N
otes to the Condensed Consolidated
Financial Statements
September 30, 2016
(unaudited)
Note 1- Organization and Significant Accounting
Policies
The Company
Cocrystal Pharma, Inc. (“the Company”) was formerly
incorporated in Nevada under the name Biozone Pharmaceuticals, Inc.
On January 2, 2014, Biozone Pharmaceuticals, Inc. sold
substantially all of its assets to MusclePharm Corporation
(“MusclePharm”), and, on the same day, merged with
Cocrystal Discovery, Inc. (“Discovery”) in a
transaction accounted for as a reverse merger. Following the
merger, the Company assumed Discovery’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 is a biotechnology company which 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, norovirus, hepatitis B virus and human
papillomavirus. By concentrating our research and development
efforts on viral replication inhibitors, we plan to leverage our
infrastructure and expertise in these areas.
The Company operates in only one segment. Management uses cash flow
as the primary measure to manage its business and does not segment
its business for internal reporting or
decision-making.
The Company’s activities since inception have consisted
principally of acquiring product and technology rights, raising
capital, and performing research and development. Successful
completion of the Company’s development programs, obtaining
regulatory approvals of its products and, ultimately,
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, 2016, the Company has funded its operations
primarily through equity offerings.
As of September 30, 2016, the Company had an accumulated deficit of
$71.7 million. During the three and nine month periods ended
September 30, 2016, the Company had losses from operations of $1.9
million and $11.4 million, respectively. Cash used in operating
activities was approximately $12.4 million for the nine months
ended September 30, 2016. 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, 2016 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2016 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, 2015 as filed with the U.S.
Securities and Exchange Commission (“SEC”). The
accompanying condensed consolidated balance sheet as of September
30, 2016 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, 2016 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 (See Note
11).
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 August 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-15,
Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going
Concern
(ASU 2014-15). ASU
2014-15 requires management to determine whether substantial doubt
exists regarding the entity’s going concern presumption,
which generally refers to an entity’s ability to meet its
obligations as they become due. If substantial doubt exists but is
not alleviated by management’s plan, the footnotes must
specifically state that “there is substantial doubt about the
entity’s ability to continue as a going concern within one
year after the financial statements are issued”. In addition,
if substantial doubt exists, regardless of whether such doubt was
alleviated, entities must disclose (a) principal conditions or
events that raise substantial doubt about the entity’s
ability to continue as a going concern (before consideration of
management’s plans, if any); (b) management’s
evaluation of the significance of those conditions or events in
relation to the entity’s ability to meet its obligations; and
(c) management’s plans that are intended to mitigate the
conditions or events that raise substantial doubt, or that did
alleviate substantial doubt, about the entity’s ability to
continue as a going concern. If substantial doubt has not been
alleviated, these disclosures should become more extensive in
subsequent reporting periods as additional information becomes
available. In the period that substantial doubt no longer exists
(before or after considering management’s plans), management
should disclose how the principal conditions and events that
originally gave rise to substantial doubt have been resolved. The
ASU applies prospectively to all entities for annual periods ending
after December 15, 2016, and to annual and interim periods
thereafter. Early adoption is permitted. The Company has not yet
adopted the provisions of this ASU.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. The 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 a term longer than 12 months. Leases will be
classified as either finance or operating, with classification
affecting the pattern of expense recognition in the income
statement. The Company is currently evaluating the
impact of its pending adoption of the new standard on its
consolidated financial statements.
In April 2016, the FASB issued ASU No. 2016-09, Stock Compensation
Topic 718:
Improvements to Employee
Share-based Payment Accounting
.
This ASU simplifies the accounting for stock compensation on income
tax accounting, classification of awards as either equity or
liabilities, estimating forfeitures, and cash flow
presentation. Based on this ASU, an entity should
recognize all excess tax benefits and tax deficiencies, including
tax benefits of dividends on share-based payment awards, as income
tax expense or benefit in the income statement; they do not need to
include the effects of windfalls and shortfalls in the annual
effective tax rate estimate from continuing operations used for
interim reporting purposes. As a result of including
income tax effects from windfalls and shortfalls in income tax
expense, the calculation of both basic and diluted EPS will be
affected. The ASU also provides an accounting policy
election for awards with service conditions to either estimate the
number of awards that are expected to vest (consistent with
existing U.S. GAAP) or account for forfeitures when they occur. The
ASU increases the allowable statutory tax withholding threshold to
qualify for equity classification from the minimum statutory
withholding requirements up to the maximum statutory tax rate in
the applicable jurisdiction(s). The ASU clarifies that cash paid to
a taxing authority by an employer when directly withholding
equivalent shares for tax withholding purposes should be considered
similar to a share repurchase, and thus classified as a financing
activity. All other employer withholding taxes on compensation
transactions and other events that enter into the determination of
net income continue to be presented within operating
activities. The new standard takes effect in 2017 for
public business entities and 2018 for all other entities. The
Company has not adopted the provisions of ASU No. 2016-09. The
Company is currently evaluating the impact of adopting ASU 2016-09
on its consolidated financial statements.
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, 2016 and December 31, 2015, and
their placement within the fair value hierarchy as discussed above
(in thousands):
|
|
Quoted
Prices in Active Markets
|
Significant
Other Observable Inputs
|
|
Description
|
|
|
|
|
Assets:
|
|
|
|
|
Cash
and cash equivalents
|
$
5,906
|
$
5,906
|
$
-
|
$
-
|
Total
assets
|
$
5,906
|
$
5,906
|
$
-
|
$
-
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Warrants
potentially settleable in cash
|
$
1,907
|
$
-
|
$
-
|
$
1,907
|
Total
liabilities
|
$
1,907
|
$
-
|
$
-
|
$
1,907
|
|
December
31,
|
Quoted Prices in Active Markets
|
Significant Other
Observable
Inputs
|
|
Description
|
2015
|
|
|
|
Assets:
|
|
|
|
|
Cash
and cash equivalents
|
$
9,276
|
$
9,276
|
$
-
|
$
-
|
Total
assets
|
$
9,276
|
$
9,276
|
$
-
|
$
-
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Warrants
potentially settleable in cash
|
$
4,115
|
$
-
|
$
-
|
$
4,115
|
Total
liabilities
|
$
4,115
|
$
-
|
$
-
|
$
4,115
|
The Company has not transferred any financial instruments into or
out of Level 3 classification during the nine months ended
September 30, 2016 or 2015. A reconciliation of the beginning and
ending Level 3 liabilities for the nine months ended September 30,
2016 and 2015 is as follows:
|
Fair
Value Measurements
Using
Significant Unobservable Inputs
(Level
3)
|
|
|
|
Balance
, January 1,
|
$
4,115
|
$
8,464
|
Estimated
fair value of warrants exchanged for common shares
|
(35
)
|
(13,862
)
|
Change
in fair value of warrants
|
(2,173
)
|
8,494
|
Balance
at September 30, 2016 and 2015
|
$
1,907
|
$
3,096
|
Note 3
– Stockholders’ equity
Preferred Stock — The Company has authorized up to 5,000,000
shares of preferred stock, $0.001 par value per share, for
issuance. In connection with the Merger Agreement with Discovery,
the Company issued to Discovery’s security holders 1,000,000
shares of the Company’s Series B Convertible Preferred Stock
(“Series B”). The Series B shares automatically
converted into 205,083,086 shares of the Company’s common
stock on March 3, 2015 as a result of the Company’s
shareholders approving an increase in the number of the
Company’s authorized common shares to
800,000,000.
In connection with the merger with RFS Pharma in November 2014, the
Company created a new series of Series A Preferred Stock
(“Series A”). The Series A shares
automatically converted into 340,760,802 shares of the
Company’s common stock on March 3, 2015 as a result of the
Company’s shareholders approving an increase in the number of
the Company’s authorized common shares to
800,000,000.
Common Stock — The Company has authorized up to 800,000,000
shares of common stock, $0.001 par value per share, and had
714,031,508 shares issued and outstanding as of September 30,
2016.
On March 9, 2016, we accepted subscription agreements representing
investor commitments totaling $5,004,371 in a private placement
offering of 9,812,492 shares of our common stock at a purchase
price of $0.51 per share. The purchasers included seven members of
our board of directors including Dr. Raymond F. Schinazi and Dr.
Phil Frost. As of the date of this report, we have received all of
the committed funds.
On September 1, 2016, we closed on proceeds of $4,008,201 in a
private placement offering (the “Offering”) of
9,776,100 shares of our common stock at a purchase price of $0.41
per share. The purchasers included three members of our board of
directors, including Chairman Dr. Raymond F. Schinazi, Interim
Chief Executive Officer Dr. Gary Wilcox, and Dr. David Block. In
addition, OPKO Health, Inc., of which one of our director's Dr.
Phillip Frost is Chairman and Chief Executive Officer, invested in
the Offering.
Shares of common stock are reserved for future issuance as follows
as of September 30, 2016 (in thousands):
|
As of
September
30,
2016
|
|
|
Stock
options issued and outstanding
|
24,651
|
Options
reserved for future issuance under the Company's 2015 Incentive
Plan
|
47,885
|
Warrants
outstanding
|
6,275
|
Total
|
78,811
|
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, 2016 (in thousands):
|
Warrants accounted for as:
|
|
Warrants accounted for as:
|
|
|
Equity
|
|
Liabilities
|
|
|
|
|
|
|
|
October
2013 Series A
warrants
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
650
|
455
|
1,500
|
|
1,000
|
775
|
4,000
|
8,380
|
|
|
|
|
|
|
|
|
|
Warrants
Expired
|
(650
)
|
(455
)
|
-
|
|
(889
)
|
-
|
-
|
(1,994
)
|
Warrants
exercised
|
-
|
-
|
-
|
|
(111
)
|
-
|
-
|
(111
)
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2016
|
-
|
-
|
1,500
|
|
-
|
775
|
4,000
|
6,275
|
|
|
|
|
|
|
|
|
|
Expiration
date
|
|
|
|
|
|
|
|
|
|
Expired
|
Expired
|
|
|
Expired
|
|
|
|
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 February 2012, October 2013
and January 2014. The remaining warrants issued in
February 2012 expired during the first quarter of
2016. The remaining outstanding warrants issued in
October 2013 and January 2014 are potentially settleable in cash
and were determined not to be indexed to the Company’s own
stock and are therefore accounted for as liabilities.
The estimated fair value of outstanding warrants accounted for as
liabilities is determined at each balance sheet date. Any decrease
or increase in the estimated fair value of the warrant liability
since the most recent balance sheet date is recorded in the
consolidated statement of comprehensive loss as changes in fair
value of derivative liabilities. The fair value of the warrants
classified as liabilities is estimated using the Black-Scholes
option-pricing model with the following inputs as of September 30,
2016:
|
|
|
|
|
|
Strike
price
|
$
0.50
|
$
0.50
|
|
|
|
Expected
term (years)
|
7.1
|
7.3
|
Cumulative
volatility %
|
96
%
|
97
%
|
Risk-free
rate %
|
1.42
%
|
1.44
%
|
The Company’s expected volatility is based on a combination
of implied volatilities of similar publicly traded entities as well
as including the Company's own common stock volatility, given that
the Company has limited history of its own observable stock price.
The expected life assumption is based on the remaining contractual
terms of the warrants. The risk-free rate is based on the zero
coupon rates in effect at the balance sheet date. The dividend
yield used in the pricing model is zero, because the Company has no
present intention to pay cash dividends.
Warrants classified as equity
Warrants that were recorded in equity at fair value upon issuance,
and are not reported as liabilities on the balance sheet, are
included in the above table which shows all warrants.
Note 5 – Stock-based compensation
The Company reversed $1,392,000 of stock option expenses during the
third quarter of 2016 related to options that had been issued to
two executives that left the organization in July 2016 and which
had not vested. Stock option expenses recorded for the remaining
employees were $254,000, resulting in a negative stock option
expense of $1,138,000 for the three months ended September 30,
2016. For the nine months ended September 30, 2016 net stock option
expense was $299,000. For the three and nine months ended September
30, 2015, stock option expenses of $738,000 and $2,049,000 were
recognized, respectively. As of September 30, 2016, there was
$1,986,000 of unrecognized compensation cost related to outstanding
options that is expected to be recognized as a component of the
Company’s operating expenses over a weighted average period
of 2.4 years.
As of September 30, 2016, an aggregate of 72,536,000 shares of
common stock were reserved for issuance under the Company’s
Equity Incentive Plans, including 24,651,000 shares subject to
outstanding common stock options granted under the plan and
47,885,000 shares available for future grants. The administrator of
the plan 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,
2016 (in thousands, except per share amounts):
|
Number
of shares available for grant
|
Total
options outstanding
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
Balance
at December 31, 2015
|
29,485
|
43,071
|
$
0.48
|
$
17,867
|
Exercised
|
-
|
(20
)
|
0.15
|
-
|
Granted
|
-
|
-
|
-
|
-
|
Cancelled
|
18,400
|
(18,400
)
|
|
|
Balance
at September 30, 2016
|
47,885
|
24,651
|
$
0.31
|
$
7,619
|
As of September 30, 2016, options to purchase 24,651,200 shares of
common stock, with an aggregate intrinsic value of $7,619,000, were
outstanding that were fully vested or expected to vest with a
weighted average remaining contractual term of 4.2 years. As of
September 30, 2016, options to purchase 21,598,860 shares of common
stock, with an intrinsic value of $6,342,000 were exercisable with
a weighted average exercise price of $0.17 per share and a weighted
average remaining contractual term of 3.7 years.
The aggregate intrinsic value of outstanding and exercisable
options at September 30, 2016 was calculated based on the closing
price of the Company’s common stock as reported on the OTCQB
market on September 30, 2016 of $0.49 per share less the exercise
price of the options. The aggregate intrinsic value is calculated
based on the positive difference between the closing fair market
value of the Company’s common stock and the exercise price of
the underlying options.
Note 6 – Net Loss per Share
The Company accounts for and discloses net loss per common share in
accordance with FASB ASC Topic 260,
Earnings Per
Share
. Basic net loss per
common share is computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares
outstanding (which includes the common share equivalents of the
outstanding Series B preferred shares prior to their conversion to
common stock in March 2015). 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 computation of basic and diluted
net loss per share (amounts in thousands, except per share
amounts):
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|
|
|
|
|
Numerator:
|
|
|
|
|
Net
income (loss)
|
$
(1,881
)
|
$
(508
)
|
$
(9,120
)
|
$
(19,673
)
|
Change
in fair value of derivative liability - income/(loss)
|
-
|
3,036
|
2,173
|
-
|
Net
income (loss) attributable to shareholders
|
$
(1,881
)
|
$
(3,544
)
|
$
(11,293
)
|
$
(19,673
)
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted average shares outstanding used to compute net
income (loss) per share:
|
|
Basic
|
707,478
|
694,375
|
702,634
|
609,803
|
Adjustment
for dilutive effects of warrants
|
-
|
2,571
|
783
|
-
|
Diluted
|
707,478
|
696,946
|
703,417
|
609,803
|
|
|
|
|
|
Net
income (loss) per share
|
|
|
|
|
Basic
(net income / basic shares)
|
$
(0.00
)
|
$
(0.00
)
|
$
(0.01
)
|
$
(0.03
)
|
Diluted
(net income attributable/ diluted shares)
|
$
(0.00
)
|
$
(0.01
)
|
$
(0.02
)
|
$
(0.03
)
|
The following table sets forth the number of potential common
shares excluded from the calculations of net loss per diluted share
because their inclusion would be anti-dilutive (in
thousands):
|
For
the three months ended
September
30,
|
For
the nine months ended
September
30,
|
|
|
|
|
|
Options
to purchase common stock
|
24,651
|
24,614
|
24,651
|
24,614
|
Warrants
to purchase common stock
|
-
|
2,571
|
783
|
-
|
Total
|
24,651
|
27,185
|
25,434
|
24,614
|
Note 7 - Mortgage Note Receivable
In June 2014, the Company acquired a mortgage note from a bank for
$2,626,290 which is collateralized by, among other things, the
underlying real estate and related improvements. The property
subject to the mortgage is owned by 580 Garcia Properties, an
entity managed by Daniel Fisher, one of the founders of Biozone,
and is currently under lease to MusclePharm Corporation
(“MusclePharm”). At September 30, 2016, the carrying
amount of the mortgage note receivable was $2,507,000. The mortgage
note has a maturity date of August 1, 2032 and bears an interest
rate of 7.24%. The Company records its mortgage note receivable at
the amount advanced to the borrower, which includes the stated
principal amount and certain loan origination and commitment fees
that are recognized over the term of the mortgage note. Interest
income is accrued as earned over the term of the mortgage note. The
Company evaluates the collectability of both interest and principal
of the note to determine whether it is impaired. The note would be
considered to be impaired if, based on current information and
events, the Company determined that it was probable that it would
be unable to collect all amounts due according to the existing
contractual terms. If the note were considered to be impaired, the
amount of loss would be calculated by comparing the recorded
investment to the value determined by discounting the expected
future cash flows at the note’s effective interest rate or to
the fair value of the Company’s interest in the underlying
collateral, less the cost to sell. No impairment loss has been
recognized in connection with the mortgage note
receivable.
On December 23, 2015, the Company issued notice of default letters
to 580 Garcia Properties, Daniel Fisher and Sharon Fisher for
failure to remit certain payments on the promissory note. The
Company also exercised a failure to pay provision within that note
to escalate the interest rate from 7.24% to 11.24%. On
September 27, 2016, The Notice of Default and Election to Sell
under Deed of Trust was formally filed and recorded in Contra Costa
County California. As of September 8, 2016, the additional amounts
due the Company total approximately $206,000. Due to the contingent
nature of this default action, the Company has not recorded a
receivable for this amount in its financial statements. The
Company is no longer accepting scheduled payments from the
defendants until matter is resolved.
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 $49,875,000 as of
September 30, 2016 and December 31, 2015 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, 2016 and December 31, 2015, 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
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.
The Company has been named as a party to a lawsuit filed on April
15, 2014 in Contra Costa County, California by an entity managed by
Mr. Daniel Fisher. Also named in this action are two of the
Company’s subsidiaries – BioZone Laboratories and
Cocrystal Discovery. The action seeks recovery on a
promissory note purportedly executed by BioZone Laboratories in the
principal amount of $295,000 in 2007, or almost seven years before
the Company’s acquisition of Cocrystal Discovery.
Motions challenging the sufficiency of the allegations in the
complaint were filed in the third quarter, 2014. The motions were
granted and plaintiff was given an opportunity to amend the
complaint, and plaintiff has filed an amended complaint. On July 2,
2015 the Company, along with its subsidiaries and other named
defendants, filed a motion to bifurcate the action, and stay
discovery on one of the causes of action. This motion was
granted on August 27, 2015 and the Court limited the scope of
discovery in the first phase of the case. The Court also
ordered that the Company post a bond for the amount of $295,000,
and the Company complied with the Order by posting the bond on
September 29, 2015. This is recorded as a short-term deposit.
At a hearing held April 19, 2016 the Court ordered the
parties to attempt resolution through a mediation. This
mediation took place May 19, 2016 with no resolution. A trial date
has been set for February 2017.
On October 13, 2013, Plaintiff Shefa LMV, LLC ("Plaintiff") filed a
First Amended Complaint in Los Angeles Superior Court for civil
penalties and injunctive relief against numerous retailers and
manufacturers of products, and alleged violations of California
Health & Safety Code Sec. 25249.6 (part of the "Safe Drinking
Water and Toxic Enforcement Act") and California Business &
Professional Code Sec. 17200, et seq. (California's "Unfair
Competition Law"). The case is captioned Shefa LMV, LLC
v. Walgreens Co., et al., LASC Case No. BC520416. The
complaint alleges that the retailers and manufacturers failed to
place a clear and reasonable warning on the products which
contained "Cocamide DEA" pursuant to the Safe Drinking Water and
Toxic Enforcement Act, and further requested that the defendants be
enjoined from manufacturing or selling products with Cocamide DEA
in the State of California. Numerous actions that had
been filed alleging similar claims against defendants who
manufactured and/or sold Cocamide DEA products have been
coordinated, with a new Judicial Council Coordination Proceeding
Case No. JCCP 4765. On October 17, 2014, Plaintiff filed
an amendment to the Complaint, adding BioZone Laboratories, Inc. a
California corporation, as Doe Defendant No. 9. The
Company filed an Answer to the First Amended Complaint on October
13, 2015. No discovery has taken place yet.
In October 2015, Cocrystal Pharma, Inc. received a subpoena from
the staff of the Securities and Exchange Commission seeking the
production of documents. The Company is fully cooperating
with the inquiry. The Company cannot predict or determine
whether any proceeding may be instituted in connection with the
subpoena or the outcome of any proceeding that may be
instituted.
On December 23, 2015, the Company issued notice of default letters
to 580 Garcia Properties, Daniel Fisher and Sharon Fisher for
failure to remit certain payments on a promissory note executed
between the parties in June 2014. On September 27, 2016, The
Notice of Default and Election to Sell under Deed of Trust was
formally filed and recorded in Contra Costa County California. The
additional amounts due the Company have not been recorded in its
financial statements.
Note 10 - Transactions with Related Parties
As part of the merger (that occurred on November 25, 2014) with RFS
Pharma, LLC, Cocrystal assumed the lease for RFS Pharma facilities
located in Tucker, Georgia. This lease was amended on January
1, 2014 and expires on December 31, 2016 for approximately 5,626
square feet of office and laboratory space. Cocrystal leases the
Tucker, Georgia facility from a trust established, in part, for the
benefit of one of Cocrystal’s Directors, Dr. Raymond
Schinazi.
This lease terminates
December 31, 2016. The total rent expense was $59,000
and $177,000 for the three and nine months ended September 30,
2016, respectively, and $55,000 and $165,000 for the three and nine
months ended September 30, 2015, 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 to 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 to Emory.
We have engaged seven physicians that comprise our Scientific
Advisory Board. These physicians are compensated
approximately $25,000 per quarter collectively for providing their
expertise. Three of these physicians are also investors in
our company.
Note 11 – Subsequent Events
None