Cocrystal Pharma, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless noted. Cocrystal is a clinical-stage antiviral drug developer with no approved products and no product-sales revenue.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Collaboration revenue | $5.078 million | $0 |
| Research and development expense | $0.878 million | $0.877 million |
| General and administrative expense | $1.323 million | $1.190 million |
| Income (loss) from operations | $2.877 million | $(2.067) million |
| Net income (loss) | $2.971 million | $(1.553) million |
| Basic and diluted earnings (loss) per share | $0.10 | $(0.06) |
| Cash provided by (used in) operating activities | $2.018 million | $(2.078) million |
| Cash and restricted cash at period end | $8.621 million | $1.278 million |
- At March 31, 2019, cash was $8.571 million, restricted cash $0.050 million, current assets $9.868 million, and current liabilities $1.753 million.
- Total assets were $76.291 million, including $65.195 million of goodwill. Total liabilities were $2.471 million; stockholders’ equity was $73.820 million.
- No convertible notes remained outstanding. Finance lease liabilities totaled $0.279 million and operating lease liabilities $0.818 million. Derivative liabilities were $0.163 million.
- Net cash from financing was $3.876 million, including $3.928 million in net proceeds from common-stock sales, partly offset by finance-lease payments. The March private placement issued approximately 1.602 million shares; shares outstanding rose from approximately 29.938 million at year-end to 31.621 million at March 31.
- No conventional product gross margin is reported; the quarter’s operating income was driven by collaboration revenue.
Changes and business developments
- Q1 revenue and the swing to net income primarily reflect the Merck influenza A/B collaboration, entered into January 2, 2019. The $5.078 million recognized comprised consideration for intellectual-property rights and research and development activities. Merck also funds program research and development, including clinical development.
- Merck paid a $4 million non-refundable upfront amount. Cocrystal is eligible for development, regulatory and sales milestones totaling up to $156 million, plus royalties; these amounts are contingent. Merck may terminate the agreement without cause before the first commercial sale.
- R&D expense was essentially flat year over year; G&A rose $0.133 million, primarily from audit-related fees and legal services, including litigation and patent matters.
- Operating cash flow improved from use of $2.078 million to provision of $2.018 million, primarily due to the collaboration. Accounts receivable was $1.078 million at quarter-end.
- Cash and restricted cash increased $5.869 million during the quarter. The Company reported approximately $8.5 million of cash on hand as of May 10, 2019.
Outlook, risks and notable items
- Management stated that cash on hand as of May 10 might not fund operations for the next 12 months, including unforeseen costs. The filing describes substantial doubt about the Company’s ability to continue as a going concern. Management expects continued operating losses and negative operating cash flows over the coming years and may seek additional equity or strategic-partner funding; financing may be unavailable or dilutive.
- For HCV candidate CC-31244, interim Phase 2a results announced in January showed 8 of 12 subjects achieved SVR12; treatment was reported as well tolerated, with no discontinuations due to adverse events. Final results were expected in Q2 2019. A Hong Kong investigator-sponsored Phase 2a study was expected to begin in the first half of 2019.
- For influenza, CC-42344 was identified as a preclinical lead; the Company planned further IND-enabling work and a Phase 1 study during 2020. Several Merck-collaboration inhibitors were in preclinical development.
- Q1 2018 included a $0.106 million gain on settlement of a mortgage note and a $0.419 million income-tax benefit; neither recurred in Q1 2019. Q1 2019 included a $0.100 million gain from a decrease in the fair value of warrant liabilities.
- The Company abandoned acquired in-process R&D assets in Q4 2018, recording a $53.905 million impairment; no in-process R&D remained on the March 31, 2019 balance sheet. Goodwill remained $65.195 million.
- Management concluded disclosure controls and procedures were not effective at March 31, 2019 and was implementing remediation for material weaknesses, with completion expected during 2019. Controls were not considered remediated until they operated effectively for a sufficient period and testing supported that conclusion.
- Pending matters include a securities class action, a shareholder derivative action, and an appeal in another lawsuit. The Company could not estimate potential losses and recorded no loss contingency. Its insurer initially declined coverage for the class and derivative actions; the Company warned litigation costs could be material.
Important facts for investors to verify
- Whether cash, collaboration reimbursements, and other funding are sufficient for the next 12 months, given management’s stated going-concern uncertainty.
- Collection and timing of the $1.078 million receivable and recognition of remaining collaboration consideration; confirm the distinction between received upfront cash, recognized revenue, reimbursements, and contingent milestones.
- Final CC-31244 Phase 2a results and progress of the proposed Hong Kong study, as well as the timing and clinical progress of influenza programs.
- Developments in litigation and insurance coverage, including potential defense costs or adverse outcomes that the filing says cannot presently be estimated.
- Progress and independent testing of internal-control remediation, and the implications of further equity financing for existing shareholders.