Cocrystal Pharma, Inc. Fair Value Disclosure
10. Fair Value Measurement
ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 — quoted prices in active markets for identical assets or liabilities.
Level 2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.
Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.
The Company categorized its cash equivalents as Level 1 fair value measurements. The warrants are valued using the Black-Scholes option-pricing model as discussed in Note 8 above.
The following table presents a summary of fair values of assets and liabilities that are remeasured at fair value at each balance sheet date as of December 31, 2017 and 2016, and their placement within the fair value hierarchy as discussed above (in thousands):
| December 31, | Quoted Prices in Active Markets | Significant Other Observable Inputs | Unobservable Inputs | |||||||||||||
| Description | 2017 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Assets: | ||||||||||||||||
| Cash, cash equivalents, and restricted cash | $ | 777 | $ | 777 | $ | - | $ | - | ||||||||
| Liabilities: | ||||||||||||||||
| Warrants potentially settleable in cash | $ | 569 | $ | - | $ | - | $ | 569 | ||||||||
| December 31, | Quoted Prices in Active Markets | Significant Other Observable Inputs | Unobservable Inputs | |||||||||||||
| Description | 2016 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Assets: | ||||||||||||||||
| Cash, cash equivalents, and restricted cash | $ | 3,640 | $ | 3,640 | $ | - | $ | - | ||||||||
| Liabilities: | ||||||||||||||||
| Warrants potentially settleable in cash | $ | 1,476 | $ | - | $ | - | $ | 1,476 | ||||||||
The Company has not transferred any financial instruments into or out of Level 3 classification during the years ended December 31, 2017, 2016, or 2015. A reconciliation of the beginning and ending Level 3 liabilities for the years ended December 31, 2017, 2016 and 2015, is as follows (in thousands):
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Balance, January 1, | $ | 1,476 | $ | 4,115 | $ | 8,464 | ||||||
| Value of warrants converted in cashless exercise | - | (36 | ) | (14,265 | ) | |||||||
| Change in fair value of warrants for the year ended | (907 | ) | (2,603 | ) | 9,916 | |||||||
| Balance at December 31, | $ | 569 | $ | 1,476 | $ | 4,115 | ||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2017 | Mar 21, 2018 | Showing above |
| 2016 | Mar 31, 2017 | |
| 2015 | Mar 15, 2016 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.