|
|
|
Results of Operations for Three Months Ended January 31, 2009
compared to Three Months Ended January 31, 2008
|
Consolidated
revenues for the three months ended January 31, 2009 were $6,836,279 compared
to $4,255,120 for the same period in 2008, an increase of approximately 61%
over the prior fiscal quarter. This increase results from increases in sales
of the Rx product line and the introduction of a new OTC product. Our sales
could be negatively impacted in the future as a result of the rejection of
our application to the DEA for our 2008 and 2009 procurement quota as well
as the related DEA administrative proceeding commenced against us to, among
other things, revoke our DEA license to manufacture and distribute controlled
substances. If we do not prevail in this action, this will have a material
adverse effect on our business, prospects, financial condition and results
of operation. See Part II, Item 1 Legal Proceedings.
During
the three months ended January 31, 2009, sales of products containing ephedrine
and guaifenesin accounted for approximately 27% of sales as compared to
approximately 42% for the same period in 2008.
Our
three largest customers represented approximately 58% of the sales for the
three months ended January 31, 2009. 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 continue to broaden its
sales base.
Cost
of revenues for the three months ended January 31, 2009 was $4,495,019 compared
to $3,262,772 for the three months ended January 31, 2008. This increase is
directly attributable to our increase in sales revenue. Our gross profit
percentage increased to 34% from 23% as a result of increases in sales of our
Rx product line and the introduction of a new OTC product that sell at a higher
margin than our current inventory of products.
Research
and development expenses for the three months ended January 31, 2009 was
$218,035 compared to $290,078 for the three months ended January 31, 2008. The
research and development expenses are in line with our 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 three months ended January 31,
2009 was $2,757,039 as compared to $1,693,210 for the three months ended
January 31, 2008. The increase in selling, general and administrative expenses
is a result of an increase in legal expense as well as non-cash stock based
compensation expense which was not incurred during the same period in 2008.
Interest
expense for the three months ended January 31, 2009 was $467,239 as compared to
$1,235,336 for the three months ended January 31, 2008. The reason for this
reduction is a result of the significant reduction in outstanding debt during
the previous fiscal year.
As
a result of the foregoing, the net loss for the three months ended January 31,
2009 was $1,101,054 or ($0.04) per share, as compared to a net loss of
$2,224,704 or ($0.09) per share for the three months ended January 31, 2008.
Liquidity and Capital Resources
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 $7,345,393 at January 31, 2009 as compared with $6,335,161 at
October 31, 2008. Cash and cash equivalents were $19,618 at January 31, 2009,
as compared with $65,986 at October 31, 2008.
Net
cash provided in operating activities during the three months ended January 31,
2009 was $593,022. This resulted from our net loss of $1,101,054 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 obligations, and financing expenses are reduced or
eliminated.
17
Net
cash used in investing activities during the three month period ended January
31, 2009 was $49,406. These funds were used for capital expenditures funded
through leasing activities. Net cash used in financing activities during the
three month period ended January 31, 2009 was $589,984.
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 for the year ended October 31, 2008.
We
have not entered into any material capital expenditure agreements or engaged in
any off balance sheet financing.
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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.
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|
I
TEM 4T.
|
CONTROLS AND PROCEDURES.
|
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.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting which
occurred during the most recent fiscal quarter covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
18
P
ART II - OTHER INFORMATION
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|
I
TEM 1.
|
LEGAL PROCEEDINGS.
|
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.
Kirks application for a 2009 ephedrine and pseudoephedrine manufacturing
procurement quota also remains pending.
During
February and March 2009 hearings on the merits of the case were held before an
administrative judge and a further hearing has been scheduled for June 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, Kirk 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 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.
Nostrum
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.
19
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.
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, under Nostrums theory, together with the Escrow Shares
will represent 32% of our outstanding shares on a fully diluted basis. Both
parties have filed motions for summary judgment seeking a ruling from the
Judge regarding the return of the Escrow Shares and are awaiting a decision from
the Court. 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.
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 we delivered goods and for which we have not been paid. We are
seeking judgment in the amount of $375,637 plus court costs and pre-judgment
interest. On February 6, 2009, the case was moved by Body Dynamics to the
United States District Court Southern District of Florida and on the same day
Body Dynamics filed its answer to our complaint. Mediation hearings are being
scheduled for April 2009.
We
had no material changes to our risk factors as previously disclosed in its Form
10-K for the year ended October 31, 2008 filed with the Securities and Exchange
Commission on February 5, 2009.
|
|
I
TEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
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 ours, 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 Quarterly Report on Form 10-Q, as if they were issued and outstanding.
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.
|
|
I
TEM 3.
|
DEFAULTS UPON SENIOR SECURITIES.
|
None.
|
|
I
TEM 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
None.
20
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|
I
TEM 5.
|
OTHER INFORMATION.
|
None
21
|
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Exhibits
|
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|
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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
|
22
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.
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|
Date: March 17, 2009
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By:
|
/s/ Jyotindra Gange
|
|
|
|
|
|
|
|
Jyotindra Gange
|
|
|
|
Principal Executive
Officer
|
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23
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