Cocrystal Pharma, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Amounts below are U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
Cocrystal is a pre-revenue biotechnology company developing antiviral drug candidates targeting hepatitis C, influenza, and norovirus. It reported no product sales or other ongoing revenue sufficient to cover operating costs.
- Hepatitis C: CC-31244 had shown an acceptable safety profile in healthy volunteers and HCV-infected patients, with no serious adverse events or discontinuations reported. The company said it was discussing a partnership for further clinical development.
- Influenza: CC-42344 was selected as a preclinical lead, and IND-enabling studies had begun.
- Norovirus: The company continued developing nucleoside and non-nucleoside polymerase inhibitors.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | None reported | None reported | None reported | None reported |
| Research and development expense | $1.393m | $2.093m | $4.718m | $7.803m |
| General and administrative expense | $0.717m | $(0.199)m | $1.712m | $3.630m |
| Operating loss | $(2.110)m | $(1.894)m | $(6.430)m | $(11.433)m |
| Net loss | $(2.260)m | $(1.881)m | $(5.810)m | $(9.120)m |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(5.323)m | $(12.354)m |
- Q3 basic and diluted loss per share were each reported as $(0.00); nine-month basic loss per share was $(0.01) in both years, and diluted loss per share was $(0.01) in 2017 versus $(0.02) in 2016.
- At September 30, cash and cash equivalents were $1.345m, down from $3.640m at December 31, 2016. Current assets were $2.879m and current liabilities $1.756m. Current assets included a $1.294m mortgage note receivable subject to legal proceedings.
- Total assets were $122.253m, including $53.905m of in-process research and development and $65.195m of goodwill. Total liabilities were $22.255m, including $0.855m of warrant derivative liabilities and a $20.462m deferred tax liability. The filing reports no conventional debt balance.
- Stockholders’ equity was $99.998m. The company issued 12.5m shares in a private placement for $3.0m and received $0.080m from option exercises in the first nine months. Outstanding common shares were approximately 728.239m at September 30.
- Operating cash use was partly offset by $3.080m of financing inflows; investing cash use was $0.052m. Cash declined by $2.295m during the nine months.
Changes versus prior comparable periods
- Nine-month R&D expense fell 40%, primarily because Phase I clinical trial costs were largely incurred in 2016. Management expected R&D spending to increase as development expands.
- Nine-month G&A expense fell 53%, attributed to an insurance reimbursement of prior legal costs, lower compensation following staffing turnover, a non-cash stock-compensation reversal, and lower legal costs. Q3 2016 G&A was negative because previously recorded compensation expense was reversed for forfeited, unvested executive options; this makes the Q3 year-over-year comparison unusual.
- Nine-month operating loss improved, but net loss comparisons were affected by non-cash changes in the fair value of liability-classified warrants: this produced $0.621m of income in 2017 versus $2.173m in 2016. Management advised investors to focus on operating loss rather than net loss.
- Nine-month operating cash use decreased from $12.354m to $5.323m, while financing proceeds fell from $9.016m to $3.080m.
Outlook, risks, and unusual items
- Funding and going concern: Management said cash on hand was not sufficient to fund the operating plan for the next 12 months. The company expected continued operating losses and negative operating cash flows for several years, and disclosed substantial doubt about its ability to continue as a going concern. It planned to seek private or public equity financing, but discussions had produced no agreed terms; financing might not be available or could dilute shareholders.
- Development and commercialization: Profitability depends on successful development, regulatory approval, and commercialization of candidates; the company may never become profitable. The filing gives no financial guidance or quantified commercialization timetable.
- Mortgage note and litigation: The $1.294m note, bearing 7.24% interest and maturing in 2032, was tied to a property subject to delinquency and legal proceedings. A court injunction barred foreclosure, and settlement discussions were ongoing with no assurance of resolution. The company had recorded a $1.176m impairment in 2016 and was no longer recording interest income on the note.
- Accounting and controls: Warrant liabilities are Level 3 fair-value measurements based on a Black-Scholes model and unobservable inputs. Management concluded disclosure controls were not effective as of September 30, 2017; previously identified material weaknesses remained, with remediation targeted by year-end 2017. Management turnover had affected remediation efforts.
- Other items: The company mutually terminated its Duke University/Emory University CRISPR/Cas9 license agreement on September 25, 2017, with no further rights or obligations under that agreement. The company was also leasing its facility from an entity owned by a director and principal shareholder; the lease had moved to a month-to-month arrangement.
Important facts for investors to verify
- Cash runway, actual operating burn, and whether additional financing has been secured since the filing.
- Status and terms of any partnership or further clinical development for CC-31244, and progress of CC-42344 IND-enabling studies.
- Progress and outcome of the mortgage-note litigation, foreclosure injunction, and any settlement or recovery assumptions.
- Whether material weaknesses in internal control were remediated and disclosure controls became effective.
- Potential share dilution from future equity financing, outstanding options and warrants, and the company’s reported share authorization and reserves.
- How non-cash warrant remeasurement and the unusual 2016 stock-compensation reversal affect comparisons of net loss and expenses.