,000 for the three and six months ended June 30, 2020 was $1,976,000 and $3,259,000, respectively, compared with $1,091,000 and $1,969,000 for the three and six months ended June 30, 2019, respectively. The increase for the three and six months ended June 30, 2020 compared to the three months ended SeptemberJune 30, 2017, compared with $2,093,000 for the three months ended September 30, 2016. The decrease of $700,000, or 33%,2019 was primarily due to the reductionincreases in phase I clinical trials as these costs were primarily incurred during 2016.

Total researchCOVID-19 and development expenses were approximately $4,718,000 for the nine months ended September 30, 2017, compared with $7,803,000 for the nine months ended September 30, 2016. The decrease of $3,085,000 or 40%, was predominately due to the conclusion of phase I of clinical trials in 2016.Influenza programs.

 

General and Administrative Expense

 

General and administrative expense includes compensation-related costs for our employees dedicated to general and administrative activities, legal fees, audit and tax fees, consultants and professional services, and general corporate expenses.

 

General and administrative expenses were $717,000 for the three and six months ended June 30, 2020 was $2,028,000 and $3,167,000, respectively, compared with $1,051,000 and $2,374,000 for the three and six months ended June 30, 2019, respectively. The increase for the three and six months ended June 30, 2020 compared to the three months ended SeptemberJune 30, 2017,2019 was primarily due to litigation costs, insurance increases and executive compensation.

Interest Expense, Net

Interest expense for the three and six months ended June 30, 2020 was $2,000 and $4,000, respectively, compared with negative expense of $199,000$5,000 and $11,000 for the three and six months ended June 30, 2019, respectively. The increase for the three and six months ended June 30, 2020 compared to the three months ended SeptemberJune 30, 2016. This increase of $916,000, was primarily the result of the negative general and administrative expense for the three months ended September 30, 2016. This negative expense was due to reversal of stock-based compensation expense associated with options that were forfeited by two of the Company’s executives that left the organization during the quarter which had not vested. Because we assumed a zero forfeiture rate and none of these options had vested prior to forfeiture, expense associated with these options that had been recorded2019. The interest amounts represent interest incurred on finance leased lab equipment in previous periods was reversed during the three months ended September 30, 2016.

General and administrative expenses were approximately $1,712,000 for the nine months ended September 30, 2017, compared with $3,630,000 for the nine months ended September 30, 2016. The decrease of $1,918,000, or 53%, was due to an insurance reimbursement of prior legal costs, a non-cash reversal of stock compensation expense related to unvested options for the former General Council and Interim CFO that left the Company during 2017, a decrease in compensation costs due to staffing turnover, and a general decrease in legal costs.

2019.

Interest

Other Income/Expense(Expense)

 

For the three months and nine months ended September 30, 2017, the Company had interest expense of $2,000 and $1,000, respectively. Conversely, for the three months and nine months ended September 30, 2016, the Company had interest income of $51,000 and $141,000, respectively. These amounts represent interest earned on the mortgage note the Company acquired in June 2014. The key objectives of our investment policy are to preserve principal and ensure sufficient liquidity, so our invested cash may not earn as high a level of income as longer-term or higher risk securities, which generally have less liquidity and more volatility.

2

Other Income/Expense

For the three months ended September 30, 2017 and 2016, the Company had total other income (expense), net, of ($150,000) and $13,000, respectively. For the nine months ended September 30, 2017 and 2016, the Company had other income, net, totaling $620,000 and $2,313,000, respectively. Other income (expense) consists primarily of the change in fair value of the outstanding warrants to purchase our common stock that are accounted for as liabilities. Under accounting principles generally accepted in the United States,In accordance with U.S. GAAP, we record other income or expense forbased upon the computed change in fair value of our outstanding warrants that are accounted for as liabilities during each reporting period. If the fair value of the warrants decreases during the period, we record other income.liabilities. The fair value of our outstanding warrants is inversely related to the fair value of the underlying common stock; as such, a decreasean increase in the fair valueprice of our common stock during a given period generally results in other expense. Conversely, a decrease in the price of our common stock generally results in other income, while an increasewhich is what occurred during both periods. The change in the fair value of our common stock results in other expense. This other income or expense is non-cash. We believe investors should focus on our operating loss rather than net lossderivative liabilities for the periods presented. Our operatingsix months ended June 30, 2020 and 2019 was ($70,000) and $140,000, respectively.

Net Income (Loss)

Net loss for the three and ninesix months ended SeptemberJune 30, 20172020 was $2,110,000$3,495,000 and $6,430,000,$5,485,000, respectively, compared to $1,894,000 and $11,433,000 for the same periods in 2016, respectively.

Income Taxes

As a result of our cumulative losses, we have concluded that a full valuation allowance against our net deferred tax assets is appropriate. We have recordedwith a net deferred tax liabilityloss of $20,462,000 as$1,515,000 and a net income of September 30, 2017 and December 31, 2016 as we have not considered the deferred tax liability, which is related to acquired in-process research and development, to be a future source of taxable income in evaluating the need for a valuation allowance against our deferred tax assets due to the in-process research and development asset being considered an indefinite-lived intangible asset.

Net Loss

As a result of the above factors,$1,456,000 for the three and ninesix months ended SeptemberJune 30, 2017, we had2019, respectively, as a net lossresult of $2,260,000revenue and $5,810,000 compared to a net loss of $1,881,000 and $9,120,000 for the same periods in 2016.expenses described above.

 

Liquidity and Capital Resources

 

Net cash used in operating activities was $5,323,000$4,388,000 for the ninesix months ended SeptemberJune 30, 20172020 compared to $12,354,000with net cash provided by operating activities of $990,000 for the same period in 2016. For2019. This was primarily due to the nine months ended September 30, 2016, net cash used by operating activities consisted primarily$4,000,000 upfront payment from Merck at the signing of $5,810,000the Collaboration Agreement in operating expenses net of changes in operating assets and liabilities.January 2019.

 

Net cash used infor investing activities was $52,000approximately $220,000 for the ninesix months ended SeptemberJune 30, 20172020 compared to $32,000 forwith $29,000 net cash used in the same period in 2016.2019. For the ninesix months ended SeptemberJune 30, 2017,2020 and 2019, net cash used for investing activities consisted primarily of capital spending of $40,000for computers and the payment of long-term deposits of $12,000. For the nine months ended September 30, 2016, net cash used for investing activities of $32,000 consisted mostly of capital spending totaling $49,000 and payment of long-term deposits of $23,000, net of $40,000 in principal payments received on our mortgage note receivable.lab equipment.

 

Net cash provided by financing activities was $3,080,000totaled $16,505,000 for the ninesix months ended SeptemberJune 30, 20162020 compared to cash provided by financing activities of $9,016,000with $3,811,000 for the same period in 2016. For2019. This was primarily due to the nine months ended September 30, 2017, cash provided by financing activities resulted from our sale of common stock which resulted in proceeds of $3,000,000 and $80,000 fromthree registered direct offerings during the exercising of stock options. Net cash provided by financing activities for the ninesix months ended SeptemberJune 30, 2016 amounted to approximately $9,013,000 in proceeds from sale of our common stock and $3,000 for the exercise of stock options.2020.

 

The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs. The Company had $19,365,000 cash on June 30, 2020 and believes this is sufficient to maintain planned operations through 2021.

3

 

We have a history of operating losses as we have focused our efforts on raising capital and research and development activities. activities, including through collaborations with suitable partners. We have been profitable on a quarterly basis, but have never been profitable on an annual basis. We have no products approved for sale and have incurred operating losses and negative operating cash flows on an annual basis since inception.

The Company’s interim consolidated financial statements are prepared using generally accepted accounting principles in the U.S.United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Historically, public and private equity offerings have been our principal source of liquidity. During the six months ended June 30, 2020, the Company closed the following three registered direct offerings of its Common Stock.

On January 29, 2020, the Company entered into a Placement Agency Agreement with AGP, pursuant to which AGP agreed to serve as the placement agent in connection with the registered offering of 3,492,063 shares of Common Stock at a public offering price of $0.63 per share for aggregate gross proceeds to the Company of approximately $2.2 million, before deducting fees payable to the placement agent and other estimated offering expenses payable by the Company. In connection with the offering, the Company also entered into Securities Purchase Agreements with certain investors named therein, pursuant to which the Company agreed to issue the Shares directly to investors. 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 gross proceeds to the Company of approximately $11.0 million, before 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 gross proceeds to the Company of approximately $6.8 million, before deducting fees payable to the placement agent and other estimated offering expenses payable by the Company. The Company closed the offering on March 10, 2020.

Subsequently, on July 1, 2020 Company entered into an At-The-Market Offering Agreement (“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. The Company has never been profitable, has no products approved for sale, has not generatedsold any revenuesshares pursuant to date from product sales, and has incurred significant operating losses and negative operating cash flows since inception. For the nine months ended September 30, 2017, the Company recorded a net loss of approximately $5.8 million and used approximately $5.3 million of cash for operating activities.

As of September 30, 2017, the Company had $1.3 million in cash to fund its operations. The Company does not believe its current cash balances will be sufficient to allow the Company to fund its operating plan for the next twelve months. The abilitythis ATM as of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations or substantially curtail its drug development activities. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classificationdate of recorded asset amounts and classification of liabilities should the Company be unable to continue as a going concern.this filing.

 

As the Company continues to incur losses, achieving profitability is dependent upon the successful development, approval and commercialization of its product candidates, and achieving a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital. Management intends to fund future operations through additional private or public equity offerings. The Company continues to engage in preliminary discussionsofferings and through arrangements with potential investors and broker-dealers but no terms have been agreed upon.strategic partners or from other sources. There can be no assurances, however, that additional funding will be available on terms acceptable to the Company, or at all. Anyall, and any equity financing may be very dilutive to existing shareholders.

 

Tabular Disclosure of Contractual Obligations

Contractual Obligations ($ in thousands) Payments due by period 
   

Less than

1 year

   

1-3 years

   

3-5 years

   

More than 5 years

 
Operating Lease Obligations $224  $56  $-  $- 

Cautionary Note Regarding Forward-Looking Statements

 

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the potential earnings under the Collaboration Agreement; the expected progress of, and the anticipated timing of achieving the value-driving milestones in, our drug development activities,Influenza program, including the initiation of the Phase 1 study in 2021; the expected progress of, and the anticipated timing of achieving the value-driving milestones in, our coronavirus program, including identifying additional replication inhibitors using our proprietary platform technology in Q3 2020 and the selection of a preclinical lead molecule in Q4 2020; the expected progress of, and the anticipated timing of achieving the value-driving milestones in, our norovirus program, including completing the proof-of-concept animal model study in the fourth quarter of 2020; and future equity offering, cash flow deficit and liquidity. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

 

The results anticipated by any or all of these forward-looking statements might not occur. Important factors that could cause actual results to differ from those in the forward-looking statements include the continued strengthrisks arising from the impact of the market for bio pharma equity offerings, unanticipated events which adversely affectCOVID-19 pandemic on our Company, including its future effect on the timingU.S. and successglobal economies, supply chain disruptions, our continued ability to proceed with our programs, receive necessary regulatory approvals and continue to rely on certain third parties, risks arising from our reliance on continuing collaboration with Merck under the Collaboration Agreement, the future results of ourpreclinical and clinical studies, general risks arising from clinical trials, receipt of regulatory filings, failure to develop products which are deemed safeapprovals, development of effective treatments and/or vaccines by competitors, and effective and other issues which affect our ability to commercialize our product candidates.find and enter into agreements with suitable collaboration partners. Further information on our risk factors is contained in our filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2016.2019. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.

 

4

Critical Accounting Policies and Estimates

 

In our Annual Report on Form 10-K for the year ended December 31, 2016,2019, we disclosed our critical accounting policies and estimates upon which our financial statements are derived. There have been no

Accounting estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these estimates

Goodwill. As of June 30, 2020, the Company had a goodwill of $19,092,000. Goodwill is tested at least annually for impairment or when events or changes to these policies since December 31, 2016. in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more. The Company’s last annual impairment assessment was on November 30, 2019.

Revenue recognition. Effective in the fourth quarter of 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606–Revenue from Contracts with Customers.

Readers are encouraged to review these disclosures in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 in conjunction with the review of this report.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.RISK

 

There has been no material change in our assessment of sensitivity to market risk since our presentation set forth in Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management,We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, have evaluatedof the effectiveness of the Company’sour disclosure controls and procedures, (asas defined in Rules 13a-15(e) and 15d-15(e) underof the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Reportreport. Based on Form 10-Q. Ourthat evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designedas of June 30, 2020 were effective to provide reasonable assuranceensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controlsCommission’s rules and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, management concluded that our disclosure controls and procedures were not effective as of September 30, 2017 at the reasonable assurance level.forms.

 

Changes to the Company’sin Internal Control Overover Financial Reporting

 

The followingThere were no material changes in our internal controls over financial reporting or in other factors that occurred during the nine months ended September 30, 2017 havecould materially affected,affect, or are reasonably likely to materially affect, our internal controlcontrols over financial reporting.

On January 24, 2017, Curtis Dale, Interim Chief Financial Officer, tendered his resignation, at which timereporting during the Company initiated a search for a qualified replacement.

On February 12, 2017, Walt A. Linscott informed the Boardquarter ended June 30, 2020. Because of the Company of his resignation as General Counsel and Secretary of the Company, effective March 1, 2017.

On February 23, 2017, James Martin was appointed to serve as the Interim Chief Financial Officer. Mr. Martin has extensive experience in accounting and finance, as well as significant pharmaceutical industry knowledge.

During the year ended December 31, 2016, we concluded there were material weaknesses in the design and operating effectiveness of ourits inherent limitations, internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. With the oversightmay not prevent or detect misstatements. Also, projections of senior management and our audit committee, we took additional measuresany evaluation of effectiveness to remediate the underlying causes of the material weaknesses. During the year ended December 31, 2016, we worked with a third-party consultant to assist our management team in addressing the underlying cause of the material weaknesses primarily through the documentation of improved processes and documented procedures, which were designed and implemented by our management team. Management concluded that certain previously identified material weaknesses were not completely remediated as of December 31, 2016. Progress in addressing material weaknesses has also recently been hampered by the timing of the turnover in our management team, as described above, during the first quarter of 2017 and the effect of such timing on the transition of responsibilities relatedfuture periods are subject to the executionrisk that controls may become inadequate because of control activities. Therefore, we identified several material weaknesses that still existed as of December 31, 2016 and which were reportedchanges in our Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 30, 2017.

We have begun procedures to enhance our internal control and are in the process of designing and implementing enhanced internal control to address these material weaknesses. After these enhanced internal control processes are implemented, we plan to test these controls to determine whether they are operating effectively and whether we can concludeconditions, or that the material weaknesses previously identified have been remediated. The material weaknesses previously identified cannot be considered remediated untildegree of compliance with the controls have operated for a sufficient period of time and until management has concluded that the controls are operating effectively. Our goal is to remediate the material weaknesses by the end of 2017.

5

policies or procedures may deteriorate.

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, the Company is a party to, or otherwise involved in, legal proceedings arising in the normal course of business. During the quarter ended September 30, 2017,reporting period, except as set forth below, there werehave been no material developmentschanges to our previously reportedthe description of legal proceedings exceptset forth in our Annual Report on Form 10-K for the following:year ended December 31, 2019.

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.

 

In 2014, Daniel Fisher and his affiliate, 580 Garcia Properties LLC, brought multiple lawsuits againstJune 2020, the Company involving its predecessorsnegotiated and subsidiaries. The lawsuits have been settledexecuted term sheets with respect to the proposed settlement of the class action and the complaints initiating them dismissed, withoutderivative lawsuit discussed above. The term sheets are subject to approval by the court. As of June 30, 2020, the Company making any paymentsagreed to either Mr. Fisher or 580 Garcia Properties LLC. In addition, the mortgage note discussed above is a promissory note secured by a deed of trust under which 580 Garcia Properties LLC is the primary obligor. Aspay $450,000 for its share of the time oftotal proposed class action settlement and as for the acquisition by the Company of the promissory note, 580 Garcia Properties LLC, was delinquent in its obligationderivative lawsuit agreed to make certain monthly payments thereunder. Consequently,corporate governance changes.

In November 2017, Lee Pederson, a former Biozone lawyer, filed a lawsuit in December 2015,Minnesota against co-defendants the Company, issuedDr. Phillip Frost, OPKO Health, Inc. and Brian Keller for various allegations. On September 13, 2018, the United States District Court granted the Company and its co-defendants’ motion to dismiss Pederson’s amended complaint. On October 11, 2018, Pederson filed a notice of default letters to 580 Garcia Properties LLC,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, and Sharon Fisher for said delinquencies, and proceeded in accordance with rights of a secured real estate creditor under California law, to initiate private foreclosure proceedings respecting the property, to foreclose under the promissory note secured by the deed of trust. A foreclosure sale was set in accordance with California law for January 27, 2017. Prior to the date of this foreclosure sale, Mr. Fisher filed a motion where he sought among other things an order of the court enjoining the foreclosure sale, alleging wrongdoingFisher. In his complaint, Pederson alleges tortious interference by the Company and Biozone Pharmaceuticals, Inc.Dr. Frost with the collaboration agreement between Mr. Pederson and othersMr. 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 Mr. Fisher claimsfirst lawsuit having been dismissed and appeal denied, the stay was lifted, and the Company has direct responsibility over.was served in July 2020 with the complaint initiating that second lawsuit. The courtCompany is reviewing the complaint with counsel.

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 Fisher/Biozone Lawsuit heard oral argument on Mr. Fisher’s motion on March 2, 2017. On March 23, 2017,United States District Court for the court ordered further briefingSouthern 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 March 30, 2017 onand between the issue of whether to enjoin the foreclosure sale. On April 5, 2017, the courtCompany and AGP. AGP seeks (i) damages estimated in the Fisher/Biozone Lawsuit entered a preliminary injunction barring the foreclosure sale until further order,complaint to be in excess of $1 million and since that time theattorneys’ fees, and (ii) declaratory relief. The Company has engaged in settlement discussions with Mr. Fisher and 580 Garcia Properties LLC and others,filed a motion to discuss an overall resolution of Fisher/Biozone claims of money damages allegedly caused to it bydismiss the transfer of occupants at the property, and Company efforts to either bring the promissory note to a performing status or to otherwise monetize the Company’s rights under the promissory note. The Company cannot offer any assurances as to when, or if, any settlement will be achieved, and the court has scheduled case management conferences to consider further proceedings, with the next case management conference set for November 30, 2017.complaint.

 

ITEM 1.A RISK FACTORS

 

NoneThe information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Our Coronavirus program is in the preclinical stage and we face significant competition from multiple parties pursuing the development of an effective COVID-19 treatment or a vaccine, some of which have significantly more advanced product candidates and substantially more resources. If we fail to gain market share as the result of our competitors developing and successfully commercializing effective COVID-19 therapies or vaccines more quickly than we do, our business and future prospects would be materially and adversely affected.

Our COVID-19 program is the preclinical stage. We initiated preclinical studies during the second quarter of 2020 and anticipate .the selection of the lead preclinical molecule in the fourth quarter of 2020. We may be unable to produce an effective therapy in a timely manner or at all. Additionally, we are committing substantial financial and other resources to our COVID-19 program, which may negatively impact our other programs. Further, in the wake of the global COVID-19 pandemic a number of third parties, including large biotechnology and pharmaceutical companies and academic institutions have been conducting research aimed at development of an effective treatment for, or a vaccine against, COVID-19. Some of our competitors have substantially more resources, including government funding, than we do and have existing products in significantly more advanced stages of development. For example, remdesivir, an investigational antiviral agent developed by Gilead Sciences, Inc. (“Gilead”), is currently used for the treatment of hospitalized patients with severe COVID-19 symptoms pursuant to an emergency use authorization granted by the U.S. Food and Drug Administration, and Gilead earlier announced that it could spend as much as $1 billion on remdesivir in 2020. If we are unable to timely advance our Coronavirus program or if we fail to gain market share as the result of our competitors developing and successfully commercializing effective COVID-19 therapies more quickly than we do, our business and future prospects would be materially and adversely affected.

The COVID-19 pandemic may have a material adverse effect on our business.

We have experienced delays in our supply chain and with service partners as a result of the COVID-19 pandemic. Because the full impact of the COVID-19 pandemic remains uncertain, it may have 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.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

All recent unregistered sales of unregistered securities have been previously reported.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

NoneNone.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicableapplicable.

 

ITEM 5. OTHER INFORMATION

 

NoneNone.

 

ITEM 6. EXHIBITS

 

The exhibits listed in the accompanying “Index to Exhibits”“Exhibit Index” are filed or incorporated by reference as part of this Form 10-Q.

6

EXHIBIT INDEX

 

Exhibit   Incorporated by Reference   

Filed or

Furnished

No. Exhibit Description Form Date Number Herewith
3.1 Certificate of Incorporation, as amended 10-Q 8/9/18 3.1  
3.2 Bylaws 8-K 12/1/14 3.4  
10.1 License Agreement dated April 19, 2020, between the Company and Kansas State University Research Foundation*       Filed
31.1 Certification of Principal Executive Officer (302)       Filed
31.2 Certification of Principal Financial Officer (302)       Filed
32.1 Certification of Principal Executive and Principal Financial Officer (906)       Furnished**
101.INS XBRL Instance Document       Filed
101.SCH XBRL Taxonomy Extension Schema Document       Filed
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document       Filed
101.DEF XBRL Taxonomy Extension Definition Linkbase Document       Filed
101.LAB XBRL Taxonomy Extension Label Linkbase Document       Filed
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document       Filed

 

* Portions of this exhibit have been omitted as permitted by the rules of the SEC. The information excluded is both (i) not material and (ii) would be competitively harmful if publicly disclosed. The Company undertakes to submit a marked copy of this exhibit for review by the SEC staff, to the extent it has not been previously provided, and provide supplemental materials to the SEC staff promptly upon request.

** This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

+ Exhibits and/or schedules have been omitted. The Company hereby agrees to furnish to the SEC upon request any omitted information.

Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to our Corporate Secretary at Cocrystal Pharma, Inc., 4400 Biscayne Blvd, Suite 101, Miami, FL 33137.

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 Cocrystal Pharma, Inc.
   
Dated: November 8, 2017August 06, 2020By:/s/Gary Wilcox
  

Gary Wilcox

Interim

Chief Executive Officer

(Principal Executive Officer)

 

Dated: November 8, 2017August 06, 2020By:/s/ James Martin
  

James Martin

Chief Financial Officer

(Principal Financial Officer)

 

711

EXHIBIT INDEX

  Incorporated by Reference
Exhibit No. Exhibit Description Form Date Number Filed or Furnished Herewith
3.1 Certificate of Incorporation, as amended 10-K 3/31/15 3.1  
3.2 Amended and Restated Bylaws 8-K 12/1/14 3.6  
10.1 James Martin Consulting Agreement* 8-K 2/24/17 10.1  
10.2 Form of Securities Purchase Agreement dated April 20, 2017 8-K 4/24/17 10.1  
10.3 James Martin Offer Letter date May 26, 2017 8-K 6/1/17 10.1  
31.1 Certification of Principal Executive Officer (302)       Filed
31.2 Certification of Principal Financial Officer (302)       Filed
32.1 Certification of Principal Executive Officer and Principal Financial Officer (906)       Furnished**
101.INS XBRL Instance Document       Filed
101.SCH XBRL Taxonomy Extension Schema Document       Filed
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document       Filed
101.LAB XBRL Taxonomy Extension Label Linkbase Document       Filed
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document       Filed

* Represents management contracts or compensatory plan

** This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to our Corporate Secretary at Cocrystal Pharma, Inc., 1860 Montreal Road, Tucker GA 30084.

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