Cocrystal Pharma, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The company is a development-stage biotechnology business pursuing antiviral candidates; it reported no product revenue and has no approved products.
Financial performance and position
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | No product revenue | No product revenue | No product revenue to date |
| Research and development expense | $1.467 million | $3.464 million | $1.393 million; $4.718 million |
| General and administrative expense | $952,000 | $3.157 million | $717,000; $1.712 million |
| Net loss | $1.868 million | $4.762 million | $2.260 million; $5.810 million |
| Basic and diluted loss per share | $0.06 | $0.17 | $0.09; $0.24 |
| Cash used in operating activities | Not separately stated | $6.320 million | $5.323 million |
Margins are not meaningful because the company had no product revenue. The nine-month net loss improved year over year, while operating cash use increased.
- At September 30, cash was $4.684 million and restricted cash was $29,000. Current assets were $4.991 million versus current liabilities of $1.137 million.
- Total assets were $124.171 million, including $65.195 million of goodwill and $53.905 million of in-process research and development. Total liabilities were $13.270 million; stockholders’ equity was $110.901 million.
- No convertible notes remained outstanding at quarter-end. The company converted $2.062 million of principal and accrued interest into shares in May 2018; it had borrowed $1.0 million in January under an 8% convertible note before conversion.
- Nine-month cash flows included $1.387 million provided by investing activities, mainly from collecting $1.4 million on a mortgage-note settlement, and $8.869 million provided by financing activities. Cash and restricted cash increased by $3.936 million to $4.713 million.
Changes versus the prior comparable period
- Third-quarter R&D expense rose 5.3%, primarily due to timing of Phase 2a trial costs; nine-month R&D expense declined 26.6%, reflecting lower costs and timing of clinical activity.
- G&A expense rose 32.8% for the quarter, primarily because of annual-meeting and listing-related professional fees. Nine-month G&A increased $1.445 million; 2017 had included an $896,000 insurance reimbursement and a $132,000 noncash stock-compensation reversal.
- Nine-month net loss narrowed by $1.048 million. The 2018 results included $1.459 million of income tax benefit and a $106,000 gain on the mortgage-note settlement. The tax benefit does not indicate recurring operating profitability.
- Fair-value changes in liability-classified warrants produced $410,000 of other income for the nine months, compared with $621,000 in 2017; these noncash changes are sensitive to the company’s share price.
- The May public offering generated approximately $7.684 million in net proceeds. Shares outstanding increased to 29.923 million at September 30, from 24.275 million at December 31, 2017.
Outlook, risks and notable items
- Liquidity and going concern: Management stated the company did not have sufficient capital for planned operations over the next 12 months. The filing reports substantial doubt about the company’s ability to continue as a going concern; additional financing is necessary, may not be available on acceptable terms, and could materially dilute shareholders. Management expects substantial operating losses and negative operating cash flows for several years.
- Potential financing: A July 2018 equity distribution agreement permits discretionary sales of up to $10 million of common stock; no shares had been sold under it as of the filing date. The filing identifies a broker-related conflict of interest and use of an independent underwriter.
- Pipeline: CC-31244, an HCV candidate, entered a Phase 2a combination study with Epclusa; enrollment was completed in September and topline data were expected in 2018. CC-42344 was selected as a preclinical influenza lead, with a Phase 1 study planned for 2019. Other influenza candidates and norovirus polymerase inhibitors remained in preclinical development.
- Impairment exposure: A decline in market capitalization prompted a goodwill impairment assessment. Management concluded fair value exceeded book value by approximately 3% at September 30 and recorded no impairment. It noted the market capitalization continued to decline afterward and planned an annual assessment for November 30, 2018.
- Controls: Management concluded disclosure controls were not effective due to previously reported material weaknesses in financial reporting reviews and account reconciliations. Remediation was underway; management expected completion in November 2018, subject to controls operating effectively and testing.
- Legal and related-party matters: A securities class action filed in September 2018 seeks damages; management could not assess its potential impact. A separate case dismissed in September was appealed after quarter-end. The company also disclosed leases involving entities owned by directors and a license arrangement with Emory University involving potential milestones and royalties.
- Other risks include clinical and regulatory uncertainty, competition, ability to protect intellectual property, reliance on financing and strategic relationships, and the possibility that candidates will not be successfully developed or commercialized.
Investor facts to verify
- Cash runway and funding needs, including whether the company raised capital under the $10 million equity distribution agreement after the filing date.
- Phase 2a CC-31244 results and subsequent clinical, regulatory, and partnership developments; progress toward the planned CC-42344 Phase 1 study.
- Outcome of the November 2018 goodwill impairment assessment and subsequent market-capitalization trends.
- Progress in remediating the material weaknesses and whether management later concluded controls were effective.
- Developments, potential exposure, and any financial impact from the securities class action and the appeal.
Unless otherwise indicated, financial amounts are in U.S. dollars; statements of operations and cash flows are for the periods shown.