Cocrystal Pharma, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Dollar figures are in millions unless noted. Cocrystal is a pre-revenue biotechnology company developing antiviral medicines. The January 2014 reverse merger with Biozone Pharmaceuticals was accounted for as a recapitalization, with Cocrystal Discovery as the accounting acquirer; comparisons with 2013 therefore may not reflect a like-for-like operating business.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $0.866 | $0.950 | $2.722 | $2.936 |
| General and administrative expense | $0.353 | $0.055 | $1.417 | $0.159 |
| Operating loss | $(1.219) | $(1.005) | $(4.139) | $(3.095) |
| Net income (loss) | $(2.549) | $(1.005) | $1.808 | $(3.093) |
| Net cash used in operations | Not provided for quarter | Not provided for quarter | $(4.257) | $(2.878) |
There are no revenue-based margins to assess. Nine-month net income was not generated by operations: it primarily reflected a $6.952 million noncash gain from the decline in fair value of liability-classified warrants. Q3 included $0.792 million of noncash warrant revaluation expense and a $0.584 million loss related to returning escrowed MusclePharm shares. Management says operating loss is a more useful indicator of performance.
At September 30, cash and cash equivalents were $3.006 million; marketable securities were $5.543 million, including approximately $3.043 million of shares remaining in escrow; and the mortgage note receivable was $2.634 million. Total assets were $11.635 million, liabilities $7.657 million, and stockholders’ equity $3.978 million. Current assets totaled $5.803 million versus current liabilities of $7.657 million; the latter consisted primarily of $7.242 million in derivative liabilities. The filing reports no conventional debt balance.
Cash increased $1.972 million during the first nine months, supported by $2.750 million of January stock-and-warrant financing and investment proceeds, while operations used $4.257 million. In October, MusclePharm repurchased 250,000 shares for $2.5 million. The company reported $5.292 million of cash and cash equivalents as of November 6, 2014, plus 260,000 MusclePharm shares still held in escrow. Management estimated approximately $6.0 million of negative cash flow over the 12 months ending September 30, 2015, and said available resources were sufficient for its current operating plan for at least 12 months.
Changes and notable items
- Q3 operating loss increased to $1.219 million from $1.005 million. R&D expense declined 9% year over year, while G&A rose to $0.353 million from $0.055 million, reflecting public-company, merger, financing, professional-services, compensation, and facility costs.
- Nine-month operating loss increased to $4.139 million from $3.095 million, despite lower R&D spending, as G&A rose substantially.
- The January merger and recapitalization substantially changed the company’s capital structure. The company reported 122.494 million common shares outstanding at September 30 and 122.494 million at November 14. Series B preferred stock is convertible into approximately 205.1 million common shares; outstanding warrants and options add further potential dilution.
- The company invested approximately $2.626 million in a mortgage note secured by property leased to MusclePharm. The note bears 7.24% interest and matures in 2032.
Outlook, risks, and contingencies
- Pipeline: The company selected a hepatitis C lead for IND-enabling studies and expected to submit regulatory filings to begin clinical trials in the first half of 2015. It expected an influenza IND filing in December 2015. Programs also included hepatitis C helicase inhibitors, dengue, norovirus, rhinovirus, and Ebola research. These are forward-looking expectations, not assured milestones.
- Funding and profitability: Management expects substantial operating losses and negative operating cash flow during development. Profitability depends on successful development, regulatory approval, and commercialization; additional debt or equity funding, strategic partnerships, or asset sales may be needed. Financing may not be available on acceptable terms.
- MusclePharm matters: A landlord’s eviction action involving MusclePharm’s leased property remains unresolved. The company agreed to keep 260,000 MusclePharm shares in escrow while the parties seek an arrangement concerning a claimed $3.037 million exposure. A separate lawsuit seeks recovery on a purported 2007 $295,000 promissory note; the complaint was amended after dismissal with leave to amend. The company says it intends to defend both matters.
- Internal controls: Management concluded disclosure controls were ineffective as of September 30 because a material weakness in accounting for complex financial instruments remained. Remediation was in progress but incomplete as of November 14, 2014.
- Valuation and dilution: Warrants potentially settleable in cash are recorded as Level 3 liabilities and remeasured, creating potentially significant noncash earnings volatility. Potential common shares include 26.669 million warrants and 3.058 million options; Series B conversion and plan reserves also create substantial potential dilution.
Important facts for investors to verify
- Progress toward the anticipated hepatitis C and influenza regulatory submissions, and the scientific and regulatory status of other programs.
- Actual cash burn versus management’s $6.0 million estimate, future financing needs, and the availability or terms of capital.
- The release or continued escrow of MusclePharm shares, resolution of the landlord dispute, and any resulting indemnity or litigation costs.
- Changes in warrant fair value and the resulting noncash earnings impact, alongside operating loss and cash used in operations.
- Completion and effectiveness of the company’s remediation of its material weakness in financial reporting controls.
- The filing’s stated common-share and potential-dilution figures, including Series B conversion terms and outstanding warrants and options.