Cocrystal Pharma, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2018, Cocrystal was a clinical-stage biotechnology company developing antiviral candidates for hepatitis C, influenza, and norovirus. It had no approved products and reported no product revenue. Financial amounts below are in thousands of dollars unless stated otherwise.
Financial performance and liquidity
- Revenue: None from product sales; the company had not established a recurring revenue source.
- Operating results: R&D expense was $877, down 58% from $2,071 in Q1 2017; G&A was $1,190, up 13% from $1,050. Total operating expenses and operating loss were $2,067, compared with $3,121. Net loss was $1,553, or $0.06 per share, versus $2,548, or $0.11 per share.
- Other items: Q1 2018 included a $106 gain on settlement and collection of the mortgage note and a $419 income tax benefit. The company recorded $32 of interest expense and a $21 gain from the change in fair value of derivative liabilities. The filing’s MD&A gives the derivative gain as $22 and operating loss as $2,068; the financial statements show $21 and $2,067, respectively.
- Cash flow: Operating cash use was $2,078, versus $2,052 in Q1 2017. Investing activities provided $1,395, mainly the $1,400 mortgage-note collection; financing provided $1,184, including $1,000 of note proceeds and $184 from option exercises. Cash and cash equivalents were $1,249 at March 31, plus $29 restricted cash, versus $748 and $29, respectively, at year-end.
- Balance sheet and debt: Current assets were $1,481 and current liabilities $1,358. Total liabilities were $16,585, including $2,039 of convertible notes and a $13,163 deferred tax liability. Total assets were $120,721, including $53,905 of in-process R&D and $65,195 of goodwill. Accumulated deficit was $139,596.
Changes versus the prior comparable period
- Net loss narrowed by $995, principally due to lower R&D and personnel costs and reduced legal expense. Management attributed lower R&D spending to completion of a Phase 1 trial in 2017 and lower preclinical testing.
- Operating cash use was slightly higher year over year despite the narrower net loss. Cash at quarter-end benefited from the mortgage-note collection and new borrowing.
- Interest expense rose from $2 of interest income in Q1 2017 as the company issued convertible notes in late 2017 and Q1 2018. The fair-value gain on derivative liabilities was substantially smaller than in Q1 2017.
Outlook, risks, and notable developments
- Pipeline: The FDA cleared the IND for HCV candidate CC-31244 in March, allowing the company to initiate a Phase 2a study; management reported prior acceptable safety findings and antiviral activity and said it was discussing partnerships. CC-42344 was selected as an influenza preclinical lead, with IND-enabling studies and an IND filing planned for 2018. Norovirus inhibitor research continued.
- Funding and going concern: The company disclosed recurring operating losses, negative operating cash flow, and substantial expected future losses. It said it lacked sufficient proceeds to fund the next 12 months unless the underwriter’s overallotment option was fully exercised, and expected to need further capital. Additional financing may be unavailable or dilutive; inability to obtain adequate funding could force cessation or substantial curtailment of development.
- Subsequent offering: On May 3, 2018, the company closed a public offering of 4,210,527 shares, reporting approximately $8 million gross and $7.1 million net proceeds, plus an underwriter warrant and a 45-day overallotment option. The filing separately states that full exercise would yield approximately $8.2 million in net proceeds.
- Impairment risk: Management reported a share-price decline after March 31, from $6.43 on April 2 to $1.91 on May 9, attributing it partly to the offering and thin trading. If sustained, the decline could trigger an impairment assessment of goodwill and in-process R&D; a material impairment in a later period was possible.
- Controls and other risks: Management concluded disclosure controls were ineffective at March 31 because of material weaknesses in financial reporting reviews and account reconciliations. Remediation was underway, but management said it needed more time and expected completion in 2018. Risks also include clinical and regulatory failure, competition, financing access, and protection of proprietary technology. The mortgage-note dispute was settled for $1.4 million; the company reported no other material legal proceedings.
- Capital structure: A one-for-thirty reverse stock split took effect January 24, 2018; share and per-share data were retroactively adjusted. The March 31 balance sheet reports 24,402,444 shares outstanding. Convertible notes totaling $2 million principal carry 8% interest and mature in 2019 and 2020, with conversion and automatic-conversion provisions.
Key facts for investors to verify
- Confirm cash runway and financing needs against the May offering’s actual net proceeds, any overallotment exercise, and expected development spending.
- Review the progress, cost, and timing of the CC-31244 Phase 2a study and the planned CC-42344 IND filing.
- Assess potential dilution from the offering, outstanding convertible notes, warrants, options, and the underwriter warrant.
- Track whether the post-quarter share-price decline triggers impairment testing and any write-down of the $119.1 million combined goodwill and in-process R&D balance.
- Monitor remediation and independent testing of the disclosed material weaknesses in internal control.
- Reconcile the filing’s differing rounded figures for derivative gains, operating loss, offering proceeds, and the cover-page share count placeholder (“XXX”) with the underlying statements and subsequent filings.