Cocrystal Pharma, Inc. 10-K

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. 46 COCRYSTAL PHARMA, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statements of Stockholders’ Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 47 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Cocrystal Pharma, Inc. Bothell, Washington Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Cocrystal Pharma, Inc. (the “Company”) and subsidiaries as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board of the United States “(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Goodwill Impairment Assessment As described in Notes 2 and 4 to the consolidated financial statements, the Company’s consolidated net goodwill balance was $19,092,000 as of December 31, 2020. Management conducts impairment testing at the reporting unit level on an annual basis as of November 30th or more frequently if events or circumstances indicate a potential impairment. Reporting units are tested for impairment by comparing the estimated fair value of each reporting unit to their respective carrying amounts. Impairment is measured as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the carrying amount of goodwill for that reporting unit. Management estimates the fair value of the reporting units using the income approach, specifically the discounted cash flow method, and uses a market capitalization corroboration. This requires the use of significant estimates and assumptions, including future revenues, projected margins and capital spending, terminal growth rates, and discount rates. The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are the significant judgment by management when developing the fair value measurements of the reporting units, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing audit procedures and evaluating audit evidence related to management’s significant assumptions related to future revenues, projected margins and capital spending, terminal growth rates, and discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing management’s process for developing the fair value of the reporting units, (ii) evaluating the appropriateness of the discounted cash flow models, (iii) testing the completeness and accuracy of underlying data used in the models, (iv) performing an independent market corroboration calculation, and (iv) evaluating the significant assumptions used by management related to future revenues, projected margins and capital spending, terminal growth rates, and discount rates. Evaluating management’s assumptions related to future revenues and projected margins and capital spending involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the reporting units, third-party industry data, and whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow models and the terminal growth rates and discount rates assumptions. We have served as the Company’s auditor since 2019. /s/ Weinberg & Company Los Angeles, California March 17, 2021 F- 1 COCRYSTAL PHARMA, INC. CONSOLIDATED BALANCE SHEETS (in thousands) December 31, 2020 December 31, 2019 Assets Current assets: Cash $ 33,010 $ 7,418 Restricted cash 50 50 Accounts receivable 556 644 Prepaid expenses and other current assets 399 169 Total current assets 34,015 8,281 Property and equipment, net 591 431 Deposits 46 50 Operating lease right-of-use assets, net (including $39 to related party) 498 677 Goodwill 19,092 19,092 Total assets $ 54,242 $ 28,531 Liabilities and stockholders’ equity Current liabilities: Accounts payable and accrued expenses $ 1,080 $ 1,999 Current maturities of finance lease liabilities 39 103 Current maturities of operating lease liabilities (including $39 to related party) 178 177 Derivative liabilities 61 7 Total current liabilities 1,358 2,286 Long-term liabilities: Finance lease liabilities 34 14 Operating lease liabilities 345 523 Total long-term liabilities 379 537 Total liabilities 1,737 2,823 Commitments and contingencies Stockholders’ equity: Common stock, $0.001 par value; 100,000 shares authorized as of December 31, 2020 and December 31, 2019; 70,439 and 35,150 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively 71 36 Additional paid-in capital 297,342 260,932 Accumulated deficit (244,908 ) (235,260 ) Total stockholders’ equity 52,505 25,708 Total liabilities and stockholders’ equity $ 54,242 $ 28,531 See accompanying notes to consolidated financial statements. F- 2 COCRYSTAL PHARMA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) December 31, 2020 2019 Revenues: Collaboration revenue $ 2,014 $ 6,564 Operating expenses: Research and development 6,307 4,004 General and administrative 5,293 4,863 Impairments - 46,103 Total operating expenses 11,600 54,970 Loss from operations (9,586 ) (48,406 ) Other (expense) income: Interest expense, net (8 ) (19 ) Change in fair value of derivative liabilities (54 ) 256 Total other income (expense), net (62 ) 237 Loss before income taxes (9,648 ) (48,169 ) Income tax - - Net loss $ (9,648 ) $ (48,169 ) Net loss per common share: Loss per share, basic and diluted $ (0.17 ) $ (1.51 ) Weighted average number of common shares outstanding, basic and diluted 55,217 31,859 See accompanying notes to consolidated financial statements. F- 3 COCRYSTAL PHARMA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Common Stock Additional Paid-in Accumulated Total Stockholders’ Shares Amount Capital Deficit Equity Balance as of December 31, 2018 29,938 $ 30 $ 253,949 $ (187,091 ) $ 66,888 Stock-based compensation - - 351 - 351 Sale of common stock, net of transaction costs 5,212 6 6,632 - 6,638 Net loss - - - (48,169 ) (48,169 ) Balance as of December 31, 2019 35,150 36 260,932 (235,260 ) 25,708 Stock-based compensation - - 662 - 662 Sale of common stock, net of transaction costs 35,289 35 35,748 - 35,783 Net loss - - - (9,648 ) (9,648 ) Balance as of December 31, 2020 70,439 $ 71 $ 297,342 $ (244,908 ) $ 52,505 See accompanying notes to consolidated financial statements. F- 4 COCRYSTAL PHARMA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) 2020 2019 Operating activities: Net loss $ (9,648 ) $ (48,169 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 157 98 Amortization of right of use assets 179 156 Stock-based compensation 662 351 Payments on operating lease liabilities (177 ) (133 ) Loss on impairment goodwill - 46,103 Change in fair value of derivative liabilities 54 (256 ) Changes in operating assets and liabilities: Accounts receivable 88 (644 ) Prepaid expenses and other current assets (230 ) 22 Deposits 4 (10 ) Accounts payable and accrued expenses (919 ) 919 Net cash used in operating activities (9,830 ) (1,563 ) Investing activities: Purchases of property and equipment (240 ) (145 ) Net cash used in investing activities (240 ) (145 ) Financing activities: Payments of finance lease obligations (121 ) (214 ) Proceeds from sale of common stock, net of transaction costs 35,783 6,638 Net cash provided by financing activities 35,662 6,424 Net increase in cash and restricted cash 25,592 4,716 Cash and restricted cash at beginning of period 7,468 2,752 Cash and restricted cash at end of period $ 33,060 $ 7,468 SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Recognition of finance lease right-of-use asset and liability $ 77 $ - Recognition of operating lease right-of-use assets and operating lease liabilities upon adoption of ASC Topic 842, Leases $ - $ 833 See accompanying notes to consolidated financial statements. F- 5 COCRYSTAL PHARMA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Business Cocrystal Pharma, Inc. (“we”, the “Company” or “Cocrystal”), a biopharmaceutical 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. (“Biozone”). 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’s activities since inception have principally consisted of acquiring product and technology rights, raising capital, and performing research and development. Successful completion of the Company’s development programs, obtaining regulatory approvals of its products and, ultimately, the attainment of profitable operations is dependent on future events, including, among other things, its ability to access potential markets, secure financing, develop a customer base, attract, retain and motivate qualified personnel, and develop strategic alliances. Through December 31, 2020, the Company has primarily funded its operations through equity offerings. 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 $9,586,000 and $48,406,000 in the years ended December 31, 2020 and 2019, respectively. As the disease caused by SARS-CoV-2, a novel strain of coronavirus, COVID-19 continues to spread and severely impact the economy of the U.S. and other countries around the world, we are committed to the need of antiviral therapeutics for this unprecedented challenge. The extent to which this coronavirus impacts our business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning the virus, including variants of the virus, and the actions to contain the spread of or to detect, prevent, or treat COVID-19, among others. In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain payroll tax credits associated with the retention of employees. Liquidity 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, 2020, the Company recorded a net loss of approximately $9,648,000 and used approximately $9,830,000 of cash in operating activities. On December 31, 2020, the Company had cash and cash equivalents of approximately $33,060,000. We believe that our current resources will be sufficient to fund our operations for the foreseeable future. This estimate is based, in part, upon our currently projected expenditures for 2021 and 2022. The Company will need to continue obtaining adequate capital to fund operating losses until it becomes profitable. The Company can give no assurances that the additional capital it is able to raise, if any, will be sufficient to meet its needs, or that any such financing will be obtainable on acceptable terms. If the Company is unable to obtain adequate capital, it could be forced to cease operations or substantially curtail its drug development activities. The Company expects to continue incurring substantial operating losses and negative cash flows from operations over the next several years during its pre-clinical and clinical development phases. F- 6 2. Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting of annual financial information. Principles of Consolidation The consolidated financial statements include the accounts of Cocrystal Pharma, Inc. and its wholly owned subsidiaries: Cocrystal Discovery, Inc., Cocrystal Merger Sub, Inc., Baker Cummins Corp. and Biozone Laboratories, Inc. Intercompany transactions and balances have been eliminated. Segments The Company operates in only one segment. Management uses cash flows as the primary measure to manage its business and does not segment its business for internal reporting or decision-making. Use of Estimates Preparation of the Company’s consolidated financial statements in conformance with U.S. GAAP requires the Company’s management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes. The significant estimates in the Company’s consolidated financial statements relate to the valuation of equity awards and derivative liabilities, recoverability of deferred tax assets, estimated useful lives of fixed assets, and forecast assumptions used in the impairment testing of goodwill. The Company bases estimates and assumptions on historical experience, when available, and on various factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis, and its actual results may differ from estimates made under different assumptions or conditions. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash deposited in accounts held at two U.S. financial institutions, which may, at times, exceed federally insured limits of $250,000 for each institution accounts are held. At December 31, 2020 and 2019, our primary operating account held approximately $33,010,000 and $7,418,000, respectively, and our collateral account balance was $50,000 at a different institution. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risks thereof. As of December 31, 2020, 100% of our revenue and receivables are from one customer. 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, ability to obtain regulatory approvals, competition from currently available treatments and therapies, competition from larger companies, effective protection of proprietary technology, maintenance of 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. F- 7 Cash and Restricted Cash 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, and the Company held no cash equivalents as of December 31, 2020 and 2019. The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands): December 31, 2020 December 31, 2019 Cash $ 33,010 $ 7,418 Restricted cash 50 50 Total cash and restricted cash shown in the statements of cash flows $ 33,060 $ 7,468 Restricted cash represents amounts pledged as collateral for financing arrangements that are currently limited to the issuance of business credit cards. The restriction will end upon the conclusion of these financing arrangements. Property and Equipment Property and equipment, which consists of lab equipment (including lab equipment under capital lease), computer equipment, and office equipment, is recorded at cost and depreciated over the estimated useful lives of the underlying assets (three to five years) using the straight-line method. Leases Prior to January 1, 2019, the Company accounted for leases under Accounting Standards Codification (“ASC”) 840, Accounting for Leases. Effective from January 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease right-of-use assets and lease liabilities of approximately $833,000 and did not result in a cumulative-effect adjustment to accumulated deficit. Fair Value Measurements FASB Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: Level 1 — quoted prices in active markets for identical assets or liabilities. Level 2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date. Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date. The Company categorizes its cash and restricted cash as Level 1 fair value measurements. The Company categorizes its warrants potentially settleable in cash as Level 3 fair value measurements. The warrants potentially settleable in cash are measured at fair value on a recurring basis and are being marked to fair value at each reporting date until they are completely settled or meet the requirements to be accounted for as component of stockholders’ equity. The warrants are valued using the Black-Scholes option pricing model as discussed in Note 10 – Warrants. At December 31, 2020 and 2019, the carrying amounts of financial assets and liabilities, such as cash, accounts receivable, other assets, and accounts payable and accrued expenses approximate their fair values due to their short-term nature. The carrying values of notes payable approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing market interest rates. F- 8 The Company has not transferred any financial instruments into or out of Level 3 classification during the years ended December 31, 2020 and 2019. A reconciliation of the beginning and ending Level 3 liabilities for is as follows (in thousands): Fair Value Measurements Using Significant Unobservable Inputs (Level 3) 2020 2019 Balance, January 1, $ 7 $ 263 Change in fair value of warrants potentially settleable in cash (Note 10) 54 (256 ) Balance at December 31, $ 61 $ 7 Goodwill We account for business combinations using the acquisition method, recording the acquisition-date fair value of total consideration over the acquisition-date fair value of net assets acquired as goodwill. Acquisition-related costs, including banking, legal, accounting, valuation, and other similar costs, are expensed in the periods in which the costs are incurred and included in loss from operations in the consolidated financial statements. The results of operations of the acquired business are included in the consolidated financial statements from the acquisition date. In November 2014, goodwill was recorded in connection with the acquisition of RFS Pharma, and have represented a series of awarded patents and filed patent applications. We evaluate indefinite-lived intangible assets and goodwill for impairment annually, as of November 30, or more frequently when events or circumstances indicate that impairment may have occurred. As part of the impairment evaluation, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the indefinite-lived intangible asset or the reporting unit (for goodwill) is less than its carrying value, we then would proceed with the quantitative impairment test to compare the fair value to the carrying value and record an impairment charge if the carrying value exceeds the fair value. Beginning January 1, 2019, the Company early adopted ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The standard eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. Such early adoption did not have a material effect on the Company’s financial statements and related disclosures. Fair value is typically estimated using an income approach based on the present value of future discounted cash flows. The significant estimates in the discounted cash flow model primarily include the discount rate, and rates of future revenue and expense growth and/or profitability of the acquired assets. In performing the impairment test, the Company considered, among other factors, the Company’s intention for future use of acquired assets, analyses of historical financial performance and estimates of future performance of Cocrystal’s product candidates. At December 31, 2018, the Company had goodwill of $65,195,000. The Company completed its annual impairment test in November 2019, and at that time determined the fair value of its reporting unit, under both the Company’s Nasdaq market capitalization and an income approach analysis; both methods did not exceed the carrying value as of December 31, 2019; therefore, management considered goodwill to be impaired. This resulted in a $46,103,000 impairment in 2019. At December 31, 2020, the Company had goodwill of approximately $19,092,000. The Company completed its annual impairment test in November 2020, and at that time determined the fair value of its reporting unit, under both the Company’s Nasdaq market capitalization and an income approach analysis; both methods did exceed the carrying value as of December 31, 2020; therefore, management did not consider goodwill to be impaired. F- 9 Long-Lived Assets The Company regularly reviews the carrying value and estimated lives of its long-lived assets, including property and equipment, to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash flow in future periods as well as the strategic significance of the assets to the Company’s business objective. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying amount over the asset’s fair value. Research and Development Expenses All research and development costs are expensed as incurred. Revenue Recognition The Company recognizes revenue from research and development arrangements. In accordance with Accounting Standards Codification (“ASC”) Topic 606– Revenue from Contracts with Customers (“Topic 606”), revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods and services. In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 . This ASU provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. Accordingly, this amendment added unit of account guidance in Topic 606 when an entity is assessing whether the collaborative arrangement, or a part of the arrangement, is within the scope of Topic 606. In addition, the amendment provides certain guidance on presenting the collaborative arrangement transaction together with Topic 606. The Company adopted ASU 2018-18, effective in the fourth quarter of 2018 with no impact on our consolidated financial statements and related footnote disclosures. On January 2, 2019, the Company entered into an Exclusive License and Research Collaboration Agreement (the “Collaboration Agreement”) with Merck Sharp & Dohme Corp. (“Merck”) to discover and develop certain proprietary influenza A/B antiviral agents. Under the terms of the Collaboration Agreement, Merck will fund research and development for the program, including clinical development, and will be responsible for worldwide commercialization of any products derived from the collaboration. During the year ended December 31, 2020 the Company recognized revenue of $1,779,000 for research and development activities related to its influenza A/B program and $235,000 for program expense reimbursements. During the year ended December 31, 2019 the Company recognized revenue of $4,368,000 as consideration in exchange for conveyance of intellectual property rights at the signing of the agreement, $1,838,000 for research and development activities related to its influenza A/B program and $358,000 for program expense reimbursements. As of December 31, 2020 and 2019, accounts receivable of $556,000 and $644,000 were due from Merck, respectively. Income Taxes The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization of deferred tax assets is dependent upon future taxable income. A valuation allowance is recognized if it is more likely than not that some portion or all of a deferred tax asset will not be realized based on the weight of available evidence, including expected future earnings. The Company recognizes an uncertain tax position in its financial statements when it concludes that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement. This is determined on a cumulative probability basis. The full impact of any change in recognition or measurement is reflected in the period in which such change occurs. The Company elects to accrue any interest or penalties related to income taxes as part of its income tax expense. F- 10 Stock-Based Compensation The Company recognizes compensation expense using a fair value-based method for costs related to stock-based payments, including stock options. The fair value of options awarded to employees is measured on the date of grant using the Black-Scholes option pricing model and is recognized as expense over the requisite service period on a straight-line basis. Use of the Black-Scholes option pricing model requires the input of subjective assumptions including expected volatility, expected term, and a risk-free interest rate. The Company estimates volatility using a blend of its own historical stock price volatility as well as that of market comparable entities since the Company’s common stock has limited trading history and limited observable volatility of its own. The expected term of the options is estimated by using the Securities and Exchange Commission Staff Bulletin No. 107’s Simplified Method for Estimate Expected Term . The risk-free interest rate is estimated using comparable published federal funds rates. Common Stock Purchase Warrants and Other Derivative Financial Instruments We classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40, Contracts in Entity’s Own Equity . We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). We assess classification of our common stock purchase warrants and other freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required. Net Income (Loss) per Share The Company accounts for and discloses net income (loss) per common share in accordance with FASB ASC Topic 260, Earnings Per Share . Basic income (loss) per common share is computed by dividing income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common stock for all potential dilutive common shares outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants. 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): December 31, 2020 2019 Outstanding options to purchase common stock 1,780 931 Warrants to purchase common stock 243 243 Total 2,023 1,174 Recent Accounting Pronouncements The following are new FASB Accounting Standards Updates that have not been adopted by the Company as of December 31, 2020, and contain detail regarding the effective dates: In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s financial position, results of operations, and cash flows. F- 11 Other recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (“SEC”) did not, or are not expected to, have a material impact on the Company’s consolidated financial statements and related disclosures. 3. Property and Equipment Property and equipment as of December 31, consists of the following (table in thousands): 2020 2019 Lab equipment (excluding equipment under finance leases) $ 1,498 $ 1,073 Finance lease right-of-use lab equipment obtained in exchange for finance lease liabilities, net 92 347 Computer and office equipment 120 92 Total property and equipment 1,710 1,512 Less accumulated depreciation 1,119 (1,081 ) Property and equipment, net $ 591 $ 431 Depreciation expense was $157,000 and $98,000 for the years ended December 31, 2020 and 2019, respectively. 4. Goodwill A reconciliation of the beginning and ending goodwill for the years ended December 31, 2020 and 2019 is as follows (table in thousands): 2020 2019 Balance, January 1, $ 19,092 $ 65,195 Impairment charges - 46,103 Balance at December 31, $ 19,092 $ 19,092 At December 31, 2018, the Company had goodwill of $65,195,000. On November 30, 2019 the Company performed its annual impairment test and determined the fair value of its reporting unit, measured by the Company’s Nasdaq market capitalization and an income approach analysis, exceeded the carrying value by $46,103,000; therefore, management considered goodwill of that amount to be impaired. Based on management’s impairment test at November 30, 2020, there were no further indicators of impairment. 5. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following as of December 31, (table in thousands): 2020 2019 Accounts payable $ 657 $ 1,511 Accrued compensation 126 83 Accrued other expenses 297 405 Total accounts payable and accrued expenses $ 1,080 $ 1,999 Accounts payable and accrued other expenses contain unpaid general and administrative expenses and costs related to research and development that have been billed and estimated unbilled, respectively, as of year-end. F- 12 6. Common Stock As of December 31, 2020, the Company has authorized 100,000,000 shares of common stock, $0.001 par value per share. The Company had approximately 70,439,000 and 35,150,000 shares issued and outstanding as of December 31, 2020 and 2019, respectively. The holders of common stock are entitled to one vote for each share of common stock held. In January, March and November 2019, the Company closed a series of placements of its common stock resulting in the sale of 5,211,695 shares of its common stock for net proceeds after transaction costs of approximately $6,638,422. On January 29, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering, 3,492,063 of the Company’s shares of common stock, par value $0.001 at a purchase price per share of $0.63 for aggregate net proceeds to the Company of approximately $1.5 million, after deducting fees payable to the placement agent and other estimated offering expenses payable by the Company. The Company closed the offering on January 31, 2020. On February 27, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering, 8,461,540 of the Company’s shares of common stock, par value $0.001 at a purchase price per share of $1.30 for aggregate net proceeds to the Company of approximately $10.1 million, after deducting fees payable to the placement agent and other estimated offering expenses payable by the Company. The Company closed the offering on February 28, 2020. On March 9, 2020, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering, 5,037,038 of the Company’s shares of common stock, par value $0.001 at a purchase price per share of $1.35 for aggregate net proceeds to the Company of approximately $5.0 million, before after fees payable to the placement agent and other estimated offering expenses payable by the Company. The Company closed the offering on March 10, 2020. On July 1, 2020, the Company entered into an At-The-Market Offering Agreement (“ATM”) with H.C. Wainwright & Co., LLC (“Wainwright”), pursuant to which the Company may issue and sell over time and from time to time, to or through Wainwright, up to $10,000,000 of shares of the Company’s common stock. On August 31, 2020, the Company closed an underwritten public offering of its common stock totaling 16,422,813 shares at public offering price of $1.05 per share sold to Wainwright for net proceeds of approximately $15.6 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company. The 16,422,813 shares of common stock sold in the offering includes 2,137,098 shares pursuant to Wainwright’s partial exercise of its over-allotment option to purchase additional shares of common stock, pursuant to the Amended and Restated Underwriting Agreement, dated as of August 26, 2020, between the Company and Wainwright. In November 2020, we sold 1,875,243 shares of common stock under the ATM and received net proceeds of approximately $3,621,000 and in January 2021, we sold 1,030,000 shares of common stock under the ATM and received net proceeds of approximately $2,072,000. 7. Stock Based Awards Equity Incentive Plans The Company adopted an equity incentive plan in 2007 (the “2007 Plan”) under which 1,786,635 shares of common stock have been reserved for issuance to employees and nonemployee directors and consultants of the Company. Recipients of incentive stock options granted under the 2007 Plan shall be eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the fair market value of such stock on the date of grant. The maximum term of options granted under the 2007 Plan is ten years. The options generally vest 25% after one year, with the remaining balance vesting monthly over the following three years. As of December 31, 2020, all future options available under the 2007 plan have expired and no options remain available for future grant under this plan. F- 13 The Company adopted a second equity incentive plan in 2015 (the “2015 Plan”) under which 1,666,667 shares of common stock have been reserved for issuance to employees, and nonemployee directors and consultants of the Company. Recipients of incentive stock options granted under the 2015 Plan shall be eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options granted under the 2015 Plan is ten years. The options generally vest 25% after one year, with the remaining balance vesting monthly over the following three years. As of December 31, 2020, 2,262,736 options remain available for future grant under the 2015 Plan. The following table summarizes stock option transactions for the 2007 Plan and 2015 Plan, collectively, for the year ended December 31, 2020 and 2019 (table in thousands, except per share amounts): Number of Shares Available for Grant Total Options Outstanding Weighted Average Exercise Price Aggregate Intrinsic Value Balance at December 31, 2018 873 1,351 $ 5.73 $ 788 Exercised - - - - Authorized 2,295 - - - Cancelled 420 (420 ) 7.04 - Balance at December 31, 2019 3,588 931 $ 4.14 $ - Exercised - - - - Granted (928 ) 928 1.33 29 Expired (476 ) - - - Cancelled 79 (79 ) 7.37 - Balance at December 31, 2020 2,263 1,780 $ 2.53 $ 29 During the year ended December 31, 2020 the Company granted stock options to officers, directors, employees and consultants to purchase a total of 928,000 shares of common stock. The options have an exercise price of $1.33 per share, expire in ten years, and vest as follows: one half vests on the one-year anniversary of the grant date and the remainder will vest in eight equal quarterly increments with the first such quarterly increment vesting on September 30, 2021. The total fair value of these options at the grant date was approximately $944,000 using the Black-Scholes Option pricing model. The Company did not grant any stock options during the year ended December 31, 2019. The Black-Scholes option pricing model includes the following weighted average assumptions for grants made during the year ended December 31, 2020: Assumptions: Weighted average per share grant date fair value $ 1.08 Risk-free interest rate 0.44 % Expected dividend yield 0.00 % Expected volatility 107.41 % Expected terms (in years) 5.9 The Company accounts for share-based awards to employees and nonemployee directors and consultants in accordance with the provisions of ASC 718, Compensation—Stock Compensation. , and under the recently issued guidance following FASB’s pronouncement, ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting . Under ASC 718, and applicable updates adopted, share-based awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service, or vesting, period. The Company values its equity awards using the Black-Scholes option pricing model, and accounts for forfeitures when they occur. For the years ended December 31, 2020 and 2019, equity-based compensation expense recorded was $662,000 and $351,000, respectively. As of December 31, 2020, there was $1,426,000 of total unrecognized compensation expense related to non-vested stock options that is expected to be recognized over a weighted average period of 2.11 years. For options granted and outstanding, there were 1,779,399 options outstanding which were fully vested or expected to vest, with an aggregate intrinsic value of $29,040, a weighted average exercise price of $2.53, and weighted average remaining contractual term of 8.33 years at December 31, 2020. For vested and exercisable options, outstanding shares totaled 541,811, with an aggregate intrinsic value of $453. These options had a weighted-average exercise price of $4.38 per share and a weighted-average remaining contractual term of 6.76 years at December 31, 2020. F- 14 The aggregate intrinsic value of outstanding and exercisable options at December 31, 2020 was calculated based on the closing price of the Company’s common stock as reported on the Nasdaq Capital Market on December 31, 2020 of approximately $1.36 per share less the exercise price of the options. The aggregate intrinsic value is calculated based on the positive difference between the closing fair market value of the Company’s common stock and the exercise price of the underlying options. Common Stock Reserved for Future Issuance The following table presents information concerning common stock available for future issuance as of December 31, (in thousands): 2020 2019 Stock options issued and outstanding 1,780 931 Shares authorized for future option grants 2,263 3,588 Warrants outstanding 243 243 Total 4,286 4,762 8. 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, 2020 and 2019 (table in thousands): Warrants Accounted for as: Equity Warrants Accounted for as: Liabilities May 2018 Warrants October 2013 Warrants January 2014 Warrants Total Outstanding, December 31, 2018 84 26 133 243 Exercised - - - - Granted - - - - Expired - - - - Outstanding, December 31, 2019 84 26 133 243 Exercised - - - - Granted - - - - Expired - - - - Outstanding, December 31, 2020 84 26 133 243 Expiration date October 27, 2022 October 24, 2023 January 16, 2024 Warrants consist of equity-classified warrants and warrants with the potential to be settled in cash, which are liability-classified warrants. As of December 31, 2020, and 2019, 159,000 warrants are accounted for as liabilities and 84,000 warrants are accounted for as equity. Warrants Classified as Equity Equity-classified warrants consist of stand-alone warrants with rights to buy shares of the Company at a pre-designated price on or before the date of expiration, irrespective of the market price. These purchase warrants are not attached to any debt or equity instruments, thus considered freestanding, and there are no circumstances under ASC 815 that require the warrants to be classified as liabilities or as derivatives. Thus, our May 2018 warrants will be classified as equity, and their value will be carried in the additional paid-in capital account in the stockholders’ equity section of the balance sheet. F- 15 These warrants were granted to the underwriters and investment brokers for services provided related to the Company’s May 2018 equity financing, and collectively grant the right to buy 84,211 shares of our stock at $2.09 per share for up to four years until expiration from the commencement date of October 27, 2018. Warrants Classified as Liabilities Liability-classified warrants consist of warrants issued by Biozone in connection with equity financings in October 2013 and January 2014, which were assumed by the Company in connection with its merger with Biozone in January 2014. Warrants accounted for as liabilities have the potential to be settled in cash or are not indexed to the Company’s own stock. The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. Any decrease or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the consolidated statement of operations as changes in fair value of derivative liabilities. The fair value of the warrants classified as liabilities is estimated using the Black-Scholes option-pricing model with the following inputs as of December 31, 2020: October 2013 Warrants January 2014 Warrants Strike price $ 15.00 $ 15.00 Expected dividend yield 0.00 % 0.00 % Expected term (years) 2.8 3.0 Cumulative volatility 119.18 % 116.65 % Risk-free rate 0.16 % 0.18 % The fair value of the warrants classified as liabilities is estimated using the Black-Scholes option-pricing model with the following inputs as of December 31, 2019: October 2013 Warrants January 2014 Warrants Strike price $ 15.00 $ 15.00 Expected dividend yield 0.00 % 0.00 % Expected term (years) 3.8 4.0 Cumulative volatility 89.59 % 90.58 % Risk-free rate 1.67 % 1.68 % The Company estimates volatility using its own historical stock price volatility based upon the range of periods consistent with the expected life of the warrants. 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. 9. Licenses and Collaborations Merck Sharp & Dohme Corp. On January 2, 2019, the Company entered into an Exclusive License and Research Collaboration Agreement (the “Collaboration Agreement”) with Merck Sharp & Dohme Corp. (“Merck”) to discover and develop certain proprietary influenza A/B antiviral agents. Under the terms of the Collaboration Agreement, Merck will fund research and development for the program, including clinical development, and will be responsible for worldwide commercialization of any products derived from the collaboration. Cocrystal received an upfront payment of $4 million and is eligible to receive payments related to designated development, regulatory and sales milestones with the potential to earn up to $156,000,000, as well as royalties on product sales. Merck can terminate the Collaboration Agreement at any time prior to the first commercial sale of the first product developed under the Collaboration Agreement, in its sole discretion, without cause. The Company continues working with Merck under this Collaboration Agreement. F- 16 The Company recognized revenue for the years ended December 31, 2020 and 2019 of $2,014,000 and $6,564,000, respectively. As of December 31, 2020 and 2019, accounts receivable of $556,000 and $644,000 was due from Merck, respectively. Kansas State University Research Foundation On February 18, 2020, Cocrystal Pharma, Inc. (the “Company”) entered into a License Agreement (the “Agreement”) with Kansas State University Research Foundation (the “Foundation”) effective February 12, 2020. Pursuant to the terms of the Agreement, the Foundation granted the Company an exclusive for human use a royalty bearing license to practice under certain patent rights, including a patent and a patent application covering antiviral compounds against coronaviruses and norovirus, and related know-how, to make and sell therapeutic, diagnostic and prophylactic products. The Company agreed to pay the Foundation a one-time non-refundable license initiation fee in the amount of $80,000 and an annual license maintenance fee in the amount of $20,000 per year and agreed to reimburse the Foundation for third party expenses associated with the filing, prosecution, and maintenance of the patent rights in question. The Company also agreed to make certain future milestone payments up to $3.1 million, dependent upon the progress of clinical trials, regulatory approvals, and initiation of commercial sales in the United States and certain countries outside the United States. On April 17, 2020, the Company entered into an Agreement with Foundation effective April 1, 2020. Pursuant to the terms of the Agreement, the Foundation granted the Company an exclusive for human use a royalty bearing license to practice under certain patent rights, including a patent and a patent application covering antiviral compounds against coronaviruses and norovirus, and related know-how, to make and sell therapeutic, diagnostic and prophylactic products. The Company agreed to pay the Foundation a one-time non-refundable license initiation fee in the amount of $110,000 and an annual license maintenance fee in the amount of $20,000 per year for the first seven (7) years and $50,000 per year thereafter and agreed to reimburse the Foundation for third party expenses associated with the filing, prosecution and maintenance of the patent rights in question. The Company also agreed to make certain future milestone payments up to $4,150,000, dependent upon the progress of clinical trials, regulatory approvals, and initiation of commercial sales in the United States and certain countries outside the United States. As of December 31, 2020 no milestone payments were due under the agreement. The Agreement will remain in effect until the expiration of the patent rights covered by the Agreement, unless earlier terminated pursuant to customary terms. 10. 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 consolidated 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 as income tax expense. F- 17 The Company is subject to taxation and files income tax returns in the United States and various state jurisdictions. All tax years from inception to date 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. Currently, no years are under examination. Significant components of the Company’s deferred income taxes at December 31, 2020 and 2019 are shown below (table in thousands): 2020 2019 Deferred tax assets: Net operating loss carryforwards (i)(ii) $ 17,240 $ 15,406 Compensation 837 762 Research and development tax credits (iii) 2,182 1,996 Other 311 121 Total deferred tax assets 20,570 18,285 Deferred tax liabilities: Property and equipment (20 ) (9 ) Other (107 ) - Total deferred tax liabilities (127 ) (9 ) Total deferred taxes, net 20,443 18,276 Valuation allowance (20,443 ) (18,276 ) Deferred tax liability, net $ - $ - 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. On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions are the extension of the carryback period of certain losses to five years, and increasing the ability to deduct interest expense from 30 percent to 50 percent of modified taxable income. The CARES Act also provides for a credit against employee wages, the opportunity to defer payment of a portion of federal payroll taxes to December 2021 and December 2022 and enhanced small business loans to assist business impacted by the pandemic. The Company’s tax provision and financial position was not materially impacted by the CARES Act. On December 27, 2020, the United States enacted the Consolidated Appropriations Act which extended and modified many of the tax related provisions of the CARES Act. The Company does not anticipate a material impact of the Consolidated Appropriations Act on its tax provision or financial position. At December 31, 2020, the Company has federal and state net operating losses (“NOL”) carryforwards of approximately $80,700,000 and $2,000,000, respectively. The federal and Florida NOL generated after 2017 of $19,100,000 and $2,000,000, respectively, will carryforward indefinitely. Under the CARES Act, the Internal Revenue Code was amended to allow for federal NOL carrybacks for five years to offset previous income, or can be carried forward indefinitely to offset 100% of the taxable income for the tax year 2020 and 80% of the taxable income for the tax years 2021 and thereafter. The federal NOL carryforwards begin to expire in 2026 F- 18 At December 31, 2020, the Company had federal and state capital loss carryforwards of approximately $2,200,000 that expire in 2028. At December 31, 2020, the Company had federal and state capital loss carryforwards of approximately $1,070,000 that expire in 2023. The above NOL carryforward and the research tax credit carryforward may be subject to an annual limitation under the 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 382/382 analysis. If a change in ownership were to have occurred, NOL and tax credits 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. A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows: 2020 2019 Statutory federal income tax rate 21.0 % 21.0 % Goodwill impairment 0 % (20.1 )% Change in valuation allowance (22.5 )% 3.1 % Other tax, credit and adjustments 1.5 % (4.0 )% Effective income tax rate 0.0 % 0.0 % 11. Lease Commitments Operating Leases The Company leases office space in Miami, Florida and laboratory space in Bothell, Washington under operating leases that expire on August 31, 2021 and January 31, 2024, respectively. The lease for our Miami office is with a related party (see below). Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives. Prior to January 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases (“ASC 842”), which requires an entity to recognize a right-of-use asset and a lease liability for certain leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on January 1, 2019, resulted in the recognition of operating lease right-of-use assets of $833,000 and corresponding lease liabilities of approximately the same amount. There was no cumulative-effect adjustment to accumulated deficit. As of December 31, 2020, the unamortized right of use asset was $498,000 and total lease liabilities were $523,000, of which $178,000 was current. F- 19 The components of rent expense and supplemental cash flow information related to leases for the period are as follows (tables in thousands): Year Ended December 31, 2020 Lease Cost Operating lease cost (included in operating expenses in the Company’s consolidated statement of operations) $ 228 Other Information Cash paid for amounts included in the measurement of lease liabilities $ 227 Weighted average remaining lease term – operating leases (in years) 2.9 Average discount rate – operating leases 8.0 % The supplemental balance sheet information related to leases for the period is as follows (tables in thousands): At December 31, 2020 At December 31, 2019 Operating leases Long-term right-of-use assets of which $39 relates to related party, net of amortization of $335 $ 498 $ 677 Short-term operating lease liabilities, of which $39 relates to related party 178 .177 Long-term operating lease liabilities, of which $0 relates to related party 345 523 Total operating lease liabilities $ 523 $ 700 Year ending December 31, (in thousands) 2019 $ - 2020 - 2021 213 2022 178 2023 and thereafter 198 Total minimum operating lease payments $ 589 Less: present value discount (66 ) Total operating lease liabilities 523 The minimum lease payments above do not include common area maintenance (CAM) charges, which are contractual obligations under the Company’s Bothell, Washington lease, but are not fixed and can fluctuate from year to year. CAM charges for the Bothell, Washington facility are calculated and billed based on total common expenses for the building incurred by the lessor and apportioned to tenants based on square footage. In 2020 and 2019, approximately $74,000 and $86,000 of CAM charges for the Bothell, Washington lease were included in operating expenses in the consolidated statements of operations, respectively. On September 1, 2018, the Company entered into a lease agreement with a limited liability company controlled by Dr. Phillip Frost, a director, and a principal shareholder of the Company for the lease of its Miami office (see Note 16 – Transactions with Related Parties). The lease term is three years with an optional three-year extension. Monthly lease payments under this lease total $155,000 through September 2021. The minimum lease payments above include taxes and fees, which are expected to be approximately $9,000 annually. As of December 31, 2020, the remaining right of use asset relating to this lease was $39,000 and the remaining lease obligation was $39,000. Rent expense, excluding capital leases and CAM charges, for 2020 and 2019 totaled $228,000 and $226,000, respectively. F- 20 Finance Leases In November 2018, the Company entered into two lease agreements to acquire equipment with 18 monthly payments of $18,000 payable through May 27, 2020 and 36 monthly payments of $1,000 payable through November 21, 2021. The lease agreements have an effective interest rate of 8.00%. Future minimum finance lease payments, by year and in aggregate, are as follows: Year ending December 31, (in thousands) 2020 $ - 2021 44 2022 29 2023 and thereafter 7 Total minimum capital lease payments $ 80 The leased lab equipment is included under property and equipment and depreciable over five years. Total assets and accumulated depreciation recognized, net, under finance leases was $92,000 and $119,000 as of December 31, 2020, respectively. Total assets and accumulated depreciation recognized, net, under finance leases was $347,000 and $75,000 as of December 31, 2019. 12. Commitments and Contingencies Contingencies From time to time, the Company is a party to, or otherwise involved in, legal proceedings arising in the normal course of business. As of the date of this report, except as described below, the Company is not aware of any proceedings, threatened or pending, against it which, if determined adversely, would have a material effect on its business, results of operations, cash flows or financial position. On September 20, 2018, Anthony Pepe, individually and on behalf of a class, filed with the United States District Court for the District of New Jersey a complaint against the Company, certain current and former executive officers and directors of the Company and the other defendants named therein for violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. The class consists of the persons and entities who purchased the Company’s common stock during the period from September 23, 2013 through September 7, 2018. Pepe also alleges violation of other sections of the Exchange Act by the defendants named in the complaint other than the Company. Pepe seeks damages, pre-judgment and post-judgment interest, reasonable attorneys’ fees, expert fees and other costs. On January 16, 2019, Ms. Susan Church, a stockholder of the Company, filed with the United States District Court for the Western District of Washington a derivative suit against certain current and former executive officers and directors of the Company alleging breach of fiduciary duties, unjust enrichment, waste of corporate assets, and violations of the rules governing proxy solicitation. Church seeks, among other things, money damages, disgorgement of profits from alleged wrongful conduct, including cash bonuses, pre-judgment and post-judgment interest, reasonable attorneys’ fees, expert fees and other costs. On December 16, 2020, the United States District Court for the District of New Jersey approved the terms of the settlement of the above class action, the derivative action discussed above, and two related derivative actions. The Company paid $450,000 for its share of the total class action settlement. As for the settlement of the derivative lawsuits, on February 14, 2021, the Board of Directors of the Company approved certain corporate governance changes that the Company agreed to make pursuant to the terms of the settlement, including an amendment to its Bylaws. F- 21 Liberty Insurance Underwriters Inc. filed suit against us in federal court in Delaware seeking a declaratory judgment that there was no insurance coverage for any settlement, judgment, or defense costs in the class and derivative litigation, that the monies totaling approximately $1 million it paid to the Company in connection with the SEC investigation were not covered by insurance, and for recoupment of the monies already paid. We have retained counsel to defend us which has filed an answer to the complaint denying its material allegations, as well as a counterclaim against Liberty for breach of contract, declaratory judgment, bad faith and violation of the Washington State Consumer Protection Act, alleging among other things that Liberty wrongfully denied the Company’s claims for coverage of the class and derivative litigations, and seeking money damages. The case has been set for trial in July, 2022. In November 2017, Lee Pederson, a former Biozone lawyer, filed a lawsuit in the U.S. District Court in Minnesota against co-defendants the Company, Dr. Phillip Frost, OPKO Health, Inc. and Brian Keller alleging that defendants engaged in wrongful conduct related to Biozone, including causing Biozone to enter into an allegedly improper licensing agreement and engaged in alleged market manipulation (“Pederson I”). On September 13, 2018, the United States District Court granted the Company and its co-defendants’ motion to dismiss Pederson’s amended complaint in Pederson I for lack of personal jurisdiction in Minnesota. On October 11, 2018, Pederson filed a notice of appeal with the United States Court of Appeals for the Eighth Circuit. The plaintiff’s appeal was denied and the dismissal of Pederson I affirmed in March 2020. Meanwhile, in July 2019, Lee Pederson had filed another lawsuit in the U.S. District Court in Minnesota against co-defendants the Company, Dr. Frost, and Daniel Fisher (“Pederson II”). In his complaint in Pederson II, Pederson alleges tortious interference by the Company and Dr. Frost with an alleged collaboration agreement between Mr. Pederson and Mr. Fisher. In Pederson II, Mr. Pederson seeks damages in the amount of $800,000 or such other amount as may be determined at trial. Pederson II had previously been stayed by the court, pending disposition of Pederson I. With that first lawsuit having been dismissed and appeal denied, the stay was lifted in Pederson II, and the Company and all other defendants in that case filed Motions to Dismiss the (then amended) complaint. On November 19, 2020 the Magistrate Judge recommended dismissal of Pederson II, and further recommended that Pederson be restricted from filing any other actions in the District of Minnesota against defendants on the same or similar allegations as those in Pederson II, and on January 4, 2021 the District Court Judge adopted those recommendations and ordered dismissal of Pederson II. On February 1, 2021 Pederson filed a Notice of Appeal from the order of dismissal of Pederson II in the Eighth Circuit, and that appeal remains pending. On May 19, 2020, A.G.P./Alliance Global Partners (“AGP”), which had previously acted as the Company’s underwriter, placement agent and sales agent in connection with the Company’s registered and exempt equity offerings, filed a lawsuit against the Company in the United States District Court for the Southern District of New York alleging violation of a lock-up provision under the Placement Agent Agreement, dated January 28, 2020 (the “Placement Agent Agreement”), by and between the Company and AGP. AGP seeks (i) damages estimated in the complaint to be in excess of $1 million and attorneys’ fees, and (ii) declaratory relief. The Company has answered the complaint and discovery has been initiated. While the Company intends to defend itself vigorously from the claims in the aforementioned disputes, it is unable to predict the outcome of these legal proceedings. Any potential loss as a result of these legal proceedings cannot be reasonably estimated. As a result, the Company has not recorded a loss contingency for any of the aforementioned claims. 13. Transactions with Related Parties In September 2018, the Company leased administrative offices from a limited liability company owned by one of the Company’s directors and principal shareholder, Dr. Phillip Frost. The lease term is three years with an optional three-year extension. On an annualized basis, rent expense, including taxes and fees, for this location would be approximately $62,000. The Company paid a lease deposit of $4,000 and total rent and other expenses paid in connection with this lease were $57,000 for both years ended December 31, 2020 and 2019. 14. Subsequent Events Common Stock Sales During January 2021, the Company sold 1,030,000 shares of its common stock pursuant to the ATM offering agreement with Wainwright for net proceeds of approximately $2,072,000. F- 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures Not applicable.