Cocrystal Pharma, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
Cocrystal is a clinical-stage biotechnology company developing antiviral candidates, with programs focused on hepatitis C, norovirus, and influenza. It had no approved products and generated no product-sales revenue; reported revenue was limited to research grant income.
Financial performance and liquidity
| Metric | Q3 2015 | Nine months 2015 | Comparable 2014 period |
|---|---|---|---|
| Grant revenue | $24,000 | $78,000 | $0 |
| Research and development expense | $2.177 million | $5.751 million | $0.866 million; $2.722 million |
| General and administrative expense | $1.437 million | $3.902 million | $0.353 million; $1.417 million |
| Loss from operations | $3.590 million | $9.575 million | $1.219 million loss; $4.139 million loss |
| Net income (loss) | $0.508 million loss | $19.673 million loss | $2.549 million loss; $1.808 million income |
| Operating cash used | Not provided for quarter | $7.277 million | $4.257 million |
Q3 2015 net loss was substantially reduced by $3.036 million of noncash income from the decrease in the fair value of warrant liabilities. For the nine-month period, the warrant fair-value change produced $8.494 million of expense, and a $1.686 million loss on MusclePharm shares also contributed to the net loss. Management advised investors to focus on operating loss rather than net income or loss. Gross margin is not meaningful for the company’s grant-revenue and development-stage activities.
At September 30, cash and cash equivalents were $12.413 million, compared with $3.970 million at December 31, 2014; current assets were $13.225 million and current liabilities $4.151 million. Total liabilities were $69.407 million, including $3.096 million of derivative liabilities and a $65.195 million deferred tax liability. The filing does not report conventional interest-bearing debt at period end. Financing activities provided $15.882 million during the first nine months, primarily from a private placement. Management reported cash of $11 million as of November 13, 2015 and believed it would fund the current operating plan for at least 12 months.
Changes and notable items
- Operating expenses increased year over year: nine-month R&D rose 111% and G&A rose 175%, reflecting added personnel, development and testing activity, professional costs, and stock-based compensation.
- Nine-month net results shifted from $1.808 million income in 2014 to a $19.673 million loss in 2015, driven in part by noncash warrant remeasurement and the MusclePharm share loss. Operating losses also increased.
- Preferred shares converted into common stock in March 2015. Common shares outstanding increased to 694.375 million at September 30 from 122.494 million at year-end 2014. The company raised approximately $15.86 million through 2015 private placements and received $13.862 million from net warrant exercises.
- Research programs: the company anticipated beginning IND-enabling studies for an influenza lead in 2016 and expected first-in-human studies for HCV candidate CC-31244 in 2016. Work on CC-1845’s scalable chemistry extended its preclinical timeline; norovirus and HCV NS5A programs remained in development.
Outlook, risks, and contingencies
Management expected substantial operating losses and negative operating cash flow to continue during clinical development, with future capital needed. Additional financing was not assured and could dilute shareholders; without adequate funding, the company could reduce spending, extend supplier payment terms, or suspend or curtail programs. Product development, approvals, commercialization, and eventual profitability were uncertain.
Disclosure controls were deemed ineffective due to weaknesses in financial reporting review, documentation, disclosure procedures, and segregation of duties. Remediation was underway but incomplete as of November 14, 2015; the company had engaged a third-party consultant and hired a full-time Controller. In October 2015, the company received an SEC staff subpoena for documents and said it was cooperating; the outcome was uncertain.
Other disclosed matters included a $295,000 court-ordered bond in a dispute over a promissory note, a product-warning lawsuit involving a former subsidiary, and an uncertain potential recovery of escrowed MusclePharm shares for which the company recorded a full allowance. The company also disclosed October appointments of a full-time CEO and a Chief Medical Officer, with significant option grants.
Important facts for investors to verify
- Cash runway assumptions, current operating-plan spending, and timing and terms of any additional financing.
- Development milestones and whether the projected 2016 study timelines were achieved.
- Warrant-liability valuation and its effect on reported earnings; the filing’s MD&A cites a $9.843 million nine-month “operating loss” excluding specified items, which does not clearly reconcile to the $9.575 million loss from operations in the statements.
- Status and potential consequences of the SEC subpoena, litigation, and the $295,000 bond.
- Progress and independent assessment of the material-weakness remediation, plus the dilution impact of outstanding options, warrants, and future equity issuance.