Cocrystal Pharma, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; filed November 13, 2020. Cocrystal is a clinical-stage antiviral biotechnology company with no products approved for sale and one reportable segment.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $0.489 million | $0.492 million | $1.504 million | $6.162 million |
| Research and development | $2.077 million | $1.077 million | $5.336 million | $3.046 million |
| General and administrative | $1.121 million | $1.223 million | $4.288 million | $3.597 million |
| Operating loss | $2.709 million | $1.808 million | $8.120 million | $0.481 million |
| Net loss | $2.670 million | $1.780 million | $8.155 million | $0.324 million |
| Basic and diluted loss per share | $0.05 | $0.06 | $0.16 | $0.01 |
- Cash and liquidity: Cash was $31.781 million at September 30, 2020, up from $7.418 million at December 31, 2019; current assets were $32.899 million and current liabilities $2.614 million. Management said cash was sufficient for planned operations well beyond the next 12 months.
- Cash flows, nine months: Operating cash used was $7.449 million, investing cash used $0.239 million, and financing cash provided $32.051 million. Financing included $32.161 million of common-stock proceeds. Cash and restricted cash increased by $24.363 million to $31.831 million.
- Debt and leases: The filing reports no material conventional borrowings. Finance lease liabilities totaled $0.084 million and operating lease liabilities $0.569 million at quarter-end.
- Margins: Gross profit and gross margin are not reported; the company’s reported revenue is collaboration revenue, while its principal costs are R&D and G&A.
Material changes and comparisons
- Q3 revenue was nearly unchanged year over year, while R&D expense rose primarily with COVID-19 and influenza program activity. Q3 G&A declined year over year; nine-month G&A increased, attributed mainly to litigation costs, insurance, and executive compensation.
- Nine-month revenue and earnings comparisons were affected by 2019 collaboration-related revenue. The filing states that 2019 revenue included $4.368 million for conveyance of intellectual property rights at the Merck agreement signing, although an MD&A sentence appears to misidentify the year for that amount.
- Operating cash use increased from $0.333 million in the 2019 nine-month period, when the company received Merck’s $4 million upfront payment, to $7.449 million in 2020. Equity issuance funded operations: the company reported three registered direct offerings and an August public offering during the period, with approximately $32.2 million of total stock proceeds reported in cash flows.
- Shares outstanding increased from 35.150 million at December 31, 2019 to 68.564 million at September 30, 2020, reflecting substantial equity financing and dilution.
Programs, outlook, and risks
- Merck influenza collaboration: Merck funds research and development, including clinical development, and holds worldwide commercialization responsibility. Cocrystal is eligible for up to $156 million in development, regulatory, and sales milestones, plus royalties; Merck may terminate before first commercial sale at its discretion. Merck was the company’s sole customer and source of all revenue and receivables at September 30, 2020.
- Influenza A candidate CC-42344: The preclinical lead was undergoing remaining IND-enabling work. Management planned to initiate a Phase 1 study in 2021.
- Coronavirus: The program was preclinical, using licensed compounds and the company’s platform. Management anticipated selecting a preclinical lead in Q4 2020. The company warned that competition included better-funded developers with more advanced candidates, and that COVID-19 could disrupt research, supply chains, and third-party services.
- HCV and norovirus: The CC-31244 Phase 2a study was complete; eight of 12 participants achieved SVR12, and the company was discussing potential partnering. A Hong Kong investigator-initiated study was terminated in March 2020. Norovirus preclinical work was underway, with an animal proof-of-concept study expected in Q4 2020.
- Funding and going concern: The company had no approved products or recurring revenue sufficient to cover operating costs and had incurred annual operating losses and negative operating cash flows since inception. Management expects to seek equity financing, strategic partners, or other funding; future funding is not assured and equity financing could be dilutive.
- Legal matters: Proposed settlements of shareholder class and derivative actions were subject to court approval. The company agreed to pay $450,000 toward the class-action settlement and to implement governance changes under the derivative settlement. Other matters include an AGP suit seeking damages estimated above $1 million, an insurer’s disputed claim to recover $1 million previously advanced, and a Pederson suit seeking $800,000. The company said outcomes could not be predicted and had not recorded a loss contingency for the claims.
- Nasdaq listing: The filing reports that in November 2020 the company was notified it was below Nasdaq’s $1 minimum bid-price requirement after 30 consecutive trading days. It had until May 3, 2021 to regain compliance, subject to a possible extension.
- Goodwill: Goodwill was $19.092 million. The company reported no further impairment was required as of September 30, 2020, with its next annual impairment test planned for November 2020. It recorded a $46.103 million impairment in 2019.
Key facts for investors to verify
- Whether Merck continues funding the collaboration and whether development milestones or royalties become achievable; revenue concentration is a significant exposure.
- Whether the stated program milestones occurred: coronavirus lead selection and norovirus animal study in Q4 2020, and CC-42344 Phase 1 initiation planned for 2021.
- Cash runway against actual R&D spending, further financing needs, and the dilution and terms of any additional share issuance.
- Nasdaq bid-price compliance status and any subsequent effect on trading or financing access.
- Final court approval and payment of the proposed settlements, and developments in the AGP, insurer, and Pederson disputes.
- The apparent year inconsistency in the MD&A discussion of the $4.368 million 2019 intellectual-property revenue item.