UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 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
(State or Other Jurisdiction
of Incorporation or Organization)
1860 Montreal Road, Tucker GA
(Address of Principal Executive Office)
35-2528215
(I.R.S. Employer
Identification No.)
30084
(Zip Code)
Registrant’s telephone number, including area code: (678)-892-8800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ]
No [X]
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 [ ]
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
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.
Large accelerated filer
Non-accelerated filer
[ ]
[ ]
Accelerated filer
Smaller reporting company
[X]
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price
as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2016, was approximately $132
million.
The number of shares outstanding of the registrant’s common stock, as of March 24, 2017, was approximately 714 million shares.
Part I.
INDEX
Page
Business.
Item 1.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2.
Item 3.
Item 4. Mine Safety Disclosures.
Properties.
Legal Proceedings.
Part II.
Selected Financial Data.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Item 9.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Part III.
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
Part IV.
Item 15. Exhibits, Financial Statement Schedules.
Item 16. Form 10-K Summary
SIGNATURES
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Forward-Looking Statements
PART I
Except for the historical information contained herein or incorporated by reference, this Annual Report and the information incorporated
by reference contains forward-looking statements that involve risks and uncertainties. These statements include projections about our
accounting and finances, plans and objectives for the future, future operating and economic performance and other statements regarding
future performance. These statements are not guarantees of future performance or events. Our actual results may differ materially from
those discussed here. Factors that could cause or contribute to differences in our actual results include those discussed in the following
section, and included in the Item1A the Risk Factors.
Overview
Our primary business is to develop novel medicines for use in the treatment of human viral diseases. 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. in a transaction accounted for as a reverse merger. Following the merger, the Company assumed Cocrystal
Discovery, Inc.’s business plan and operations. On March 18, 2014, the Company reincorporated in Delaware under the name Cocrystal
Pharma, Inc.
Effective November 25, 2014, Cocrystal Pharma, Inc. and affiliated entities completed a series of merger transactions as a result of which
Cocrystal Pharma, Inc. merged with RFS Pharma, LLC, a Georgia limited liability company (“RFS Pharma”). We refer to the surviving
entity of this merger as “Cocrystal” or the “Company.”
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.
Cocrystal Technology
We are developing antiviral therapeutics that inhibit the essential replication function of a virus, including the RNA-dependent RNA
polymerase enzyme, the helicase enzyme, and the NS5A protein of hepatitis C (HCV), and the RNA-dependent RNA polymerases of
influenza virus and norovirus. The polymerase inhibitors include both nucleosides (Nucs) and non-nucleosides (NNIs). To discover and
design these inhibitors, we use a proprietary platform comprising computation, nucleoside and medicinal chemistry, X-ray crystallography,
and our extensive know-how. We determine the structures of cocrystals containing the inhibitors bound to the enzyme or protein to guide
our design. We also use advanced computational methods to screen and design product candidates using proprietary cocrystal structural
information. In designing the candidates, we seek to anticipate and avert potential viral mutations leading to resistance. By designing and
selecting drug candidates that interrupt the viral replication process and also have specific binding characteristics, we seek to develop drugs
that are not only effective against both the virus and possible mutants of the virus, but which also have reduced off-target interactions that
cause undesirable clinical side effects. While this approach is easy to describe, it is much more difficult to carry out. In particular, an
extensive knowledge of viruses and drug targets is required. In addition, knowledge and experience in the fields of structural biology,
enzymology, and nucleoside chemistry is required.
We developed our proprietary structure-based drug design and antiviral nucleoside chemistry under the guidance of Dr. Roger Kornberg,
our Chief Scientist and recipient of the Nobel Prize in Chemistry in 2006, and Dr. Raymond Schinazi, our Chairman and a world leader in
the area of nucleoside chemistry and the cofounder of several biotechnology companies focusing on antiviral drug discovery and
development, including Triangle Pharmaceuticals, Idenix Pharmaceuticals, and Pharmasset Inc. Our drug discovery process focuses on
those parts of the enzymes to which drugs bind and on drug-enzyme interactions at the atomic level. Additionally, we have developed
proprietary targeted in-house chemical libraries of nucleosides, non-nucleoside inhibitors, metal-binding inhibitors, and fragments. Our
drug discovery process is different from traditional, empirical, medicinal chemistry approaches that often require iterative high-throughput
compound screening and lengthy hit-to-lead processes. We continue developing preclinical and clinical drug candidates using our
proprietary drug discovery technology.
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Cocrystal’s proprietary technology integrates several powerful and specialized techniques:
(1)
Selection of viral drug targets amenable to broad-spectrum antiviral drug development and essential for viral genome replication;
(2) Nucleoside chemistry;
(3) Atomic resolution 3-D structure determination of drug binding pockets;
(4)
In-depth computational analysis of conservation of drug-binding pockets and critical molecular interactions between antiviral
inhibitors and amino acid residues of the target molecule’s drug-binding pocket;
(5)
Cocrystal structure determinations to inform hit identification, hit-to-lead, and lead optimization processes;
(6) Molecular modeling and computer-guided lead discovery to support rational chemical modifications based on structure-activity
relationships, or SAR, of candidate inhibitor compounds;
(7) Knowledge of enzymatic mechanisms to guide the design of drugs with exceptional affinity, specificity, and broad spectrum activity;
and
(8)
Platforms for rapid identification of antiviral enzyme inhibitors showing broad-spectrum antiviral capability.
We have applied these techniques to develop antiviral inhibitors of three important viruses: hepatitis C, influenza, and norovirus.
Market-Driven Product Profiles
In all of our programs our goal is to develop best-in-class broad-spectrum antiviral drugs with high-barrier-to-drug resistance. An ideal
product for an antiviral therapy would have at least the following characteristics:
(1) Good safety and tolerability profile;
(2)
Effective against all viral subtypes that cause disease;
(3) High barrier to viral resistance; and
(4)
Ease of administration, for example, a pill.
Even at the discovery stage of drug development, we select compounds with these factors in mind. Furthermore, our technology is capable
of delivering therapies that satisfy all of these key factors, as detailed below.
Safety and tolerability: All drugs have side effects, also referred to as adverse effects. These usually result from a drug’s ability to bind to
human biological molecules (usually proteins). When this interaction is intentional (i.e., part of the drug’s mechanism of action), the
adverse effects are classified as on-target effects. When this interaction is unintentional (i.e., resulting from the drug’s interaction with an
unintended human molecule), the effects are called off-target effects. Our inhibitors target viral replication enzymes and a viral replication
protein, which are unique to viruses. Because the targets are viral, not human, minimal adverse effects are possible. During the discovery
phase, we evaluate candidate compounds for potential cross-reactivity with human replication enzymes and eliminate those that are cross-
reactive.
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Broadly effective against major strains responsible for a viral disease: For any given viral disease, there are different strains of viruses that
cause the disease. For example, there are six major different strains of the virus known to cause hepatitis C (HCV). These strains are
termed “genotypes.” Each HCV genotype is common in some parts of the world and rare in others. Also, there are three types of influenza
viruses, A, B, and C. Influenza A and B viruses are significant human respiratory pathogens that cause both seasonal, endemic inflection,
and unpredictable pandemics. Influenza C is a subtype of the influenza virus that tends to only mild illness, and is not responsible for
seasonal and pandemic infections.
Many antiviral drugs available today are only effective against certain strains of viruses and less effective or not effective at all against
other strains. To address this problem, we are developing drug candidates that specifically target viral proteins involved in viral replication.
Despite the various strains of virus that may exist, these enzymes are essentially identical (highly conserved) among all strains of a given
virus. By targeting these conserved replication enzymes, our antiviral compounds are designed and tested to be effective against major
virus strains. Replication enzymes are conserved not only among subtypes of a given virus but also among many different viruses, creating
an opportunity for the development of broad spectrum antiviral drugs.
High Barrier to drug Resistance: Drug resistance is a major obstacle to developing effective antiviral therapies. Viruses can reproduce
rapidly and in enormous quantities in infected human cells. During viral replication, random changes in the viral genome, called mutations,
spontaneously develop. If such a mutation occurs in a region of the viral genome that is targeted by a given antiviral therapy that therapy
may no longer be effective against the mutated virus. These mutated or “resistant” viruses can freely infect and multiply even in
individuals who have received drug treatment. In some cases, resistant virus strains may even predominate. For example, in the 2009 swine
influenza pandemic, the predominant strain was resistant to the best available therapies.
Cocrystal’s focus on viral replication proteins can overcome the obstacle of viral resistance. We identify and target critical components of
viral replication proteins that are essential for function, therefore, sensitive to change. Any mutation in these critical components is likely to
inactivate the replication protein and, in turn, render the virus incapable of replicating. Because such mutations cannot propagate, the virus
cannot effectively develop resistance to the enzyme inhibitors we employ. We test the effectiveness of our compounds against potential
viral mutations and select compounds with the highest barrier to resistance.
Ease of administration: We select compounds for development that can be administered orally, preferably once daily, and in pill-form.
Research and Development update
Therapeutic Targets
Hepatitis C: A large competitive market with opportunity for shorter treatment regimens
HCV is a highly competitive and changing market. Currently, the standard treatment varies with the genotype of the HCV infection. Prior
to late 2013, treatment included peginterferon alpha and ribavirin, along with a protease inhibitor (either telaprevir, boceprevir, or
simeprevir). In late 2013, sofosbuvir, a drug belonging to a new class of drugs called “nucleoside analogs” or “Nucs,” was approved to treat
hepatitis C. In patients infected with HCV genotype 1 (the most common HCV genotype in the US), sofosbuvir was administered in
combination with peginterferon alpha and ribavirin. In patients with HCV genotypes 2 and 3, however, sofosbuvir could be effectively
administered in combination with ribavirin, without the need for peginterferon alpha. Since 2014, several new combinations of direct-
acting antiviral agents (DAAs) have been approved for the treatment of HCV infection. These include Harvoni (sofosbuvir/ledipasvir), and
Viekira Pak (ombitasvir/paritaprevir/ritonavir, dasabuvir), Epclusa (sofosbuvir/velpatasvir), and Zepatier (elbasvir/grazoprevir). In addition
to these drugs, several compounds are currently in development by companies such as Janssen, Merck, and Bristol-Myers Squibb.
We anticipate a significant global HCV market opportunity that will persist through at least 2036, given the large prevalence of HCV
infection worldwide. The 2015 World Health Organization Fact Sheet for HepC reports that between 130-150 million people worldwide
have chronic HepC infections. We have four classes of HCV DAAs targeting three different HCV replication proteins - NS5B polymerase
(NNI and Nuc), NS5A, and NS3 helicase. These DAAs could be developed as part of an all-oral, pan-genotypic combination regimen with
significant upside. Our focus is on developing what is now called ultrashort treatment regimens from 2 to 6 weeks in length. Such a
combination treatment with different classes of DAAs has the potential to change the paradigm of treatment for HCV with its efficacy,
higher barrier to viral resistance, improved compliance, and shorter duration of treatment. These strategies could allow us to expand and
broaden our portfolio in the HCV antiviral therapeutic area globally, and could lead to a high and fast cure rate, to improve compliance, and
to simplified treatment duration. No competing company has yet developed a short HCV treatment of 4 weeks or less successfully with a
high (>95%) sustained virological response at week 12.
CC-31244, HCV NNI, is a potential best in class pan-genotypic inhibitor of NS5B polymerase for the treatment of hepatitis C infection. The
Company completed a Phase 1a study in Canada in September 2016, with favorable safety results in a randomized, double-blinded, Phase
1a study in healthy volunteers and HCV-infected subjects. The Company is presently conducting a Phase 1b study in HCV genotype 1
subjects. Cocrystal Pharma presented the interim results from the 1b study at the APASL in February 2017. 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 preclinical candidates: a pan-genotypic nucleoside inhibitor, an NS5A inhibitor, and an NS3 helicase
inhibitor.
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The Company is seeking a partner for further clinical development of CC-31244 and the preclinical candidates.
Influenza: A worldwide public health problem, including the potential for pandemic disease.
Influenza is a severe respiratory illness, caused primarily by influenza A or B virus. The Centers for Disease Control (CDC) estimates that
influenza is linked to 49,000 deaths and 200,000 hospitalizations each year in the United States. The worldwide market for antiviral drugs
to treat influenza was $3.8 billion in 2012 and is expected to grow to $6 billion by 2018 (bccResearch).
Influenza viruses are significant human respiratory pathogens that cause both seasonal, endemic infections and periodic, unpredictable
pandemics. The worst pandemic on record, in 1918, killed approximately 50 million people worldwide. Human infections caused by H5N1
highly pathogenic avian influenza viruses have raised concern about the emergence of another pandemic. The histopathology of fatal
influenza virus pneumonias has been documented over the past 120 years. Strikingly, the spectrum of pathologic changes described in the
1918 influenza pandemic is not significantly different from the histopathology observed in other less lethal pandemics or even in deaths
occurring during seasonal influenza outbreaks.
Currently, approved antiviral treatments for influenza are effective, but burdened with significant viral resistance. Strains of influenza virus
that are resistant to the approved treatments osteltamivir phosphate (Tamiflu(R)) and zanamavir (Relenza(R)) have appeared, and in some
cases predominate. For example, the predominant strain of the 2009 swine influenza pandemic was resistant to Tamiflu. These drugs target
viral neuraminidase enzymes, which are not highly conserved between viral strains. In fact, different influenza virus strains such as H1N1
and H5N1 are named according to their respective differences in hemagglutinin (H) and neuraminidase (N).
The Company has 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 IND-
enabling studies this year. A small number of antiviral product candidates that are competitors for Cocrystal’s influenza program are a
nucleobase-like drug (Favipiravir), developed by Toyama Chemical, and VX-787, developed by Janssen.
Norovirus: A worldwide public health problem responsible for close to 90% of epidemic, non-bacterial outbreaks of gastroenteritis around
the world.
Norovirus is a very common and highly contagious virus that causes symptoms of acute gastroenteritis including nausea, vomiting, stomach
pain and diarrhea. Other symptoms include fatigue, fever and dehydration. Noroviruses are a major cause of gastrointestinal illness in
closed and crowded environments, having become notorious for their common occurrence in hospitals, nursing homes, child care facilities,
and cruise ships. In the United States alone, noroviruses are the most common cause of acute gastroenteritis, and are estimated to cause 21
million illnesses each year and contribute to 70,000 hospitalizations and 800 deaths. Noroviruses are responsible for up to 1.1 million
hospitalizations and 218,000 deaths annually in children in the developing world. In immunosuppressed patients, chronic norovirus
infection can lead to a debilitating illness with extended periods of nausea, vomiting and diarrhea. There is currently no effective treatment
or effective vaccine for norovirus, and the ability to curtail outbreaks is limited. Few companies are developing antiviral treatments for this
disease. However, three candidate vaccines are currently in early stages of clinical testing by GlaxoSmithKline, Ligocyte and Takeda
Pharmaceuticals.
By targeting viral replication enzymes, we believe it is possible to develop an effective treatment for all genogroups of norovirus. Also,
because of the significant unmet medical need and the possibility of chronic norovirus infection in immunocompromised individuals, new
antiviral therapeutic approaches may warrant an accelerated path to market. Cocrystal is developing inhibitors of the RNA-dependent RNA
polymerase of norovirus. It owns one of the earliest patents on nucleosides that could treat norovirus infections. Similar to the hepatitis C
virus polymerases, this enzyme is essential to viral replication and is highly conserved between all noroviral genogroups. Therefore, an
inhibitor of this enzyme might be an effective treatment or short-term prophylactic agent, when administered during a cruise or nursing
home stay, for example. We have developed a preclinical Nuc which exhibits broad spectrum anti-norovirus activity. In addition, we have
developed X-ray quality norovirus polymerase crystals. We are implementing the platform and approaches that have proven successful in
our other antiviral programs.
Intellectual Property
Our success depends, in part, upon our ability to protect our core technology. To establish and protect our proprietary rights, we rely on a
combination of patents, patent applications, trademarks, copyrights, trade secrets and know-how, license agreements, confidentiality
procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements, and other contractual
rights.
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As of December 31, 2016, our patent portfolio consisted of patents and pending applications in the areas primarily related to the treatment
of HCV, HIV, and Norovirus.
With respect to treatment of HCV, our portfolio is divided into three groups, related to our NS5B, NS5A and NS3 programs. The NS5B
program includes both nucleoside (Nuc) and non-nucleoside (NNI) compounds. In our NS5B Nuc program, we have two patents, one U.S.
non-provisional application, three international applications filed under the Patent Cooperation Treaty (PCT) at the World Intellectual
Property Organization (WIPO), and nineteen foreign counterpart applications, over seven patent families. The counterpart foreign
applications were filed in a number of countries and regions depending on the particular patent family, including Brazil, Canada, China,
Europe, India, Japan, Korea, Mexico and Russia.
In our NS5B NNI program, our patent portfolio consists of two related families, including one granted U.S. patent, one pending U.S. patent
application, one pending international application, and pending counterpart applications in Taiwan and the European Patent Office.
In our NS5A program, we have two issued U.S. patents, two pending U.S. application, twenty-four foreign counterpart applications
pending in Australia, Brazil, Canada, China, Columbia, Europe, India, Indonesia, Israel, Japan, Korea, Mexico, Malaysia, New Zealand,
the Philippines, Russia, Singapore, South Africa, Thailand, the Ukraine, and Vietnam.
In our NS3 program, we have one issued U.S. patent, an allowed European application, and three pending foreign applications in Canada,
China, and Japan.
In our Norovirus program, our patent portfolio consists of one issued U.S. patent and three pending foreign counterpart applications.
Claims directed to the treatment of norovirus were also pending in another patent family, which also focused on the treatment of HCV.
We have one issued patent focused on HIV, and many of the patent applications related to NS5B nucleosides also disclose treating HIV.
Management is considering the best approach to proceed with this asset.
Collaborations
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 was dated March 7,
2013. As part of the agreement, Emory agreed 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. Cocrystal’s Chairman and largest shareholder, Dr.
Raymond Schinazi, is an inventor, and also a faculty member at Emory University.
NIH: Cocrystal Pharma has two Public Health Biological Materials License Agreements with the NIH. The original License Agreements
were dated August 31, 2010 and were amended on November 6, 2013. The materials licensed are being used in Norovirus assays to screen
potential antiviral agents in our library.
Genoscience, BioLineRx and CTTQ: On February 1, 2012, Cocrystal Pharma, in collaboration with Genoscience, entered into a worldwide
license agreement with BioLineRx (NASDAQ: BLRX; TASE: BLRX), a biopharmaceutical development company, to develop and
commercialize BL-8030, an orally available treatment for hepatitis C. The agreement included upfront royalties and milestones payable to
both companies. BL-8030 was co-developed through a joint collaboration between Cocrystal Pharma and Genoscience. Advanced
preclinical studies were conducted in collaboration with CTTQ for China and Hong Kong markets. This collaboration was terminated in
February 2016.
University of Pittsburgh and Emory University: Cocrystal Pharma assigned its patent rights to the patent titled “3’-AZIDO
PURINENUCLEOTIDE PRODRUGS FOR TREATMENT OF VIRAL INFECTIONS” to University of Pittsburgh on November 21, 2014.
This patent is jointly owned by Cocrystal Pharma, the University of Pittsburgh and Emory University. Dr. Raymond Schinazi, is an
inventor, and also a faculty member at Emory University.
Duke University and Emory University: Cocrystal 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 and Emory University upon a
determination of rights letter between Emory University and the U.S. Veterans Administration with respect to patents and know-how.
Future royalties may be payable to Duke and Emory University, ranging from 2-5% of net sales depending on achieving certain sales
milestones, if commercial products are developed using this know-how. Dr. Raymond Schinazi, is an inventor and a faculty member at
Emory University.
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Competition
The biotechnology and pharmaceutical industries are subject to intense and rapidly changing competition as companies seek to develop new
technologies and proprietary products. We know of several companies that have marketed or are developing products for the treatment of
influenza, including Gilead Sciences, Inc. (“Gilead”), Merck & Co., Janssen Pharmaceuticals, Inc., Bristol-Myers Squibb, Toyama
Chemical Co. and Abbvie, Inc. In particular, Gilead dominates the market for hepatitis C with an estimated share greater than 70% of the
market. Its product is widely considered effective. Other companies involved in HCV drug discovery are Regulus Therapeutics, Inc.,
Achillion Pharmaceuticals, Inc. and Enanta Pharmaceuticals, Inc.
In February 2017, Merck & Co. announced it would write off $2.9 billion (pretax) relating to a prior acquisition for a hepatitis C drug still
in clinical trials. Meanwhile Gilead announced lower forecasted sales from its three hepatitis drugs. Many of these and other companies
developing products for the other viral diseases that are of interest to us have substantially greater financial resources, expertise and
capabilities than we do.
Government Regulation
Government authorities extensively regulate the research, development, testing, manufacturing and commercialization of drug products.
Any product candidates we develop must be approved by the U.S. Food and Drug Administration (“FDA”) before they may be legally
marketed in the U.S., and by the appropriate foreign regulatory agencies before they may be legally marketed in other countries. The
clinical testing of product candidates to establish their safety and efficacy in humans is subject to substantial statutory and regulatory
requirements with which we must comply.
Research and Development Expenses
Manufacturing
We do not own or operate, and have no plans to establish any manufacturing facilities. Our chemistry laboratory can produce research scale
(milligram-gram) quantities of our lead drug candidates. As such, our progress is often dependent on successful project execution by third
party vendors.
Employees
As of March 31, 2017, we employ 18 full-time employees. Of these full-time employees, 16 are engaged in research and development
activities.
Legacy Business
Our Legacy Business
Prior to the merger with Cocrystal Discovery on January 2, 2014, while operating as Biozone Pharmaceuticals, Inc., we were primarily
engaged in the business of developing and manufacturing over-the-counter drug products (OTC) and cosmetic and beauty products for third
parties. In addition, we marketed two lines of proprietary skin care products. All of these assets were sold to MusclePharm as part of the
January 2, 2014 Asset Purchase Agreement in exchange for 1,200,000 shares of MusclePharm common stock which had a market value as
of January 2, 2014 of $9,840,000. In addition, MusclePharm licensed back to us the patents we sold it for six months in exchange for our
paying it a 5% royalty on gross sales.
While operating as Biozone Pharmaceuticals, Inc., we also owned a 45% interest in BetaZone Laboratories, LLC (“BetaZone”), which was
engaged in the sale and license of pharmaceutical and cosmetic products in Latin America. We received no material royalties from
BetaZone, which had licensed our proprietary technology. This technology was also sold to MusclePharm.
We were incorporated as a Nevada corporation on December 4, 2006 under the name International Surf Resorts Inc. We changed our name
to Biozone Pharmaceuticals, Inc. on March 1, 2011 and we acquired Biozone Labs and our other subsidiaries on June 30, 2011. On January
30, 2014, we re-incorporated in Delaware. We acquired our current corporate structure and business operations following our merger with
RFS Pharma, LLC effective November 25, 2014.
Item 1A. Risk Factors.
You should consider carefully the following risk factors, together with all of the other information included or incorporated in this Annual
Report. Each of these risk factors, either alone or taken together, could adversely affect our business, operating results and financial
condition, and adversely affect the value of an investment in our common stock. There may be additional risks that we do not know of or
that we believe are immaterial that could also impair our business and financial position.
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors before deciding
whether to invest in the Company. If any of the events discussed in the risk factors below occur, our business, financial condition, results of
operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could
decline.
RISKS RELATED TO OUR FINANCIAL CONDITION AND NEED FOR ADDITIONAL CAPITAL
We have never generated revenue and expect that due to the regulatory constraints on a drug development company with products
in the pre-clinical stage, we may not ever generate revenue and may continue to incur significant losses for the foreseeable future.
We are primarily a preclinical-stage, biopharmaceutical discovery and development company. Since inception, our operations have been
limited to organizing and staffing the Company, acquiring and developing intellectual property rights, developing our technology platform,
undertaking basic research on viral replication enzyme targets and conducting preclinical studies for our initial programs. In 2016, we
initiated our first clinical trial in Canada, a Phase 1 study for a HCV product. Because of the need to complete clinical trials, establish safety
and efficacy and obtaining regulatory approval, we do not anticipate generating revenue for at least five years and will continue to sustain
large losses.
Based on cash on hand as of March 29, 2017 of $2.0 million, Cocrystal does not have the capital to finance operations for the next 12
months. This raises substantial doubt about our ability to be a going concern.
We have devoted the majority of our financial resources to research and development. We have financed our operations primarily through
the sale of equity securities. The results of our operations will depend, in part, on the rate of future expenditures and our ability to obtain
funding through equity or debt financings, strategic alliances or grants. We anticipate our expenses will increase substantially if and as we
continue our research and clinical and preclinical development of our product candidates. We anticipate that if we continue to undertake
clinical studies our expenses will increase even further.
Because we have yet to generate any revenue on which to evaluate our potential for future success and to determine if we will be
able to execute our business plan, it is difficult to evaluate our future prospects and the risk of success or failure of our business.
Our ability to generate revenue and achieve profitability depends on our ability, alone or with partners, to successfully complete the
development of, obtain the regulatory approvals for and commercialize pharmaceutical product candidates. We have no pharmaceutical
product candidates that have generated any commercial revenue, do not expect to generate revenues from the commercial sale of
pharmaceutical products in the near future, and might never generate revenues from the sale of pharmaceutical products. Our ability to
generate revenue and achieve profitability will depend on, among other things, the following:
identifying and validating new therapeutic strategies;
completing our research and preclinical development of pharmaceutical product candidates;
initiating and completing clinical trials for pharmaceutical product candidates;
seeking and obtaining regulatory marketing approvals for pharmaceutical product candidates that successfully complete clinical
trials;
establishing and maintaining supply and manufacturing relationships with third parties;
launching and commercializing pharmaceutical product candidates for which we obtain regulatory marketing approval, with a
partner or, if launched independently, successfully establishing a sales force, marketing and distribution infrastructure;
maintaining, protecting, enforcing, defending and expanding our intellectual property portfolio; and
attracting, hiring and retaining qualified personnel.
Because of the numerous risks and uncertainties associated with pharmaceutical product development, we cannot predict the timing or
amount of increased expenses and when we will be able to achieve or maintain profitability, if ever. Our expenses could increase beyond
expectations if we are required by the FDA or foreign regulatory agencies to perform unanticipated studies and trials.
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Even if one or more pharmaceutical product candidates we independently develop is approved for commercial sale, we anticipate incurring
significant costs associated with commercializing any approved pharmaceutical product candidate. Moreover, if we can generate revenues
from the sale of any approved pharmaceutical products, we may not become profitable and may need to obtain additional funding to
continue operations.
If we do not raise additional debt or equity capital, we may not be able to remain operational.
Presently we have cash to last through April, 2017. Accordingly, we must raise approximately $8 to $10 Million to support our planned
operations over the next 12 months. The Company is presently exploring various financing options, including but not limited to a private
placement.
We have a non-binding commitment to invest $3 million. See “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Liquidity.”
There can be no assurances that we will raise the necessary capital or, if we do, it will be on terms that are favorable to our shareholders.
Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is very expensive. We expect our research
and development expenses to substantially increase as we advance our product candidates toward clinical programs. In order to conduct
these trials, we will need to raise additional capital to support our operations and such funding may not be available to us on acceptable
terms, or at all.
As we move lead compounds through toxicology and other preclinical studies, also referred to as nonclinical studies, we have and we will
be required to file an Investigational New Drug application (“IND”) or its equivalent in foreign countries, and as we conduct clinical
development of product candidates, we may have adverse results that may cause us to consume additional capital. Our partners may not
elect to pursue the development and commercialization of our product candidates subject to our respective agreements with them. These
events may increase our development costs more than we expect. We may need to raise additional capital or otherwise obtain funding
through strategic alliances if we initiate clinical trials for new product candidates other than programs currently partnered. We will require
additional capital to obtain regulatory approval for, and to commercialize, product candidates.
In securing additional financing, such additional fundraising efforts may divert our management from our day-to-day activities, which may
adversely affect our ability to develop and commercialize product candidates. We cannot guarantee that future financing will be available
in sufficient amounts or on terms acceptable to us, if at all. If we cannot raise additional capital when required or on acceptable terms, we
may be required to:
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significantly delay, scale back or discontinue the development or commercialization of any product candidates;
● seek strategic alliances for research and development programs at an earlier stage than otherwise would be desirable or on
terms less favorable than might otherwise be available; or
● relinquish or license on unfavorable terms, our rights to technologies or any product candidates we otherwise would seek to
develop or commercialize ourselves.
If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing
development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects or
may render the Company unable to continue operations at all.
RISKS RELATED TO THE DISCOVERY AND DEVELOPMENT OF PRODUCT CANDIDATES
Because the approach we are taking to discover and develop drugs is novel, it may never lead to marketable products.
We are concentrating our antiviral therapeutic product research and development efforts using our proprietary technology, and our future
success depends on the continued successful development of this technology and the products derived from it. We have no drug products
commercialized. The scientific discoveries that form the basis for our efforts to discover and develop drug product candidates are relatively
new and unproven. The scientific evidence to support the feasibility of developing product candidates based on our approach is limited. If
we do not successfully develop and commercialize drug product candidates based upon our technological approach, we may not become
profitable and the value of our stock may decline.
Further, our focus on Cocrystal’s technology for developing drugs, as opposed to relying entirely on more standard technologies for drug
development, increases the risks associated with the ownership of our stock. If we are unsuccessful in developing any product candidates
using Cocrystal’s technology, we may be required to change the scope and direction of our product development activities. We may not
identify and implement successfully an alternative product development strategy, and may as a result cease operations.
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If we do not succeed in our efforts to identify or discover potential product candidates, your investment may be lost.
The success of our business depends primarily upon our ability to identify, develop and commercialize antiviral drug products, an
extremely risky business. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield
product candidates for clinical development for several reasons, including:
● our research methodology or that of our partners may be unsuccessful in identifying potential product candidates;
● potential product candidates may have harmful side effects or may have other characteristics that may make the products
unmarketable or unlikely to receive marketing approval; and
● we or our partners may change their development profiles for potential product candidates or abandon a therapeutic area.
Such events may force us to abandon our development efforts for a program or programs, which would have a material adverse effect on
our business and could cause us to cease operations. Research programs to identify new product candidates require substantial technical,
financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove
to be unsuccessful.
If we are unable to successfully complete preclinical testing and clinical trials of our product candidates or experience significant
delays in doing so, our business will be materially harmed.
We intend to invest a significant portion of our efforts and financial resources in the identification and preclinical development of product
candidates that target viral replication enzymes. Our ability to generate product revenues, which we do not expect will occur for many
years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates.
The commercial success of our product candidates will depend on several factors, including:
● successful completion of preclinical studies and clinical trials;
● receipt of marketing and pricing approvals from regulatory authorities;
● obtaining and maintaining patent and trade secret protection for product candidates;
● establishing and maintaining manufacturing relationships with third parties or establishing our own manufacturing
capability; and
● commercializing our products, if and when approved, whether alone or in collaboration with others.
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to
successfully complete development of, or to successfully commercialize, our product candidates, which would materially harm our
business. Most pharmaceutical products that do overcome the long odds of drug development and achieve commercialization still do not
recoup their cost of capital. If we are unable to design and develop each drug to meet a commercial need far in the future, the approved
drug may become a commercial failure and our investment in those development and commercialization efforts will have been
commercially unsuccessful.
We may be unable to demonstrate safety and efficacy of our product candidates to the satisfaction of regulatory authorities or we
may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and
commercialization of our product candidates.
Before obtaining marketing approval from regulatory authorities for the sale of product candidates, we or our partners must conduct
extensive preclinical studies and clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical testing
is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more
clinical trials can occur at any stage of testing. The outcome of preclinical studies and early clinical trials may not be predictive of the
success of later clinical trials, and interim results of a clinical trial do not predict final results. Moreover, preclinical and clinical data are
often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed
satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for their products.
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Events that may cause a delay or unsuccessful completion of clinical development include, as examples:
● delays in agreeing with the FDA or other regulatory authorities on final clinical trial design;
● imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other
regulatory authorities;
● delays in agreeing on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;
● delays in obtaining required institutional review board approval at each clinical trial site;
● delays in recruiting suitable patients to participate in a trial;
● delays in the testing, validation, manufacturing and delivery of the product candidates to the clinical sites;
● delays in having patients complete participation in a trial or return for post-treatment follow-up;
● delays caused by patients dropping out of a trial due to product side effects or disease progression;
● clinical sites dropping out of a trial to the detriment of enrollment;
● time required to add new clinical sites; or
● delays by our contract manufacturers in producing and delivering sufficient supply of clinical trial materials.
If we or our partners must conduct additional clinical trials or other testing of any product candidates beyond those that are contemplated,
or are unable to successfully complete clinical trials or other testing of any the product candidates, or if the results of these trials or tests are
not positive or are only modestly positive or if there are safety concerns, we or our partners may:
● be delayed in obtaining marketing approval for our product candidates;
● not obtain marketing approval at all;
● obtain approval for indications or patient populations not as broad as intended or desired;
● obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;
● be subject to additional post-marketing testing requirements; or
● remove the product from the market after obtaining marketing approval.
Our product development costs will also increase if we experience delays in testing or in obtaining marketing approvals. We do not know
whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule if at all. Significant clinical
trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow
our competitors to bring products to market before we do, which would impair our ability to successfully commercialize our product
candidates and may harm our business and results of operations. Any inability to successfully complete preclinical and clinical
development, whether independently or with our partners, could cause additional costs to us or impair our ability to generate revenues from
our product candidates, including product sales, milestone payments, profit sharing or royalties.
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Our product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval
or limit the scope of any approved label or market acceptance.
Adverse events (“AEs”), that may be observed during clinical trials of our product candidates could cause us, other reviewing entities,
clinical trial sites or regulatory authorities to interrupt, delay or halt such trials and could cause denial of regulatory approval. If AEs are
observed in any clinical trials of our product candidates, including those our partners may develop under our alliance agreements, our or our
partners’ ability to obtain regulatory approval for product candidates may be negatively impacted.
Serious or unexpected side effects caused by an approved product could result in significant negative consequences, including:
● regulatory authorities may withdraw prior approval of the product or impose restrictions on its distribution in the form of a
modified risk evaluation and mitigation strategy;
● we may be required to add labeling statements, such as warnings or contraindications;
● we may be required to change the way the product is administered or conduct additional clinical trials;
● we could be sued and held liable for harm caused to patients; and
● our reputation may suffer.
These events could prevent us or our partners from achieving or maintaining market acceptance of the affected product and could
substantially increase the costs of commercializing our products and impair our ability to generate revenues from the commercialization of
these products either by us or by our partners.
Even if we complete the necessary preclinical studies and clinical trials, we cannot predict whether or when we will obtain
regulatory approval to commercialize a product candidate and we cannot, therefore, predict the timing of any revenue from a
product.
Neither we nor any partners we may have can commercialize a product until the appropriate regulatory authorities, such as the FDA or its
foreign equivalent, have reviewed and approved the product candidate. The regulatory agencies may not complete their review processes in
a timely manner, or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory Committee or
foreign regulatory authority recommends restrictions on approval or recommends non-approval.
Following regulatory approval for a product candidate, we will still face extensive regulatory requirements and the approved
product may face future development and regulatory difficulties.
Even if we obtain regulatory approval in the United States or elsewhere including Canada, the applicable regulators may still impose
significant restrictions on the indicated uses or marketing of our product candidates, or impose ongoing requirements for potentially costly
post-approval studies or post-market surveillance. The following discussion is based on United States law. Similar types of regulatory
provision apply outside of the United States.
The holder of an approved New Drug Application (“NDA”), must monitor and report AEs and any failure of a product to meet the
specifications in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval
for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must
comply with FDA rules and other applicable federal and state laws, and are subject to FDA review.
Drug product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the
FDA and other regulatory authorities for compliance with current Good Manufacturing Practices (“cGMP”), and adherence to commitments
made in the NDA. If we or a regulatory agency discover previously unknown problems with a product such as AEs of unanticipated
severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that
product or the manufacturing facility, including requiring recall or withdrawal of the product from the market or suspension of
manufacturing.
If we or our partners fail to comply with regulatory requirements following approval of our product candidates, a regulatory agency may:
● issue a warning letter asserting we are in violation of the law;
● seek an injunction or impose civil or criminal penalties or monetary fines;
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● suspend or withdraw regulatory approval;
● suspend any ongoing clinical trials;
● refuse to approve a pending NDA or supplements to an NDA submitted by us;
● seize product; or
● refuse to allow us to enter into supply contracts, including government contracts.
Our defense of any government investigation of alleged violations of law, or any lawsuit alleging such violations, could require us to
expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described
above may prevent or inhibit our ability to commercialize our products and generate revenues.
We may not succeed in obtaining or maintaining necessary rights to drug compounds and processes for our development pipeline
through acquisitions and in-licenses.
We may be unable to acquire or in-license any compositions, methods of use, processes or other third-party intellectual property rights from
third parties we identify. The licensing and acquisition of third-party intellectual property rights is a competitive area, and more established
companies are also pursuing strategies to license or acquire third-party intellectual property rights we may consider attractive. These
established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and
commercialization capabilities.
Companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or
acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment. If we are
unable to successfully obtain rights to required third-party intellectual property rights, our business, financial condition and prospects for
growth could suffer.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or
incur costs that could have a material adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the
handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve using hazardous and flammable
materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with
third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. If
contamination occurs or injury results from our use of hazardous materials, we could be held liable for any resulting damages, and any
liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.
Although our workers’ compensation insurance may cover us for costs and expenses we may incur due to injuries to our employees
resulting from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against
other potential liabilities. We may incur substantial costs to comply with current or future environmental, health and safety laws and
regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply
with these laws and regulations also may cause substantial fines, penalties or other sanctions.
Compliance with governmental regulations regarding the treatment of animals used in research could increase our operating costs,
which would adversely affect the commercialization of our technology.
The Animal Welfare Act (“AWA”), is the United States federal law that covers the treatment of certain animals used in research. The
AWA imposes a wide variety of specific regulations that govern the humane handling, care, treatment and transportation of certain animals
by producers and users of research animals, most notably relating to personnel, facilities, sanitation, cage size, feeding, watering and
shipping conditions. Third parties with whom we contract are subject to registration, inspections and reporting requirements. Some states
have their own regulations, including general anti-cruelty legislation, which establish certain standards in handling animals. If we or our
contractors fail to comply with United States and foreign laws and regulations, as applicable, concerning the treatment of animals used in
research, we may be subject to fines and penalties and adverse publicity, and our operations could be adversely affected.
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Public perception of ethical and social issues may limit or discourage the type of research we conduct.
Our clinical trials will involve people, and we and third parties with whom we contract also do research using animals. Governmental
authorities could, for public health or other purposes, limit the use of human or animal research or prohibit the practice of our technology.
In addition, animal rights activists could protest or make threats against our facilities, which may cause property damage and delay our
research. Ethical and other concerns about our methods, such as our use of human subjects in clinical trials or our use of animal testing,
could adversely affect our market acceptance.
We have limited experience in conducting and managing the preclinical development activities and clinical trials necessary to
obtain approvals for marketing our product candidates, including approval by the FDA.
Our efforts to develop our product candidates are at an early stage. To date, with one exception, we have not entered a compound into
human clinical trials. We may be unable to progress our other product candidates undergoing preclinical testing into clinical trials. Success
in preclinical testing and early clinical trials does not ensure that later clinical trials will succeed, and favorable initial results from a clinical
trial do not determine outcomes in subsequent clinical trials. The indications of use for which we are pursuing development may have
clinical effectiveness endpoints not previously reviewed or validated by the FDA or foreign regulatory authorities, which may complicate
or delay our effort to obtain marketing approval. We cannot guarantee that our clinical trials will succeed. In fact, most compounds fail in
clinical trial, even at companies far larger and more experienced than us.
We have not obtained marketing approval or commercialized any of our product candidates. We may not successfully design or implement
clinical trials required for marketing approval to market our product candidates. If we are unsuccessful in conducting and managing our
preclinical development activities or clinical trials or obtaining marketing approvals, we might not be able to commercialize our product
candidates, or might be significantly delayed in doing so, which will materially harm our business.
RISKS RELATED TO OUR RELIANCE ON THIRD PARTIES
If we form strategic alliances which are unsuccessful or are terminated, we may be unable to develop or commercialize certain
product candidates and we may be unable to generate revenues from our development programs.
We are likely to use third party alliance partners for financial, scientific, manufacturing, marketing and sales resources for the clinical
development and commercialization of certain of our product candidates. These strategic alliances will likely constrain our control over
development and commercialization of our product candidates, especially once a candidate has reached the stage of clinical development.
Our ability to recognize revenues from successful strategic alliances may be impaired by several factors including:
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a partner may shift its priorities and resources away from our programs due to a change in business strategies, or a
merger, acquisition, sale or downsizing of its company or business unit;
a partner may cease development in therapeutic areas which are the subject of our strategic alliances;
a partner may change the success criteria for a program or product candidate delaying or ceasing development of such
program or candidate;
a significant delay in initiation of certain development activities by a partner could also delay payment of milestones
tied to such activities, impacting our ability to fund our own activities;
a partner could develop a product that competes, either directly or indirectly, with an alliance product;
a partner with commercialization obligations may not commit sufficient financial or human resources to the marketing,
distribution or sale of a product;
a partner with manufacturing responsibilities may encounter regulatory, resource or quality issues and be unable to
meet demand requirements;
a partner may exercise its rights under the agreement to terminate a strategic alliance;
a dispute may arise between us and a partner concerning the research, development or commercialization of a program
or product candidate resulting in a delay in milestones, royalty payments or termination of a program and possibly
resulting in costly litigation or arbitration which may divert management attention and resources; and
a partner may use our proprietary information or intellectual property to invite litigation from a third party or fail to
maintain or prosecute intellectual property rights possibly jeopardizing our rights in such property.
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Termination of a strategic alliance may require us to seek out and establish alternative strategic alliances with third-party partners; this may
not be possible, or we may not be able to do so on terms acceptable to us, in which case it may be necessary for us to limit the size or scope
of one or more of our programs or increase our expenditures and seek additional funding by other means. Such events would likely have a
material adverse effect on our results of operations and financial condition.
We expect to rely on third parties to conduct some or all aspects of our compound formulation, research and preclinical testing,
and those third parties may not perform satisfactorily.
We do not expect to independently conduct most and certainly not all aspects of our drug discovery activities, compound formulation
research or preclinical testing of product candidates. We rely and expect to continue to rely on third parties to conduct some aspects of our
preclinical testing and on third party Clinical Research Organizations (“CROs”) to conduct clinical trials.
If these third parties terminate their engagements, we will need to enter into alternative arrangements which would delay our product
development activities. Our reliance on these third parties for research and development activities will reduce our control over these
activities but will not relieve us of our responsibilities. If in the future, we elect to develop and commercialize on our own, we will remain
responsible for ensuring that each of our IND-enabling preclinical studies and clinical trials are conducted under the respective study plans
and trial protocols.
If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our studies under regulatory
requirements or our stated study plans and protocols, we will not be able to complete, or may be delayed in completing, the necessary
clinical trials and preclinical studies to enable us or our partners to select viable product candidates for IND submissions and will not be
able to, or may be delayed in our efforts to, successfully develop and commercialize such product candidates.
Because we intend to rely on third-party manufacturers to produce our preclinical and clinical supplies, and commercial supplies
of any approved product candidates, we will subject to a variety of risks.
Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured the product candidates ourselves,
including:
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the inability to meet any product specifications and quality requirements consistently;
a delay or inability to procure or expand sufficient manufacturing capacity;
manufacturing and product quality issues related to scale-up of manufacturing;
costs and validation of new equipment and facilities required for scale-up;
a failure to comply with cGMP and similar foreign standards;
the inability to negotiate manufacturing agreements with third parties under commercially reasonable terms;
termination or nonrenewal of manufacturing agreements with third parties in a manner or that is costly or damaging to
us;
the reliance on a few sources, and sometimes, single sources for raw materials, such that if we cannot secure a
sufficient supply of these product components, we cannot manufacture and sell product candidates in a timely fashion,
in sufficient quantities or under acceptable terms;
the lack of qualified backup suppliers for any raw materials currently purchased from a single source supplier;
operations of our third-party manufacturers or suppliers could be disrupted by conditions unrelated to our business or
operations, including the bankruptcy of the manufacturer or supplier;
carrier disruptions or increased costs beyond our control; and
failing to deliver products under specified storage conditions and in a timely manner.
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These events could lead to clinical study delays or failure to obtain regulatory approval, or impact our ability to successfully commercialize
future products. Some of these events could be the basis for regulatory actions, including injunction, recall, seizure or total or partial
suspension of production.
Because we expect to rely on limited sources of supply for the drug substance and drug product of product candidates, any
disruption in the chain of supply may cause a delay in developing and commercializing these product candidates.
We intend to establish manufacturing relationships with a limited number of suppliers to manufacture raw materials, the drug substance,
and the drug product of any product candidate for which we are responsible for preclinical or clinical development. Each supplier may
require licenses to manufacture such components if such processes are not owned by the supplier or in the public domain. As part of any
marketing approval, a manufacturer and its processes must be qualified by the FDA or foreign regulatory authorities prior to
commercialization. If supply from the approved vendor is interrupted, there could be a significant disruption in commercial supply. An
alternative vendor would need to be qualified through an NDA or marketing authorization supplement, which could cause further delay.
The FDA or other regulatory agencies outside of the United States may also require additional studies if a new supplier is relied upon for
commercial production.
These factors could cause the delay of clinical trials, regulatory submissions, required approvals or commercialization of our product
candidates, cause us to incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail
to deliver the required commercial quantities of drug substance or drug product on a timely basis and at commercially reasonable prices,
and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical trials
may be delayed or we could lose potential revenue.
Manufacturing issues may arise that could increase product and regulatory approval costs or delay commercialization.
As third parties scale up manufacturing of product candidates and conduct required stability testing, product, packaging, equipment and
process-related issues may require refinement or resolution to proceed with any clinical trials and obtain regulatory approval for
commercial marketing. We or the manufacturers may identify significant impurities or stability problems, which could cause increased
scrutiny by regulatory agencies, delays in clinical programs and regulatory approval, significant increases in our operating expenses, or
failure to obtain or maintain approval for product candidates or any approved products.
We expect to rely on third parties to conduct, supervise and monitor our clinical trials, and if those third parties perform in an
unsatisfactory manner, it may harm our business.
We expect to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials. While we will have
agreements governing their activities, we and our partners will have limited influence over their actual performance. Nevertheless, we or
our partners will be responsible for ensuring that each of our clinical trials is conducted in accordance with its protocol, and all legal,
regulatory and scientific standards. Our reliance on the CROs does not relieve us of our regulatory responsibilities.
We, our partners and our CROs must comply with current Good Clinical Practices (“cGCPs”), as defined by the FDA and the International
Conference on Harmonization, for conducting, recording and reporting the results of IND-enabling preclinical studies and clinical trials, to
ensure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of clinical trial participants
are protected. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites.
If we or our CROs fail to comply with cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or
other regulators may require us to perform additional clinical trials before approving any marketing applications. Our clinical trials will
require a sufficiently large number of test subjects to evaluate the safety and effectiveness of a product candidate. If our CROs fail to
comply with these regulations or fail to recruit a sufficient number of patients, fail to recruit properly qualified patients or fail to properly
record or maintain patient data, we may be required to repeat such clinical trials, which would delay the regulatory approval process.
Our contracted CROs will not be our employees, and we cannot control whether they devote sufficient time and resources to our clinical
and nonclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom
they may also be conducting clinical trials, or other drug development activities that could harm our competitive position. If our CROs do
not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical
data they obtain is compromised due to failing to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our
clinical trials may be extended, delayed or terminated, and we may not obtain regulatory approval for, or successfully commercialize our
product candidates. Our financial results and the commercial prospects for such products and any product candidates we develop would be
harmed, our costs could increase, and our ability to generate revenues could be delayed.
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We also expect to rely on other third parties to store and distribute drug products for any clinical trials we may conduct. Any performance
failure by our distributors could delay clinical development or marketing approval of our product candidates or commercialization of our
products, if approved, producing additional losses and depriving us of potential product revenue.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
If we cannot obtain or protect intellectual property rights related to our future products and product candidates, we may not be
able to compete effectively in our markets.
We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to
our future products and product candidates. The strength of patents in the biotechnology and pharmaceutical field involves complex legal
and scientific questions and can be uncertain. The patent applications we own or in-license may fail to result in patents with claims that
cover the products in the United States or in other countries. There is no assurance that all of the potentially relevant prior art relating to
our patents and patent applications has been found; such prior art can invalidate a patent or prevent a patent from issuing based on a pending
patent application. Even if patents do successfully issue, third parties may challenge their validity, enforceability or scope, which may
cause such patents to be narrowed or invalidated. Even if unchallenged, our patents and patent applications may not adequately protect our
intellectual property or prevent others from designing around our claims.
If the patent applications we hold or have in-licensed regarding our programs or product candidates fail to issue or if their breadth or
strength of protection is threatened, it could dissuade companies from collaborating with us to develop product candidates, and threaten our
ability to commercialize products. We cannot offer any assurances about which patents will issue or whether any issued patents will be
found invalid and unenforceable or will be threatened by third parties. Since patent applications in the United States and most other
countries are confidential for a period after filing, and some remain so until issued, we cannot be certain that we were the first to invent a
patent application related to a product candidate. In certain situations, if we and one or more third parties have filed patent applications in
the United States and claiming the same subject matter, an administrative proceeding can be initiated to determine which applicant is
entitled to the patent on that subject matter. Patents have a limited lifespan. In the United States, the natural expiration of a patent is 20
years after it is filed, although various extensions may be available. However the life of a patent, and the protection it affords, is limited.
Once the patent life has expired for a product, we may be open to competition from generic medications. Further, if we encounter delays in
regulatory approvals, the time during which we could market a product candidate under patent protection could be reduced.
Besides the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-
how that is not patentable, processes for which patents are difficult to enforce and any other elements of our drug discovery and
development processes that involve proprietary know-how, information or technology not covered by patents. Each of our employees
agrees to assign their inventions to us through an employee inventions agreement. In addition, as a general practice, `our employees,
consultants, advisors and any third parties who have access to our proprietary know-how, information or technology enter into
confidentiality agreements. Nonetheless, we cannot provide any assurances that our trade secrets and other confidential proprietary
information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop
substantially equivalent information and techniques. The FDA, as part of its Transparency Initiative, is considering whether to make
additional information publicly available on a routine basis, including information we may consider to be trade secrets or other proprietary
information, and it is not clear how the FDA’s disclosure policies may change, if at all.
The laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United
States. We may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad.
If we are unable to prevent material disclosure of the non-patented intellectual property related to our technologies to third parties, and
there is no guarantee we will have any such enforceable trade secret protection, we may not be able to establish or maintain a competitive
advantage in our market, which could materially adversely affect our business, results of operations and financial condition.
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Third-party claims of intellectual property infringement may prevent or delay our development and commercialization efforts.
Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is
substantial litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology
and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, and reexaminations and other post-grant
proceedings before the U.S. Patent and Trademark Office (“U.S. PTO”), and corresponding foreign patent offices. Numerous U.S. and
foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our partners
are pursuing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases
that our product candidates may be subject to claims of infringement of the patent rights of third parties.
Third parties may assert we are employing their proprietary technology without authorization. There may be third-party patents or patent
applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of
our product candidates. Because patent applications can take many years to issue, there may be patent applications currently pending that
may later result in patents that our product candidates may infringe. Third parties may obtain patents in the future and claim that use of our
technologies infringes these patents. If any third-party patents were to be held by a court of competent jurisdiction to cover the
manufacturing process of any of our product candidates, any molecules formed during the manufacturing process or any final product
itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtained a license
under the applicable patents, or until such patents expire. Similarly, if any third-party patents were to be held by a court of competent
jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including combination therapy, the holders
of any such patents may be able to block our ability to develop and commercialize the applicable product candidate unless we obtained a
license or until such patent expires. In either case, such a license may not be available on commercially reasonable terms or at all.
Parties making intellectual property claims against us may obtain injunctive or other equitable relief, which could block our ability to
further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, involves
substantial litigation expense and would be a substantial diversion of employee resources from our business. If a claim of infringement
against us succeeds, we may have to pay substantial damages, possibly including treble damages and attorneys’ fees for willful
infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or
require substantial time and monetary expenditure.
We may need to obtain licenses to intellectual property rights from third parties.
We may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates. We may
fail to obtain these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and
commercialize one or more of our product candidates, which could harm our business significantly. We cannot provide any assurances that
third-party patents do not exist that might be enforced against our products, resulting in either an injunction prohibiting our sales, or, with
respect to our sales and other activities, an obligation on our part to pay royalties and/or other forms of compensation to third parties.
Because of the costs involved in defending patent litigation, we currently lack and may in the future lack the capital to defend our
intellectual property rights.
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-
consuming and unsuccessful.
Competitors may infringe our patents or the patents of our licensors. To counter such infringement or unauthorized use, we may be
required to file infringement claims, or we may be required to defend the validity or enforceability of such patents, which can be expensive
and time-consuming. In an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is
unenforceable, or may refuse to stop the other party from using the technology at issue because our patents do not cover that technology.
An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted
narrowly and could put our patent applications at risk of not issuing.
Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions regarding our
patents or patent applications or those of our partners or licensors. An unfavorable outcome could require us to cease using the related
technology or to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a
license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may cause
substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors,
misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the
United States.
Because of the substantial amount of discovery required in intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of
hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it
could have a material adverse effect on the price of our securities.
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We may be subject to claims our employees, consultants or independent contractors have wrongfully used or disclosed confidential
information of third parties.
We employ individuals previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims we or our
employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of our
employees’ former employers or other third parties. We may also be subject to claims that former employers or other third parties have an
ownership interest in our patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending
these claims, and if we succeed, litigation could cause substantial cost and be a distraction to our management and other employees.
Because we face significant competition from other biotechnology and pharmaceutical companies, our operating results will suffer
if we fail to compete effectively.
The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the United States and
internationally, including major multinational pharmaceutical companies, biotechnology companies and universities and other research
institutions. Our competitors have substantially greater financial, technical and other resources, such as larger research and development
staff and experienced marketing and manufacturing organizations. Additional mergers and acquisitions in the biotechnology and
pharmaceutical industries may cause even more resources being concentrated in our competitors. Competition may increase further
because of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries.
Our competitors may develop, acquire or license drug products that are more effective or less costly than any product candidate we may
develop. See the discussion at page 8 of this Report.
With the exception of one product for which a clinical trial is underway in Canada, all of our programs are in a preclinical development
stage and are targeted toward indications for which there are approved products on the market or product candidates in clinical
development. We will face competition from other drugs that are or will be approved for the same therapeutic indications. Our ability to
compete successfully will depend largely on our ability to leverage our experience in drug discovery and development to:
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discover and develop therapeutics superior to other products in the market;
attract qualified scientific, product development and commercial personnel;
obtain patent and/or other proprietary protection for our technology platform and product candidates;
obtain required regulatory approvals; and
successfully collaborate with pharmaceutical companies in the discovery, development and commercialization of new
therapeutics.
The availability of our competitors’ products could limit the demand, and the price we can charge, for any products we may develop and
commercialize. We will not achieve our business plan if the acceptance of these products is inhibited by price competition or the reluctance
of physicians to switch from existing drug products to our products, or if physicians switch to other new drug products or reserve our
products for use in limited circumstances. The inability to compete with existing or subsequently introduced drug products would have a
material adverse impact on our business, financial condition and prospects.
Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license
novel compounds that could make our product candidates less competitive. Any new product that competes with an approved product must
typically demonstrate advantages, such as in efficacy, convenience, tolerability or safety, to overcome price competition and to succeed.
Our competitors may obtain patent protection, receive approval by FDA and/or foreign regulatory authorities or discover, develop and
commercialize product candidates before we do, which would have a material adverse impact on our business.
The commercial success of our product candidates will depend upon the acceptance of these product candidates by the medical
community, including physicians, patients and healthcare payors.
Assuming one or more product candidates achieve regulatory approval and we commence marketing such products, the market acceptance
of any product candidates will depend on several factors, including:
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demonstration of clinical safety and efficacy compared to other products;
the relative convenience, ease of administration and acceptance by physicians, patients and healthcare payors;
the prevalence and severity of any AEs;
limitations or warnings in the label approved by FDA and/or foreign regulatory authorities for such products;
availability of alternative treatments;
pricing and cost-effectiveness;
the effectiveness of our or any collaborators’ sales and marketing strategies;
our ability to obtain hospital formulary approval; and
our ability to obtain and maintain sufficient third-party payor coverage or reimbursement.
If our current product candidates are approved, we expect sales to generate substantially all of our product revenues for the foreseeable
future, and as such, the failure of these products to find market acceptance would harm our business.
If coverage and adequate reimbursement are not available for our product candidates, it could make it difficult for us to sell
products profitably.
Presently, we cannot predict whether any healthcare or health insurance legislation will be enacted, although it is a key issue for President
Trump. Market acceptance and sales of any product candidates we develop will depend on coverage and reimbursement policies and may
be affected by future healthcare reform measures. Government authorities and third-party payors, such as private health insurers, hospitals
and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure that
coverage and adequate reimbursement will be available for any product candidates. Also, inadequate reimbursement amounts may reduce
the demand for, or the price of, our future products. If reimbursement is not available, or is available only at limited levels, we may not be
able to successfully commercialize product candidates we develop.
We cannot be certain if and when we will obtain formulary approval to allow us to sell any products we may develop and commercialize
into our target markets. Obtaining formulary approval from hospitals and from payors can be an expensive and time-consuming process.
Failure to obtain timely formulary approval will limit our commercial success.
There have been numerous legislative and regulatory proposals to change the healthcare system in the United States and in some foreign
jurisdictions that could affect our ability to sell products profitably. These legislative and/or regulatory changes may negatively impact the
reimbursement for drug products, following approval. The availability of generic treatments may also substantially reduce reimbursement
for our future products. The potential application of user fees to generic drug products may expedite approval of additional generic drug
treatments. We expect to experience pricing pressures in connection with sale of any of our products, due to the trend toward managed
healthcare, the increasing influence of health maintenance organizations and additional legislative changes. If we fail to successfully secure
and maintain reimbursement coverage for our future products or are significantly delayed in doing so, we will have difficulty achieving
market acceptance of our products and our business will be harmed.
In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements
governing drug pricing vary widely from country to country. The European Union, or EU, provides options for its member states to restrict
the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of
medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system
of direct or indirect controls on the profitability of Cocrystal placing the medicinal product on the market. There can be no assurance that
any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and
pricing arrangements for our products. Historically, products launched in the EU do not follow price structures of the U.S. and tend to be
priced significantly lower.
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If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our
product candidates, we may be unable to generate any revenues.
We do not have an organization for the sales, marketing and distribution of pharmaceutical products and the cost of establishing and
maintaining such an organization may exceed the cost-effectiveness of doing so. To market any products that may be approved, we must
build our sales, marketing, managerial and other non-technical capabilities or arrange with third parties to perform these services.
Our current and future partners may not dedicate sufficient resources to the commercialization of our product candidates or may otherwise
fail in their commercialization due to factors beyond our control. If we are unable to establish effective alliances to enable the sale of our
product candidates to healthcare professionals and in geographical regions, including the United States, that will not be covered by our own
marketing and sales force, or if our potential future strategic partners do not successfully commercialize the product candidates, our ability
to generate revenues from product sales will be adversely affected.
If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may
not be able to generate sufficient product revenue and may not become profitable. We will be competing with many companies that have
extensive and well-funded marketing and sales operations. Without an internal team or the support of a third party to perform marketing
and sales functions, we may be unable to compete successfully against these more established companies.
If we obtain approval to commercialize any approved products outside of the United States, a variety of risks associated with
international operations could materially adversely affect our business.
If any of our product candidates are approved for commercialization, we may enter into agreements with third parties to market them on a
worldwide basis or in more limited geographical regions. We expect we will be subject to additional risks related to entering into
international business relationships, including:
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different regulatory requirements for drug approvals in foreign countries;
reduced protection for intellectual property rights;
unexpected changes in tariffs, trade barriers and regulatory requirements;
economic weakness, including inflation, or political instability in foreign economies and markets;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign taxes, including withholding of payroll taxes;
foreign currency fluctuations, which could cause increased operating expenses and reduced revenues, and other
obligations incident to doing business in another country;
workforce uncertainty in countries where labor unrest is endemic;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including
earthquakes, typhoons, floods and fires.
RISKS RELATED TO OUR BUSINESS OPERATIONS AND INDUSTRY
If we lose key management or scientific personnel, cannot recruit qualified employees, directors, officers, or other personnel or
experience increases in our compensation costs, our business may materially suffer.
We depend on principal members of our executive and research teams, the loss of whose services may adversely impact the achievement
of our objectives. We are highly dependent on our Chairman of the Board, Dr. Raymond Schinazi and our President, Dr. Sam Lee. During
2016, both our Chief Executive Officer and our Chief Medical Officer abruptly resigned. Our former Chief Executive Officer has resumed
his duties on an interim basis. We do not carry “key-man” life insurance on the lives of our Chairman, who is not an employee, or any of
our employees or advisors. Furthermore, our future success will also depend in part on the continued service of our key scientific and
management personnel and our ability to identify, hire, and retain additional personnel. We may not be able to attract and retain personnel
on acceptable terms, as there is significant competition among numerous pharmaceutical companies for individuals with similar skill sets.
Because of this competition, our compensation costs may increase significantly. If we lose key employees, our business may suffer.
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If we expand our organization, we may experience difficulties in managing growth, which could disrupt our operations.
As of March 31, 2017, we have 18 full-time employees. As our company matures, we expect to expand our employee base to increase our
managerial, scientific and operational, commercial, financial and other resources and to hire more consultants and contractors. Future
growth would impose significant additional responsibilities on our management, including the need to identify, recruit, maintain, motivate
and integrate additional employees, consultants and contractors. Also, our management may need to divert a disproportionate amount of its
attention away from our day-to-day activities and to managing these growth activities. We may not be able to effectively manage the
expansion of our operations, which may cause weaknesses in our infrastructure, and give rise to operational mistakes, loss of business
opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant
capital expenditures and may divert financial resources from other projects, such as developing additional product candidates. If our
management cannot effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow
revenues could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to
commercialize product candidates and compete will depend, in part, on our ability to manage any future growth.
Any relationships with customers and third party payors may be subject, directly or indirectly, to federal and state healthcare
fraud and abuse laws, false claims laws and health information privacy and security laws. If we are unable to comply, or have not
fully complied, with such laws, we could face criminal sanctions, civil penalties, contractual damages, reputational harm and
diminished profits and future earnings.
If we obtain FDA approval for any of our product candidates and commercialize those products in the United States, our operations may be
directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the
federal Anti-Kickback Statute and the federal False Claims Act. These laws may impact, among other things, our proposed sales, marketing
and education programs. We may be subject to patient privacy regulation by the federal government and by the U.S. states and foreign
jurisdictions in which we conduct our business. The laws that may affect our ability to operate include:
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t h e federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully
soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, either the
referral of an individual, or the purchase or recommendation of an item or service for which payment may be made
under a federal healthcare program, such as the Medicare and Medicaid programs;
federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things,
individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare,
Medicaid, or other third party payers that are false or fraudulent;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal
criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false
statements relating to healthcare matters;
HIPAA, as amended by the Health Information Technology and Clinical Health Act of 2009, or HITECH, and its
implementing regulations, which imposes certain requirements relating to the privacy, security and transmission of
individually identifiable health information; and
state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which
may apply to items or services reimbursed by any third party payer, including commercial insurers, and state and
foreign laws governing the privacy and security of health information in certain circumstances, many of which differ
from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
If our operations are found to violate any of the laws described above or any other governmental regulations that apply to us, we may be
subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, possible exclusion from Medicare, Medicaid
and other government healthcare programs, and curtailment or restructuring of our operations, which could adversely affect our ability to
operate our business and our results of operations.
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We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability and costs.
Using our product candidates in clinical trials and the sale of any products for which we obtain marketing approval exposes us to the risk of
product liability claims. Product liability claims might be brought against us by consumers, healthcare providers, pharmaceutical companies
or others selling or otherwise coming into contact with our products. If we cannot successfully defend against product liability claims, we
could incur substantial liability and costs. Regardless of merit or eventual outcome, product liability claims may cause:
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impairment of our business reputation;
withdrawal of clinical trial participants;
costs due to related litigation;
distraction of management’s attention from our primary business;
substantial monetary awards to patients or other claimants;
the inability to commercialize our product candidates; and
decreased demand for our product candidates, if approved for commercial sale.
We do not have any product liability insurance coverage. We anticipate obtaining such insurance prior to the commencement of any clinical
trials but any such insurance coverage we obtain may not reimburse us for all expenses or losses we may suffer. Insurance coverage is
becoming increasingly expensive and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to
protect us against losses due to liability. If and when we obtain marketing approval for product candidates, we intend to expand our
insurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability insurance on
commercially reasonable terms or in adequate amounts. Occasionally, large judgments have been awarded in class action lawsuits based on
drugs that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our
stock price to decline and, if judgments exceed our insurance coverage, could adversely affect our results of operations and business.
Business interruptions could delay us in developing our future products.
We have locations in Washington and Georgia. We are vulnerable to natural disasters such as earthquakes and tornados as well as other
events that could disrupt our operations. We do not carry insurance for natural disasters and we may not carry sufficient business
interruption insurance to compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on
our business operations.
If our information technology systems are hacked, a third party may misappropriate our trade secrets which could harm our
business and future results of operations.
We keep some of our intellectual property, including trade secrets and results of our clinical and preclinical research on a central server, and
our employees email such information to each other and to third parties outside of our offices. In addition, since we do not encrypt all of
this information, there is a risk that hackers could misappropriate our intellectual property. Any such misappropriation could harm our
business and future results of operations.
RISKS RELATED TO OUR COMMON STOCK
Because we are subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock which
adversely affects its liquidity and market price.
The Securities and Exchange Commission (“SEC”) has adopted regulations which generally define “penny stock” to be an equity security
that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the Bulletin
Board has been substantially less than $5.00 per share and therefore we are currently considered a “penny stock” according to SEC rules.
This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a
written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.
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Due to factors beyond our control, our stock price may be volatile.
Companies trading in the stock market in general, and particularly the over-the-counter markets, including the OTCQB, have experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.
Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating
performance.
Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control
over matters which require stockholder approval.
As of March 15, 2017, our executive officers, directors, 5% stockholders and their affiliates beneficially owned approximately 60% of our
common stock. Therefore, these stockholders will have the ability to influence us through this ownership position. These stockholders may
be able to determine all matters requiring stockholder approval. These stockholders, acting together, may be able to control elections of
directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction.
This may prevent or discourage unsolicited acquisition proposals or offers for our common stock you may believe are in your best interest
as one of our stockholders.
Future sales and issuances of our common stock or rights to purchase common stock, including under our equity incentive plan,
could cause additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We expect that significant additional capital will be needed to continue our planned operations. To the extent we raise additional capital by
issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other
equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible
securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may
also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.
Under our Equity Incentive Plans, our management may grant stock options and other equity-based awards to our employees, directors and
consultants. Approximately 43 million shares of common stock are available for future grant.
If we are subject to securities class action litigation, we may sustain material costs.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its
securities. This risk is especially relevant for us because pharmaceutical companies have experienced significant stock price volatility in
recent years. If we face such litigation, it could cause substantial costs and a diversion of management’s attention and resources, which
could harm our business.
Because we are subject to an SEC investigation, we may be subject to penalties, other relief and reputational harm.
The SEC is conducting an investigation which relates, in part, to matters that arose prior to the Company’s acquisition of Cocrystal
Discovery on January 2, 2014. We are co-operating with the SEC Staff and have incurred substantial legal fees, although we understand all
further fees (up to policy limits) will be covered by our D&O insurance. We cannot predict the outcome of the investigation. Among
possible remedies are the imposition of civil/monetary penalties and injunctive relief as well as reputational harm.
Our ability to use our net operating loss carry forwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986 if a corporation undergoes an “ownership change,” generally defined as a greater
than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating
loss carry forwards (“NOLs”), and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be
limited. We believe that, with the RFS Pharma and Cocrystal Discovery mergers and other transactions that have occurred over the past
three years, we may have triggered an “ownership change” limitation. We may also experience ownership changes in the future because of
subsequent shifts in our stock ownership. If we earn net taxable income, our ability to use our pre-change net operating loss carry forwards
to offset U.S. federal taxable income may be subject to limitations, which could result in increased future tax liability to us. At the state
level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently
increase state taxes owed.
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We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.
We have never declared or paid any cash dividends on our common stock. We anticipate we will retain future earnings for the
development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable
future. Any return to stockholders will therefore be limited to the appreciation of their stock.
Because we may not attract the attention of major brokerage firms, it could have a material impact upon the price of our common
stock.
It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since the firm itself
cannot recommend the purchase of our common stock under the penny stock rules referenced in the previous risk factor. The absence of
such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to
attract new investors when we acquire additional capital.
Because many of our outstanding shares are freely tradable, sales of these shares could cause the market price of our common
stock to drop significantly, even if our business is performing well.
As of March 24, 2017, we had approximately 714 million shares of common stock outstanding, approximately 287 million of which are
either free trading or may be sold without volume or manner of sale limitations under Rule 144. The remainder of our shares, because they
are held by affiliates, are subject to additional restrictions as described below.
In general, Rule 144 provides that any non-affiliate of Cocrystal, who has held restricted common stock for at least six months, is entitled to
sell their restricted stock freely, provided that we stay current in our SEC filings. After one year, a non-affiliate may sell without any
restrictions.
The remainder of our shares of common stock outstanding are held by affiliates of the Company. An affiliate may sell after six months
(subject to contractual restrictions as described above) with the following restrictions:
(i) we are current in our filings,
(ii) certain manner of sale provisions, and
(iii) filing of Form 144.
Future sales of our common stock could cause the market price of our common stock to drop significantly, even if our business is
performing well.
We may issue preferred stock which could make it more difficult for a third party to acquire us and could depress our stock price .
In accordance with the provisions of our Certificate of Incorporation and the Stockholder Rights Agreement described above, our Board
may issue one or more additional series of preferred stock that have more than one vote per share, so long as the Board obtains the majority
approval of each of the groups of shareholders who formerly held our Series A and Series B. This could permit our Board to issue preferred
stock to investors who support our management and give effective control of our business to our management. Issuance of preferred stock
could block an acquisition resulting in both a drop in our stock price and a decline in interest of our common stock. This could make it more
difficult for shareholders to sell their common stock. This could also cause the market price of our common stock shares to drop
significantly, even if our business is performing well.
If we are not successful in completing preclinical or clinical testing or are unable to demonstrate safety and efficacy of our product
candidates to the satisfaction of the regulatory authorities, we may suffer impairment on our IPR&D assets.
In-process research and development (IPR&D) represents a series of awarded patents, filed patent applications and an in-process research
program acquired in the acquisition of RFS Pharma that are integral to the development of the Company’s planned future products. In-
process research and development represents an indefinite-lived intangible asset. Any series of preclinical and clinical outcomes that reduce
the probability for technical and regulatory success, may trigger interim impairment testing. If our IPR&D becomes impaired, write down
on the carrying amount of these assets may result, which could depress our stock price. During 2015, we lowered our forecasts of future
cash flows, which caused a reduction in our IPR&D, resulting in an impairment charge of $38.7 million. In 2016, we lowered our forecasts
of future cash flow again. This reduction caused us to write-down our IPR&D by $92.4 million.
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We continue to have material weaknesses in our internal control over financial reporting. If we are unable to remediate these
material weaknesses, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective
system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which
may adversely affect investor confidence in us and could negatively impact our ability to raise capital.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a
timely basis. Although we have developed and are implementing a plan to remediate these material weaknesses and believe, based on our
evaluation to date, that these material weaknesses will be remediated during 2017, we cannot assure you that this will occur within the
contemplated timeframe. Moreover, we cannot assure you that we will not identify additional material weaknesses in our internal control
over financial reporting in the future. If we are unable to remediate the material weaknesses, our ability to record, process and report
financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the
Securities and Exchange Commission could be adversely affected. The occurrence of or failure to remediate the material weaknesses may
adversely affect investor confidence in us and could negatively impact our ability to raise capital.
As described under “Item 9A. Controls and Procedures,” we have identified control deficiencies which constitute material weaknesses in
our internal control over financial reporting related to the following:
I. Control Environment
We did not maintain an effective control environment, which is the foundation and structure necessary for effective internal control over
financial reporting, as evidenced by: (i) lack of segregation of duties over individuals responsible for certain key control activities; (ii) an
insufficient number of personnel appropriately qualified to perform control monitoring activities, including the recognition of the risks and
complexities of transactions; and (iii) an insufficient number of personnel with the appropriate level of GAAP knowledge and experience
commensurate with our financial reporting requirements. This control environment material weakness contributed to the company not
having effective controls to ensure that potential errors or misstatements may occur, but may not be detected.
II. Risk Assessment, Monitoring Activities and Control Activities - Segregation of Duties
We did not maintain adequate segregation of duties in our accounting and financial reporting processes. We have not appropriately
restricted access to our accounting applications to appropriate users and do not have processes in place that ensure that appropriate
segregation of duties is maintained. Certain personnel have access to financial applications, programs and data beyond that needed to
perform their individual job responsibilities and without independent monitoring. This allows for the creation, review and processing of
certain financial data without independent review and authorization. There are also certain financial personnel that have incompatible
duties, including in the areas of cash disbursements, payroll, and journal entry reviews. We have not yet completed the process of assigning
different people the responsibilities of authorizing transactions, recording transactions, 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. Particularly in the areas of purchases, cash disbursements, and payroll, certain individuals have incompatible duties that limit our
ability to identify and detect errors or fraud that may occur.
III. Risk Assessment, Monitoring Activities and Control Activities - Supervision and Review of Complex Accounting Areas
The Company lacks sufficient qualified personnel to review conclusions reached regarding the accounting for complex transactions and
related analyses to record amounts resulting from such transactions in our financial records. For calculations related to stock-based
compensation and the fair value of our derivative liabilities in particular, there is a lack of review of assumptions used and the underlying
calculations made by the preparer of this information that are then used to record amounts in our financial statements. There is also a lack
of review of assumptions used and documentation of the sources of information used in our evaluation of the fair value of our in-process
research and development intangible asset. Our internal control over these processes would not allow for employees to detect a material
misstatement in these areas in the normal course of performing their duties.
27
IV. Risk Assessment, Information and Communication - Authorization, Identification and Reporting of Related Party Transactions
We do not have processes in place to ensure that all related party transactions, including those entered into with or on behalf of related
parties, (1) have been identified, (2) are properly authorized prior to entering into the transaction, and (3) are properly monitored and
evaluated for appropriate recording and presentation in the financial statements.
V. Monitoring Activities and Control Activities - Financial Reporting Process
We did not maintain an effective financial reporting process to prepare financial statements in accordance with U.S. GAAP. Specifically,
our process lacked timely and complete financial statement reviews and procedures to ensure all required disclosures were made in our
financial statements. We also lacked a process to review information used to prepare our financial statements and disclosures and did not
have adequate segregation of duties over preparation of the financial statements.
The material weaknesses identified by management could result in a material misstatement to our annual or interim financial statements
that would not be prevented or detected. Management has concluded that our internal control over financial reporting was not effective as
of December 31, 2016 due to the material weaknesses identified. We reviewed the results of management’s assessment with the Audit
Committee of the Company’s Board of Directors.
Item 1B. Unresolved Staff Comments
Not Applicable
Item 2. Properties
We have operating facilities in Bothell, WA and Tucker, GA.
In January 2015, Cocrystal renewed its lease for approximately 9,400 square feet of office and laboratory space in Bothell, Washington.
The lease expires on February 1, 2019 and provides for annual rent of approximately $149,617.
As part of 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 expired on December 31, 2016 for approximately
6,148 square feet of office and laboratory space. The Company executed a short-term lease extension for six months, through June 30,
2017. Cocrystal leases the Tucker, Georgia facility from a limited liability company owned by one of Cocrystal’s directors and principal
shareholder, Dr. Raymond Schinazi. The annual expense for this lease is estimated to be $196,000.
We believe that our facilities are sufficient to meet our current needs and that suitable additional space will be available if needed for future
work.
28
Item 3. 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. 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 October 2013, Plaintiff Shefa LMV, LLC (“Plaintiff”) filed a First Amended Complaint (“Complaint”) in Los Angeles Superior Court
for civil penalties and injunctive relief against numerous retailers and manufacturers of products, and alleged violations of California Health
& Safety Code Sec. 25249.6 (part of the “Safe Drinking Water and Toxic Enforcement Act”) and California Business & Professional Code
Sec. 17200, et seq. (California’s “Unfair Competition Law”). The case is captioned Shefa LMV, LLC v. Walgreens Co., et al., Los Angeles
Superior Court Case No. BC520416. The Complaint alleges that the retailers and manufacturers failed to place a clear and reasonable
warning on the products which contained “Cocamide DEA” pursuant to the Safe Drinking Water and Toxic Enforcement Act. On October
17, 2014, Plaintiff filed an amendment to the Complaint, adding the Company’s subsidiary Biozone Laboratories, Inc. a California
corporation, as Doe Defendant No. 9. An oral agreement between counsel for the Company and for Plaintiff has resulted in preparation of a
Proposed Consent Judgment as to Biozone Laboratories, Inc. If fully executed and approved by the court, the Company will pay $7,500 in
exchange for the release and discharge by the settling plaintiff only, with the Company presently expecting no further proceedings.
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 Company holds 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 in an action that
Mr. Fisher, Biozone Pharmaceuticals, Inc., and numerous others had been parties to, captioned Fisher v. Biozone Pharmaceuticals, et al.
N.D. Cal. C12-03716 (WHA) (LB) (“Fisher/Biozone Lawsuit”) that had originally been filed in 2012 and settled by means of a settlement
agreement dated September 5, 2013. In the motion that Mr. Fisher filed, 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. Since the
filing of Mr. Fisher’s motion the Company has voluntarily postponed the announced foreclosure sale several times from the original
January 27, 2017 date and it is currently scheduled for April 28, 2017. There is no assurance that the sale date will not again be changed;
that is highly dependent on proceedings in the Fisher/Biozone Lawsuit.
In October 2015, Cocrystal Pharma, Inc. received a subpoena from the staff of the Securities and Exchange Commission seeking the
production of documents. The Company is fully cooperating with the inquiry. The Company cannot predict or determine whether any
proceeding may be instituted in connection with the subpoena or the outcome of any proceeding that may be instituted.
Item 4. Mine Safety Disclosures
Not applicable.
29
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock has been quoted on the OTCQB under the symbol “COCP” since April 15, 2014. Prior to that it was shown on the
OTCQB under the symbol “BZNE.” The following table sets forth the high and low prices as reported on the OTCQB for the prior two
years. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual
transactions. As of March 10, 2017, there were approximately 232 holders of record of our common stock.
Year ended December 31, 2016
January 1, 2016 through March 31, 2016
April 1, 2016 through June 30, 2016
July 1, 2016 through September 30, 2016
October 1, 2016 through December 31, 2016
Year ended December 31, 2015
January 1, 2015 through March 31, 2015
April 1, 2015 through June 30, 2015
July 1, 2015 through September 30, 2015
October 1, 2015 through December 31, 2015
High
Low
$
$
$
$
$
$
$
$
0.92 $
0.86 $
0.57 $
0.52 $
1.53 $
1.51 $
1.16 $
0.89 $
0.46
0.42
0.32
0.37
0.40
0.95
0.59
0.52
The last reported sales price of our Common stock on the OTCQB on March 28, 2017 was $0.25 per share.
Stock Performance Graph
The following graph compares the five-year cumulative total return of our Common Stock with the S&P 500 Index and the NASDAQ
Biotechnology Index. The graph assumes $100 invested on December 31, 2011 in our Common Stock and in each of the foregoing indices.
The stock price performance reflected in the graph below is not necessarily indicative of future price performance.
30
Dividend Policy
We have not declared nor paid any cash dividend on our common stock, and we currently intend to retain future earnings, if any, to finance
the expansion of our business, and we do not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition,
results of operations, capital requirements and other factors that our board of directors considers significant.
31
Securities Authorized for Issuance under Equity Compensation Plans
Equity Compensation Plan Information
The following chart reflects the number of awards granted under equity compensation plans approved and not approved by shareholders
and the weighted average exercise price for such plans as of December 31, 2016.
Number of
shares of
common
stock to be
issued upon
exercise of
outstanding
options (1)
(a)
Weighted
Average
Exercise Price
of Outstanding
Options (b)
($)
Number of
shares
remaining
available for
issuance
under equity
compensations
plans
(excluding the
shares
reflected in
column a)
-
24,351
24,351
-
0.30
0.30
-
48,368
48,368
Name of Plan (Share values in 000’s)
Equity compensation plans not approved by security holders
Equity compensation plans approved by security holders (2)
Total
(1) Consists of stock options.
(2) This represents securities issued under the 2007 Equity Incentive Plan (the “Prior Plan”) and 2015 Equity Incentive Plan.
In 2014, in connection with the Cocrystal Discovery merger, Cocrystal adopted and assumed the Prior Plan. On April 13, 2015, the Board
adopted the 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan provides for the grant of incentive stock options, qualified stock
options, restricted stock awards, restricted stock units, stock appreciation rights, and performance shares or units and cash awards. Awards
may be granted under the 2015 Plan to our employees, directors and independent contractors.
Recent Sales of Unregistered Securities
All recent sales of unregistered securities have been previously reported.
Item 6. Selected Financial Data
The following selected historical consolidated statement of operations data for the years ended December 31, 2016, 2015, 2014, 2013
and 2012 and the consolidated balance sheet data as of December 31, 2016, 2015, 2014, 2013 and 2012, below are derived from our audited
consolidated financial statements and related notes thereto. This data should be read in conjunction with our “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto.
32
(In thousands, except per share information)
Statement of operations data:
Grant Revenues
Costs and expenses:
Research and development (a)
General and administrative
Total costs and expenses
Operating loss
Other income (expense), net
Income tax benefit (provision)
Net loss
Net loss attributable to common shareholders
Loss per share, basic and diluted:
Net loss per share
Weighted average number of common shares
outstanding (basic):
Weighted average number of common shares
outstanding (diluted):
Balance sheet data:
Total assets
Long-term liabilities
Stock (Common & Preferred)
Total stockholders’ equity
2016
For the years ended December 31,
2014
2015
2013
2012
$
- $
78 $
9 $
- $
-
101,679
4,140
105,819
(105,819)
1,551
29,394
(74,874)
(74,874) $
47,261
6,765
54,026
(53,948)
(11,422)
15,248
(50,122)
(50,122) $
4,071
1,737
5,808
(5,799)
5,648
52
(99)
(99) $
18
3,283
3,301
(3,301)
(20,457)
-
(23,758)
(23,758) $
489
2,064
2,553
(2,553)
(5,411)
-
(7,965)
(7,965)
(0.11) $
(0.08) $
(0.01) $
(0.33) $
(0.13)
705,529
630,316
326,779
72,500
61,631
706,000
630,316
327,753
72,500
61,631
$
$
$
$
$
$
124,883 $
20,525 $
239,749 $
102,319 $
224,230 $
49,936 $
230,150 $
167,594 $
259,283 $
65,257 $
18,849 $
6,651 $
6,456 $
- $
27,724 $
(6,026) $
7,240
-
10,548
(3,580)
(a) Includes $92,396 and $38,665 impairment on IPR&D in 2016 and 2015, respectively
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements included elsewhere in this
report.
Company Overview
The Company was formerly incorporated in Nevada under the name Biozone Pharmaceuticals, Inc. On January 2, 2014, the Company sold
substantially all of its assets to MusclePharm Corporation (“MusclePharm”), and, on the same day, merged with Cocrystal Discovery, Inc.
in a transaction accounted for as a reverse merger. Following the merger, the Company assumed Cocrystal Discovery, Inc.’s business plan
and operations. On March 18, 2014, the Company reincorporated in Delaware under the name Cocrystal Pharma, Inc.
Effective November 25, 2014, Cocrystal Pharma, Inc. and affiliated entities completed a series of merger transactions as a result of which
Cocrystal Pharma, Inc. merged with RFS Pharma, LLC, a Georgia limited liability company (“RFS Pharma”). We refer to the surviving
entity of this merger as “Cocrystal” or the “Company.”
33
Our primary business going forward is to develop novel medicines for use in the treatment of human viral diseases. Cocrystal 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.
Results of Operations
For the Years Ended December 31, 2016 and December 31, 2015
As stated above, we are focused on research and development of novel medicines for use in the treatment of human viral diseases.
Accordingly, we had no revenue for the years ended December 31, 2016 or 2015, except for $78,000 in grant revenues for 2015. For the
year ended December 31, 2016, we had a net loss of $74,874,000 compared to a net loss of $50,122,000 for 2015. This net loss for the year
was due primarily to an impairment loss of $92,396,000 on our IPR&D, $13,400,000 from ongoing operations, $1,177,000 impairment on
our mortgage note, and a ($29,394,000) deferred tax benefit associated with the impairment charges incurred. Our operating loss for the
year ended December 31, 2016 was $105,819,000, compared to an operating loss of $53,948,000 in 2015. Other income was $1,551,000 for
the year ended December 31, 2016, which is primarily due to a $2,603,000 gain on the fair value of derivative liabilities, offset by a loss of
$1,177,000 related to impairment of our mortgage note receivable. 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 value of the warrants decreases during a period, which occurred during the year ended December 31, 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 while an increase in the fair
value of our common stock generally results in other expense. This other income or expense is non-cash. We believe investors should focus
on our operating loss rather than net income or loss for the periods presented.
Research and Development Expense
Research and development expense consists primarily of compensation-related costs for our 16 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 pre-clinical development activities.
Also included in research and development expense for the years ended December 31, 2016 and 2015 are impairment charges related to our
in-process research and development (IPR&D) intangible asset.
Total research and development expenses were $101,679,000 for the year ended December 31, 2016, compared with $47,261,000 for the
year ended December 31, 2015. This increase of $54,418,000 is primarily the result of recognizing an impairment loss on IPR&D of
$92,396,000 in 2016 as compared to an impairment loss of $38,665,000 in 2015. Excluding the impact of the IPR&D impairment charges
in each period, research and development expenses were $9,283,000 for the year ended December 31, 2016, which is an increase of
$687,000 from $8,596,000 for the year ended December 31, 2015. We continue to expect research and development expenses to increase in
2017 as a result of ongoing Phase 1 programs and Phase 2 start up.
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 $4,140,000 for the year ended December 31, 2016, compared with $6,765,000 for the year ended
December 31, 2015. This decrease of $2,625,000 is primarily the result of lower stock option expense due to the resignation of the CEO
and CMO during the year.
34
Future general and administrative expenses are expected to continue at the current levels, although we expect legal expenses relating to the
SEC and the SEC investigation to be covered by insurance.
Interest Income/Expense
Interest income was $126,000 for the year ended December 31, 2016, compared to $180,000 for the year ended December 31, 2015. These
amounts primarily represent interest earned on the mortgage note we acquired in June 2015. 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.
Other Income/Expense
Other Income, net, was $1,551,000 for the year ended December 31, 2016 compared with Other Expense, net of $11,422,000 for the year
ended December 31, 2015. Other Income, net for the year ended December 31, 2016 primarily consists of a gain recognized from a
decrease in the fair value of our derivative liabilities as our stock price decreased offset by an impairment loss of $1,177,000 related to our
mortgage note receivable. Other Expense for the year ended December 31, 2015 is primarily due to a loss of $9,916,000 associated with an
increase in the fair value of our derivative liabilities as our stock price decreased. In the year ended December 31, 2015, we also recorded
other expense of $1,686,000 related to a loss shares that were previously held in escrow related to our sale of certain assets to
MusclePharm. These shares were to be held in escrow but instead were released by the escrow agent to MusclePharm, which resulted in us
recording a loss upon release of these shares.
Income Taxes
For the year ended December 31, 2016, we recorded an income tax benefit of $29,394,000 resulting from reduction of our deferred tax
liability primarily stemming from the impairment loss recorded for the Company’s in-process research and development.
For the Years Ended December 31, 2015 and December 31, 2014
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.
Total research and development expenses were $47,261,000 for the year ended December 31, 2015, compared with $4,071,000 for the year
ended December 31, 2014. This increase of $43,190,000 is primarily the result of recognizing an impairment loss on our IPR&D intangible
asset of $38,665,000 as well as reporting a full year of operations reflecting the merger of RFS Pharma, which occurred in November 2014.
Laboratory Services increased $2,814,000, personnel costs increased $1,142,000 and professional fees increased $569,000.
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.
General and administrative expenses were $6,765,000 for the year ended December 31, 2015, compared with $1,737,000 for the year ended
December 31, 2014. This increase of $5,028,000 is primarily the result of reporting a full year of operations reflecting the merger of RFS
Pharma, which occurred in November 2014. In addition, there were significant new expenses in 2015 for equity stock option grants to new
executives of $2,934,000 and $518,000 in additional legal expenses related to the several legal proceedings Cocrystal Pharma, Inc. is a
party to.
35
Interest Income/Expense
Interest income was $180,000 for the year ended December 31, 2015, compared to $96,000 for the year ended December 31, 2014. These
amounts primarily represent interest earned on the mortgage note we 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.
Other Income/Expense
Other expense, net, was $11,422,000 for the year ended December 31, 2015 compared with Other Income, net of $5,648,000 for the year
ended December 31, 2014.
Other expense, net of $11,422,000 for the year ended December 31, 2015 reflects an increase in fair value of our derivative liabilities as our
stock price increased, which resulted in other expense of $9,916,000, and the loss on MusclePharm escrow shares of $1,686,000. These
shares were to be held in escrow but released by the escrow agent to MusclePharm.
Other Income in 2014 of $5,648,000 reflects a $1,359,000 realized gain on marketable securities, and other income of $5,730,000 related to
the decrease in fair value of our derivative liabilities as our stock price decreased, offset by other expense of $946,000 for the difference
between the proceeds received in our January 2014 common stock financing and the fair value of the warrants issued with the common
stock. These derivative liabilities are warrants to acquire the Company’s common stock that are potentially settleable in cash.
36
Income Taxes
For the year ended December 31, 2015, we recorded an income tax benefit of $15,248,000 resulting primarily from reduction of our
deferred tax liability stemming from the impairment loss recorded for the Company’s in-process research and development intangible asset.
Liquidity and Capital Resources
For the year ended December 31, 2016, net cash used in operating activities was $14,655,000, compared to net cash used in operating
activities of $10,317,000 for 2015. The increase in cash used in operating activities from 2016 to 2015 was attributable to our increase in
research and development activities, including Phase I testing of our lead non-nucleoside inhibitor. In 2016, net cash provided by investing
activities of $3,000 consisted of receipts related to our mortgage note offset by capital expenditures primarily for lab equipment for our
R&D facilities, as compared to cash used by investing activities of $262,000 when our capital expenditures exceeded amounts received for
our mortgage note. For the year ended December 31, 2016, net cash provided by financing activities was $9,016,000, compared to cash
provided by financing activities of $15,885,000 for 2015. In both years, net cash generated by financing activities was primarily generated
from the issuance of common stock.
For the year ended December 31, 2015, net cash used in operating activities was $10,317,000, compared to net cash used in operating
activities of $6,012,000 for 2014. The increase in cash used in operating activities from 2014 to 2015 was attributable to our increase in
research and development activities, including an increase in personnel, and increased general and administrative expenses associated with
being a public company and with the two mergers we entered into during 2014. In 2015, net cash used in investing activities of $262,000
consisted of capital expenditures primarily for improvements to our corporate offices in Tucker, Georgia. For the year ended December 31,
2015, net cash provided by financing activities was $15,885,000, compared to cash provided by financing activities of $2,866,000 for 2014.
In 2015, net cash generated by financing activities was primarily due to the proceeds from issuance of common stock.
As of March 29, 2017, we have approximately $2.0 million cash on hand. Presently we have cash to last through April 2017. Accordingly,
we must raise approximately $8 to $10 million to support our planned operations over the next 12 months. The Company is presently
exploring various financing options, including but not limited to a private placement. We have a history of operating losses as we have
focused our efforts on raising capital and research and development activities.
The Company has received non-binding offers from three parties including its two largest shareholders, both of whom are directors of the
Company, to invest $1 million each or a total of $3 million. The understanding is that the investment will be common stock based on a 10-
prior day average price going back from March 29th and is subject to approval of our Board of Directors and execution of Stock Purchase
Agreements.
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 incurred net losses and negative operating cash flows since inception. For the year ended December 31, 2016,
the Company recorded a net loss of approximately $74.9 million and used approximately $14.6 million of cash in operating activities. The
Company has not yet established an ongoing source of revenue sufficient to cover its operating 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.
We can give no assurances that any additional capital that we are able to obtain, if any, will be sufficient to meet our needs, or that any such
financing will be obtainable on acceptable terms. If we are unable to obtain adequate capital, we could be forced to cease operations or
substantially curtail our commercial activities. These conditions raise substantial doubt as to our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset
amounts and classification of liabilities should we be unable to continue as a going concern.
Over the next 12 months ending December 31, 2017, we estimate negative cash flow from operations. Management intends to fund future
operations through additional private or public equity offerings, and may seek additional capital through arrangements with strategic
partners or from other sources.
Cautionary Note Regarding Forward Looking Statements
This report includes forward-looking statements including statements regarding our future business development, regulatory compliance,
generation of revenues, our liquidity, expectations from proposed capital raises, and the issues relating to the potential claims relating to
our former Pittsburg, California lease and the related bank loan guarantee.
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.
37
The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that
may cause actual results to differ materially from these forward-looking statements are contained in the Risk Factors in this report. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future
events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors and
our other filings with the SEC.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial
statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or GAAP. The preparation of
these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities
and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on
our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and
assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results and experiences may differ materially from these estimates. While our significant accounting policies are more fully
described in the accompanying notes to the consolidated financial statements included in this Annual Report on Form 10-K for the year
ended December 31, 2016, we believe that the following accounting policies are the most critical to aid you in fully understanding and
evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our
consolidated financial statements.
Stock-Based Compensation
We account for stock options related to our equity incentive plans under the provisions of Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 718 which requires the recognition of the fair value of stock-based compensation. The fair
value of stock options was estimated using a Black-Scholes option valuation model. This model requires the input of subjective
assumptions including expected stock price volatility, expected life and estimated forfeitures of each award. The fair value of equity-based
awards is amortized ratably over the requisite service period of the award. Due to the limited amount of historical data available to us,
particularly with respect to stock-price volatility, employee exercise patterns and forfeitures, actual results could differ from our
assumptions.
Fair Value of Warrants
Warrants are recorded either as equity instruments or derivative liabilities. In the case of warrants recorded as liabilities, they are recorded
at their estimated fair value at the date of issuance. Subsequent changes in estimated fair value are recorded in other income (expense) in
the Company’s statement of operations in each subsequent period. The warrants are measured at estimated fair value using the Black
Scholes valuation model, which is based, in part, upon inputs for which there is little or no observable market data, requiring the Company
to develop its own assumptions. Inherent in this model are assumptions related to expected stock price volatility, expected life, risk-free
interest rate and dividend yield. We estimate the volatility of our common stock at the date of issuance, and at each subsequent reporting
period, based on historical implied volatility based on a group of comparable companies, that matches the expected remaining life of the
warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the measurement date for a maturity similar
to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual
term. The dividend rate is based on our historical rate, which we anticipate to remain at zero. The assumptions used in calculating the
estimated fair value of the warrants represent our best estimates. However these estimates involve inherent uncertainties and the application
of management judgment. As a result, if factors change and different assumptions are used, the warrant liability and the change in estimated
fair value could be materially different.
Business Combinations and Intangible Assets
In connection with our acquisition of RFS Pharma in November 2014, we acquired a substantial amount of intellectual property. We have
accounted for the intellectual property acquired as an in-process research and development (IPR&D) asset and have determined that asset to
have an indefinite life based on the stage of development of the research projects of RFS Pharma at the date of acquisition. This intangible
asset, which we recorded at its estimated fair value of $185.0 million as of the acquisition date, will continue to have an indefinite life until
the associated research and development activities are complete, at which point a determination of the asset’s useful life will be made. Prior
to completion of these research and development activities, the intangible asset will be subject to annual impairment tests, or more frequent
tests in the event of any impairment indicators occurring. These impairment tests require significant judgment regarding the status of the
research activities, the potential for future revenues to be derived from any products that may result from those activities, and other factors.
38
The Company conducted its annual impairment tests related to the in-process research and development asset as of November 30, 2015.
The initial valuation recorded in November 2014 at the time of the RFS Pharma acquisition represented the fair value of the acquired
hepatitis C program acquired from RFS Pharma. We performed our impairment test and estimated fair value of each unit of account based
on the income approach (also known as the discounted cash flow (“DCF”) method, which utilizes the present value of future cash flows to
estimate fair value.) The future cash flows for our hepatitis C assets were projected based upon our estimates of future revenues, operating
income and other factors (such as working capital and capital expenditures). We took into account market conditions for hepatitis C
therapies, anticipated new competitive therapies and anticipated market price declines as we modeled future cash flows.
Late in 2015, the Company received reports from ongoing pre-clinical studies that indicated higher than acceptable toxicity related to its
hepatitis C lead molecule, CC-1845. Work is ongoing to further isolate the source(s) of the higher than acceptable toxicity by separating
the two diasteromers that form CC-1845. We have determined one of these diasteromers has higher than desired toxicity. Work on the
second diasteromer is still in process. These events result in longer than anticipated development times for our lead molecule, a lower
probability of technical and regulatory success and longer development times for back-up molecules within hepatitis C. As a result, we
have lowered our forecasts of future cash flows, which caused a reduction in value of our hepatitis C assets and which led to the
impairment charge recorded in the amount of $38.7 million in 2015 related to our IPR&D asset. As we continue work on this program, we
may be required to record additional impairment charges depending on the outcome of our research activities.
In November 2016, the Company performed annual tests of impairment on our IPR&D asset and to determine the fair value. Due to
industry reports forecasting patient volume decreasing and the average price of treatment trending downward, as well as due to increased
competition in the hepatitis C market, and partially the result of further data defining the scientific and commercial potential of Company
HCV compounds, we have lowered our forecasts of future cash flows, which caused a reduction in value of our hepatitis C assets. This
resulted in an impairment charge recorded to our IPR&D asset in the amount of $92.4 million in 2016.
We also recorded $65.2 million of goodwill in the RFS Pharma acquisition that is subject to impairment testing. This goodwill primarily
represents the amount recorded as a deferred tax liability in the RFS Pharma acquisition, which was required as the goodwill recorded for
book purposes is not tax deductible based on the structure of the acquisition. Future impairment tests of goodwill will also require
substantial judgment and estimates. We completed our annual goodwill impairment tests as of November 30, 2016 and 2015, and
determined that there was no impairment.
Income Taxes
Given the uncertainty regarding future realization of our deferred tax assets, which primarily result from our net operating losses and
research and development credit carryforwards, we have placed a full valuation allowance on our deferred tax assets. However, as noted
above, we initially recorded a deferred tax liability of $65.2 million related to the RFS Pharma acquisition. Due to the impairment loss we
recognized on our in-process research and development in 2015, we reduced the deferred tax liability for the tax effect on that impairment
loss of approximately $15.3 million. In 2016, we recognized another impairment loss on our in-process research and development of $92.4
million. As a result, our deferred tax liability at December 31, 2016 was reduced to $20.5 million. We have not considered this deferred tax
liability as a source of future income in our determination of the need for a valuation allowance against our deferred tax assets due to the
fact that this deferred tax liability relates to our indefinite-lived IPR&D asset, and the timing of reversal of this deferred tax liability cannot
currently be determined due to uncertainty regarding the ultimate outcome of our research activities associated with the intellectual property
acquired in the RFS Pharma transaction. To the extent our estimates regarding the outcome of those activities changes in future periods, our
determination regarding the valuation allowance may also change.
Contractual Obligations
The following table summarizes our significant contractual obligations at December 31, 2016 (in thousands):
Operating lease obligations
Total
Total
Less than 1 year
1 to 3 years
402 $
402 $
228 $
228 $
174
174
$
$
The minimum lease payments above do not include common area maintenance (CAM) charges, which are contractual obligations under
some of the Company’s operating leases, but are not fixed and can fluctuate from year to year.
Licenses and Collaborations
In addition to the above contractual commitments, we also have potential future payments due under various licenses and collaborations as
follows:
Emory University: Cocrystal Pharma has an exclusive license from Emory University for use of certain inventions and technology related
to inhibitors of hepatitis C virus 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.
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 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.
39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest
rates. However, as our investments are in highly liquid money market funds, we do not believe we are subject to any material market risk
exposure. As of December 31, 2016, we did not have any material derivative financial instruments held as assets. The fair value of our cash
and cash equivalents was $3.6 million as of December 31, 2016.
We do not currently have any hard to value investment securities or securities for which a market is not readily available or active.
We are not subject to significant credit risk as this risk does not have the potential to materially impact the value of our assets and
liabilities.
Item 8. Financial Statements
The consolidated financial statements of Cocrystal Pharma, Inc. required by this Item are described in Item 15 of this Annual Report on
Form 10-K and are presented beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Not applicable.
Item 9A. Controls and Procedures
Our management, with the participation of our interim Chief Executive Officer and interim Chief Financial Officer, have evaluated the
effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2016. Our disclosure controls and procedures are designed
to provide reasonable assurance 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 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 December 31, 2016 as a result of the material weaknesses in our internal control over financial reporting discussed below.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-
15(f) and 15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined effective could provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Our management conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2016, based on the framework in the Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 Internal Control-Integrated
Framework”). A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected
on a timely basis. During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2016, our
management concluded that our Company has the following material weaknesses in internal control over financial reporting as of
December 31, 2016:
40
Control Environment
We did not maintain an effective control environment, which is the foundation and structure necessary for effective internal control over
financial reporting, as evidenced by: (i) lack of segregation of duties over individuals responsible for certain key control activities; (ii) an
insufficient number of personnel appropriately qualified to perform control monitoring activities, including the recognition of the risks and
complexities of transactions; and (iii) an insufficient number of personnel with the appropriate level of GAAP knowledge and experience
commensurate with our financial reporting requirements. This control environment material weakness contributed to the company not
having effective controls to ensure that potential errors or misstatements may occur, but may not be detected.
Risk Assessment, Monitoring Activities and Control Activities - Segregation of Duties
We did not maintain adequate segregation of duties in our accounting and financial reporting processes. We have not appropriately
restricted access to our accounting applications to appropriate users and do not have processes in place that ensure that appropriate
segregation of duties is maintained. Certain personnel have access to financial applications, programs and data beyond that needed to
perform their individual job responsibilities and without independent monitoring. This allows for the creation, review and processing of
certain financial data without independent review and authorization. There are also certain financial personnel that have incompatible
duties, including in the areas of cash disbursements, payroll, and journal entry reviews. We have not yet completed the process of assigning
different people the responsibilities of authorizing transactions, recording transactions, 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. Particularly in the areas of purchases, cash disbursements, and payroll, certain individuals have incompatible duties that limit our
ability to identify and detect errors or fraud that may occur.
Risk Assessment, Monitoring Activities and Control Activities - Supervision and Review of Complex Accounting Areas
The Company lacks sufficient qualified personnel to review conclusions reached regarding the accounting for complex transactions and
related analyses to record amounts resulting from such transactions in our financial records. For calculations related to stock-based
compensation and the fair value of our derivative liabilities in particular, there is a lack of review of assumptions used and the underlying
calculations made by the preparer of this information that are then used to record amounts in our financial statements. There is also a lack
of review of assumptions used and documentation of the sources of information used in our evaluation of the fair value of our in-process
research and development intangible asset. Our internal control over these processes would not allow for employees to detect a material
misstatement in these areas in the normal course of performing their duties.
Risk Assessment, Information and Communication - Authorization, Identification and Reporting of Related Party Transactions
We do not have processes in place to ensure that all related party transactions, including those entered into with or on behalf of related
parties, (1) have been identified, (2) are properly authorized prior to entering into the transaction, and (3) are properly monitored and
evaluated for appropriate recording and presentation in the financial statements.
Monitoring Activities and Control Activities - Financial Reporting Process
We did not maintain an effective financial reporting process to prepare financial statements in accordance with U.S. GAAP. Specifically,
our process lacked timely and complete financial statement reviews and procedures to ensure all required disclosures were made in our
financial statements. We also lacked a process to review information used to prepare our financial statements and disclosures and did not
have adequate segregation of duties over preparation of the financial statements.
The material weaknesses identified by management could result in a material misstatement to our annual or interim financial statements
that would not be prevented or detected. Management has concluded that our internal control over financial reporting was not effective as
of December 31, 2016 due to the material weaknesses identified. We reviewed the results of management’s assessment with the Audit
Committee of the Company’s Board of Directors.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by BDO USA, LLP, an
independent registered public accounting firm, as stated in their report, as set forth at the beginning of Part II, Item 8 of this Annual Report
on Form 10-K.
41
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting that occurred during the quarter ended December 31, 2016, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, the following
changes that occurred subsequent to December 31, 2016 have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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 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.
As previously disclosed in our Annual Report on Form 10-K for 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, as of December 31, 2015. With the oversight of senior management and our audit committee, we took
additional measures 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, described above, were not remediated as of December
31, 2016, primarily due to the timing of the turnover in our management team and the effect of such timing on the transition of
responsibilities related to the execution of control activities.
Remedial Actions to Address Material Weaknesses
Management is actively implementing a remediation plan to ensure that control deficiencies contributing to the material weakness are
remediated such that these controls will operate effectively. The remediation actions we are taking, and expect to take, include:
(i)
(ii)
(iii)
(iv)
the implementation of additional review procedures designed to enhance the control owner’s execution of controls
activities, including entity level controls, through the implementation of improved documentation standards evidencing
execution of these controls, oversight, and training;
improving the control activities and procedures associated the review of complex accounting areas, including proper
segregation of duties and assigning personnel with the appropriate experience as preparers and reviewers over analyses
relating to such accounting areas;
educating and re-training control owners regarding internal control processes to mitigate identified risks and maintaining
adequate documentation to evidence the effective design and operation of such processes; and
implementing enhanced controls to monitor the effectiveness of the underlying business process controls that are
dependent on the data and financial reports generated from the relevant information systems.
In addition, as discussed above, in February 2017, our Board of Directors oversaw a change in the Company’s senior leadership when it
appointed a new Interim Chief Financial Officer following the resignation of our former Interim Chief Financial Officer.
We believe that these actions, and the improvements we expect to achieve as a result, will effectively remediate the material weaknesses
identified. However, the material weaknesses in our internal control over financial reporting will not be considered remediated until the
remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating
effectively. We expect that the remediation of these material weaknesses will be completed in 2017.
Item 9B. Other Information
Not applicable.
42
COCRYSTAL PHARMA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Cocrystal Pharma, Inc.
Tucker, Georgia
We have audited the accompanying consolidated balance sheets of Cocrystal Pharma, Inc. (the “Company”) as of December 31, 2016 and
2015 and the related consolidated statements of operations and comprehensive income (loss), convertible preferred stock and stockholders’
equity (deficit), and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Cocrystal Pharma, Inc. at December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cocrystal
Pharma, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report
dated March 31, 2017, expressed an adverse opinion thereon.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
described in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an
accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BDO USA, LLP
Seattle, Washington
March 31, 2017
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Cocrystal Pharma, Inc.
Tucker, Georgia
We have audited Cocrystal Pharma, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). Cocrystal Pharma, Inc.’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s
Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or
detected on a timely basis. Material weaknesses regarding management’s failure to maintain an effective control environment; design and
maintain controls over appropriate segregation of duties; design and maintain controls over the supervision and review of complex
accounting areas; design and maintain controls over the supervision and review of the financial reporting process; and design and maintain
controls over the authorization, identification, and disclosure of related party transactions have been identified and described in
management’s assessment. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied
in our audit of the 2016 financial statements, and this report does not affect our report dated March 31, 2017, on those financial statements.
In our opinion, Cocrystal Pharma, Inc. did not maintain, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the
company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Cocrystal Pharma, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of
operations and comprehensive income (loss), convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the
three years in the period ended December 31, 2016, and our report dated March 31, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Seattle, Washington
March 31, 2017
F-3
COCRYSTAL PHARMA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, 2016 December 31, 2015
$
$
$
3,640 $
21
517
1,294
5,472
280
31
-
53,905
65,195
124,883 $
563 $
1,476
2,039
63
20,462
20,525
9,276
32
441
170
9,919
430
31
2,354
146,301
65,195
224,230
2,585
4,115
6,700
61
49,875
49,936
$
22,564 $
56,636
Assets
Current assets:
Cash and cash equivalents
Accounts receivable
Prepaid and other current assets
Mortgage note receivable, current portion
Total current assets
Property and equipment, net
Deposits
Mortgage note receivable, long-term portion
In process research and development
Goodwill
Total assets
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable and accrued expenses
Derivative liabilities
Total current liabilities
Long-term liabilities
Deferred rent
Deferred tax liability
Total long-term liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Common stock, $.001 par value; 800,000 shares authorized; 714,032 and 694,396 shares
issued and outstanding as of December 31, 2016 and December 31, 2015, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
714
239,035
(137,430)
102,319
Total liabilities and stockholders’ equity
$
124,883 $
694
229,456
(62,556)
167,594
224,230
See accompanying notes to consolidated financial statements.
F-4
COCRYSTAL PHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Grant revenues
Operating expenses
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income
Realized gain on marketable securities
Other expense
Fair value of warrant liabilities in excess of proceeds from financing
Loss on return of escrowed shares
Impairment loss on mortgage note receivable
Change in fair value of derivative liabilities
Total other income (expense), net
Loss before income taxes
Income tax benefit
Net loss
Comprehensive income (loss):
Net loss
Unrealized gain on marketable securities, net of tax
Total comprehensive income (loss)
Net loss per common share:
Net loss per share, basic
Net loss per share, diluted
Weighted average common shares outstanding, basic
Weighted average common shares outstanding, diluted
2016
2015
2014
$
- $
78 $
9
101,679
4,140
105,819
47,261
6,765
54,026
4,071
1,737
5,808
(105,819)
(53,948)
(5,799)
126
-
(1)
-
-
(1,177)
2,603
1,551
180
-
-
-
(1,686)
-
(9,916)
(11,422)
96
1,359
(7)
(946)
(584)
-
5,730
5,648
(104,268)
(65,370)
(151)
29,394
15,248
(74,874) $
(50,122)
(74,874) $
-
(74,874) $
(50,122) $
-
(50,122) $
52
(99)
(99)
236
137
(0.11) $
(0.11) $
705,529
706,000
(0.08) $
(0.08) $
630,316
630,316
(0.00)
(0.01)
326,779
327,753
$
$
$
$
$
See accompanying notes to consolidated financial statements.
F-5
COCRYSTAL PHARMA, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
Series A
Convertible
Series B
Convertible
Additional
Accumulated
Other
Preferred Stock
Preferred Stock Common Stock
Paid-in
Comprehensive Accumulated
Total
Stockholders'
Equity
Shares Amount Shares Amount Shares Amount Capital
- $
- $
3,502 $
Income (loss)
- $
-
1
-
-
10,107
-
-
-
-
-
-
721
279 $
(10,308)
(7,046)
-
-
-
-
-
-
-
-
-
1,000 178,218
Balance as of December 31, 2013 7,046 $ 10,308
Conversion of series A convertible
stock
Merger between Biozone
Pharmaceuticals, Inc. and
Cocrystal Discovery, Inc.
Exercise of common stock options
Stock-based compensation
Issuance of common stock and
warrants in January 2014
Unrealized gain on marketable
securities, net of tax
Series A preferred stock issued in
the merger with RFS Pharma,
LLC
Stock options issued in the merger
-
with RFS Pharm, LLC
Net loss
-
Balance as of December 31, 2014 1,000 $ 178,218 1,000 $
Conversion of series A convertible
stock
Stock-based compensation
Exercise of common stock options
Unrealized gain on marketable
securities, net of tax
Sale of common stock
Exercise of warrants
Net loss
Balance as of December 31, 2015
Exercise of common stock options
Stock-based compensation
Sale of common shares
Exercise of warrants
Net loss
Balance as of December 31, 2016
(1,000) (178,218) (1,000)
-
-
-
-
-
-
- $
-
-
-
-
-
- $
-
-
-
-
- $
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- 115,907
1,087
-
-
-
116
1
-
(1,596)
115
38
(6)
-
5,500
-
-
-
-
6
-
-
-
-
-
-
1 122,494 $
-
-
123 $
6,565
18,725
(1) 545,844
-
-
182
-
546
-
-
177,673
2,934
23
-
-
- 17,239
8,637
-
-
-
- 694,396 $
20
-
-
-
- 19,589
27
-
-
-
- 714,032 $
-
17
8
-
- $
15,845
14,256
-
694 $ 229,456 $
3
548
8,993
35
-
714 $ 239,035 $
-
-
20
-
-
See accompanying notes to consolidated financial statements.
F-6
Deficit
(Deficit)
(12,335) $
(8,833)
-
10,108
-
-
-
-
-
-
-
(99)
(12,434) $
-
-
-
-
-
-
(50,122)
(62,556) $
-
-
-
-
(74,874)
(137,430) $
(1,480)
116
38
-
236
-
6,565
(99)
6,651
178,218
2,934
23
(236)
15,862
14,264
(50,122)
167,594
3
548
9,013
35
(74,874)
102,319
-
-
-
-
-
236
-
-
-
236 $
-
-
-
(236)
-
-
-
- $
-
-
-
-
-
- $
COCRYSTAL PHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation
Stock-based compensation
Change in fair value of derivative liabilities
Deferred income tax
Loss on return of escrowed shares
Impairment on mortgage note receivable
Realized gain on sale of marketable securities
Impairment on IPR&D
Loss on sale of equipment
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Deposits
Deferred rent
Net cash used in operating activities
Investing activities
Cash acquired in acquisition of Biozone Pharmaceuticals, Inc.
Cash acquired in acquisition of RFS Pharma, Inc.
Purchase of property and equipment
Proceeds from sale of marketable securities
Investment in mortgage note receivable
Interest earned on mortgage note receivable
Principal payments received on mortgage note receivable
Net cash provided by (used in) investing activities
Financing activities
Proceeds from exercise of stock options
Proceeds from issuance of common stock and warrants
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Cashless exercise of warrants
Unrealized gain on marketable securities, net of tax
Fair value of assets acquired and liabilities assumed in reverse merger with Biozone
Pharmaceuticals, Inc.:
Prepaid expenses and other current assets
Marketable securities
Accounts payable and accrued expenses
Derivative liabilities
Fair value of Series A preferred stock issued in acquisition of RFS Pharma, LLC
Fair value of stock options issued in acquisition of RFS Pharma, LLC
Fair value of assets acquired and liabilities assumed in acquisition of RFS Pharma,
LLC:
In-process research and development
Goodwill
Deferred tax liabilities
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Property and equipment
Other long term assets
2016
2015
2014
$
(74,874) $
(50,122) $
(99)
201
548
(2,603)
(29,413)
-
1,177
-
92,396
-
11
(76)
(2,022)
-
2
(14,655)
-
-
(51)
-
-
33
21
3
3
9,013
9,016
(5,636)
9,276
3,640 $
192
2,934
9,916
(15,267)
1,686
-
-
38,665
-
-
(212)
1,891
-
-
(10,317)
-
-
(339)
-
-
-
77
(262)
23
15,862
15,885
5,306
3,970
9,276 $
199
38
(5,730)
(52)
584
-
(1,359)
-
6
-
9
(551)
(3)
-
(6,012)
589
194
(5)
7,900
(2,626)
-
30
6,082
116
2,750
2,866
2,936
1,034
3,970
35 $
-
14,265 $
-
-
236
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5
8,811
(410)
(10,475)
178,218
6,566
184,966
65,195
(65,195)
132
(532)
14
10
$
$
See accompanying notes to consolidated financial statements.
F-7
COCRYSTAL PHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Cocrystal Pharma, Inc. (the “Company”) is a biopharmaceutical company focused on developing antiviral therapeutics for human diseases.
On January 2, 2014, Biozone Pharmaceuticals, Inc. merged with Cocrystal Discovery, Inc. (as further described below). The Company was
previously incorporated in Nevada under the name Biozone Pharmaceuticals, Inc. (“Biozone”). On March 18, 2014, the Company
reincorporated in Delaware under the name Cocrystal Pharma, Inc. (“we”, the “Company”, or “Cocrystal”).
Our primary business is to develop novel medicines for use in the treatment of human viral diseases. Cocrystal has been developing novel
technologies and approaches to create 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.
Effective January 2, 2014, Biozone, Biozone Acquisitions Co., Inc., a wholly-owned subsidiary of Biozone (the “Merger Sub”), and
Cocrystal Discovery entered into and closed an Agreement and Plan of Merger (the “Biozone Merger Agreement”). Pursuant to the Biozone
Merger Agreement, Merger Sub merged with and into Cocrystal Discovery (the “Merger”), with Cocrystal Discovery continuing as the
surviving corporation and a wholly-owned subsidiary of Biozone. Cocrystal Discovery was considered the accounting acquirer as its
shareholders owned 60% of the combined entity after the Merger. In connection with the Biozone Merger Agreement, all of the Company’s
shares of Series A preferred stock were first converted to common stock, and Biozone then issued to Cocrystal Discovery’s security holders
a total of 1,000,000 shares of the Company’s Series B Convertible Preferred Stock (“Series B”) (at a ratio of 0.07454 Series B stock for
each common share of Cocrystal Discovery). The Series B shares automatically converted into 205,083,086 shares of the Company’s
common stock on March 3, 2015 as a result of the Company’s shareholders approving an increase in the number of the Company’s
authorized common shares to 800,000,000. Additionally, the Company assumed all of the outstanding stock options under the Cocrystal
Discovery 2007 Equity Incentive Plan. Subsequent to the Merger, Biozone changed its name to Cocrystal Pharma, Inc.
The Merger was treated as a reverse merger and recapitalization effected by a share exchange for financial accounting and reporting
purposes since substantially all of Biozone’s operations were disposed of immediately prior to the consummation of the Merger as reported
on a Form 8-K filed by Biozone on January 2, 2014. Cocrystal Discovery was treated as the accounting acquirer as its shareholders
controlled the Company after the Merger, even though Biozone was the legal acquirer. As a result, the assets and liabilities and the
historical operations that are reflected in these financial statements are those of Cocrystal Discovery as if Cocrystal Discovery had always
been the reporting company and, on the Merger date, changed its name and reorganized its capital stock. Since Biozone had no operations
upon the Merger taking place, the transaction was treated as a recapitalization for accounting purposes and no goodwill or other intangible
assets were recorded by the Company as a result of the Merger. Historical common stock amounts and additional paid-in capital were
retroactively adjusted using the exchange ratio of 0.07454 Series B shares for each one common share of Cocrystal Discovery.
Effective November 25, 2014, Cocrystal, Cocrystal Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of Cocrystal,
Cocrystal Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Cocrystal Merger Sub”), RFS
Merger Sub, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (the “RFS Merger Sub”) and RFS
Pharma, LLC, a Georgia limited liability company (“RFS Pharma”), entered into and closed an Agreement and Plan of Merger (the “RFS
Merger Agreement”).
The consideration paid by the Company was approximately $184.8 million, consisting of the issuance of 1,000,000 shares of Series A
Preferred stock (“Series A”) with an estimated fair value of approximately $178.2 million and the issuance of 16,542,538 options to
purchase the Company’s common stock as replacements of awards previously issued to employees of RFS Pharma with an estimated fair
value of approximately $6.6 million. The Series A shares automatically converted into 340,760,802 shares of the Company’s common
stock upon the approval of the Company’s shareholders on March 3, 2015 to increase the total number of the Company’s authorized
common shares to 800,000,000 shares. Prior to the Series A shares being converted to common stock, the Series A shares contained a
provision that they could be redeemed at each holder’s option based on a defined conversion price beginning on November 25, 2015 if not
previously converted to common stock. The Series A shares were therefore classified as mezzanine equity in the Company’s balance sheet
as of December 31, 2014, because at that time such shares could potentially have been redeemed by its holders for events that were outside
the Company’s control. No accretion to redemption value was required, as redemption was not probable.
F-8
Basis of Presentation
The financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of Cocrystal Pharma, Inc. and its wholly owned subsidiaries: RFS Pharma,
LLC, Cocrystal Discovery, Inc., Cocrystal Merger Sub, Inc., Baker Cummins Corp. and Biozone Laboratories, Inc. Intercompany
transactions and balances have been eliminated.
Liquidity
The Company has no pharmaceutical products approved for sale, has not generated any revenues to date from pharmaceutical product sales,
and has incurred significant operating losses since inception. The Company has never been profitable and has incurred losses from
operations of $105.8 million, $53.9 million and $5.8 million in the years ended December 31, 2016, 2015 and 2014, respectively. The
Company does not believe that its cash and cash equivalents of $3.6 million as of December 31, 2016 are sufficient to fund its operations
for the next twelve months. 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 commercial activities. The Company
believes these conditions raise substantial doubt as to the Company’s ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts
and classification of liabilities should the Company be unable to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management plans to
obtain such resources for the Company include obtaining capital from the sale of its equity securities during 2017. However, management
cannot provide any assurance that the Company will be successful in accomplishing any of its plans.
2. Summary of Significant Accounting Policies
Segments
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.
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.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash
equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company
has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash.
Risks and Uncertainties
The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future
operating results and cause actual results to vary materially from expectations include, but are not limited to, rapid technological change,
regulatory approvals, competition from current treatments and therapies and larger companies, protection of proprietary technology,
strategic relationships and dependence on key individuals.
Products developed by the Company will require clearances from the U.S. Food and Drug Administration (the “FDA”) and other
international regulatory agencies prior to commercial sales in their respective markets. The Company’s products may not receive the
necessary clearances and if they are denied clearance, clearance is delayed or the Company is unable to maintain clearance the Company’s
business could be materially adversely impacted.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash
equivalents. Cash and cash equivalents include cash in a readily available checking account.
F-9
Property and Equipment
Property and equipment, which consists of lab equipment, computer equipment, and office equipment, are stated at cost and depreciated
over the estimated useful lives of the assets (three to five years) using the straight-line method.
Goodwill and In-Process Research and Development
Goodwill and an intangible asset for in-process research and development were recorded in connection with the acquisition of RFS Pharma
in November 2014. In-process research and development represents a series of awarded patents, filed patent applications and an in-process
research program acquired in the acquisition of RFS Pharma that are integral to the development of the Company’s planned future
products. In-process research and development represents an indefinite-lived intangible asset. As a result, both goodwill and in-process
research and development are not amortized but are tested for impairment annually at the reporting unit level on November 30 or more
frequently if events and circumstances indicate impairment may have occurred. Factors the Company considers important that could trigger
an interim review for impairment include, but are not limited to, the following:
● Significant changes in the manner of its use of acquired assets or the strategy for its overall business;
● Significant negative industry or economic trends;
● Significant decline in stock price for a sustained period; and
● Significant decline in market capitalization relative to net book value.
● Limited funding could further delay development efforts
● Safety or efficacy issues could surface during development efforts
● Clinical outcomes for drug candidates do not lead to regulatory approval
Goodwill and in-process research and development are evaluated for impairment first by a qualitative assessment to determine the
likelihood of impairment. If it is determined that impairment is more likely than not, the Company will then proceed to the two step
impairment test. For goodwill, the first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit
and for in-process research and development to compare the fair value of the in-process research and development asset to its carrying
amount (the “First Step”). If the carrying amount exceeds the fair value, a second step must be followed to calculate impairment (the
“Second Step”). Otherwise, if the fair value exceeds the carrying amount, the goodwill or indefinite-lived research and development asset
is not considered to be impaired as of the measurement date. In its review of the carrying value of the goodwill for its single reporting unit
and its in-process research and development, the Company determines fair values of its goodwill using the market approach, and its in-
process research and development asset using the income approach. For both the years ended December 31, 2016 and 2015, the Company
determined that a quantitative assessment of impairment of goodwill and in-process research and development was necessary and
performed its annual impairment tests as of November 30, 2016 and 2015.
In performing the impairment valuation, 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 Pharma’s product candidates. The fair
values of intangible assets were calculated primarily using a discounted cash flow analysis of future revenues to be generated from the
eventual sale of potential products to be developed under the programs by geographic region, expected development costs and exit values
under a number of different scenarios. Company management estimated the probabilities of occurrence of each scenario and prepared
forecast balance sheets and income statements for the combined company. The rates utilized to discount net cash flows to their present
values were based on a range of discount rates from 13.1% (rate during the active periods) to 14.4% (terminal rate). Other assumptions used
to develop our estimated cash flows include prices charged by competitors for similar products, the expected price of our product
candidates if and when they begin generating revenues, the probabilities of our product candidates obtaining regulatory approvals through
various phases of development, and the market size of potential candidates for the products we are developing.
Upon completion of the impairment evaluation, we have determined that in-process research and development assets related to our
Hepatitis C programs have been impaired. During the fourth quarter of 2015, we determined the carrying value of our Hepatitis C in-
process research and development was impaired by $38.7 million. During the fourth quarter of 2016, we determined the carrying value of
our Hepatitis C in-process research and development was impaired by an additional $92.4 million. This impairment was the result of
increased competition within the marketplace that is putting downward pressure on revenue projections and partially the result of further
data defining the scientific and commercial potential of Company HCV compounds. We have reflected these write-downs in Research and
Development expenses in our Consolidated Statements of Operations.
Long-Lived Assets
The Company regularly reviews the carrying value and estimated lives of all 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.
F-10
Mortgage Note Receivable
The Company records its mortgage note receivable at the amount advanced to the borrower, which includes the stated principal amount 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 is considered to be impaired if, based on current information and events, the Company determines that it is
probable that it would be unable to collect all amounts due according to the existing contractual terms. Upon determination that the note is
impaired, the amount of loss is calculated by comparing the recorded investment to the value determined by discounting the expected
future cash flows at the note’s effective interest rate or to the fair value of the Company’s interest in the underlying collateral, less the cost
to sell.
Grant Revenue and Accounts Receivable
Research and development grants are recorded as revenue when there is reasonable assurance that the Company has complied with all
conditions necessary to achieve the grants, collectability is reasonably assured, and as the expenditures are incurred. Accounts receivable
represents amounts due under research and development grants that have not yet been received.
Research and Development Expenses
All research and development costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates
and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization of deferred tax assets is
dependent upon future taxable income. A valuation allowance is recognized if it is more likely than not that some portion or all of a
deferred tax asset will not be realized based on the weight of available evidence, including expected future earnings. The Company
recognizes an uncertain tax position in its financial statements when it concludes that a tax position is more likely than not to be sustained
upon examination based solely on its technical merits. Only after a tax position passes the first step of recognition will measurement be
required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized
upon effective settlement. This is determined on a cumulative probability basis. The full impact of any change in recognition or
measurement is reflected in the period in which such change occurs. The Company elects to accrue any interest or penalties related to
income taxes as part of its income tax expense.
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, net of a forfeiture rate, over the requisite service period on a straight-line basis.
F-11
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 market comparable entities since the Company’s common stock has
limited trading history and limited observable volatility of its own. The expected term of the options is estimated by using the Securities
and Exchange Commission Staff Bulletin No. 107’s Simplified Method for Estimate Expected Term . The risk free interest rate is estimated
using comparable published federal funds rates.
Common Stock Purchase Warrants and Other Derivative Financial Instruments
We classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or
settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as
defined in ASC 815-40, Contracts in Entity’s Own Equity . We classify as assets or liabilities any contracts that require net-cash settlement
(including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a
choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). We assess classification of our common
stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between
assets and liabilities is required.
Our derivative instruments consisting of warrants to purchase our common stock were valued using the Black-Scholes option pricing
model, using the following assumptions at December 31, 2016:
●
●
●
●
Estimated dividends:
None
Expected volatility:
99.65 – 99.95%
Risk-free interest rate:
2.24 – 2.25%
Expected term:
6.82 – 7.05 years
Our derivative instruments consisting of warrants to purchase our common stock were valued using the Black-Scholes option pricing
model, using the following assumptions at December 31, 2015:
●
●
●
●
Estimated dividends:
None
Expected volatility:
78 - 101%
Risk-free interest rate:
0.49 - 2.20%
Expected term:
0.20 – 8.0 years
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (ASC Topic 606). The standards update outlines a single comprehensive model for entities to
utilize to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that will be
received in exchange for the goods and services. Additional disclosures will also be required to enable users to understand the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In 2016, the FASB issued accounting
standards updates to address implementation issues and to clarify the guidance for identifying performance obligations, licenses and
determining if a company is the principal or agent in a revenue arrangement. In August 2015, the FASB issued ASU 2015-14, Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date , which deferred the effective date of ASU 2014-09. The
mandatory adoption date of ASC 606 for the Company is now January 1, 2018. There are two methods of adoption allowed, either a “full”
retrospective adoption or a “modified” retrospective adoption. The Company expects to adopt the standard on a modified retrospective
basis applying the new rules to all contract existing at January 1, 2018, with an adjustment for the cumulative effect of all changes
recognized in beginning retained earnings. The Company does not expect the updated standard will have a significant impact on its
financial statements and related disclosures.
F-12
In September 2014, the FASB issued ASU No. 2014-15 , Presentation of Financial Statements - Going Concern (Subtopic 205-
40): Disclosure of Uncertainties about an Entity’s Ability to Continue as Going Concern. ASU 2014-15 defines when and how companies
are required to disclose going concern uncertainties, which must be evaluated each interim and annual period. Specifically, the ASU
requires management to determine whether substantial doubt exists regarding the entity’s going concern presumption. Substantial doubt
about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate
that it is probable that the entity will be unable to meet its obligations as they become due within one year after the financial statements are
issued (or available to be issued). If substantial doubt exists, certain disclosures are required; the extent of those disclosures depends on an
evaluation of management’s plans (if any) to mitigate the going concern uncertainty. The guidance is effective for fiscal years ending after
December 15, 2016 and for interim periods within that fiscal year. The Company has adopted this guidance during the year ended
December 31, 2016.
In November 2015, the FASB issued guidance on the classification of deferred taxes, ASU No. 2015-17, Balance Sheet
Classification of Deferred Taxes. ASU 2015-17 eliminates the guidance in Topic 740, Income Taxes, that required an entity to separate
deferred tax liabilities and assets between current and noncurrent amounts in a classified balance sheet. The amendments require that all
deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any related valuation allowance, be offset and
presented as a single amount in a classified balance sheet. The amendments are effective for public business entities for fiscal years, and for
interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted as of the beginning of any interim
period or annual reporting period. The Company adopted this guidance during the year ended December 31, 2016. There was no impact as
a result of adoption of this ASU.
In February 2016, the FASB issued 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
finance 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 implemented this guidance as of December 31, 2016. However, based upon 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 standard is effective for interim and annual reporting periods beginning after December
15, 2016, although early adoption is permitted. The Company continues to evaluate ASU 2016-09 and at the current time has not quantified
the effects adoption of the new standard will have on its financial statements.
3. RFS Pharma, LLC Acquisition
On November 25, 2014, the Company entered into and closed an Agreement and Plan of Merger with RFS Pharma. At the closing of the
merger, the Company issued to RFS Pharma’s members 1,000,000 shares of the Company’s Series A preferred shares to purchase all of the
outstanding member interests in RFS Pharma, and also issued 16,542,538 options to purchase the Company’s common stock as
replacements of awards previously issued to employees of RFS Pharma. The consideration paid by the Company was approximately
$184.8 million, consisting of approximately $178.2 million for the issuance of the Series A preferred stock and approximately $6.6 million
for the issuance of the options. The Series A shares automatically converted into 340,760,802 shares of the Company’s common stock upon
the approval of the Company’s shareholders on March 3, 2015 to increase the total number of the Company’s authorized common shares to
800,000,000 shares.
The goodwill associated with the acquisition is not deductible for tax purposes.
The fair value of the Series A shares was based on the quoted market price of the Company’s common stock into which the Series A shares
were convertible and the fair value of the replacement options issued was based on the Black-Scholes option pricing model.
The purchase price consideration was allocated based on the estimated fair value of the tangible and identifiable intangible assets acquired
and liabilities assumed from RFS Pharma. Based upon the estimated fair values determined by the Company, the total purchase price was
allocated as follows (in thousands):
F-13
Purchased in-process research and development
Net book value of tangible assets acquired
Goodwill
Deferred tax liability
Total purchase price
4. Property and Equipment
Property and equipment as of December 31 (in thousands):
Lab equipment
Computer and office equipment
Total equipment
Less accumulated depreciation
Property and equipment, net
$
$
184,966
(183)
65,195
(65,195)
184,783
2016
2015
$
$
1,241 $
393
1,634
(1,354)
280 $
1,205
378
1,583
(1,153)
430
Depreciation expense was $201,000, $192,000 and $199,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
5. Marketable Securities
As of December 31, 2014, the Company owned 260,000 shares of MusclePharm, Inc. (“MusclePharm”) common stock. The 260,000 shares
were part of 600,000 shares originally issued to the Company related to the Company’s sale of assets to MusclePharm that were required to
be held in escrow until October 2014 to satisfy any breaches of representations under the Biozone Merger Agreement. The 600,000 shares
received by the Company that were not required to be held in escrow were sold for $5,400,000 in June 2014. On September 29, 2014, the
Company signed a Memo of Understanding in which it agreed to release 90,000 shares of MusclePharm stock out of the original balance of
600,000 shares held in escrow in exchange for a release from all claims which MusclePharm had made concerning assets which it acquired
in its purchase of assets from the Company in January 2014. The Company recognized a net loss on the return of these MusclePharm
shares of $584,000 in the year ended December 31, 2014. In October 2014, MusclePharm exercised its right to repurchase 250,000 shares
of MusclePharm shares at $10.00 per share. MusclePharm did not withdraw the portion of its claim that relates to the pending eviction
proceedings and was to continue to hold in escrow 260,000 shares of its stock pending such time as MusclePharm and the Company could
reach a mutually agreeable arrangement with respect to the MusclePharm lease. However, during the second quarter of 2015, the escrow
agent released these shares held in escrow to MusclePharm without Cocrystal Pharma, Inc.’s consent. The Company recorded a $1,686,000
loss on this conversion, but may pursue reimbursement.
6. 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 Daniel Fisher, one of the founders of
Biozone, and is currently under lease to MusclePharm. The mortgage note has a maturity date of August 1, 2032 and bears an interest rate
of 7.24%.
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. Since the filing of Mr. Fisher’s motion the Company has voluntarily
postponed the announced foreclosure sale several times from the original January 27, 2017 date and it is currently scheduled for April 28,
2017. There is no assurance that the sale date will not again be changed; that is highly dependent on proceedings in the Fisher/Biozone
Lawsuit.
Because the Company intends to foreclose on the property and foreclosure is probable, 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, the asset was
reclassified from long-term to current.
F-14
7. Convertible Preferred Stock
Series A Convertible Preferred Stock
As of January 1, 2014, Cocrystal Discovery, Inc. had outstanding shares of its Series A Preferred Stock (“Cocrystal Discovery Series A”).
The holders of Cocrystal Discovery Series A preferred stock were entitled to receive cumulative dividends at a rate of $0.1153 per share per
annum. The preferred stock dividends were payable when and if declared by the Company’s Board of Directors. No dividends were ever
declared on the Cocrystal Discovery Series A.
In connection with the merger with Biozone in January 2014, the Company exchanged the above Cocrystal Discovery Series A for a new
Series B Convertible Preferred Stock. See below for more information.
The Company has authorized up to 5,000,000 shares of preferred stock, $0.001 par value per share, for issuance. In connection with the
merger with RFS Pharma in November 2014, the Company created a new series of Series A Preferred Stock (“Series A”). The Series A
shares automatically converted into 340,760,802 shares of the Company’s common stock on March 3, 2015 as a result of the Company’s
shareholders approving an increase in the number of the Company’s authorized common shares to 800,000,000. The Series A shares were
classified as mezzanine equity in the Company’s consolidated balance sheet as of December 31, 2014, because at that date such shares
could potentially have been redeemed by its holders for events that were outside the Company’s control. No accretion to redemption value
was required, as redemption was not probable.
Series B Convertible Preferred Stock
In connection with the merger with Biozone, the Company issued to Cocrystal Discovery’s Series A and Common security holders
1,000,000 shares of the Company’s Series B Convertible Preferred Stock (“Series B”). The Series B shares automatically converted into
205,083,086 shares of the Company’s common stock on March 3, 2015 as a result of the Company’s shareholders approving an increase in
the number of the Company’s authorized common shares to 800,000,000.
8. Common Stock
As of December 31, 2016, the Company had 800,000,000 shares of authorized common stock, $0.001 par value per share, and had
714,031,255 shares issued and outstanding.
The holders of common stock are entitled to one vote for each share of common stock held.
On March 15, 2016, the Company accepted subscription agreements representing investor commitments totaling $5,004,370 in a private
placement offering to investors who participated in the March 2015 private placement on a pro-rata basis to their participation in the March
2015 private placement of 9,812,491 shares of the Company’s common stock at a purchase price of $0.51 per share. The purchasers
included 7 members of the Company’s board of directors including Dr. Raymond F. Schinazi and Dr. Phil Frost.
9. Stock Based Awards
Equity Incentive Plans
The Company adopted an equity incentive plan (the “2007 Plan”) in 2007 under which 53,599,046 shares of common stock have been
reserved for issuance to employees, nonemployee directors and consultants of the Company. Recipients of incentive stock options shall be
eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of
such stock on the date of grant. The maximum term of options granted under the 2007 Plan is ten years. The options generally vest 25%
after one year, with the balance vesting monthly over the remaining three years. As of December 31, 2016, 1,638,000 shares remain under
this plan.
The Company adopted a second equity incentive plan (the “2015 Plan”) in 2015 under which 50,000,000 shares of common stock have
been reserved for issuance to employees, directors and consultants of the Company. Recipients of incentive stock options shall be eligible
to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock
on the date of grant. The maximum term of options granted under the 2015 Plan is ten years. The options generally vest 25% after one year,
with the balance vesting monthly over the remaining three years. As of December 31, 2016, 46,730,000 shares of common stock remain
available for future grant under the 2015 Plan.
The following table summarizes stock option transactions for the 2007 and 2015 Plans for the year ended December 31, 2016 (amounts in
thousands, except per share amounts):
Balance at December 31, 2015
Exercised
Granted
Cancelled
Balance at December 31, 2016
Number of
shares
available
for grant
Total
options
outstanding
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
29,668
-
-
18,700
48,368
43,071 $
(20)
-
(18,700)
24,351 $
0.48 $
0.15
-
0.70
0.30 $
17,867
-
-
-
5,457
F-15
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. The Black-Scholes option pricing model includes the
following weighted average assumptions:
Assumptions:
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected terms (in years)
2015
2014
1.66 - 2.08%
0%
78 - 108%
5.00 - 6.50
1.08 – 2.51%
0%
108%
6.08
The Company did not grant any options during the year ended December 31, 2016. During 2015, the Company granted 21,970,000 options
under the 2015 Plan and 1,750,000 under the 2007 Plan with exercise prices ranging from $0.70 to $1.17 per share. In the merger with RFS
Pharma during 2014, the Company issued 16,542,538 options with a weighted average exercise price of $0.10 per share in exchange for
RFS options then outstanding. These were the only options issued in 2014. The weighted average fair value of options granted during
2014 was $0.45. Exercise prices under the 2015 Plan reflect the market price of Cocrystal Pharma, Inc. stock on the grant date.
The Company uses historical data to estimate forfeitures at the time of grant and is required to record stock-based compensation only for
those awards that are expected to vest. The Company has assumed a zero-forfeiture rate in the valuation of awarded stock options. The
Company recorded employee stock-based compensation expense of $548,000 and $2,934,000 for the years ended December 31, 2016 and
2015, respectively.
As of December 31, 2016, there was $1,725,000 of total unrecognized compensation expense related to non-vested employee stock options
that is expected to be recognized over a weighted average period of 2.2 years. For options granted and outstanding, there were 24,351,000
options outstanding which were fully vested or expected to vest, with an aggregate intrinsic value of $5,589,000 and a weighted average
remaining contractual term of 6.0 years at December 31, 2016. For vested and exercisable options, outstanding shares totaled 21,323,860,
with an aggregate intrinsic value of $5,286,000. These options had a weighted-average exercise price of $0.22 per share and a weighted-
average remaining contractual term of 5.4 years at December 31, 2016.
The aggregate intrinsic value of outstanding and exercisable options at December 31, 2016 was calculated based on the closing price of the
Company’s common stock as reported on the Over-the-Counter Bulletin Board and the OTCQx markets on December 31, 2016 of
approximately $0.39 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 present information concerning common stock available for future issuance (in thousands):
Stock options issued and outstanding
Authorized for future option grants
Warrants outstanding
Total
F-16
December 31,
2016
2015
24,351
48,368
6,275
43,071
29,485
8,280
78,994
80,836
10. Warrants
The following is a summary of activity in the number of warrants outstanding to purchase the Company’s common stock for the years
ended December 31, 2016, 2015 and 2014 (in thousands):
Warrants accounted for as:
Equity
Warrants accounted for as:
Liabilities
January
2012
warrants
March
2013
warrants
April
2013
warrants
February
2012
warrants
August
2013
warrants
October
2013
warrants
October
2013
Series A
warrants
January
2015
warrants Total
Outstanding, January 1, 2014
Warrants acquired in merger with
Biozone
Warrants issued
Outstanding, December 31, 2014
Warrants exercised
Outstanding, December 31, 2015
Warrants expired
Warrants exercised
Outstanding, December 31, 2016
-
-
-
-
-
-
-
-
-
650
-
650
-
650
(650)
455
-
455
-
455
(455)
-
-
1,864
-
1,864
(364)
1,500
-
1,500
1,000
(889)
(111)
-
-
1,000 10,000
-
1,000 10,000
- (10,000)
-
200
-
200
(200)
-
7,000
-
7,000
(6,225)
775
-
-
-
-
-
775
- 21,169
5,500
5,500
5,000 26,669
(1,500) (18,289)
8,380
4,000
(1,994)
(111)
6,275
-
4,000
Expiration date
January
11,
2016
March
1, 2016
April
25,
2018
February
28, 2016
August
26,
2023
October
18,
2018
October
24,
2023
January
16,
2024
Warrants consist of warrants with the potential to be settled in cash, which are liability-classified warrants, and equity-classified warrants.
Warrants classified as liabilities
Liability-classified warrants consist of warrants issued by Biozone in connection with equity financings in February 2012, August 2013,
October 2013 and January 2014, which were assumed by the Company in connection with its merger with Biozone in January 2014. As of
December 31, 2016, 4,775,000 warrants are accounted for as liabilities and 1,500,000 warrants are accounted for as equity. Warrants
accounted for as liabilities have the potential to be settled in cash or not indexed to the Company’s own stock.
The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. Any decrease or
increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the consolidated statement
of operations and comprehensive income (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 December 31, 2016:
Strike price
Expected term (years)
Cumulative volatility %
Risk-free rate %
October 2013
warrants
January 2015
warrants
$
0.50
$
6.8
99.7%
2.24%
0.50
7.0
100%
2.25%
The fair value of the warrants classified as liabilities is estimated using the Black-Scholes option-pricing model with the following inputs
as of December 31, 2015:
February
2012
warrants
August
2013
warrants
October
2013
warrants
October
2013
warrants
January
2014
warrants
Strike price
$
0.60
$
0.40
$
0.50
$
0.50
$
0.50
Expected term (years)
Cumulative volatility %
Risk-free rate %
0.2
81%
0.49%
7.7
101%
2.18%
2.8
78%
1.26%
7.8
101%
2.14%
8.0
100%
2.15%
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-17
11. Licenses and Collaborations
Emory University: Cocrystal Pharma has an exclusive license from Emory University for use of certain inventions and technology related
to inhibitors of hepatitis C virus 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.
NIH: Cocrystal Pharma has two Public Health Biological Materials License Agreements with the NIH. The original License Agreements
were dated August 31, 2010 and it was amended on November 6, 2013. The materials licensed are being used in Norovirus assays to screen
potential antiviral agents in our library.
University of Pittsburgh and Emory University: Cocrystal Pharma assigned its patent rights to the patent titled “3’-AZIDO
PURINENUCLEOTIDE PRODRUGS FOR TREATMENT OF VIRAL INFECTIONS” to University of Pittsburgh on November 21, 2015.
This patent is jointly owned by Cocrystal Pharma, the University of Pittsburgh and Emory University. One of Cocrystal’s Directors, Dr.
Raymond Schinazi, is also a faculty member at Emory University.
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 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.
12. Fair Value Measurement
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 warrants are valued using the Black-Scholes
option-pricing model as discussed in Note 10 above.
F-18
The following table presents a summary of fair values of assets and liabilities that are remeasured at fair value at each balance sheet date as
of December 31, 2016 and 2015, and their placement within the fair value hierarchy as discussed above (in thousands):
Description
Assets:
Cash and cash equivalents
Liabilities:
Warrants potentially settleable in cash
Description
Assets:
Cash and cash equivalents
Liabilities:
Warrants potentially settleable in cash
December 31,
2016
Quoted Prices
in Active
Markets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
$
$
3,640 $
3,640 $
- $
-
1,476 $
- $
- $
1,476
December 31,
2015
Quoted Prices
in Active
Markets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
$
$
9,276 $
9,276 $
- $
-
4,115 $
- $
- $
4,115
The Company has not transferred any financial instruments into or out of Level 3 classification during the years ended December 31, 2016,
2015, or 2014. A reconciliation of the beginning and ending Level 3 liabilities for the years ended December 31, 2016, 2015 and 2014, is as
follows (in thousands):
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
2015
2014
2016
Balance , January 1,
Value of warrants converted in cashless exercise
Change in fair value of Teva option
Estimated fair value of warrants assumed in merger on January 2, 2014
Estimated fair value of warrants issued in January common stock sale
Change in fair value of warrants for the year ended
Balance at December 31,
$
$
4,115 $
(36)
-
-
-
(2,603)
1,476 $
8,464 $
(14,265)
-
-
-
9,916
4,115 $
23
-
(23)
10,475
3,696
(5,707)
8,464
13. 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. 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
stock for all potential dilutive common shares outstanding. Potential common shares consist of shares issuable upon the exercise of stock
options and warrants.
F-19
The following table sets forth the computation of basic and diluted net loss per share (amounts in thousands, except per share amounts):
Numerator:
Net loss attributable to common shareholders
Adjustment for change in fair value of derivative liability
Net loss attributable to common shareholders, as adjusted
Denominator:
Weighted average shares outstanding used to compute net loss per share:
Basic
Adjustment for dilutive effects of warrants
Diluted
Net loss per share
Basic
Diluted
2016
For the year ended:
2015
2014
$
$
(74,874) $
(2,603)
(77,477) $
(50,122) $
-
(50,122) $
(99)
(2,228)
(2,327)
705,529
471
706,000
630,316
-
630,316
326,779
954
327,733
$
$
(0.11) $
(0.11) $
(0.08) $
(0.08) $
(0.00)
(0.01)
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):
Options to purchase common stock
Warrants to purchase common stock
Total
F-20
For the year ended
December 31,
2015
2016
24,351
-
24,351
43,071
8,280
51,351
2014
19,600
16,669
36,269
14. Income Taxes
In accordance with the authoritative guidance for income taxes under ASC 740, a deferred tax asset or liability is determined based on the
difference between the financial statement and the tax basis of assets and liabilities as measured by the enacted tax rates, which will be in
effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the
available evidence, it is more likely than not that the deferred tax assets will be realized.
The Company recognizes the impact of a tax position in the financial statements only if that position is more likely than not of being
sustained upon examination by taxing authorities, based on the technical merits of the position. The Company’s practice is to recognize
interest and/or penalties related to income tax matters in income tax expense.
The Company is subject to taxation in the U.S. and various state jurisdictions. Currently no years are under examination. All tax years are
subject to examination by the U.S. and state tax authorities due to the carry-forward of unutilized net operating losses and research and
development credits.
A reconciliation of income tax expense (benefit) for the years ended December 31, 2016, 2015, and 2014 is as follows:
Current:
Federal
State
Total current income tax expense
Deferred:
Federal
State
Total deferred income tax expense (benefit)
Total income tax expense (benefit)
Year Ended December 31,
2015
2016
2014
$
$
19
19
- $
19
19
(32,421)
3,008
(29,413)
(29,394) $
(12,001)
(3,266)
(15,267)
(15,248) $
-
2
2
(51)
(3)
(54)
(52)
Significant components of the Company’s deferred income taxes at December 31, 2016 and 2015 are shown below (in thousands):
Deferred Tax Assets:
Net operating loss carryforwards
Compensation
Research and development tax credits
Property and equipment
Other
Total gross deferred tax assets
Deferred Tax Liabilities
Property and equipment
Acquired in-process research and development
Total Deferred Tax Liabilities
Net deferred tax assets
Valuation allowance
Net Deferred Tax Liability
F-21
$
December 31,
2016
2015
20,633 $
1,323
1,390
22
545
14,273
1,098
972
-
128
23,912
16,471
-
(20,462)
(5)
(49,875)
(20,462)
(49,880)
3,450
(23,912)
(33,409)
(16,466)
$
(20,462) $
(49,875)
The Company has established a valuation allowance against net deferred tax assets due to the uncertainty that such assets will be realized.
The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than
not that deferred tax assets will be realizable, the valuation allowance will be reduced. The Company has not considered the deferred tax
liability 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.
At December 31, 2016, the Company had federal and California net operating losses, or NOL, carryforwards of approximately $54.0
million and $47.0 million, respectively. The federal NOL carryforwards begin to expire in 2027, and the California NOL carryforwards
begin to expire in 2029. At December 31, 2016, the Company also had federal and California research tax credit carryforwards of
approximately $1.2 million and $0.3 million, respectively. The federal research tax credit carryforwards begin to expire in 2029, and the
California research tax credit carryforwards do not expire and can be carried forward indefinitely until utilized.
The above NOL carryforwards and the research tax credit carryforwards may be subject to an annual limitation under Section 382 and 383
of the Internal Revenue Code of 1986, and similar state provisions if the Company experienced one or more ownership changes, which
would limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In
general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or
public groups in the stock of the corporation by more than 50 percentage points over a three-year period. The Company has not completed
an IRC Section 382/383 analysis. If a change in ownership were to have occurred, NOL and tax credit carryforwards could be eliminated or
restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the
valuation allowance. As long as the Company maintains a full valuation allowance against its deferred tax assets, limitations created by
future ownership changes, if any, will not impact the Company’s effective tax rate.
A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Statutory federal income tax rate
Change in fair value of warrant liability
State income taxes, net of federal benefit
Tax credits
Change in valuation allowance
Permanent differences
State rate adjustment
Other
Year Ended December 31,
2015
2014
2016
34.0%
0.9%
4.8%
0.4%
(7.3)%
-
(5.3%)
0.9%
34%
(5.2)%
0.1%
0.3%
(12.5)%
(0.8)%
3.3%
4.4%
34.0%
10.7%
0.4%
0.9%
(11.2)%
(0.7)%
-
0.1%
Effective rate
28.3%
23.6%
23.6%
F-22
15. Commitments and Contingencies
Commitments
The Company leases office and laboratory space in Bothell, Washington and Tucker, Georgia, under operating leases that expire in January
2019 and June 2017, respectively. Future minimum lease payments, by year and in aggregate, are as follows:
Year ending December 31
2017
2018
2019
Total Minimum Lease Payments
(in thousands)
$
$
228
160
14
402
The minimum lease payments above do not include common area maintenance (CAM) charges, which are contractual obligations under
some of the Company’s operating leases, but are not fixed and can fluctuate from year to year.
The minimum lease payments above include the amounts that would be paid if the Company maintains its Bothell lease for the five-year
term. The Company has the right to terminate this lease after three years, by giving prior notice at least 180 days prior to such early
termination date and by paying a termination fee equal to the sum of three months’ rent plus the unamortized balance of the sum of (a) all
brokerage commissions paid by the landlord of the property in connection with the lease and (b) the abated free base rent related to the five
months of the lease, treating items (a) and (b) as being amortized on a level basis over the five year base term of the lease.
The offices and laboratory space in Tucker, Georgia are leased from a limited liability company owned by one of Cocrystal’s Directors, Dr.
Raymond Schinazi.
Rent expense for 2016, 2015, and 2014, totaled $345,000, $375,000 and $295,000, respectively.
Contingencies
From time to time, the Company is a party to, or otherwise involved in, legal proceedings arising in the normal course of business. As of
the date of this report, except as described below, the Company is not aware of any proceedings, threatened or pending, against it which, if
determined adversely, would have a material effect on its business, results of operations, cash flows or financial position.
In October 2013, Plaintiff Shefa LMV, LLC (“Plaintiff”) filed a First Amended Complaint (“Complaint”) in Los Angeles Superior Court
for civil penalties and injunctive relief against numerous retailers and manufacturers of products, and alleged violations of California Health
& Safety Code Sec. 25249.6 (part of the “Safe Drinking Water and Toxic Enforcement Act”) and California Business & Professional Code
Sec. 17200, et seq. (California’s “Unfair Competition Law”). On October 17, 2014, Plaintiff filed an amendment to the Complaint, adding
the Company’s subsidiary Biozone Laboratories, Inc. a California corporation, as Doe Defendant No. 9. An oral agreement between
counsel for the Company and for Plaintiff has resulted in preparation of a Proposed Consent Judgment as to Biozone Laboratories, Inc. If
fully executed and approved by the court, the Company will pay $7,500 in exchange for the release and discharge by the settling plaintiff
only, with the Company presently expecting no further proceedings.
In October 2015, Cocrystal Pharma, Inc. received a subpoena from the staff of the Securities and Exchange Commission seeking the
production of documents. The Company is fully cooperating with the inquiry. The Company cannot predict or determine whether any
proceeding may be instituted in connection with the subpoena or the outcome of any proceeding that may be instituted.
F-23
16. Quarterly Results (Unaudited)
Selected quarterly financial data for 2016 and 2015 are contained in the Condensed Interim Financial Data table below.
($ in thousands except per share amounts)
2016
Grant Revenues
Research and development
General and administrative
Total costs and expenses
Operating loss
Other income (expense), net
Income tax benefit (provision)
Net (loss) income
Basic (loss) earnings per common share
(Loss) earnings per common share assuming dilution
2015
Grant Revenues
Research and development
General and administrative
Total costs and expenses
Operating loss
Other income (expense), net
Income tax benefit (provision)
Net (loss) income
Basic (loss) earnings per common share
(Loss) earnings per common share assuming dilution
4th Q
3rd Q
2nd Q
1st Q
$
-
$
- $
- $
93,876(1)
510
94,386
(94,386)
(762)
29,394
(65,754)
(0.10)
(0.10)
$
$
$
-
$
41,578(2)
2,795
44,373
(44,373)
(1,376)
15,300
(30,449)
(0.05)
(0.05)
$
$
$
2,093
(199)
1,894
(1,894)
13
- $
(1,881)
(0.00) $
(0.00) $
24 $
2,177
1,437
3,614
(3,590)
3,082
-
(508) $
(0.00) $
(0.01) $
2,368
1,836
4,204
(4,204)
977
- $
(3,227)
(0.00) $
(0.00) $
27 $
1,946
1,898
3,844
(3,817)
1,246
(52)
(2,623) $
(0.00) $
(0.01) $
$
$
$
$
$
$
$
-
3,342
1,992
5,334
(5,334)
1,322
-
(4,012)
(0.01)
(0.01)
27
1,560
635
2,195
(2,168)
(14,374)
-
(16,542)
(0.03)
(0.04)
(1) Includes impairment charge for the company’s IPR&D asset of $92,369,000
(2) Includes impairment charge for the company’s IPR&D asset of $38,665,000
F-24
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by Item 10 will be included in the Proxy Statement to be filed relating to our 2017 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 11 will be included in the Proxy Statement to be filed relating to our 2017 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 will be included in the Proxy Statement to be filed relating to our 2017 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 will be included in the Proxy Statement to be filed relating to our 2017 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 will be included in the Proxy Statement to be filed relating to our 2017 Annual Meeting of
Stockholders and is incorporated herein by reference.
43
Item 15. Exhibits, Financial Statement Schedules
PART IV
EXHIBIT INDEX
Exhibit No.
Exhibit Description
Incorporated by Reference
Date
Form
Number
3/31/15
12/1/14
3/31/15
3/31/15
3/17/15
6/1/15
09/02/16
3/15/16
11/20/15
9/24/15
9/24/15
7/27/15
7/27/15
04/29/16
04/29/16
04/29/16
3/31/15
3.1
3.4
10.5
10.6
10.1
Annex A
10.1
10.1
10.1
10.1
10.2
10.1
10.2
10.16
10.17
14.1
21.1
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
14.1
21.1
31.1
31.2
32.1
101.INS
101.SCH
101.CAL
Certificate of Incorporation, as amended
Bylaws
Termination of Employment Agreement – Gary
Wilcox*
Amendment of Employment Agreement – Sam Lee*
Employment Agreement, as amended – Jeffrey
10-K
8-K
10-K
10-K
8-K
Meckler*
2015 Equity Incentive Plan*
Form of Securities Purchase Agreement
Form of Securities Purchase Agreement
Curtis Dale Employment Agreement*
Jeffrey Meckler Employment Agreement*
Douglas Mayers Employment Agreement*
Walt Linscott Employment Agreement*
Walt Linscott Stock Option Agreement*
Gary Wilcox Advisory Agreement*
Jerry McGuire Stock Option Agreement*
Code of Ethics
Subsidiaries
Certification of Principal Executive Officer (302)
Certification of Principal Financial Officer (302)
Certification of Principal Executive and Principal
Financial Officer (906)**
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase
Document
DEF 14A
8-K
10-K
8-K
8-K
8-K
8-K
8-K
10-K/A
10-K/A
10-K/A
10-K
101.DEF
XBRL Taxonomy Extension Definition Linkbase
Document
101.LAB
XBRL Taxonomy Extension Label Linkbase
Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Document
* Management contract or compensatory plan or arrangement.
Filed or
Furnished
Herewith
Filed
Filed
Filed
Filed
Filed
Filed
Filed
Filed
Filed
** 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 Georgia
30084.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
44
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
March 31, 2017
COCRYSTAL PHARMA, INC.
By:/s/ Gary Wilcox
Gary Wilcox
Interim Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Gary Wilcox
Gary Wilcox
Chief Executive Officer (Principal Executive Officer)
March 31, 2017
/s/ Raymond F. Schinazi
Raymond F. Schinazi
Chairman
/s/ David Block
David Block
/s/ Phillip Frost
Phillip Frost
/s/ Jane Hsiao
Jane Hsiao
/s/ Steven Rubin
Steven Rubin
/s/ James Martin
James Martin
Director
Director
Director
Director
Interim Chief Financial Officer (Principal Accounting Officer)
March 31, 2017
45
March 31, 2017
March 31, 2017
March 31, 2017
March 31, 2017
March 31, 2017
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Gary Wilcox, certify that:
1. I have reviewed this annual report on Form 10-K of Cocrystal Pharma, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 31, 2017
/s/ Gary Wilcox
Gary Wilcox
Interim Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, James Martin, certify that:
1. I have reviewed this annual report on Form 10-K of Cocrystal Pharma, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 I and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 31, 2017
/s/ James Martin
James Martin
Interim Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Cocrystal Pharma, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2016, as
filed with the Securities and Exchange Commission on the date hereof, I, Gary Wilcox, certify, pursuant to 18 U.S.C. §1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The annual report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
2. The information contained in the annual report fairly presents, in all material respects, the financial condition and results of
Exhibit 32.1
operations of the Company.
/s/ Gary Wilcox
Gary Wilcox
Interim Chief Executive Officer
(Principal Executive Officer)
Dated: March 31, 2017
In connection with the annual report of Cocrystal Pharma, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2016, as
filed with the Securities and Exchange Commission on the date hereof, I, James Martin, certify, pursuant to 18 U.S.C. §1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1. The annual report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
2. The information contained in the annual report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ James Martin
James Martin
Interim Chief Financial Officer
(Principal Financial Officer)
Dated: March 31, 2017