During
the year ended October 31, 2008, we incurred an impairment loss of $660,919
as compared to $4,006,386 for the prior fiscal year. The decrease is attributable
to the non-recurrence of a one time impairment loss incurred by us during
fiscal year ended 2007 in connection with the termination of the Technology
License Agreement and ANDA Agreement pursuant to the terms of the settlement
agreement with Dr. Mubye and Nostrum.
Interest
expense for the year ended October 31, 2008 was $4,166,852 as compared to
$6,400,962 for the year ended October 31, 2007. The reason for this reduction
in interest expense is as a result of our repayment of outstanding indebtedness
during the fiscal year that at October 31, 2007 was $18,625,000 and at October
31, 2008 was $6,190,000. In
addition, during the year ended October 31, 2008, there was interest forgiveness
of $3,325,747 relating to the repayment and settlement of outstanding debt.
As
a result of the foregoing, the net loss for the year ended October 31, 2008 was
$4,005,831 or ($0.17) per share, as compared to a net loss of $20,857,884 or
$1.09 per share for the year ended October 31, 2007.
Results
of Operations for Year Ended October 31, 2007 compared to Year Ended October
31, 2006
Total
revenues for the year ended October 31, 2007 were $23,466,311, compared to
$10,516,398 for the year ended October 31, 2006, an increase in excess of 123%
over the prior year. Gross profit was $6,629,185 for the year
ended October 31, 2007, as compared with $2,357,671 for the year ended October
31, 2006, an increase of $4,271,514 or 180%. These increases result from
several factors. First, is the inclusion in our financial statements of a full
year of the results of Kirk and ANDAPharm. These entities were acquired in May
2006 and partial year results were included in the prior years financial
statements. Both of these operating entities had growth in their year on year
sales resulting from price increases, new customers and additional products.
Sales of our ephedrine and pseudoephedrine product group were negatively impacted
by the interruption of supply during the fourth quarter of fiscal year 2007.
Gross margin was impacted by changes in prices and costs. In
addition, increased production and product mix positively impacted margins. We
had increases in materials attributed to increases in the cost of petroleum.
Our
three largest customers represented approximately 54% of the sales for the year
ended October 31, 2007 as compared to 68% in the prior year. Although we believe
we have good working relationships with each of these customers, we are continuing
to work to further relationships with these and other entities in order to
broaden our sales base.
Sales
of products containing pseudoephedrine, ephedrine and/or guaifenesen accounted
for approximately 63% of sales. These products have come under increasing
government regulation due to the concern of these products in the production of
methamphetamine.
Total
expenses for the year ended October 31, 2007 were $16,893,656 as compared with
$5,976,857 for the year ended October 31, 2006. The increases in year to year
expenses were primarily caused by the inclusion of Kirk and ANDAPharm in our
financial statements for the full year ended October 31,2007, as well as the
cost of consulting agreements entered into in the normal course of business by
the Company. In addition, expenses were higher due to the granting of options,
and to the higher legal expenses in connection with the financing and legal
activity of the Company. Our consulting expense was $6,818,602, the cost to the
Company of
43
granting
options was $759,762, and legal fees incurred by us were, $1,900,003, for the
twelve months ended October 31, 2007. The operating expenses of Kirk and
ANDAPharm are in line with historical norms of Kirk and ANDAPharm. Increases were
in line with normal operating conditions and the increase in revenues. There
were no significant unusual expenses.
The
increase in interest expense to $6,400,962 from $3,909,716 relates to the
increased debt that we incurred during the year as discussed elsewhere in this
Annual Report on Form 10-K. In addition, increased interest rates and other
penalties relating to non-payment of debt negatively impacted the total for the
year.
The
impairment loss of $4,006,386 relates to the settlement agreement with Dr.
Mulye and Nostrum whereby the Technology License Agreement and ANDA Agreement
were terminated.
As
a result of the aforesaid, the net loss for the year ended October 31, 2007 was
$20,857,884 as compared with $8,571,021 for the year ended October 31, 2006.
The net loss per share was $1.09 for the year ended October 31, 2007 as compared
with a loss of $.33 for the year ended October 31, 2006.
Liquidity and Capital
Resources
Year
Ended October 31, 2008, 2007, and 2006
To
date, our operations have not generated sufficient cash flow to satisfy our
capital needs. We have financed our operations primarily through the private
sale of common stock, warrants and debt securities. We had a working capital
deficit of $6,335,161 at October 31,
2008, as compared with $19,458,268 and $5,289,000 at October 31, 2007 and 2006,
respectively. Cash and cash equivalents were $65,987, $0 and $2,393,437 at
October 31, 2008, 2007 and 2006, respectively.
Net
cash provided (used in) operating activities during the years ended October 31,
2008, 2007 and 2006 was $3,862,575, ($2,408,514) and ($5,165,425),
respectively. The approximately $3,900,000 in net cash provided by operating
activities during the year ended October 31, 2008 was the result of our net loss
of $4,005,831 offset by non cash expenses of stock based compensation as well
as deferred financing fees offset by changes in working capital levels. The
approximately $2,400,000 in net cash used by operating activities during the
year ended October 31, 2007 was the result of our net loss of $20,857,884
offset by non cash expenses as well as changes in working capital. The
approximately $5,200,000 in net cash used by operating activities during the
year ended October 31, 2006 was the result of our net loss of $8,571,021 offset
by non cash expenses including the loss in the joint ventures of $1,042,119.
Net
cash used in investing activities during the years ended October 31, 2008, 2007
and 2006, was $708,305, $709,593 and $10,392,751, primarily the result of the purchase of
equipment and fees associated with acquisition activities.
Net
cash (used) provided by financing activities during the years ended October 31,
2008, 2007, and 2006, was ($3,088,284), $724,670 and $17,822,794, respectively.
The cash
44
provided in 2008, 2007, and
2006 reflects approximately $8,096,716, $6,801,785 and $19,240,000 from the proceeds
from the private placement of our securities.
We
will require additional equity and/or debt financing for fiscal year 2009 to
fund our operations and to satisfy our debt service obligations. There can be
no assurance given that we will be successful in the sale of our equity or
obtaining additional capital from other sources or means.
Our
auditors have emphasized the uncertainty related to our ability to continue as
a going concern in their audit report. See Note 2 of the Notes to the
Consolidated Financial Statements regarding our plans to address this concern.
We
have not entered into any material capital expenditure agreements, or engaged
in any off balance sheet financing.
The
following table depicts our obligations and commitments as of October 31, 2008
to make future payments under existing contracts or contingent commitments.
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Payments Due by Period
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Contractual Obligations
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Total
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Less than 1
Year
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1-3 years
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4-5 years
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After 5
Years
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Note payable bank
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$
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5,600,000
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$
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1,850,000
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$
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3,800,000
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Note payable shareholders & others
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$
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540,000
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$
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540,000
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Capital lease obligations
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$
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294,070
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$
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70,291
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$
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149,658
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$
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74,121
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$
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6,434,070
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$
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2,460,291
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$
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3,949,658
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$
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74,121
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ITEM 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
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We
do not invest in or own any market risk sensitive instruments entered into for
trading purposes or for purposes other than trading purposes. All loans made to
us have been for fixed interest rates and accordingly, the market risk to us
prior to maturity is minimal.
45
|
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I
TEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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Reference
is made to the Consolidated Financial Statements for the fiscal year ended
October 31, 2008, the Notes thereto and Independent Auditors Report thereon
commencing at Page F-1 of this Report.
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I
TEM 9.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
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None.
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I
TEM 9A(T).
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CONTROLS AND PROCEDURES.
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Evaluation of Disclosure Controls and
Procedures
Our
management, with the participation of our Principal Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this report. Based on
that evaluation, our Principal Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is (i)
recorded, processed, summarized and reported, within the time periods specified
in the SECs rules and forms; and (ii) accumulated and communicated to
management, including our Principal Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
Managements Report on Internal Control over
Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control over financial reporting has been
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the United States
of America.
Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect transactions and dispositions of our assets; provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, that receipts and
expenditures are being made only in accordance with authorization of our
management and directors; and provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial statements.
46
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management
evaluated the effectiveness of our internal control over financial reporting at
October 31, 2008. In making this assessment, management based its evaluation on
the report of the Committee of Sponsoring Organizations of the Treadway
Commission entitled Internal ControlIntegrated Framework (the
COSO Framework
). Based on its evaluation
under the COSO Framework, management has determined that, at October 31, 2008,
our internal control over financial reporting was effective.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to
provide only managements report in this annual report.
Changes in Internal Control over Financial
Reporting
There
have been no changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fourth quarter of fiscal year 2008 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
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I
TEM 9B.
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OTHER INFORMATION.
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DEA
Action
The
following disclosure would have otherwise been filed on Form 8-K under the heading
Item 8.01 Other Events:
On
September 15, 2008, the DEA commenced an administrative proceeding with the
U.S. Department of Justice against Kirk to revoke its DEA license to
manufacture and distribute controlled substances in schedules III-V and deny
any amendment to Kirks application to add specific List I chemical
manufacturing codes to its controlled substance registration. The DEA alleges
in the administrative proceedings that Kirk shipped ephedrine guaifenesin
products to a contract packager for repackaging and relabeling that did not
have the requisite DEA license. In addition, the DEA alleges that Kirk failed
to maintain an effective system of controls to guard against and prevent a
theft of approximately 1.3 million ephedrine guiafenesin tablets, which
occurred at Kirk in July 2008. The DEA also alleges that Kirk failed to
maintain appropriate recordkeeping practices.
47
In
addition, in December 2007, Kirk applied to the DEA for a 2008 ephedrine and
pseudoephedrine manufacturing procurement quota. In April 2008, the DEA
rejected Kirks application and Kirk is challenging its denial which has
been consolidated with the administrative proceeding commenced by the DEA.
A
hearing has been scheduled before an administrative law judge to commence
February 18, 2009. Based on the allegations made by the DEA, and our
understanding of relevant facts and circumstances, we believe that the action
commenced by the DEA is without merit and we intend to vigorously defend against
this.
In
a separate but related action, the United States of America commenced an
action in the United States District Court District of New Jersey on July
3, 2008 to forfeit and condemn ephedrine guaifenesin products shipped to
Kirks contract
packager referenced above at an appraised value of approximately $680,000 and
which were seized by the DEA. On September 2, 2008, we filed our answer and
counterclaimed seeking an award of damages for wrongful seizure of the seized
property as well as a declaratory judgment that the United States acted unlawfully,
arbitrarily and capriciously in implementing its quota system.
There
can be no assurance that we will prevail in these actions or that they will be
resolved upon terms favorable to us. If our registration were revoked, denied
or suspended, or if our quota application is rejected, we could no longer
lawfully possess or distribute controlled substances or manufacture and
distribute products containing the disallowed controlled substance which would
have a material adverse effect on our business, prospects, financial condition
and results of operation. (See
Risk Factors
above)
Maneesh
and Singh Grant
The
following disclosure would have otherwise been filed on Form 8-K under the
heading Item 3.02 Unregistered Sale of Equity Securities:
On
November 11, 2008, our Board of Directors authorized the grant of 500,000
shares of our common stock to Maneesh and 125,000 shares of our common stock
to Harry Singh, both affiliates of the Company, in consideration for their
deferral in payment of certain fees due to them under a joint venture agreement
in the case of Maneesh and a consulting agreement in the case of Harry Singh.
We have not issued these shares although are treating them, for the purposes
of this Annual Report on Form 10-K, as if they were issued and outstanding.
Upon
issuance, these securities will be offered and sold in reliance upon exemptions
from registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended.
Steven
Getraer
The
following disclosure would have otherwise been filed on Form 8-K under the
heading Item 3.02 Unregistered Sale of Equity Securities:
On
January 27, 2009 we agreed to issue to Steven Getraer, our former Chief
Financial Officer, warrants to acquire 200,000 fully vested shares of our
common stock at an exercise price
48
of $0.75 per
share exercisable at any time prior to July 31, 2012 in connection with a
separation agreement entered into with Mr. Getraer.
These
securities were offered and sold in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended.
P
ART III
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I
TEM 10.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
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The
following table sets forth certain information regarding our current directors,
executive officers and key employees:
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Name
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Age
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Position
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Ronald H.
Lane, Ph.D.
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63
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Chairman of
the Board and Secretary
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Jyotindra
Gange
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60
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Interim
Principal Executive Officer and Director
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Vinay Sapte
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52
|
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Director
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Maneesh
Sapte
|
|
36
|
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Director
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Harcharan
Singh
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|
58
|
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Director
|
Manny Desai
|
|
60
|
|
Chief
Financial Officer
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John S.
Copanos
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|
37
|
|
VP of
Business Development of Kirk Pharmaceuticals LLC
|
Business Experience
The
following is a brief account of the education and business experience during at
least the past five years of our current directors, executive officers and key
employees, indicating the principal occupation during that period, and the name
and principal business of the organization in which such occupation and
employment were carried out.
Ronald
Howard Lane, Ph.D.
has served as Chairman of the Board
since December 2004 and served as Chief Executive Officer of Synovics from
December 1994 until June 2008, and Chairman and Chief Executive Officer of our
predecessor, NutraGenics (Delaware), since April 1994. He also served as our
President from inception to April 18, 2007. Dr. Lane is responsible for
directing Synovics corporate development and growth. He received a Ph.D. and
post-doctorate NIH fellowship from the University of Wisconsin (Madison) in
Neurophysiology. Dr. Lane had been employed previously by Norcap Financial
Corporation, The National Western Group, Inc. (an investment company), and
Taylor Pearson Corporation.
Jyotindra
Gange
has served as a Director since May 2008 and has
served as Interim Principal Executive Officer since July 2008. Mr. Gange
currently serves as Chief Financial Officer of Maneesh, a pharmaceuticals
manufacturing and distribution company based in India. From 2001 until joining
Maneesh in November 2007, Mr. Gange was Chief Financial Officer of Multi Arc
India Ltd., a provider of industrial coatings. From 2000 to 2001, Mr. Gange was
Chief Finance Officer at Bharat Serums and Vaccines Ltd., an Indian
pharmaceuticals company, and
49
from 1997 to
2000, he was Vice President - Finance at Universal Ferrous Ltd., a producer of
ferro alloys. Mr. Gange has trained for Chartered Accountancy having received a
Bachelors degree in Accounting and Finance from Mumbai University, India.
Vinay
Sapte
has served as a Director since April 2008. Mr.
Sapte serves as Chairman and Managing Director of Maneesh, a pharmaceuticals
manufacturing and distribution company based in India, which he founded in
1975. Mr. Sapte has an Electrical Engineering Degree from the University of
Mumbai. Vinay Sapte is the brother of Maneesh Sapte.
Maneesh
Sapte
has served as a Director since May 2008. Mr.
Sapte serves as a director of Maneesh, a pharmaceuticals manufacturing and
distribution company based in India, which he joined in 1989. Mr. Sapte assists
Mr. Vinay Sapte, his brother, in running the business of Maneesh both in India
and abroad. Mr. Sapte has a B.S. degree in chemistry from the University of
Mumbai.
Harcharan
Singh
has served as a Director since May 2008. Mr.
Singh has acted as a consultant to us and prior to becoming a member of our
board, held observer rights since April 2007. Mr. Singh serves as President and
Chief Executive Officer of Glopec International Inc., an asset trading company
specializing in pharmaceutical active ingredients, fine chemicals and
intermediates and custom synthesis which he founded in 1989. From 1987 until
1989, he served as Director, Cyanamid India, and later in area operations at
Lederle International Division; from 1980 until 1987, he served as General
Manager and Chief Executive Officer of Tata Pharma; and from 1972 until 1980,
he worked in various positions at Warner Lambert Co. Mr. Singh holds a B. Tech.
from the India Institute of Technology, Madras, and an MBA from the Indian
Institute of Management, Ahmedabad.
Mahendra
(Manny) Desai
has served as Chief Financial Officer
since October 2008. Prior to that he served from January 2004 until September
2008 as Vice President, Finance of Citi Prepaid Services (formerly Ecount Inc.)
in Philadelphia and as a financial and tax advisor for Chernow, Kurtzman &
Co., a Certified Public Accountants firm in Philadelphia. From August 2000
until December 2003, Mr. Desai served as Senior Manager and Tax Advisor for
Creative Management Concepts, Inc., a Certified Public Accountants firm and Tax
Consultants in New Jersey. Prior to this, Mr. Desai spent 19 years in various
management, financial and accounting roles. Mr. Desai holds a Chartered
Accountants degree from India and received a Bachelors degree in Accounting
and Finance from Mumbai University, India.
John
S. Copanos
is the founder of Kirk and its affiliate,
ANDAPharm, which he founded in 1999. Mr. Copanos currently serves as VP of
Business Development of Kirk and heads business development for Kirk and
ANDAPharm. Previously Mr. Copanos served as President, Chief Executive Officer,
Treasurer and Secretary of Kirk and ANDAPharm.
There
have been no events under any bankruptcy act, no criminal proceedings and no
judgments, injunctions, orders or decrees material to the evaluation of the
ability and integrity of any of our directors, executive officers, promoters or
control persons during the past five years.
50
The Board of Directors
Our
Board is divided into three classes with each class of director elected for a
staggered term of three years and until their respective successors are duly
elected and qualified. Class II directors will serve until our next annual
meeting of stockholders. Class III directors will serve until the second
succeeding annual meeting of stockholders and Class I directors will serve
until the third succeeding annual meeting of stockholders.
Vinay
Sapte, Ronald Lane and Harcharan Singh and their respective affiliates are
among principal parties to a Voting Agreement dated as of May 9, 2008 entered
into upon the initial closing of the Series C Preferred Stock Offering. Under
the terms of the Voting Agreement, each of the parties agrees to vote all of
its shares to ensure that the size of our Board will be five directors (or
seven if the Board resolves to expand its size to seven). Further, each of the
parties agrees to vote its shares in favor of the following designations: (i)
one director designated by Ronald Lane and his affiliates (to initially be Dr.
Lane), (ii) one director designated by Harcharan Singh and his affiliates (to
initially be Mr. Singh), (iii) three directors designated by Maneesh and its
affiliates (to initially be Vinay Sapte, Maneesh Sapte and Jyotindra Gange).
The Voting Agreement further provides that if the Board is expanded to seven
directors, then Maneesh and its affiliates shall be entitled to one further
designee and Axiom Captial Management LLC (
Axiom
)
and Indigo Securities LLC (
Indigo
)
shall be entitled to designate one director. If certain of the parties to the
Voting Agreement cease to beneficially own at least 4% of the outstanding
shares of common stock of the Company determined immediately after giving
effect to the initial closing of the Series C Offering, then the right of
designation applicable to such party shall terminate and the right shall vest
in the entire board.
Committees of the Board
Since
the resignation of Richard Feldheim and William McCormick in April 2008 and the
subsequent appointment of Vinay Sapte, Maneesh Sapte, Jyotindra Gange and
Harcharan Singh to the Board in connection with the Series C Preferred Stock
Offering, we do not currently have a standing audit committee, compensation
committee and nominating committee. None of our directors would be considered
independent under Rule 4200(a)(15) of the Nasdaq Marketplace Rules, even though
such definition does not currently apply to us because we are not listed on
Nasdaq. Mr. Gange has experience in accounting and finance and has been
designated as an audit committee financial expert.
We
intend to expand the Board in the future to appoint one or more independent
directors. Until that time, the entire Board will perform the duties of the
audit committee, the compensation committee and the nominating
committee.
Code of Ethics
We
have not yet adopted a code of ethics applicable to our principal executive
officer, principal financial officer, principal accounting officer or
controller. Our examination of our corporate governance and other policies and
procedures have been interrupted by the time and effort required by the Nostrum
dispute and our capital raising efforts. Shortly following
51
conclusion of
these matters, we expect to adopt a code of ethics applicable to all directors,
officers and employees.
Stockholder Communications
Stockholders
and other interested parties may contact the Board of Directors at the following
address: Board of Directors 5360 NW 35 Avenue, Fort
Lauderdale, FL 33309. All communications received at the above address will be
relayed to the Board of Directors. Communications regarding accounting,
internal accounting controls or auditing matters may also be reported to the
Board of Directors using the above address.
Typically,
we do not forward to our directors communications from our stockholders or
other communications which are of a personal nature or not related to the
duties and responsibilities of the Board, including:
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Junk mail
and mass mailings;
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New product
suggestions;
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Resumes and
other forms of job inquiries;
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Opinion
surveys and polls;
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Business
solicitations or advertisements.
|
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires our directors and officers, and persons who
own more than 10% of a registered class of our equity securities, to file
reports of ownership and changes in ownership with the SEC. Officers, directors
and greater than 10% stockholders are required by SEC regulation to furnish us
with copies of all Section 16(a) forms they file.
Based
solely upon a review of Forms 3, 4 and 5, and amendments thereto, furnished to
us during fiscal year 2008, we believe that during fiscal year 2008, our
executive officers, directors and all persons who own more than ten percent of
a registered class of our equity securities complied with all Section 16(a)
filing requirements except with respect to the following: Form 4 filings have
not been made by Ronald H. Lane, Richard Feldheim, William McCormick, Harcharan
Singh and late filings of Forms 3 and 4 have been made by Vinay Sapte, Maneesh
Sapte, Svizera Holdings BV and Maneesh Pharmaceuticals Ltd.
Executive Compensation
Compensation Discussion and Analysis
Philosophy
and Objectives of our Compensation Program
. Our
approach to executive compensation, one of the most important and also most
complex aspects of corporate
52
governance, is
influenced by our belief in rewarding people for consistently strong execution
and performance. We believe that the ability to attract and retain qualified
executive officers and other key employees is essential to our long term
success.
Our
plan to obtain and retain highly skilled employees is to provide significant
incentive compensation opportunities and market competitive salaries. The plan
was intended to link individual employee objectives with overall company
strategies and results, and to reward executive officers and significant
employees for their individual contributions to those strategies and results.
Furthermore, we believe that equity awards serve to align the interests of our
executives with those of our stockholders. As such, equity is a key component
of our compensation program.
The
named executive officers for fiscal year ended October 31, 2008 are Ronald
Lane, Chairman of the Board and former Chief Executive Officer; Jyotindra
Gange, our current interim Principal Executive Officer; Steven Getraer, our
former Chief Financial Officer; Mahendra Desai, our current Chief Financial
Officer; David Coffin-Beach, our former Chief Operating Officer; John Copanos,
our VP of Business Development of Kirk; Joe Esposito, our Director of Technical
Operations of Kirk and Aldo Rodriguez, our Controller. These individuals are
referred to collectively in this prospectus as the
Named Executive Officers
.
Administration
of our Compensation Program.
Our compensation
committee was previously responsible for the administration of our compensation
program. With the resignation of our two independent directors from the Board
and the subsequent appointment of four non-independent directors, we do not
currently have a compensation committee. Until such time that we reconstitute
the compensation committee, compensation matters are handled by our board.
The
compensation committee had previously retained the services of Charas Consulting
for the purposes of assisting the compensation committee in ensuring that they
are competitive and appropriately linked to our long term success and creation
of stockholders value. The compensation committee also periodically sought
input from Charas Consulting on a range of external market factors, including
evolving compensation trends, appropriate peer group companies and market
survey data. Although the compensation committee reviewed the compensation
practices of its peer companies, due to shortage of cash it did not adhere to
strict formulas or survey data to determine the mix of compensation elements.
Elements
of our Compensation Program and How We Determine the Amount for Each Element
Overview
.
The primary elements of our executive compensation program are base salary,
bonus and stock and long term compensation typically in the form of stock
option grants. Although we may in the future provide other types of
compensation, these three elements are the principal means by which we endeavor
to provide the Named Executive Officers with compensation opportunities.
We
have not had any formal or informal policy or target for allocating
compensation between long-term and short-term compensation, between cash and
non-cash compensation or
53
among the
different forms of non-cash compensation. Instead, after reviewing information
provided by compensation surveys and publicly available filings of peer
companies, we determined subjectively what we believe to be the appropriate level
and mix of the various compensation components. Ultimately, the objective in
allocating between long-term and currently paid compensation is to ensure
adequate base compensation to attract and retain personnel, while providing
incentives to maximize long-term value for us and our stockholders.
We
do not have formal employment agreements with any of our Named Executive
Officers other than those entered into with our former employees Dr. Lane,
Steven Getraer and David Coffin-Beach.
Base Salary.
We pay a base salary to our Named
Executive Officers. In general, base salaries for the Named Executive Officers
are determined by evaluating the responsibilities of the executives position,
the executives experience and the competitive marketplace. As appropriate,
base salary adjustments will be considered and would take into account changes
in the executives responsibilities, the executives performance and changes in
the competitive marketplace.
The
base salary for our former Chief Executive Officer was established pursuant to
recommendations given to the compensation committee by the third party
consultant, Charas Consulting, and the other Named Executive Officers (other
than in the case of Mr. Desai) were established by the compensation committee
based upon the recommendation of our senior management team. We believe that
the base salaries of the Named Executive Officers are appropriate within the
context of the compensation elements provided to the executives and because
they are at a level which remains competitive in the marketplace.
Bonuses.
The Board of Directors may authorize us to give
discretionary bonuses, payable in cash or shares of common stock, to the Named
Executive Officers and other key employees. Such bonuses are designed to
motivate the Named Executive Officers and other employees to achieve specified
corporate, business unit and/or individual, strategic, operational and other
performance objectives. Due to lack of adequate financial resources, no bonuses
were awarded to Named Executive Officers during the fiscal year ended October
31, 2008 except to Mr. Esposito who was awarded a stock grant of 100,000 shares
of our common stock.
Stock
Options.
Compensation for executive officers also
includes the long-term incentives afforded by stock options. Our stock option
award program is designed to motivate our Named Executive Officers and assist
in their retention. The size of the stock option grant is generally intended to
reflect the executives position with us and we generally grant stock options
upon commencement of employment with us with an annual vesting schedule of
three years to encourage key employees to continue their employment with us.
Other
Compensation.
Our Named Executive Officers are
eligible for the same level and offering of benefits that we may make available
to other employees from time to time.
We
do not have any defined benefit pension or retirement plans.
54
Post-Termination/
Change of Control Compensation.
We have arrangements
with certain of the Named Executive Officers that may provide them with
compensation following termination of employment. These arrangements are
discussed below under Agreements with Named Executive Officers.
Tax
Implications of Executive Compensation.
Our aggregate
deductions for each Named Executive Officer compensation are potentially
limited by Section 162(m) of the Internal Revenue Code to the extent the
aggregate amount paid to an executive officer exceeds $1 million, unless it is
paid under a predetermined objective performance plan meeting certain
requirements, or satisfies one of various other exceptions specified in the
Internal Revenue Code. At our 2008 Named Executive Officer compensation levels,
we did not believe that Section 162(m) of the Internal Revenue Code would be
applicable, and accordingly, we did not consider its impact in determining
compensation levels for our Named Executive Officers in 2008.
Agreements with Named Executive Officers
Ronald
H. Lane, Ph.D.,
Chairman of the Board of Directors and
Former Chief Executive Officer. On May 17, 2007, we entered into an employment
agreement, dated as of January 30, 2007, with Ronald Lane for serving as the
Companys Chief Executive Officer through January 30, 2010, renewable for
an additional one year unless either we or Dr. Lane provides written notice of
termination at least 60 days prior to the end of the term. On July 10, 2008,
Dr. Lane resigned as Chief Executive Officer and his employment agreement was
terminated.
The
employment agreement provided for an annual base salary of $400,000 and, solely
at the discretion of the Board of Directors, based on his performance and the
Companys financial condition and operating results, a bonus payable in
cash or shares of common stock. The agreement further provided that the Board
may grant him options under any equity compensation plan in which he is eligible
to participate. The agreement further provided that we owe Dr. Lane an amount
to be mutually agreed upon (the
Deferred
Obligation
) which amount was determined to be $214,102 as of
October 31, 2008 after giving effect to the conversion of $100,000 into 200
shares of Series C Preferred Stock and warrants to acquire 100,000 shares of
our common stock at an initial exercise price of $0.75.
The
agreement provided that if Dr. Lanes employment by us is terminated without
cause, by his death, or by Lane for good reason (which includes a change of
control), Dr. Lane will be entitled in addition to unpaid salary through the
date of termination, payment of the Deferred Obligation and a severance amount
of all or a portion (not less than one-half) of his base salary for one year
based on the number of completed years of service under the Agreement. Change
of Control is defined as a (i) change of holders of more than 50% of the voting
stock by means of a consolidation or merger, (ii) the sale of all or
substantially all of the assets or capital stock of the Company or (iii) the acquisition
by a person or group of persons in one or a series of related transactions of
more than 50% of the voting stock. Further the agreement provided that if we
terminate Dr. Lanes employment for cause or Dr. Lane terminates his employment
with us without good reason, Dr. Lane shall be entitled to any earned but
unpaid base salary, the Deferred Obligation plus any unpaid reimbursable
expenses through the date of termination of his employment.
55
As
compensation for Dr. Lanes services as Chairman of the Board, Dr. Lane
receives a salary of $120,000 per annum. In addition, we agreed to pay Dr. Lane
severance of $400,000 as well as pay Dr. Lane deferred compensation under his
former employment agreement which was $214,102 at October 31, 2008 and
reimburse Dr. Lane for expenses incurred by him which was $77,147 at October
31, 2008.
Steven Getraer
. Former Chief Financial Officer. On
July 10, 2007, we entered into an employment agreement with Mr. Steven Getraer
employing him as our Executive Vice President and Chief Financial Officer. On
October 6, 2008, we terminated Mr. Getraers employment. The agreement provided
that Mr. Getraers employment with us is for a three year term ending July 9,
2010, renewable for subsequent terms unless earlier terminated by either party.
Under the agreement, Mr. Getraer was entitled to a base salary of $265,000 per
annum, increasing to $280,000 per annum commencing on August 10, 2008 and to
$295,000 commencing on August 10, 2009. In addition, Mr. Getraer was entitled
to a discretionary fiscal year-end bonus payable in cash and/or shares of our
common stock and was granted options to acquire an aggregate of 600,000 shares
of our common stock exercisable for seven years at an initial exercise price of
$2.00 per share and vesting annually in three equal installments, with the
first installment vesting on July 10, 2008. The agreement also provided that we
may also in our discretion grant Mr. Getraer options pursuant to any eligible
equity compensation plan.
If
we terminated Mr. Getraers employment without cause, upon Mr. Getraers death,
or if Mr. Getraer terminates his employment for good reasons including a change
of control event, he would be entitled to the following severance: (i) Mr.
Getraers current base salary for one year; and (ii) any earned but unpaid base
salary plus any unpaid reimbursable expenses through the date of termination of
his employment. In the event that we terminated Mr. Getraers employment for
cause or Mr. Getraer terminates his employment with us without good reason, Mr.
Getraer would be entitled to any earned but unpaid base salary, unpaid bonus
approved by the Board plus any unpaid reimbursable expenses through the date of
termination of his employment.
On
January 27, 2009, we entered into a separation agreement with Mr. Getraer
pursuant to which we agreed to pay Mr. Getraer severance of $175,000 less
applicable withholding and deductions payable over ten months, unpaid salary of
$8,154 less applicable withholdings and deductions as well as expense
reimbursement of $1,658. In addition, we agreed to issue warrants to acquire
200,000 fully vested shares of our common stock at an exercise price of $0.75
per share exercisable at any time prior to July 31, 2012, it being acknowledged
that Mr. Getraer holds no additional options, warrants or other rights to
purchase our common stock.
David Coffin Beach.
Former Chief Operating Officer. On
April 18, 2007, we entered into an employment agreement with Mr. David Coffin-Beach
employing him as our Chief Operating Officer. On February 11, 2008, Mr.
Coffin-Beach resigned from this position and his employment agreement
terminated. Mr. Coffin Beachs employment agreement provided for a three year
term ending April 18, 2010 and may be automatically renewed for additional one
year periods. He was entitled to a base salary of $300,000 per annum and a
discretionary year end bonus payable in cash and/or shares of our common stock.
In addition, Mr. Coffin-Beach was granted options to acquire an aggregate of
1,500,000 shares of the registrants common stock
56
exercisable
for seven years at an initial exercise price of $2.00 per share and vesting
annually in three equal installments, with the first installment vesting on
April 18, 2008. At the date of Mr. Coffin-Beachs resignation, none of his
options vested. We also had the discretion to grant Mr. Coffin-Beach options
pursuant to any eligible equity compensation plan.
If
we terminated Mr. Coffin-Beachs employment without cause, upon Mr.
Coffin-Beachs death or if Mr. Coffin Beach terminated his employment for good
reasons including a change of control event, Mr. Coffin-Beach would have been
entitled to the following severance: (i) Mr. Coffin-Beachs current base salary
for one year plus any accrued bonus prior to termination; and (ii) any earned
but unpaid base salary plus any unpaid reimbursable expenses through the date
of termination of his employment. If we terminated Mr. Coffin-Beachs
employment for cause or Mr. Coffin-Beach terminates his employment with us
without good reason, Mr. Coffin-Beach would be entitled to any earned but
unpaid base salary plus any unpaid reimbursable expenses through the date of
termination of his employment. Mr. Coffin-Beachs resignation constituted
termination by Mr. Coffin-Beach without good reason and he was paid
accordingly.
57
Summary Compensation Table
The
table below summarizes the compensation information in respect of the Named
Executive Officers for the fiscal years ended October 31, 2008, 2007 and 2006.
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Name and
Principal Position
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|
Year
(1)
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
(2)
($)
|
|
|
Option
Awards
(3)
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All Other
Compensation
(4)
($)
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Total
($)
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|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Ronald Lane
Chairman of the
Board and Former
Chief
Executive
Officer(5)
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|
|
2008
2007
2006
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|
$
$
$
|
326,752
400,000
353,846
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(6)
(7)
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|
|
|
$
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245,556
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|
|
|
|
|
|
|
|
|
|
|
$
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9,855
11,000
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|
$
$
$
|
582,163
411,000
353,846
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|
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Jyotindra Gange
Chairman of the
Principal
Executive
Officer(8)
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2008
2007
2006
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Mahendra Desai
Chief Financial
Officer(9)
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2008
2007
2006
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$
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10,834
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|
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$
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10,834
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|
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|
|
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|
|
Steven Getraer
Former Chief
Financial
Officer(10)
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|
|
2008
2007
2006
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|
$
$
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249,712
250,000
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(11)
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|
|
|
|
|
|
$
$
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204,697
552,215
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|
|
|
|
|
|
$
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3,527
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|
$
$
$
|
457,936
802,215
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David Coffin-Beach
Former
President(12)
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2008
2007
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|
$
$
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30,417
161,600
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|
|
$
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87,500
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(13)
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|
$
$
|
39,022
1,788,230
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(13)
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|
|
|
|
$
$
|
828
4,400
|
|
$
$
|
157,767
1,952,230
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|
58
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John Copanos
VP Business
Development of
Kirk
Pharmaceuticals
LLC
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|
2008
2007
2006
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|
$
$
$
|
225,000
225,000
112,115
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|
$
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25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
$
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7,932
3,900
|
|
$
$
$
|
232,932
253,900
112,115
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Joe Esposito
Director of
Technical
Operations
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|
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2008
2007
2006
|
|
$
$
$
|
122,500
117,000
43,076
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|
|
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$
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68,000
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|
|
|
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|
|
|
|
|
|
$
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2,700
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|
$
$
$
|
190,500
119,700
43,076
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Aldo Rodriguez
Controller
|
|
|
2008
2007
2006
|
|
$
$
$
|
120,000
114,000
8,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
$
$
|
120,000
114,000
8,426
|
|
|
|
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(1)
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The information is provided
for each fiscal year which begins on November 1 and ends on October 31.
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(2)
|
The amounts reflect the
compensation expense in accordance with FAS 123(R) of these stock awards. The
assumptions used to determine the fair value of the option awards for the
fiscal year ended October 31, 2008 is set forth in note 15 of our financial
statements for the year ended October 31, 2008.
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(3)
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The amounts reflect the
compensation expense in accordance with FAS 123(R) of these option awards.
The assumptions used to determine the fair value of the option awards for the
fiscal year ended October 31, 2008 is set forth in note 15 of our financial
statements for the year ended October 31, 2008. Our Named Executive Officers
will not realize the value of these awards in cash unless and until these
awards are exercised and the underlying shares subsequently sold.
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(4)
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Represents amounts paid for
health insurance premium.
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(5)
|
Dr. Lane resigned as Chief
Executive Officer on July 3, 2008 although he continued to serve as Chairman
of the Board.
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(6)
|
Does not include
accumulated deferred compensation of $241,196 which amount excludes $100,000
of accumulated deferred compensation that previously converted into 200
shares of Series C Preferred Stock and warrants to acquire 100,000 shares of
our common stock.
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(7)
|
Does not include
accumulated deferred compensation of $267,948.
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(8)
|
Mr. Gange has been acting
as interim Principal Executive Officer since July 3, 2008.
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59
|
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(9)
|
Mr. Desai
was appointed Chief Financial Officer on October 6, 2008.
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|
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(10)
|
Mr. Getraer was appointed Chief Financial Officer on July 10, 2007.
Prior to that from September 2006 until July 2007 he served as Chief
Executive Officer of Kirk and President of ANDAPharm. Mr.
Getraer was terminated as our Chief Financial Officer effective November 6,
2008.
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(11)
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$90,000
represents amount paid as an employee and $160,000 represents amount paid as
a consultant.
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(12)
|
Mr.
Coffin-Beach was appointed Chief Operating Officer on April 18, 2007 and
resigned from this position on February 11, 2008.
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|
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(13)
|
Represents grant made to Mr. Coffin-Beach upon
his resignation as our President. At the date of Mr. Coffin-Beachs
resignation, none of the options to acquire up to 1,500,000 shares of our
common stock previously granted to him vested.
|
Grants of Plan-Based Awards
The
following table sets forth information regarding grants of plan based awards to
the Named Executive Officers during the fiscal year ended October 31, 2008.
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Estimated Possible Payouts
Under Non-Equity Incentive
Plan Awards
|
|
Estimated Future Payouts
Under
Equity Incentive Plan
Awards
|
|
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (#)
|
|
All Other
Option
Awards:
Number of
Securities
Underlying
Options (#)
|
|
Exercise or
Base Price
of Option
Awards
($/Sh)
|
|
Grant
Date Fair
Value of
Stock and
Option
Awards
(1)
|
|
|
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|
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Name
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Grant
Date
|
|
Threshold
($)
|
|
Target
($)
|
|
Maximum
($)
|
|
Threshold
(#)
|
|
Target
(#)
|
|
Maximum
(#)
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
Ronald H. Lane
|
|
|
5/9/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
$
|
245,556
|
|
Joe Esposito
|
|
|
6/13/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
$
|
68,000
|
|
David Coffin-Beach
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|
|
2/11/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
(3)
|
125,000
|
(3)
|
$
|
1.00
|
|
$
|
126,522
|
|
|
|
(1)
|
The amounts
reflect the compensation expense in accordance with FAS 123(R) of these
option awards. The assumptions used to determine the fair value of the option
awards for the fiscal year ended October 31, 2008 are set forth in note 15 of
our financial statements for the year ended October 31, 2008. Our Named
Executive Officers will not realize the value of these awards in cash unless
and until these awards are exercised and the underlying shares subsequently
sold.
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|
|
(2)
|
Represents
restrictive stock grant award that vests one third on May 9, 2008, May 9,
2009 and May 9, 2010.
|
|
|
(3)
|
Represents
grant made to Mr. Coffin-Beach upon his resignation as our President. At the
date of Mr. Coffin-Beachs resignation, none of the options to acquire up to
1,500,000 shares of our common stock previously granted to him vested.
|
60
Outstanding Equity Awards at Fiscal Year-End
The
following table sets forth information concerning stock options and stock
awards held by the Named Executive Officers as of October 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
Equity
Incentive Plan
Awards
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
Number of
Shares or
Units of
Stock Held
That Have
Not Vested
(#)
|
|
Market Value
of Shares or
Units of
Stock Held
That Have
Not Vested
($)
|
|
Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
|
|
Equity Incentive
Plan Awards:
Market or
Payout Value of
Unearned
Shares, Units or
Other Rights
That Have Not
Vested
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald H. Lane
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
666,667
|
(1)
|
$
|
233,333
|
|
David Coffin- Beach
|
|
|
125,000
|
(2)
|
|
|
|
|
|
|
$
|
1.00
|
|
|
02/11/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Getraer
|
|
|
200,000
|
(2)
|
|
|
|
|
|
|
$
|
0.75
|
|
|
7/10/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents restricted stock
award grant that vests one half on May 9, 2009 and one half on May 9, 2010.
|
|
|
(2)
|
Represents shares of common
stock underlying fully-vested warrants.
|
Option Exercises and Stock Vested
The
following table sets forth information concerning options exercised and stock
awards vested held by the Named Executive Officers during fiscal year ended
October 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
|
Name
|
|
Number of Shares Acquired on Exercise
(#)
|
|
Value Realized on Exercise
($)
|
|
Number of Shares Acquired
on Vesting
(#)
|
|
Value Realized on Vesting
($)
|
|
Ronald H. Lane
|
|
|
|
|
|
|
|
|
333,333(1)
|
|
|
$173,333
|
|
|
|
(1)
|
Represents restricted stock
award grant that vested upon grant on May 9, 2008.
|
61
Pension Benefits
We
do not provide pension benefits to the Named Executive Officers.
Nonqualified Deferred Compensation
We
do not have any defined contribution or other plan that provides for the
deferral of compensation on a basis that is not tax-qualified.
Potential Payments Upon Termination or Change
of Control
Please
see the discussion under
Compensation Discussion and Analysis Agreements
with Named Executive Officers
.
Director Compensation
The
following table sets forth director compensation for the year ended October 31,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Director
|
|
Fees Earned or
Paid in Cash
($)
|
|
Stock Awards
(1)
($)
|
|
Option Awards
(2)
($)
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
Nonqualified
Deferred Compensation
($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald H. Lane (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jyotindra Gange(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinay Sapte
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maneesh Sapte
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harcharan Singh(4)
|
|
|
|
|
$
|
491,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
491,111
|
|
William McCormick(5)
|
|
|
|
|
$
|
65,000
|
|
$
|
78,382
|
|
|
|
|
|
|
|
|
|
|
$
|
143,382
|
|
Richard Feldheim(5)
|
|
|
|
|
$
|
65,000
|
|
$
|
78,382
|
|
|
|
|
|
|
|
|
|
|
$
|
143,382
|
|
|
|
(1)
|
The amounts reflect the
compensation expense in accordance with FAS 123(R) of these stock awards. The
assumptions used to determine the fair value of the option awards for the
fiscal year ended October 31, 2008 is set forth in note 15 of our financial
statements for the year ended October 31, 2008.
|
|
|
(2)
|
The amounts reflect the
compensation expense in accordance with FAS 123(R) of these option awards.
The assumptions used to determine the fair value of the option awards for the
fiscal year ended October 31, 2008 is set forth in note 15 of our financial
statements for the year ended October 31, 2008. The named persons will not
realize the value of these awards in cash unless and until these awards are
exercised and the underlying shares subsequently sold.
|
|
|
(3)
|
Please refer to the summary
compensation table for executive compensation with respect to the named
individual.
|
|
|
(4)
|
At the time of the grant of
the referenced stock award, Mr. Singh was not a member of our Board of
Directors.
|
|
|
(5)
|
The named person resigned
from our Board on April 29, 2008.
|
62
Compensation Committee Interlocks and Insider
Participation
During
the fiscal year ended October 31, 2008, Messrs Feldheim and McCormick served on
our compensation committee until their resignation from the Board on April 29,
2008. Except as set forth below, no member of our compensation committee has
ever been an officer or employee of ours. During the fiscal year ended October
31, 2008, none of our executive officers served on the Board of Directors or on
the compensation committee of any other entity, any officers of which served
either on our Board or on our compensation committee.
From
July 1992 until October 1996 Mr. Feldheim served as a Director, Secretary and
Chief Financial Officer of LipoGenics, Inc., a now non-operating subsidiary of
ours.
Compensation Committee Report
Our
Board does not have a compensation committee. Our Board reviewed and discussed
with management the Compensation Discussion and Analysis set forth above for
the 2008 fiscal year. As a result of this review and discussion, the Board
approved the Compensation Discussion and Analysis for inclusion in this annual
report.
|
|
|
Ronald H. Lane (Chairman)
|
|
Vinay Sapte
|
|
Jyotindra Gange
|
|
Maneesh Sapte
|
|
Harcharan Singh
|
|
|
I
TEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
The
following table sets forth certain information regarding beneficial ownership
of our common stock as of December 31, 2008 by (i) each person who is known by
us to own beneficially more than 5% of our common stock, (ii) each of our Named
Executive Officers, and (iii) all our directors and executive officers as a
group. On such date, we had 29,827,357 shares of our common stock outstanding,
after giving effect to 4,000,000 shares of our common stock that we are
obligated to issue.
As
used in the table below and elsewhere in this prospectus, the term beneficial
ownership with respect to a security consists of sole or shared voting power,
including the power to vote or direct the vote and/or sole or shared investment
power, including the power to dispose or direct the disposition, with respect
to the security through any contract, arrangement, understanding, relationship,
or otherwise, including a right to acquire such power(s) during the next 60
days following December 31, 2008.
Except
as indicated, and subject to community property laws when applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
Except as otherwise noted, the
63
address of the
persons named in the table above is c/o Synovics Pharmaceuticals Inc., 5360
Northwest 35
th
Avenue, Ft. Lauderdale, Florida 33309.
|
|
|
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
Shares of
Common Stock Beneficially Owned
|
|
Percentage
of
Class Beneficially
Owned
|
|
Ronald H.
Lane, Ph.D.(1)(3)
|
|
|
5,239,668
|
(4)
|
|
17.4
|
%
|
|
|
|
|
|
|
|
|
Jyotindra
Gange(1)(2)
|
|
|
0
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
Vinay R.
Sapte(1)
|
|
|
31,644,700
|
(5)
|
|
57.3
|
%
|
|
|
|
|
|
|
|
|
Maneesh
Sapte(1)
|
|
|
31,644,700
|
(5)
|
|
57.3
|
%
|
|
|
|
|
|
|
|
|
Harcharan
Singh(1)
|
|
|
15,401,858
|
(6)
|
|
37.8
|
%
|
|
|
|
|
|
|
|
|
Mahendra
Desai(2)
|
|
|
0
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
David
Coffin-Beach(3)
|
|
|
250,000
|
(7)
|
|
|
*
|
|
|
|
|
|
|
|
|
Steven
Getraer(3)
|
|
|
200,000
|
(8)
|
|
|
*
|
|
|
|
|
|
|
|
|
Joe Esposito
|
|
|
100,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
Aldo
Rodriguez
|
|
|
0
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
John Copanos
|
|
|
2,100,000
|
(8)
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
Maneesh
Pharmaceuticals Ltd.
23-24 Kalpatru Court
C.G. Road, Chembour
Mumbai 7 400 074 India
|
|
|
31,644,700
|
(5)
|
|
57.3
|
%
|
|
|
|
|
|
|
|
|
2133820
Ontario Inc.
265
Rimrock Road, Suite 1,
North York,
Ontario, M3J 3C6, Canada
|
|
|
10,276,858
|
(9)
|
|
25.8
|
%
|
|
|
|
|
|
|
|
|
Lionheart
Investments Ltd.
Heston Business Court
19 Camp Rd
London SW19 4UW
United Kingdom
|
|
|
9,298,300
|
(10)(13)
|
|
24
|
%
|
|
NalinKant
Amratlal Rathod
JL. Teregong Kecil A/1
Pondok Indah
Jakarta, Indonesia
|
|
|
2,698,018
|
(11)
|
|
9
|
%
|
|
|
|
|
|
|
|
|
Executive
Officers and Directors
as a Group
(six persons)
|
|
|
52,286,226
|
(12)
|
|
78.6
|
%
|
64
|
|
*
|
Denotes less
than a 1% interest
|
|
|
(1)
|
Indicates
director.
|
|
|
(2)
|
Indicates
officer.
|
|
|
(3)
|
Indicates
former officer
|
|
|
(4)
|
Represents (i) 3,403,638
shares of common stock held of record by R.H. Lane Limited Partnership of
which Dr. Lane is a general partner. He shares voting power over these shares
with Richard M. Feldheim, a general partner, (ii) 1,000,000 shares of common
stock sold by Dr. Lane in 2006 on a three year note at $3.00 per share,
wherein Lane continues to have beneficial ownership and voting rights until
the note is repaid or stock returned and note cancelled, (iii) 100,000 shares
of common stock issuable upon exercise of warrants issued in the Series C
Offering, (iv) 200,000 shares of common stock issuable upon conversion of
Series C Preferred Stock, and (v) 1,000,000 shares of restricted stock that
we have authorized to be issued to Dr. Lane (but which have not been issued
as of the date hereof). Dr. Lane disclaims beneficial ownership of 60,000
shares of common stock held by such partnership for the benefit of other
partners and 180,000 shares of common stock held by the partnership for the
benefit of his wife.
|
|
|
(5)
|
Represents (i) 1,700,000
shares of common stock owned by Svizera Holdings BV (
Svizera
), a wholly-owned subsidiary of
Maneesh, (ii) 4,000,000 shares of common stock issued to Maneesh for the
replacement of the Nostrum Guarantee, (iii) 9,071,700 shares of common stock
issuable upon exercise of warrants issued to Svizera in the Series C
Offering, and (iv) 16,373,000 shares of common stock issuable upon conversion
of Series C Preferred Stock issued to Svizera in the Series C Offering.
Maneesh and Messrs. Vinay and Maneesh Sapte share the power to vote or to
direct the vote or to dispose or direct the disposition of the 31,644,700
shares of common stock because Messrs. Vinay and Maneesh Sapte, as the
directors authorized to act on behalf of Maneesh and Svizera, respectively,
with respect to the 31,644,700, and 27,644,700 shares of common stock,
respectively, may act on behalf of Maneesh and Svizera to vote or to direct
the vote or to dispose or direct the disposition of the 4,000,000 shares and
27,644,700 shares of common stock titled in the name of Maneesh and Svizera,
respectively. Neither Maneesh, Vinay or Maneesh Sapte hold sole power to vote
or to direct the vote or to dispose or direct the disposition of any of the
31,144,700 shares of common stock. The aforesaid is based partially on
information provided in Schedule 13D/A filed with the Commission on May 7,
2008, as subsequently amended on May 19, 2008, August 28, 2008 and September
24, 2008.
|
|
|
(6)
|
Represents (i) 2,330,458
shares of common stock owned by Mr. Singh, (ii) 2,125,000 shares of common
stock that we have authorized to be issued to Mr. Singh (but which have not
been issued as of the date hereo), (iii) 1,000,000 shares of common stock
issuable upon exercise of warrants issued to Mr. Singh, (iv) 4,290,400 shares
of common stock issuable upon exercise of warrants issued to 2133820 Ontario
Inc. (
Ontario
) in the Series
C Offering, (v) 5,656,000 shares of common stock
|
65
|
|
|
issuable upon conversion
of Series C Preferred Stock issued to Ontario in the Series C Offering. Mrs.
Prembala Singh, Mr. Singhs wife, is the sole director, officer and
shareholder of Ontario. Mr. Singh disclaims beneficial ownership of the
securities beneficially owned by Mrs. Singh and Ontario.
|
|
|
(7)
|
Represents (i) 125,000
shares of common stock that we have agreed to issue (but which have not been
issued as of the date hereof) to Mr. Coffin-Beach, and (ii) 125,000 shares of
common stock issuable upon exercise of warrants which we have agreed to issue
to Mr. Coffin-Beach (but which have not been issued as of the date hereof).
|
|
|
(8)
|
Represents shares of
common stock issuable upon exercise of a warrant exercisable within 60 days
following January 23, 2009.
|
|
|
(9)
|
Represents (i) 330,458
shares of common stock owned by Ontario, (ii) 4,290,400 shares of common
stock issuable upon exercise of warrants issued to Ontario Inc. in the Series
C Offering, and (iii) 5,656,000 shares of common stock issuable upon
conversion of Series C Preferred Stock issued to Ontario in the Series C
Offering. Mrs. Prembala Singh is the sole director, officer and shareholder
of Ontario. Mrs. Singh is the wife of Mr. Harcharan Singh. Mr. Singh
disclaims beneficial ownership of the securities beneficially owned by Mrs.
Singh and Ontario.
|
|
|
|
|
(10)
|
Includes 4,191,300 shares
of common stock issuable upon exercise of warrants and 4,657,000 shares of
common stock issuable upon conversion of Series C Preferred Stock issued in
the Series C Offering. Photon Gobal Limited is the beneficial owner of the
referenced shares.
|
|
|
(11)
|
Includes
212,806 shares of common stock beneficially owned by Mr. Rathod, which includes
116,156 shares of common stock that were purportedly transferred to Mr.
Rathod in 2006 by Bali Holdings Limited (but for which Mr. Rathod has yet to
receive share certificates from the Companys transfer agent) and 96,650
shares of common stock that are held for the benefit of Mr. Rathod by Merrill
Lynch. The above referenced shares of common stock also include 1,720,926
shares of common stock beneficially owned by Asia Pacific Investment Holdings
Limited (
Asia
Pacific
), of which Mr. Rathod is the owner and sole director, and
250,000 shares of common stock acquirable by Asia Pacific under the terms of a
Common Stock Purchase Warrant, dated as of April 17, 2006. These shares of
common stock beneficially owned by Asia Pacific include (i) 216,018 shares of
common stock that are held for the benefit of Asia Pacific by Royal Bank of
Canada, (ii) 60,875 shares of common stock that are held for the benefit of
Asia Pacific by Great Asian Holdings Limited, and (iii) 94,533 shares of
common stock that are held by James M. Belcher, since Asia Pacific may be
deemed to have shared voting power over those shares as a consequence of Mr.
Belchers inclusion on Asia Pacifics slate of nominees. The above referenced
shares of common stock also include 14,286 shares of common stock
beneficially owned by Technology Resources & Investments Limited (
Technology
Resources
), of which Mr. Rathod is the owner and sole director.
Mr. Rathod shares the power to vote or to direct the vote or to dispose or
direct the disposition of the 1,735,212 shares of common stock held in the
aggregate (including 250,000 shares of common stock acquirable by Asia
Pacific under the terms of a Common Stock Purchase Warrant, dated as of April
17, 2006) by Asia Pacific and Technology Resources because Mr. Rathod, as the
100% owner, controls each of those entities and, in his capacity as sole
director, may act on behalf of each of those entities to vote or to direct
the vote or to dispose or direct the disposition of the 1,735,212 shares of
common stock they collectively hold (including 250,000 shares of common stock
acquirable by Asia Pacific under the terms of a Common Stock Purchase
Warrant, dated as of April 17, 2006). In the course of his business, Mr.
Rathod also provides investment advice and consulting services to certain
business associates who to his knowledge hold, collectively, approximately
310,000 shares of common stock (including certain shares of common stock held
by Macro Power Ltd that are reflected as beneficially owned by Mr. Rathod in
recent filings by the Company). Mr. Rathod disclaims beneficial ownership of
those shares of common stock. The foregoing information is based upon a
Schedule 13D/A filed with the Commission on July 3, 2007.
|
66
|
|
(12)
|
Includes (i) 3,000,000
shares of restricted stock that we have authorized to be issued (but have not
been issued as of the date hereof), (ii) 14,462,100 shares of common stock
issuable upon exercise of warrants of which 13,462,100 shares of common stock
are issuable upon exercise of warrants issued in the Series C Offering, (iii)
22,229,000 shares of common stock issuable upon conversion of Series C
Preferred Stock issued in the Series C Offering.
|
|
|
(13)
|
Notwithstanding the
inclusion of the warrants and shares of Series C Preferred Stock beneficially
owned by the referenced investor in the beneficial ownership calculation, the
referenced investor and the Company agreed that the holder of the warrants
and Series C Preferred Stock shall not have the right to exercise any portion
of such securities and that we shall not affect any exercise or conversion
thereof to the extent that after giving effect to such issuance after
exercise such holder of the warrants together with his, her or its
affiliates, would beneficially own in excess of 4.99% of the number of shares
of common stock outstanding immediately after giving effect to such issuance.
Such 4.99% limitation may be waived by the holder upon not less than 61 days
prior notice to change such limitation to 9.99% of the number of shares of
common stock outstanding immediately after giving effect to such issuance.
|
Securities Authorized for Issuance under
Equity Compensation Plans
We
do not currently have any equity compensation plans. We are planning to adopt
such a plan in the future.
|
|
I
TEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
|
All
related person transactions are reviewed and, as appropriate, may be approved
or ratified by our Board of Directors. If a director is involved in the
transaction, he or she may not participate in any review, approval or
ratification of such transaction. Related person transactions are approved our
Board of Directors only if, based on all of the facts and circumstances, they
are in, or not inconsistent with, our best interests and our stockholders, as
the Board of Directors determines in good faith. The Board of Directors takes
into account, among other factors it deems appropriate, whether the transaction
is on terms generally available to an unaffiliated third-party under the same
or similar circumstances and the extent of the related persons interest in the
transaction. The Board of Directors may also impose such conditions as it deems
necessary and appropriate on us or the related person in connection with the
transaction.
In
the case of a transaction presented to the Board of Directors for ratification,
the Board of Directors may ratify the transaction or determine whether
rescission of the transaction is appropriate.
Copanos Note
Amendment
As
previously reported we entered into a promissory note in the principal amount
of $3,000,000 with John Copanos (the
Copanos
Note
) as partial consideration for the acquisition by us of Kirk and
ANDAPharm. Subsequently, on December 13, 2006 and on May 21, 2007, the
67
Copanos Note was amended. John Copanos currently
serves as VP of Business Development and was a founder of Kirk.
On November
30, 2007, we entered into a further agreement amending the Copanos Note, as
amended, according to which the interest rate on the outstanding principal of
$2,000,000 and accrued and unpaid interest of $258,041.51 was increased to 12%
per annum retroactively to October 3, 2007 and the payment schedule for the
payment of such principal and accrued and unpaid interest was adjusted. In
connection with the agreement, the parties executed mutual releases and we
consented, in the case of default, to John Copanos obtaining a final judgment
without necessity of a further hearing.
On March
19, 2008, we entered into an agreement amending the Copanos Note, as amended,
according to which the interest rate on the outstanding principal of $2,000,000
and accrued and unpaid interest was increased to 15% per annum retroactively
from January 15, 2008 and the payment schedule for the payment of such
principal and accrued and unpaid interest was further adjusted. From May 2,
2008, to August 31, 2008 the Copanos Note bore interest at 18% per annum and
increased further to 24% per annum from September 1, 2008. In addition, Copanos
was given the right to convert up to $500,000 of the principal amount due to
him into our Series C Preferred Stock, at the same price that Series C
Preferred Stock is sold to other investors. In connection with the agreement,
the parties consented, in the case of default, to Mr. Copanos obtaining a final
judgment without necessity of a further hearing.
In
addition, on March 19, 2008, we issued to Mr. Copanos a seven year warrant to
acquire 2,100,000 shares of our common stock exercisable at $1.00 per share
(the
Copanos Warrant
) in connection with the renegotiation
of the repayment terms of the Copanos Note. Of the shares issuable upon exercise
of the warrant, 1,400,000 were immediately exercisable and the remaining 700,000
are exercisable if Mr. Copanos is employed by us or our subsidiary on March 19,
2009 except that if Dr. Lane is removed or resigns from our Board of Directors,
then such 700,000 shares shall become immediately exercisable. As a result of
the Series C Preferred Stock Offering, the exercise price of the Copanos Warrant
automatically reduced to $0.75. In addition, we agreed to include the shares
issuable upon exercise of the Copanos Warrant in our next registration statement
subject to reasonable cutbacks as may be required by the investor or investor
group whose shares are also being registered.
The foregoing
description is a summary and is qualified in its entirety by the agreements,
which are attached as an exhibit hereto and incorporated by reference herein.
Resignation of David
Coffin-Beach
On February
11, 2008, David Coffin-Beach resigned as our President and Chief Operating
Officer. No options granted under Mr. Coffin-Beachs employment agreement
vested and by separate agreement Mr. Coffin-Beach was retained as a consultant
and granted (i) a five year option to acquire 125,000 shares of our common
stock at an exercise price of $1.00 per share, and (ii) 125,000 shares of our
common stock.
68
2008 Bridge Notes
On April 3,
2008, the Company and Kirk completed an initial closing of a bridge round of
debt financing (the
2008 Bridge Note
Offering
), whereby Kirk issued convertible bridge notes (the
2008 Bridge Notes
) in
the principal
amount of $6,592,292 to accredited investors as defined by Rule 501 under the
Securities Act of 1933, as amended (the
Securities
Act
). Subsequently, we completed an additional closing and issued a
further 2008 Bridge Note in the principal amount of $200,000 to an accredited
investor.
Of the 2008
Bridge Notes issued, notes in the principal amount of $5,227,292 were issued in
exchange for (i) 2008 Bridge Notes in the principal amount equal to the unpaid
principal of convertible bridge notes issued by Kirk in a bridge note offering
conducted during 2007 (the
2007 Bridge Note
Offering
), and (ii) 2008 Bridge Notes in the principal amount equal
to (1) the unpaid principal and accrued and unpaid interest of a bridge note
held by Ontario, an affiliate of Harcharan Singh, a beneficial owner of more
than 10% of our outstanding common stock and member of our board, that was
issued by Kirk in April 2007 (the
Singh
Note
), and (2) accrued and outstanding consulting fees due to Mr.
Singh. The incremental gross proceeds to us were $1,552,292.
The lead
investor in the 2008 Bridge Note Offering was Svizera which invested an
aggregate of $1 million in the 2008 Bridge Note Offering. Svizera is a
wholly-owned subsidiary of Maneesh which is controlled by Vinay Sapte and his
brother Maneesh Sapte. As a result of this transaction and subsequent related
transactions, Maneesh became our largest shareholder and three of its
designees, Jyotindra Gange, Vinay Sapte and Maneesh Sapte, became members of
our five-member board. In addition, Ontario invested an aggregate of $1,652,292
in the 2008 Bridge Note Offering (including $1,552,292 of unpaid principal and
accrued and unpaid interest of a promissory note issued by Kirk which rolled
over into the 2008 Bridge Note Offering plus accrued and unpaid consulting
fees).
The
2008 Bridge Notes bore interest at 6% per annum increasing to 18% in the
case of an event of default and mature on June 30, 2008, unless earlier converted.
Upon the closing of a qualified equity financing (as defined therein), the
2008 Bridge Notes were convertible at the option of the holder into our Series
C Preferred Stock and warrants to acquire shares of common stock to be issued
in a qualified equity financing at a premium of 10% of the unpaid principal
and interest of the 2008 Bridge Notes. In addition, upon closing of the qualified
equity financing, holders of the 2008 Bridge Notes were entitled to receive
bridge warrants to acquire our common stock at an exercise price and upon
other terms identical to the warrants to be issued in the qualified equity
financing. The number of shares of common stock into which the bridge warrants
were exercisable ranged from 40% to 50% of the number of shares of common stock
issuable to holders upon conversion of the Series C Preferred Stock receivable
upon conversion of the 2008 Bridge Notes, with the range depending on the
timing of the initial closing of the qualified equity financing.
69
In
connection with the 2008 Bridge Note Offering, we issued an aggregate of
1,358,458 shares of its common stock to holders of the 2008 Bridge Notes
including 200,000 and 330,458 shares to Svizera and Ontario, respectively.
To
secure Kirks obligations under the 2008 Bridge Notes, we issued 1,000,000
shares of Series B Convertible Preferred Stock to Axiom Capital Management,
Inc. (
Axiom
), the placement agent of the 2008
Bridge Note Offering, acting as collateral agent of holders of the 2008 Bridge
Notes. The shares of Series B Convertible Preferred voted together with the
shares of common stock and other preferred stock entitled to vote on an as-converted
basis. In the event of default under the 2008 Bridge Notes, the Series B
Convertible Preferred Stock were convertible into our common stock on a 1:15
basis for the purpose of utilizing the proceeds thereof to satisfy the obligations
under the 2008 Bridge Notes. In an event of default, we were obligated to file
a registration statement under the Securities Act covering the resale of shares
of common stock issuable upon conversion of the Series B Convertible Preferred
Stock. If we did not file a registration statement within 15 days following an
event of default, the 2008 Bridge Notes would be deemed to increase in
principal amount by 1% every month up to 10% in the aggregate. The 1,000,000
shares of Series B Convertible Preferred Stock have subsequently been redeemed
by us for a redemption price of $1,000.
The 2008
Bridge Notes were also secured by a pledge by an affiliate of Dr. Lane, our
Chairman of the Board and former Chief Executive Officer, of 2,000,000 shares
of common stock. As an inducement to the pledge by Dr. Lanes affiliate, we
agreed to issue to Dr. Lanes affiliate one share of our common stock for every
pledged share of common stock sold in an event of default under the 2008 Bridge
Notes.
The
foregoing description is a summary and is qualified in its entirety by the
transaction documents attached as an exhibit hereto and incorporated by
reference herein.
Series C Preferred
Stock Offering
On May 9,
2008, we completed an initial closing of a Series C Preferred Stock offering
(the
Series C Offering
) whereby
we sold an aggregate of 23,978 shares of our newly created Series C Convertible
Redeemable Preferred Stock (the
Series C
Preferred Stock
) together with detachable warrants to acquire an
aggregate of 16,700,200 shares of our common stock to accredited investors as
defined by Rule 501 under the Securities Act of 1933, as amended (the
Securities Act
). We
subsequently
completed a series of additional closings and sold in the aggregate an
additional 4,160 shares of Series C Preferred Stock and additional warrants to
acquire an aggregate of 2,080,000 shares of our common stock.
Pursuant
to the Amended and Restated Certificate of Designations, Preferences and Rights
of Series C Convertible Redeemable Preferred Stock (the
Certificate
of Designation
)
the shares of Series C Preferred Stock are convertible, both at the option of
the holder and the Company according to the terms of the Certificate of
Designation, at the initial rate of 1,000 shares of common stock for each share
of Series C Preferred Stock (based on a stated value of $500 per share and an
initial conversion price of $0.50) subject to adjustment for, among other
things, stock splits, stock dividends, distributions, reclassifications and
sales below the conversion price. The Series C Preferred Stock votes on an
as-converted basis together with our shares of common stock and any class of preferred
stock entitled to vote with our common stock at any annual or special
70
meeting of
ours. Holders of Series C Preferred Stock are entitled to receive cumulative
dividends at the rate of 6% of the stated value per annum on each outstanding
share of Series C Preferred Stock accruing from May 9, 2008 until the earlier
of May 9, 2011 or the conversion thereof into shares of common stock, payable
quarterly on March 31, June 30, September 30 and December 31, with the first
payment due June 30, 2008, and payable in cash or shares of Series C Preferred
Stock in accordance with the terms of the Certificate of Designation. Holders
of Series C Preferred Stock are also entitled to participate on a pro-rata
basis in any dividends paid on the Registrants common stock on an as-converted
basis. The Certificate of Designation further provides that each
share of Series C Preferred Stock will also be entitled to a preference equal
to 125% of the sum of the stated value plus accrued but unpaid cash dividends
upon the merger, acquisition, sale of voting control or sale of all or
substantially all of our assets, upon our liquidation, dissolution or
winding-up or upon an event of bankruptcy. On May 9, 2011, the shares of Series
C Preferred Stock are subject to redemption at our option at a redemption price
of the stated value plus accrued but unpaid dividends on the shares of Series C
Preferred Stock.
The
Warrants are exercisable for a period of five years from the date of grant at
an initial exercise price of $0.75 per share, subject to adjustment for, among
other things, stock splits, stock dividends, distributions, reclassifications
and sales below the exercise price.
Of
the Series C Preferred Stock and Warrants sold, 2008 Bridge Notes in the
principal amount of $5,202,292 plus accrued interest thereon, which were
issued by Kirk in the 2008 Bridge Note Offering, were exchanged at a premium
of 10% into (i) an aggregate of 11,778 shares of Series C Preferred Stock
and Warrants to acquire an aggregate of 5,889,000 shares of common stock,
and (ii) bridge Warrants to acquire an aggregate of 4,711,200 shares of common
stock (equal to 40% of the number of shares of common stock issuable upon
conversion of the Series C Preferred Stock received upon conversion of the
2008 Bridge Notes). In addition, Dr. Lane converted $100,000 of deferred
compensation due under his employment agreement for an investment of like
amount in the Series C Offering resulting in the issuance to him of 200 shares
of Series C Preferred Stock and Warrants to acquire 100,000 shares of common
stock.
Pursuant
to a registration rights agreement entered into with purchasers of the Series
C Preferred Stock, we agreed to use our best efforts to file, within 45 days
of the final closing of the Series C Offering, with the Securities and Exchange
Commission a registration statement (the
Mandatory
Registration Statement
) covering the registration of (i) securities
issuable upon exercise of the Warrants and placement agent warrants, (ii)
securities issued by way of liquidated damages under the registration rights
agreement, (iii) up to 1,000,000 shares of common stock owned by Maneesh prior
to May 8, 2008, (iv) 1,000,000 shares of common stock beneficially owned by Mr.
Singh as of May 8, 2008, and (v) 1,000,000 shares of common stock beneficially
owned by Dr. Lane as of May 8, 2008 (collectively the
Registrable Securities
).
The registration rights agreement provided that if the Mandatory Registration
Statement has not been filed within 45 days of final closing of the Series C
Offering or declared effective within 195 days following final closing, we agreed
to pay to the purchasers liquidated damages, payable in cash or Series C Preferred
Stock, of 1% of the purchase price paid by the purchaser in the Series C Offering
for each month until the registration statement is declared effective, with the
total of the foregoing capped at 10%. If the Mandatory Registration Statement
has not been declared effective and we receive a request between October 6, 2008
and May 9, 2010 from purchasers who invested at
71
least $500,000 in the Series C Offering that we file a registration
statement, then we are obligated, subject to certain limitations, to file a
registration covering the Registrable Securities requested to be registered.
Further, if the Mandatory Registration Statement has not been declared
effective and we file a registration statement for our own account or the
account of others then we shall, subject to customary cutbacks and restrictions,
include in such registration statement the Registrable Securities of the
purchasers of the Series C Preferred Stock that request to be included. We have
timely filed a Mandatory Registration Statement which is currently pending.
Pursuant
to a letter agreement entered into with our placement agent, Axiom, as
subsequently amended, Axiom is entitled to a cash fee of $255,000
plus expenses of $34,509 for services rendered in our 2007 Bridge Note
Offering, 2008 Bridge Note Offering and the Series C Offering. In addition,
we are negotiating the number of number of warrants to which Axiom
is entitled to in connection with the aforesaid financings.
The
incremental gross proceeds to us from the Series C Offering were $7,780,000 and,
together with the 2008 Bridge Note Offering, the incremental gross proceeds to
us were $9,335,000.
With
the new infusion of capital from the Series C Offering, we used the proceeds
from the Series C Offering to pay down our credit facility with the Bank of
India in the current principal amount of $5,650,000 (the
BOI Loan
) and retire our remaining
outstanding material indebtedness. On or around May 12, 2008, we repaid an
aggregate of $2,445,000 to holders of delinquent convertible promissory notes
in like principal amount issued by us in a bridge note offering that initially
closed in October 2005 (the
2005 Bridge
Notes
). In addition, we repriced warrants to purchase an aggregate
of 407,493 shares of common stock, issued to holders of the 2005 Bridge Notes,
to $0.75 per share and extended the term of such warrants by one year. We
further issued an aggregate of 817 shares of Series C Preferred Stock and
1,091,813 shares of common stock in lieu of payment of accrued and unpaid
interest under the 2005 Bridge Notes. In consideration of the aforesaid, we
obtained a full release from such holders of the 2005 Bridge Notes in
connection with the 2005 Bridge Notes and related transactions.
We
further used proceeds from the Series C Offering to retire additional
indebtedness including, without limitation, indebtedness under the 2008 Bridge
Notes in the principal amount of $1,590,000 (that did not convert into the
Series C Offering), $1,500,000 of indebtedness under a promissory note held by
John Copanos, the VP of Business Development of Kirk and founder of Kirk and
$725,893 of indebtedness under a remaining 2005 Bridge Note held by a holder
that commenced a lawsuit against us.
In
connection with the Series C Offering, our Board authorized the following
issuances: (i) 2,000,000 shares of restricted common stock to Mr. Singh,
vesting over twenty four months, with one-third vesting on each of May 9, 2008,
May 9, 2009 and May 9, 2010; (ii) 1,000,000 shares of restricted common stock
to Dr. Lane, vesting over twenty-four months, with one-third vesting on each
of May 9, 2008, May 9, 2009 and May 9, 2010; and (iii) 125,000 shares of
common stock and five-year warrants to acquire 250,000 shares of common stock
at an initial exercise price of $0.75 per share to our former directors,
William McCormick and Richard Feldheim, who resigned on April 29, 2008.
Further, in addition to the repricing of the
72
2005 Bridge Note warrants, our Board authorized the repricing of
additional warrants to acquire an aggregate of 875,263 shares of common stock
to $0.75 per share. We also agreed to reprice warrants to acquire
1,000,000 shares of common stock held by Harcharan Singh that were issued to
him in April, 2007 to $0.75.
The lead
investor in the Series C Offering was Svizera, which invested an aggregate of
$8,086,000 in the Series C Offering (including the roll-over of a 2008 Bridge
Note in the principal amount of $1 million and the exchange of $300,000 expense
reimbursement due to Svizera) from its working capital, purchased an aggregate
of 16,373 shares of Series C Preferred Stock and warrants exercisable for an
aggregate of 9,071,700 shares of our common stock. As stated previously,
Svizera is a wholly-owned subsidiary of Maneesh, which is controlled by Vinay
Sapte and his brother Maneesh Sapte. Vinay Sapte who was appointed to our Board
on April 29, 2008, and Maneesh Sapte, together with Jyotindra Gange, both
Maneesh designees, became members of our Board on May 23, 2008.
In
addition, Ontario, an affiliate of Mr. Harcharan Singh, invested an aggregate
of $2,661,930 in the Series C Offering (including the roll-over of a 2008
Bridge Note in the principal amount of $1,652,292) from its working capital
and, together with the Maneesh designees, became a member of our Board on May
23, 2008.
Vinay
Sapte, Dr. Lane and Mr. Singh and their respective affiliates were among
principal parties to a Voting Agreement dated as of May 8, 2008 entered into
upon the initial closing of the Series C Offering. Under the terms of the
Voting Agreement, each of the parties agreed to vote all of its shares to
ensure that the size of our Board will be five directors (or seven if the Board
resolves to expand its size to seven). Further, each of the parties agreed to
vote its shares in favor of the following designations: (i) one director
designated by Dr. Lane and his affiliates (to initially be Dr. Lane), (ii) one
director designated by Mr. Singh and his affiliates (to initially be Mr.
Singh), (iii) three directors designated by Maneesh and its affiliates (to
initially be Vinay Sapte, Maneesh Sapte and Jyotindra Gange). The Voting Agreement
further provided that if the Board is expanded to seven directors, then Maneesh
and its affiliates shall be entitled to one further designee and Axiom and
Indigo Securities LLC (
Indigo
) shall be entitled to designate
one director. If certain of the parties to the Voting Agreement cease to
beneficially own at least 4% of the outstanding shares of our common stock
determined immediately after giving effect to the initial closing of the Series
C Offering, then the right of designation applicable to such party shall
terminate and the right shall vest in the entire Board.
Svizera
and the Company have also executed a side letter agreement dated May 8, 2008
whereby we agreed, among other things, to become a party to the Voting
Agreement, to gross-up 4,000,000 shares of common stock issued to
Maneesh in consideration of the release of Nostrum Guarantee in the event that
10,661,000 shares of common stock are ultimately returned or released to
Nostrum and to the subrogation of Maneesh to BOI in the event that Maneesh
becomes a guarantor of the credit facility. Further, Svizera agreed that
neither it nor its affiliates would engage Nostrum, Dr. Mulye or Anil Anand or
any of their affiliates in connection with us except to resolve outstanding disputes
between the Registrant and Dr. Mulye and his affiliates.
73
To ensure
that the investment by Maneesh and the related transactions were effected as
contemplated, we entered into an amendment to the Rights Agreement, dated as of
September 8, 2006, pursuant to which Maneesh and its affiliates as well as Dr.
Lane, Mr. Singh, Axiom and Indigo and their affiliates will not be considered
an Acquiring Person as a result of the transactions described herein.
The
foregoing description is a summary and is qualified in its entirety by the
transaction documents attached as an exhibit hereto and incorporated by
reference herein.
Joint Venture
Agreement
On June 6,
2008, we entered into a Joint Venture Agreement with Maneesh. Under the terms
of the agreement, Maneesh agreed to provide consulting services to the Company
and its subsidiaries for an initial term of one year, which term shall
automatically renew for additional one year terms absent notice of non-renewal.
Pursuant to the agreement, we agreed to pay Maneesh a consulting fee of $25,000
per month, commencing June 2008, plus reimbursement of reasonable and
accountable expenses. The agreement further provided that Maneesh and Kirk may
in the future agree to the license by Maneesh to Kirk of the non-exclusive
right to manufacture and distribute pharmaceutical products proprietary to
Maneesh.
The
foregoing description is a summary and is qualified in its entirety by the
Joint Venture Agreement attached as an exhibit hereto and incorporated by
reference herein.
Maneesh and Singh
Grant
On
November 11, 2008, our Board of Directors authorized the grant of 500,000
shares of our common stock to Maneesh and 125,000 shares of our common stock
to Harry Singh, both affiliates of the Company, in consideration for their
deferral in payment of certain fees due to them under a joint venture agreement
in the case of Maneesh and a consulting agreement in the case of Harry Singh.
We have not issued these shares although we are treating them for the purposes
of this Annual Report on Form 10-K as if they were issued and outstanding.
Lane Compensation
On
November 11, 2008, we agreed to compensate Dr. Lanes services as Chairman of
the Board pursuant to which he is to receive a salary of $120,000 per annum. In
addition, we agreed to pay Dr. Lane severance of $400,000 as well as pay down
Dr. Lanes deferred compensation which was $214,102 at October 31, 2008 and
reimburse Dr. Lane for expenses incurred by him which were $77,147 at October
31, 2008.
Steven Getraer
Separation
On
January 27, 2009, we entered into a separation agreement with Mr. Getraer
pursuant to which we agreed to pay Mr. Getraer severance of $175,000 less
applicable withholding and deductions payable over ten months, unpaid salary of
$8,154 less applicable withholdings and deductions as well as expense
reimbursement of $1,658. In addition, we agreed to issue warrants
74
to acquire
200,000 fully vested shares of our common stock at an exercise price of $0.75
per share exercisable at any time prior to July 31, 2012, it being acknowledged
that Mr. Getraer holds no additional options, warrants or other rights to
purchase our common stock.
|
|
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|
The
following table presents fees, including reimbursements for expenses, for
professional audit services rendered by Miller Ellin & Company, LLP. (
Miller Ellin
) for the
audits of our annual financial statements and interim reviews of our quarterly
financial statements for the years ended October 31, 2008 and October 31, 2007
and fees billed for other services rendered by Miller Ellin during those
periods.
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Audit
Fees(1)
|
|
$
|
121,966
|
|
$
|
70,000
|
|
Audit-Related
Fees
|
|
|
|
|
|
|
|
Tax
Fees
|
|
|
|
|
|
|
|
All
Other Fees
|
|
|
|
|
|
|
|
|
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(1)
|
Audit fees
consist of fees billed for professional services rendered for the audit of
our consolidated annual financial statements and review of the interim
consolidated financial statements included in quarterly reports and services
that are normally provided by Rosen Seymour in connection with statutory and
regulatory filings or engagements.
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75
PART IV
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I
TEM 15.
|
EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.
|
|
|
|
(a)
Documents filed as part of this Report
|
|
|
|
(1)
The financial statements listed in the Index to Consolidated Financial
Statements are filed as part of this report
|
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|
(2)
The financial statements listed in the Index are filed a part of this report.
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(3)
List of Exhibits
|
|
|
|
|
See Index to
Exhibits in paragraph (c) below.
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|
|
The Exhibits
are filed with or incorporated by reference in this report.
|
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|
(b)
Financial Statement Schedules
|
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|
|
None.
|
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|
(c) Exhibits
required by Item 601 of Regulation S-K.
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Exhibit
|
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|
Description
|
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3.1
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Restated
Articles of Incorporation (1)
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3.2
|
|
Articles of
Amendment to the Articles of Incorporation (1)
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3.3
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|
Amendment to
the Restated Articles of Incorporation (2)
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3.4
|
|
Certificate
of Designations, Preferences and Rights of Series B Preferred Stock (33)
|
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3.5
|
|
Amended and Restated Certificate
of Designations, Preferences and Rights of Series C Preferred Stock (31)
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3.6
|
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Bylaws (1)
|
|
|
|
3.7
|
|
Bylaws, as
amended through September 20, 2006 (3)
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4.1
|
|
Form of
Certificate evidencing shares of common stock (1)
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10.1
|
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Form of
Rights Agreement, effective as of September 8, 2006, between the Registrant
and Continental Stock Transfer & Trust Company, as rights agent (4)
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10.2
|
|
Amendment
No. 1 to Technology License Agreement, by and between the Company and Nostrum
Pharmaceuticals, Inc., dated June 30, 2005 (5)
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76
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10.3
|
|
Amendment
No. 2 to Technology License Agreement, by and between the Company and Nostrum
Pharmaceuticals, Inc., dated August 31, 2005 (5)
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10.4
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|
Amendment
No. 3 to Technology License Agreement, by and between the Company and Nostrum
Pharmaceuticals, Inc., dated October 3, 2005 (6)
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10.5
|
|
ANDA
Ownership Transfer and Product License Agreement, dated as of May 17, 2006,
by and between Nostrum Pharmaceuticals, Inc. and Synovics Laboratories, Inc.
(7)
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10.6
|
|
Letter
Agreement, by and between the Company, Nostrum Pharmaceuticals, Inc. and
Enem Nostrum Remedies Pvt. Ltd, dated September 27, 2005 (8)
|
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10.7
|
|
Placement
Agency Agreement, by and between the Company and Indigo Securities LLC, dated
September 27, 2005 with respect to the Bridge Financing (6)
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10.8
|
|
Form of
Subscription Agreement associated with the Bridge Financing (6)
|
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|
10.9
|
|
Form of 9%
Convertible Bridge Notes (6)
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10.10
|
|
Form of Note
offered in exchange for Convertible Bridge Note (4)
|
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10.11
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|
Form of
Bridge Warrants associated with the Bridge Financing (6)
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|
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10.12
|
|
Form of
Registration Rights Agreement associated with the Bridge Financing (6)
|
|
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10.13
|
|
Credit
Agreement, dated as of May 22, 2006, between the Registrant and Bank of
India, New York Branch (9)
|
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10.14
|
|
Promissory
Note, dated May 22, 2006, by the Registrant in favor of Bank of India, in the
principal amount of $10,500,000 (9)
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10.15
|
|
Security
Agreement, dated May 22, 2006, by the Registrant in favor of Bank of India
(9)
|
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10.16
|
|
Corporate
Guaranty, dated May 22, 2006, by ANDAPharm, Inc., ANDAPharm, LLC, Bionutrics
Health Products, Inc., Incon Technologies, Inc., Kirk Pharmaceuticals, LLC,
Kirk Pharmaceuticals, Inc., Lipogenics, Inc., Synovics Laboratories, Inc.,
and Nutrition Technology Corp. in favor of Bank of India (9)
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10.17
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|
Corporate
Guaranty, dated May 22, 2006 by Nostrum Pharmaceuticals, Inc. in favor of
Bank of India (9)
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10.18
|
|
Individual
Guaranty, dated May 22, 2006, by Dr. Nirmal Mulye in favor of Bank of India
(9)
|
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10.19
|
|
Promissory
Note, dated May 23, 2006, by the Registrant in favor of John S. Copanos (10)
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77
|
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10.20
|
|
Form of Purchase
and Sale Agreement by and among the Company, Asia Pacific Investment Holdings
Limited, InCon Technologies, Inc., Bali Holdings, LLC, InCon Processing, LLC,
InCon International, Inc., N.P. Shaikh and John R. Palmer, dated as of
October 31, 2005 (11)
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10.21
|
|
Form of
Consent of Noteholders to purchase (11)
|
|
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|
10.22
|
|
ANDAPharm
Purchase Agreement, dated as of July 28, 2005, between the Registrant and
John S. Copanos (9)
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10.23
|
|
Form of
Warrant for investors in private placement that initially closed on January
26, 2007 (12)
|
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10.24
|
|
Consulting
Agreement between the Registrant and Saggi Capital Corp. dated February 1,
2007 (13)
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10.25
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|
Consulting
Agreement between the Registrant and Bridge Ventures, Inc. dated February 1,
2007 (13)
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10.26
|
|
Consulting
Agreement between the Registrant and VCG&A, Inc. effective as of February
1, 2007 (14)
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|
|
10.27
|
|
Employment
Agreement dated as of April 18, 2007 between the Registrant and David
Coffin-Beach (15)
|
|
|
|
10.28
|
|
Consulting
Agreement dated April 20, 2007 between the Registrant and Harcharan Singh
(16)
|
|
|
|
10.29
|
|
Promissory
Note dated April 20, 2007 of Kirk Pharmaceuticals, LLC issued to 2138820
Ontario, Inc.(16)
|
|
|
|
10.30
|
|
License and
Supply Agreement between the Registrant and Fluid Air, Inc. (17)
|
|
|
|
10.31
|
|
Employment
Agreement dated as of January 30, 2007 between the Registrant and Ronald H.
Lane, Ph.D. (18)
|
|
|
|
10.32
|
|
Employment
Agreement dated July 10, 2007 between the Registrant and Steven Getraer (19)
|
|
|
|
10.33
|
|
Form of
Convertible Bridge Note for 2007 convertible bridge note financing (20)
|
|
|
|
10.34
|
|
Settlement
Agreement dated July 31, 2007 (21)
|
|
|
|
10.35
|
|
Promissory
Note Dated August 31, 2007 in the principal amount of $1,500,000 issued by
Kirk Pharmaceuticals, LLC in favor of CB Distributors, Inc. (22)
|
78
|
|
|
10.36
|
|
Purchase
Agreement, dated as of August 31, 2007 between Kirk Pharmaceuticals, Inc. and
CB Distributors, Inc. (22)
|
|
|
|
10.37
|
|
Agreement
between Registrant and John Copanos dated as of November 30, 2007 (23)
|
|
|
|
10.38
|
|
Letter
agreement between the Registrant and Axiom Capital Management, Inc. dated
June 5, 2007 (24)
|
|
|
|
10.39
|
|
Form of
Agreement between John Copanos and the Registrant (25)
|
|
|
|
10.40
|
|
Form of
Warrant issued to John Copanos (25)
|
|
|
|
10.41
|
|
Second Supply
Agreement dated as of February 1, 2008 between Breckenridge Pharmaceutical,
Inc. and ANDApharm LLC (25)(26)
|
|
|
|
10.42
|
|
Side Letter
dated April 3, 2008 among the Registrant and Svizera Holdings BV, as amended
on April 24, 2008 (27)
|
|
|
|
10.43
|
|
Amendment
dated April 24, 2008 to Side Letter (27)
|
|
|
|
10.44
|
|
Form of
Convertible Bridge Note (28)
|
|
|
|
10.45
|
|
Side Letter
dated April 3, 2008 among the Registrant, Kirk and Holders of the Convertible
Promissory Note (28)
|
|
|
|
10.46
|
|
Joint
Venture Agreement dated as of June 6, 2008 by and between the Registrant and
Maneesh Pharmaceuticals, Ltd. (29)
|
|
|
|
10.47
|
|
Complaint
filed June 27, 2008 in the United States District Court for the Southern
District of New York (30)
|
|
|
|
10.48
|
|
Voting
Agreement dated as of May 8, 2008 (31)
|
|
|
|
10.49
|
|
Amendment
No. 1 to Rights Agreement dated as of May 9, 2008 between the Registrant and
Continental Transfer Company (31)
|
|
|
|
10.50
|
|
Form of
Subscription Agreement in Series C Offering (32)
|
|
|
|
10.51
|
|
Form of
Registration Rights Agreement in Series C Offering (32)
|
|
|
|
10.52
|
|
Form of
Warrant in Series C Offering (32)
|
|
|
|
10.53
|
|
Side Letter
dated May 8, 2008 between Synovics Pharmaceuticals Inc. and Svizera Holdings
BV
|
|
|
|
21.1
|
|
Subsidiaries
of the Company*
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 and Securities and Exchange Commission Release 34-46427*
|
79
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and Securities and Exchange Commission Release 34-46427*
|
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
|
|
|
|
|
32.2
|
|
Certification
of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
|
|
|
|
|
|
|
* Filed
herewith
See Item 13
of the Companys Report on Form 10-K for the year ended October 31, 2005 for a
list of other material agreements executed prior to October 1, 2005.
|
|
(1)
|
Incorporated
by reference to Registrants Form 10 filed with the Commission on or about
January 21, 1997.
|
|
|
(2)
|
Incorporated
by reference to Registrants Form 10-K filed with the Commission on February
13, 2007.
|
|
|
(3)
|
Incorporated
by reference to Registrants Form 8-K filed with the Commission on September
21, 2006.
|
|
|
(4)
|
Incorporated
by reference to Registrants Form 8-K filed with the Commission on September
14, 2006.
|
|
|
(5)
|
Incorporated
by reference to Registrants Form 10-K filed with the Commission on January
30, 2006.
|
|
|
(6)
|
Incorporated
by reference to Registrants Form 8-K filed with the Commission on October 7,
2005, as amended on October 11, 2005.
|
|
|
(7)
|
Incorporated
by reference to Registrants Form 8-K filed with the Commission on May 19,
2006.
|
|
|
(8)
|
Incorporated
by reference to Registrants Form 8-K filed with the Commission on October 3,
2005.
|
|
|
(9)
|
Incorporated
by reference to Registrants Form 8-K filed with the Commission on May 26,
2006.
|
80
|
|
(10)
|
Incorporated
by reference to Registrants Form 8-K/A (amendment to 8-K filed on May 26,
2006) filed May 31, 2006
|
|
|
(11)
|
Incorporated
by reference to Registrants Form 10-Q filed with the Commission on March 16,
2006
|
|
|
(12)
|
Incorporated
by reference to Registrants Form 8-K/A filed February 2, 2007
|
|
|
(13)
|
Incorporated
by reference to Registrants Form 8-K filed February 6, 2007
|
|
|
(14)
|
Incorporated
by reference to Registrants Form 8-K filed February 8, 2007
|
|
|
(15)
|
Incorporated
by reference to Registrants Form 8-K filed April 24, 2007
|
|
|
(16)
|
Incorporated
by reference to Registrants Form 8-K filed April 26, 2007
|
|
|
(17)
|
Incorporated
by reference to Registrants Form 8-K filed May 7, 2007
|
|
|
(18)
|
Incorporated
by reference to Registrants Form 8-K filed May 17, 2007
|
|
|
(19)
|
Incorporated
by reference to Registrants Form 8-K filed July 11, 2007
|
|
|
(20)
|
Incorporated
by reference to Registrants Form 8-K filed July 11, 2007
|
|
|
(21)
|
Incorporated
by reference to Registrants Form 8-K filed August 6, 2007
|
|
|
(22)
|
Incorporated
by reference to Registrants Form 8-K filed September 7, 2007
|
|
|
(23)
|
Incorporated
by reference to Registrants Form 8-K filed December 6, 2007
|
|
|
(24)
|
Incorporated
by reference to Registrants Form 10-K filed February 13, 2008
|
|
|
(25)
|
Incorporated
by reference to Registrants Form 10-Q filed with the Commission on March 21,
2008
|
|
|
(26)
|
We have
requested confidential treatment with respect to this exhibit. In the event
that the Commission should deny such request in whole or in part, such
exhibit or the relevant portions thereof shall be filed by amendment to the
Quarterly Report on Form 10-Q filed with the Commission on March 21, 2008
|
|
|
(27)
|
Incorporated
by reference to Registrants Form 8-K filed May 5, 2008
|
|
|
(28)
|
Incorporated
by reference to Registrants Form 8-K/A filed May 15, 2008
|
|
|
(29)
|
Incorporated
by reference to Registrants Form 8-K filed June 12, 2008
|
|
|
(30)
|
Incorporated
by reference to Registrants Form 8-K filed July 3, 2008
|
81
|
|
(31)
|
Incorporated
by reference to Registrants Form 10-Q filed September 15, 2008
|
|
|
(32)
|
Incorporated
by reference to Registrants Form 8-K filed January 29, 2009.
|
|
|
(33)
|
Incorporated by reference to Registrants
Form 8-K filed April 16, 2008.
|
82
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
SYNOVICS
PHARMACEUTICALS INC.
|
|
|
Dated:
February 4, 2009
|
By:
|
/s/ Jyotindra
Gange
|
|
|
|
|
Name:
Jyotindra Gange
|
|
Title:
Principal Executive Officer
|
Pursuant to
the requirements of the Securities Act of 1934, this Report has been signed
below by the following persons on behalf of the Company and in the capacities
and on the dates indicated.
|
|
|
|
|
Title
|
|
|
|
Date
|
|
|
|
|
|
/s/
Jyotindra Gange
|
|
Principal
Executive Officer,
|
|
February 4,
2009
|
|
|
Director
|
|
|
Jyotindra
Gange
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Mahendra
Desai
|
|
Chief
Financial Officer
|
|
February 4,
2009
|
|
|
(Principal
Accounting Officer)
|
|
|
Mahendra
Desai
|
|
|
|
|
|
|
|
|
|
/s/ Ronald
H. Lane
|
|
Chairman of
the Board
|
|
February 4,
2009
|
|
|
|
|
|
Ronald H.
Lane
|
|
|
|
|
|
|
|
|
|
/s/ Vinay
Sapte
|
|
Director
|
|
February 4,
2009
|
|
|
|
|
|
Vinay Sapte
|
|
|
|
|
|
|
|
|
|
/s/ Maneesh
Sapte
|
|
Director
|
|
February 4,
2009
|
|
|
|
|
|
Maneesh
Sapte
|
|
|
|
|
|
|
|
|
|
/s/
Harcharan Singh
|
|
Director
|
|
February 4,
2009
|
|
|
|
|
|
Harcharan
Singh
|
|
|
|
|
83
SYNOVICS PHARMACEUTICALS, INC. AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2008 AND 2007
CONTENTS
84
R
EPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To Synovics
Pharmaceuticals, Inc.
We have
audited the accompanying consolidated balance sheets of Synovics Pharmaceuticals,
Inc. and Subsidiaries as of October 31, 2008 and 2007 and the related
consolidated statements of operations, stockholders equity (deficit) and cash
flows for the years ended October 31, 2008, 2007, and 2006. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted
our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform an audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Synovics
Pharmaceuticals, Inc. and Subsidiaries as of October 31, 2008 and 2007 and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2008, 2007, and 2006 in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the consolidated
financial statements, the Company has negative working capital of $6,540,018
and has experienced significant losses and negative cash flows. These facts
raise substantial doubt about the Companys ability to continue as a going
concern. Managements plans in this regard are described in Note 2.
|
|
|
/s/ Miller Ellin & Company, LLP
|
|
|
|
CERTIFIED PUBLIC ACCOUNTANTS
|
|
|
New York, New York
|
|
January 29, 2009
|
|
F-1
SYNOVICS PHARMACEUTICALS,
INC. AND SUBSIDIARIES
C
ONSOLIDATED BALANCE SHEETS
|
|
|
October
31,
|
|
|
|
October
31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
65,986
|
|
|
$
|
-
|
|
Trade
receivables, net
|
|
|
3,820,465
|
|
|
|
3,328,951
|
|
Inventory
|
|
|
2,901,664
|
|
|
|
1,928,009
|
|
Prepaid
expenses and other current assets
|
|
|
377,269
|
|
|
|
302,937
|
|
|
Total
Current Assets
|
|
|
7,165,384
|
|
|
|
5,559,897
|
|
|
PROPERTY
- Net of accumulated depreciation of $911,452
|
|
|
|
|
|
|
|
|
and $490,771,
respectively
|
|
|
2,483,577
|
|
|
|
2,024,407
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Security
deposits
|
|
|
87,548
|
|
|
|
87,548
|
|
Deferred
financing fees
|
|
|
698,449
|
|
|
|
2,899,296
|
|
Intangible
assets - net of accumulated amortization of
|
|
|
|
|
|
|
|
|
$1,463,877
and $612,279, respectively
|
|
|
463,454
|
|
|
|
1,315,051
|
|
|
Goodwill
|
|
|
11,447,698
|
|
|
|
11,447,698
|
|
Total
Other Assets
|
|
|
12,697,149
|
|
|
|
15,749,593
|
|
|
TOTAL
ASSETS
|
|
$
|
22,346,110
|
|
|
$
|
23,333,897
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
5,978,002
|
|
|
$
|
4,716,702
|
|
Accrued
interest
|
|
|
374,864
|
|
|
|
4,529,342
|
|
Accrued
liabilities
|
|
|
4,054,739
|
|
|
|
2,544,825
|
|
Dividends
payable
|
|
|
382,649
|
|
|
|
|
|
Notes
payable - shareholders and others
|
|
|
500,000
|
|
|
|
3,250,000
|
|
Notes
payable
|
|
|
40,000
|
|
|
|
8,175,000
|
|
Current
portion of Capital Leases
|
|
|
70,291
|
|
|
|
52,297
|
|
Current
portion of note payable - bank
|
|
|
2,100,000
|
|
|
|
1,750,000
|
|
|
Total
current liabilities
|
|
|
13,500,545
|
|
|
|
25,018,166
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
-
|
|
|
|
847,334
|
|
Note
payable bank, net of current portion
|
|
|
3,550,000
|
|
|
|
5,450,000
|
|
Capital
lease obligation, net of current portion
|
|
|
294,071
|
|
|
|
122,523
|
|
|
Total
Liabilities
|
|
|
17,344,616
|
|
|
|
31,438,023
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
Series
A preferred stock - $.001 par value - authorized, 600,000 shares;
|
|
|
|
|
|
|
|
|
591,850
and 591,850 issued and outstanding, respectively
|
|
|
|
|
|
|
|
|
(liquidation
preference of $798,998)
|
|
|
798,998
|
|
|
|
798,998
|
|
Series
C preferred stock - $.001 par value - authorized, 100,000 shares;
|
|
|
|
|
|
|
|
|
28,955
and 0 issued and outstanding, respectively
|
|
|
28,955
|
|
|
|
-
|
|
Common
stock - $.001 par value - authorized, 45,000,000 shares;
|
|
|
|
|
|
|
|
|
27,619,015
and 19,118,133 issued and outstanding, respectively
|
|
|
38,280
|
|
|
|
29,838
|
|
Additional
paid-in capital
|
|
|
84,759,876
|
|
|
|
71,537,568
|
|
Warrants
|
|
|
9,127,392
|
|
|
|
4,892,997
|
|
Accumulated
deficit
|
|
|
(78,649,597
|
)
|
|
|
(74,261,117
|
)
|
Common
Stock in Treasury
|
|
|
(10,952,410
|
)
|
|
|
(10,952,410
|
)
|
Subscription
receivable
|
|
|
(150,000
|
)
|
|
|
(150,000
|
)
|
Total
stockholders' equity (deficit)
|
|
|
5,001,494
|
|
|
|
(8,104,126
|
)
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$
|
22,346,110
|
|
|
$
|
23,333,897
|
|
See
notes to the consolidated financial statements.
F-2
SYNOVICS PHARMACEUTICALS, INC. AND SUBSIDIARIES
C
ONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
YEARS
ENDED OCTOBER 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
|
REVENUES,
net
|
|
$
|
25,959,579
|
|
|
$
|
23,466,311
|
|
|
$
|
10,516,398
|
|
|
|
COST
OF REVENUES
|
|
|
16,988,322
|
|
|
|
16,837,126
|
|
|
|
8,158,727
|
|
|
GROSS
PROFIT
|
|
|
8,971,257
|
|
|
|
6,629,185
|
|
|
|
2,357,671
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,177,313
|
|
|
|
1,289,833
|
|
|
|
1,200,000
|
|
Selling,
general, and administrative
|
|
|
10,277,409
|
|
|
|
15,603,823
|
|
|
|
4,776,857
|
|
Total
expenses
|
|
|
11,454,722
|
|
|
|
16,893,656
|
|
|
|
5,976,857
|
|
|
OPERATING
LOSS
|
|
|
(2,483,465
|
)
|
|
|
(10,264,471
|
)
|
|
|
(3,619,186
|
)
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
-
|
|
|
|
12,503
|
|
|
|
-
|
|
Impairment
loss
|
|
|
(660,919
|
)
|
|
|
(4,006,386
|
)
|
|
|
-
|
|
Loss
on disposal of assets
|
|
|
(20,342
|
)
|
|
|
(198,568
|
)
|
|
|
-
|
|
Settlement
registration rights liabilty
|
|
|
3,325,747
|
|
|
|
-
|
|
|
|
-
|
|
Interest
expense, net
|
|
|
(4,166,852
|
)
|
|
|
(6,400,962
|
)
|
|
|
(3,909,716
|
)
|
|
Total
other (expenses) income
|
|
|
(1,522,366
|
)
|
|
|
(10,593,413
|
)
|
|
|
(3,909,716
|
)
|
|
NET
LOSS BEFORE PROVISION FOR
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX
|
|
|
(4,005,831
|
)
|
|
|
(20,857,884
|
)
|
|
|
(7,528,902
|
)
|
|
PROVISION
FOR INCOME TAXES
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
NET
LOSS FROM CONTINUING OPERATIONS
|
|
|
(4,005,831
|
)
|
|
|
(20,857,884
|
)
|
|
|
(7,528,902
|
)
|
Equity
in the loss of InCon Processing, LLC.
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,042,119
|
)
|
|
NET
LOSS
|
|
$
|
(4,005,831
|
)
|
|
$
|
(20,857,884
|
)
|
|
$
|
(8,571,021
|
)
|
|
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
FROM
CONTINUING OPERATIONS
|
|
|
(0.17
|
)
|
|
|
(1.09
|
)
|
|
|
(0.29
|
)
|
FROM
DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.04
|
)
|
|
NET
LOSS PER SHARE
|
|
|
(0.17
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(0.33
|
)
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING
|
|
|
23,547,066
|
|
|
|
19,070,573
|
|
|
|
26,044,630
|
|
See
notes to the condensed consolidated financial statements.
F-3
SYNOVICS PHARMACEUTICALS, INC. AND
SUBSIDIARIES
C
ONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
Series C Preferred Stock
|
|
Common Stock
|
|
Warrants
|
|
|
|
Paid in
|
|
|
|
Accumulated
|
|
|
Treasury stock
|
|
|
Subscription
|
|
|
|
Stockholders'
|
|
|
Shares
|
|
|
Amount
|
|
Shares
|
|
|
Amount
|
|
Shares
|
|
|
|
Amount
|
|
Number
|
|
|
|
Amount
|
|
|
|
Capital
|
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Receivable
|
|
|
|
Equity (Deficit)
|
|
Balances, October 31, 2005
|
591,850
|
|
$
|
798,998
|
|
-
|
|
$
|
-
|
|
22,681,775
|
|
|
$
|
22,681
|
|
431,896
|
|
|
$
|
511,650
|
|
|
$
|
54,802,633
|
|
|
$
|
(44,832,212
|
)
|
|
-
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,303,750
|
|
Issuance of common stock
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
3,362,902
|
|
|
|
3,363
|
|
-
|
|
|
|
-
|
|
|
|
7,499,542
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
7,502,905
|
|
Warrants issued
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
564,996
|
|
|
|
300,326
|
|
|
|
(300,326
|
)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
(10,000
|
)
|
|
|
(405
|
)
|
|
|
405
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants issued in connection with convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bridge notes
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
883,526
|
|
|
|
3,328,401
|
|
|
|
(3,328,401
|
)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Beneficial conversion feature of convertible bridge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
notes
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
|
|
3,202,653
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
3,202,653
|
|
Options issued
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options canceled
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
(6,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net Loss
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,571,021
|
)
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,571,021
|
)
|
Subscription receivable on sale of warrants
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
(150,000
|
)
|
|
|
(150,000
|
)
|
Acquisition of treasury stock
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
59,000
|
|
|
(184,800
|
)
|
|
|
-
|
|
|
|
(184,800
|
)
|
Balances, October 31, 2006
|
591,850
|
|
|
798,998
|
|
-
|
|
|
-
|
|
26,044,677
|
|
|
|
26,044
|
|
1,864,418
|
|
|
|
4,139,972
|
|
|
|
61,876,506
|
|
|
|
(53,403,233
|
)
|
|
59,000
|
|
|
(184,800
|
)
|
|
|
(150,000
|
)
|
|
|
13,103,487
|
|
Issuance of common stock
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
1,095,000
|
|
|
|
1,095
|
|
-
|
|
|
|
-
|
|
|
|
550,690
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
551,785
|
|
Stocks and warrants issued
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
1,712,500
|
|
|
|
324,473
|
|
|
|
1,501,114
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
1,825,587
|
|
Stocks and warrants issued in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible debt
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
648,506
|
|
|
|
649
|
|
366,664
|
|
|
|
251,088
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
251,737
|
|
Warrants issued in connection with note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
525,000
|
|
|
|
177,464
|
|
|
|
2,270,735
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
2,448,199
|
|
Stock and warrants issued for sevices
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
2,000,000
|
|
|
|
2,000
|
|
4,378,333
|
|
|
|
-
|
|
|
|
5,249,195
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
5,251,195
|
|
Stocks and warrants issued for interest
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
50,000
|
|
|
|
50
|
|
-
|
|
|
|
-
|
|
|
|
89,324
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
89,374
|
|
Net Loss
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,857,884
|
)
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,857,884
|
)
|
Acquisition of treasury stock
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
(10,661,000
|
)
|
|
|
-
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
10,661,000
|
|
|
(10,767,610
|
)
|
|
|
-
|
|
|
|
(10,767,610
|
)
|
Balances, October 31, 2007
|
591,850
|
|
|
798,998
|
|
-
|
|
|
-
|
|
19,177,183
|
|
|
|
29,838
|
|
8,846,915
|
|
|
|
4,892,997
|
|
|
|
71,537,564
|
|
|
|
(74,261,117
|
)
|
|
10,720,000
|
|
|
(10,952,410
|
)
|
|
|
(150,000
|
)
|
|
|
(8,104,130
|
)
|
Stock for loan gaurantee
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
4,000,000
|
|
|
|
4,000
|
|
-
|
|
|
|
-
|
|
|
|
1,036,000
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
1,040,000
|
|
Warrants issued or repriced
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
4,180,000
|
|
|
|
1,467,925
|
|
|
|
1,548,465
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
3,016,390
|
|
Warrants cancelled or expired
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
(3,920,000
|
)
|
|
|
(932,191
|
)
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(932,191
|
)
|
Stocks and warrants issued in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible debt
|
-
|
|
|
-
|
|
28,955
|
|
|
28,955
|
|
3,394,712
|
|
|
|
3,395
|
|
18,500,200
|
|
|
|
3,263,837
|
|
|
|
9,956,277
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
13,252,464
|
|
Stock and warrants issued for sevices
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
1,047,120
|
|
|
|
1,047
|
|
1,413,800
|
|
|
|
434,824
|
|
|
|
681,570
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
1,117,441
|
|
Series C Preferred dividend
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(382,649
|
)
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(382,649
|
)
|
Net Loss
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,005,831
|
)
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,005,831
|
)
|
Balances, October 31, 2008
|
591,850
|
|
$
|
798,998
|
|
28,955
|
|
$
|
28,955
|
|
27,619,015
|
|
|
$
|
38,280
|
|
29,020,915
|
|
|
$
|
9,127,392
|
|
|
$
|
84,759,876
|
|
|
$
|
(78,649,597
|
)
|
|
10,720,000
|
|
$
|
(10,952,410
|
)
|
|
$
|
(150,000
|
)
|
|
$
|
5,001,494
|
)
|
See notes to the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
F-4
SYNOVICS PHARMACEUTICALS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
YEARS
ENDED OCTOBER 31,
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(4,005,831
|
)
|
|
$
|
(20,857,884
|
)
|
|
$
|
(8,571,021
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of definite life intangible asset
|
|
660,919
|
|
|
|
3,362,837
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
611,360
|
|
|
|
596,634
|
|
|
|
122,911
|
|
Equity
in the loss of joint venture
|
|
-
|
|
|
|
-
|
|
|
|
1,042,119
|
|
Amortization
of deferred financing fees
|
|
3,165,913
|
|
|
|
1,809,716
|
|
|
|
1,230,412
|
|
Stock
based compensation and financing fees
|
|
7,182,319
|
|
|
|
5,041,639
|
|
|
|
-
|
|
Stock
issued for interest
|
|
-
|
|
|
|
89,473
|
|
|
|
-
|
|
Stock
and warrants issued from note conversion
|
|
-
|
|
|
|
2,450,774
|
|
|
|
-
|
|
Forgiveness
of interest
|
|
(3,325,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Expenses
satisfied with issuance of common stock
|
|
-
|
|
|
|
251,088
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(491,514
|
)
|
|
|
(1,168,933
|
)
|
|
|
(113,335
|
)
|
Inventory
|
|
(973,655
|
)
|
|
|
448,471
|
|
|
|
974,229
|
|
Prepaids
and other current assets
|
|
(74,332
|
)
|
|
|
789,649
|
|
|
|
(386,222
|
)
|
Accounts
payable
|
|
1,261,300
|
|
|
|
1,490,038
|
|
|
|
(1,985,106
|
)
|
Accrued
interest
|
|
(829,478
|
)
|
|
|
2,794,168
|
|
|
|
1,735,174
|
|
Accrued
liabilities
|
|
1,527,908
|
|
|
|
626,845
|
|
|
|
866,346
|
|
Deferred
Revenues
|
|
(847,334
|
)
|
|
|
(133,029
|
)
|
|
|
(80,932
|
)
|
Net
cash provided (used in) in operating activities
|
|
3,862,575
|
|
|
|
(2,408,514
|
)
|
|
|
(5,165,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(708,305
|
)
|
|
|
(709,593
|
)
|
|
|
(447,939
|
)
|
Acquisition
activities
|
|
-
|
|
|
|
-
|
|
|
|
(8,800,000
|
)
|
Patent
acquisitions
|
|
-
|
|
|
|
-
|
|
|
|
(1,144,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
(708,305
|
)
|
|
|
(709,593
|
)
|
|
|
(10,392,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of common and preferred stock
|
|
6,796,716
|
|
|
|
551,785
|
|
|
|
5,640,000
|
|
Proceeds
from debt
|
|
1,300,000
|
|
|
|
6,250,000
|
|
|
|
13,600,000
|
|
Repayment
of debt
|
|
(11,185,000
|
)
|
|
|
(3,620,000
|
)
|
|
|
(341,783
|
)
|
Renegotiation
of bank note
|
|
-
|
|
|
|
(2,300,000
|
)
|
|
|
-
|
|
Payment
of deferred financing
|
|
-
|
|
|
|
-
|
|
|
|
(840,639
|
)
|
Repayment
of capital leases
|
|
-
|
|
|
|
(157,115
|
)
|
|
|
(234,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
(3,088,284
|
)
|
|
|
724,670
|
|
|
|
17,822,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND
|
|
|
|
|
|
|
|
|
|
|
|
CASH
EQUIVALENTS
|
|
65,986
|
|
|
|
(2,393,437
|
)
|
|
|
2,264,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
-
|
|
|
|
2,393,437
|
|
|
|
128,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
65,986
|
|
|
$
|
-
|
|
|
$
|
2,393,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH FINANCING
|
|
|
|
|
|
|
|
|
|
|
|
AND
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness
of interest
|
|
(3,325,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Purchase
of equipment through capital leases
|
|
(171,547
|
)
|
|
|
-
|
|
|
|
-
|
|
Equity
issued in exchange for settlement of fees
|
|
(1,645,771
|
)
|
|
|
-
|
|
|
|
-
|
|
Settlement
of debt through issuance of equity
|
|
(2,550,000
|
)
|
|
|
-
|
|
|
|
2,088,244
|
|
|
$
|
(7,692,318
|
)
|
|
$
|
-
|
|
|
$
|
2,088,244
|
|
See notes to the
consolidated financial statements.
F-5
|
|
NOTE 1 -
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
ORGA
NIZATION, AND NATURE OF BUSINESS
|
Principles of Consolidation
The consolidated financial
statements include the accounts of Synovics Pharmaceuticals, Inc. (
Synovics
) and its wholly
owned
subsidiaries, (collectively the
Company
). All significant inter-company
accounts and transactions have been eliminated in consolidation.
Organization and Nature of Business
Synovics Pharmaceuticals,
Inc. is a specialty pharmaceutical company engaged in the development,
manufacturing and commercialization of generic over the counter pharmaceutical
products and generic prescription drug products. Synovics Pharmaceuticals, Inc.
previously called Bionutrics, Inc. was incorporated in Nevada in 1990. The
Company has two primary subsidiaries, Kirk Pharmaceuticals, LLC (
Kirk
), and ANDAPharm, LLC
(
ANDAPharm
). Kirk manufactures and
distributes OTC products developed by or licensed to the Company. ANDAPharm
serves as the product research and RX manufacturing arm of the Company with a
focus on the development of active compounds for drugs.
Cash and Cash Equivalents
The Company considers all
liquid investments with an original maturity of three months or less to be cash
equivalents. At October 31, 2008, and 2007 cash consisted of cash on deposit
with banks and the Company had no cash equivalents.
Inventory
The Companys inventory is
stated at the lower of cost or market. Cost is determined using the first in
first out method.
Property and Depreciation
Property and equipment are
stated at cost. Major renewals and improvements are capitalized and
replacements, maintenance and repairs, which do not improve or extend the lives
of the respective assets, are charged to expense when incurred. When items of
property and equipment are retired or otherwise disposed of, the original cost
and related accumulated depreciation to date are removed from the accounts and
any gain or losses upon retirement or sale is recognized in income. The
Companys property consists of, manufacturing equipment, computer equipment
leasehold improvements, and furniture and fixtures, which are depreciated for
financial reporting purposes using the straight-line method over the estimated
useful life of the assets.
Patents
Costs incurred for the
application of patents are capitalized and amortized on the straight-line method
for 17 years, which is their estimated useful life. These costs are charged to
expense if the patent is unsuccessful. The Company continually reviews patents
for impairment. If conditions indicate that the carrying value is not
recoverable an impairment charge is recognized to reduce the carrying amount to
the estimated fair value of the asset. Patents currently capitalized relate to
both the processes and products associated with the Companys business.
Impairment of Long-Lived Tangible Assets
The Company continually
evaluates the fair value of long-lived tangible assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. There was no impairment of long-lived tangible
assets during the years ended October 31, 2008, 2007 and 2006.
F-6
|
|
NOTE 1 -
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
ORGANIZATION, AND NATURE OF BUSINESS (CONTINUED)
|
Revenue Recognition
The Company generally
recognizes product revenue at the time of shipment to the customer. Revenues
from services are recorded at the time the service is rendered and/or
reimbursable expenses are incurred.
Revenues for the years ended
October 31, 2008, 2007 and 2006 were derived primarily from services and
product sales.
Research and Development
The cost of research and
development is charged to expense as incurred.
Loan Closing Costs
In the year ended October
31, 2006, the Company incurred various expenses in connection with obtaining a
line of credit bank facility to finance the Kirk and ANDAPharm acquisitions.
These costs are being amortized over 36 months. Amortization expense charged to
operations for the years ended October 31, 2008, 2007 and 2006, were $159,346,
$159,346 and $79,867, respectively.
Intangible Assets
Goodwill and intangible
assets with indefinite lives are reviewed at least annually for impairment.
Management performed its review of the carrying value of the Companys goodwill
and other intangible assets and recognized impairments during the years ended
October 31, 2008, 2007 and 2006 of $660,919, $4,006,386 and $0, respectively.
Share-Based Compensation
The Company accounts for
share-based compensation using the fair value based method of accounting.
Income Taxes
The Company accounts for
income taxes using the liability method. The liability method measures deferred
income taxes by applying enacted statutory rates in effect at the balance sheet
date to the differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements. Any resulting deferred tax
assets or liabilities are adjusted to reflect changes in tax laws as they
occur.
Effective November 1, 2007,
the Company adopted the provisions of FASBs Interpretation (
FIN
) No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB
No. 109
. FIN 48 prescribes a recognition threshold and measurement
attribute for how a company should recognize, measure, present, and disclose
uncertain tax positions that the company has taken or expects to take on a tax
return in its financial statements. FIN 48 requires that the financial
statements reflect expected future tax consequences of such positions presuming
the taxing authorities full knowledge of the position and all relevant facts,
but without considering time values. No such amounts were accrued for at
November 1, 2007. Additionally, no adjustments related to uncertain tax
positions were recognized during the year ended October 31, 2008.
The Company recognizes
interest and penalties related to uncertain tax positions as a reduction of the
income tax benefit. No interest and penalties related to uncertain tax
positions were accrued as of October 31, 2008.
The Company operates in
multiple tax jurisdictions within the United States of America. Although we do
not believe that we are currently under examination in any of our major tax
jurisdictions, we remain subject to examination in all of our tax jurisdictions
until the applicable statutes of limitation expire. As of October 31, 2008, the
tax returns for years ended 2005 onwards remain subject to examination for our
federal and major state tax jurisdictions. The Company does not expect to have
a material change to unrecognized tax positions within the next twelve months.
F-7
|
|
NOTE 1 -
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
ORGANIZATION, AND NATURE OF BUSINESS (CONTINUED)
|
Use of Estimates
The preparation of financial
statements in conformity with generally accepted accounting principles in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates include the allowance for doubtful accounts.
Concentrations of Credit Risk
Cash
The Company maintains cash
balances in banks, which, at times, may exceed the limits of amounts insured by
the Federal Deposit Insurance Corporation (FDIC); however, management does not
believe that there is a significant risk of loss of uninsured amounts.
Sales and Receivables
The
Company has customers that accounted for over 10% of revenues in the years
ended October 31, 2008, 2007, and 2006. The percentages by customer are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
24.7
|
%
|
21.9
|
%
|
33.4
|
%
|
|
Customer B
|
|
17.2
|
%
|
21.3
|
%
|
27.5
|
%
|
|
Customer C
|
|
9.5
|
%
|
11.0
|
%
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
51.40
|
%
|
54.2
|
%
|
67.7
|
%
|
The concentration of accounts receivables
with customers owing more than 10% is:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
19.9
|
%
|
24.1
|
%
|
30.8
|
%
|
|
Customer B
|
|
11.6
|
%
|
21.0
|
%
|
26.2
|
%
|
|
Customer C
|
|
0.0
|
%
|
10.4
|
%
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
41.5
|
%
|
55.5
|
%
|
57.0
|
%
|
F-8
NOTE 2 - BASIS OF PRESENTATION
Going Concern and Operating Plans
The accompanying
consolidated financial statements have been prepared assuming the Company will
continue to operate as a going concern. Under that assumption, it is expected
that assets will be realized and liabilities will be satisfied in the normal
course of business. However, the Company has experienced significant operating
losses and negative cash flows from operations in each of the last three fiscal
years as shown in the accompanying financial statements. The Company has
sustained cumulative losses of approximately $80 million through October 31,
2008 and has a working capital deficit of approximately $6.5 million at that
date. Therefore, substantial doubts have been raised about the Companys
ability to continue as a going concern. Management is currently in the process
of evaluating several funding alternatives it believes will address its current
financial requirements to enable it to stabilize its financial condition. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of assets and liabilities as
might be necessary if the Company is unable to continue as a going concern.
The Companys continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to maintain adequate financing,
and ultimately to attain successful operations.
NOTE 3 - ACQUISITION
In July 2005, the Company
entered into a Purchase Agreement (the
Kirk
Purchase Agreement
) to acquire Kirk and its affiliate, ANDAPharm
for $12,000,000. The acquisition was consummated on May 22, 2006. Kirk is a
Florida based pharmaceutical company that manufactures over-the-counter (
OTC
) and generic
prescription drugs in
its FDA and DEA approved facility. ANDAPharm serves as the product research and
RX manufacturing arm of the Company with a focus on the development of active
compounds for drugs.
The Company has accounted for this
acquisition using the purchase method. The purchase price of the acquisition is
set forth below:
|
|
|
|
|
|
|
Cash on closing
|
|
$
|
9,000,000
|
|
|
Note payable to sellers
|
|
|
3,000,000
|
|
|
Estimated transaction
costs incurred
|
|
|
552,000
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
12,552,000
|
|
|
|
|
|
|
|
|
Assets Acquired:
|
|
|
|
|
|
Current assets
|
|
$
|
5,437,675
|
|
|
Non-current assets
|
|
|
1,378,655
|
|
|
Liabilities assumed
|
|
|
(5,712,028
|
)
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
1,104,302
|
|
|
|
|
|
|
|
|
Cost in excess of net assets acquired (recorded
goodwill)
|
|
|
11,447,698
|
|
|
|
|
|
|
|
|
Total estimated fair value of net assets acquired
and recorded
goodwill
|
|
$
|
12,552,000
|
|
|
|
|
|
|
|
F-9
NOTE 4 - INVENTORY
As of October
31, 2008, and 2007 inventory consists of:
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
712,849
|
|
$
|
203,409
|
|
Work in
Process
|
|
|
495,384
|
|
|
515,120
|
|
Raw
materials
|
|
|
1,693,431
|
|
|
1,209,480
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,901,664
|
|
$
|
1,928,009
|
|
|
|
|
|
|
|
|
|
NOTE 5 - INTANGIBLE ASSETS
Intangible
Assets consists of long term rights to profits on revenues from sales of one
of the Companys products. These rights were purchased in May, 2006
from a company that was in partnership for the specific product. This asset
is being amortized over the estimated life of the product (five years). As
of October 31, 2008 the unamortized balance is $463,454.
Amortization
expense was $190,680, $190,680 and $76,807 for the years ended October 31,
2008, 2007 and 2006, respectively.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and
equipment at October 31, 2008 and 2007 consists of the following:
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Leasehold
Improvements
|
|
$
|
656,143
|
|
$
|
415,443
|
|
Machinery
& Equipment
|
|
|
2,449,089
|
|
|
1,879,699
|
|
Computers
and Software
|
|
|
289,798
|
|
|
220,036
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,395,030
|
|
$
|
2,515,178
|
|
Less
Accumulated Depreciation
|
|
|
(911,452
|
)
|
|
(490,771
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
2,483,577
|
|
$
|
2,024,407
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $319,297, $327,468 and $92,614 for the years ended October 31,
2008, 2007 and 2006, respectively.
NOTE 7 - NOTE PAYABLE - BANK
In May 2006,
the Company entered into a bank financing with the Bank of India (
BOI
) as senior secured debt in the
principal amount $10,500,000 (the
BOI
Credit Facility
). Of the principal, $5,250,000 could only be
utilized for working capital purposes, the amount borrowed to equal 70% of the
value of fully paid inventory and the accounts receivable and 100% of the cash
in the accounts maintained by the borrower at the bank. The interest rate is 1%
above the banks prime rate (8% at October 31, 2008). Interest is payable
monthly. In September, 2007, the amount of the loan was reduced by $5,250,000
held back for working capital purposes. As of October 31, 2008, the outstanding
principal balance due under the BOI Credit Facility was $5,650,000.
F-10
NOTE 7 - NOTE PAYABLE BANK (CONTINUED)
Future
maturities of notes payable - bank are as follows:
|
|
|
|
|
2009
|
|
$
|
2,100,000
|
|
2010
|
|
|
2,650,000
|
|
2011
|
|
|
900,000
|
|
|
|
$
|
5,650,000
|
|
|
|
|
|
|
Interest
expense under the note payable was $550,847, $931,829, $143,347 for the years
ended October 31, 2008, 2007 and 2006, respectively.
NOTE
8 NOSTRUM SETTLEMENT AND RELEASE OF NOSTRUM GUARANTEE
Synovics and its subsidiary Synovics Laboratories, Inc. (
Synovics
Labs
), were involved in a legal
dispute with Nostrum Pharmaceuticals, Inc. (
Nostrum
)
and Nirmal Mulye, Ph.D. (
Mulye
).
As disclosed in the Companys previous periodic reports, these parties were
among the parties to pending actions and proceedings before the Federal
District Court of the Southern District of New York and the District of New
Jersey as well as arbitration before the American Arbitration Association. As
part of the legal dispute, the Company alleged, among other things, that (i)
Mulye breached fiduciary duties and usurped corporate opportunities as a member
of the board and Chief Scientific Officer and that Anil Anand (a confessed
felon in a $700 million bank fraud) and Nostrum aided and abetted Mulye in such
actions, (ii) Mulye, Anand and Nostrum tortiously interfered with prospective
contractual relationships of the Company, (iii) Mulye fraudulently induced the
Company to enter into certain financial transactions, and (iv) Mulye, Anand and
Nostrum conspired to breach fiduciary duties and steal valuable corporate
opportunities.
On July 31, 2007, the Company together with Synovics Labs entered into
a settlement agreement with all parties to the various actions. Under the terms
of the settlement agreement, all pending actions and proceedings between the
parties were dismissed with prejudice, the parties mutually released one
another and all pre-settlement agreements were terminated, including the
Technology License Agreement between the Company and Nostrum and the ANDA
Ownership Transfer and Product License Agreement (
ANDA Agreement
) between Synovics Labs and Nostrum. In
connection with the termination of the ANDA Agreement, Synovics and Synovics
Labs assigned to Nostrum the Abbreviated New Drug Application for Metformin
Extended Release 500mg. As part of the settlement, 10,661,000 shares of common
stock of the Company that were owned by Nostrum were placed in escrow pursuant
to a separate escrow agreement (the
Escrow
Shares
). The escrow agreement provided, among other things, that if
the guarantees of Mulye and Nostrum to the Bank of India and the related
undertakings in connection with the BOI Credit Facility were extinguished in
full or in part by May 1, 2008, the Escrow Shares were to be released to
Synovics in an amount proportionate to the amount by which the guarantees have
been extinguished. Further, if the Escrow Shares were released to Nostrum and
during the escrow period the Company issued additional shares of common stock
or common stock equivalents to cause the Escrow Shares to represent less than
32% of the outstanding shares of the Company on a fully diluted basis, then the
Company was required to issue to Nostrum additional shares of common stock so
that the Escrow Shares together with the additional shares constitute 32% of
the outstanding shares of the Company on a fully diluted basis.
F-11
NOTE
8 NOSTRUM SETTLEMENT AND RELEASE OF NOSTRUM GUARANTEE (CONTINUED)
On April 29, 2008, the guarantees given by Nostrum and Mulye
were replaced with a letter of credit issued by an affiliate of Maneesh Pharmaceuticals
Ltd. (
Maneesh
) in favor of BOI
securing the BOI Loan. Maneesh is an affiliate of the Company and three of its
designees presently serve on the Companys board of directors. Consequently,
the Company delivered a notice to the escrow agent, pursuant to the terms of
the escrow agreement demanding release to the Company of the Escrow Shares.
Nostrum is currently contesting the release of the Escrow Shares and the
Company commenced an action in the Federal District Court of the Southern
District of New York (the
Court
).
The Escrow Shares are being treated as treasury stock. The cost of the
shares included in treasury stock at October 31, 2008 was $10,767,610. In the
event that the Court decides to order the release of any Escrow Shares to
Nostrum from escrow, the Company may recognize an additional charge at that
time.
As an inducement for replacing the guarantees, the Company issued
4,000,000 shares of its common stock to Maneesh and provided anti-dilution
protection in the event that all or part of the Escrow Shares are ultimately
released to Nostrum. These shares were valued at $1,040,000 and were included
in the accompanying statement of operations for year ended October 31, 2008.
NOTE 9 - NOTES PAYABLE - SHAREHOLDERS AND
OTHER RELATED PARTIES
Copanos Note
The Company
entered into a promissory note (the
Copanos
Note
) in the principal amount of $3,000,000 with the seller, John
Copanos, as partial consideration for the acquisition of Kirk and ANDAPharm.
During the
year ended October 31, 2007, $1,000,000 was repaid to the seller. The Copanos
Note was subsequently amended in 2007 and 2008. As a result of the most recent
amendment, the then outstanding principal on the note ($2,000,000) was due in
two payments, one in the amount of $1,500,000 due on or before May 1, 2008 and
$500,000 on or before August 1, 2008. During the year ended October 31, 2008,
the Company repaid a further $1,500,000 to the seller with a principal balance
of $500,000 remaining outstanding. The Company is currently in negotiation
to extend the balance due. The Copanos Note bore interest of 12% per annum
from October 3, 2007 to January 14, 2008 and 15% per annum from January
15, 2008 to May 1, 2008. From May 2, 2008 to August 31, 2008, the note bore
an interest rate of 18% per annum and from September 1, 2008 to October 31,
2008 it was 24% per annum with interest payments payable monthly. As of October
31, 2008, there was unpaid interest of $20,333, which has been included in
these financial statements. Interest expense under the Copanos Note was $167,250,
$201,042 and $99,798 for the years ended October 31, 2008, 2007 and 2006.
In connection with renegotiation of the repayment terms of the Copanos Note,
the Company consented, in the case of default, to the seller obtaining a
final judgment without necessity of a further hearing.
In addition,
in
connection with the renegotiation of the repayment terms of the Copanos Note,
on March 19, 2008, the Company issued to the seller a seven year warrant
to acquire 2,100,000 shares of the Companys common stock exercisable
at $1.00 per share (the
Seller Warrant
).
Of the shares issuable upon exercise of the warrant, 1,400,000 are immediately
exercisable and the remaining 700,000 are exercisable if the seller is employed
by the Company or its subsidiary on March 19, 2009 except that if Ronald Lane
is removed or resigns from the Companys board of directors, then such 700,000
shares shall become immediately exercisable. As a result of the Series C
Preferred Stock Offering (as described in Note 12 below), the exercise price
of the Seller Warrant automatically reduced to $0.75. The Company also agreed
to include the shares issuable upon exercise of the Seller Warrant in the
Companys next registration statement subject to reasonable adjustments
as may be required by the investor or investor group whose shares are also being
registered.
The per share
weighted value of the warrants to purchase 2,100,000 shares of common stock at
$0.75 per share is $0.35. The warrants were valued using the Black-Scholes
option pricing model with the following weighted average assumptions: no
dividend yield; expected volatility of 80%; risk free interest rate of 2.25%;
and expected life of seven years.
F-12
NOTE 9 - NOTES PAYABLE - SHAREHOLDERS AND
OTHER RELATED PARTIES (CONTINUED)
Singh Note
On April 20,
2007, the Company entered into a Consulting Agreement with Harcharan Singh.
Additionally, Kirk issued a promissory note to an affiliate of Mr. Singh
(the
Singh Note
), in the
principal amount of $1,250,000 in exchange for cash. The note bore interest at
the rate of 15% per annum. On April 3, 2008, the principal and unpaid interest
of the Singh Note in addition to the accrued consulting fees payable pursuant
to the Consulting Agreement were exchanged for a 2008 Bridge Note in the
aggregate principal amount of $1,652,292 (including the purchase of a 2008
Bridge Note by an affiliate of Singh in the principal amount of $100,000). The
2008 Bridge Note was part of a series of an aggregate of $6,792,292 in
aggregate principal amount of 2008 Bridge Notes issued by Kirk to accredited
investors and described further below in Note 10. The Company also issued to
Mr. Singhs
affiliate 330,458 shares of common stock of the Company valued at $115,660 in
consideration of its purchase of the 2008 Bridge Note. Interest expense of $8,553
is reflected in the accompanying financial statements.
Maneesh Note
On April 3,
2008, an affiliate of Maneesh purchased a 2008 Bridge Note in the principal amount
of $1,000,000 and the Company issued an aggregate of 200,000 shares of common
stock valued at $70,000 in consideration of its purchase of the 2008 Bridge
Note. Interest expense of $6,000 is
reflected in the accompanying financial statements.
The outstanding
principal and accrued and unpaid interest on the 2008 Bridge Notes issued to
Mr. Singhs affiliate and Maneesh were subsequently converted into securities
issued in the Companys Series C Preferred Stock Offering as described in Note
12 below.
NOTE 10
OTHER NOTES PAYABLE
Other notes
payable consists of the following:
|
|
|
|
|
|
|
|
|
|
October 31,
2008
|
|
October 31,
2007
|
|
|
|
|
|
|
|
|
2005
Convertible Bridge Notes
|
|
$
|
|
|
$
|
2,945,000
|
|
2007 Bridge
Notes
|
|
|
|
|
|
3,450,000
|
|
Customer
Note
|
|
|
|
|
|
1,500,000
|
|
Other
|
|
|
40,000
|
|
|
280,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,000
|
|
$
|
8,175,000
|
|
|
|
|
|
|
|
|
|
F-13
NOTE 10 OTHER NOTES PAYABLE (CONTINUED)
2005 Convertible Bridge Notes
In October
2005, the Company commenced the issuance of convertible bridge notes (
2005 Bridge Notes
) in the aggregate
principal amount of $4,845,000. The
2005 Bridge Notes initially had a maturity date of 18 months from the date of
issuance. In connection with the issuance of the 2005 Bridge Notes, the Company
also issued detachable stock purchase warrants to purchase 807,493 shares of
common stock at $4.00 per share. The warrants initially expired three years
from the date of issuance. Based on the relative fair values, the Company
attributed $1,429,540 of the total proceeds to the warrants and recorded the
warrants as additional paid-in capital and discount to the 2005 Bridge Notes.
The per share weighted value of the warrants to purchase 807,493 shares of
common stock at $4.00 per share is $4.47. The warrants were valued using the
Black-Scholes option pricing model with the following weighted average
assumptions: no dividend yield, expected volatility of between 198% and 550%;
risk free interest rate of 4.9%; and expected life of three years. In
connection with the issuance of the 2005 Bridge Notes, the Company paid a cash
commission of $301,050 to Indigo Securities, LLC and issued to it three year
warrants to purchase 500,000 shares of common stock at $5.00 per share and
75,263 at $4.00 per share for its role as placement agent of a portion of the
2005 Bridge Notes sold. The per share weighted value of the warrants to
purchase the combined total of 575,263 shares of common stock is $4.87. The
warrants were valued using the Black-Scholes option pricing model with the
following weighted average assumptions: no dividend yield, expected volatility
of 198%, risk free interest rate of 4.9%; and expected life of three years. As
a result of the consummation of the acquisition of Kirk and ANDAPharm, the 2005
Bridge Notes were revised (the
Revised
Notes
). The Revised Notes were to mature on April 3, 2009 and
constituted unsecured indebtedness of the Company. Of the $4,845,000,
$2,150,000 aggregate principal amount converted to the Revised Notes. Of the
remaining $2,695,000 aggregate principal amount of 2005 Bridge Notes, $300,000
was repaid on July 6, 2006 and an aggregate principal amount of $2,395,000 and
all accrued and unpaid interest thereon matured and became payable on September
1, 2006.
The Company did not repay any amounts due to the holders of 2005 Bridge
Notes on September 1, 2006 and requested that the holders agree to extend the
maturity date to November 1, 2006. In exchange, the Company offered to increase
the interest rate on the outstanding principal amount to 18% per annum for the
period of such extension, as well as to reduce the exercise price of the
warrants issued with the sale of the 2005 Bridge Notes to $2.50 per share. The
Company also did not repay back the principal to holders of the 2005 Bridge
Notes on November 1, 2006. The Company was accruing the aforementioned 18%
default interest retroactively to the date of issuance of the notes on the
unpaid principal.
On March 6, 2007, the Company concluded the renegotiation of the terms
of one of the 2005 Bridge Notes in the principal amount of $100,000 and during
the year ended October 31, 2007, the entire note was exchanged for 168,556
shares of the Companys common stock. In September 2007, the Company repaid all
principal and interest owing on a 2005 Bridge Note issued to Asia Pacific
Investments Holdings Limited totaling $1,855,125.
In connection with the Series C Preferred Stock Offering (as
described in Note 12 below), on May
12, 2008, the then outstanding 2005 Bridge Notes and Revised Notes in the
principal amount of $2,945,000 were repaid in full.
F-14
NOTE 10 OTHER NOTES PAYABLE (CONTINUED)
2005 Convertible Bridge Notes (Continued)
The Company
entered into a registration rights agreement in connection with the sale of
2005 Bridge Notes. The agreement provided that the Company file a registration
statement with the SEC that covers the resale of 125% of the registerable
securities (the shares issuable upon conversion at the initial current
conversion price and upon exercise of related warrants at the initial exercise
price) (the
Mandatory Registration
Statement
). According to the registration rights agreement, if the
Mandatory Registration Statement has not been declared or ordered effective
within one hundred twenty (120) days after the closing of the offering, the
Company is to pay each investor a fee equal to 1% of the purchase price paid by
such investor for the securities purchased plus the aggregate exercise price of
the warrants and the placement agent warrants for the first two thirty (30) day
periods after such failure and 2.5% of such amount for each subsequent thirty
(30) day period (pro rata, in each case, for partial months). Any such payments
are to be made at the end of each calendar month until the date that the
Mandatory Registration Statement is declared effective. There is no cap on the
maximum amount of the penalties that could be payable under the agreement. The registration rights agreement
was terminated with respect to most holders of the 2005 Bridge Notes and
Revised Notes. Although the Company filed a Mandatory Registration Statement,
the Company failed to have the Mandatory Registration Statement declared
effective and recognized $896,246, $2,195,064, $914,549 of penalties for the
years ended October 31, 2008, 2007, and 2006 of which $3,325,747 was waived and
forgiven.
2007 Convertible Bridge Notes
Beginning on
July 5, 2007, Kirk issued convertible bridge notes (the
2007 Bridge Notes
) in the principal
amount of $3,450,000 to accredited investors as defined by Rule 501 under the
Securities Act of 1933, as amended (the
Securities
Act
).
The bridge
notes bore interest at 6% per annum increasing to 18% in the case of an event
of default and had a maturity date of six months from the issuance date, unless
earlier converted. Upon the closing of a qualified equity financing, the bridge
notes were automatically convertible into the Companys Series C Preferred
Stock to be issued in a qualified equity financing at a premium of 10% of the
unpaid principal and interest of the bridge notes. In addition, upon closing of
the qualified equity financing, holders of the bridge notes were entitled to
receive common stock purchase warrants of the Company at an exercise price and
other terms identical to the warrants to be issued in the qualified equity
financing. The amount of common stock into which the common stock purchase
warrants were exercisable ranged from 40% to 50% of the number of shares of
common stock issuable to bridge note holders upon conversion of the Series C
Preferred Stock receivable upon conversion of the bridge notes, with the range
depending on the timing of the initial closing of the qualified equity
financing.
The bridge
notes were secured by a pledge by Ronald H. Lane, the Companys Chairman
of the board and former Chief Executive Officer, of 2,000,000 shares of common
stock of the Company beneficially owned by Dr. Lane. In addition, the Company
agreed to issue 1,000,000 shares of its Series B Convertible Preferred
Stock to be held by Axiom Capital Management, Inc. (
Axiom
)
as nominee of the bridge note holders. Axiom acted as placement agent in the
2007 Bridge Note offering.
As further
described below, on April 3, 2008, the 2007 Bridge Notes were exchanged for
2008 Bridge Notes.
F-15
NOTE 10 OTHER NOTES PAYABLE (CONTINUED)
2008 Convertible Bridge Notes
Beginning on
April 3, 2008, Kirk issued convertible bridge notes (the
2008 Bridge Notes
) in the principal
amount of $6,792,292 to accredited investors as defined by Rule 501 under the
Securities Act. Of the 2008 Bridge Notes issued, notes in the principal amount of
$5,227,292 were issued in exchange for (i) 2008 Bridge Notes in the principal
amount equal to the unpaid principal of the 2007 Bridge Notes, and (ii) 2008
Bridge Notes in the principal amount equal to the unpaid principal and accrued
and unpaid interest of the Singh Note and accrued and outstanding consulting
fees due to Mr. Singh.
The 2008
Bridge Notes bore interest at 6% per annum increasing to 18% in the case of an
event of default and matured on June 30, 2008, unless earlier converted. Upon
the closing of a qualified equity financing (as defined therein), the 2008
Bridge Notes were convertible at the option of the holder into the Companys
Series C Preferred Stock and warrants to acquire shares of common stock to be
issued in a qualified equity financing at a premium of 10% of the unpaid
principal and interest of the 2008 Bridge Notes. In addition, upon closing of
the qualified equity financing, holders of the 2008 Bridge Notes were entitled
to receive bridge warrants to acquire the Companys common stock at an exercise
price and upon other terms identical to the warrants to be issued in the
qualified equity financing. The number of shares of common stock into which the
bridge warrants were exercisable ranged from 40% to 50% of the number of shares
of common stock issuable to holders upon conversion of the Series C Preferred
Stock receivable upon conversion of the 2008 Bridge Notes, with the range
depending on the timing of the initial closing of the qualified equity
financing.
In connection
with the issuance of the 2008 Bridge Notes, the Company issued an aggregate of
1,358,458 shares of its common stock to holders of the 2008 Bridge Notes.
To secure
Kirks obligations under the 2008 Bridge Notes, the Company issued 1,000,000
shares of Series B Convertible Preferred Stock to Axiom, the placement agent of
the 2008 Bridge Note offering, acting as collateral agent of holders of the
2008 Bridge Notes. According to the Series B Certificate of Designations,
Preferences and Rights of Series B Convertible Preferred Stock, the shares of
Series B Convertible Preferred Stock vote together with the common stock and
other preferred stock entitled to vote on an as-converted basis. In the event
of default under the 2008 Bridge Notes, the Series B Convertible Preferred
Stock is convertible into the Companys common stock on a 1:15 basis for the
purpose of utilizing the proceeds thereof to satisfy the obligations under the
2008 Bridge Notes. In an event of default, the Company may be obligated to file
a registration statement under the Securities Act covering the resale of shares
of common stock issuable upon conversion of the Series B Convertible Preferred
Stock. If the Company does not file a registration statement within 15 days
following an event of default, the 2008 Bridge Notes will be deemed to increase
in principal amount by 1% every month up to 10% in the aggregate. The then
outstanding shares of Series B Preferred Stock are redeemable on a pro-rata
basis by the Company at a redemption price of $0.001 per share in the event of
conversion of the 2008 Bridge Notes pursuant to the terms thereof or in the
event of payment of any portion of the principal outstanding under such
convertible bridge notes. The Company has subsequently redeemed the 1,000,000
shares of Series B Convertible Preferred Stock for a total redemption price of
$1,000.
F-16
NOTE 10 OTHER NOTES PAYABLE (CONTINUED)
2008 Convertible Bridge Notes (Continued)
The 2008
Bridge Notes were also secured by a pledge by an affiliate of Ronald H. Lane,
the Companys Chairman of the board and former Chief Executive Officer,
of 2,000,000 shares of common stock of the Company. As an inducement to the pledge
by Dr. Lanes affiliate, the Company agreed to issue to Dr. Lanes
affiliate one share of the Companys common stock for every pledged share
of common stock sold in an event of default under the 2008 Bridge Notes.
2008 Bridge
Notes in the principal amount of $5,202,292 plus accrued interest thereon
converted into securities sold in the Companys Series C Preferred Stock
Offering (as described in Note 12 below). Of the remaining 2008 Bridge Notes
that did not convert into securities sold, the Company repaid the entire
outstanding principal amount of $1,590,000 during the year ended October 31,
2008. Interest expense of $125,186 was recognized, which was converted into
the Series C Preferred Stock offering.
Customer Note
On August 31,
2007, Kirk issued an unsecured Promissory Note in favor of CB Distributors,
Inc. in the amount of $1,500,000 together with interest per annum equal to
8%. With extensions, this note was due January, 31, 2008. On June 17, 2008, the
Company repaid in full all outstanding principal and accrued and unpaid
interest totalling $1,608,116. The Company recognized interest expense of $20,667,
$82,642 and $0 for the years ended October 31, 2008, 2007, and 2006, respectfully.
NOTE 11 - 2007 PRIVATE PLACEMENT
During January
and February 2007, the Company completed closings of a private placement (
2007 Private Placement
), whereby the
Company sold an aggregate of 1,575,000 units (
Units
)
to accredited investors as defined by Rule 501 under the Securities Act. Of the
1,575,000 Units sold, 450,000 Units were exchanged in lieu of repayment of
notes issued in a bridge financing conducted during the fiscal year ended
October 31, 2007 in the principal amount of $450,000.
The price per
Unit was $1.00 and each Unit consisted of (i) one share of common stock of the
Company; and (ii) a warrant to purchase, at any time prior to the third
anniversary following the final closing of the Private Placement, half a share
of common stock at an exercise price of $1.50 per share, subject to adjustment
in certain instances; except that with respect to 290,000 Units, the warrant
is exercisable for one share of common stock at an exercise price of $3.00.
The warrants are also redeemable by the Company where the exercise price
exceeds a certain amount.
The per share
weighted value of the warrants to purchase 1,575,000 shares of common stock at
$3.00 per share was between $0.98 and $1.32. The warrants were valued using the
Black-Scholes option pricing model with the following weighted average
assumptions: no dividend yield; expected volatility between 153% and 155%; risk
free interest rate of between 4.63% and 4.9%; and expected life of three years.
F-17
NOTE 11 - 2007 PRIVATE PLACEMENT (CONTINUED)
The
subscription agreement required the Company to file a registration statement,
covering the securities sold in the 2007 Private Placement within 30 days of
final closing of the 2007 Private Placement and use its best efforts to cause
the registration statement to become effective within 90 days of final closing.
If the registration statement has not been declared effective within 150 days
following final closing, the Company has agreed to pay to the investors
liquidated damages, payable in cash or common stock, of 1.5% of the purchase
price paid by the investor in the 2007 Private Placement and 1% of the purchase
price paid by the investor in the 2007 Private Placement for each subsequent 30
day period, with the total of the foregoing capped at 9%. The Company has filed
a pending registration statement covering shares issuable upon exercise of the
warrants issued in the 2007 Private Placement and has recognized $164,700 of
penalties as of October 31, 2008.
NOTE 12 SERIES C PREFERRED STOCK OFFERING
From May to
September 2008, the Company completed a series of closings of a Series C
Preferred Stock offering (the
Series C
Preferred Stock Offering
) whereby the Company sold an aggregate of
28,138 shares of its Series C Convertible Redeemable Preferred
Stock (the
Series C Preferred Stock
)
together with detachable warrants (
Warrants
)
to acquire an aggregate of 18,780,200 shares of its common stock to accredited
investors as defined by Rule 501 under the Securities Act.
According to
the terms of the Amended and Restated Certificate of Designations, Preferences
and Rights of Series C Convertible Redeemable Preferred Stock (
Certificate
of Designation
), the Series C
Preferred Stock is convertible into shares of the Companys common stock
both at the option of the holder and the Company according to the terms of the
Certificate of Designation at an initial rate of 1,000 shares of common stock
for each share of Series C Preferred Stock (based on a stated value of $500 per
share and an initial conversion price of $0.50 per share) subject to adjustment
for, among other things, stock splits, stock dividends, distributions, reclassifications
and sales below the conversion price. The Series C Preferred Stock votes on an
as-converted basis together with the Companys
common stock and any class of preferred stock entitled to vote with the Companys
common stock at any annual or special meeting of the Registrant. Holders of Series
C Preferred Stock are entitled to receive cumulative dividends at the rate of
6% of the stated value per annum on each outstanding share of Series C Preferred
Stock accruing from May 9, 2008 until the earlier of May 9, 2011 or the conversion
thereof into shares of common stock, payable quarterly on March 31, June 30,
September 30 and December 31, with the first payment due June 30, 2008, and payable
in cash or shares of Series C Preferred Stock in accordance with the terms of
the Certificate of Designation. Holders of Series C Preferred Stock are also
entitled to participate on a pro-rata basis in any dividends paid on the
Registrants common stock on an as-converted basis. The Company has accrued
$382,649 in dividend expense.
The
Certificate of Designation further provides that each share of Series C
Preferred Stock will also be entitled to a preference equal to 125% of the sum
of the stated value plus accrued but unpaid cash dividends upon the merger,
acquisition, sale of voting control or sale of all or substantially all of the
assets of the Company, upon the liquidation, dissolution or winding-up of the Registrant
or upon an event of bankruptcy of the Registrant. On May 9, 2011, the then
outstanding shares of Series C Preferred Stock may be redeemed by the Company
at its option at a redemption price of the stated value plus accrued but unpaid
dividends on the shares of Series C Preferred Stock.
Warrants are
exercisable for a period of five years from the date of grant at an initial
exercise price of $0.75 per share, subject to adjustment for, among other
things, stock splits, stock dividends, distributions, reclassifications and
sales below the exercise price. The per share weighted value of the Warrants to
purchase 18,780,200 shares of common stock at $0.75 per share is $0.31. The
warrants were valued using the Black-Scholes option pricing model with the following
weighted average assumptions: no dividend yield; expected volatility of 84%;
risk free interest rate of 2%; and expected life of 5 years.
F-18
NOTE 12 SERIES C PREFERRED STOCK OFFERING
(CONTINUED)
Of the Series
C Preferred Stock and Warrants sold, 2008 Bridge Notes in the principal amount
of $5,202,292 plus accrued interest thereon were exchanged at a premium of 10%
into (i) an aggregate of 11,778 shares of Series C Preferred Stock and Warrants
to acquire an aggregate of 5,889,000 shares of common stock, and (ii) bridge
Warrants to acquire an aggregate of 4,711,200 shares of common stock (equal to
40% of the number of shares of common stock issuable upon conversion of the
Series C Preferred Stock receivable upon conversion of the 2008 Bridge Notes).
In addition,
Ronald H. Lane, Ph.D., the Companys Chairman of the board and former Chief
Executive Officer, converted $100,000 of deferred compensation due under his
employment agreement for an investment of like amount in the Series C Preferred
Stock Offering resulting in the issuance to him of 200 shares of Series C Preferred
Stock and Warrants to acquire 100,000 shares of common stock.
Pursuant to a
registration rights agreement entered into with purchasers of the Series C
Preferred Stock, the Company agreed to use its best efforts to file, within 45
days of the final closing of the Series C Preferred Stock Offering, with the
Securities and Exchange Commission a registration statement (the
Mandatory
Registration Statement
)
covering the registration of (i) securities issuable upon exercise of the
Warrants and placement agent warrants, (ii) securities issued by way of
liquidated damages under the registration rights agreement, (iii) up to
1,000,000 shares of common stock owned by Maneesh prior to May 8, 2008, (iv)
1,000,000 shares of common stock beneficially owned by Mr. Singh as of
May 8, 2008, and (v) 1,000,000 shares of common stock beneficially owned by
Dr. Lane as of May 8, 2008 (collectively the
Registrable Securities
).
If the Mandatory Registration Statement has not been filed within 45 days of
final closing of the Series C Preferred Stock Offering or declared effective
within 195 days following final closing, the Company has agreed to pay to the
purchasers liquidated damages, payable in cash or Series C Preferred Stock, of
1% of the purchase price paid by the purchaser in the Series C Preferred Stock
Offering for each month until the registration statement is declared effective,
with the total of the foregoing capped at 10%. If the Mandatory Registration
Statement has not been declared effective and the Company receives a request
between October 6, 2008 and May 9, 2010 from purchasers who invested at least
$500,000 in the Series C Preferred Stock Offering that the Company file a registration
statement, then the Company shall, subject to certain limitations, file a registration
covering the Registrable Securities requested to be registered. Further, if the
Mandatory Registration Statement has not been declared effective and the Company
files a registration statement for its own account or the account of others then
the Company shall, subject to customary cutbacks and restrictions, include in
such registration statement the Registrable Securities of the purchasers of the
Series C Preferred Stock that request to be included. The Company has timely
filed a Mandatory Registration Statement which is currently pending.
Pursuant to a
letter agreement entered into with the Companys placement agent, Axiom,
as subsequently amended, Axiom is entitled to a cash fee of $255,000 plus expenses
of $34,509 for services rendered in the 2007 Bridge Note Offering, the 2008 Bridge
Note Offering and the Series C Preferred Stock Offering. In addition, the Company
is negotiating the number of number of warrants which Axiom is entitled to
in connection with the aforesaid financings. To date the Company has recognized
$215,874 as the value of the warrants which Axiom may be entitled to.
F-19
NOTE 12 SERIES C PREFERRED STOCK OFFERING
(CONTINUED)
The
incremental gross proceeds to the Company from the Series C Preferred Stock
Offering were $7,780,000 and, together with the 2008 Bridge Note offering, the
incremental gross proceeds to the Company were $9,335,000.
The Company
used the proceeds from the Series C Preferred Stock Offering to pay down the
BOI Credit Facility and retire its remaining material indebtedness. On or
around May 12, 2008, the Company repaid an aggregate of $2,445,000 to holders
of 2005 Bridge Notes and Revised Notes. In addition, the Registrant repriced
warrants to purchase an aggregate of 407,493 shares of common stock, issued to
holders of the 2005 Bridge Notes and Revised Notes, to $0.75 per share and extended
the term of such warrants by one year. The Company further issued an aggregate
of 817 shares of Series C Preferred Stock and 1,091,813 shares of common
stock in lieu of payment of accrued and unpaid interest under said notes.
In consideration of the aforesaid, the Company has obtained a full release
from such holders of the 2005 Bridge Notes and Revised Notes in connection
with the 2005 Bridge Notes and Revised Notes and related transactions.
The Company
further used proceeds from the Series C Preferred Stock Offering to retire
additional indebtedness including, without limitation, indebtedness under the
2008 Bridge Notes in the principal amount of $1,590,000 (that did not convert
into the Series C Preferred Stock Offering), $1,500,000 of indebtedness under
a promissory note held by John Copanos, and $725,893 of indebtedness under
a remaining 2005 Bridge Note held by a holder that commenced a lawsuit against
the Registrant.
In connection
with the Series C Preferred Stock Offering, the Companys board authorized
the following issuances: (i) 2,000,000 shares of restricted common stock to
Mr. Singh, vesting over twenty four months, with one-third vesting on
each of May 9, 2008, May 9, 2009 and May 9, 2010; (ii) 1,000,000 shares of
restricted common stock to Dr. Lane, vesting over twenty-four months, with
one-third vesting on each of May 9, 2008, May 9, 2009 and May 9, 2010; and
(iii) 125,000 shares of common stock and five-year warrants to acquire 250,000
shares of common stock at an initial exercise price of $0.75 per share to each
of the Companys former directors, William McCormick and Richard Feldheim,
who resigned on April 29, 2008. Further, in addition to the repricing of the
2005 Bridge Note warrants, the Companys board authorized the repricing
of additional warrants to acquire an aggregate of 875,263 shares of common stock
to $0.75 per share. The Registrant has also agreed to reprice options to
acquire 200,000 shares of common stock held by Steven Getraer, the Companys
former Chief Financial Officer to $0.75 and warrants to acquire 1,000,000
shares of common stock held by Harcharan Singh that were issued to him in
April 2007 to $0.75.
The lead
investor in the Series C Preferred Stock Offering was Svizera Holdings BV, (
Svizera
)
which invested an aggregate of $8,086,000 in the Series C Preferred Stock Offering
(including the roll-over of a 2008 Bridge Note in the principal
amount of $1 million and the exchange of $300,000 of expense reimbursement due
to Svizera) from its working capital, to purchase an aggregate of 16,373 shares
of Series C Preferred Stock and Warrants exercisable for an aggregate of 9,071,700
shares of common stock. Svizera is a wholly-owned subsidiary of Maneesh, which
is controlled by Vinay Sapte and his brother Maneesh Sapte. Vinay Sapte was appointed
to the Companys
board on April 29, 2008 and Maneesh Sapte, together with Jyotindra Gange, both
Maneesh designees, became members of the Companys board on May 23, 2008.
In addition, an affiliate of Mr. Harcharan Singh invested an aggregate of $2,661,930
in the Series C Preferred Stock Offering (including the roll-over of
a 2008 Bridge Note in the principal amount of $1,652,292) from its working capital
and, together with the Maneesh designees, became a member of the Registrants
board on May 23, 2008.
F-20
NOTE 13 - CONSULTING AND STRATEGIC ALLIANCE
AGREEMENTS
Saggi and Bridge Ventures Consulting
Agreements
On February 1,
2007, the Company entered into consulting agreements with each of Saggi Capital
Corp. and Bridge Ventures, Inc. (each, a
Consultant
)
for the provision of consulting services (including investor relations and
strategic consulting) by the Consultants. Under the consulting agreements, each
Consultant is entitled to receive $5,000 per month during the term of the
agreement and five-year warrants to acquire 200,000 shares of the Companys
common stock, par value $0.001 per share, at an exercise price of $2.00 per
share, subject to adjustment in certain circumstances, or on a cashless or net
issuance basis. The per share weighted value of the warrants to purchase
400,000 shares of common stock at $2.00 per share is $1.37. The warrants were
valued using the Black-Scholes option pricing model with the following weighted
average assumptions: no dividend yield; expected volatility of 153%; risk free
interest rate of 4.84%; and expected life of five years. In the fiscal year
ended October 31, 2007, the Company recorded a charge of $273,212 for each
consultant, to recognize the agreement.
VCG Consulting Agreement
On February 1,
2007, the Company entered into a consulting agreement (the
VCG Agreement
) with VCG & A, Inc.
(
VCG
) for the provision of consulting
services by VCG that include assisting the Company in its capital raising
efforts, the development of an overall business strategy and the purchase of an
over-the-counter generic version of Omeprazole (the
Target Product
) as well as to assist the Company in ongoing
management, sales and marketing support. Under the VCG Agreement, the Company
agreed to pay VCG cash fees and royalties based upon the net sales of the
Target Product. In addition, VCG was entitled to receive stock options to
purchase 300,000 shares of the Companys common stock, par value $0.001 per
share, at an exercise price of $1.40. The stock options vested immediately upon
execution of the VCG Agreement. The per share weighted value of the options to
purchase 300,000 shares of common stock at $1.40 per share is $1.39. The
options were valued using the Black-Scholes option pricing model with the
following weighted average assumptions: no dividend yield; expected volatility
of 153%; risk free interest rate of 4.84%; and expected life of five years. In
the fiscal year ended October 31, 2007, the Company recorded a charge of
$416,475 to recognize the agreement.
On May 1,
2007, the Company issued 1,300,000 share options exercisable for five (5) years
at a price equal to the closing share price as at the day prior to the
execution of a licensing agreement by the Company to acquire the rights to an
Omeprazole type product with the assistance of VCG. The stock options vested
immediately upon execution of the VCG Agreement. The per share weighted value
of the options to purchase 1,300,000 shares of common stock at $1.35 per share
is $1.17. The options were valued using the Black-Scholes option pricing model
with the following weighted average assumptions: no dividend yield; expected
volatility of 130%; risk free interest rate of 4.67%; and expected life of five
years. In the fiscal year ended October 31, 2007, the Company recorded a charge
of $1,527,000 to recognize the agreement.
In connection
with the VCG Agreement, the Company granted to VCG and its designees five-year
warrants to acquire an aggregate of 1,600,000 shares of its common stock at an
exercise price of $1.36 per share. Such warrants were issued in lieu of any
options issuable under the VCG Agreement described above. The Company
recognized $1,943,482 of expense charges to income during the fiscal year ended
October 31, 2007.
F-21
NOTE 13 - CONSULTING AND STRATEGIC ALLIANCE
AGREEMENTS (CONTINUED)
Singh Strategic Alliance
On April 20, 2007, the Company
entered into a strategic alliance with Harcharan Singh. In connection with this
strategic alliance, the Company and Kirk, entered into a Consulting Agreement
with Mr. Singh (the
Consulting Agreement
)
and Kirk issued to an affiliate of Mr. Singh, a note in the principal amount of
$1,250,000 (the
Singh Note
).
Mr. Singh was appointed to the Corporations board on May 23, 2008.
During the term of the
Consulting Agreement, Mr. Singh is being retained to provide strategic
consulting services to the Company. In consideration for these services, Mr.
Singh receives a $10,000 monthly retainer and was issued 2,000,000 shares of
the Companys common stock and warrants to purchase a further 1,000,000
shares of the Companys common stock. In addition, if the Company achieves
annual earnings before interest, taxes, depreciation and amortization (EBITA)
of at least $20,000,000, then Mr. Singh will be entitled to a further grant
of 1,000,000 shares of Companys common stock and warrants to purchase
500,000 shares of the Companys common stock. The warrants were exercisable
for a period of seven years from the date of grant at an initial exercise
price of $2.00, subject to adjustment in certain circumstances, and contain
a cashless or net issuance component. In connection with the Series C Preferred
Stock Offering, the Company reduced the exercise price of the warrants to
acquire 1,000,000 shares of the Companys common stock to $0.75 and
eliminated the cashless or net issuance component. The per share weighted
value of the warrants to purchase 1,000,000 shares of common stock at $0.75
is $0.36. The warrants were valued using the Black-Scholes option pricing
model with the following weighted average assumptions: no dividend yield;
expected volatility of 84%; risk free interest rate of 2% and expected life
of seven years. The Company recorded a charge of $1,192,153 for the fiscal
year ended October 31, 2007 to recognize the agreement.
On April 3, 2008, accrued
consulting fees of $120,000 converted into a 2008 Bridge Note. Consulting fees
amounting to $60,000 for the year ended October 31, 2008, are included in the
accompanying financial statements. Subsequent to the end of fiscal year ended
October 31, 2008, in connection with the Consulting Agreement, the Companys
board of directors authorized the grant of 125,000 shares of common stock to
Mr. Singh. (See Note 20)
Omeprazole
License Agreement
On May 1, 2007, the Companys
subsidiary, Synovics Labs, entered into a License and Supply Agreement dated as
of April 11, 2007 with Fluid Air Inc. doing business as PharmPro (
FAI
) for the development and
commercialization of the over-the-counter generic version of Omeprazole (the
License Agreement
). According to the
License Agreement, FAI granted Synovics Labs, under FAIs patent rights, an
exclusive worldwide license to develop, commercialize and sublicense capsules
containing the generic version of over-the-counter Omeprazole (the
Drug Product
). The agreement provided
that FAI is to be responsible for developing the Drug Product in accordance
with the Drug Product development plan while Synovics Labs is to be responsible
for research and development activities and will file in the Companys name,
the appropriate regulatory filings with FAI being responsible for the
chemistry, manufacturing and controls review portion of such filings. Once
developed and necessary regulatory approvals have been obtained, Synovics Labs
is to be responsible for promoting, marketing and distributing the Drug Product
supplied exclusively by FAI.
As partial consideration for
the rights granted, Synovics Labs paid FAI a license of $500,000 with further
payments due upon the completion of certain milestones. Commencing upon the
first commercial sale of the Drug Product, the Company is also required to pay
to FAI royalties on the net product sales of the Drug Product until the later
of (i) the expiration of the last to expire FAI patent rights covering the Drug
Product; and (ii) ten years from the first commercial sale of the Drug Product.
Unless terminated sooner for cause, the License Agreement will expire on a
country by country basis on the expiration of Synovics Labs obligation to make
royalty payments with respect to such country.
Presently, the Company does not
anticipate that it will be proceeding forward with the development and
commercialization of Omeprazole with FAI. The Company has been in discussion
with FAI and no final resolution has been reached.
F-22
NOTE 13 - CONSULTING AND
STRATEGIC ALLIANCE AGREEMENTS (CONTINUED)
Michaels Consulting Agreement
On January 28, 2008, the Company
entered into a consulting agreement with Paul Michaels (
Michaels
). In
consideration for the consulting services rendered by Michaels, the Company
issued an aggregate of 99,990 shares of the Companys common stock. These
shares were valued at $74,925 and were included in the accompanying statement
of operations for year ended October 31, 2008.
Maneesh Joint Venture
On June 6, 2008, the Company
entered into a Joint Venture Agreement with Maneesh. Under the terms of the
joint venture agreement, Maneesh has agreed to provide consulting services to
the Company and its subsidiaries for an initial term of one year, which term
shall automatically renew for additional one year terms absent notice of
non-renewal. Pursuant to the joint venture agreement, the Company has agreed to
pay Maneesh a consulting fee of $25,000 per month, plus reimbursement of
reasonable and accountable expenses. The joint venture agreement further
provides that Maneesh and Kirk may in the future agree to the license by
Maneesh to Kirk of the non-exclusive right to manufacture and distribute
pharmaceutical products proprietary to Maneesh.
Voting Agreement
Vinay Sapte, Dr, Lane and
Mr. Singh and their respective affiliates are among principal parties to
a Voting Agreement dated as of May 8, 2008 entered into upon the initial
closing of the Series C Preferred Stock Offering. Under the terms of the Voting
Agreement, each of the parties agrees to vote all of its shares to ensure that
the size of the Companys board will be five directors (or seven if the
board resolves to expand its size to seven). Further, each of the parties agrees
to vote its shares in favor of the following designations: (i) one director
designated by Dr. Lane and his affiliates (to initially be Dr. Lane),
(ii) one director designated by Mr. Singh and his affiliates (to
initially be Mr. Singh), (iii) three directors designated by Maneesh and
its affiliates (to initially be Vinay Sapte, Maneesh Sapte and Jyotindra
Gange). The Voting Agreement further provides that if the board is expanded to
seven directors, then Maneesh and its affiliates shall be entitled to one
further designee and Axiom and Indigo Securities LLC (
Indigo
)
shall be entitled to designate one director. If certain of the parties to the
Voting Agreement cease to beneficially own at least 4% of the outstanding shares
of common stock of the Company determined immediately after giving effect to
the initial closing of the Series C Preferred Stock Offering, then the right
of designation applicable to such party shall terminate and the right shall vest
in the entire board.
NOTE 14 - EMPLOYMENT AGREEMENTS
Ronald H. Lane
On May 17, 2007, the Company
executed an employment agreement dated as of January 30, 2007 with Dr. Lane
providing for Dr. Lane to serve as the Companys Chief Executive Officer
through January 30, 2010, renewable for an additional one year unless either
the Company or Lane provides written notice of termination at least 60 days
prior to the end of the term. According to the Lane employment agreement, Lane
was to receive an annual base salary of $400,000 and, solely at the discretion
of the Board, based on his performance and the Companys financial condition
and operating results, a bonus payable in cash or shares of the Companys
common stock. The employment agreement further provided that the Board may
grant him options under any equity compensation plan in which he is eligible to
participate. The employment agreement provided that the Company owes Lane an
amount to be mutually agreed by them, representing, among other things,
accrued, but unpaid salary. Upon the initial closing of the Series C Preferred
Stock Offering, $100,000 of the deferred compensation was converted for an
investment of like amount in the Series C Preferred Stock Offering.
On July 3, 2008, Dr. Lane resigned
as the Companys Chief Executive Officer and his employment agreement
terminated. Dr. Lane currently serves as the Companys Chairman of the Board
and subsequent to the end of the fiscal year, the Company entered into a new
agreement with Dr. Lane compensating him for his services as Chairman of the
Board. (See Note 20)
F-23
NOTE 14 - EMPLOYMENT AGREEMENTS
(CONTINUED)
Steven Getraer
On July 9, 2007 the Company entered
into an employment agreement with Steven Getraer as the Companys Executive
Vice President and Chief Financial Officer. On October 6, 2008, the Company terminated
Mr. Getraers employment. Mr. Getraers
employment agreement provided for a three year term ending July 9, 2010, renewable
for subsequent terms unless earlier terminated by either party. Mr. Getraer
was entitled to a base salary of $265,000 per annum, increasing to $280,000 per
annum commencing on July 10, 2008 and to $295,000 commencing on July 10, 2009.
In addition, Mr. Getraer was entitled to a minimum 10% bonus plus a
discretionary fiscal year-end bonus payable in cash and/or shares of the
Companys common stock and was granted options to acquire an aggregate of
600,000 shares of the Companys common stock exercisable for seven years
at an initial exercise price of $2.00 per share and vesting annually in three
equal installments, with the first installment vesting on July 10, 2008. The
per share weighted value of the options to purchase 600,000 shares of common
stock at $2.00 was $0.92. The options were valued using the Black-Scholes option
pricing model with the following weighted average assumptions: no dividend
yield; expected volatility of 122%; risk free interest rate of 4.97%; and expected
life of seven years.
In connection with the Series C Preferred Stock Offering, t
he
Companys
board authorized the repricing of options to acquire the 600,000 shares of
common stock held by Mr. Getraer
to $0.75 per share. The per share weighted value of the options to purchase
600,000 shares of common stock at $0.75 per share is $0.34. The options were
valued using the Black-Scholes option pricing model with the following weighted
average assumptions: no dividend yield; expected volatility of 84%; risk free
interest rate of 2%; and expected life of six years.
Subsequent to the end of the fiscal
year ended October 31, 2008, the Company entered into a separation agreement
with Mr. Getraer. (See Note 20)
Manny Desai
The Company has agreed to employ
Mahendra (Manny) Desai as its Chief Financial Officer to replace Mr. Getraer
at a salary of $135,000 per annum. Mr. Desai is entitled to a discretionary
bonus based on his performance and the approval of the Companys board.
Mr. Desai is also entitled to contributions to medical and dental insurance,
long term disability insurance and a pension plan in accordance with the
Companys
practices for its other management personnel.
F-24
NOTE 15 - STOCKHOLDERS DEFICIT
Common Stock
The Company has authorized
45,000,000 shares of common stock, with a par value of $0.001 per share. During
the year ended October 31, 2008, the Company issued 9,497,394 shares of its
common stock.
Preferred Stock
The Company has authorized
5,000,000 shares of Preferred Stock, with a par value of $0.001 per share of
which 591,850 shares of Series A Preferred Stock are outstanding and 28,955
shares of Series C Preferred Stock are outstanding.
The
591,850 shares of Series A Preferred Stock were issued prior
to November 1, 2001 as consideration for the cancellation of $798,998 of
debt and accrued interest thereon that was owed to a director. The shares
have a cumulative annual dividend of $0.108 per share and a liquidation value
of $6.75 per share, and each share is convertible into one-fifth of a share
of common stock. The preferred shares have a dividend and a liquidation preference
over common shares. No dividend on the preferred shares outstanding has ever
been declared or paid and dividends in arrears amounted to $515,912 at October
31, 2008.
The 28,955 shares of Series C Preferred Stock are described elsewhere
in Note 12.
Stock Based Compensation
On October 31, 1996 the Company
adopted its 1996 Stock Option Plan (the
1996 Plan
) authorizing
570,000 common shares for issuance to key personnel, consultants, and independent
contractors. Under the 1996 Plan, incentive stock options may be granted to purchase
its common stock at 100% (110% for an optionee
who is a 10% stockholder) of the fair market value of the stock on the date of
grant. Stock options are exercisable for a period of up to ten years from the
date of grant (five years for an option granted to a 10% stockholder). All participants
are eligible to receive stock awards and stock appreciation rights, as to be
determined by the Companys board of directors. No stock awards or stock
appreciation rights are outstanding under the Plan. As of October 31, 2008,
the 1996 Plan expired.
A summary of transactions for non-employee stock options and warrants for the years ended October 31, 2008, 2007 and 2006 is as follows:
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
Number of
|
|
Option Price
|
|
Remaining
|
|
Exercise
|
|
|
Shares
|
|
Range
|
|
Life
|
|
Price
|
|
|
|
|
|
|
|
|
|
OPTIONS AND WARRANTS
|
|
311,896
|
|
$3.00 - $5.00
|
|
2.9
|
|
$3.99
|
OUTSTANDING, AS OF
|
|
|
|
|
|
|
|
|
October 31, 2005
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
1,448,522
|
|
$4.00 - $6.00
|
|
2.5
|
|
$3.99
|
Warrants canceled
|
|
10,000
|
|
$3.00 - $3.13
|
|
|
|
$5.00
|
Options issued
|
|
|
|
|
|
|
|
|
Options canceled
|
|
6,000
|
|
$5.00
|
|
|
|
$5.00
|
OPTIONS AND WARRANTS
|
|
1,744,418
|
|
$3.00 - $6.00
|
|
2.4
|
|
$4.60
|
OUTSTANDING, AS OF
|
|
|
|
|
|
|
|
|
October 31, 2006
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
4,882,497
|
|
$.075 - $3.00
|
|
3.26
|
|
$1.58
|
Warrants canceled
|
|
|
|
|
|
|
|
|
Options issued
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
|
|
|
|
|
|
OPTIONS AND WARRANTS
|
|
6,626,915
|
|
$0.75 - $4.00
|
|
2.56
|
|
$1.42
|
OUTSTANDING, AS OF
|
|
|
|
|
|
|
|
|
October 31, 2007
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
22,194,000
|
|
$0.75
|
|
4.58
|
|
$0.75
|
Warrants canceled
|
|
|
|
|
|
|
|
|
Options issued
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
|
|
|
|
|
|
OPTIONS AND WARRANTS
|
|
|
|
|
|
|
|
|
OUTSTANDING, AS OF
|
|
|
|
|
|
|
|
|
October 31, 2008
|
|
28,820,915
|
|
$0.75 - $4.00
|
|
4.12
|
|
$1.25
|
F-25
NOTE 15 - STOCKHOLDERS DEFICIT
(CONTINUED)
Stock Based Compensation
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of fiscal year
|
|
|
|
|
|
0
|
|
|
0
|
|
Warrants exercisable, end of fiscal year
|
|
|
28,120,915
|
|
|
6,626,915
|
|
|
1,744,418
|
|
Weighted average fair value of options granted during the
year
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
Weighted average fair value of warrants granted during the
year
|
|
$
|
0.31
|
|
$
|
0.47
|
|
$
|
0.63
|
|
Additional information regarding
options and warrants outstanding as of October 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
RANGE OF
EXERCISE
PRICES
|
|
NUMBER
OUTSTANDING
|
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
|
|
WEIGHTED AVERAGE
REMAINING
CONTRACTUAL LIFE
(YEARS)
|
|
EXERCISABLE
|
|
|
|
|
|
|
|
|
|
$0.75 $4.00
|
|
28,820,915
|
|
$1.25
|
|
4.37
|
|
28,120,915
|
The Company accounts for
stock-based compensation in accordance with the provisions of SFAS No. 123,
Accounting
for Stock-Based Compensation
, which provides guidance for the recognition
of compensation expense as it related to the issuance of stock options and
warrants. In addition, the Company adopted the provisions of SFAS No. 148,
Accounting
for Stock-Based Compensation Transition and Disclosure an amendment of SFAS
No. 123
. SFAS No. 148 amended SFAS No. 123 to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation provided by SFAS No. 123. As
permitted by SFAS No. 148, the Company has adopted the fair value method
recommended by SFAS No. 123 to effect a change in accounting for stock-based
employee compensation. In addition, the Company adopted the provisions of SFAS
No. 123R,
Share-Based Payment
, which revised SFAS No. 123 to require
all share-based payments to employees, including grants of employee stock
options, to be recognized based on their fair values.
The Company determined the fair
value of options and warrants issued using the Black-Scholes option pricing
model with the following assumptions: 3 to 6 year expected lives; risk-free
interest rate ranging from 2.00% to 3.00%, stock price volatility ranging from
80% to 84%, with no dividends over the expected life.
The Company recognized stock-based
compensation expenses of approximately $353,717, $414,205, and $0 related to
the issuance of stock options to certain employees. Such expenses are reflected
in selling, general and administrative expenses on the accompanying
Consolidated Statement of Income for the years ended October 31, 2008, 2007 and
2006, respectively.
The Company
recognized stock-based compensation expense of approximately $172,180, $0,
and $0 related to its issuance of stock-based compensation to non-employees.
Such expense is reflected in selling, general and administrative expenses on
the accompanying Consolidated Statements of Income for the years ended October
31, 2008, 2007 and 2006, respectively.
F-26
NOTE 15 - STOCKHOLDERS DEFICIT (CONTINUED)
Stock Based Compensation (Continued)
The fair value
of each employee-nonemployee option and warrant was calculated on the date of
grant using the Black-Scholes model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED OCTOBER 31
|
|
RISK FREE INTEREST
|
|
VOLATILITY
RATE
|
|
DIVIDEND
YIELD
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2.00
|
%
|
|
85
|
%
|
|
0
|
|
2007
|
|
|
4.97
|
%
|
|
135
|
%
|
|
0
|
|
2006
|
|
|
4.48
|
%
|
|
225
|
%
|
|
0
|
|
Employee Stock Based
Compensation
A summary of
transactions for employee stock options and warrants for the years ended
October 31, 2008, 2007, and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE
OPTIONS AND
WARRANTS
|
|
NUMBER OF
SHARES
|
|
OPTION
PRICE
RANGE
|
|
WEIGHTED
REMAINING
LIFE
|
|
AVERAGE
EXERCISE PRICE
|
|
|
|
|
|
|
|
|
|
|
|
OPTIONS AND WARRANTS OUTSTANDING,
AS OF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
31, 2005
|
|
|
120,000
|
|
|
$16.25
|
|
|
2.75
|
|
|
$
|
16.25
|
|
|
Options
granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPTIONS AND WARRANTS OUTSTANDING, AS OF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2006
|
|
|
120,000
|
|
|
$16.25
|
|
|
1.75
|
|
|
$
|
16.25
|
|
|
Options granted
|
|
|
2,100,000
|
|
|
$2.00
|
|
|
6.75
|
|
|
$
|
2.00
|
|
|
Options canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPTIONS AND WARRANTS OUTSTANDING, AS OF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2007
|
|
|
2,220,000
|
|
|
$2.00 - $16.25
|
|
|
6.5
|
|
|
$
|
2.79
|
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
2,020,000
|
|
|
$2.00 - $16.25
|
|
|
|
|
|
$
|
5.60
|
|
|
OPTIONS AND WARRANTS OUTSTANDING, AS OF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008
|
|
|
200,000
|
|
|
$0.75
|
|
|
5.7
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of year
|
|
|
200.000
|
|
|
0
|
|
|
0
|
|
Warrants exercisable, end of year
|
|
|
|
|
|
120,000
|
|
|
120,000
|
|
Weighted average fair value of options
granted during the year
|
|
|
|
|
|
|
|
|
|
|
Options available for future grant under
the 1996 Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
NOTE 15 - STOCKHOLDERS DEFICIT (CONTINUED)
Employee Stock Based Compensation (Continued)
Additional
information regarding options and warrants outstanding as of October 31, 2008
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING
|
|
|
|
|
|
EXERCISABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RANGE
OF
EXERCISE
PRICES
|
|
NUMBER
OUTSTANDING
|
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
|
|
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
LIFE (YEARS)
|
|
EXERCISABLE
|
|
WEIGHTED
AVERAGE
EXERCISABLE
PRICE
|
|
|
|
|
|
|
|
|
|
|
|
$0.75
|
|
200,000
|
|
$0.75
|
|
6.75
|
|
200,000
|
|
$0.75
|
Loss per Common Share
Net loss per
common share is calculated by dividing net loss by the weighted average number
of shares outstanding during each period presented. Common stock equivalents,
consisting of options and warrants have not been included in the calculation
for any of the three years ended October 31, 2008, 2007, and 2006, because
their effect would be anti-dilutive. The following potentially dilutive
securities were not included in the computation of diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
200,000
|
|
|
120,000
|
|
|
120,000
|
|
Warrants
|
|
|
28,120,915
|
|
|
6,481,915
|
|
|
1,827,751
|
|
The following
table sets forth the numerator and denominator in the computation of basic and
diluted per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,005,831
|
)
|
$
|
(20,857,884
|
)
|
$
|
(8,025,402
|
)
|
Denominator
for basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding
|
|
|
23,547,066
|
|
|
29,782,703
|
|
|
26,044,630
|
|
F-28
NOTE 16 - INCOME TAXES
Federal and
state income tax expense (benefit) for the years ended October 31, 2008, 2007
and 2006 and a reconciliation of income taxes computed at the United States
federal statutory income tax rate to the provision for income taxes reflected
in the Statements of Operations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,464,773
|
)
|
$
|
(6,867,395
|
)
|
$
|
(2,367,015
|
)
|
State
|
|
|
(258,489
|
)
|
|
(1,511,894
|
)
|
|
(417,708
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
772,051
|
|
|
107,826
|
|
|
300,905
|
|
State
|
|
|
136,244
|
|
|
19,028
|
|
|
53,101
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
$
|
814,967
|
|
$
|
7,952,438
|
|
$
|
2,430,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Deferred tax assets result primarily
from net operating loss carry-forwards. The components of the Companys
deferred tax assets and liabilities at October 31, 2008, 2007, and 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
DEFERRED TAX ASSETS
|
|
|
|
|
|
|
|
|
|
|
Operating
loss carryforwards
|
|
$
|
27,200,592
|
|
$
|
26,140,547
|
|
$
|
18,479,296
|
|
Stock option
compensation
|
|
|
176,013
|
|
|
176,013
|
|
|
262,706
|
|
Deferred
loss on inventory
|
|
|
63,100
|
|
|
79,965
|
|
|
17,600
|
|
Reserve
accounts
|
|
|
87,302
|
|
|
75,515
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deferred Tax Asset
|
|
|
27,527,007
|
|
|
26,472,040
|
|
|
18,759,602
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
Allowance
|
|
$
|
(27,527,007
|
)
|
$
|
(26,472,040
|
)
|
$
|
(18,759,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
A full
valuation allowance is provided against all deferred tax assets due to the
uncertainty as to their future realization. In addition, the realization of
such NOL carryforwards may be significantly limited if it is deemed that a
change in ownership has occurred. For tax purposes, a change in ownership has
occurred if an entity or group of entities that previously did not own 50% or
more of a Company acquires enough new equity to raise its interest to more than
50% over a three-year period.
As of October
31, 2008, the Company has federal net operating loss carry forwards totaling
approximately $27,200,592 available to offset future federal taxable income.
The federal net operating loss carry-forwards expire in varying amounts through
2008. In addition, the Company has state net operating loss carry forwards of
approximately $43,343,857 available to offset future state taxable income.
The Company is in the process
of filing its tax returns for the current and all applicable prior years and
may be subject to late filing penalties the amount of which cannot be
determined at this time.
F-29
NOTE 17 - COMMITMENTS AND CONTINGENCIES
Regulation
The Company is
required to obtain certain licenses in connection with the manufacture of its
products. These licenses require compliance with certain licensing
stipulations, as well as the FDA, DEA and other regulation bodies rules
and regulations. If the Company were to be out of compliance with any of these
rules or regulations, there could be a material adverse effect on the Companys
business, prospects, financial condition and results of operation, which could
have an adverse effect on the Companys
financial statements. See Note 18 below for a description of certain actions
commenced by the DEA.
Operating Leases
Rent expense
for the years ended October 31, 2008, 2007, and 2006 was $863,970, $753,760 and
$91,246, respectively. Kirk and ANDAPharm have commitments for office and
manufacturing space. The leases for rent expense annually are $898,282. Minimum
future rent payments under the operating leases at October 31, 2008 are as
follows:
|
|
|
|
|
Twelve Months
Ended October 31,
|
|
Amount
|
|
|
|
|
|
|
|
2009
|
|
$
|
650,282
|
|
2010
|
|
|
662,905
|
|
2011
|
|
|
256,091
|
|
2012
|
|
|
175,816
|
|
2013
|
|
|
|
|
The Company
estimates additional rent expense aggregating $1,745,094 year for a period of
five years.
Capital Leases
Minimum future
lease payments under capitalized leases at the October 31, 2008 are as follows:
|
|
|
|
|
Twelve Months
Ended October 31,
|
|
Amount
|
|
|
|
|
|
|
|
2009
|
|
$
|
70,291
|
|
2010
|
|
|
72,415
|
|
2011
|
|
|
77,243
|
|
2012
|
|
|
56,548
|
|
2013
|
|
|
17,573
|
|
|
|
|
|
|
Net minimum
lease payments
|
|
|
|
|
Less: Amount
representing interest
|
|
$
|
294,070
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion
|
|
$
|
70,291
|
|
|
|
|
|
|
Long-term
portion
|
|
$
|
294,071
|
|
|
|
|
|
|
The
capitalized leases have effective interest rates ranging from 8% through 12%
per annum.
F-30
NOTE 18 - LITIGATION
DEA Administrative Proceeding
On September
15, 2008, the DEA commenced an administrative proceeding with the U.S.
Department of Justice against Kirk to revoke its DEA license to manufacture and
distribute controlled substances in schedules III-V and deny any amendment to
Kirks application to add specific List I chemical manufacturing codes to its
controlled substance registration. The DEA alleges in the administrative
proceedings that Kirk shipped ephedrine guaifenesin products to a contract
packager for repackaging and relabeling that did not have the requisite DEA
license. In addition, the DEA alleges that Kirk failed to maintain an effective
system of controls to guard against and prevent a theft of approximately 1.3
million ephedrine guiafenesin tablets, which occurred at Kirk in July 2008. The
DEA also alleges that Kirk failed to maintain appropriate recordkeeping
practices.
In addition,
in December 2007, Kirk applied to the DEA for a 2008 ephedrine and
pseudoephedrine manufacturing procurement quota. In April 2008, the DEA
rejected Kirks application and Kirk is challenging its rejection which has
been consolidated with the administrative proceeding commenced by the DEA.
A hearing has
been scheduled before an administrative law judge to commence February 18,
2009. Based on the allegations made by the DEA, and the Companys understanding
of relevant facts and circumstances, it believes that the action commenced by
the DEA is without merit and it intends to vigorously defend against this.
In a separate
but related action, the United States of America commenced an action in the
United States District Court District of New Jersey on July 3, 2008 to forfeit
and condemn ephedrine guaifenesin products shipped to Kirks contract packager
referenced above at an appraised value of approximately $680,000 and which were
seized by the DEA. On September 2, 2008, the Company filed its answer and counterclaimed
seeking an award of damages for wrongful seizure of the seized property as well
as a declaratory judgment that the United States acted unlawfully, arbitrarily
and capriciously in implementing the quota system.
There can be
no assurance that the Company will prevail in these actions or that they will
be resolved upon terms favorable to the Company. If the Companys registration
were revoked, denied or suspended, or if its quota application is rejected, the
Company could no longer lawfully possess or distribute controlled substances or
manufacture and distribute products containing the disallowed controlled
substance which would have a material adverse effect on the Companys business
prospects, financial condition and results of operation.
Bushido
On January 18,
2008, the Company received a complaint filed by Bushido Capital Master Fund,
L.P. (
Bushido
) and BCMF
Trustees, LLC against the Company in the United States District Court, Southern
District of New York. The complaint sought recovery of an amount of no less
than $579,395 arising from a default by the Company of a Convertible Promissory
Note dated October 3, 2005 in the principal amount of $500,000 (the
Bushido Note
). On June 6, 2008, the
Company entered into a settlement and general release agreement pursuant to
which the Company repaid the unpaid principal and accrued and unpaid interest
on the Bushido Note plus agreed upon legal fees in the aggregate amount of
$725,893. Further, pursuant to the terms of the settlement, the Company agreed
to re-price warrants to acquire 83,333 shares of Company common stock issued to
Bushido to $0.75 and extend the expiration date of such warrants to October 3,
2012.
Pamlab
On December 7,
2007, an action was commenced by Pamlab LLC against ANDAPharm, and another two
co-defendants in the United States District Court, District of Colorado. The
complaint, as amended, alleged that ANDAPharms Folnate Plus product infringed
a patent of which plaintiff is a licensee and that the advertising of the
product constituted false advertising under the Lanham Act. In the amended
complaint, plaintiff sought a preliminary and permanent injunction, treble
damages as well as attorneys fees and costs. On June 27, 2008, the Company
entered into a settlement agreement pursuant to which the Company agreed to
immediately cease the manufacture and sale of ANDAPharms Folnate Plus product.
The settlement involved no monetary payment by the Company and no admission of
wrongdoing. The Company believes that the terms of the settlement will not have
a material effect on the Companys financial condition or operations.
F-31
NOTE 18 - LITIGATION (CONTINUED)
Nostrum
On June 27,
2008, the Company commenced a lawsuit in the United States District Court for
the Southern District of New York against Mulye and Nostrum (Case No. 08-Civ-5861)
seeking declaratory judgment for the immediate release to the Company of the
Escrow Shares as well as damages for breach of contract and implied covenant of
good faith and dealing. On August 13, 2008, Nostrum and Mulye filed an answer
and counterclaim to the Companys complaint and on August 26, 2008 they amended
their answer. The counterclaim is seeking declaratory judgment for the
immediate release to Nostrum of the Escrow Shares and the issuance to Nostrum
of additional shares of common stock such that, under Nostrums theory,
together with the Escrow Shares will represent 32% of the Companys outstanding
shares on a fully diluted basis. Most recently, on September 5, 2008, Nostrum
and Mulye made a motion to the Court to dismiss the Companys breach of
contract and breach of implied covenant of good faith and dealing claims and
the Company is in the process of responding to this motion. Both parties have
recently filed motions for summary judgment seeking a ruling from the Judge
regarding the return of the escrowed shares and the Court has scheduled a
hearing for February 5, 2009. The Company intends to vigorously prosecute this
case and believes its claims against Nostrum and Mulye are meritorious.
Stockbridge
On June 9,
2008, an action was commenced by Stockbridge Capital Investors, Inc. (
Stockbridge
) against the Company in the
Superior Court of the State of Arizona in the County of Maricopa. The complaint
alleges that the Company breached a letter agreement with Stockbridge by not
paying Stockbridge a success fee to which it claims entitlement. The
complaint seeks damages to be proven at trial together with attorneys fees and
costs. On September 2, 2008 the Company filed its answer. Based on the
allegations in the amended complaint, and the Companys understanding of
relevant facts and circumstances, it believes that the claims made by the
plaintiff in this lawsuit are without merit and it intends to vigorously defend
against them.
NOTE 19 - RELATED PARTY TRANSACTIONS
Singh Strategic Alliance
On April 20,
2007, the Company entered into a strategic alliance with Harcharan Singh. In
connection with this strategic alliance, the Company and Kirk, entered into a
Consulting Agreement with Mr. Singh (the
Consulting
Agreement
) and Kirk issued to an affiliate of Mr. Singh, a note in
the principal amount of $1,250,000 (the
Singh
Note
). Mr. Singh was appointed to the Corporations board on May
23, 2008.
During the
term of the Consulting Agreement, Mr. Singh is being retained to provide
strategic consulting services to the Company. In consideration for these
services, Mr. Singh receives a $10,000 monthly retainer and was issued 2,000,000
shares of the Companys common stock and warrants to purchase a further
1,000,000 shares of the Companys common stock. In addition, if the Company
achieves annual earnings before interest, taxes, depreciation and amortization
(EBITA) of at least $20,000,000, then Mr. Singh will be entitled to a further
grant of 1,000,000 shares of Companys common stock and warrants to purchase
500,000 shares of the Companys common stock. The warrants were exercisable
for a period of seven years from the date of grant at an initial exercise price
of $2.00, subject to adjustment in certain circumstances, and contain a cashless
or net issuance component. In connection with the Series C Preferred Stock
Offering, the Company reduced the exercise price of the warrants to acquire
1,000,000 shares of the Companys common stock to $0.75 and eliminated the
cashless or net issuance component. The per share weighted value of the
warrants to purchase 1,000,000 shares of common stock at $0.75 is $0.36. The
warrants were valued using the Black-Scholes option pricing model with the
following weighted average assumptions: no dividend yield; expected volatility
of 84%; risk free interest rate of 2% and expected life of seven years. The
Company recorded a charge of $1,192,153 for the fiscal year ended October 31,
2007 to recognize the agreement.
On April 3,
2008, accrued consulting fees of $120,000 converted into a 2008 Bridge Note.
Consulting fees amounting to $60,000 for the year ended October 31, 2008, are
included in the accompanying financial statements. Subsequent to the end of
fiscal year ended October 31, 2008, in connection with the Consulting Agreement,
the Companys board of directors authorized the grant of 125,000 shares of
common stock to Mr. Singh. (See Note 20)
F-32
NOTE 19 - RELATED PARTY TRANSACTIONS
(CONTINUED)
Maneesh Joint Venture
On June 6,
2008, the Company entered into a Joint Venture Agreement with Maneesh. Under
the terms of the joint venture agreement, Maneesh has agreed to provide
consulting services to the Company and its subsidiaries for an initial term of
one year, which term shall automatically renew for additional one year terms
absent notice of non-renewal. Pursuant to the joint venture agreement, the
Company has agreed to pay Maneesh a consulting fee of $25,000 per month, plus
reimbursement of reasonable and accountable expenses. The joint venture
agreement further provides that Maneesh and Kirk may in the future agree to the
license by Maneesh to Kirk of the non-exclusive right to manufacture and
distribute pharmaceutical products proprietary to Maneesh.
NOTE 20 SUBSEQUENT EVENTS
Maneesh and Singh Grant
On November
11, 2008, the Companys board of directors authorized the grant of 500,000
shares of its common stock to Maneesh and 125,000 shares of our common stock to
Harry Singh, both related parties of the Company, in consideration for their
deferral in payment of certain fees due to them under the Joint Venture
Agreement in the case of Maneesh and the Consulting Agreement in the case of
Harry Singh.
Lane Compensation
On July 3,
2008, Dr. Lane resigned as the Companys Chief Executive Officer and currently
serves as the Companys Chairman of the Board. On November 11, 2008, the
Company agreed to compensate Dr. Lanes services as Chairman of the Board
pursuant to which he is to receive a salary of $120,000 per annum. In addition,
the Company agreed to pay Dr. Lane severance of $400,000 as well as pay down
Dr. Lanes deferred compensation which was $214,102 at October 31, 2008 and
reimburse Dr. Lane for expenses incurred by him which were $77,147 at October
31, 2008.
Body Dynamics
On December
19, 2008, Kirk commenced an action against Body Dynamics, Inc. (
Body Dynamics
) in the Circuit Court of
the 17th Judicial District in Broward County, Florida. Body Dynamics is a
customer to whom Kirk delivered goods and for which Kirk has not been paid. The
Company is seeking judgment in the amount of $375,637 plus court costs and
pre-judgment interest.
Getraer Separation Agreement
On January 27,
2009, the Company entered into a separation agreement with Mr. Getraer pursuant
to which the Company agreed to pay Mr. Getraer severance of $175,000 less
applicable withholding and deductions payable over ten months, unpaid salary of
$8,154 less applicable withholdings and deductions as well as expense
reimbursement of $1,658. In addition, the Company agreed to issue warrants to
acquire 200,000 fully vested shares of the Companys common stock at an
exercise price of $0.75 per share exercisable at any time prior to July 31,
2012, it being acknowledged that Mr. Getraer holds no additional options,
warrants or other rights to purchase the Companys common stock.
F-33
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