Cocrystal Pharma, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2014. The company is a development-stage biotechnology business focused on antiviral drug candidates. On January 2, 2014, Biozone Pharmaceuticals merged with Cocrystal Discovery in a reverse merger for accounting purposes; Biozone had sold substantially all of its operating assets to MusclePharm immediately beforehand. Cocrystal Discovery is treated as the accounting acquirer, so prior-period operating results principally reflect Cocrystal Discovery and are not fully comparable to the post-merger corporate structure.
Financial performance and position
- Revenue: None in Q1 2014 or Q1 2013. Consequently, gross margin and operating margin are not meaningful.
- Operating expenses: $1.532 million, versus $1.058 million in Q1 2013. Research and development was $967,000, down 3% from $1.005 million. General and administrative expense rose to $565,000 from $53,000, mainly due to merger, financing, professional-service, and compensation costs.
- Loss: Operating loss was $1.532 million versus $1.058 million. Net loss improved to $372,000 from $1.058 million, largely because of $1.160 million of net other income, including a $2.106 million noncash gain from reduced derivative fair value, partly offset by a $946,000 charge for January financing warrants. The MD&A describes that warrant-related expense as $964,000, differing from the financial statements; investors should verify the correct amount. Basic and diluted loss per share was reported as $0.00 versus $0.02.
- Comprehensive loss: $1.823 million, including a $1.451 million unrealized loss on marketable securities.
- Cash flow: Operating activities used $1.780 million, compared with $952,000 in Q1 2013. Investing activities provided $576,000, principally from cash acquired in the merger. Financing activities provided $2.769 million, primarily from a January private placement.
- Liquidity and assets: At March 31, cash and cash equivalents were $2.599 million and marketable securities were $7.285 million, for combined cash and securities of $9.884 million. Total assets were $10.481 million. The marketable securities included MusclePharm shares; $600,000 of shares were held in escrow and the filing applies a marketability/option discount to their value.
- Liabilities and equity: Total liabilities were $12.555 million, including $12.089 million of derivative liabilities for warrants potentially settleable in cash. Stockholders’ deficit was $2.074 million. The balance sheet reports no conventional borrowings, but the company disclosed a separate legacy guarantee/contingency described below.
Material changes and unusual items
- The January merger and asset sale substantially changed the company’s business to antiviral drug development and produced the reported increase in assets and equity securities. The merger also brought in $8.737 million of MusclePharm marketable securities and $10.475 million of derivative liabilities, as disclosed in the supplemental cash-flow information.
- In January, the company raised $2.750 million by selling 5.5 million common shares and issued 5.5 million ten-year warrants with a $0.50 exercise price. The warrants were liability-classified; their initial estimated fair value exceeded the proceeds, resulting in a noncash financing-related charge.
- Series A preferred stock converted in connection with the merger, and Series B preferred shares were issued to Cocrystal Discovery security holders. Series B shares are convertible into common stock when sufficient authorized capital is available. The filing also reports substantial potential dilution from warrants, options, and preferred-stock conversion.
Outlook, risks, and contingencies
- Management anticipated filing an FDA Investigational New Drug application for hepatitis C in December 2014, influenza in December 2015, and human rhinovirus in December 2016. These are forward-looking targets, not assurances of filing or approval.
- Management estimated negative cash flow of approximately $7 million over the 12 months ending March 31, 2015, but stated that available cash, cash equivalents, and assets acquired in the merger were expected to fund the current operating plan for at least 12 months. The filing also cites approximately $2.0 million of cash and cash equivalents as of May 8, 2014 and the MusclePharm shares as liquidity resources. Further financing may be needed and may not be available on acceptable terms.
- The company expects continued substantial losses while conducting research and clinical development. Candidates require regulatory approval, and development, financing, and commercialization may be delayed or unsuccessful.
- A bank accelerated a legacy Biozone-related facility and demanded approximately $2.63 million as of February 10, 2014. The bank recorded a notice of default and could foreclose and pursue guarantors for a deficiency. MusclePharm advised that it would guarantee the facility, but the company was uncertain whether the bank would accept that guarantee. The filing does not provide a clear estimate of the company’s ultimate exposure.
- A founder/landlord sued the company, its subsidiary, and MusclePharm over the assignment of a lease to MusclePharm. The company intended to defend the case and had agreed to indemnify MusclePharm for certain eviction-related expenses; litigation and relocation costs could be substantial.
- Management concluded disclosure controls were ineffective as of March 31, 2014 because a material weakness in accounting for complex financial instruments remained unresolved. Remediation was in progress but not complete.
Important facts for investors to verify
- Reconcile the warrant-related expense: $946,000 in the financial statements versus $964,000 in MD&A.
- Assess the realizable value and liquidity of the MusclePharm shares, including escrow restrictions and the issuer’s call option, and reconcile March 31 balances with the May 8 liquidity discussion.
- Confirm the status and potential financial exposure of the accelerated bank facility, proposed MusclePharm guarantee, foreclosure process, lease dispute, and related indemnity.
- Evaluate the $12.089 million liability-classified warrant balance, its valuation assumptions, potential cash settlement terms, and dilution from outstanding securities.
- Track progress on the material-weakness remediation, financing needs, cash-burn estimate, and the stated regulatory filing targets.