development projects, as well as clinical studies. Indirect research and development costs include facilities, depreciation, and other indirect overhead costs.
Selling,
general, and administrative expenses for the three-month period ended July
31, 2008 was $3,570,238 as compared to $4,456,732 for the three-month period
ended July 31, 2007. The operating expenses are in line with historical norms
and also include consulting and compensation expense as discussed in the
accompanying notes to the financial statements. In the previous year, there
were significant non-cash consulting expenses.
Interest
expense for the three months ended July 31, 2008 was $1,404,434 as compared
to $1,479,442 for the three months ended July 31, 2007. In addition, during
the quarter ended July 31, 2008 there was interest forgiveness of $3,325,747
relating to the repayment and settlement of outstanding debt. The net income
for the three-month period ended July 31, 2008 was $489,670 or $0.02 per
share, as compared to a net loss of $7,485,619 or $0.45 per share for the
three-month period ended July 31, 2007.
Nine months ended July 31, 2008 compared with nine months ended July 31, 2007.
Consolidated
revenues for the nine months ended July 31, 2008 were $18,092,122 compared
to $18,138,872 for the same period in 2007. Revenues were negatively impacted
by the decline in sales of ephedrine and pseudoephedrine products. The primary
reason for the decline in those sales relates to the disruption in the availability
of ephedrine guaifenesin products in the soft gel form. We are actively working
on developing an alternate means for making this product available. The shortfall
in these products has been offset by significant growth in the balance of
the OTC product line and in the Rx business. Kirk’s four largest customers
represented approximately 67% of the sales for the period. Although we
believe Kirk has good working relationships with each of these customers,
Kirk is working to further relationships with these and other entities in
order to broaden its sales base.
Sales
of products containing pseudoephedrine, ephedrine and/or guaifenesin accounted
for approximately 48% of sales. These products have come under increasing
government regulation due to the concern of these products in the production
of methamphetamine.
Cost
of revenues for the nine-month period ended July 31, 2008 was $11,796,506
compared to $12,479,164 for the nine-month period ended July 31, 2007. The
gross profit percentage for the Company increased to .35% (from 31% for
the prior year) for the period. This increase primarily relates to a shift
in product mix resulting from the increases in sales of Rx products which
have a higher profit margin than some of Company’s non-controlled substance
private label OTC products.
Research
and development expenses for the nine-month period ended July 31, 2008 was
$859,291 compared to $849,563 for the nine-month period ended July 31, 2007.
The research and development expenses are in line with historical norms.
Research and development expense consists of direct costs which include salaries
and related costs of research and development personnel, and the costs of
consultants, materials and supplies associated with research and development
projects, as well as clinical studies. Indirect research and development
costs include facilities, depreciation, and other indirect overhead costs.
Selling,
general, and administrative expenses for the nine-month period ended July
31, 2008 was $8,185,309 as compared to $12,594,400 for the nine-month period
ended July 31, 2007. The operating expenses are in line with historical norms
and also include consulting and compensation expense as discussed in the
accompany notes to the financial statements. In the previous year, there
were significant non-cash consulting expenses.
The
Company’s net loss was $4,676,158 or $0.21 per share for the nine
month period ended July 31, 2008 ($16,630,154 or $0.60 per share for the
nine month period ended July 31, 2007). The significant decline in net loss
is attributable to an improvement in gross profit percentage and the reduction
in general and administrative expenses relating to non-recurrence of significant
expenses incurred in the prior year.
Liquidity and Capital Resources
To date, our operations have not generated sufficient revenues to satisfy our historical capital needs. We have been financed through operations and the sale of our common stock, warrants and debt by means of private placements. We had
24
a
working capital deficit of $7,297,512 at July 31, 2008 as compared with a
working capital deficit of $19,458,269 at October 31, 2007. Cash and cash
equivalents were $426,060 at July 31, 2008, as compared with $0 at October
31, 2007.
Net
cash provided by operating activities during the nine-month period ended
July 31, 2008 was $2,617,121. This resulted from our net loss of $4,676,159
reduced by significant amortization of loan discounts and increases in current
liabilities accounts. We have generally incurred negative cash flows from
operations since inception. We expect the negative cash flow will be reduced
in the future as our short and long term debt obligation as well as and financing
expenses are reduced or eliminated.
Net
cash used in investing activities during the nine-month period ended July
31, 2008 was $586,061. These funds were used for capital expenditures funded
through leasing activities and were substantially offset by a significant
sale of an asset. Net cash used in financing activities during the nine-month
period ended July 31, 2008 was $1,605,000.
We did not engage in any off balance sheet financing during the reporting period.
Our auditors have expressed in their audit report for the year ended October 31, 2007 a qualification as to our ability to continue as a going concern. See Note A of the Notes to the Condensed Consolidated Financial Statements.
All trends, demands, commitments, events and uncertainties resulting in a material increase or decrease in liquidity have been reported. All internal and external sources of liquidity have been identified, and all material commitments of capital expenditures as of the end of the quarter have been identified.
|
I
TEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
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 to us have been made with fixed interest rates, and, accordingly, the market risk to us prior to the maturity of those instruments is minimal.
|
ITE
M 4T.
|
CONTROLS AND PROCEDURES.
|
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including our principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we completed an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures as of July 31, 2008 had deficiencies that caused the Company’s controls and procedures to be ineffective. These deficiencies consisted of inadequate staffing and supervision that could lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely and effective reviews. Management is presently evaluating its options with its auditor
to address these deficiencies. During the period covered by this Quarterly Report on Form 10-Q, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
25
PART II - OTHER INFORMATION
|
I
TEM 1.
|
LEGAL PROCEEDINGS.
|
Bushido Lawsuit
As previously reported, on January 18, 2008, we received a complaint filed by Bushido Capital Master Fund, L.P. and BCMF Trustees, LLC against us 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 us of a Convertible Promissory Note dated October 3, 2005 in the principal amount of $500,000 (the “
Bushido Note
”). On June 6, 2008, we entered into a settlement and general release agreement pursuant to which we 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, we agreed to re-price warrants to acquire 83,333 shares of our common stock issued to
Bushido to $0.75 and extend the expiration date of such warrants to October 3, 2012.
Pamlab Lawsuit
On
December 7, 2007, an action was commenced by Pamlab LLC against our subsidiary
ANDApharm, LLC (“
ANDAPharm
”)
and another two co-defendants in the United States District Court , District
of Colorado. The complaint, as amended, alleged that ANDApharm’s 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 February 11, 2008, ANDAPharm filed its answer denying the claims
being made by plaintiff, challenging plaintiff’s standing to bring the
claim and counterclaiming for declaratory judgment of patent non-infringement
and patent invalidity. On March 14, 2008, ANDAPharm and the co-defendants
filed a motion to stay the proceedings pending the outcome of a separate
litigation challenging the ownership of the patent at issue, which was subsequently
denied by the Court. On June 27, 2008, ANDApharm entered into a settlement
agreement pursuant to which it agreed to immediately cease the manufacture
and sale of ANDApharm’s
Folnate Plus product. The settlement involved no monetary payment by ANDAPharm
and no admission of wrongdoing. We believe that the terms of the settlement
will not have a material effect on our financial condition or operations.
Nostrum Lawsuit
As previously reported, on June 27, 2008, we commenced a lawsuit in the United States District Court for the Southern District of New York against Nirmal Mulye (“
Mulye
”) and Nostrum Pharmaceuticals, Inc. (“
Nostrum
”) (Case No. 08-Civ-5861). On July 31, 2007, the Company, Mulye and Nostrum entered into a global settlement of disputes which
were the subject of four prior contested legal proceedings between the parties. Previously, Nostrum was our largest shareholder and Mulye served as our Chief Scientific Officer and was a member of our Board of Directors.
Pursuant to the terms of the settlement agreement and a related escrow agreement, certain contested intellectual property, products and corporate opportunities allegedly stolen by Mulye and Nostrum were assigned to Mulye and Nostrum, while 10,661,000 shares of our common stock (the “
Escrow
Shares
”), then owned by Nostrum, were placed in escrow to be returned to us subject to the release and discharge of guarantees and a related undertaking given by Mulye and Nostrum securing our credit facility with the Bank of India (the “
BOI Loan
”) by April 30, 2008.
On
April 28, 2008, the guarantees and undertaking given by Nostrum and Mulye
were released and discharged and replaced with a letter of credit issued
by Maneesh
in favor of the Bank of India
securing the BOI Loan. Maneesh is an affiliate of the Company and
three of its designees presently serve on our Board of Directors. In response
to our demand to the escrow agent to release the Escrow Shares to us pursuant
to the terms of the escrow agreement, Nostrum objected to the release of
the Escrow Shares for reasons we believe lack merit, and consequently we
commenced a lawsuit against Nostrum and Mulye seeking declaratory judgment
for the immediate release to us of the Escrow Shares as well as damages for
breach of contract and implied covenant of good faith and dealing.
26
On
August 13, 2008, Nostrum and Mulye filed an answer and counterclaim to our
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, together with the Escrow Shares, will represent 32% of our
outstanding shares on a fully diluted basis. Most recently, on September
5, 2008, Nostrum and Mulye made a motion to the Court to dismiss our breach
of contract and breach of implied covenant of good faith and dealing claims,
and we are in the process of responding to this motion. We intend to vigorously
prosecute this case and believe our claims against Nostrum and Mulye are
meritorious.
Stockbridge
On June 9, 2008, an action was commenced by Stockbridge Capital Investors, Inc. (“
Stockbridge
”) against us in the Superior Court of the State of Arizona in the County of Maricopa. The complaint alleges that we 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, we filed our answer. Based on the allegations in the amended complaint, and our understanding of relevant facts and circumstances, we believe that the claims made by the plaintiff in this lawsuit are without merit and we intend to vigorously defend against them.
We
had no material changes to our risk factors as previously disclosed in our
Form 10-K for the year ended October 31, 2007 filed with the Securities and
Exchange Commission on February 13, 2008.
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
None that were not previously disclosed in Form 8-K filings during the quarter ended July 31, 2008.
|
IT
EM 3.
|
DEFAULTS UPON SENIOR SECURITIES.
|
As
of the date of this filing, we are late in the payment to certain holders
of notes of principal and interest in the amount of $1,347,883, which indebtedness
exceeds 5% of our total assets.
|
I
TEM 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
None.
|
ITEM 5.
|
OTHER INFORMATION.
|
Sale of Series C Preferred Stock
The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 1.01 - Entry into a Material Definitive Agreement” and “Item 3.02-Unregistered Sales of Equity Securities”.
On
September 11, 2008, we sold to Svizera Holdings BV (“
Svizera
”),
a wholly-owned subsidiary of Maneesh, 600 shares of our Series C Convertible
Redeemable Preferred Stock (“
Series
C Preferred Stock
”), together
with detachable warrants (the “
Warrants
”)
to acquire an aggregate of 300,000 shares of our common stock in exchange
for the cancellation of $300,000 of expense reimbursement due to Svizera.
As a result of this sale, Maneesh beneficially owns 28,804,700 shares of
our common stock.
The Series C Preferred Stock is convertible into shares of the Company’s common stock at an initial rate of 1,000 shares of common stock for each share of Series C Preferred Stock subject to adjustment pursuant to the Amended and Restated Certificate of Designations, Preferences and Rights of Series C Convertible Redeemable Preferred Stock and votes on an as-converted basis together with our common stock and any class of preferred stock entitled to vote with our common stock at any annual or special meeting of the Company. 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. The shares of common stock
27
issuable upon exercise of the Warrants will be registrable under the Registration Rights Agreement between the purchasers of Series C Preferred Stock and the Company.
The foregoing description of the transactions described above is qualified in its entirety by the form of transaction documents attached as exhibits hereto.
The securities were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.
THIS QUARTERLY REPORT IS NOT AN OFFER OF SECURITIES FOR SALE. ANY SECURITIES SOLD IN CONNECTION WITH THE SERIES C OFFERING WILL NOT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES UNLESS REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION.
Amended and Restated Series C Certificate of Designations
The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year”
On
September 15, 2008, we filed with the Secretary of State of the State of
Nevada an Amended and Restated Certificate of Designations, Preferences and
Rights of Series C Convertible Redeemable Preferred Stock (the “
Certificate
of Designation
”) to amend the
redemption right of the Series C Preferred Stock so that such right is exercisable
on May 9, 2011 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 Certificate of Designation establishes the rights, preferences, restrictions and other matters relating to 100,000 shares of Series C Preferred Stock.
Pursuant to the Certificate of Designation, the Series C Preferred Stock votes, on an as-converted basis, together with our common stock and any class of preferred stock entitled to vote with our common stock in any annual or special meeting of stockholders. The shares of Series C Preferred Stock are convertible, both at the option of the holder and the Company according to the terms of 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.
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 shall also be entitled to participate on a pro-rata basis in any dividends paid on the Registrant’s 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 the assets of the Registrant, upon the liquidation, dissolution or winding-up of the Registrant or upon an event of bankruptcy of the Registrant.
The foregoing description is a summary and is qualified in its entirety by the Certificate of Designation attached as an exhibit hereto and incorporated by reference herein.
28
|
Exhibits
|
|
|
3.1
|
Amended and Restated Certificate of Designations, Preferences and Rights of Series C Convertible Redeemable Preferred Stock
|
|
10.1
|
Form of Subscription Agreement*
|
|
10.2
|
Form of Registration Rights Agreement*
|
|
10.3
|
Form of Warrant*
|
|
10.4
|
Voting Agreement dated as of May 8, 2008
|
|
10.5
|
Amendment No. 1 to Rights Agreement dated as of May 9, 2008 between Synovics Pharmaceuticals, Inc. and Continental Transfer Company
|
|
31.1
|
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act
|
|
31.2
|
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act
|
|
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
*
|
To be filed by amendment to Current Report on Form 8-K on May 15, 2008 and incorporated by reference herein.
|
29
SYNOVICS PHARMACEUTICALS, INC.
SIGNATURE
Pursuant to the requirements 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.
|
Date: September 15, 2008
|
|
By:
|
/s/ Jyotindra Gange
|
|
|
|
|
|
|
|
|
|
Jyotindra Gange
Principal Executive Officer
|
30
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