Cocrystal Pharma, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Cocrystal is a development-stage biotechnology company pursuing antiviral drug candidates; it reported no product revenue.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise. Margins are not meaningful because the company had no revenue.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Research and development expense | $1.119 | $1.255 | $1.997 | $3.325 |
| General and administrative expense | $1.013 | $(0.055) | $2.205 | $0.996 |
| Total operating expenses / operating loss | $2.132 | $1.200 | $4.202 | $4.321 |
| Net loss | $1.343 | $1.002 | $2.897 | $3.551 |
| Loss per share, basic and diluted | $0.05 | $0.04 | $0.11 | $0.15 |
- At June 30, cash and cash equivalents were $6.841 million, plus $0.029 million restricted cash; total assets were $126.325 million. Current liabilities were $1.053 million and total liabilities $13.679 million. The balance sheet showed no convertible notes payable at period-end.
- Six-month operating cash use was $4.171 million; investing activities provided $1.395 million, primarily from collecting the mortgage note; financing activities provided $8.869 million. Cash and cash equivalents increased by $6.093 million during the period.
- Accumulated deficit was $140.940 million. Goodwill was $65.195 million and in-process research and development was $53.905 million. Management’s interim goodwill assessment found no impairment, with estimated fair value approximately $25 million above book value.
Changes versus the prior comparable periods
- Six-month R&D expense fell 40% from 2017, which management attributed primarily to the timing of clinical-trial activity. Q2 R&D declined 11% for the same stated reason.
- G&A increased from a 2017 Q2 credit of $0.055 million to expense of $1.013 million; six-month G&A rose $1.209 million. The comparison reflects 2017 reductions from an $0.896 million insurance reimbursement of prior legal costs and a $0.132 million reversal of executive stock-compensation expense.
- Six-month net loss improved to $2.897 million from $3.551 million, including a $0.973 million income-tax benefit and a $0.106 million gain on disposal of the mortgage note. Q2 net loss increased to $1.343 million from $1.002 million.
- Operating cash use increased to $4.171 million from $3.137 million for the first half of 2017.
Business outlook, financing, and risks
- Pipeline: The FDA cleared the IND for HCV candidate CC-31244 in March 2018. A Phase 2a study began dosing in June, combining CC-31244 with an approved HCV drug; the company expected topline data in 2018 and reported partnership discussions. For influenza, CC-42344 was selected as a preclinical lead; the company planned to complete IND-enabling work near year-end 2018 and start a Phase 1 study in the first half of 2019. Norovirus inhibitor research continued.
- Going concern and funding: The company said it had never been profitable, had no approved products or product-sales revenue, and expected substantial operating losses and negative operating cash flow for several years. Management stated it did not believe available funds were sufficient for planned operations over the next 12 months; the filing cites substantial doubt about the company’s ability to continue as a going concern. Failure to raise capital could require cessation or substantial curtailment of development.
- The May public offering generated approximately $8 million gross and $7.7 million net. All outstanding 8% convertible notes were converted in May into 1.085 million shares, settling approximately $2.062 million of principal and accrued interest. In July, the company entered an at-the-market equity distribution agreement for up to $10 million; no shares had been sold under it by the filing date. Management believed raising at least $2 million through the agreement would fund operations for more than 12 months. Further equity financing may materially dilute shareholders.
- Risks include clinical, safety, efficacy, regulatory and commercialization uncertainty; competition; dependence on financing and partnerships; and possible impairment of substantial goodwill and IPR&D. The company identified a decline in market capitalization as an impairment indicator, though its June assessment found no goodwill impairment.
- Disclosure controls were deemed ineffective at June 30, 2018 because of previously identified material weaknesses in financial reporting reviews and account-reconciliation controls. Remediation was underway, but management said the weaknesses would not be considered remediated until controls had operated effectively for a sufficient period and been tested.
- The company settled the Fisher/580 Garcia Properties disputes for a $1.4 million payment in February 2018 and released the mortgage note and deed of trust. In a separate lawsuit, a magistrate recommended dismissal without prejudice for lack of personal jurisdiction; the plaintiff objected, and no hearing was scheduled as of the filing.
Important facts for investors to verify
- Whether the company raised at least $2 million through the post-quarter $10 million equity distribution agreement, and how much runway any proceeds provide.
- Timing and results of the CC-31244 Phase 2a topline data, and progress toward CC-42344 IND-enabling studies and the planned Phase 1 start.
- Quarterly operating cash use, financing needs, and whether management’s going-concern risk has changed.
- Progress in remediating material weaknesses and the outcome of future goodwill and IPR&D impairment assessments.
- Potential dilution from future equity issuance and outstanding options and warrants; the filing also reports that shareholders subsequently approved reducing authorized common shares from 800 million to 100 million.