Business context and reporting period
The supplied filing is BioZone Pharmaceuticals, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013, filed August 14, 2013. It describes a contract manufacturer and marketer of OTC drugs, cosmetics and nutritional supplements, with proprietary drug-delivery technology under development. The filing does not identify Cocrystal Pharma, Inc.; confirm that this is the intended filing. The document also contains inconsistent period references, including “three months ended March 31” in the contents and certifications, while the financial statements cover June 30.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sales | $1.956 million, versus $4.912 million in 2012 | $3.985 million, versus $8.422 million in 2012 |
| Gross profit and margin | $552,000; 28%, versus $2.031 million; 41% | $1.144 million; 29%, versus $3.476 million; 41% |
| Operating income (loss) | $(757,000), versus $263,000 | $(1.777) million, versus $(329,000) |
| Net loss | $(746,000), versus $(714,000) | $(2.222) million, versus $(4.360) million |
| Operating cash flow | $(582,000) for first half 2013, versus $(2.038) million in first half 2012 |
At June 30, cash was $354,000; current assets were $3.235 million and current liabilities $10.108 million, a $6.873 million working-capital deficit. Total liabilities were approximately $13.010 million, against a shareholders’ deficiency of $5.309 million. Balance-sheet debt included $2.188 million of convertible notes, $1.100 million due to a shareholder, $206,000 current long-term debt and $2.901 million long-term debt; accrued interest was another $443,000. Financing provided $920,000 in first-half cash, including $950,000 from common-stock sales and $50,000 of convertible debt, partly offset by debt repayments.
Material changes and management commentary
- Sales fell 60.2% in the quarter and 52.7% in the first half. Management attributed the decline chiefly to losing its largest customer following a December 2012 voluntary product recall; that customer represented about $1.5 million of prior-year quarterly sales and $2.4 million of prior-year first-half sales. Lower orders and end-user demand also contributed.
- Lower order volumes reduced labor efficiency and gross margins. Operating expenses declined 26.0% in the quarter and 23.2% in the first half, reflecting lower payroll, professional fees, selling costs and R&D. R&D was sharply reduced after the Princeton research facility closed and five staff members were terminated in 2012.
- First-half net loss improved year over year, largely alongside substantially lower reported interest expense; the filing attributes much of the prior-year expense to noncash debt discounts associated with warrants. Fair-value gains on derivative liabilities were $512,000 in first-half 2013 and are noncash.
- Management said it was pursuing contract-manufacturing growth through a dedicated sales team, cost and efficiency initiatives, and review of sales programs. It expected continued operating losses and stated existing cash would not meet working-capital and capital needs for the next 12 months. No quantified revenue or earnings guidance is provided.
Liquidity, risks, contingencies and unusual items
- The filing states that recurring losses, the working-capital deficit and accumulated deficit of $16.350 million raise substantial doubt about the company’s ability to continue as a going concern. Management said external financing may be needed and gave no assurance it would be available on acceptable terms.
- A March 2013 factoring and purchase-money arrangement offered up to $1.5 million at Midland’s discretion, secured by company assets and supported by guarantees; certain noteholders subordinated security interests. Factoring fees and chargeback provisions apply. The CEO and president also provided limited validity guarantees.
- The filing says the company had debt in default in its liquidity discussion, but separately reports “None” under defaults upon senior securities. This inconsistency warrants verification.
- Litigation includes a former executive’s claim seeking $23 million. The company disputes the claims; the filing does not quantify likely loss. A separate supplier dispute has no stated monetary demand. The company’s New York suit against the former executive was dismissed as part of a settlement, but the filing does not clearly explain the settlement terms or status of the $23 million action.
- The company disclosed ineffective disclosure controls due to previously reported material weaknesses; no material control changes occurred during the quarter. It also reported customer concentration: two customers accounted for 22% and 21% of quarterly sales.
- Other notable exposures include a disputed $1.100 million shareholder-note balance recorded at the amount claimed, a $2.551 million guarantee exposure tied to the 580 Garcia property mortgage, and the stated liquidation of equity-method investee BetaZone after quarter-end.
Important facts for investors to verify
- Whether this BioZone Pharmaceuticals filing, rather than a Cocrystal Pharma filing, is the intended source, and whether the period is correctly identified as June 30, 2013.
- The status and terms of debt defaults, maturities, collateral, and any waivers or subsequent financing; reconcile the conflicting default disclosures.
- Cash runway, availability and cost of Midland financing, and the feasibility of management’s sales and cost-reduction plans.
- Customer-loss and recall consequences, current customer concentration, and any remaining product-liability or litigation exposure.
- Progress in remediating material weaknesses in financial reporting controls, and the status of the former executive litigation and settlement.