Cocrystal Pharma, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014; filed August 14, 2014. Amounts below are in U.S. dollars. The company was formed as the result of a January 2014 reverse merger with Cocrystal Discovery and changed its name from Biozone Pharmaceuticals in March 2014. Financial comparisons with 2013 may not be directly comparable because the merger was accounted for as a recapitalization, with Cocrystal Discovery as the accounting acquirer.
Business context and results
Cocrystal is a preclinical biotechnology company developing antiviral medicines, with programs focused on viral replication inhibitors. It reported no revenue in either the 2014 or comparable 2013 periods. Accordingly, revenue margins are not meaningful.
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Research and development expense, 2014 / 2013 | $888,000 / $980,000 | $1.853 million / $1.986 million |
| General and administrative expense, 2014 / 2013 | $499,000 / $51,000 | $1.066 million / $104,000 |
| Total operating expenses, 2014 / 2013 | $1.387 million / $1.031 million | $2.919 million / $2.090 million |
| Operating loss, 2014 / 2013 | $1.387 million / $1.031 million | $2.919 million / $2.090 million |
| Net income (loss), 2014 / 2013 | $4.730 million / $(1.030) million | $4.357 million / $(2.088) million |
| Operating cash used, 2014 / 2013 | Six months: $3.118 million / $1.930 million |
2014 net income was driven mainly by noncash gains from the decrease in fair value of liability-classified warrants: $5.639 million for the quarter and $7.744 million for the six months. The company recorded a $946,000 expense for the initial fair value of warrants issued with its January financing exceeding the financing proceeds. Management advised investors to focus on operating loss and cash flows rather than net income.
Financial position and liquidity
- At June 30, 2014, cash and cash equivalents were $4.074 million and marketable securities were $5.719 million, or $9.793 million combined. Total assets were $12.967 million; current liabilities were $6.911 million, including $6.450 million of derivative liabilities. The filing reports no conventional borrowings on the balance sheet.
- Stockholders’ equity was $6.056 million, compared with a deficit of $8.833 million at December 31, 2013. Accumulated deficit was $7.978 million. The periods are affected by the merger, preferred-stock conversion, and other capital transactions.
- Cash increased by $3.040 million during the six months. Investing activities provided $3.351 million and financing activities provided $2.807 million, partly offset by $3.118 million used in operations. The company raised $2.750 million in a January common-stock private placement.
- The company acquired a mortgage note receivable for approximately $2.626 million in June. It bears interest at 7.24%, matures August 1, 2032, and is secured, among other things, by real estate. No impairment loss was recorded.
- The $5.719 million marketable-securities balance represents 600,000 MusclePharm shares held in escrow, subject to sale restrictions and an issuer call option. The shares’ fair value included a $1.526 million discount from the stated unrestricted market value.
Changes, outlook, and risks
- R&D expense declined 9% for the quarter and 7% for the six months year over year. G&A expense rose sharply, principally because of merger- and financing-related legal, accounting, and professional fees, as well as higher compensation and facilities costs. The company consolidated operations at its Bothell, Washington headquarters after not renewing its Mountain View lab lease.
- Management estimated negative cash flow of approximately $6.0 million over the 12 months ending June 30, 2015. At June 30 it stated that available cash was not sufficient for its operating plan for at least 12 months unless the escrowed MusclePharm shares could be sold. As of August 7, management reported $3.544 million cash and a $6.6 million fair market value for those shares, and said the plan could be funded for at least 12 months if the shares could be sold at current market prices. The shares remained in escrow until October 2014, and release or sale was not assured.
- The company expected to continue substantial operating losses and negative operating cash flows during clinical development and anticipated needing additional financing. It warned that additional capital might not be available on acceptable terms, or at all.
- For Hepatitis C, the company selected a lead molecule for IND-enabling studies and expected to submit regulatory filings to initiate clinical trials in early 2015. It was also pursuing an HCV NS3 helicase inhibitor. For influenza, it expected to file an IND with the FDA in December 2015. These were forward-looking expectations, not guarantees.
- Two legal proceedings relate to the former Garcia Avenue property. A landlord/founder action remained pending; a separate April 2014 lawsuit sought recovery on a purported $295,000 promissory note. The company challenged the allegations and said it intended to defend the action. The filing described the effect of related loan/default matters as uncertain.
- Management concluded disclosure controls were not effective as of June 30 because a material weakness in accounting for complex financial instruments, including derivatives, remained unremediated. A remediation plan was in progress, including formal reviews of complex transactions and use of outside consultants as needed.
Most important facts for investors to verify
- Whether and when the escrowed MusclePharm shares were released or sold, and the resulting proceeds available to fund operations.
- Actual cash burn versus management’s approximately $6.0 million 12-month estimate, and the timing, terms, and availability of additional financing.
- Progress and results of preclinical programs and whether anticipated regulatory filing timelines were met.
- Changes in the fair value and settlement terms of liability-classified warrants, which materially affected reported net income and liabilities.
- Developments in the Garcia property litigation and mortgage-note collection, including any impact on liquidity or financial position.
- Whether the company remediated the material weakness and improved controls over complex financial instruments.