Cocrystal Pharma, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. Cocrystal is an early-stage antiviral drug discovery and development company, with programs focused on hepatitis C (HCV), influenza, and norovirus. It reported no revenue in 2017 or 2016 and has no approved products.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $5.822 million | $101.679 million |
| General and administrative expense | $2.440 million | $4.140 million |
| Operating loss | $8.262 million | $105.819 million |
| Net loss | $0.613 million | $74.874 million |
| Net loss per share | $0.03 | $3.18 basic |
| Cash used in operating activities | $6.903 million | $14.655 million |
Amounts are in U.S. dollars; statement figures are reported in thousands unless otherwise noted. The 2017 net loss was substantially lower than the operating loss largely because of a $6.880 million income tax benefit; it should not be read as evidence of operating profitability. Other income included a $0.907 million noncash gain from a decline in the fair value of warrant liabilities. No meaningful revenue-based margin is available.
At December 31, 2017, cash and cash equivalents were $0.748 million ($0.777 million including restricted cash); current assets were $2.176 million and current liabilities $1.406 million. Total liabilities were $16.026 million, including $1.007 million of convertible notes and a $13.582 million deferred tax liability. Total assets were $121.426 million, including $53.905 million of in-process research and development and $65.195 million of goodwill; stockholders’ equity was $105.400 million. The company had an accumulated deficit of $138.043 million.
Changes versus the prior year and unusual items
- Net loss fell from $74.874 million in 2016 to $0.613 million in 2017, while operating loss fell from $105.819 million to $8.262 million. The main reason was that 2016 included a $92.396 million impairment charge against acquired HCV in-process research and development; no impairment was recorded in 2017.
- Excluding the 2016 impairment, R&D expense decreased from $9.283 million to $5.822 million, reflecting lower spending after HCV Phase 1 activity. Management expected R&D expense to increase in 2018 as development advanced.
- The $6.880 million 2017 tax benefit primarily reflected remeasurement of deferred tax liabilities following the federal corporate tax rate reduction to 21%. The benefit was non-operating and largely noncash.
- Operating cash use decreased year over year, but financing activities provided $4.080 million in 2017, including $1.000 million from convertible notes and $3.000 million from common stock issuance. Cash and restricted cash declined by $2.863 million during the year.
Development status, outlook, and principal risks
- HCV: Lead candidate CC-31244, an NS5B non-nucleoside inhibitor, completed Phase 1a with favorable safety results and was in a Phase 1b study. Interim results reported rapid HCV RNA decline and slow rebound. The company described a U.S. Phase 2a study as planned for 2018 and was seeking a partner for further development. Three additional HCV candidates were preclinical.
- Influenza: CC-42344, a PB2 inhibitor, was selected as a preclinical lead. The company planned IND-enabling studies in 2018; it also anticipated preparation for an influenza Phase 1 start-up. These are plans, not assured milestones.
- Norovirus: The company was developing polymerase inhibitors and reported promising non-nucleoside inhibitor leads; the program remained preclinical.
- Management expected negative operating cash flow in 2018 and stated that cash on hand at March 16, 2018, approximately $1.9 million, was expected to last only through June 2018. It estimated that approximately $8–$10 million of additional capital would be needed to support planned operations for the next 12 months. It was exploring financing, including equity, convertible notes, and potential strategic arrangements.
- The filing and auditor identified substantial doubt about the company’s ability to continue as a going concern without adequate new financing. Failure to raise capital could delay or curtail trials, require further cost reductions, or threaten continued operations; future equity financing could dilute shareholders.
- In November 2017, the company issued $1.000 million of 8% convertible notes due in 2019. After year-end, it borrowed a further $1.000 million from OPKO Health through an 8% convertible note due in 2020. In February 2018, it received $1.4 million in a settlement and transfer of a mortgage note; the filing said the approximately $106,000 difference from its carrying value would be recognized as a gain in first-quarter 2018.
- The company reported ineffective disclosure controls and material weaknesses in financial reporting controls, including financial statement review and account reconciliation processes. The auditor issued an adverse opinion on internal control over financial reporting; management expected remediation during 2018.
- Other major risks include clinical and regulatory failure, competition, dependence on third-party research, clinical and manufacturing providers, intellectual-property challenges, and reliance on key personnel. In 2017 the company recorded no impairment of its HCV IPR&D, but stated that future impairment remained possible. It also mutually terminated its Duke University license agreement in September 2017.
Important facts for investors to verify
- Whether the company obtained sufficient financing to meet its stated $8–$10 million funding need and extend its runway beyond June 2018.
- Progress, timing, funding, and results for the planned HCV Phase 2a work and influenza IND-enabling activities; confirm actual trial initiation and any subsequent data.
- Whether the control weaknesses were remediated and independently tested, and whether future filings report effective controls.
- How the large IPR&D and goodwill balances are supported by updated development prospects and impairment testing.
- The terms, conversion effects, and potential dilution from outstanding and subsequent convertible notes, warrants, and equity issuance.
- The audited statements show $0.613 million net loss, but a $8.262 million operating loss; assess the noncash tax benefit and warrant fair-value movements separately from operating performance.