Cocrystal Pharma, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Cocrystal is a clinical-stage biotechnology company developing antiviral medicines; it had no product-sales revenue and operated as one reportable segment.
Financial performance and position
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Grant revenue | $0 | $0.027 | $0 | $0.053 |
| Research and development expense | $2.368 | $1.946 | $5.710 | $3.505 |
| General and administrative expense | $1.836 | $1.898 | $3.829 | $2.536 |
| Operating loss | $(4.204) | $(3.817) | $(9.539) | $(5.988) |
| Net loss | $(3.227) | $(2.623) | $(7.239) | $(19.165) |
| Cash used in operating activities | Not separately stated | Not separately stated | $(9.208) | $(4.090) |
Gross margin is not meaningful because the company reported no product revenue. Q2 research and development spending rose 22%; six-month spending rose 63%, primarily as clinical and preclinical programs advanced. Six-month G&A increased 51%, including higher compensation and legal/professional fees.
Net loss comparisons were materially affected by noncash changes in fair value of warrant liabilities: the company recorded $2.211 million of income for the first half of 2016 versus $11.528 million of expense in the first half of 2015. Management recommends focusing on operating loss rather than net loss.
- Cash and liquidity: Cash and cash equivalents were $5.022 million at June 30, down from $9.276 million at December 31, 2015. Current assets were $5.936 million and current liabilities $3.383 million.
- Funding: Six-month financing cash inflow was $5.007 million, chiefly from a $5.004 million private placement. The placement issued 9.812 million shares at $0.51 per share.
- Balance sheet: Total assets were $220.148 million, including $146.301 million of in-process research and development and $65.195 million of goodwill. Total liabilities were $53.315 million, including $1.869 million of current derivative liabilities and a $49.875 million deferred tax liability. No conventional interest-bearing debt balance is identified in the filing.
- Equity and dilution: 704.255 million common shares were outstanding at June 30. Options and warrants, together with shares reserved for future option grants, represent substantial potential dilution.
Material changes, outlook, and risks
- Clinical and research progress: The Phase 1a safety study of HCV candidate CC-31244 began in April 2016; four of five dose groups had completed and dosing in the final group had begun. The company advanced preclinical work on CC-2850 and CC-2069 and continued influenza and norovirus inhibitor research.
- Funding outlook and going concern: Management said the June 30 cash balance would not fund the operating plan for the rest of 2016; cash was reported at $3.1 million as of August 5. The company expects ongoing losses and negative operating cash flows and stated that substantial doubt exists about its ability to continue as a going concern. It expects to seek additional equity, debt, strategic-partner, or other funding, with no assurance it will be available on acceptable terms. Equity financing could dilute shareholders.
- Leadership change: CEO Jeffrey Meckler and Chief Medical Officer Douglas Mayers resigned effective July 21, 2016; Gary Wilson was named interim CEO on July 22.
- Contingencies: A California lawsuit involving an alleged $295,000 promissory note had a February 2017 trial date; the company had posted a $295,000 bond. A separate product-warning lawsuit names a subsidiary; no discovery had occurred. The SEC had subpoenaed company documents in October 2015; the company said it was cooperating and could not predict the outcome.
- Mortgage note: The company reported approximately $360,000 of additional amounts claimed following a default and interest-rate increase on a mortgage note receivable. It did not record those amounts because the matter was contingent.
- Financial reporting controls: Management concluded internal control over financial reporting was ineffective at June 30 due to multiple material weaknesses, including deficient segregation of duties, staffing and review of complex accounting, related-party transaction controls, and financial reporting processes. Remediation efforts were underway but implemented controls had not been tested or validated by auditors.
- Other commitments: Operating lease payments were reported as $168,000 due within one year and $341,000 due in one to three years. The filing also describes milestone, royalty, and license obligations tied to development and commercialization.
Most important facts for investors to verify
- Whether the company secured enough capital to fund operations and clinical programs after the reported $3.1 million cash balance on August 5, 2016.
- Progress, safety findings, and timing for the CC-31244 Phase 1a trial, as well as the status of other development candidates.
- Whether leadership transitions affected execution, and whether internal-control weaknesses were remediated and independently tested.
- Developments in the SEC inquiry, the lawsuits, and the disputed mortgage-note default claim.
- The net-loss figures: the financial statements report 2015 net losses of $2.623 million for Q2 and $19.165 million for the first half, while portions of MD&A cite different comparative loss figures. Investors should consult the filed statements and reconcile this presentation.