UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 2016
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: 000-55158
COCRYSTAL PHARMA, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 35-2528215 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| 1860 Montreal Road | ||
| Tucker, Georgia | 30084 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(678)-892-8800
(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☒ 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 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | Accelerated filer | ||
| Non-accelerated filer | Smaller reporting company | ||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐[ ] No ☒
As of November 7, 2016,August 4, 2017, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 714,031,508.
COCRYSTAL PHARMA, INC.
FORM 10-Q FOR THE QUARTER ENDED SeptemberJUNE 30, 2016
INDEXINDEX
CocrystalCocrystal Pharma, Inc.
(in thousands)
| June 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,451 | $ | 3,640 | ||||
| Accounts receivable | - | 21 | ||||||
| Prepaid expenses and other current assets | 196 | 517 | ||||||
| Mortgage note receivable | 1,294 | 1,294 | ||||||
| Total current assets | 4,941 | 5,472 | ||||||
| Property and equipment, net | 268 | 280 | ||||||
| Deposits | 31 | 31 | ||||||
| In process research and development | 53,905 | 53,905 | ||||||
| Goodwill | 65,195 | 65,195 | ||||||
| Total assets | $ | 124,340 | $ | 124,883 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | 1,093 | 563 | ||||||
| Derivative liabilities | 707 | 1,476 | ||||||
| Total current liabilities | 1,800 | 2,039 | ||||||
| Long-term liabilities | ||||||||
| Deferred rent | 42 | 63 | ||||||
| Deferred tax liability | 20,462 | 20,462 | ||||||
| Total long-term liabilities | 20,504 | 20,525 | ||||||
| Total liabilities | 22,304 | 22,564 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $0.001 par value; 800,000 shares authorized; 726,532 and 714,032 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively | 727 | 714 | ||||||
| Additional paid-in capital | 242,290 | 239,035 | ||||||
| Accumulated deficit | (140,981 | ) | (137,430 | ) | ||||
| Total stockholders’ equity | 102,036 | 102,319 | ||||||
| Total liabilities and stockholders’ equity | $ | 124,340 | $ | 124,883 | ||||
| F-1 |
September 30, 2016 | December 31, 2015 | |
(unaudited) | ||
| Assets | ||
| Current assets: | ||
| Cash and cash equivalents | $5,906 | $9,276 |
| Accounts receivable | 16 | 32 |
| Prepaid expenses and other current assets | 625 | 441 |
| Mortgage note receivable, current portion | 208 | 170 |
| Total current assets | 6,755 | 9,919 |
| Property and equipment, net | 320 | 430 |
| Deposits | 54 | 31 |
| Mortgage note receivable, long-term portion | 2,276 | 2,354 |
| In process research and development | 146,301 | 146,301 |
| Goodwill | 65,195 | 65,195 |
| Total assets | $220,901 | $224,230 |
| Liabilities and stockholders' equity | ||
| Current liabilities: | ||
| Accounts payable and accrued expenses | $1,243 | $2,585 |
| Derivative liabilities | 1,907 | 4,115 |
| Total current liabilities | 3,150 | 6,700 |
| Long-term liabilities | ||
| Deferred rent | 54 | 61 |
| Deferred tax liability | 49,875 | 49,875 |
| Total long-term liabilities | 49,929 | 49,936 |
| Total liabilities | 53,079 | 56,636 |
| Commitments and contingencies | ||
| Series A convertible preferred stock, $0.001 par value; 1,000 shares authorized, 0 shares issued and outstanding at September 30, 2016 and December 31, 2015 respectively, issued in the merger with RFS Pharma, LLC | - | - |
| Stockholders' equity: | ||
| Series B convertible preferred stock, $.001 par value; 5,000 shares authorized; 0 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | - | - |
| Common stock, $.001 par value; 800,000 shares authorized; 714,032 and 694,396 issued and outstanding as of September 30, 2016 and December 31, 2015, respectively | 714 | 694 |
| Additional paid-in capital | 238,784 | 229,456 |
| Accumulated deficit | (71,676) | (62,556) |
| Total stockholders' equity | 167,822 | 167,594 |
| Total liabilities and stockholders' equity | $220,901 | $224,230 |
Cocrystal Pharma, Inc.
CONDENSEDCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(in thousands)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | 1,255 | 2,368 | 3,325 | 5,710 | ||||||||||||
| General and administrative | (55 | ) | 1,836 | 996 | 3,829 | |||||||||||
| Total operating expenses | 1,200 | 4,204 | 4,321 | 9,539 | ||||||||||||
| Loss from operations | (1,200 | ) | (4,204 | ) | (4,321 | ) | (9,539 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest income | - | 39 | 1 | 89 | ||||||||||||
| Change in fair value of derivative liabilities | 198 | 938 | 769 | 2,211 | ||||||||||||
| Total other income (expense), net | 198 | 977 | 770 | 2,300 | ||||||||||||
| Loss before income taxes | (1,002 | ) | (3,227 | ) | (3,551 | ) | (7,239 | ) | ||||||||
| Income tax expense | - | - | - | - | ||||||||||||
| Net loss and comprehensive loss | $ | (1,002 | ) | $ | (3,227 | ) | $ | (3,551 | ) | $ | (7,239 | ) | ||||
| Net loss per common share: | ||||||||||||||||
| Loss per share, basic | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
| Weighted average common shares outstanding, basic | 724,633 | 704,256 | 719,332 | 700,204 | ||||||||||||
| Loss per share, fully diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
| Weighted average common shares outstanding, diluted | 724,633 | 705,606 | 719,332 | 701,446 | ||||||||||||
| F-2 |
Three months ended September 30, | Nine months ended September 30, | |||
2016 | 2015 | 2016 | 2015 | |
| Grant revenues | $- | $24 | $- | $78 |
| Operating expenses | ||||
| Research and development | 2,093 | 2,177 | 7,803 | 5,751 |
| General and administrative | (199) | 1,437 | 3,630 | 3,902 |
| Total operating expenses | 1,894 | 3,614 | 11,433 | 9,653 |
| Loss from operations | (1,894) | (3,590) | (11,433) | (9,575) |
| Other income (expense) | ||||
| Interest income | 51 | 45 | 141 | 134 |
| Realized gain (loss) on marketable securities | - | - | - | (1,686) |
| Other income (expense) net | - | 1 | (1) | - |
| Change in fair value of derivative liabilities | (38) | 3,036 | 2,173 | (8,494) |
| Total other income (expense), net | 13 | 3,082 | 2,313 | (10,046) |
| Loss before income taxes | (1,881) | (508) | (9,120) | (19,621) |
| Income tax expense | - | - | - | (52) |
| Net loss and comprehensive loss | $(1,881) | $(508) | (9,120) | $(19,673) |
| Net loss per common share: | ||||
| Income (loss) per share, basic | $(0.00) | $(0.00) | $(0.01) | $(0.03) |
| Weighted average common shares outstanding, basic | 707,478 | 694,375 | 702,634 | 609,803 |
| Income (loss) per share, fully diluted | $(0.00) | $(0.01) | $(0.02) | $(0.03) |
| Weighted average common shares outstanding, diluted | 707,478 | 696,946 | 703,417 | 609,803 |
Cocrystal Pharma, Inc.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | capital | Deficit | Equity | ||||||||||||||||
| Balance as of December 31, 2016 | 714,032 | $ | 714 | $ | 239,035 | $ | (137,430 | ) | $ | 102,319 | ||||||||||
| Sale of common shares | 12,500 | 13 | 2,987 | - | 3,000 | |||||||||||||||
| Stock-based compensation | - | - | 268 | - | 268 | |||||||||||||||
| Net loss | - | - | - | (3,551 | ) | (3,551 | ) | |||||||||||||
| Balance as of June 30, 2017 | 726,532 | $ | 727 | $ | 242,290 | $ | (140,981 | ) | $ | 102,036 | ||||||||||
| F-3 |
Common Stock | Additional | Accumulated | Total Stockholders' | ||
Shares | Amount | Paid in capital | Deficit | Equity | |
| Balance as of December 31, 2015 | 694,396 | $694 | $229,456 | $(62,556) | $167,594 |
| Exercise of warrants | 27 | - | 35 | - | 35 |
| Exercise of common stock options | 20 | - | 3 | - | 3 |
| Stock-based compensation | - | - | 297 | - | 297 |
| Sale of common shares | 19,589 | 20 | 8,993 | - | 9,013 |
| Net loss | - | - | - | (9,120) | (9,120) |
| Balance as of September 30, 2016 | 714,032 | $714 | $238,784 | $(71,676) | $167,822 |
Cocrystal Pharma, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASHCASH FLOWS
(unaudited)
(in thousands)
| Six months ended June 30, | ||||||||
| 2017 | 2016 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | (3,551 | ) | $ | (7,239 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 52 | 109 | ||||||
| Stock-based compensation | 268 | 1,436 | ||||||
| Change in fair value of derivative liabilities | (769 | ) | (2,211 | ) | ||||
| Change in deferred rent | (9 | ) | (4 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 21 | 19 | ||||||
| Prepaid expenses and other current assets | 321 | (247 | ) | |||||
| Accounts payable and accrued expenses | 530 | (1,071 | ) | |||||
| Net cash used in operating activities | (3,137 | ) | (9,208 | ) | ||||
| Investing activities: | ||||||||
| Purchase of fixed assets | (40 | ) | (36 | ) | ||||
| Long-term deposits | (12 | ) | (25 | ) | ||||
| Principal payments received on mortgage note receivable | - | 8 | ||||||
| Net cash used in investing activities | (52 | ) | (53 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from issuance of common stock and warrants | 3,000 | 5,004 | ||||||
| Proceeds from exercise of stock options | - | 3 | ||||||
| Net cash provided by financing activities | 3,000 | 5,007 | ||||||
| Net decrease in cash and cash equivalents | (189 | ) | (4,254 | ) | ||||
| Cash and cash equivalents at beginning of period | 3,640 | 9,276 | ||||||
| Cash and cash equivalents at end of period | $ | 3,451 | $ | 5,022 | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Cashless exercise of warrants | - | 35 | ||||||
| F-4 |
Nine months ended September 30, | ||
2016 | 2015 | |
| Operating activities: | ||
| Net loss | $(9,120) | $(19,673) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||
| Depreciation | 159 | 133 |
| Deferred income taxes | - | 52 |
| Stock-based compensation | 297 | 2,049 |
| Change in fair value of derivative liabilities | (2,173) | 8,494 |
| Realized loss on marketable securities | - | 1,686 |
| Change in deferred rent | (7) | - |
| Changes in operating assets and liabilities: | ||
| Accounts receivable | 16 | 7 |
| Prepaid expenses and other current assets | (184) | (387) |
| Accounts payable and accrued expenses | (1,342) | 362 |
| Net cash used in operating activities | (12,354) | (7,277) |
| Investing activities | ||
| Purchase of fixed assets | (49) | (217) |
| Long-term deposits | (23) | - |
| Principal payments received on mortgage note receivable | 40 | 55 |
| Net cash provided by (used in) investing activities | (32) | (162) |
| Financing activities | ||
| Proceeds from issuance of common stock and warrants | 9,013 | 15,862 |
| Proceeds from exercise of stock options | 3 | 20 |
| Net cash provided by financing activities | 9,016 | 15,882 |
| Net increase (decrease) in cash and cash equivalents | (3,370) | 8,443 |
| Cash and cash equivalents at beginning of period | 9,276 | 3,970 |
| Cash and cash equivalents at end of period | $5,906 | $12,413 |
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||
| Unrealized loss on marketable securities net of tax | $- | $(236) |
| Estimated fair value of warrants exchanged for common shares | - | 13,862 |
| Cashless exercise of warrants | 35 | - |
Cocrystal Pharma, Inc.
NotesNotes to the Condensed Consolidated Financial Statements
June 30, 2016
(unaudited)
Note 1- Organization and Significant Accounting Policies
Overview
Cocrystal Pharma, Inc. (“the Company”) has been developing novel technologies and approaches to create first-in-class and best-in-class antiviral drug candidates since its initial funding in 2008. Our focus is to pursue the development and commercialization of broad-spectrum antiviral drug candidates that will transform the treatment and prophylaxis of viral diseases in humans. By concentrating our research and development efforts on viral replication inhibitors, we plan to leverage our infrastructure and expertise in these areas.
The Company was formerly incorporated in Nevada under the name Biozone Pharmaceuticals, Inc. 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’sCocrystal Discovery, Inc.’s business plan and operations. On March 18, 2014, the Company reincorporated in Delaware under the name Cocrystal Pharma, Inc.
Effective November 25, 2014, Cocrystal Pharma, Inc. and affiliated entities completed a series of merger transactions as a result of which Cocrystal Pharma, Inc. merged with RFS Pharma, LLC, a Georgia limited liability company (“RFS Pharma”). We refer to the surviving entity of this merger as “Cocrystal” or the “Company.”
Cocrystal has developed proprietary structure-based drug design technology and antiviral nucleoside chemistry to create antiviral drug candidates. In addition, we have licensed gene-editing technologies. 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, norovirus infections and hepatitis B virus and human papillomavirus.B. By concentrating our research and development efforts on viral replication inhibitors, we plan to leverage our infrastructure and expertise in these areas.
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 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 are 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, 2016,2017, the Company has funded its operations primarily through equity offerings.
As of SeptemberJune 30, 2016,2017, the Company had an accumulated deficit of $71.7$141.0 million. During the three and ninesix month periodsperiod ended SeptemberJune 30, 2016,2017, the Company had lossesa loss from operations of $1.9$1.2 million and $11.4$4.3 million, respectively. Cash used in operating activities was approximately $12.4$3.1 million for the ninesix months ended SeptemberJune 30, 2016.2017. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs. costs and allow it to continue as a going concern.
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.
Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, have been condensed or omitted pursuant to those rules and with the instructionsregulations. We believe disclosures made are adequate to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all ofmake the information and footnotes required by U.S. GAAP for complete financial statement presentation.presented not misleading. In the opinion of management, all adjustments, (consistingconsisting only of normal recurring adjustments) consideredadjustments necessary for a fair presentation ofto fairly state the financial position, results of operations and cash flows with respect to the interim condensed consolidated financial statements have been included. The results of operations for the interim periods presented. Operating results for the nine month period ended September 30, 2016 are not necessarily indicative of the results that may be expectedof operations for the year ending December 31, 2016 or any future interim periods.entire fiscal year. All intercompany accounts and transactions have been eliminated in consolidation.
| F-5 |
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In August 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15,Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern2016-02,Leases(ASU 2014-15)Topic 842). ASU 2014-15 requires management to determine whether substantial doubt exists regarding the entity’s going concern presumption, which generally refers to an entity’s ability to meet its obligations as they become due. If substantial doubt exists but is not alleviated by management’s plan, the footnotes must specifically state2016-02 impacts any entity that “there is substantial doubt about the entity’s ability to continue asenters into a going concern within one year after the financial statements are issued”. In addition, if substantial doubt exists, regardless of whether such doubt was alleviated, entities must disclose (a) principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans, if any); (b) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations; and (c) management’s plans that are intended to mitigate the conditions or events that raise substantial doubt, or that did alleviate substantial doubt, about the entity’s ability to continue as a going concern. If substantial doubt has not been alleviated, these disclosures should become more extensive in subsequent reporting periods as additional information becomes available. In the period that substantial doubt no longer exists (before or after considering management’s plans), management should disclose how the principal conditions and events that originally gave rise to substantial doubt have been resolved. The ASU applies prospectively to all entities for annual periods ending after December 15, 2016, and to annual and interim periods thereafter. Early adoption is permitted. The Company has not yet adopted the provisions of this ASU.
In AprilMarch 2016, the FASB issued ASU No. 2016-09,Compensation—Stock Compensation Topic 718:Improvements to Employee Share-based Payment Accounting(Topic 718). This ASU simplifiesstandard makes several modifications to Topic 718 related to the accounting for stockforfeitures, employer tax withholding on share-based compensation on income tax accounting, classificationand the financial statement presentation of awards as either equity or liabilities, estimating forfeitures, and cash flow presentation. Based on this ASU, an entity should recognize all excess tax benefits and tax deficiencies, including tax benefitsor deficiencies. ASU 2016-09 also clarifies the statement of dividends oncash flows presentation for certain components of share-based payment awards,awards. The Company adopted this standard as income tax expense or benefit in the income statement; they do not need to include the effects of windfalls and shortfalls in the annual effective tax rate estimate from continuing operations used for interim reporting purposes. As a result of including income tax effects from windfalls and shortfalls in income tax expense, the calculation of both basic and diluted EPS will be affected. The ASU also provides an accounting policy election for awards with service conditions to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur. The ASU increases the allowable statutory tax withholding threshold to qualify for equity classification from the minimum statutory withholding requirements up to the maximum statutory tax rate in the applicable jurisdiction(s). The ASU clarifies that cash paid to a taxing authority by an employer when directly withholding equivalent shares for tax withholding purposes should be considered similar to a share repurchase, and thus classified as a financing activity. All other employer withholding taxes on compensation transactions and other events that enter into the determination of net income continue to be presented within operating activities. The new standard takes effect in 2017 for public business entities and 2018 for all other entities.January 1, 2017. The Company has not adoptedelected to adopt the provisions of ASU No. 2016-09. The Company is2016-09 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 adoptingthis new guidance on our Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2016-09No. 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.
In July 2017, the FASB issued ASU 2017-11,Accounting for Certain Financial Instruments with Down Round Features and Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with 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. The Company has not yet determined when it will adopt the provisions of this Update and has not yet determined the impact on its consolidated financial statements.statements upon adoption.
| F-6 |
Note 2 – Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
| Level 1 — quoted prices in active markets for identical assets or liabilities. | |
| Level 2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date. | |
| Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date. |
The Company categorized its cash equivalents as Level 1 fair value measurements. The Company categorized its warrants potentially settleable in cash as Level 3 fair value measurements. The warrants potentially settleable in cash are measured at fair value on a recurring basis and are being marked to fair value at each reporting date until they are completely settled or meet the requirements to be accounted for as component of stockholders’ equity. The warrants are valued using the Black-Scholes option-pricing model as discussed in Note 4 below.
The following table presents a summary of fair values of assets and liabilities that are re-measured at fair value at each balance sheet date as of SeptemberJune 30, 20162017 and December 31, 2015,2016, and their placement within the fair value hierarchy as discussed above (in thousands):
| Quoted Prices in Active Markets | Significant Other Observable Inputs | Unobservable Inputs | ||||||||||||||
| Description | June 30, 2017 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 3,451 | $ | 3,451 | $ | - | $ | - | ||||||||
| Total assets | $ | 3,451 | $ | 3,451 | $ | - | $ | - | ||||||||
| Liabilities: | ||||||||||||||||
| Warrants potentially settleable in cash | $ | 707 | $ | - | $ | - | $ | 707 | ||||||||
| Total liabilities | $ | 707 | $ | - | $ | - | $ | 707 | ||||||||
| 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 | ||||||||
| F-7 |
September 30, | Quoted Prices in Active Markets | Significant Other Observable Inputs | Unobservable Inputs | |
| Description | 2016 | (Level 1) | (Level 2) | (Level 3) |
| Assets: | ||||
| Cash and cash equivalents | $5,906 | $5,906 | $- | $- |
| Total assets | $5,906 | $5,906 | $- | $- |
| Liabilities: | ||||
| Warrants potentially settleable in cash | $1,907 | $- | $- | $1,907 |
| Total liabilities | $1,907 | $- | $- | $1,907 |
December 31, | Quoted Prices in Active Markets | Significant Other Observable Inputs | Unobservable Inputs | |
| Description | 2015 | (Level 1) | (Level 2) | (Level 3) |
| Assets: | ||||
| Cash and cash equivalents | $9,276 | $9,276 | $- | $- |
| Total assets | $9,276 | $9,276 | $- | $- |
| Liabilities: | ||||
| Warrants potentially settleable in cash | $4,115 | $- | $- | $4,115 |
| Total liabilities | $4,115 | $- | $- | $4,115 |
The Company has not transferred any financial instruments into or out of Level 3 classification during the ninesix months ended SeptemberJune 30, 20162017 or 2015.2016. A reconciliation of the beginning and ending Level 3 liabilities for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 is as follows:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||
September 30, 2016 | September 30, 2015 | |
| Balance , January 1, | $4,115 | $8,464 |
| Estimated fair value of warrants exchanged for common shares | (35) | (13,862) |
| Change in fair value of warrants | (2,173) | 8,494 |
| Balance at September 30, 2016 and 2015 | $1,907 | $3,096 |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||
| June 30, 2017 | June 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 | (769 | ) | (2,211 | ) | ||||
| Balance at June 30, | $ | 707 | $ | 1,869 | ||||
Note 3 – Stockholders’ equity
Common Stock — The Company has authorized up to 800,000,000 shares of common stock, $0.001 par value per share, and had 714,031,508726,531,530 shares issued and outstanding as of SeptemberJune 30, 2016.
On March 9, 2016, we accepted subscription agreements representing investor commitments totaling $5,004,371April 20, 2017, the Company closed on proceeds of $3,000,000 in a private placement offering of 9,812,49212,500,000 shares of ourthe Company’s common stock at a purchase price of $0.51$0.24 per share. The purchasersshare to three accredited investors, which included seven members of our board of directors includingChairman Dr. Raymond F. Schinazi and Dr. Phil Frost. As of the date of this report, we have received all of the committed funds.
Shares of common stock are reservedauthorized for future issuance as follows as of SeptemberJune 30, 20162017 (in thousands):
| As of June 30, | ||||
| Stock options issued and outstanding | 23,051 | |||
| 49,668 | ||||
| Warrants outstanding | 6,275 | |||
| Total | 78,994 | |||
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 – 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, 2016 (in thousands):
Warrants accounted for as: | Warrants accounted for as: | |||||||
Equity | Liabilities | |||||||
January 2012 warrants | March 2013 warrants | April 2013 warrants | February 2012 warrants | October 2013 Series A warrants | January 2014 warrants | Total | ||
| Outstanding, December 31, 2015 | 650 | 455 | 1,500 | 1,000 | 775 | 4,000 | 8,380 | |
| Warrants Expired | (650) | (455) | - | (889) | - | - | (1,994) | |
| Warrants exercised | - | - | - | (111) | - | - | (111) | |
| Outstanding, September 30, 2016 | - | - | 1,500 | - | 775 | 4,000 | 6,275 | |
| Expiration date | January 11, 2016 | March 1, 2016 | April 25, 2018 | February 28, 2016 | October 24, 2023 | January 16, 2024 | ||
Expired | Expired | Expired | ||||||
| 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, June 30, 2017 | 1,500 | 775 | 4,000 | 6,275 | ||||||||||||
| Expiration date | April 25, 2018 | October 24, 2023 | January 16, 2024 | |||||||||||||
Warrants consist of warrants potentially settleable in cash, which are liability-classified warrants, and equity-classified warrants.
| F-8 |
Warrants classified as liabilities
Liability-classified warrants consist of warrants issued in connection with equity financings in February 2012, October 2013 and January 2014. The remaining warrants issued in February 2012 expired during the first quarter of 2016. The remaining outstanding warrants issued in October 2013 and January 2014 areand potentially settleable in cash and were determined not to be indexed to the Company’s own stock and are therefore accounted for as liabilities.
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 consolidated statement of comprehensive loss as changes in fair value of derivative liabilities. The fair value of the warrants classified as liabilities is estimated using the Black-Scholes option-pricing model with the following inputs as of September 30, 2016:
October 2013 warrants | January 2014 warrants | |
| Strike price | $0.50 | $0.50 |
| Expected term (years) | 7.1 | 7.3 |
| Cumulative volatility % | 96% | 97% |
| Risk-free rate % | 1.42% | 1.44% |
The Company’s expected volatility is based on a combination of implied volatilities of similar publicly traded entities as well as including the Company's own common stock volatility, 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.
The fair value of the warrants classified as liabilities is estimated using the Black-Scholes option-pricing model with the following inputs as of June 30, 2017:
| October 2013 warrants | January 2014 warrants | |||||||
| Strike price | $ | 0.50 | $ | 0.50 | ||||
| Expected term (years) | 6.3 | 6.6 | ||||||
| Cumulative volatility % | 90 | % | 91 | % | ||||
| Risk-free rate % | 2.10 | % | 2.11 | % | ||||
Warrants classified as equity
Warrants that were recorded in equity at fair value upon issuance, and are not reported as liabilities on the balance sheet, are included in the above table which shows all warrants.
Note 5 – Stock-based compensation
The Company reversed $1,392,000recorded approximately $54,000 and $268,000 of stock option expenses during the third quarter of 2016stock-based compensation related to options that had been issued to two executives that left the organization in July 2016 and which had not vested. Stock option expenses recorded for the remaining employees were $254,000, resulting in a negativeemployee stock option expense of $1,138,000options for the three and six months ended SeptemberJune 30, 2016. For the nine months ended September 30, 2016 net stock option expense was $299,000. For2017 and $719,000 and $1,436,000 for the three and ninesix months ended SeptemberJune 30, 2015, stock option expenses of $738,000 and $2,049,000 were recognized,2016, respectively. As of SeptemberJune 30, 2016,2017, there was $1,986,000$751,000 of unrecognized compensation cost related to outstanding options that is expected to be recognized as a component of the Company’s operating expenses over a weighted average period of 2.41.75 years.
The administrator of the planplans 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 shares for all shares issued for options and restricted share awards.
The following schedule presents activity in the Company’s outstanding stock options for the ninesix months ended SeptemberJune 30, 20162017 (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, 2015 | 29,485 | 43,071 | $0.48 | $ 17,867 |
| Exercised | - | (20) | 0.15 | - |
| Granted | - | - | - | - |
| Cancelled | 18,400 | (18,400) | ||
| Balance at September 30, 2016 | 47,885 | 24,651 | $0.31 | $7,619 |
| 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 | - | - | - | - | |||||||||||||
| Granted | - | - | - | - | |||||||||||||
| Cancelled | 1,300 | (1,300 | ) | 0.96 | - | ||||||||||||
| Balance at June 30, 2017 | 49,668 | 23,051 | $ | 0.26 | $ | 2,352 | |||||||||||
As of SeptemberJune 30, 2016,2017, options to purchase 24,651,20023,051,200 shares of common stock, with an aggregate intrinsic value of $7,619,000,$2,352,000, were outstanding that were fully vested or expected to vest with a weighted average remaining contractual term of 4.24.1 years. As of SeptemberJune 30, 2016,2017, options to purchase 21,598,86021,521,709 shares of common stock with an intrinsic value of $6,342,000 were exercisable with a weighted average exercise price of $0.17$0.23 per share and a weighted average remaining contractual term of 3.7 years.3.6 years were fully vested with an intrinsic value of $2,306,000.
| F-9 |
The aggregate intrinsic value of outstanding and exercisable options at SeptemberJune 30, 20162017 was calculated based on the closing price of the Company’s common stock as reported on the OTCQB market on SeptemberJune 30, 20162017 of $0.49$0.223 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.
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 Share. 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 (which includes the common share equivalents of the outstanding Series B preferred shares prior to their conversion to common stock in March 2015).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.
Three months ended September 30, | Nine months ended September 30, | |||
2016 | 2015 | 2016 | 2015 | |
| Numerator: | ||||
| Net income (loss) | $(1,881) | $(508) | $(9,120) | $(19,673) |
| Change in fair value of derivative liability - income/(loss) | - | 3,036 | 2,173 | - |
| Net income (loss) attributable to shareholders | $(1,881) | $(3,544) | $(11,293) | $(19,673) |
| Denominator: | ||||
Weighted average shares outstanding used to compute net income (loss) per share: | ||||
| Basic | 707,478 | 694,375 | 702,634 | 609,803 |
| Adjustment for dilutive effects of warrants | - | 2,571 | 783 | - |
| Diluted | 707,478 | 696,946 | 703,417 | 609,803 |
| Net income (loss) per share | ||||
| Basic (net income / basic shares) | $(0.00) | $(0.00) | $(0.01) | $(0.03) |
| Diluted (net income attributable/ diluted shares) | $(0.00) | $(0.01) | $(0.02) | $(0.03) |
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, | |||
2016 | 2015 | 2016 | 2015 | |
| Options to purchase common stock | 24,651 | 24,614 | 24,651 | 24,614 |
| Warrants to purchase common stock | - | 2,571 | 783 | - |
| Total | 24,651 | 27,185 | 25,434 | 24,614 |
| For the three months ended June 30 | For the six months ended June 30 | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Options to purchase common stock | 23,051 | 43,051 | 23,051 | 43,059 | ||||||||||||
| Warrants to purchase common stock | 6,275 | 1,350 | 6,275 | 1,242 | ||||||||||||
| Total | 29,326 | 44,401 | 29,326 | 44,301 | ||||||||||||
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 580 Garcia Properties, an entity managed by Daniel Fisher, one of the founders of Biozone, and is currently under lease to MusclePharm Corporation (“MusclePharm”).Flavor Producers, Inc. At SeptemberJune 30, 2016,2017, the carrying amount of the mortgage note receivable was $2,507,000.$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%. The Company records its mortgage note receivable at the amount advanced to the borrower, which includes the stated principal amount
In 2014, Daniel Fisher and certain loan origination and commitment fees that are recognized over the term of the mortgage note. Interest income is accrued as earned over the term of the mortgage note. The Company evaluates the collectability of both interest and principal of the note to determine whether it is impaired. The note would be considered to be impaired if, based on current information and events,his affiliate, 580 Garcia Properties LLC, brought multiple lawsuits against the Company determined that it was probable that it would be unableinvolving its predecessors and subsidiaries. The lawsuits have been settled and the complaints initiating them dismissed, without the Company making any payments to collect all amounts due according to the existing contractual terms. If the note were considered to be impaired, the amount of loss would be calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the note’s effective interest rateeither Mr. Fisher or to the fair value of the Company’s interest in the underlying collateral, less the cost to sell. No impairment loss has been recognized in connection with580 Garcia Properties LLC. In addition, the mortgage note receivable.
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 accepting scheduled paymentsrecording interest income and the asset was reclassified from the defendants until matter is resolved.
long-term to current at December 31, 2016.
| F-10 |
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 $49,875,000$20,462,000 as of SeptemberJune 30, 20162017 and December 31, 20152016 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 SeptemberJune 30, 20162017 and December 31, 2015,2016, 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.
Note 9 - Contingencies
As a publicly traded company, from time to time, the Company is amay be 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, the Company has been named asacquired a party tomortgage note from a lawsuit filed on April 15, 2014 in Contra Costa County, Californiabank, which is collateralized by, an entity managed by Mr. Daniel Fisher. Also named in this action are twoamong other things, the underlying real estate and related improvements. At June 30, 2017, the carrying amount of the Company’s subsidiaries – BioZone Laboratories and Cocrystal Discovery. The action seeks recovery on a promissorymortgage note purportedly executed by BioZone Laboratories in the principal amountreceivable was $1,294,000, consisting entirely of $295,000 in 2007, or almost seven years before the Company’s acquisition of Cocrystal Discovery. Motions challenging the sufficiency of the allegations in the complaint were filed in the third quarter, 2014. The motions were granted and plaintiff was given an opportunity to amend the complaint, and plaintiff has filed an amended complaint. On July 2, 2015 the Company, along with its subsidiaries and other named defendants, filed a motion to bifurcate the action, and stay discovery on one of the causes of action. This motion was granted on August 27, 2015 and the Court limited the scope of discovery in the first phase of the case. The Court also ordered that the Company post a bond for the amount of $295,000, and the Company complied with the Order by posting the bond on September 29, 2015. This is recorded as a short-term deposit. At a hearing held April 19, 2016 the Court ordered the parties to attempt resolution through a mediation. This mediation took place May 19, 2016 with no resolution. A trial date has been set for February 2017.
Note 10 - Transactions with Related Parties
Since November 2014, the merger (that occurred on November 25, 2014) with RFS Pharma, LLC, Cocrystal assumed the lease for RFS Pharma facilities located in Tucker, Georgia. This lease was amended on January 1, 2014 and expires on December 31, 2016 for approximately 5,626 square feet of office and laboratory space. Cocrystal leases theCompany has leased its Tucker, Georgia facility from a trust established, in part, for the benefit oflimited liability company owned by one of Cocrystal’s Directors,directors and principal shareholder, Dr. Raymond Schinazi.
Emory University: Cocrystal Pharma 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 Cocrystal Pharma employees. The License 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, Cocrystal 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 Cocrystal’s Directors, Dr. Raymond Schinazi, is also a faculty member at Emory University and may share in these royalty payments towith Emory.
Duke University and Emory University: Cocrystal Pharma has entered an agreement 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). This license allows Cocrystal Pharma to develop and potentially commercialize a cure for HBV and HPV utilizing the underlying patents and technologies developed by the universities. This agreement includes a non-refundable $100,000 license fee payable to Duke upon a determination of rights letter from the U.S. Veterans Administration with respect to patents and know-how that disclaims any ownership interest. Future royalties may be payable to Duke, ranging from 2-5% of net sales depending on achieving certain sales milestones, if commercial products are developed using this know-how. One of Cocrystal’s Directors, Dr. Raymond Schinazi, is also a faculty member at Emory University and may share in these royalty payments towith Emory.
| F-11 |
Overview
Cocrystal is a biotechnology company working to develop novel medicines for use in the treatment of human viral diseases. Cocrystal has developed proprietary structure-based drug design technology and antiviral nucleoside chemistry to create first-in-class and best-in-class antiviral drug candidates. Our focus is to pursue the development and commercialization of broad-spectrum antiviral drug candidates that will transform the treatment and/orand prophylaxis of hepatitis C, virus,influenza and norovirus and influenza virus.infections. By concentrating our research and development efforts on viral replication inhibitors, we plan to leverage our infrastructure and expertise in these areas.
Highlights
During the threelast six months, ending September 30, 2016, the Company focused on its research and development efforts and continued its clinical trials for our Non-Nucleoside HCV Polymerase Inhibitor (NNI) CC-31244, which beganprimarily in April 2016.
| ● | 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. The Company completed a Phase 1b study during July 2017 in HCV infected genotype 1 subjects. HCV-infected subjects treated with CC-31244 had a rapid and marked decline in HCV RNA levels, slow viral rebound after treatment, and no viral breakthrough during treatment. Results of this study suggest that CC-31244 could be an important component in an all-oral HCV combination therapy. The Company has three additional broad-spectrum preclinical candidates: a nucleoside inhibitor, an NS5A inhibitor, and an NS3 helicase inhibitor. The Company is seeking a partner for further clinical development of CC-31244 and the preclinical candidates. | |
| ● | 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 plan to initiate Investigational New Drug (“IND”) enabling studies this year. | |
| ● | Norovirus Infections. We continue to identify and develop nucleoside and non-nucleoside polymerase inhibitors. We have a preclinical nucleoside inhibitor, which exhibits broad spectrum anti-norovirus activity. |
Hepatitis C - CC-31244 (Pan-genotypic NNI).The Company announced positive interim data from a randomized, double-blind Phase Ia/Ib study of CC-31244, a pan-genotypic, potent NS5B non-nucleoside inhibitor (NNI), for the treatment of chronic hepatitis C virus (HCV) infection. The study is designed to evaluate CC-31244's safety/tolerability and pharmacokinetics, including food effect and antiviral activity.
Research and Development Expense
Research and development expense consists 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 expect research and development expenses to increase in future periods as we expand our clinical and pre-clinical development activities.
Total research and development expenses were approximately $2,093,000$1,255,000 for the three months ended SeptemberJune 30, 2016,2017, compared with $2,177,000$2,368,000 for the three months ended SeptemberJune 30, 2015.2016. The decrease of $84,000,$1,113,000, or 4%47%, was due a decreaseto the reduction in stock-based compensation expense of $352,000 caused primarily by reversal of stock-based compensation expense associated with options that were forfeited by an employee prior to vesting, and lower operating costs of $119,000 (primarily a decrease in rent expense of $98,000), offset by higher clinical and pre-clinical costs, a $395,000 increase, as we proceeded with a Phasephase I clinical trial intrials as these costs were primarily incurred during 2016.
Total research and development expenses were approximately $7,803,000 for the ninesix months ended SeptemberJune 30, 2016,2017 were $3,325,000, compared with $5,751,000$5,710,000 for the ninesix months ended SeptemberJune 30, 2015.2016. The increasedecrease of $2,052,000$2,385,000 or 36%42%, was predominately due to a $1,619,000 increase in pre-clinical and clinical costs as we ramped up athe conclusion of phase I trialof clinical trials in 2016, a $200,000 increase in professional fees for consulting services engaged to support initiation of a Phase I clinical trial, and $109,000 in compensation and other operating costs. These were partially offset by a reduction in general operating costs of $193,000 (primarily a decrease in rent expense of $153,000).
General and Administrative Expense
General and administrative expense includes compensation-related costs for our employees dedicated to general and administrative activities, legal fees, audit and tax fees, consultants and professional services, and general corporate expenses.
| 3 |
General and administrative expenses were negative$(55,000) for the three months ended SeptemberJune 30, 2016 in the amount of $199,000,2017, compared with positive expense of $1,437,000$1,836,000 for the three months ended SeptemberJune 30, 2015.2016. The decrease of $1,636,000, is$1,891,000, or 103%, was primarily due to an insurance reimbursement of prior legal costs in the amount of $896,000 and a $1,524,000 decline in stock-based$132,000 non-cash reversal of stock compensation expense lower personnelrelated to unvested options for executives that are no longer with the Company. In addition, we had a decrease in compensation costs of $244,000 and lower travel and entertainment expenses of $41,000, offset by higher general operating costs of $183,000 (primarily an increase in rent expense of $98,000). The significant decline in stock-based compensation and the resulting negative amount of general and administrative expense for the three months ended September 30, 2016 was due to reversal of stock-based compensation expense associated with options that were forfeited by the Company's former Chief Executive Officer prior to vesting. Because we had assumedstaffing turnover and a zero forfeiture rate related to these options, expense associated with these options that had been recordeddecrease in previous periods was reversed during the three months ended September 30, 2016, since none of these options had vested prior to forfeiture.
General and administrative expenses were approximately $3,630,000$996,000 for the ninesix months ended SeptemberJune 30, 2016,2017, compared with $3,902,000$3,829,000 for the ninesix months ended SeptemberJune 30, 2015.2016. The decrease of $272,000,$2,833,000, or 7%74%, iswas due to a $1,616,000 decline inthe aforementioned insurance reimbursement of prior legal costs, reversal of stock optioncompensation expense primarily for the reason cited in the previous paragraph, offset by higherand lower personnel costs of $321,000, higher professional fees of $569,000 (primarily legal expenses) and higher general operating costs of $451,000 (reflecting higher rent of $221,000, higher depreciation relateddue to equipment additions and leasehold improvements at our Tucker, Georgia facility of $70,000, higher insurance costs related to D&O coverage and the addition of clinical trials coverage of $47,000, higher utilities and network services of $70,000 and California franchise taxes of $30,000 related to an audit of one of our predecessor companies, Biozone Pharmaceuticals).
Interest Income/Expense
Interest income was $51,000$0 and $141,000$1,000 for the three months and ninesix months ended SeptemberJune 30, 2016,2017, respectively. Interest income was $45,000$39,000 and $134,000$89,000 for the three months and ninesix months ended SeptemberJune 30, 2015,2016, respectively. TheseThe 2016 amounts representsrepresent interest earnedrecognized on the mortgage note we acquired in June 2014. Interest expense was negligible for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015.
Other Income/Expense
Other income, net was $13,000$198,000 and $2,313,000$770,000 for the three and ninesix months ended SeptemberJune 30, 2017, respectively. Conversely, other income, net was $977,000 and $2,300,000 for the three and six months ended June 30, 2016, respectively. Other income consists primarily of the change in fair value of outstanding warrants to purchase our common stock, which areis accounted for as liabilities. For both the three and ninesix months ended SeptemberJune 30, 2017 and 2016, our stock price decreased,decreased. During 2016, 111,111 warrants were exercised and 888,889 warrants expired. Under accounting principles generally accepted in the United States, we record other income or expense for the 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 decreaseswere to decrease during the period, which it did during the three and six months ended June 30, 2017 and 2016, we record other income. The fair value of our outstanding warrants is inversely related to the fair value of the underlying common stock; as such, a decrease in the fair value of our common stock during a given period generally results in other income, which occurred during the three and six months ended June 30, 2017 and 2016, while an increase in the fair value of our common stock results in other expense. For the three and nine months ended September 30, 2015, we recorded other income of $3,082,000 and other expense of $10,046,000, respectively. Except for the interest income amount noted above, thisThis other income or expense is non-cash. We believe investors should focus on our operating loss rather than net loss for the periods presented. Our operating loss for the three and ninesix months ended SeptemberJune 30, 20162017 was $1,894,000$1,200,000 and $11,433,000,$4,321,000, respectively, compared to $3,590,000$4,204,000 and $9,575,000$9,539,000 for the same periods in 2015,2016, respectively.
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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 recorded a net deferred tax liability of $49,875,000$20,462,000 as of SeptemberJune 30, 20162017 and December 31, 20152016 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, for the three and ninesix months ended SeptemberJune 30, 2016,2017, we had a net loss of approximately $1,881,000$1,002,000 and $9,120,000$3,551,000 compared to a net loss of approximately $508,000$3,227,000 and $19,673,000$7,239,000 for the same periods in 2015. For the three months ended September 30, 2016, our net loss increased $1,373,000 compared to the same period in 2015 primarily from lower other income recognized on the change in fair value of our warrant liability ($3,074,000 other income reduction) offset by lower stock option expenses of $1,856,000 due to the aforementioned options forfeiture by two executives that left the organization. Greater research and development pre-clinical and clinical spending for the three months ended September 30, 2016 compared to the same period last year ($395,000 increase) contributes to the overall increase in net loss for the period. The decrease in net loss for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 of $10,553,000 is primarily attributable to the $10.7 million difference in the amount recorded during the periods related to the change in the fair value of our warrant liabilities, as described above, offset by increases in research and development pre-clinical and clinical spending as we ramped up a phase I trial in 2016. We believe investors should focus on our operating loss rather than net loss for the periods presented. Our operating loss, which does not include the change in the value of derivative liabilities, a non-cash expense, for the three and nine months ended September 30, 2016 was $1,894,000 and $11,433,000 respectively, compared to an operating loss $3,590,000 and $9,575,000 for the same periods in 2015, respectively.
Liquidity and Capital Resources
Net cash used in operating activities was approximately $12,354,000$3,137,000 for the ninesix months ended SeptemberJune 30, 20162017 compared to $7,277,000$9,208,000 for the same period in 2015.2016. For the ninesix months ended SeptemberJune 30, 2016,2017, net cash used by operating activities consisted primarily of $11,433,000$4,321,000 in operating expenses net of changes in operating assets and liabilities.
Net cash used in investing activities was $32,000$52,000 for the ninesix months ended SeptemberJune 30, 20162017 compared to $162,000$53,000 provided for the same period in 2015.2016. For the ninesix months ended SeptemberJune 30, 2017, net cash used for investing activities consist primarily of capital spending of $40,000 and payment of a long-term deposit of $12,000. For the six months ended June 30, 2016, net cash used for investing activities consistedconsist primarily of capital spending of $49,000$36,000 and payment of a long-term depositsdeposit of $23,000,$25,000, net of $40,000$8,000 in principal payments received on our mortgage note receivable.
For the ninesix months ended SeptemberJune 30, 2015, net cash used for investing activities of $162,000 consisted of capital spending of $217,000, mostly for renovations of our Tucker, Georgia facility, net of principal payments received on our mortgage note receivable of $55,000.
We have a history of operating losses as we have focused our efforts on raising capital and research and development activities. The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the 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. The Company has never been profitable, has no products approved for sale, has not generated any revenues to date from product sales, and has incurred significant operating losses and negative operating cash flows since inception. For the year ended December 31, 2015, the Company recorded a net loss of approximately $50.1 million and used approximately $10.3 million of cash in operating activities. For the nine months ended September 30, 2016, the Company recorded a net loss of approximately $9.1$74.9 million, which included an IPR&D write-down of $92.4 million and used approximately $12.4$14.7 million of cash in operating activities. For the six months ended June 30, 2017, the Company recorded a net loss of approximately $3.6 million and used approximately $3.1 million of cash for operating activities.
As of SeptemberJune 30, 2016 and November 7, 2016,2017, the Company has $5.9had $3.5 million and
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As the Company continues to incur losses, achieving profitability is dependent upon the successful development, approval and commercialization of its product candidates, and achieving a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital. Management intends to fund future operations through additional private or public equity offering and may seek additional capital through arrangements with strategic partners or from other sources. There can be no assurances, however, that additional funding will be available on terms acceptable to the Company, or at all. Any equity financing may be dilutive to existing shareholders.
| Contractual Obligations ($ in thousands) | Payments due by period | |||
Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |
| Operating Lease Obligations | $191 | $333 | $- | $- |
| Contractual Obligations ($ in thousands) | Payments due by period | |||||||||||||||
| Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||
| Operating Lease Obligations | $ | 222 | $ | 99 | $ | - | $ | - | ||||||||
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements including statements regarding our drug development activities, future equity offering,offerings, cash flow deficitdeficits 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 strength of the market for bio pharma equity offerings, unanticipated events which adversely affect the timing and success of our regulatory filings, failure to develop products which are deemed safe and effective and other issues which affect our ability to commercialize our product candidates. Further information on our risk factors is contained in our filings with the SEC, including our Annual Report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.
Critical Accounting Policies and Estimates
In our Annual Report on Form 10-K for the year ended December 31, 2015,2016, we disclosed our critical accounting policies and estimates upon which our financial statements are derived. There have been no changes to these policies since December 31, 2015.2016. Readers are encouraged to review these disclosures in conjunction with the review of this report. Because of the materiality associated with in-process research and development assets on our Balance Sheet, the following has been included which highlights management’s assessment of impairment of these assets.
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, 2015.
ITEMITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, is responsible for establishingwith the participation of our Chief Executive Officer and maintaining adequate internal control over financial reporting asour Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(f)13a-15(e) and 15d-15(f)15d-15(e) under the Securities Exchange Act.Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our management is alsodisclosure controls and procedures are designed to provide reasonable assurance that information required to assessbe disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reportreported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls 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 June 30, 2017 at the effectiveness ofreasonable assurance level.
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Changes to the Company’s Internal Control Over Financial Reporting
The following changes that occurred during the six months ended June 30, 2017 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting in accordance with Section 404reporting.
On January 24, 2017, Curtis Dale, Interim Chief Financial Officer, tendered his resignation, at which time the Company initiated a search for a qualified replacement.
On February 12, 2017, Walt A. Linscott informed the Board of the Sarbanes-Oxley ActCompany of 2002 (“Section 404”). Management assessedhis 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, 2015, we concluded there were material weaknesses in the design and operating effectiveness of our internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. With the oversight of September 30, 2016. In making this assessment,senior management and our audit committee, we usedtook additional measures to remediate the criteria set forth by the Committee of Sponsoring Organizationsunderlying causes of the Treadway Commission (COSO) inInternal Control - Integrated Framework (2013).material weaknesses. During our assessment of the effectiveness of internal control over financial reporting as of September 30,year ended December 31, 2016, we identified the following material weaknesses:
We have completed the process of assigning different people the responsibilities of authorizing transactions, recording transactions,begun procedures to enhance our internal control and maintaining custody of assets to reduce the opportunities to allow any person to be in a position to both perpetrate and conceal errors or fraud in the normal course of the person’s duties. Our financial software does not provide robust administrative tools to effectively segregate roles, especially with limited financial staff. The Company will be evaluating a replacement financial system in 2016 but will also focus on effective compensating controls until the financial software can be upgraded or replaced.
ITEM 1. LEGALLEGAL PROCEEDINGS
From time to time, the Company is a party to, or otherwise involved in, legal proceedings arising in the normal course of business. As ofDuring the quarter ended June 30, 2017, there were no material developments to our previously reported legal proceedings except the following:
In proceedings involving the Company’s litigation with a former affiliate, Daniel Fisher, and his affiliated entity, 580 Garcia Properties LLC, a foreclosure sale was set in accordance with California law for January 27, 2017. Prior to 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.
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All recent sales of 9,812,492 shares of our common stock at a purchase price of $0.51 per share. The purchasers included seven members of our board of directors including Dr. Raymond F. Schinazi and Dr. Phil Frost. As of the date of this report, weunregistered securities have received all of the committed funds.
ITEM 3. DEFAULTSDEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINEMINE SAFETY DISCLOSURES
Not Applicable
The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-Q.
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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: | By: | /s/ Gary Wilcox |
| Gary Wilcox | ||
| Interim Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Dated: August 8, 2017 | By: | /s/ James Martin |
| James Martin | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
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EXHIBIT INDEX
| Incorporated by Reference | |||||||
| Exhibit No. | Exhibit Description | Form | Date | Number | Filed or Furnished Herewith | ||
| 10.1 | Form of Securities Purchase Agreement | 8-K | 9/2/2016 | 10.1 | 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 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 | |||||
| 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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