Filing identity and reporting period
Important identity discrepancy: The request identifies Cocrystal Pharma, Inc., but the supplied Form 10-Q is for Biozone Pharmaceuticals, Inc. (Nevada), for the three months ended March 31, 2012. Verify the issuer and filing before relying on this summary.
Biozone reported a pharmaceutical, OTC-product and contract-manufacturing business following acquisitions and a 2011 reverse acquisition. It also said it was developing proprietary drug-delivery technology. The financial statements are unaudited.
Financial performance and condition
| Metric | Q1 2012 | Q1 2011 or comparison |
|---|---|---|
| Sales | $3.510 million | $2.797 million; up 25.5% |
| Gross profit / margin | $1.727 million / 49% | $1.691 million / 60% |
| Operating expenses | $2.318 million | $1.588 million |
| Operating income (loss) | $(591,383) | $102,891 |
| Net loss | $(3.646) million; $(0.06) per share | $(13,295); $(0.00) per share |
| Operating cash flow | $(1.936) million | $(462,239) |
| Cash at quarter-end | $76,883 | $416,333 at Dec. 31, 2011 |
Gross margin fell because raw-material cost increases could not be passed on to customers. General and administrative costs rose by $573,520, including about $297,000 in professional fees; research and development expense increased by $156,747, partly reflecting a Princeton research facility and five additional staff.
Interest expense was $3.473 million, largely associated with warrant and convertible-note accounting. The company recorded a $418,192 gain from the change in fair value of derivative liabilities. The filing reports $3.332 million of interest expense related to warrants in its cash-flow reconciliation, indicating a substantial noncash component to the reported loss.
At March 31, current assets were $3.236 million and current liabilities $10.774 million, producing negative working capital of $7.537 million. Shareholders’ deficiency was $5.765 million. Derivative liabilities were $6.002 million, compared with $883,619 at year-end. Long-term debt was $2.996 million, plus $241,149 current portion; the balance sheet also lists $1.100 million due to a shareholder and $1.096 million of convertible notes net of discount. Cash used in investing was $242,427; financing provided $1.839 million. Cash declined by $339,450 during the quarter.
Material changes and financing
- Q1 sales increased 25.5%, which management attributed primarily to increased customer orders and end-user demand; gross profit rose only 2.1% as margins contracted.
- During the quarter, the company raised $3.3 million from convertible-note sales and $650,000 from common-stock sales. It also repaid the March 2011 notes and other debt. The OPKO notes carry 10% interest, are convertible at an initial $0.20 per share, and are secured by company assets; associated warrants cover up to 11.5 million shares at $0.20 per share.
- At March 31, the company reported $3.3 million of convertible-note principal outstanding before a $2.204 million debt discount. A separate $1 million March note is convertible at $1.50 per share and is secured by specified vendor proceeds.
- After quarter-end, a $250,000 note was issued on April 18. On April 25, holders cashlessly exercised warrants covering 3.5 million shares and received 2,636,804 shares. Shares outstanding were 56,936,165 at March 31 and 60,436,165 at May 21.
Outlook, risks and unusual items
- Going concern: Management said available cash would not meet working-capital and capital-expenditure needs for the next 12 months, that the company was not generating sufficient cash, and that external financing may be required. The filing states these conditions raise substantial doubt about the company’s ability to continue as a going concern. Management also referred to debt in default and gave no assurance financing would be available on acceptable terms.
- Management expected operating losses to continue as it invested in research and development, and said it was reviewing manufacturing costs and sales programs. It provided no quantified financial guidance.
- The company disclosed ineffective disclosure controls and procedures and a material weakness related to limited accounting staff and lack of segregation of duties over cash disbursements. It reported no material change in internal control during the quarter.
- Two customers represented approximately 26% and 11% of Q1 2012 sales. Management noted that cough-and-cold-related sales are seasonal, with about two-thirds of revenue generated in the second half of the calendar year.
- A former executive disputes the amount owed under a shareholder advance; the company recorded the full amount claimed. A Maryland lawsuit alleges contract and other commercial wrongdoing relating to a purchase order; the company said its investigation was at an early stage and did not expect a material impact. Its separate Colorado action against ComputerShare and Cardium was dismissed for improper venue.
- The company guarantees a mortgage related to its consolidated variable-interest entity; the disclosed maximum exposure was $2.630 million. It also disclosed a cashless warrant exercise after quarter-end and derivative liabilities subject to fair-value remeasurement.
Investor facts to verify
- Whether this Biozone Pharmaceuticals filing is actually the intended filing for Cocrystal Pharma, Inc.
- Near-term liquidity, debt-default status, repayment terms, and the availability and conditions of additional financing.
- The composition and valuation of derivative liabilities and warrant-related interest expense, including potential dilution from outstanding securities.
- Whether manufacturing-cost actions can restore gross margins and whether customer concentration or seasonal demand affects sales.
- Progress in addressing the disclosed internal-control material weakness and the status and potential exposure of the shareholder dispute and litigation.