Cocrystal Pharma, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The company is a preclinical-stage antiviral drug developer with no pharmaceutical product sales. Comparisons with 2014 are affected by the November 2014 RFS Pharma merger; 2015 reflects a fuller year of its operations.
Business context
Programs target hepatitis C, norovirus and influenza using inhibitors of viral replication. The HCV portfolio includes nucleoside and non-nucleoside NS5B polymerase inhibitors, NS5A inhibitors and NS3 helicase inhibitors. All programs were preclinical; the company had not entered a compound into human clinical trials. It had 23 full-time employees, including 18 in research and development, and relied on third parties for manufacturing and other development work.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Grant revenue | $78,000 | $9,000 |
| Research and development expense | $47.261 million | $4.071 million |
| General and administrative expense | $6.765 million | $1.737 million |
| Operating loss | $53.948 million | $5.799 million |
| Net loss | $50.122 million | $99,000 |
| Net cash used in operating activities | $10.317 million | $6.009 million |
- Revenue consisted almost entirely of grants; product revenue and meaningful commercial margins were absent.
- FY2015 net loss included a $38.665 million impairment of acquired in-process research and development (IPR&D), $9.916 million of noncash expense from changes in warrant-liability fair value, and a $1.686 million loss relating to escrowed MusclePharm shares. A $15.248 million income-tax benefit partly offset the loss.
- Cash and cash equivalents were $9.276 million at year-end, versus $3.970 million a year earlier. Current assets were $9.919 million and current liabilities $6.700 million; management reported working capital of approximately $7.3 million excluding derivative liabilities.
- Financing activities provided $15.885 million, primarily from common-stock issuance. Investing activities used $262,000. The filing reports no off-balance-sheet arrangements and no conventional borrowings in the presented balance sheet; liabilities included $4.115 million in derivative liabilities and a $49.875 million deferred tax liability.
- Total assets were $224.230 million, including $146.301 million of IPR&D and $65.195 million of goodwill. Total liabilities were $56.636 million.
Material changes, outlook and risks
- Research and development expense rose substantially versus 2014, reflecting both the RFS Pharma merger and the IPR&D impairment. General and administrative expense also increased, including $2.934 million of stock-based compensation for executive option grants and higher legal costs.
- Preclinical testing identified higher-than-acceptable toxicity associated with HCV lead CC-1845. The company reported work to separate its two diastereomers and assess the source of toxicity. The finding delayed development, reduced expected program cash flows and led to the impairment; further impairment remained possible.
- Management expected higher R&D spending in 2016, including manufacturing scale-up and initiation of Phase I programs. It estimated approximately $17 million of negative cash flow for the 12 months ending December 31, 2016.
- The company stated that year-end cash plus a subsequent $5.004 million private placement would not fund its current operating plan for at least 12 months. The placement, completed in March 2016 at $0.51 per share, provided cash but did not remove substantial doubt about the company’s ability to continue as a going concern. Management expected to seek further equity or debt funding, strategic partners or other capital; no assurance was given that funding would be available on acceptable terms.
- The financial-statement auditor issued an unmodified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern. The auditor issued an adverse opinion on internal control over financial reporting. Identified material weaknesses included inadequate segregation of duties, insufficient review of complex accounting, controls over related-party transactions, and financial-statement preparation and review.
- An SEC staff subpoena seeking documents was received in October 2015; the company said it was cooperating and could not predict the outcome. Other matters included a lawsuit concerning a purported $295,000 promissory note and litigation alleging inadequate warnings on products containing Cocamide DEA. The company posted a $295,000 bond in the note case.
- Risks include dependence on additional capital, unproven preclinical candidates and regulatory outcomes, competition from better-resourced companies, reliance on third parties, and patent and commercialization risks. Common shares outstanding increased substantially through preferred-stock conversions and financings; further issuance could dilute holders.
Important facts for investors to verify
- Current cash runway, expected spending and whether additional financing has been secured on terms sufficient to support the operating plan.
- Follow-up toxicology findings for CC-1845 and the status and funding needs of backup HCV candidates and planned Phase I work.
- Progress in remediating the reported material weaknesses and any subsequent auditor assessment of internal controls.
- Developments in the SEC inquiry, the promissory-note litigation and the disputed MusclePharm escrow shares.
- Current fully diluted share count, including outstanding options and warrants, and potential effects of further fundraising.