Cocrystal Pharma, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unless noted otherwise, amounts are in U.S. dollars; financial statement figures below are in millions. Cocrystal is a pre-revenue biotechnology company developing antiviral drug candidates, including programs for hepatitis C, influenza and norovirus.
Financial performance and position
- Revenue: No revenue for the quarter or nine-month period in 2016. Grant revenue was $24,000 for Q3 2015 and $78,000 for the first nine months of 2015. The company reports no product sales.
- Q3 results: Operating expenses were $1.894 million and operating loss was $1.894 million, versus $3.614 million and $3.590 million, respectively, in Q3 2015. Net loss was $1.881 million, compared with $508,000 a year earlier.
- Nine-month results: Operating expenses were $11.433 million and operating loss was $11.433 million, versus $9.653 million and $9.575 million in 2015. Net loss was $9.120 million, compared with $19.673 million in 2015.
- Expense detail: R&D expense was $2.093 million for Q3 and $7.803 million for nine months, up 36% year over year for the nine-month period as clinical and preclinical work expanded. Q3 G&A was a negative $199,000, reflecting reversal of unvested executive option expense; nine-month G&A was $3.630 million, down 7%.
- Noncash item: Changes in fair value of warrant liabilities contributed $2.173 million of other income for the first nine months of 2016, versus $8.494 million of expense in 2015. This drove much of the year-over-year net-loss comparison; management says operating loss is a more useful measure. Q3 2016 included only $13,000 of total other income, versus $3.082 million in Q3 2015.
- Cash flow: Cash used in operating activities was $12.354 million for the first nine months, versus $7.277 million in 2015. Investing activities used $32,000; financing provided $9.016 million, principally from common-stock issuance.
- Liquidity and liabilities: Cash and cash equivalents were $5.906 million at September 30, down from $9.276 million at December 31, 2015; management reported $5.2 million as of November 7. Current assets were $6.755 million and current liabilities $3.150 million. Total liabilities were $53.079 million, including a $49.875 million deferred tax liability and $1.907 million of derivative liabilities. The balance sheet does not list borrowings.
- Capital and dilution: 2016 private placements raised about $5.0 million in March and $4.0 million in September. Shares outstanding were approximately 714.0 million at September 30. The filing lists 24.7 million outstanding options and 6.3 million warrants, in addition to shares reserved for future option grants.
Changes, pipeline and outlook
- R&D spending rose as the company initiated and advanced a Phase I trial of CC-31244, a pan-genotypic HCV polymerase inhibitor. Interim results reported by the company showed an average viral-load decline of about 3 logs by day four in the four HCV-infected patients dosed; no viral breakthrough or serious adverse event was reported at that point. These were early interim findings, not evidence of efficacy or safety in larger studies.
- Other disclosed work included preclinical HCV candidates CC-2850 and CC-2069, HCV helicase inhibitors, influenza polymerase inhibitors entering preclinical toxicology, and continued norovirus inhibitor research.
- Management expects substantial operating losses and negative operating cash flow for several years and says current cash is insufficient to fund its operating plan for the next 12 months. It expects to seek further public or private equity, strategic partners or other financing; availability and terms are uncertain, and equity financing may dilute shareholders. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- The former CEO and Chief Medical Officer resigned in July 2016; former CEO and director Gary Wilcox was serving as interim CEO, and both roles remained unfilled at filing. Management identified material weaknesses in internal controls, including staffing and segregation-of-duties gaps, review of complex accounting, related-party transaction controls and financial reporting. Remediation work was underway, but implemented controls had not been tested or validated by auditors.
Risks, contingencies and unusual items
- The company reported $146.3 million of in-process research and development and $65.2 million of goodwill. Management reported no interim impairment indicators; the IPR&D asset is indefinite-lived and subject to impairment testing.
- A mortgage note receivable secured by real estate was in default. The company recorded a notice of default and election to sell in September 2016, increased the contractual rate from 7.24% to 11.24%, and said approximately $206,000 of additional amounts due had not been recorded because collection was contingent. It was no longer accepting scheduled payments pending resolution.
- Other matters include a lawsuit seeking recovery on a $295,000 note, for which the company posted a $295,000 bond and a February 2017 trial date was set; a Cocamide DEA-related lawsuit involving a subsidiary; and an SEC staff subpoena for documents, with which the company said it was cooperating. Outcomes were not predictable from the filing.
- Contractual operating lease payments were listed as $191,000 due within one year and $333,000 in one to three years. Additional university license milestone payments and potential royalties depend on development or commercialization events.
- Related-party matters include leases from a trust established partly for a director’s benefit, board members’ participation in the 2016 private placements, and university licensing relationships involving a director who is also an Emory faculty member.
Investor facts to verify
- Whether the company secured financing sufficient to support operations beyond the stated 12-month horizon, and on what terms.
- Subsequent clinical-trial results for CC-31244, including patient numbers, safety, durability and efficacy; the Q3 data were preliminary.
- Resolution and collectability of the defaulted mortgage note, including the unrecorded approximately $206,000 claim, and outcomes of the disclosed legal matters and SEC inquiry.
- Whether internal-control remediation was completed and independently tested, and whether any material misstatements or restatements resulted.
- Potential dilution from outstanding options, warrants and future capital raises, as well as impairment risk for the substantial IPR&D and goodwill balances.