Business context and reporting period
The supplied filing is BioZone Pharmaceuticals, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2013—not a filing in the name of Cocrystal Pharma, Inc. The company’s operations included contract manufacturing and marketing of OTC drugs, cosmetics and supplements, as well as development of proprietary drug-delivery technology. The filing states that results are seasonal, with about two-thirds of annual revenue generated in the second half of the year.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Sales | $2.03 million | $3.51 million |
| Gross profit / margin | $592,083 / 29% | $1.45 million / 41% |
| Operating expenses | $1.61 million | $2.04 million |
| Operating loss | $1.02 million | $591,383 |
| Net loss | $1.48 million | $3.65 million |
| Basic and diluted loss per share | $0.02 | $0.06 |
| Operating cash flow | $95,377 provided | $1.94 million used |
At March 31, 2013, cash was $92,123; current assets were $2.52 million and current liabilities were $9.21 million, producing a reported working-capital deficit of $6.69 million. Total assets were $7.11 million and shareholders’ deficiency was $5.06 million. Debt and debt-like balances included $1.82 million of convertible notes net of discount, $1.10 million due to a shareholder, and $3.16 million of long-term debt including its current portion. Accrued interest was $364,183 and derivative liabilities were $900,292.
Changes versus the prior comparable period
- Sales fell 42.2%, primarily due to lower customer orders and end-user demand. Gross profit declined 59.0%; management attributed the margin contraction to fixed costs weighing more heavily on lower sales and higher raw-material costs that could not be passed to customers.
- Operating expenses decreased $424,534, including lower professional fees and lower R&D costs after closure of the Princeton research facility.
- Net loss narrowed by $2.17 million, but the comparison was substantially affected by noncash financing-related interest expense: Q1 2012 included warrant/derivative-related expense that was not repeated at the same level in Q1 2013. The operating loss itself worsened.
- Operating cash flow improved, but included a $730,813 increase in accounts payable; cash remained very limited. Cash increased by $29,827 during the quarter.
Outlook, risks and unusual items
- Going concern: Management reported recurring operating losses, negative working capital, accumulated deficit of $15.60 million, debt in default, and substantial doubt about the company’s ability to continue as a going concern. It said existing cash would not meet working-capital and capital-expenditure needs for the next 12 months and external financing may be required; availability and terms were uncertain.
- Financing: A March 2013 factoring agreement provided for up to $1.5 million of discretionary receivables financing, with significant fees and potential chargebacks. The company and an affiliate guaranteed obligations and pledged assets; certain noteholders subordinated security interests. The filing does not establish how much funding was actually drawn.
- Subsequent equity raise: In April 2013, the company sold 3.8 million shares and issued 1.9 million warrants for $950,000 gross proceeds, before fees. It also issued 2,518,356 shares to prior investors as an inducement/for dilution, plus placement-agent warrants. The filing reports 69,461,325 common shares outstanding as of May 10, 2013.
- Legal matters: A former executive’s action seeking $23 million was settled on April 19, 2013; the company agreed to honor specified employment and stock-purchase agreement consideration, but full settlement terms were not yet disclosed. A related company lawsuit was dismissed. A separate customer lawsuit remained pending, with no estimate of reasonably possible losses provided.
- Controls: Management concluded disclosure controls were ineffective, citing a material weakness related to inadequate segregation of duties and limited accounting staff.
- No formal revenue or earnings guidance is provided. Management described plans to grow contract manufacturing and proprietary-brand sales, reduce costs and review sales efforts, but warned that financing may not be available on acceptable terms.
Important facts for investors to verify
- Confirm the issuer and filing identity: the supplied document names BioZone Pharmaceuticals, Inc., while the request metadata names Cocrystal Pharma, Inc.
- Check the status, amount drawn, effective cost and collateral consequences of the Midland factoring and purchase-money facilities, and the reported debt default.
- Review subsequent filings for the complete Fisher settlement terms, related share or other consideration, and the outcome of the remaining litigation.
- Assess whether the April financing and later funding were sufficient to address liquidity needs, and track share-count and warrant dilution.
- Monitor customer demand, gross margins, customer concentration and remediation of the disclosed internal-control weakness.