Notes
to the Condensed Consolidated Financial Statements
June
30, 2017
(unaudited)
Note
1- Organization and Significant Accounting Policies
Overview
Cocrystal
Pharma, Inc. (“the Company”) has been developing novel technologies and approaches to create first-in-class and best-in-class
antiviral drug candidates since its initial funding in 2008. Our focus is to pursue the development and commercialization of broad-spectrum
antiviral drug candidates that will transform the treatment and prophylaxis of viral diseases in humans. By concentrating our
research and development efforts on viral replication inhibitors, we plan to leverage our infrastructure and expertise in these
areas.
The
Company was formerly incorporated in Nevada under the name Biozone Pharmaceuticals, Inc. On January 2, 2014, Biozone Pharmaceuticals,
Inc. sold substantially all 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.”
Cocrystal
has developed proprietary structure-based drug design technology and antiviral nucleoside chemistry to create antiviral drug candidates.
In addition, we have licensed gene-editing technologies. Our focus is to pursue the development and commercialization of broad-spectrum
antiviral drug candidates that will transform the treatment and prophylaxis of hepatitis C, influenza, norovirus infections and
hepatitis B. By concentrating our research and development efforts on viral replication inhibitors, we leverage our infrastructure
and expertise in these areas.
The
Company operates in only one segment. Management uses cash flow as the primary measure to manage its business and does not segment
its business for internal reporting or decision-making.
The
Company’s activities since inception have consisted principally of acquiring product and technology rights, raising capital,
and performing research and development. Successful completion of the Company’s development programs, obtaining regulatory
approvals of its products and, ultimately, the attainment of profitable operations are 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 June 30, 2017, the Company has funded its operations through equity
offerings.
As
of June 30, 2017, the Company had an accumulated deficit of $141.0 million. During the three and six month period ended June 30,
2017, the Company had a loss from operations of $1.2 million and $4.3 million, respectively. Cash used in operating activities
was approximately $3.1 million for the six months ended June 30, 2017. 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. The Company can give no assurances that any additional capital that it is able to obtain,
if any, will be sufficient to meet its needs, or that any such financing will be obtainable on acceptable terms. If the Company
is unable to obtain adequate capital, it could be forced to cease operations or substantially curtail its drug development activities.
These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. The Company expects
to continue to incur substantial operating losses and negative cash flows from operations over the next several years during its
pre-clinical and clinical development phases.
Basis
of Presentation and Significant Accounting Policies
The
accompanying condensed consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange
Commission (“SEC”). Certain information and footnote disclosures, normally included in annual financial statements
prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), have been condensed or omitted
pursuant to those rules and regulations. We believe disclosures made are adequate to make the information presented not misleading.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to fairly state the financial
position, results of operations and cash flows with respect to the interim condensed consolidated financial statements have been
included. The results of operations for the interim periods are not necessarily indicative of the results of operations for the
entire fiscal year. All intercompany accounts and transactions have been eliminated in consolidation. Reference is made to the
audited annual financial statements of Cocrystal Pharma, Inc. included in our Annual Report on Form 10-K for the year ended December
31, 2016 filed on March 30, 2017 (“Annual Report”), which contain information useful to understanding the Company’s
business and financial statement presentations. The condensed consolidated balance sheet as of December 31, 2016 was derived from
the Company’s most recent audited financial statements, but does not include all disclosures required by GAAP for a year-end
balance sheet. Our significant accounting policies and practices are presented in Note 2 to the financial statements included
in the Form 10-K.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Recent
Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02,
Leases
(Topic 842). ASU 2016-02 impacts any entity that enters into a lease with some specified scope exceptions.
This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on
the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either 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 yet implemented this guidance. However, based on the Company’s
current operating lease arrangements, the Company does not expect the adoption of this standard to have a material impact on its
financial statements based upon current obligations.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718)
. This standard makes several
modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and
the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash
flows presentation for certain components of share-based awards. The Company adopted this standard as of January 1, 2017. The
Company has elected to adopt the provisions of ASU No. 2016-09 that allow for stock option forfeitures to be recorded as they
occur; however, adoption of this provision had no impact on its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230)
. This standard addresses the classification
of eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 will be effective
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.
We are currently evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350)
. This standard simplifies how
an entity is required to test for goodwill impairment. ASU 2017-04 will be effective for annual or interim goodwill impairment
tests in fiscal years beginning after December 15, 2019, with early adoption permitted after January 1, 2017. We are currently
evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.
In
July 2017, the FASB issued ASU 2017-11,
Accounting for Certain Financial Instruments with Down Round Features and Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception
. Part I of this ASU addresses the complexity of accounting for
certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of future equity offerings. Current accounting
guidance requires financial instruments with down round features to be accounted for at fair value. Part II of the Update applies
only to nonpublic companies and is therefore not applicable to the Company. The amendments in Part I of the Update change the
classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining
whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer
precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result,
a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative
liability at fair value as a result of the existence of a down round feature. For freestanding equity-classified financial instruments,
the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of
the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common
shareholders in basic EPS. This Update is effective for public entities for fiscal years beginning after December 15, 2018. Early
adoption is permitted. The Company has not yet determined when it will adopt the provisions of this Update and has not yet determined
the impact on its consolidated financial statements upon adoption.
Note
2 – Fair Value Measurements
ASC
820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances
disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value
under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a
fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable,
that may be used to measure fair value which are the following:
|
Level
1 — quoted prices in active markets for identical assets or liabilities.
|
|
Level
2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement
date.
|
|
Level
3 — significant unobservable inputs that reflect management’s best estimate of what market participants would
use to price the assets or liabilities at the measurement date.
|
The
Company categorized its cash equivalents as Level 1 fair value measurements. The Company categorized its warrants potentially
settleable in cash as Level 3 fair value measurements. The warrants potentially settleable in cash are measured at fair value
on a recurring basis and are being marked to fair value at each reporting date until they are completely settled or meet the requirements
to be accounted for as component of stockholders’ equity. The warrants are valued using the Black-Scholes option-pricing
model as discussed in Note 4 below.
The
following table presents a summary of fair values of assets and liabilities that are re-measured at fair value at each balance
sheet date as of June 30, 2017 and December 31, 2016, and their placement within the fair value hierarchy as discussed above (in
thousands):
|
|
|
|
|
Quoted
Prices in
Active
Markets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
Description
|
|
June 30, 2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,451
|
|
|
$
|
3,451
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
$
|
3,451
|
|
|
$
|
3,451
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants potentially settleable in cash
|
|
$
|
707
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
707
|
|
Total liabilities
|
|
$
|
707
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
707
|
|
|
|
|
|
|
Quoted
Prices in
Active
Markets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
Description
|
|
December 31, 2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,640
|
|
|
$
|
3,640
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
$
|
3,640
|
|
|
$
|
3,640
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants potentially settleable in cash
|
|
$
|
1,476
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,476
|
|
Total liabilities
|
|
$
|
1,476
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,476
|
|
The
Company has not transferred any financial instruments into or out of Level 3 classification during the six months ended June 30,
2017 or 2016. A reconciliation of the beginning and ending Level 3 liabilities for the six months ended June 30, 2017 and 2016
is as follows (in thousands):
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
June 30, 2017
|
|
|
|
June 30, 2016
|
|
Balance, January 1,
|
|
$
|
1,476
|
|
|
$
|
4,115
|
|
Estimated fair value of warrants exchanged for common shares
|
|
|
-
|
|
|
|
(35
|
)
|
Change in fair value of warrants
|
|
|
(769
|
)
|
|
|
(2,211
|
)
|
Balance at June 30,
|
|
$
|
707
|
|
|
$
|
1,869
|
|
Note
3 – Stockholders’ equity
Common
Stock — The Company has authorized up to 800,000,000 shares of common stock, $0.001 par value per share, and had 726,531,530
shares issued and outstanding as of June 30, 2017.
On
April 20, 2017, the Company closed on proceeds of $3,000,000 in a private placement offering of 12,500,000 shares of the Company’s
common stock at a purchase price of $0.24 per share to three accredited investors, which included Chairman Dr. Raymond F. Schinazi
and OPKO Health, Inc., of which the Company’s director Dr. Phillip Frost is Chairman and Chief Executive Officer.
Shares
of common stock authorized for future issuance as follows as of June 30, 2017 (in thousands):
|
|
As of
June 30, 2017
|
|
Stock options issued and outstanding
|
|
|
23,051
|
|
Authorized for future option grants
|
|
|
49,668
|
|
Warrants outstanding
|
|
|
6,275
|
|
Total
|
|
|
78,994
|
|
The
common stock authorized for future option grants was not reserved by the Company. The Company currently does not have enough common
stock authorized to issue all the options authorized by the Company for future grants.
Note
4 – Warrants
The
following is a summary of activity in the number of warrants outstanding to purchase the Company’s common stock for the
six months ended June 30, 2016 (in thousands):
|
|
Warrants accounted for as: Equity
|
|
|
Warrants accounted for as:
Liabilities
|
|
|
|
April 2013
warrants
|
|
|
October 2013
Series A
warrants
|
|
|
January 2014
warrants
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
1,500
|
|
|
|
775
|
|
|
|
4,000
|
|
|
|
6,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, June 30, 2017
|
|
|
1,500
|
|
|
|
775
|
|
|
|
4,000
|
|
|
|
6,275
|
|
Expiration date
|
|
|
April 25, 2018
|
|
|
|
October 24, 2023
|
|
|
|
January 16, 2024
|
|
|
|
|
|
Warrants
consist of warrants potentially settleable in cash, which are liability-classified warrants, and equity-classified warrants.
Warrants
classified as liabilities
Liability-classified
warrants consist of warrants issued in connection with equity financings in October 2013 and January 2014 and potentially settleable
in cash and were determined not to be indexed to the Company’s own stock and are therefore accounted for as liabilities.
The
estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. Any decrease
or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the consolidated
statement of comprehensive loss as changes in fair value of derivative liabilities.
The
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.
The
fair value of the warrants classified as liabilities is estimated using the Black-Scholes option-pricing model with the following
inputs as of June 30, 2017:
|
|
October 2013
warrants
|
|
|
January 2014
warrants
|
|
|
|
|
|
|
|
|
Strike price
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
Expected term (years)
|
|
|
6.3
|
|
|
|
6.6
|
|
Cumulative volatility %
|
|
|
90
|
%
|
|
|
91
|
%
|
Risk-free rate %
|
|
|
2.10
|
%
|
|
|
2.11
|
%
|
Warrants
classified as equity
Warrants
that were recorded in equity at fair value upon issuance, and are not reported as liabilities on the balance sheet, are included
in the above table which shows all warrants.
Note
5 – Stock-based compensation
The
Company recorded approximately $54,000 and $268,000 of stock-based compensation related to employee stock options for the three
and six months ended June 30, 2017 and $719,000 and $1,436,000 for the three and six months ended June 30, 2016, respectively.
As of June 30, 2017, there was $751,000 of unrecognized compensation cost related to outstanding options that is expected to be
recognized as a component of the Company’s operating expenses over a weighted average period of 1.75 years.
The
administrator of the plans determines the times when an option may become exercisable at the time of grant. Vesting periods of
options granted to date have not exceeded five years. The options generally will expire, unless previously exercised, no later
than ten years from the grant date. The Company is using unissued shares for all shares issued for options and restricted share
awards.
The
following schedule presents activity in the Company’s outstanding stock options for the six months ended June 30, 2017 (in
thousands, except per share amounts):
|
|
|
Number of
shares
available
for grant
|
|
|
Total
options
outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance at December 31, 2016
|
|
|
|
48,368
|
|
|
|
24,351
|
|
|
$
|
0.30
|
|
|
$
|
5,457
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
|
1,300
|
|
|
|
(1,300
|
)
|
|
|
0.96
|
|
|
|
-
|
|
Balance at June 30, 2017
|
|
|
|
49,668
|
|
|
|
23,051
|
|
|
$
|
0.26
|
|
|
$
|
2,352
|
|
As
of June 30, 2017, options to purchase 23,051,200 shares of common stock, with an aggregate intrinsic value of $2,352,000, were
outstanding that were fully vested or expected to vest with a weighted average remaining contractual term of 4.1 years. As of
June 30, 2017, options to purchase 21,521,709 shares of common stock with a weighted average exercise price of $0.23 per share
and a weighted average remaining contractual term of 3.6 years were fully vested with an intrinsic value of $2,306,000.
The
aggregate intrinsic value of outstanding and exercisable options at June 30, 2017 was calculated based on the closing price of
the Company’s common stock as reported on the OTCQB market on June 30, 2017 of $0.223 per share less the exercise price
of the options. The aggregate intrinsic value is calculated based on the positive difference between the closing fair market value
of the Company’s common stock and the exercise price of the underlying options.
Note
6 – Net Loss per Share
The
Company accounts for and discloses net loss per common share in accordance with FASB ASC Topic 260,
Earnings Per Share
.
Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number
of common shares outstanding. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders
by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common
shares for all potential dilutive common shares outstanding. Potential common shares consist of shares issuable upon the exercise
of stock options and warrants.
The
following table sets forth the number of potential common shares excluded from the calculations of net loss per diluted share
because their inclusion would be anti-dilutive (in thousands):
|
|
For the three months ended
June 30
|
|
|
For the six months ended
June 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Options to purchase common stock
|
|
|
23,051
|
|
|
|
43,051
|
|
|
|
23,051
|
|
|
|
43,059
|
|
Warrants to purchase common stock
|
|
|
6,275
|
|
|
|
1,350
|
|
|
|
6,275
|
|
|
|
1,242
|
|
Total
|
|
|
29,326
|
|
|
|
44,401
|
|
|
|
29,326
|
|
|
|
44,301
|
|
Note
7 - Mortgage Note Receivable
In
June 2014, the Company acquired a mortgage note from a bank for $2,626,290 which is collateralized by, among other things, the
underlying real estate and related improvements. The property subject to the mortgage is owned by an entity managed by Daniel
Fisher, one of the founders of Biozone, and is currently under lease to Flavor Producers, Inc. At June 30, 2017, the carrying
amount of the mortgage note receivable was $1,294,000, consisting entirely of principal. The mortgage note has a maturity date
of August 1, 2032 and bears an interest rate of 7.24%.
In
2014, Daniel Fisher and his affiliate, 580 Garcia Properties LLC, brought multiple lawsuits against the Company involving its
predecessors and subsidiaries. The lawsuits have been settled and the complaints initiating them dismissed, without the Company
making any payments to either Mr. Fisher or 580 Garcia Properties LLC. In addition, the mortgage note discussed above is a promissory
note secured by a deed of trust under which 580 Garcia Properties LLC is the primary obligor. As of the time of the acquisition
by the Company of the promissory note, 580 Garcia Properties LLC, was delinquent in its obligation to make certain monthly payments
thereunder. Consequently, in December 2015, the Company issued notice of default letters to 580 Garcia Properties LLC, Daniel
Fisher, and Sharon Fisher for said delinquencies, and proceeded in accordance with rights of a secured real estate creditor under
California law, to initiate private foreclosure proceedings respecting the property, to foreclose under the promissory note secured
by the deed of trust. A foreclosure sale was set in accordance with California law for January 27, 2017. Prior to the date of
this foreclosure sale, Mr. Fisher filed a motion where he sought among other things an order of the court enjoining the foreclosure
sale, alleging wrongdoing by the Company and Biozone Pharmaceuticals, Inc. and others that Mr. Fisher claims the Company has direct
responsibility over. The court in the Fisher/Biozone Lawsuit heard oral argument on Mr. Fisher’s motion on March 2, 2017.
On March 23, 2017, the court ordered further briefing by March 30, 2017 on the issue of whether to enjoin the foreclosure sale.
On April 5, 2017, the court in the Fisher/Biozone Lawsuit entered a preliminary injunction barring the foreclosure sale until
further order, and since that time the Company has engaged in settlement discussions with Mr. Fisher and 580 Garcia Properties
LLC and others, to discuss an overall resolution. The Company cannot offer any assurances as to when, or if, any settlement will
be achieved, and the court has scheduled case management conferences to consider further proceedings, with the next case management
conference set for September 14, 2017.
Because
the Company intended to foreclose on the property and foreclosure was probable, in December 2016 the Company recognized an impairment
on the mortgage note receivable of $1,176,000 to adjust the carrying value of the note to its fair value. The fair value of the
note was determined by reference to the estimated fair value of the underlying property, which was determined based on analysis
of comparable properties and recent market data. Furthermore, as a result of the Company’s plan to divest of this asset
within the next twelve months, we are no longer recording interest income and the asset was reclassified from long-term to current
at December 31, 2016.
N
ote
8 – Income Taxes
Deferred
income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between
the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount
of deferred tax assets that, based on available evidence, are not expected to be realized.
As
a result of the Company’s cumulative losses, management has concluded that a full valuation allowance against the Company’s
net deferred tax assets is appropriate. The Company has recorded a net deferred tax liability of $20,462,000 as of June 30, 2017
and December 31, 2016 as it has not considered the deferred tax liability, which is related to acquired in-process research and
development, to be a future source of taxable income in evaluating the need for a valuation allowance against its deferred tax
assets due to the in-process research and development asset being considered an indefinite-lived intangible asset.
FASB
ASC Topic 740, Income Taxes (“ASC 740”), prescribes a recognition threshold and a measurement criterion for the financial
statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be
recognized, a tax position must be considered more likely than not to be sustained upon examination by taxing authorities. The
Company records interest and penalties related to uncertain tax positions as a component of the provision for income taxes. As
of June 30, 2017 and December 31, 2016, the Company had no unrecognized tax benefits.
The
Company currently files income tax returns in the United States federal and various state jurisdictions. The Company is not currently
under examination in any jurisdiction.
Note
9 - Contingencies
As
a publicly traded company, from time to time, the Company may be party to, or otherwise involved in, legal proceedings and inquiries
from regulators arising in the normal course of business. As of the date of this report, except as described below, the Company
is not aware of any proceedings, threatened or pending, against it which, if determined adversely, would have a material effect
on its business, results of operations, cash flows or financial position.
In
June 2014, the Company acquired a mortgage note from a bank, which is collateralized by, among other things, the underlying real
estate and related improvements. At June 30, 2017, the carrying amount of the mortgage note receivable was $1,294,000, consisting
entirely of principal. The Company is currently in legal proceedings regarding the mortgage note receivable and collateralized
real estate (see Note 7).
Note
10 - Transactions with Related Parties
Since
November 2014, the Company has leased its 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 $209,000. The
present lease expired June 30, 2017 and the Company is currently on a month-to-month term. The total rent expense was $63,000
and $111,000 for the three and six months ended June 30, 2017 and $46,000 and $92,000 for the three and six months ended 2016,
respectively.
Emory
University: Cocrystal Pharma has an exclusive license from Emory University for use of certain inventions and technology related
to inhibitors of HCV that were jointly developed by Emory and Cocrystal Pharma employees. The License Agreement is dated March
7, 2013 wherein Emory agrees to add to the Licensed Patents and Licensed Technology Emory’s rights to any patent, patent
application, invention, or technology application that is based on technology disclosed within three (3) years of March 7, 2013.
The agreement includes payments due to Emory ranging from $40,000 to $500,000 based on successful achievement of certain drug
development milestones. Additionally, Cocrystal may have royalty payments at 3.5% of net sales due to Emory with a minimum in
year one of $25,000 and increase to $400,000 in year five upon product commercialization. One of Cocrystal’s Directors,
Dr. Raymond Schinazi, is also a faculty member at Emory University and may share in these royalty payments with Emory.
Duke
University and Emory University: Cocrystal Pharma has entered an agreement to license various patents and know-how to use CRISPR/Cas9
technologies for developing a possible cure for hepatitis B virus (HBV) and human papilloma virus (HPV). This license allows Cocrystal
Pharma to develop and potentially commercialize a cure for HBV and HPV utilizing the underlying patents and technologies developed
by the universities. This agreement includes a non-refundable $100,000 license fee payable to Duke upon a determination of rights
letter from the U.S. Veterans Administration with respect to patents and know-how that disclaims any ownership interest. Future
royalties may be payable to Duke, ranging from 2-5% of net sales depending on achieving certain sales milestones, if commercial
products are developed using this know-how. One of Cocrystal’s Directors, Dr. Raymond Schinazi, is also a faculty member
at Emory University and may share in these royalty payments with Emory.