Filing and reporting period
Important identity discrepancy: The supplied filing is Biozone Pharmaceuticals, Inc.’s Form 10-Q for the quarter and nine months ended September 30, 2013. It is not identified in the filing as a Cocrystal Pharma, Inc. filing.
Biozone operated through its subsidiary as a contract manufacturer of OTC drugs, cosmetics, and nutritional products, and was developing drug-delivery technology. The financial statements are unaudited. The company reported a strategic shift toward divesting its manufacturing operations and investing in biotechnology assets.
Financial performance
| Metric | Three months ended September 30, 2013 | Nine months ended September 30, 2013 | Comparable 2012 period |
|---|---|---|---|
| Sales from continuing operations | $2.09 million | $5.76 million | $4.73 million quarterly; $12.86 million nine-month |
| Gross profit | $1.11 million | $2.02 million | $1.91 million quarterly; $5.16 million nine-month |
| Gross margin | Approximately 53% | Approximately 35% | Approximately 40% in both comparisons |
| Operating loss | $0.41 million | $2.33 million | Operating income of $0.34 million quarterly; loss of $0.07 million nine-month |
| Net loss, per financial statements | $5.31 million | $7.53 million | $0.10 million quarterly; $4.46 million nine-month |
| Operating cash flow | Cash used of $0.88 million for nine months | Cash used of $1.64 million |
Quarterly derivative fair-value loss was $4.66 million; the nine-month loss was $4.15 million. These non-cash valuation changes materially affected reported losses. Nine-month interest expense was $1.95 million. No income-tax provision was recorded, with a full valuation allowance against net operating loss carryforwards.
Liquidity, balance sheet, and financing
- At September 30, cash and cash equivalents were $529,895, current assets were $2.83 million, and current liabilities were $15.29 million. The filing reports a working-capital deficit of $12.46 million.
- Total assets were $7.60 million; shareholders’ deficiency was $10.45 million. Long-term debt, excluding its current portion, was $2.76 million. Convertible notes had a reported carrying amount of $2.26 million after debt discount.
- Net cash from financing activities was $1.43 million for the nine months, including $2.10 million of convertible-debt proceeds and $950,000 from common-stock sales, offset by debt repayments and a $1.05 million shareholder payment.
- In August, the company borrowed $2.0 million through a one-year, 10% secured convertible note and issued warrants for 10 million shares. Subsequent disclosures say $1.0 million was repaid and the remainder converted into 5 million common shares in October.
Material changes, outlook, and risks
- Revenue contraction: Continuing-operations sales fell 55.9% in the quarter and 55.2% over nine months. Management attributed the decline primarily to losing its largest customer after a December 2012 product recall, plus weaker customer orders and end-user demand.
- Margins and expenses: Quarterly gross margin improved to about 53% from 40%, which management attributed to targeted production-cost reductions. Nine-month margin declined to about 35%, reflecting smaller orders, lower labor efficiency, and lost sales. Nine-month operating expenses decreased 16.7%, including lower R&D after the Princeton facility closed and staff were terminated in 2012.
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, the working-capital deficit, and accumulated deficit of $21.66 million. The statements include no adjustments that might be needed if the company cannot continue as a going concern.
- Asset sales and strategic shift: In September, Biozone sold Glyderm assets for $1.0 million in installments plus inventory consideration and retained a five-year supply arrangement without minimum purchase commitments. In November, it agreed to sell substantially all operating assets, including specified drug-delivery technologies, to MusclePharm for 1.2 million MusclePharm shares. Management expected the transaction to leave Biozone with minimal operations; closing and the anticipated financial outcome were not assured in the filing.
- Subsequent funding and liability settlements: The filing reports an October private placement of Series A preferred stock for $3.5 million gross proceeds, with 10% dividends and warrants; holders converted the preferred shares into common stock in November. It also reports post-quarter settlements involving Aphena and Zicam, including a $700,000 Zicam payment. These events affect liquidity and should be read alongside the subsequent financing and debt conversions.
- Legal and customer risks: The Fisher litigation was settled in September for $1.05 million and mutual releases. The filing links loss of a major customer to a product recall; it also describes significant customer concentration, with two customers representing 24% and 20% of nine-month sales.
- No numerical operating guidance is provided. Management’s outlook depended on closing the MusclePharm sale and potentially completing a biotechnology acquisition; it cautioned that negotiations, transaction conditions, and future operations could differ from expectations.
Key facts investors should verify
- Confirm the issuer identity: the submitted document names Biozone Pharmaceuticals, Inc., not Cocrystal Pharma, Inc.
- Reconcile material reported-loss discrepancies: the statements show a third-quarter net loss of $5.31 million and nine-month net loss of $7.53 million, while MD&A gives different figures. The filing also reports a $685,653 gain on sale in the statements but cites $285,653 in MD&A.
- Verify the status, consideration, closing conditions, and ultimate proceeds from the proposed MusclePharm asset sale, including restrictions or repurchase rights on shares received.
- Assess post-quarter cash, debt conversions, preferred-stock conversion, and settlement payments against the September 30 working-capital deficit and going-concern warning.
- Review the derivative-warrant liabilities and their sensitivity to share price and valuation assumptions, given their large effect on reported earnings.