Cocrystal Pharma, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Cocrystal is a pre-revenue biotechnology company developing antiviral drug candidates; it reported no product revenue.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 or prior period |
|---|---|---|
| Research and development expense | $2.071 million | $3.342 million |
| General and administrative expense | $1.050 million | $1.992 million |
| Operating loss | $3.121 million | $5.334 million |
| Net loss | $2.548 million | $4.012 million |
| Net loss per share, basic and diluted | $0.00 loss per share, rounded | $0.01 loss per share |
| Cash used in operating activities | $2.052 million | $4.042 million |
| Cash and cash equivalents, March 31 | $1.555 million | $10.242 million at March 31, 2016 |
At March 31, 2017, total assets were $122.518 million, including $53.905 million of in-process research and development and $65.195 million of goodwill. Total liabilities were $22.535 million, including $0.905 million of derivative liabilities and a $20.462 million deferred tax liability. The filing reports no conventional borrowings. Current assets were $3.100 million and current liabilities were $2.026 million. No operating margin is meaningful given the absence of revenue.
Changes versus the comparable period
- Operating expenses fell 42%, with R&D down 38% and G&A down 47%. Management attributed the reductions primarily to lower development and consulting costs, personnel turnover, and reduced compensation and stock-based compensation.
- Net loss narrowed by $1.464 million. Management emphasized operating loss as a more useful comparison because results included noncash changes in the fair value of warrant liabilities.
- Cash used in operations decreased by $1.990 million, but cash declined $2.085 million during Q1; there were no financing proceeds in the quarter.
- Derivative-liability fair-value gains were $0.571 million, versus $1.273 million in Q1 2016. These noncash gains reduced reported net loss in both periods.
Business, outlook, risks and unusual items
- Pipeline: CC-31244, an HCV polymerase inhibitor, completed Phase 1a and Phase 1b enrollment; interim Phase 1b results were presented in February 2017. The company reported rapid declines in HCV RNA and no viral breakthrough during treatment, and is seeking a development partner. CC-42344 was selected as a preclinical influenza lead, with IND-enabling studies planned for 2017. Norovirus polymerase inhibitors remained in preclinical development.
- Funding and going concern: The company had an accumulated deficit of approximately $140 million, no established revenue source sufficient to cover costs, and expected substantial future losses and negative operating cash flows. Management stated that these conditions raised substantial doubt about the company’s ability to continue as a going concern and that additional funding was required. A subsequent private placement closed April 20, 2017, raising $3.0 million through issuance of 12.5 million shares at $0.24 each.
- Mortgage note and litigation: A $1.294 million mortgage note receivable was subject to foreclosure litigation. On April 5, 2017, a court enjoined the planned foreclosure sale pending further proceedings; the company could not predict when or whether a sale would occur or its outcome. The note had been impaired by $1.176 million in December 2016, and the company had stopped recognizing interest income.
- Other legal matters: The company was cooperating with an SEC staff document subpoena and could not predict whether proceedings would follow. A proposed consent judgment in a separate matter contemplated a $7,500 payment, subject to execution and court approval.
- Internal controls: Management concluded internal control over financial reporting was ineffective at March 31, 2017, citing material weaknesses in the control environment, segregation of duties, review of complex accounting, related-party transaction controls, and financial reporting. Remediation was underway, with completion expected during 2017; weaknesses were not considered remediated pending testing.
- Other exposures: The company disclosed related-party facility lease expense of $47,000 for the quarter and potential milestone and royalty obligations under university licenses. No specific financial guidance was provided.
Important facts for investors to verify
- Whether the $3.0 million April placement and any subsequent financing provide adequate liquidity, given the $1.555 million quarter-end cash balance and expected operating losses.
- Progress, safety and efficacy evidence, regulatory requirements, and partner prospects for CC-31244 and other pipeline candidates; reported Phase 1b findings were interim.
- Developments in the mortgage-note foreclosure litigation and the recoverability of the $1.294 million receivable.
- Whether management remediates and independently tests the disclosed material weaknesses, particularly around complex accounting estimates and related-party transactions.
- Potential dilution from outstanding options and warrants, and the impact of future equity financing on existing shareholders.