Cocrystal Pharma, Inc. — 2016 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2016, Cocrystal was a clinical-stage antiviral drug discovery and development company, with programs targeting hepatitis C (HCV), influenza, and norovirus. It had no approved products and generated no product revenue. The company’s only clinical program described was its HCV candidate CC-31244.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $0 | $78,000 grant revenue |
| Operating expenses | $105.8 million | $54.0 million |
| Operating loss | $105.8 million | $53.9 million |
| Net loss | $74.9 million | $50.1 million |
| Net loss per share | $0.11 | $0.08 |
| Cash used in operating activities | $14.7 million | $10.3 million |
| Cash and cash equivalents at year-end | $3.6 million | $9.3 million |
Amounts are in U.S. dollars; financial statement figures are rounded. Operating margins are not meaningful because the company had no revenue. Research and development expense was $101.7 million, including a $92.4 million impairment charge for HCV in-process research and development (IPR&D). Excluding IPR&D impairment, R&D expense was $9.3 million, versus $8.6 million in 2015. General and administrative expense fell to $4.1 million from $6.8 million, primarily due to lower stock-option expense after executive departures.
At December 31, 2016, total assets were $124.9 million, total liabilities $22.6 million, and stockholders’ equity $102.3 million. Reported liabilities included a $20.5 million deferred tax liability and $1.5 million in derivative liabilities; the balance sheet does not show conventional borrowings. Current assets were $5.5 million and current liabilities $2.0 million, but the company stated its cash was insufficient to fund operations for the next 12 months. Cash fell by $5.6 million during 2016; financing activities provided $9.0 million, primarily from stock issuance. Common shares outstanding increased from 694.4 million to 714.0 million during the year.
Material changes and unusual items
- Net loss increased by $24.8 million year over year, while operating loss nearly doubled. The $92.4 million 2016 IPR&D impairment was the principal unusual item; it followed a $38.7 million impairment in 2015.
- A $29.4 million income-tax benefit, mainly from reducing the deferred tax liability associated with the IPR&D impairment, partially offset the 2016 loss. A $2.6 million noncash gain from changes in warrant fair value also contributed to other income.
- Quarterly data show a fourth-quarter 2016 net loss of $65.8 million, including the $92.4 million IPR&D impairment and a $29.4 million tax benefit. The impairment reflected lower projected cash flows amid HCV competition and pricing pressures, as well as updated assessments of the company’s compounds.
- The company recorded a $1.2 million impairment on a mortgage note receivable and was pursuing foreclosure on the collateral; the sale was scheduled for April 28, 2017, subject to court proceedings.
Outlook, risks, contingencies, and management commentary
- Funding and going concern: As of March 29, 2017, cash was approximately $2.0 million, which management said would last through April. The company estimated it needed $8–$10 million to support planned operations over the following 12 months and was exploring financing options. Three parties, including two major shareholders who were directors, had made non-binding offers totaling $3 million, subject to board approval and executed agreements. The auditor and management cited substantial doubt about the company’s ability to continue as a going concern.
- Development outlook: Management expected R&D spending to rise in 2017 with ongoing Phase 1 programs and Phase 2 start-up. CC-31244 completed a Phase 1a study in September 2016; the company was conducting a Phase 1b study in HCV genotype 1 patients. Interim results presented in February 2017 reported a rapid decline in HCV RNA, slow rebound after treatment, and no viral breakthrough during treatment. The company was seeking a partner for further development. CC-42344, an influenza PB2 inhibitor, was selected as a preclinical lead, with IND-enabling studies planned for 2017. These are development plans and preliminary findings, not assurances of success.
- Key operating risks: Product candidates remain early-stage and require further preclinical and clinical testing and regulatory approvals. The company relies on third parties for research, trials, and manufacturing, and faces competition, intellectual-property risks, and the possibility of adverse safety or efficacy results. It has no commercial revenue and may never achieve profitability.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end. The auditor issued an adverse opinion on internal control, identifying material weaknesses involving the control environment, segregation of duties, review of complex accounting, related-party transactions, and financial reporting. Management expected remediation in 2017, but it was not yet complete.
- Legal and governance matters: The SEC had issued a subpoena in 2015 and was conducting an investigation; the company was cooperating and could not predict the outcome. The company also disclosed pending Fisher-related litigation affecting its planned mortgage foreclosure, and a proposed $7,500 settlement in a product-warning case, subject to execution and court approval. The Georgia facility was leased from an entity owned by a director and principal shareholder.
- Other shareholder risks: The company warned of potential dilution from future equity financing and equity awards, volatile OTC trading, penny-stock restrictions, and substantial ownership concentration. It reported approximately 714 million shares outstanding as of March 2017.
Most important facts for investors to verify
- Whether the proposed $3 million investment was finalized and whether the company raised the additional capital needed to fund operations.
- Subsequent cash runway, operating cash burn, and any financing terms or share dilution.
- Full Phase 1b CC-31244 results and subsequent clinical plans, including any partnership; progress toward IND-enabling studies for CC-42344.
- Further changes to the value of HCV IPR&D, including the assumptions underlying impairment estimates and the commercial prospects of the HCV portfolio.
- Progress in remediating material weaknesses and any subsequent SEC investigation or litigation developments.