Cocrystal Pharma, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Cocrystal is a pre-revenue biotechnology company developing antiviral drug candidates; its programs were primarily preclinical, with its lead HCV candidate beginning first-in-human studies in April 2016, after quarter-end. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Grant revenue | $0 | $0.027 |
| Research and development expense | $3.342 | $1.560 |
| General and administrative expense | $1.992 | $0.635 |
| Operating loss | $(5.334) | $(2.168) |
| Net loss per financial statements | $(4.012); $(0.01) per share | $(16.542); $(0.04) per share |
| Cash used in operating activities | $(4.042) | $(1.559) |
| Cash and cash equivalents at quarter-end | $10.242 | $9.276 at Dec. 31, 2015 |
Operating expenses rose 143% in aggregate, driven by increased development activity, clinical-trial consulting, additional staff and stock-based compensation, and legal and professional costs. Revenue was negligible, so a meaningful revenue margin comparison is not available. The lower reported net loss chiefly reflects a $1.273 noncash gain from a decrease in the fair value of warrant liabilities; Q1 2015 included a $14.418 noncash warrant-related expense and a $0.980 unrealized loss on marketable securities in comprehensive loss.
Cash increased by $0.966 during the quarter, including $5.004 of private-placement proceeds. Current assets were $10.916 and current liabilities $5.891, for working capital of approximately $5.025. Total liabilities were $55.825, including a $49.875 deferred tax liability and $2.807 of derivative liabilities. The filing reports no conventional borrowings. A mortgage note receivable was carried at $2.505; the company said the borrowers were in default and did not record approximately $0.245 of additional contingent amounts due.
Changes, outlook and key risks
- Funding and going concern: The company had an accumulated deficit of $66.568 and stated substantial doubt about its ability to continue as a going concern. It said $10.2 of cash at March 31, including the recent financing, was insufficient to fund operations for the next 12 months; cash was $7.6 as of May 10. Management expected continued substantial operating losses and negative operating cash flows and planned to seek further equity, strategic-partner or other financing. Availability and terms were uncertain, and equity financing could dilute shareholders.
- Pipeline: CC-31244, an HCV polymerase inhibitor, began first-in-human studies in April 2016. Work to select and scale a CC-1845 nucleotide is expected to extend its preclinical timeline; CC-2069 was selected for further profiling. The company also reported work on HCV helicase inhibitors, norovirus polymerase inhibitors and influenza PB2 inhibitors. These remain development programs, not approved products.
- Unusual accounting and asset exposure: Warrant liabilities are valued using Level 3 assumptions; their quarterly fair-value movements materially affected net loss but were noncash. In-process research and development and goodwill totaled $211.496; the filing identifies potential impairment risk if development prospects weaken and notes a $38.7 million IPR&D impairment in 2015.
- Controls: Management concluded internal control over financial reporting was ineffective at March 31, 2016 because of material weaknesses involving staffing and GAAP expertise, segregation of duties, review of complex accounting, related-party transactions and financial reporting. Remediation was underway but incomplete.
- Legal and other contingencies: The company disclosed an SEC staff subpoena and said it was cooperating, without predicting whether proceedings would follow. Other matters include litigation relating to a disputed $295,000 promissory note and a product-warning case involving its subsidiary. The note dispute resulted in a $295,000 court-ordered bond recorded as a short-term deposit. Related-party arrangements include a facility lease and university licensing relationships.
- Other risks: Development, clinical and regulatory outcomes are uncertain; the company relies on external research, clinical and manufacturing providers. Additional risks include financing needs, potential dilution, intellectual-property and competition challenges, and the possibility that candidates never reach approval or commercialization.
Important facts for investors to verify
- Funding runway: reconcile the reported March 31 cash of $10.242 with $7.6 reported as of May 10, and monitor financing needs and terms.
- Net-loss comparison: the income statement reports Q1 2015 net loss of $16.542, while MD&A describes $17.522 as net loss; $17.522 is the financial statements’ comprehensive loss, including the unrealized securities loss.
- Clinical progress and timing for CC-31244 and other pipeline candidates, including whether preclinical delays or trial results alter development plans.
- Progress in remediating material weaknesses and any resulting changes to financial reporting reliability or compliance costs.
- Developments in the SEC inquiry, lawsuits, mortgage-note default and unrecorded contingent amount, as well as potential dilution from future financing and equity awards.