Cocrystal Pharma, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. Unless otherwise noted, financial amounts are in millions of dollars. Cocrystal is a clinical-stage antiviral drug developer with no approved products or product-sales revenue.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Collaboration revenue | $0.592 | $0 | $5.670 | $0 |
| Research and development expense | $1.091 | $1.119 | $1.969 | $1.997 |
| General and administrative expense | $1.051 | $1.013 | $2.374 | $2.205 |
| Operating income (loss) | $(1.550) | $(2.132) | $1.327 | $(4.202) |
| Net income (loss) | $(1.515) | $(1.343) | $1.456 | $(2.897) |
| Operating cash flow | Not separately provided | Not separately provided | $0.990 | $(4.171) |
- The Merck collaboration generated $4.368 million of license-related revenue, including a $4.0 million upfront payment, plus reimbursement revenue. Six-month revenue also included $1.302 million of reimbursed research and development costs; Q2 reimbursement revenue was $0.592 million. The $0.914 million accounts receivable at quarter-end was due from Merck.
- Six-month net income included collaboration revenue; it does not indicate ongoing product profitability. Q2 remained loss-making. There was no income tax benefit or expense in 2019. In 2018, income tax benefits were $0.554 million for Q2 and $0.973 million for the six-month period.
- At June 30, cash was $7.474 million, restricted cash was $0.050 million, and total current assets were $8.533 million. Total assets were $74.907 million, including $65.195 million of goodwill. Stockholders’ equity was $72.418 million.
- Six-month cash increased by $4.772 million to $7.524 million including restricted cash. Financing provided $3.811 million net, chiefly from $3.928 million of stock-sale proceeds, partly offset by lease payments. Investing used $0.029 million.
- Total liabilities were $2.489 million: $1.854 million current and $0.635 million long-term. Finance lease liabilities totaled $0.225 million and operating lease liabilities $0.780 million. Liability-classified warrants were $0.123 million. The filing reports no outstanding convertible notes at June 30.
Material changes and business developments
- Compared with the prior-year periods, revenue rose from zero because of the January 2019 Merck agreement. Six-month operating cash flow improved from a $4.171 million use to $0.990 million provided, primarily due to collaboration revenue. Research and development expense was broadly flat; general and administrative expense increased, mainly on audit, legal, contract, litigation, and patent-related costs.
- On March 13, 2019, Cocrystal completed a private placement yielding approximately $3.584 million net proceeds. It suspended at-the-market sales in March; an agreement with one sales agent remained in place, but sales were suspended. Common shares outstanding increased from 29.938 million at year-end 2018 to 31.621 million at June 30, 2019.
- Adoption of lease accounting on January 1, 2019 added approximately $0.833 million of operating lease right-of-use assets and corresponding liabilities, with no material reported effect on operating results or liquidity.
Outlook, risks, and contingencies
- Management stated that historical losses create substantial doubt about the company’s ability to continue as a going concern. It reported approximately $7.2 million of cash on August 9, 2019 and said this may not fund operations for the next 12 months, particularly if legal costs or other unexpected expenses are higher than anticipated. Additional financing may be needed; availability and terms are uncertain, and equity financing could dilute shareholders.
- Management expects substantial operating losses and negative operating cash flows during development. It provided no revenue or earnings guidance. Merck funds research and development, including clinical development, and holds worldwide commercialization responsibility for products from the collaboration. Cocrystal may receive development, regulatory, and sales milestones totaling up to $156 million and royalties, but Merck may terminate the agreement before first commercial sale at its discretion.
- CC-31244: the company reported that 8 of 12 participants in its U.S. Phase 2a study achieved SVR12; the treatment was described as well tolerated, with no discontinuations due to adverse events. A final study report was expected in the second half of 2019. A separate Hong Kong Phase 2a study began in May 2019. The filing highlights civil unrest and political instability as risks to its timely completion and to potential partnering discussions.
- Influenza candidate CC-42344 was in preclinical IND-enabling studies; management planned to initiate a Phase 1 study in 2020. The Merck influenza A/B program was also in preclinical development.
- Pending matters include a securities class action, a related shareholder derivative suit stayed pending the class action, and a Pederson lawsuit filed July 8, 2019 seeking $0.8 million or other damages. Cocrystal said it could not estimate potential losses and recorded no loss contingency. Its insurer had initially declined coverage for the class and derivative actions; legal costs could be material.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2019 due to material weaknesses. Management described remediation work and expected completion in 2019, subject to controls operating effectively and testing.
Important facts for investors to verify
- Whether cash and any new financing are sufficient to support the stated development plans and operating needs, including potentially material litigation costs.
- Merck collaboration revenue recognition, reimbursable expenses, remaining obligations, and the agreement’s termination and milestone terms.
- Progress and results of the CC-31244 studies, including the final U.S. study report and the Hong Kong study’s status and exposure to disruption.
- Developments in the class action, derivative action, Pederson case, and insurance-coverage dispute; no potential loss amount was estimated in the filing.
- Remediation and independent testing of the disclosed material weaknesses, as well as the effects of further share issuance or other dilution.