Cocrystal Pharma, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Cocrystal is a clinical-stage biotechnology company developing antiviral drug candidates; it has no products approved for sale and is primarily funded by equity offerings. Amounts below are in U.S. dollars; financial statement amounts are generally in thousands unless noted.
Financial results and liquidity
- Revenue: $461,000, down from $5.078 million in Q1 2019. The prior-year period included $4.368 million of consideration for intellectual property rights under the Merck collaboration. Current revenue was Merck-funded research and development reimbursement.
- Expenses and earnings: Research and development expense was $1.283 million, up $405,000, primarily reflecting increased coronavirus and influenza program activity. General and administrative expense was $1.139 million, down $184,000. Operating loss was $1.961 million, compared with operating income of $2.877 million in Q1 2019. Net loss was $1.990 million, or $0.05 per share, versus net income of $2.971 million, or $0.10 per share.
- Cash flow: Operating activities used $2.188 million, versus $2.018 million provided in Q1 2019; investing activities used $93,000; financing activities provided $16.549 million, mainly from stock offerings. Cash and restricted cash increased by $14.268 million to $21.736 million. The MD&A gives slightly different operating and financing cash-flow figures ($2.186 million used and $16.547 million provided); the filing does not explain these differences.
- Balance sheet and debt: Cash was $21.686 million at quarter-end, versus $7.418 million at December 31, 2019. Current assets were $22.582 million and current liabilities $1.925 million. Total liabilities were $2.410 million, including $60,000 of finance lease liabilities and $657,000 of operating lease liabilities; the filing reports no material conventional borrowings. Total stockholders’ equity was $40.431 million.
- Equity financing: Three registered direct offerings raised $16.606 million net during the quarter. Shares outstanding increased from 35.150 million at year-end to 52.141 million at March 31, 2020. No income tax expense or benefit was recorded.
Changes, programs, and outlook
- The earnings swing from Q1 2019 primarily reflects the absence of the prior-year Merck upfront intellectual-property payment. Revenue remains dependent on the Merck collaboration; Merck accounted for all revenue and receivables at March 31, 2020.
- Under its Merck influenza collaboration, Cocrystal reported continued work on influenza A/B inhibitors. It selected CC-42344 as a preclinical lead and planned to initiate a Phase 1 study in 2021. Merck funds program research and development, including clinical development, and is responsible for commercialization; it may terminate the agreement before first commercial sale.
- Cocrystal initiated a SARS-CoV-2 program and began preclinical studies in Q2 2020. Management planned to identify additional inhibitors in Q3 and select a preclinical lead in Q4 2020. A February 2020 Kansas State University Research Foundation license covers antiviral compounds, including for coronavirus and norovirus. A second license was signed April 19, 2020, after quarter-end, with an $110,000 initiation fee and potential future milestone and royalty obligations.
- For norovirus, preclinical work was underway, with a proof-of-concept animal study expected in Q4 2020. For HCV candidate CC-31244, the Phase 2a study was completed; eight of 12 subjects achieved SVR12. An investigator-initiated study agreement was terminated March 24, 2020 amid Hong Kong unrest and the coronavirus pandemic; the company said it was discussing further development partnerships.
- Management stated that $21.686 million of cash was expected to fund planned operations through 2021. The company has not established recurring revenue sufficient to cover operating costs, has never been profitable annually, and expects it may need additional financing; future funding availability and terms are uncertain and equity financing could be dilutive.
Risks, contingencies, and unusual items
- COVID-19 had caused supply-chain and service-provider delays. The filing identifies potential effects on personnel, third-party research, laboratory supplies and access, program progress, and the broader economy; the full impact was uncertain.
- The company disclosed ongoing securities class-action, derivative, and insurance-related litigation. It intends to defend itself, cannot estimate potential losses, and recorded no loss contingency. Other proceedings are also described in the filing.
- Goodwill was $19.092 million. A $46.103 million impairment was recorded in 2019; management reported no additional impairment was required at March 31, 2020.
- Revenue concentration, reliance on Merck, clinical and preclinical development uncertainty, regulatory approvals, competition, financing needs, and dependence on third parties are material risks. The company reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether cash and available financing support operations beyond management’s stated runway through 2021, given operating cash use and ongoing R&D needs.
- Progress and timing of the influenza, coronavirus, and norovirus milestones, and the status of potential HCV development partnerships.
- Merck collaboration revenue, customer concentration, and any changes to Merck’s funding or termination rights.
- The potential dilution from additional equity issuance and the impact of the substantial increase in shares outstanding.
- Developments in the disclosed litigation and whether any potential loss becomes estimable or requires accrual.
- The cash-flow figures, which differ slightly between the financial statements and MD&A, and the related explanations, if any, in the complete filing.