Notes
to the Condensed Consolidated Financial Statements
September
30, 2017
(unaudited)
Note
1- Organization and Significant Accounting Policies
The
Company
Cocrystal
Pharma, Inc. (“the Company”) is a biotechnology company that develops novel medicines for use in the treatment of
human viral diseases. Cocrystal has developed proprietary structure-based drug design technology and antiviral nucleoside chemistry
to create antiviral drug candidates. Our focus is to pursue the development and commercialization of broad-spectrum antiviral
drug candidates designed to transform the treatment and/or prophylaxis of hepatitis C virus, influenza virus and norovirus. By
concentrating our research and development efforts on viral replication inhibitors, we plan to leverage our infrastructure and
expertise in these areas.
Cocrystal
Pharma, Inc. was formerly incorporated in Nevada under the name Biozone Pharmaceuticals, Inc. On January 2, 2014, Biozone Pharmaceuticals,
Inc. sold substantially all of its assets to MusclePharm Corporation (“MusclePharm”), and, on the same day, merged
with Cocrystal Discovery, Inc. (“Discovery”) in a transaction accounted for as a reverse merger. Following the merger,
the Company assumed Discovery’s business plan and operations. On March 18, 2014, the Company reincorporated in Delaware
under the name Cocrystal Pharma, Inc.
Effective
November 25, 2014, Cocrystal Pharma, Inc. and affiliated entities completed a series of merger transactions as a result of which
Cocrystal Pharma, Inc. merged with RFS Pharma, LLC, a Georgia limited liability company (“RFS Pharma”). We refer to
the surviving entity of this merger as “Cocrystal” or the “Company.”
The
Company operates in only one segment. Management uses cash flow as the primary measure to manage its business and does not segment
its business for internal reporting or decision-making.
The
Company’s activities since inception have 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, achieving profitable operations are dependent on, among other things, its ability to
access potential markets, securing financing, attracting, retaining and motivating qualified personnel, and developing strategic
alliances. Through September 30, 2017, the Company has funded its operations through equity offerings.
As
of September 30, 2017, the Company had an accumulated deficit of $143.2 million. During the three and nine month periods ended
September 30, 2017, the Company had losses from operations of $2.1 million and $6.4 million, respectively. Cash used in operating
activities was approximately $5.3 million for the nine months ended September 30, 2017. The Company has not yet established an
ongoing source of revenue sufficient to cover its operating costs. The ability of the Company to continue as a going concern is
dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. The Company can give
no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs, or that any
such financing will be obtainable on acceptable terms. If the Company is unable to obtain adequate capital, it could be forced
to cease operations or substantially curtail its drug development activities. These conditions raise substantial doubt as to the
Company’s ability to continue as a going concern. The Company expects to continue to incur substantial operating losses
and negative cash flows from operations over the next several years during its pre-clinical and clinical development phases.
Basis
of Presentation and Significant Accounting Policies
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete
financial statement presentation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Operating
results for the nine month period ended September 30, 2017 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2017 or any future interim periods. All intercompany accounts and transactions have been eliminated
in consolidation.
These
unaudited condensed financial statements should be read in conjunction with the audited financial statements and footnotes included
in the Cocrystal Pharma, Inc. Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the U.S. Securities
and Exchange Commission (“SEC”). The accompanying condensed consolidated balance sheet as of September 30, 2017 has
been derived from the audited financial statements as of that date, but does not include all of the information and notes required
by GAAP. The Company has evaluated subsequent events after the balance sheet date of September 30, 2017 through the
date it has filed these unaudited condensed consolidated financial statements with the SEC and has disclosed all events or transactions
that would require recognition or disclosures in these unaudited condensed consolidated financial statements.
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
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 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 September 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
|
|
September
30, 2017
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,345
|
|
|
$
|
1,345
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
assets
|
|
$
|
1,345
|
|
|
$
|
1,345
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
potentially settleable in cash
|
|
$
|
855
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
855
|
|
Total
liabilities
|
|
$
|
855
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
855
|
|
|
|
|
|
|
Quoted
Prices in Active Markets
|
|
|
Significant
Other
Observable Inputs
|
|
|
Unobservable
Inputs
|
|
Description
|
|
December
31, 2016
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,640
|
|
|
$
|
3,640
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
assets
|
|
$
|
3,640
|
|
|
$
|
3,640
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
potentially settleable in cash
|
|
$
|
1,476
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,476
|
|
Total
liabilities
|
|
$
|
1,476
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,476
|
|
The
Company has not transferred any financial instruments into or out of Level 3 classification during the nine months ended September
30, 2017 or 2016. A reconciliation of the beginning and ending Level 3 liabilities for the nine months ended September 30, 2017
and 2016 is as follows:
|
|
Fair
Value Measurements
Using Significant Unobservable
Inputs
(Level 3)
|
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
Balance,
January 1,
|
|
$
|
1,476
|
|
|
$
|
4,115
|
|
Estimated
fair value of warrants exchanged for common shares
|
|
|
-
|
|
|
|
(35
|
)
|
Change
in fair value of warrants
|
|
|
(621
|
)
|
|
|
(2,173
|
)
|
Balance
at September 30, 2017 and 2016
|
|
$
|
855
|
|
|
$
|
1,907
|
|
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 728,238,507
shares issued and outstanding as of September 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 September 30, 2017 (in thousands):
|
|
As
of
September 30, 2017
|
|
Stock
options issued and outstanding
|
|
|
21,344
|
|
Authorized
for future option grants
|
|
|
49,668
|
|
Warrants
outstanding
|
|
|
6,275
|
|
Total
|
|
|
77,287
|
|
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
nine months ended September 30, 2017 (in thousands):
|
|
Warrants
accounted for
as:
Equity
|
|
|
Warrants
accounted for as:
Liabilities
|
|
|
|
April
2013
warrants
|
|
|
October
2013
Series A
warrants
|
|
|
January
2014
warrants
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2016
|
|
|
1,500
|
|
|
|
775
|
|
|
|
4,000
|
|
|
|
6,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding,
September 30, 2017
|
|
|
1,500
|
|
|
|
775
|
|
|
|
4,000
|
|
|
|
6,275
|
|
Expiration
date
|
|
|
April
25, 2018
|
|
|
|
October
24, 2023
|
|
|
|
January
16, 2024
|
|
|
|
|
|
Warrants
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 September 30, 2017:
|
|
October
2013 warrants
|
|
|
January
2014 warrants
|
|
|
|
|
|
|
|
|
Strike
price
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
Expected
term (years)
|
|
|
6.1
|
|
|
|
6.3
|
|
Cumulative
volatility %
|
|
|
88.00
|
%
|
|
|
89.00
|
%
|
Risk-free
rate %
|
|
|
2.11
|
%
|
|
|
2.12
|
%
|
The
Company’s expected volatility is based on a combination of implied volatilities of similar publicly traded entities as well
as including the Company's own common stock volatility, given that the Company has limited history of its own observable stock
price. The expected life assumption is based on the remaining contractual terms of the warrants. The risk-free rate is based on
the zero coupon rates in effect at the balance sheet date. The dividend yield used in the pricing model is zero, because the Company
has no present intention to pay cash dividends.
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 $142,000 and $409,000 of stock-based compensation related to employee stock options for the three
and nine months ended September 30, 2017. For the three and nine months ended September 30, 2016, stock option expense was a ($1,138,000)
and $297,000, respectively. During the third quarter of 2016, the Company reversed $1,392,000 in stock option expenses related
to non-vested options issued to two executives that left the organization. Expense for the remaining employees were only $254,000,
resulting in the negative stock option expense for the three months ended September 30, 2016.
As
of September 30, 2017, there was $643,000 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 1.50 years.
The
administrator of the Company’s stock option plans determines the times when an option may become exercisable at the time
of grant. Vesting periods of options granted to date have not exceeded five years. The options generally will expire, unless previously
exercised, no later than ten years from the grant date. The Company is using unissued 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 nine months ended September 30,
2017 (in thousands, except per share amounts):
|
|
Number
of shares available
for
grant
|
|
|
Total
options
outstanding
|
|
|
Weighted
Average Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance
at December 31, 2016
|
|
|
48,368
|
|
|
|
24,351
|
|
|
$
|
0.30
|
|
|
$
|
5,457
|
|
Exercised
|
|
|
-
|
|
|
|
(1,707
|
)
|
|
|
0.05
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
1,300
|
|
|
|
(1,300
|
)
|
|
|
0.96
|
|
|
|
|
|
Balance
at September 30, 2017
|
|
|
49,668
|
|
|
|
21,344
|
|
|
$
|
0.28
|
|
|
$
|
2,874
|
|
As
of September 30, 2017, options to purchase 21,344,222 shares of common stock, with an aggregate intrinsic value of $2,874,000,
were outstanding that were fully vested or expected to vest with a weighted average remaining contractual term of 4.1 years. As
of September 30, 2017, options to purchase 20,464,222 shares of common stock with a weighted average exercise price of $0.24 per
share and a weighted average remaining contractual term of 3.6 years were fully vested with an intrinsic value of $2,874,000.
The
aggregate intrinsic value of outstanding and exercisable options at September 30, 2017 was calculated based on the closing price
of the Company’s common stock as reported on the OTCQB market on September 29, 2017 of $0.27 per share less the exercise
price of the options. The aggregate intrinsic value is calculated based on the positive difference between the closing fair market
value of the Company’s common stock and the exercise price of the underlying options.
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
September 30
|
|
|
For
the nine months ended
September 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Options
to purchase common stock
|
|
|
21,344
|
|
|
|
24,651
|
|
|
|
21,344
|
|
|
|
24,651
|
|
Warrants
to purchase common stock
|
|
|
6,275
|
|
|
|
-
|
|
|
|
6,275
|
|
|
|
783
|
|
Total
|
|
|
27,619
|
|
|
|
24,651
|
|
|
|
27,619
|
|
|
|
25,434
|
|
Note
7 - Mortgage Note Receivable
In
June 2014, the Company acquired a mortgage note from a bank for $2,626,290 which is collateralized by, among other things, the
underlying real estate and related improvements. The property subject to the mortgage is owned by an entity managed by Daniel
Fisher, one of the founders of Biozone, and to the Company’s knowledge, is currently being occupied by Flavor Producers,
Inc. in an instance where that company is not currently making rent payments. At September 30, 2017, the carrying amount of the
mortgage note receivable was $1,294,000, consisting entirely of principal. The mortgage note has a maturity date of August 1,
2032 and bears an interest rate of 7.24%.
In
2014, Daniel Fisher and his affiliate, 580 Garcia Properties LLC, brought multiple lawsuits against the Company involving its
predecessors and subsidiaries. The lawsuits have been settled and the complaints initiating them dismissed, without the Company
making any payments to either Mr. Fisher or 580 Garcia Properties LLC. In addition, the mortgage note discussed above is a promissory
note secured by a deed of trust under which 580 Garcia Properties LLC is the primary obligor. As of the time of the acquisition
by the Company of the promissory note, 580 Garcia Properties LLC, was delinquent in its obligation to make certain monthly payments
thereunder. Consequently, in December 2015, the Company issued notice of default letters to 580 Garcia Properties LLC, Daniel
Fisher, and Sharon Fisher for said delinquencies, and proceeded in accordance with rights of a secured real estate creditor under
California law, to initiate private foreclosure proceedings respecting the property, to foreclose under the promissory note secured
by the deed of trust. A foreclosure sale was set in accordance with California law for January 27, 2017. Prior to the date of
this foreclosure sale, Mr. Fisher filed a motion where he sought among other things an order of the court enjoining the foreclosure
sale, alleging wrongdoing by the Company and Biozone Pharmaceuticals, Inc. and others that Mr. Fisher claims the Company has direct
responsibility over. The court in the Fisher/Biozone Lawsuit heard oral argument on Mr. Fisher’s motion on March 2, 2017.
On March 23, 2017, the court ordered further briefing by March 30, 2017 on the issue of whether to enjoin the foreclosure sale.
On April 5, 2017, the court in the Fisher/Biozone Lawsuit entered a preliminary injunction barring the foreclosure sale until
further order, and since that time the Company has engaged in settlement discussions with Mr. Fisher and 580 Garcia Properties
LLC and others, to discuss an overall resolution of Fisher/Biozone claims of money damages allegedly caused to it by the transfer
of occupants at the property, and Company efforts to either bring the promissory note to a performing status or to otherwise monetize
the Company’s rights under the promissory note. The Company cannot offer any assurances as to when, or if, any settlement
will be achieved, and the court has scheduled case management conferences to consider further proceedings, with the next case
management conference set for November 30, 2017.
Because
the Company intended to foreclose on the property and foreclosure was probable, in December 2016 the Company recognized an impairment
on the mortgage note receivable of $1,176,000 to adjust the carrying value of the note to its fair value. The fair value of the
note was determined by reference to the estimated fair value of the underlying property, which was determined based on analysis
of comparable properties and recent market data. Furthermore, as a result of the Company’s plan to divest of this asset
within the next twelve months, we are no longer recording interest income and the asset was reclassified from long-term to current
at December 31, 2016.
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 September 30,
2017 and December 31, 2016 as it has not considered the deferred tax liability, which is related to acquired in-process research
and development, to be a future source of taxable income in evaluating the need for a valuation allowance against its deferred
tax assets due to the in-process research and development asset being considered an indefinite-lived intangible asset.
FASB
ASC Topic 740,
Income Taxes
(“ASC 740”), prescribes a recognition threshold and a measurement criterion for
the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those
benefits to be recognized, a tax position must be considered more likely than not to be sustained upon examination by taxing authorities.
The Company records interest and penalties related to uncertain tax positions as a component of the provision for income taxes.
As of September 30, 2017 and December 31, 2016, the Company had no unrecognized tax benefits.
The
Company currently files income tax returns in the United States federal and various state jurisdictions. The Company is not currently
under examination in any jurisdiction.
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 September 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 $233,000. The
present lease expired June 30, 2017 and the Company is currently on a month-to-month term. The total rent expense was $51,000
and $162,000 for the three and nine months ended September 30, 2017 and $59,000 and $177,000 for the three and nine months ended
2016, respectively.
Emory
University: The Company has an exclusive license from Emory University for use of certain inventions and technology related to
inhibitors of HCV that were jointly developed by Emory and Company employees. The 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, the Company may have royalty payments at 3.5% of net sales due to Emory with a minimum in year one of $25,000 and
increase to $400,000 in year five upon product commercialization. One of the Company’s Directors, Dr. Raymond Schinazi,
is also a faculty member at Emory University and may share in these royalty payments with Emory.
On
February 2, 2016, the Company entered into an agreement with Duke University and Emory University to license various patents and
know-how to use CRISPR/Cas9 technologies for developing a possible cure for hepatitis B virus (HBV) and human papilloma virus
(HPV). On September 25, 2017 (“Termination Date”), the Company mutually terminated the agreement with Duke University
and there are no further rights or obligations under this license agreement after the Termination Date.