Cocrystal Pharma, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unless otherwise noted, amounts are in millions of dollars. Cocrystal is a clinical-stage antiviral drug developer with no approved products or product-sale revenue.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $0.492 | — | $6.162 | — |
| Operating expenses | $2.300 | $2.419 | $6.643 | $6.621 |
| Operating loss | $(1.808) | $(2.419) | $(0.481) | $(6.621) |
| Net loss | $(1.780) | $(1.868) | $(0.324) | $(4.762) |
| Loss per share | $(0.06) | $(0.06) | $(0.01) | $(0.17) |
Nine-month revenue included a $4.368 million license-related amount recognized under the Merck collaboration and $1.794 million of research-cost reimbursements; Q3 included $0.492 million of reimbursements. The filing reports no product-sales revenue. No meaningful profit margin is reported; the company remained loss-making.
At September 30, cash was $5.994 million and restricted cash was $0.050 million, versus $2.723 million and $0.029 million, respectively, at year-end 2018. Total assets were $73.437 million, including $65.195 million of goodwill. Total liabilities were $2.692 million, including $0.740 million of operating lease liabilities and $0.172 million of finance lease liabilities. The filing reports no outstanding convertible notes. Cash and restricted cash increased $3.292 million during the nine months.
The cash-flow statement reports $0.333 million used in operations, $0.144 million used in investing, and $3.769 million provided by financing, chiefly from $3.928 million net equity proceeds, partly offset by finance-lease payments. Management’s discussion gives slightly different operating and financing cash-flow figures ($0.317 million used and $3.753 million provided); the filing text does not explain the discrepancy.
Changes versus prior comparable periods
- Revenue rose from zero, primarily due to the Merck agreement signed January 2, 2019. The agreement provides an upfront payment, reimbursement of specified R&D, potential development, regulatory and sales milestones of up to $156 million, and royalties. Merck funds program development, including clinical development, and controls worldwide commercialization. Merck may terminate before first commercial sale at its discretion.
- Nine-month net loss narrowed to $0.324 million from $4.762 million, reflecting collaboration revenue and the prior-year tax benefit and mortgage-note gain. Q3 net loss improved modestly to $1.780 million from $1.868 million.
- R&D expense decreased to $3.046 million for nine months from $3.464 million; G&A increased to $3.597 million from $3.157 million, with management citing higher audit and legal costs.
- Operating cash use declined substantially from $6.320 million in the prior-year period, which included no Merck revenue. Prior-year investing cash flow included $1.4 million of mortgage-note settlement proceeds.
Outlook, risks and notable items
- Management said cash on hand of approximately $7.2 million as of November 7, 2019 might not fund operations for the next 12 months, including unforeseen or higher legal costs. The filing states substantial doubt exists about the company’s ability to continue as a going concern; continued operations depend on additional capital and/or collaboration revenue. Management expects ongoing operating losses and negative operating cash flows during development.
- On November 4, 2019, after quarter-end, the company completed an offering for approximately $3.0 million gross and $2.6 million net proceeds, selling 3,529,412 shares at $0.85 per share to the public. The underwriter had a 45-day over-allotment option. This financing is dilutive.
- CC-31244 HCV Phase 2a results announced in January showed 8 of 12 subjects achieved SVR12, with no discontinuations due to adverse events. The final study report was then expected in Q1 2020. A separate Hong Kong Phase 2a study began in May 2019; civil unrest and political instability could delay or disrupt it. The filing also describes partnership discussions for CC-31244.
- For influenza A, the preclinical lead CC-42344 was undergoing IND-enabling work, with a Phase 1 study planned for 2020. Merck collaboration influenza A/B candidates remained preclinical.
- Goodwill of $65.195 million was unchanged, but management cited declining share price as a possible impairment indicator and planned further procedures by November 30, 2019.
- Litigation includes a securities class action, a stayed shareholder derivative suit, and a separate Pederson action seeking $0.8 million. Potential losses were not estimable and no loss contingency was recorded. The insurer initially declined coverage for the class and derivative actions; legal costs or an adverse outcome could be material.
- Management concluded disclosure controls were not effective at September 30, 2019 due to material weaknesses. Remediation was underway; management said weaknesses would not be considered remediated until controls operated effectively and were tested.
Investor verification points
- Confirm cash runway, going-concern assumptions, and the impact and dilution of the November 2019 offering.
- Review the Merck agreement’s termination provisions, reimbursement timing, milestone conditions, and actual collaboration receipts.
- Track HCV study completion and results, the Hong Kong study’s progress, and the anticipated influenza Phase 1 timing.
- Assess the goodwill impairment review and any subsequent impairment conclusion.
- Monitor litigation, insurance coverage, potential legal costs, and progress in remediating material weaknesses.
- Reconcile the MD&A cash-flow amounts with the condensed cash-flow statement.