Cocrystal Pharma, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Cocrystal is a development-stage biotechnology company pursuing antiviral candidates; it reported no product revenue and has no products approved for sale.
Financial results and liquidity
| Metric ($ millions, except per-share data) | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | None reported | None reported | None reported | None reported |
| Research and development expense | 1.255 | 2.368 | 3.325 | 5.710 |
| General and administrative expense | (0.055) | 1.836 | 0.996 | 3.829 |
| Operating loss | (1.200) | (4.204) | (4.321) | (9.539) |
| Net loss | (1.002) | (3.227) | (3.551) | (7.239) |
| Basic loss per share | (0.00) | (0.00) | (0.01) | (0.01) |
With no revenue, gross margin and operating margin are not meaningful. Other income was $0.198 million for Q2 and $0.770 million for H1, mainly from noncash reductions in the fair value of warrant liabilities. Management advises focusing on operating loss rather than net loss.
At June 30, cash and cash equivalents were $3.451 million, down from $3.640 million at year-end 2016. Current assets were $4.941 million and current liabilities $1.800 million; current assets included a $1.294 million mortgage note receivable subject to litigation. Total assets were $124.340 million, including $53.905 million of in-process R&D and $65.195 million of goodwill. Total liabilities were $22.304 million, including a $20.462 million deferred tax liability and $0.707 million of derivative liabilities. No conventional borrowings are identified in the supplied filing text.
H1 operating cash use was $3.137 million, investing cash use was $0.052 million, and financing provided $3.000 million. The financing was a private placement of 12.5 million shares at $0.24 per share. The company had 726.532 million shares outstanding at June 30; 726,531,530 were reported outstanding as of August 4. The filing does not provide a clear cash-runway estimate, but states that available cash was not expected to fund planned operations through the balance of 2017.
Changes versus prior comparable periods
- H1 operating loss narrowed to $4.321 million from $9.539 million; net loss narrowed to $3.551 million from $7.239 million.
- R&D expense declined 42% for H1, primarily because Phase 1 clinical trial costs had largely occurred in 2016.
- Q2 G&A was negative $55,000, compared with $1.836 million of expense in Q2 2016. The 2017 result reflected an $896,000 insurance reimbursement for prior legal costs and a $132,000 reversal of stock compensation, as well as lower personnel and legal costs.
- Cash used in operations decreased to $3.137 million from $9.208 million for H1 2016; cash declined by $0.189 million in H1 2017 versus $4.254 million in H1 2016.
Outlook, risks, and notable items
- Pipeline: The company reported completion of a Phase 1b study of HCV candidate CC-31244 in July 2017, after quarter-end. It described rapid HCV RNA declines and no viral breakthrough during treatment, and was seeking a development partner. Influenza candidate CC-42344 was selected as a preclinical lead, with IND-enabling studies planned for 2017. Norovirus inhibitors remained in preclinical development.
- Funding and going concern: The company has no ongoing product revenue, a $141.0 million accumulated deficit, and expects substantial operating losses and negative operating cash flows for several years. Management stated that substantial doubt exists about the company’s ability to continue as a going concern and that additional financing is needed. Financing may not be available on acceptable terms, and equity financing could dilute shareholders.
- Legal contingency: A court injunction entered April 5, 2017 barred foreclosure on property securing the company’s $1.294 million mortgage note receivable. Settlement discussions were ongoing; the company gave no assurance of resolution. A case management conference was scheduled for September 14, 2017.
- Controls: Management concluded disclosure controls and procedures were not effective as of June 30, 2017. Previously identified material weaknesses remained; management cited executive and finance leadership turnover as impeding remediation and targeted remediation by year-end 2017.
- Other: The company leases its facility from an entity owned by a director and principal shareholder; the lease moved to month-to-month after June 30. The filing also describes university licensing obligations, potential milestone payments and royalties, and a related-party interest in possible Emory royalties.
Important facts for investors to verify
- Whether the company secured financing after the filing and how long available cash can support planned operations.
- Full Phase 1b CC-31244 results, next clinical-development steps, and whether a development partner was obtained.
- Progress and costs for CC-42344 IND-enabling work and other preclinical programs.
- Status and recoverability of the mortgage note, including developments in the Fisher litigation and foreclosure proceedings.
- Whether material weaknesses were remediated and disclosure controls improved, and the potential dilution from future fundraising and outstanding options and warrants.