Business context and reporting period
The supplied filing is BioZone Pharmaceuticals, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, filed April 1, 2013. This does not match the requested company, Cocrystal Pharma, Inc.; the filing identifies BioZone Pharmaceuticals as the registrant. The period is a full fiscal year, not a standalone fourth quarter.
BioZone primarily manufactured over-the-counter drugs and cosmetic products for third parties. It also sold proprietary skin-care brands and pursued early-stage drug-delivery technology development. Contract manufacturing generated about 94% of 2012 sales. The company reported one operating segment.
Financial results and position
| Metric | 2012 | 2011 |
|---|---|---|
| Sales | $17.19 million | $12.61 million |
| Gross profit / margin | $7.22 million / 42% | $2.69 million / 21% |
| Operating expenses | $9.86 million | $6.57 million |
| Operating loss | $2.64 million | $3.89 million |
| Interest expense | $5.48 million | $1.24 million |
| Net loss | $7.96 million | $5.46 million |
| Basic and diluted loss per share | $0.13 | $0.11 |
| Cash used in operating activities | $1.47 million | $0.42 million |
- Sales rose 36.4%, driven by a new internet-retailer customer, higher Matrixx Initiatives production, and increased legacy-customer orders.
- Gross margin improved to 42% from 21%; excluding obsolete-inventory write-offs, management reported margins of 44% and 33%, respectively. Inventory write-offs were $0.41 million in 2012 versus $1.44 million in 2011.
- Operating loss narrowed, but net loss increased as interest expense rose sharply, largely due to warrant valuation and amortization of debt discounts on convertible notes.
- At year-end, cash was $62,296; current assets were $2.67 million and current liabilities $7.93 million, producing negative working capital of $5.26 million. Total assets were $7.24 million, shareholders’ deficiency was $3.58 million, and reported long-term debt was $2.89 million. Current liabilities also included $1.47 million of convertible notes, $1.10 million of shareholder notes payable, and $0.92 million of derivative instruments.
- Financing activities provided $1.49 million net cash in 2012, including $3.75 million of convertible-note proceeds and $650,000 from stock sales, offset mainly by debt repayments. Shares outstanding increased to 63.14 million from 55.18 million at year-end 2011.
Material changes, outlook and risks
- Results are not fully comparable: the BioZone operating group was acquired in a reverse merger in 2011, and Baker Cummins was consolidated for a full year in 2012 versus part of 2011.
- A December 2012 voluntary recall of one lot of Zicam nasal gel followed detection of a small amount of Burkholderia cepacia in a sample. BioZone recorded a $2 million recall charge; it had paid $579,197, with the balance remaining due. Matrixx’s preliminary damage estimate was $1 million to $3 million. The filing reported no known illness reports.
- Management said cash on hand would not meet working-capital and capital-expenditure needs for the next 12 months and that external financing might be necessary. The auditor’s report expressed substantial doubt about the company’s ability to continue as a going concern. A March 2013 factoring arrangement provided for up to $1.5 million in discretionary receivables and raw-material financing, subject to fees; it is not a guarantee of available funding.
- Management planned cost-structure reviews and sales initiatives, and expected them to reduce or eliminate ongoing losses, but gave no quantified guidance and cautioned that financing and results were uncertain. Equachem and Equalan were liquidated in February and March 2013, with activities transferred to BioZone Labs to reduce overhead.
- Customer concentration is significant: four customers represented approximately 28%, 21%, 7%, and 5% of 2012 sales; one customer represented 50% of year-end receivables. The business is seasonal, with about two-thirds of revenue in the second half of the year.
- The company reported material weaknesses in financial reporting and information-technology controls, including inadequate documentation, review, reconciliations, segregation of duties, and access/change controls. Management concluded disclosure controls were ineffective; the auditor disclaimed an opinion on internal control over financial reporting. The financial-statement audit opinion was unqualified but included the going-concern emphasis.
- Legal matters included a former officer’s $23 million claim, a company countersuit seeking at least $2 million and cancellation of 6.65 million shares, and a separate contract dispute for which the company could not estimate a loss range. The shareholder note balance of $1.10 million was also disputed, though the company recorded the full amount claimed.
- Research and development expense was $743,091. The company terminated its Princeton research activity in September 2012; it reported no human clinical studies of any product candidate.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is for BioZone Pharmaceuticals, Inc., not Cocrystal Pharma, Inc.
- Review subsequent filings for the status, payment, or dispute of the $2 million recall accrual and any further recall-related claims.
- Verify actual liquidity and financing availability, including use and cost of the discretionary Midland facility, near-term debt maturities, and any additional capital raised.
- Track customer retention and concentration, especially Matrixx and other major accounts, and assess whether improved gross margins persist.
- Check updates on the going-concern uncertainty, remediation of material control weaknesses, and the material litigation and shareholder-debt dispute.