Cocrystal Pharma, Inc. annual report, FY2011

Business context and reporting period

The supplied filing is Biozone Pharmaceuticals, Inc.’s Form 10-K for the fiscal year ended December 31, 2011—not a Cocrystal Pharma filing and not a standalone fourth-quarter report. The company’s business shifted in 2011 from its former surf-resort plan to OTC drug and cosmetic contract manufacturing, proprietary skin-care products, and early-stage drug-delivery research. The BioZone Labs group was treated as the accounting acquirer in a reverse merger; the company also acquired Aero Pharmaceuticals’ Baker Cummins product line.

Financial results and liquidity

• Revenue fell 17.4%, principally due to delayed customer orders and lower end-user demand. Contract manufacturing generated most sales.
• Gross profit declined by $2.86 million. A $1.44 million inventory-obsolescence write-off was a major factor; cost of sales rose despite lower revenue.
• Interest expense was $1.24 million, up from $0.44 million, and the company recorded a $0.28 million loss on changes in derivative fair value.
• At year-end, cash was $416,333; current assets were $2.90 million and current liabilities $7.28 million, giving negative working capital of $4.37 million. Shareholders’ deficiency was $2.77 million.
• Debt included $2.05 million of current convertible notes, $1.10 million payable to a shareholder, and $3.30 million of long-term debt before its current portion. The filing states debt was in default; the auditor cited financing needs to repay defaulted debt as a going-concern concern.

Changes, outlook, and risks

• Management expected continued losses in 2012 and said available cash would not cover working-capital and capital-expenditure needs for the next 12 months. Management planned cost-structure and sales reviews but gave no quantified forecast. The auditor’s report expressed substantial doubt about the company’s ability to continue as a going concern.
• R&D expense increased to $399,624 from $240,873. The drug-delivery program was early-stage; its propofol candidate had not entered human clinical studies.
• FDA inspections in January and November 2011 resulted in Form 483 observations. The company reported timely remediation responses, VAI classifications, and no Warning Letters.
• Customer concentration was material: four customers represented approximately 27%, 9%, 7%, and 7% of 2011 sales. The filing identifies loss of major customers, price competition, regulation, raw-material costs, and protection of intellectual property as risks.
• Internal and disclosure controls were reported ineffective because of inadequate staffing and lack of segregation of duties over cash disbursements, identified as a material weakness.
• Subsequent to year-end, the company raised capital through equity-unit sales and convertible notes. February 2012 notes included $2.3 million of 10% secured convertible debt with a $0.20 initial conversion price and warrants; March 2012 financing included a $1.0 million 10% convertible note. These financings may increase debt, dilution, and claims against company assets. OPKO also received licenses to the company’s delivery technology in February 2012.
• The filing describes a contract lawsuit filed in March 2012; the company disputed the claims and said it intended to defend itself. A separate company lawsuit was dismissed for improper venue.

Key facts for investors to verify

• Confirm the issuer and period: the source is Biozone Pharmaceuticals, Inc.’s 2011 annual report, despite the request metadata naming Cocrystal Pharma and “2011 Q4.”
• Verify the status, amount, and terms of defaulted debt and subsequent financings, including collateral, conversion prices, warrants, and repayment obligations.
• Assess whether post-year-end funding and operating cash generation were sufficient to address the disclosed going-concern and working-capital shortfalls.
• Track remediation of FDA observations, the material weakness in financial controls, customer concentration, and any subsequent litigation developments.
• Reconcile reported net-loss figures where the MD&A gives a slightly different amount; the consolidated statements report a 2011 net loss of $5,457,310.