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BZNE > SEC Filings for BZNE > Form 10-Q on 18-Nov-2013All Recent SEC Filings

Show all filings for BIOZONE PHARMACEUTICALS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BIOZONE PHARMACEUTICALS, INC.


18-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Certain statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements that involve risks and uncertainties. Words such as may, will, should, would, anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements. References to "Biozone," the "Company," "we," "us" and "our" refer to Biozone Pharmaceuticals, Inc. and its subsidiaries including BioZone Laboratories, Inc. which we refer to as "BZL."

Company Overview

The Company, through its subsidiary BZL, is primarily is engaged in the business of developing and manufacturing Over-the-Counter drug products and cosmetic and beauty products on behalf of health care product marketing companies and national retailers. The Company has been developing its proprietary drug delivery technology as an enhancement for approved, generic prescription drugs that are limited due to poor stability or bioavailability or variable absorption.

Recently, the Company's Board of Directors (the "Board") conducted a strategic review of the feasibility and relative merits of various financial and business strategies for the Company. After careful consideration, the Board concluded that the optimum business strategy for the Company is to leverage its relationships and expertise in pharmaceutical product development to maximize current and future shareholder value. To that end, the Board decided to divest the Company's contract manufacturing business and reinvest in biotechnology assets that promise significant upside in growth. In connection with that strategy, in November 2013, the Company entered into an Asset Purchase Agreement (the "November APA") with MusclePharm Corporation ("Musclepharm"). In connection with the November APA, the Company agreed to sell substantially all of the Company's operating assets including the QuSomes, HyperSorb and EquaSomes drug delivery technologies (excluding certain assets including cash on hand) for 1,200,000 shares of Musclepharm's common stock. We believe this sale will significantly transform the Company and provide an opportunity to deliver substantial shareholder value.

Currently, the Company is engaged in late stage negotiations with a significant biotech company, partially owned by OPKO Health, Teva Pharmaceuticals and one of our largest shareholders, Dr. Phillip Frost, and The Frost Group. The target acquisition is a privately funded biotechnology company developing technologies that are focused on the creation of first- and best-in-class antiviral therapeutics for human diseases.

In September 2013, the Company sold certain assets relating to the GlydermŪ brand of skin care products including the GlydermŪ trademark, the GlydermŪ patents, the GlydermŪ product formulations and the Company's entire inventory of GlydermŪ products held for resale. In consideration for the purchased assets, the Company received or will receive (i) $600,000 on the closing date, (ii) $200,000 payable six months after the closing date, and (iii) $200,000 payable 12 months after the closing date; plus the purchase price for the purchased inventory. All sales and operating expenses related to the Glyderm brand have been reclassified as discontinued operations for all periods presented. The right to receive the installment payments will be sold to Musclepharm as part of the November APA.

Results of Operations

Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012:

Sales.

Sales from continuing operations for the three months ended September 30, 2013 and 2012 were $2,086,986 and $4,734,148, respectively. The decrease in sales of $2,647,162 or 55.9% was primarily attributable to the loss of our largest customer in 2013 due to a voluntary recall of product supplied by the Company in December of 2012. This customer represented approximately $1.9 million in sales in the prior year quarter. The remainder of the decrease is due to reduced customer orders from decreased end-user demand.


Cost of Sales and Gross Profit.

Cost of sales for the three months ended September 30, 2013 and 2012 was $977,165 and $2,827,922, respectively, resulting in gross profit of $1,109,821 and $1,906,226, respectively. The gross profit percentage for the three months ended June 30, 2013 and 2012 was approximately 53% and 40%, respectively. The decrease in gross profit of $796,405 is largely attributable to the decrease in order size, resulting in reduced labor efficiency, and a decrease in sales of select products primarily attributable to decreased customer orders from decreased end user demand. However, the Company was able to increase the gross profit percentage to 53% for the three months ended September 30, 2013, compared to 40% in the prior year period by making targeted cost cuts in our cost of goods sold due to the decrease in sales.

Operating Expenses.

We had total operating expenses of $1,515,621 for the three months ended September 30, 2013 as compared to $1,567,718 for the three months ended June 30, 2012. The decrease in operating expenses of $52,097 or 3.3% is due to a decrease of our research and development expenses of $100,551, which is primarily due to the closing of our research facility in Princeton, New Jersey and the termination of five staff members in August 2012. Our general and administrative expenses increased $20,711 which is primarily due to an increase in professional fees of $219,028, which is primarily legal fees related to the settlement of the three lawsuits that were settled recently. These increases were offset by a reduction in salary and related expenses of approximately $110,000 mostly due to a reduction in hours worked and a decrease in workforce due to attrition, the remaining decrease was due to small decreases in miscellaneous other accounts, primarily due to reduced business activity. Our selling expenses increased by $27,743 or 47% to $86,772 for the three months ended September 30, 2013 from $59,029 for the three months ended September 30, 2012, due to an effort to increase sales.

Interest Expense.

We incurred interest expense of $991,601 for the three months ended September 30, 2013 as compared to $482,960 for the three months ended September 30, 2012. The increase in interest expense of $508,641 is due to the recording of an interest charge of $488,768 related to the derivative liability of the warrants issued in the three months ended September 2013, the remainder of the increase was due to an increase in the amount of debt outstanding.

Change in value of derivative instruments.

We recorded an unrealized loss on the fair market value of our derivative instruments of $4,660,841 for the three month period ended September 30, 2013, as compared to a gain of $21,912 for the three months ended September 30, 2012, resulting from an increase in the fair value of our derivative instruments.

Discontinued Operations /Gain on sale of assets.

As a result of our sale of the Glyderm brand and related assets we recorded income from discontinued operations of $64,058 for the three month period ended September 30, 2013, as compared to income of $23,810 in the prior year period. The Company recorded a gain on the sale of assets of $285,653 (see Note 5).

Net Loss.

As a result of the foregoing, we realized a net loss from continuing operations of $6,058,242 and a net loss of $5,422,878 for the three months ended September 30, 2013 as compared to a net loss of $98,730 for the three months ended September 30, 2012, an increase in net loss of $5,324,148.

Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012:

Sales.

Sales from continuing operations for the nine months ended September 30, 2013 and 2012 were $5,764,116 and $12,860,988 respectively. The decrease in sales of $7,096,872 or 55.2% was primarily attributable to the loss of our largest customer in 2013 due to a voluntary recall of product supplied by the Company in December of 2012. This customer represented approximately $3.5 million in sales in the prior year period. The remainder of the decrease is due reduced customer orders from decreased end-user demand.


Cost of Sales and Gross Profit.

Cost of sales for the nine months ended September 30, 2013 and 2012 was $3,742,495 and $7,703,507, respectively, resulting in gross profit of $2,021,621 and $5,157,481, respectively. The gross profit percentage for the nine months ended September 30, 2013 and 2012 was approximately 35% and 40%, respectively. The decrease in gross profit of $3,135,860 and resulting decrease in gross profit percentage is largely attributable to the decrease in order size, resulting in reduced labor efficiency, and a decrease in sales of select products primarily attributable to the loss of our largest customer as well as decreased customer orders from decreased end user demand.

Operating Expenses.

We had total operating expenses of $4,352,938 for the nine months ended September 30, 2013 as compared to $5,228,090 for the nine months ended September 30, 2012. The decrease in operating expenses of $875,152 or 16.7% is due to an decrease of general and administrative expenses of $351,861 which is primarily due to a decrease in salary and related expenses of approximately $175,000 mostly due to a reduction in hours worked and a decrease in workforce due to attrition, a decrease in professional fees of $180,000, the remaining increase was due to small increases in miscellaneous other accounts. Our selling expenses decreased by $20,298 or 5.0% to $386,986 for the nine months ended September 30, 2013 from $407,284 for the nine months ended September 30, 2012, due to the decrease in sales. Our research and development expenses decreased $502,993, which is due to the closing of our research facility in Princeton, New Jersey and the termination of five staff members in August of 2012.

Interest Expense.

We incurred interest expense of $1,948,686 for the nine months ended September 30, 2013 as compared to $4,970,657for the nine months ended September 30, 2012. The decrease in interest expense of $3,021,971 is due to the recording of an interest charge of $3,692,528 related to the derivative liability of the warrants issued in connection with the convertible notes issued in 2012, which was offset by a similar charge of $488,768 in the current year period as well as an increase in interest expense for outstanding convertible notes in the current period.

Change in value of derivative instruments.

We recorded an unrealized loss on the fair market value of our derivative instruments of $4,148,748 for the nine month period ended September 30, 2013, as compared to a gain of $477,830 for the nine months ended September 30, 2012, resulting from an increase in the fair value of our derivative instruments.

Discontinued Operations /Gain on sale of assets.

As a result of our sale of the Glyderm brand and related assets we recorded income from discontinued operations of $212,848 for the nine month period ended September 30, 2013, as compared to income of $104,232 in the prior year period. The Company recorded a gain on the sale of assets of $285,653 (see Note 5).

Net Loss.

As a result of the foregoing, we realized a net loss from continuing operations of $8,428,751 and a net loss of $7,930,250 for the nine months ended September 30, 2013 as compared to a net loss of $4,459,204 for the nine months ended September 30, 2012, an increase in net loss of $3,471,046.


Liquidity and Capital Resources

A summary of our cash flows is as follows:

                                                          Nine Months Ended
                                                            September 30,
                                                       2013              2012
                                                             (Unaudited)
Net cash used in provided by operating activities   $   875,985       $ 1,636,699
Net cash used in investing activities               $    86,366       $   320,116
Net cash provided by financing activities           $ 1,429,950       $ 1,623,103

Operating activities used net cash of $875,985 for the period ended September 30, 2013, as compared to using net cash of $1,636,699 for the period ended September 30, 2012. The principal factors were a non-cash gain of $4,148,748 from the change in fair value of derivative liability and a non-cash interest expense of $1,775,086.

During the nine months ended September 30, 2013, investing activities used net cash of $86,366, comprised of cash used for the purchase of property and equipment. During the period ended June 30, 2012, investing activities used net cash of $320,116.

During the nine months ended September 30, 2013, cash of $1,429,950 was provided by financing activities, consisting of proceeds from the sale of common stock of $950,000 and proceeds from the issuance of convertible debt of $2,100,000, these were offset by the repayment of debt of $217,550,repayment of borrowings from note holders of $350,000 and a payment to shareholder of $1,052,500, as compared to net cash provided by financing activities of $1,623,103 during the nine-month period ended September 30, 2012, which consisted of proceeds from convertible notes of $3,750,000, proceeds from the sale of common stock of $650,000 offset by the repayment of borrowings from note holders of $2,550,000, repayment of debt of $190,593 and payment of deferred financing costs of $36,304.

Our net loss for the nine months ended September 30, 2013 and 2012 was $7,530,250 and $4,459,204, respectively. We anticipate that we will continue to generate losses from operations until we close the Musclepharm sale. As of September 30, 2013, we had cash and cash equivalents of $529,895 and negative working capital of $12,461,184.

Historical Financings

In August 2013, the Company borrowed $2,000,000 from Musclepharm an issued a one-year 10% secured convertible promissory note and 10,000,000 warrants (exercise price of $0.40 per share). In October 2013, the Company repaid $1,000,000 of the Musclepharm note and Musclepharm converted the remaining portion into 5,000,000 shares of common stock.

In October 2013, the Company issued shares of common stock to seven note holders upon conversion of approximately $600,000 of notes and $216,000 of accrued interest related to those notes.

In October 2013, the Company closed on the sale of 3,500 shares of Series A Preferred Stock in a private placement offering. The net proceeds to the Company were $3,410,100. The Company used a portion of the proceeds to pay off $1,800,000 of outstanding debt and payables. Additionally, as of November 14, 2013, the Company issued 7,381,865 shares of common stock to shareholders who purchased outstanding debt or payables owed by the Company.

On November 18, 2013, the holders of a $500,000 note converted it (and accrued interest) into shares of common stock. On November 15, 2013, Mr. Roberto Prego-Novo, Chairman of the Board of Directors of the Company, converted a $100,000 secured convertible note (plus accrued interest) into shares of common stock. This note is one of the February 2012 Notes referred to in Note 9 to the Consolidated Financial Statements.

Liquidity Considerations

As of November 15, 2013, the Company had approximately $1,042,000 of available cash. Assuming the Musclepharm APA closes, the Company will have no operations with minimal expenses and have 1,200,000 shares of Musclepharm stock of which 600,000 shares are not subject to a repurchase right by Musclepharm. The closing price of Musclepharm's common stock was $0.57 on November 15, 2013.
Additionally, the Company expects most holders of outstanding Notes will convert to common stock, and it will pay all of its liabilities.

Off-Balance Sheet Arrangements

As of September 30, 2013, we had no material off-balance sheet arrangements.


Critical Accounting Estimates

There were no material changes to our critical accounting estimates during the period covered by this report.

Recent Accounting Pronouncements.

There have been no recent accounting pronouncements or changes in accounting pronouncements during the period covered by this report that are of material significance, or have potential material significance, to us.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements including our liquidity, our payment of our liabilities, delivery of shareholder value, completion of the biotechnology acquisition, closing of the Musclepharm sale, our ability to consummate an acquisition of a biotechnology company and delivery of shareholder value. Forward-looking statements can be identified by words such as "anticipates," "intends," "plans," "seeks," "believes," "estimates," "expects" and similar references to future periods.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the ability to reach an agreement with the biotechnology company, that company's future operations and Musclepharm's receipt of a satisfactory fairness opinion.

Further information on our risk factors is contained in our filings with the SEC, including the Form 10-K filed on April 1, 2013. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

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