Cocrystal Pharma, Inc. (formerly Biozone Pharmaceuticals, Inc.) — FY 2013 Form 10-K
Period: Fiscal year ended December 31, 2013, compared with FY 2012. Although filed under Cocrystal Pharma’s name, the audited financial statements are for the legacy Biozone business. On January 2, 2014, Biozone sold substantially all operating assets to MusclePharm and completed a reverse merger with Cocrystal Discovery; Cocrystal Discovery is the accounting acquirer for future reporting.
Business context and reporting period
Following the transaction, the company’s primary business is preclinical antiviral drug discovery, using structure-based design to target viral replication enzymes. Programs address hepatitis C, influenza, rhinovirus, dengue and norovirus. No program had entered clinical trials as of the filing. The former OTC drug and cosmetics manufacturing operations, which generated most legacy revenue, are reported as discontinued operations.
Financial results and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Continuing-operations sales | $0 | $0 |
| Discontinued-operations revenue | $8.43 million | $17.19 million |
| Discontinued-operations gross profit | $2.79 million; 33.1% gross margin | $7.22 million; 42.0% gross margin |
| Loss from continuing operations | $11.64 million | $7.63 million |
| Loss from discontinued operations | $8.65 million | $0.33 million |
| Net loss | $19.62 million | $7.96 million |
| Net cash used in operating activities | $4.57 million | $1.59 million |
- FY 2013 reported loss included $4.53 million of expense from changes in derivative fair value, $3.34 million of interest expense, and a $4.14 million deemed dividend on preferred stock attributable to common shareholders. Stock and warrant compensation was a significant noncash cash-flow adjustment.
- At December 31, 2013, cash was $589,471, total assets were $6.46 million, current liabilities were $12.48 million, derivative liabilities were $8.49 million, and shareholders’ equity was negative $6.03 million. Cash was $8,101 at year-end 2012.
- The filing reports $2.9 million of cash and cash equivalents at March 20, 2014, and estimates approximately $7 million of negative cash flow for the 12 months ending March 31, 2015. Management expected available cash and transaction-related assets to fund its current plan for at least 12 months, but also anticipated needing additional capital.
- Legacy convertible notes were reported as fully converted or repaid by year-end. Separately, Biozone Labs had guaranteed a property-related bank loan; the filing cites approximately $2.5 million of principal and a bank demand of approximately $2.63 million, including interest and a prepayment penalty, as of February 10, 2014.
Material changes versus the prior period
- Discontinued-operations revenue fell about 51% year over year, while the gross margin declined from 42.0% to 33.1%; discontinued operations moved from a $0.33 million loss to an $8.65 million loss.
- Net loss increased to $19.62 million from $7.96 million, and operating cash use increased to $4.57 million from $1.59 million.
- FY 2013 included the sale of the Glyderm product line for $1 million, producing a reported $666,592 gain. The larger asset sale to MusclePharm closed after year-end for 1.2 million MusclePharm shares, half held in escrow for indemnification.
- The January 2014 reverse merger changed the business focus from contract manufacturing and consumer products to antiviral drug development. A January 2014 private placement raised $2.75 million gross, or $2.61 million net, and included warrants.
Outlook, commentary and principal risks
- Management planned an HCV Investigational New Drug filing for December 2014, influenza for December 2015, and rhinovirus for December 2016; these are forward-looking targets, not assured milestones. Lead selection was planned for influenza by early 2015 and rhinovirus by the end of 2015.
- The company described potential pan-genotypic HCV leads targeting NS5B polymerase and NS3 helicase, and sought partnerships to help fund clinical development and commercialization. Teva retained an option relating to the HCV polymerase program.
- The pipeline is preclinical and unproven. The company warned that candidates may fail in preclinical or clinical testing, may not receive regulatory approval, and may require substantial additional funding. Financing may not be available on acceptable terms; equity issuance could materially dilute shareholders.
- Other significant risks include competition from larger pharmaceutical companies, dependence on partners and third parties, limited patent protection (one pending U.S. application and related filings were described for the NS5B program), and uncertainty over the Teva option.
- The bank’s acceleration/default action and potential foreclosure or deficiency claims, along with possible landlord action and the company’s indemnity to MusclePharm, create contingent financial and legal exposure. The company said MusclePharm offered to guarantee the facility, but acceptance by the bank was uncertain.
- The filing reported ineffective disclosure controls and material weaknesses in financial reporting and information technology controls as of December 31, 2013. The independent auditor gave an unqualified opinion on the financial statements but did not audit or opine on internal control effectiveness.
Most important facts for investors to verify
- Confirm current cash, cash runway, actual operating burn and the status and terms of any subsequent financing; the stated 12-month liquidity assessment coexists with a $7 million forecast cash shortfall.
- Verify the current status of the bank guarantee, default demand, foreclosure/deficiency exposure, landlord dispute, and MusclePharm indemnity and escrow arrangements.
- Track whether HCV and other development milestones were met, whether Teva exercised its option, and whether any program advanced beyond preclinical work.
- Reconcile potential dilution and voting control. The filing reports 120.5 million common shares outstanding in March 2014 and Series B preferred convertible into approximately 205.1 million common shares; option and warrant totals also require reconciliation across the filing.
- Assess remediation of the disclosed material weaknesses and obtain updated audited financial statements reflecting the post-merger Cocrystal business; FY 2013 reported operating results are principally for the legacy Biozone business.