GORX Geopharma (MM)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-16185

 

 

GEOPHARMA, INC.

(Exact name of registrant as specified in its charter)

 

 

 

State of Florida		59-2600232
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

6950 Bryan Dairy Road, Largo, Florida		33777
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (727) 544-8866

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x   Yes     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨   (Do not check if a smaller reporting company)		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):     ¨   Yes     x   No

The number of shares outstanding of the Issuer’s common stock at $.01 par value as of August 10, 2009 was 19,379,194.

 

 

 

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PART I – FINANCIAL INFORMATION

 

Item 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

GEOPHARMA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

as of June 30, and March 31, 2009

 

		June 30, 2009				March 31, 2009
		(unaudited)				(audited)
ASSETS
Current assets:
Cash and cash equivalents		$	74,505			$	90,346
Certificates of deposit			5,419,180				5,377,397
Accounts receivable, net			2,351,022				2,119,279
Accounts receivable, other			26,850				22,055
Inventories, net			5,672,268				6,537,937
Prepaid expenses and other current assets			343,180				421,964
Assets to be disposed of			2,878,421				4,760,100
Total current assets		$	16,765,426			$	19,329,078
Property, plant, leasehold improvements and equipment, net			10,980,702				11,458,195
Goodwill, net			728,896				728,896
Deferred compensation			3,999,722				2,969,412
Intangible assets, net			5,987,073				6,109,812
Deferred tax asset, net			5,254,976				5,254,976
Notes receivable, net			500,000				500,000
Investment in unconsolidated affiliate			1,594,502				1,594,502
Other assets, net			1,091,525				1,091,529
Assets to be disposed of			1,127,148				1,267,722
Total assets		$	48,029,970			$	50,304,122
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	5,326,029			$	5,056,351
Notes payable			5,567,464				5,630,488
Current portion - long-term obligations			1,107,776				2,826,737
Current portion - convertible debt			3,100,000				2,800,000
Accrued expenses related party and other liabilities			6,785,902				4,479,289
Liabilities to be disposed of			6,945,030				7,753,051
Total current liabilities		$	28,832,201			$	28,545,916
Long-term obligations, less current portion			3,385,903				2,193,747
Long-term obligations - convertible debt			11,900,000				12,200,000
Total liabilities		$	44,118,104			$	42,939,663
Commitments and contingencies
Shareholders’ equity:
6% convertible preferred stock, Series B, $.01 par value (5,000 shares authorized, 3,975 shares issued and outstanding; liquidation preference $3,975,000)			40				40
Common stock, $.01 par value; 24,000,000 shares authorized; 19,379,194 and 18,177,500 shares issued and outstanding			193,792				181,775
Treasury stock (65,428 common shares, $.01 par value)			(654	)			(654	)
Additional paid-in capital			67,444,471				66,852,176
Retained earnings (deficit)			(61,010,993	)			(57,147,538	)
Total GeoPharma shareholders’ equity		$	6,626,656			$	9,885,799
Noncontrolling interest			(2,714,790	)			(2,521,340	)
Total equity		$	3,911,866			$	7,364,459
Total liabilities and equity		$	48,029,970			$	50,304,122

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GEOPHARMA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

for the three months ended June 30, 2009 and 2008

(unaudited)

 

		June 30, 2009				June 30, 2008
Revenues:
Manufacturing		$	4,617,527			$	6,283,640
Pharmaceutical			582,506				124,438
Total revenues		$	5,200,033			$	6,408,078
Cost of goods sold:
Manufacturing			3,023,054				4,687,474
Pharmaceutical			868,706				935,829
Total cost of sales		$	3,891,760			$	5,623,303
Gross profit (deficit):
Manufacturing			1,594,473				1,596,166
Pharmaceutical			(286,200	)			(811,391	)
Gross profit (deficit)		$	1,308,273			$	784,775
Operating costs and expenses:
Selling, general and administrative			2,550,480				2,921,205
Depreciation and amortization			457,430				594,658
Stock compensation expense			849,315				306,350
Total operating costs and expenses		$	3,857,225			$	3,822,213
Operating income (loss)		$	(2,548,952	)		$	(3,037,438	)
Other income (expense), net:
Interest income (expense), net			(454,560	)			(378,290	)
Other income (expense), net			12,132				152,568
Total other income (expense), net		$	(442,428	)		$	(225,722	)
Income (loss) from continuing operations before noncontrolling interest and income taxes		$	(2,991,380	)		$	(3,263,160	)
Income tax benefit (expense)			—				634,267
Income (loss) from continuing operations before noncontrolling interest and preferred stock dividends		$	(2,991,380	)		$	(2,628,893	)
Discontinued operations - Distribution:
Revenues – Distribution		$	4,701,029			$	13,617,229
Cost of goods sold – Distribution			4,074,497				10,667,555
Gross Profit – Distribution		$	626,532			$	2,949,674
Selling, general and administrative – Distribution			1,525,568				2,933,908
Other income (expense), net – Distribution			(108,485	)			(229,102	)
Income tax benefit (expense)			—				28,133
Income (loss) from discontinued operations, net of income tax		$	(1,007,521	)		$	(185,203	)
Net income (loss)		$	(3,998,901	)		$	(2,814,096	)
Preferred stock dividends			58,000				149,800
Net income (loss) available to common shareholders		$	(4,056,901	)		$	(2,963,896	)
Less: Net loss attributable to the noncontrolling interest			193,449				197,736
Net income (loss) attributable to GeoPharma, Inc.		$	(3,863,452	)		$	(2,766,160	)
Basic and diluted income (loss) per share from continuing operations		$	(0.15	)		$	(0.18	)
Basic and diluted weighted average number of common shares outstanding			19,230,197				14,692,521
Basic and diluted discontinued operations earnings (loss) per share – Distribution		$	(0.05	)		$	(0.01	)

The accompanying notes are an integral part of these consolidated financial statements.

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GEOPHARMA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		June 30, 2009				June 30, 2008
		(Unaudited)				(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(3,863,452	)		$	(2,616,360	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, leasehold and intangible amortization			761,085				668,102
Income tax expense (benefit)			—				(662,400	)
Amortization of stock deferred compensation			727,440				306,350
Accrued interest income			(41,783	)			(73,092	)
Changes in operating assets and liabilities:
Accounts receivable, net			269,419				1,190,897
Accounts receivable, other			234,047				(20,467	)
Inventories, net			2,045,278				360,362
Prepaid expenses and other current assets			40,855				285,117
Deferred tax asset, net			—				(800	)
Accounts payable			(327,129	)			(2,218,232	)
Accrued expenses and other payables			480,470				(1,006,335	)
Net cash provided by (used in) operating activities		$	326,230			$	(1,736,717	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, leasehold improvements and equipment		$	(20,279	)		$	(139,275	)
Purchase of intangible assets			—				(1,527,838	)
Proceeds (uses) due to noncontrolling interest investment, net			(193,449	)			(197,736	)
Net cash provided by (used in) investing activities		$	(213,728	)		$	(1,864,849	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement – Convertible debt		$	—			$	5,000,000
Proceeds (repayments) from credit line, net			32,000				223,000
Proceeds from vested stock options exercised			—				8,500
Payments for private placement fees			—				(24,603	)
Payments of short-term obligations			(120,597	)			(41,021	)
Payments of long-term obligations			(39,746	)			(84,532	)
Net cash provided by (used in) financing activities		$	(128,343	)		$	5,081,344
Net increase (decrease) in cash		$	(15,841	)		$	1,479,778
Cash at beginning of period			90,346				523,802
Cash at end of period		$	74,505			$	2,003,580
SUPPLEMENTAL INFORMATION:
Cash paid for interest		$	188,905			$	125,805
Cash paid for income taxes		$	—			$	—
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Value of common stock to be issued to pay preferred stock dividends		$	99,375			$	149,800
Value of restricted common stock to be issued for deferred compensation		$	1,757,750			$	2,221,771
Value of common stock to be issued for payment of accrued interest expense		$	450,000			$	865,059
Value of accounts receivable converted to other assets		$	—			$	300,000
Value of common stock issued for payment of consulting fees		$	154,313			$	24,691

See accompanying notes to condensed consolidated financial statements.

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GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instruction to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month periods ended June 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2010. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Form 10-K as of and for the years ended March 31, 2009 and 2008 as filed with the Securities and Exchange Commission on June 30, 2009.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Principles of Consolidation

The condensed consolidated financial statements as of and for the three months ended June 30, 2009 include the accounts of GeoPharma, Inc. (the “Company”), (“GeoPharma”), which is continuing to do manufacturing business as Innovative Health Products, Inc. (“Innovative”), and its wholly-owned subsidiaries IHP Marketing, Inc. (“IHP Marketing”), Breakthrough Engineered Nutrition, Inc. (“Breakthrough”), Breakthrough Marketing, Inc. (“Breakthrough Marketing”), Belcher Pharmaceuticals, Inc. (“Belcher”), Belcher Capital Corporation (“Belcher Capital”), Libi Labs, Inc. (“Libi Labs”) and its 51% owned LLC, American Antibiotics, which is accounted for given the consideration of the 49% minority interest, EZ-Med Company (“EZ-Med”), Dynamic Health Products, Inc. (“BOSS”) and its 40% owned corporation Acellis Biosciences, Inc. (“Acellis”), a Florida corporation. As of March 31, 2009, BOSS and Breakthrough are accounted for as discontinued operations. All transactions relating to significant intercompany balances and transactions have been eliminated in consolidation.

b. Industry Segments

In accordance with the provisions of Statement of Financial Accounting Standards No. 131, (SFAS 131), “Disclosures about Segments of an Enterprise and Related Information”, a company is required to disclose selected financial and other related information about its operating segments. Operating segments are components of an enterprise about which separate financial information is available and is utilized by the chief operating decision maker (“CODM”) related to the allocation of resources and in the resulting assessment of the segment’s overall performance. The measure used by the Company’s CODM is a business segment’s gross profit. As of and for the three months ended June 30, 2009, and as of March 31, 2009, the Company had two continuing industry segments that accompany corporate: manufacturing and pharmaceutical. For the three months ended June 30, 2008, the Company had three industry segments that accompany corporate: manufacturing, distribution and pharmaceutical. Effective March 31, 2009, the Company discontinued its Distribution segment.

Each of the continuing business segments total revenues for the three months ended June 30, 2009 and 2008 are presented on the face of the statements of operations. The $44,024,401 of the continuing business segment total assets as of June 30, 2009 were comprised of $19,116,135 attributable to corporate, $9,351,652 attributable to manufacturing, and $15,556,614 attributable to pharmaceutical. The $44,276,300, of total assets as of March 31, 2009 were comprised of $16,079,021 attributable to corporate, $14,280,086 attributable to manufacturing, and $13,917,193 attributable to pharmaceutical.

c. Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

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d. Certificate of Deposit

Certificate of deposits amounting to $5,419,180 at June 30, 2009 earn interest at a rate of 3.16% per annum, matures on October 8, 2009, and has been assigned as collateral for the $5 million note payable to First Community Bank of America, due on October 6, 2009.

e. Accounts Receivable

Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances.

f. Inventories

Inventories, net, are stated at lower of cost or market. Cost is determined using the first-in, first-out method (“FIFO”).

g. Property, Plant, Leasehold Improvements and Equipment

Depreciation is provided for using the straight-line method, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives (asset categories range from three to thirty-nine years) and is recorded within cost of goods sold for manufacturing and pharmaceutical machinery and equipment with the balance recorded within selling, general and administrative expenses. Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Leased equipment under capital leases is amortized using the straight-line method over the lives of the respective leases or over the service lives of the assets, whichever is shorter, for those leases that substantially transfer ownership. Accelerated depreciation methods are used for tax purposes.

h. Intangible Assets

Intangible assets consist primarily of goodwill, loan costs, customer lists, a distributor agreement and intellectual property (including generic drug ANDAs). Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangibles” (SFAS 142) requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. The Company has selected January 1 as the annual date to test these assets for impairment. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives, and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. The unamortized balance of the intellectual property, including generic drug ANDAs, as of June 30, 2009 and March 31, 2009 was $5,987,073 and $5,224,979, respectively. Based on the required analyses performed as of that annual test date, no impairment loss was required to be recorded for the three months ended June 30, 2009 with an impairment loss of $615,617 required to be recorded for the fiscal year ended March 31, 2009 based on discontinuance of the Distribution segment.

For the three months ended June 30, 2009 and 2008, amortization expense associated with goodwill was $0. The unamortized balance of goodwill at June 30, and March 31, 2009 was $728,896. No impairment loss was required to be recorded for the three months ended June 30, 2009 with an impairment loss of $12,696,597 required to be recorded for the year ended March 31, 2009 as related to the March 31, 2009 discontinuance of the Distribution segment.

i. Impairment of Assets

In accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), the Company’s policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and goodwill when certain events have taken place that indicate the remaining unamortized balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of related undiscounted cash flows. See Note h, Intangible Assets, above for the impairment losses recorded.

j. Income Taxes

The Company utilizes the guidance provided by Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109). Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities.

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k. Earnings (Loss) Per Common Share

Earnings (loss) per share are computed using the basic and diluted calculations on the face of the statement of operations. Basic earnings (loss) per share are calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. The reconciliation between basic and fully diluted shares for the three months ended June 30, 2009 and 2008 are as follows:

 

		For the Three Months Ended
		June 30, 2009				June 30, 2008
		(Unaudited)				(Unaudited)
Net income (loss) per share – basic:
Net income (loss)		$	(3,863,452	)		$	(2,766,160	)
Weighted average shares – basic			19,230,197				14,692,521
Net income (loss) from discontinued operations – basic		$	(0.05	)		$	(0.01	)
Net income (loss) from continuing operations per share – basic		$	(0.15	)		$	(0.18	)
Net income (loss) per share – diluted:
Net income (loss)		$	(3,863,452	)		$	(2,766,160	)
Preferred stock dividends			—				—
		$	(3,863,452	)		$	(2,766,160	)
Weighted average shares – basic			19,230,197				14,692,521
Effect of convertible instruments prior to conversion			—				—
Effect of warrants prior to conversion			—				—
Effect of stock options			—				—
Weighted average shares – diluted			19,230,197				14,692,521
Net income (loss) from discontinued operations		$	(0.05	)		$	(0.01	)
Net income (loss) from continuing operations per share – diluted		$	(0.15	)		$	(0.18	)

For the three months ended June 30, 2009, 4,352,064 shares issuable upon conversion of convertible instruments, warrants on 1,092,560 shares of common stock and 1,856,518 shares issuable upon exercise of stock options were not included in the computation of diluted earnings (loss) per share because their effects were anti-dilutive. For the three months ended June 30, 2008, 4,284,706 shares issuable upon conversion of convertible instruments, warrants on 1,105,923 shares of common stock and 1,866,518 shares issuable upon exercise of stock options were not included in the computation of diluted earnings (loss) per share because their effects were anti-dilutive.

l. Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles, requires management to make estimates, assumptions and apply certain critical accounting policies that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at June 30, 2009 and March 31, 2009, as well as the reported amounts of revenues and expenses for the three months ended June 30, 2009 and 2008. Estimates and assumptions used in our financial statements are based on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions also require the application of certain accounting policies, many of which require estimates and assumptions about future events and their effect on amounts reported in the financial statements and related notes. We periodically review our accounting policies and estimates and make adjustments when facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions. Any differences may have a material impact on our financial condition, results of operations and cash flows.

m. Concentration of Credit Risk

Concentrations of credit risk with respect to trade accounts receivable are customers with balances that exceed 5% of total consolidated trade accounts receivable, net from continuing operations. At June 30, 2009, three customers individually exceeded 5% of our total consolidating accounts receivable, net from continuing operations, Supplement Synergy with 17.4%, Vetquinol with 10.1% and Intelligent Beauty with 7.5% of the total of consolidated trade accounts receivable, net from continuing operations. At March 31, 2009, two customers individually exceeded 5% of our total consolidating accounts receivable, net from continuing operations, Supplement Synergy with 12% and Vetquinol with 11.7% of the total of consolidated trade accounts receivable, net from continuing operations.

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For the three months ended June 30, 2009, six customers individually exceeded 5% of our total consolidated revenues from continuing operations which included Supplement Synergy for 15.9%, Central Coast Nutraceuticals for 13.7%, Vetquinol for 11.2%, Pristine Bay for 9%, Intelligent Beauty for 8% and Sogeval for 5.8%, in relation to total consolidated revenues, and for the three months ended June 30, 2008, one customer individually exceeded 5% of our total consolidated revenues from continuing operations which included Jacks Distribution for 6.3%, in relation to total consolidated revenues from continuing operations.

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The Company has no concentration of customers within specific geographic areas outside the United States that would give rise to significant geographic credit risk.

n. Revenue and Cost of Goods Sold Recognition

In accordance with Staff Accounting Bulletin No. 101 and 103, “Revenue Recognition in Financial Statements”, revenues are recognized by the Company when the merchandise is shipped which is when title and risk of loss has passed to the external customer. The Company analyzes the status of the allowance for uncollectible accounts based on historical experience, customer history and overall credit outstanding.

Cost of goods sold is recognized by the Company simultaneously with the recognition of revenues with a direct charge to cost of goods sold and with an equal reduction to inventory at FIFO cost. Provisions for discounts and sales incentives to customers, and returns and other adjustments are provided for in the period the related sales are recorded. All shipping and handling costs invoiced to customers are included in revenues.

o. Advertising Costs

In accordance with Statement of Position No. 93-7, “Reporting on Advertising Costs” (SOP 93-7), the Company charges advertising costs, including those for catalog sales and direct mail, to expense as incurred. Advertising expenses are included in selling, general and administrative expenses for continuing operations in the statements of operations and were $0 and $1,949 for the three months ended June 30, 2009 and 2008, respectively.

p. Research and Development Costs

Costs incurred to develop our generic pharmaceutical products are expensed as incurred and charged to research and development (“R&D”). R&D expenses for the three months ended June 30, 2009 and 2008 were $116,901 and $650,952 respectively.

q. Fair Value of Financial Instruments

The Company, in estimating its fair value disclosures for financial instruments, uses the following methods and assumptions:

Cash, Accounts Receivable, Accounts Payable and Accrued Expenses: The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to their relatively short maturity.

Short-term and Long-term Obligations: The fair value of the Company’s fixed-rate short-term and long-term obligations are estimated using the discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. At June 30, 2009 and March 31, 2009, the fair value of the Company’s short-term and long-term obligations approximated their carrying value.

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Credit Line Payable: The carrying amount of the Company’s credit line payable approximates fair market value since the interest rate on this instrument corresponds to market interest rates.

r. Reclassifications

Certain reclassifications have been made to the financial statements as of March 31, 2009 and for the three months ended June 30, 2008 to conform to the presentation as of and for the three months ended June 30, 2009.

s. Stock-Based Compensation

Effective April 1, 2006, the Company was required to adopt Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R) which replaces SFAS 123 and SFAS 148, and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). SFAS 123R requires the cost relating to share-based payment transactions in which an entity exchanges its equity instruments for goods and services from either employees or non-employees be recognized in the financial statements as the goods are received or when the services are rendered. That cost will be measured based on the fair value of the equity instrument issued.

SFAS 123R now applies to all of our existing outstanding vested share-based payment stock option awards as well as any and all future awards. We elected to use the modified prospective transition as opposed to the modified retrospective transition method such that financial statements prior to adoption remain unchanged. The Black-Scholes option pricing model was applied to value the Company’s stock option compensation expense as was used by the Company previously in the pro forma disclosures.

NOTE 3 – ACCOUNTS RECEIVABLE, NET

Accounts receivable, net, consist of the following:

 

		June 30, 2009				March 31, 2009
		(Unaudited)
Trade accounts receivable		$	3,107,573			$	2,875,830
Less allowance for uncollectible accounts			(756,551	)			(756,551	)
		$	2,351,022			$	2,119,279

As of June 30, 2009, the total accounts receivable balance of $3,107,572 includes $2,368,776 related to the Company’s manufacturing segment and $738,796 related to the Company’s pharmaceutical segment. As of March 31, 2009, the total accounts receivable balance of $2,875,830 includes $2,202,697 related to the Company’s manufacturing segment and $673,133 related to the Company’s pharmaceutical segment.

As of June 30, and March 31, 2009, the allowance for doubtful accounts balance consisted of the following:

 

		June 30, 2009				March 31, 2009
		(Unaudited)
Beginning balance		$	(756,551	)		$	(756,551	)
Provision for doubtful accounts			( —	)			( —	)
Accounts written off			—				—
Ending balance		$	(756,551	)		$	(756,551	)

The Company recognizes revenues for product sales when title and risk of loss pass to its external customers and analyzes the status of the allowance for uncollectible accounts based on historical experience, customer history and overall credit outstanding.

NOTE 4 – INVENTORIES, NET

Inventories, net, consist of the following:

 

		June 30, 2009				March 31, 2009
		(Unaudited)
Processed raw materials and packaging		$	3,936,602			$	4,771,481
Work in process			694,690				695,101
Finished goods			1,045,975				1,076,355
		$	5,677,268			$	6,542,937
Less reserve for obsolescence			(5,000	)			(5,000	)
		$	5,672,268			$	6,537,937

---

As of June 30, 2009, the total inventory balance of $5,677,268 includes $3,639,647 related to the Company’s manufacturing segment and $2,037,621 related to the Company’s pharmaceutical segment. As of March 31, 2009, the total inventory balance of $6,542,937 includes $4,376,036 related to the Company’s manufacturing segment and $2,166,901 related to the Company’s pharmaceutical segment.

As of June 30, and March 31, 2009, the reserve for obsolete inventory consisted of the following:

 

		June 30, 2009				March 31, 2009
Beginning balance		$	(5,000	)		$	(5,000	)
Provision for doubtful inventory			(—	)			(  —	)
Obsolete inventory written off			—				—
Ending balance		$	(5,000	)		$	(5,000	)

NOTE 5 – DEFERRED COMPENSATION

The deferred compensation of $3,999,722 and $2,969,412 as of June 30 and March 31, 2009, respectively, relates to corporate and is amortized over its three-year life, the length of the common stock restriction. The deferred compensation asset relates to shares of 3-year restricted common stock issued pursuant to the 2005-2009 Compensation Incentive Plan effective beginning with the fiscal year ended March 31, 2006. The Plan documents the incentive plan and related awards for Plan achievements for the Chairman of the Board of Directors and the Company’s executive officers, which include the Chief Executive Officer, the President, the Senior Vice President/Chief Financial Officer and the Vice President/General Counsel as well as shares that are awarded by the Compensation Committee, an independent subcommittee of the Company’s Board of Directors, that are a portion of the Officers’ salaries. The asset award was recorded as of June 30, 2009 based on the number of shares awarded and the fair market value of the restricted stock the date of the award and is amortized over its three-year life, the length of the restriction.

NOTE 6 – INCOME TAXES

Income taxes for the three months ended June 30, 2009 and 2008 differ from the amounts computed by applying the effective income tax rates to income before income taxes as a result of the following:

 

		June 30, 2009				June 30, 2008
		(Unaudited)				(Unaudited)
Computed tax expense (benefit) at the statutory rate (37.63%)		$	(855,095	)		$	(993,000	)
Increase (decrease) in taxes resulting from:
Effect of permanent differences:
Non deductible			171,176				4,300
Other, net			412,948				(9,600	)
Change in valuation allowance			270,971				364,033
Income tax (benefit) expense		$	0			$	(634,267	)
Temporary differences that give rise to deferred tax assets and liabilities are as follows:
Deferred tax assets:
Bad debts		$	284,690			$	65,465
Inventories			1,882				13,134
Accrued vacation			78,271				72,558
Deposits			415,861				127,962
Deferred rent			163,428				163,428
Net operating loss carryforwards			8,230,919				4,937,832
Stock option cancellation and restricted stock			1,229,951				926,846
		$	10,405,002			$	6,307,225
Valuation allowance			(5,482,971	)			(2,498,622	)
Deferred tax asset		$	4,922,031			$	3,808,603
Deferred tax liabilities:
Fixed and intangible asset basis differences		$	332,945			$	(125,226	)
Inventory capitalization			—				—
		$	332,945			$	(125,226	)
Net deferred tax asset (liability) recorded		$	5,254,976			$	3,683,377

---

At June 30, 2009 and 2008, the Company has a net operating loss carryforward of approximately $20,129,265 and $13,682,000, respectively, to offset future taxable income. The tax net operating loss carryforwards begin to expire in 2021.

The Company adopted Financial Standards Board Interpretation No. 48, “Accounting for Income Taxes” (FIN 48). As a result of the adoption of FIN 48, the Company has not recognized a material adjustment in the liability for unrecognized tax benefits and has not recorded any provision for penalties or interest related to uncertain tax positions.

NOTE 7 – DISCONTINUED OPERATIONS

During year ending March 31, 2009, the Company adopted a plan to discontinue the Distribution segment which includes Breakthrough and BOSS. The decision further was to hold BOSS out for sale based on decreasing margins and decreasing sales and existing cash flows thus leading the segment to operate unprofitably. Additionally the Company was unable to secure credit line financing which enabled the Company to operate previously. For the year ended March 31, 2009, included in Discontinued Operations—other income (expense) section, within the Statement of Operations is $13,312,214 representing the amount of an impairment loss on certain assets namely goodwill and intellectual property.

The net liabilities of the discontinued operations of BOSS and Breakthrough as of June 30 and March 31, 2009 are as follows:

 

		June 30, 2009			March 31, 2009
Balance Sheet:
Assets to be disposed of:
Trade accounts receivable, net		$	427,074		$	928,236
Accounts receivable, other, net			272,240			511,082
Inventory, net			1,929,135			3,108,744
Prepaid expenses			249,972			212,038
Total current assets to be disposed of		$	2,878,421		$	4,760,100
Property, plant and equipment, net			599,601			618,534
Other assets			527,547			649,188
Total assets to be disposed of		$	4,005,569		$	6,027,822
Liabilities to be disposed of:
Accounts payable		$	3,147,341		$	3,744,148

---

Credit line payable			2,214,000				2,182,000
Accrued expenses and other liabilities			1,583,689				1,826,903
Total liabilities to be disposed of		$	6,945,030			$	7,753,051
		For the three months ended June 30,
		2009				2008
Income Statement:
Loss from operations of the discontinued component		$	(1,007,521	)		$	(213,336	)
Income tax benefit			—				28,133
Net loss on discontinued operation		$	(1,007,521	)		$	(185,203	)
Net income/(loss)		$	(3,863,452	)		$	(2,766,160	)

NOTE 8 – LITIGATION

On September 29, 2006, Schering Corporation (“Schering”) filed an action in the United States District Court for the District of New Jersey, against Belcher Pharmaceuticals, Inc. and GeoPharma, Inc. (along with nineteen other defendants) alleging that the filing of Belcher Pharmaceuticals’ Abbreviated New Drug Application (“ANDA”) for 5 mg Desloratadine Tablets, AB-rated to Clarinex ^® , infringed U.S. Patent No. 6,100,274 (“the ‘274 patent”) Case No. 3:06-cv-04715-MLC-TJB. On November 8, 2006, Belcher filed a motion to dismiss in the New Jersey case for lack of jurisdiction. On October 5, 2006 Schering filed an action in the United States District Court for the Middle District of Florida, Tampa Division, Case No. 8:06-cv-01843-SCB-EAJ, against Belcher Pharmaceuticals, Inc. and GeoPharma, Inc. alleging that the filing of Belcher Pharmaceuticals’ ANDA for 5 mg Desloratadine Tablets, AB-rated to Clarinex ^® , infringed the ‘274 patent. On February 14, 2008 Belcher and Schering entered into a stipulation to withdraw the motion to dismiss the New Jersey action and to consolidate the New Jersey and Florida actions.

On February 20, 2008, Sepracor Inc. and University of Massachusetts (“Sepracor”) filed an action in the United States District Court for the District of New Jersey, against Belcher Pharmaceuticals, Inc. and GeoPharma, Inc. alleging that the filing of Belcher Pharmaceuticals’ ANDA for 5 mg Desloratadine Tablets, AB-rated to Clarinex ^® , infringed U.S. Patent No. 7,214,683 (“the ‘683 patent”) and U.S. Patent No. 7,214,684 (“the ‘684 patent”) Case No. 3:08-cv-00945-MLC-TJB.

The Company had earlier filed a Paragraph IV certification to, among other, U.S. Patent Nos. 6,100,274, 7,214,683 and 7,214,684, contesting that these patents were either invalid or had not been infringed upon, which resulted in the subsequent litigation by Schering and Sepracor.

On January 15, 2009, the Company and Belcher reached an agreement with Schering and Sepracor settling all Hatch-Waxman litigation relating to Desloratadine tablets (5 mg), with the Company receiving a license under all relevant parents.

Under the terms of the settlement, the Company can commercially launch its generic Desloratadine product, with 6 month marketing co-exclusivity, on July 1, 2012, or earlier in certain circumstances. The new product launch may be a prescription or over-the-counter (OTC) product depending on its status at the time of launch. The Company’s product is pending FDA approval and seeks an AB-rating as equivalent to Schering’s Clarinex ^® tablets indicated for the treatment of seasonal allergic rhinitis and perennial allergic rhinitis.

During September 2006, the Company, through its 51% owned subsidiary, American Antibiotics, LLC, filed in the Circuit Court for Anne Arundel County, Maryland, Case No. C-06-117230, naming defendents Consolidated Pharmaceutical Group (“CPG”), the directors of CPG and two other individuals acting on behalf of CPG (collectively “the Defendents”). The litigation arises from and relates to agreements entered into between American Antibiotics and CPG for the purchase by American Antibiotics all of CPG’s rights, title and interest in various pharmaceutical Abbreviated New Drug Applications (“ANDAs”) and for the Baltimore Maryland facility lease (the “Lease”). The Suit brought by the Company alleges that the Defendents breached the ANDA agreement with certain misrepresentations and by failing to perform all the required improvements and modifications to the Baltimore, Maryland facility. Consolidated with American Antibiotic’s lawsuit is a separate action file against it by CPG, alleging that American Antibiotics has failed to pay rent that is due and owing under the Lease. Both cases have been stayed pending the outcome of settlement discussions, which are ongoing between the parties.

On May 1, 2006 Esther Krausz and Sharei Yeshua (“Note Holders”) filed an action against Dynamic Health Products, Inc. in the Circuit Court of Broward County, Florida (Index No. 06-6187) alleging Dynamic Health Products, Inc. defaulted on note payment obligations. The face amount of the note alleged to be held by Ester Krausz totals $280,000, the face amount of the note alleged to be held by Sharei Yeshua totals $220,000. The notes contain an interest rate of 8% per annum. Preliminary discovery has been conducted. Dynamic Health Products, Inc. filed a third party action against the agent for the Note Holders seeking indemnity and that action was settled in May 2008.

---

have filed a request for trial with the court but no date has been set. Dynamic Health Products, Inc. is investigating whether the purported agent made any payments to the Note Holders on behalf of Dynamic Health Products, Inc. without disclosing those payments. To date, Plaintiffs have not provided copies of the notes to Dynamic Health Products, Inc. or made a specific monetary demand. Dynamic Health Products, Inc. intends to vigorously defend itself in this action.

From time to time the Company is subject to litigation incidental to its business including possible product liability claims. Such claims, if successful, could exceed applicable insurance coverage.

The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of the claims that were outstanding as of June 30, 2009 and March 31, 2009 should have a material adverse impact on its financial condition or results of operations.

NOTE 9 – SUBSEQUENT EVENTS

On July 10, 2009, the Company completed the sale of a substantial portion of the inventory, accounts receivable and other assets (the “Assets”) of the BOSS division of its subsidiary, Dynamic Health Products, Inc. (“BOSS”), to USA Sports, LLC (“USA”).

The total sale price was $2,223,351, subject to a post-Closing adjustment following the reconciliation of certain inventory returns and vendor credits.

At Closing, Wachovia Bank, National Association (“Wachovia”) received a cash payment in the amount of $1,850,000 towards the settlement of BOSS’s outstanding obligations to it. BOSS will continue to pay-down the balance of its obligations to Wachovia through the orderly liquidation of its remaining assets.

Effective August 5, 2009, GeoPharma, Inc. (the “Company”) consummated its previously reported Second Amended and Restated Note Purchase Agreement (the “Second Restated Whitebox Agreement”) with Whitebox Pharmaceutical Growth Fund, Ltd. (“Whitebox”), pursuant to which the Company has issued two Second Amended and Restated 12% Secured Convertible Promissory Notes, one in the principal amount of $5,000,000 and one in the principal amount of $10,000,000 to Whitebox (collectively, the “Second Restated Notes”). The total principal amount due to Whitebox immediately after the closing is the same as the principal amount due to Whitebox immediately prior to the closing. The Second Restated Notes replace and supersede all prior promissory notes issued to Whitebox, and the Second Restated Whitebox Agreement replaces and supersedes all prior note purchase agreements with Whitebox.

Among other things, the Second Restated Whitebox Agreement and Second Restated Notes amend the prior Whitebox agreements and notes as follows:

 

•

The Second Restated Whitebox Agreement removes all financial covenants previously imposed on the Company;

 

•

The Second Restated Whitebox Agreement allows the Company to attempt to arrange a working capital loan secured by the Company’s receivables and inventory, and further provides that if the Company is able to do so, Whitebox will subordinate its existing liens and security interests on the Company’s receivables and inventory on a dollar-for-dollar basis up to $2,000,000, provided that the working capital lender and Whitebox can mutually agree upon the terms of a subordination agreement;

 

•

The Second Restated Whitebox Agreement further provides that for every $1,000,000 of Second Restated Notes that are paid off by the Company or otherwise converted into equity by Whitebox, the Company will be permitted to incur an additional $500,000 of additional working capital;

 

•

The Second Restated Whitebox Agreement allows Whitebox to exchange up to $250,000 of principal of the Second Restated Notes per month into shares of the Company’s common stock based on the closing price of the common stock at such time (the “Debt to Equity Exchange”), and provides that any amounts so exchanged will reduce the amount of the Partial Balloon Payment (as defined below) due by the Company to Whitebox on July 1, 2012 on a dollar-for-dollar basis;

 

•

The Second Restated Whitebox Agreement requires that the Company transfer its real property located at 6950 Bryan Dairy Road, Largo, Florida 33777 to Whitebox by September 1, 2009, and provides that if the Company does so (1) the outstanding principal amount of the $10,000,000 Second Restated Note will be reduced by $2,500,000 and (2) the Company will lease the property back from Whitebox pursuant to a lease to be entered into at such time;

 

•

The Second Restated Notes require that the Company:

 

•

make monthly principal payments of $100,000, collectively, in cash, commencing on January 1, 2010 (and the first day of each month thereafter) until Second Restated Notes are repaid; and

 

•

repay $2,500,000 of principal, collectively (the “Partial Balloon Payment”), in cash, on prior to July 1, 2012, provided that the Partial Balloon Payment will be reduced as a result of any Debt to Equity Exchanges, any principal being converted into equity and any prepayments of principal;

 

•

While the interest rate remains unchanged at 12%, the Second Restated Notes provide that all remaining interest payments due in 2009 will accrete to principal and, commencing January 1, 2010, one-third of the interest will be payable in cash and the remaining two-thirds will be payable, at the option of Whitebox, by accreting such amount to principal or through the payment of shares of common stock based on 95% of the trading price of the stock at such time;

 

•

The Second Restated Notes reduce the conversion price of the notes (i.e., the price at which the notes can be converted into the Company’s common stock) from $4.46 per share to $0.75 per share with respect to the $5,000,000 Second Restated Note and $1.50 per share with respect to the $10,000,000 Second Restated Note; and

 

•

The Second Restated Notes provide that all remaining outstanding principal is due in cash on October 31, 2013.

In connection with the Second Restated Whitebox Agreement, the Company entered into and consummated an agreement with the holders of all of its outstanding 3,975 shares of series B convertible preferred stock (the “Series B Preferred Stock”), pursuant to which such holders agreed to exchange all of such shares into a total of 3,975 shares of series C convertible preferred stock (the “Series C Preferred Stock”), pursuant to a Securities Exchange Agreement dated August 5, 2009 (the “Exchange Agreement”). In connection therewith, on August 5, 2009, the Company filed an amendment to its articles of incorporation with the State of Florida to create the Series C Preferred Stock (the “Certificate of Designation”). Among others, the Series C Preferred Stock differs from the Series B Preferred Stock as follows:

 

•

Immediately prior to the closing of the Exchange Agreement, the Series B Preferred Stock was paying an annual dividend of 14%. The Series C Preferred Stock pays an annual dividend of 10%.

 

•

The Series B Preferred Stock dividend was paid quarterly in shares of common stock if the Company met certain equity conditions at that time, and if the Company did not meet those equity conditions, in cash, unless funds were not legally available to pay such dividend in cash, in which event the holder could elect (i) to waive the equity conditions and take the dividend payment in shares of stock, (ii) allow the dividend accrue to the next quarterly dividend payment or (iii) allow the dividend to be accreted to, and increase, the outstanding stated value of the Series B Preferred Stock. In contrast, the Series C Preferred Stock provides that the quarterly dividends automatically will be accreted to, and increase, the outstanding stated value of the Series C Preferred Stock until such time as the Whitebox Second Restated Notes have been repaid in full, at which time all future dividends are required to be paid in cash provided that funds are legally available for the payment of such dividends (and if funds are not so available, the dividends will again be accreted to, and increase, the outstanding stated value).

 

•

The Series B Preferred Stock was convertible into common stock at any time at the option of the holders of such shares. The Series B Preferred Stock cannot be converted by its holders until the earliest of (i) July 1, 2011, (ii) the date that the principal amount of the Whitebox Restated Notes is less than $5,000,000 and (iii) the trading price of the Company’s common stock is equal to or greater than $2 per share.

 

•

The conversion price for the Series B Preferred Stock was $6 per share of common stock. The conversion price for the Series C Preferred Stock is $1.50 per share of common stock.

 

•

The Series C Preferred Stock requires that the Company redeem $200,000 worth of Series C Preferred Stock, pro rata among all holders of such stock, on a monthly basis commencing immediately after the Whitebox Second Restated Notes have been repaid in full, and further requires the Company to redeem the balance of the Series C Preferred Stock on October 1, 2014. The Series B Preferred Stock contained no such provisions.

The Company believes that issuance of the Second Restated Notes and the shares of common stock issuable thereunder and under the Series C Preferred Stock are exempt pursuant to Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The Company believes that exchange of the Series C Preferred Stock for the previously issued Series B Preferred Stock is exempt pursuant to Sections 3(a)(9) and 18(b)(4)(C) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made only to accredited investors and the transfer of the Second Restated Notes has been restricted in accordance with the requirements of the Securities Act. The Company received written representations from the holders thereof regarding, among other things, their accredited status and investment intent.

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The statements contained in this Report that are not historical are forward-looking statements, including statements regarding the Company’s expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include the Company’s statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking statements included in this Report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. It is important to note that the Company’s actual results could differ materially from those in such forward-looking statements. Additionally, the following discussion and analysis should be read in conjunction with the Financial Statements and notes thereto appearing elsewhere in this Report. The discussion is based upon such financial statements which have been prepared in accordance with U.S. Generally Accepted Accounting Principles and the Standards of the Public Company Accounting Oversight Board (United States).

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We derive our revenues from developing, manufacturing and distributing a wide variety of nutraceuticals and cosmeticeuticals, sports nutrition products, pharmaceutical and generic drugs, and prescription and non-prescription products. We also derive revenues from the distribution of our branded product lines as well as from distributing others’ product lines.

Cost of goods sold is comprised of direct manufacturing and manufacturing and distribution material product costs, direct personnel compensation and other statutory benefits and indirect costs relating to labor to support product manufacture, distribution and the warehousing of production and other manufacturing overhead. In addition, for the distribution segment, the cost of all free goods for the purpose of product introduction or other incentive-based product costs are also recorded.

Research and development expenses that benefit us and that benefit our customers are charged against either cost of goods sold or included within selling, general and administrative expenses as incurred dependent upon whether the R&D relates to direct product materials expended, direct laboratory and manufacturing production costs or whether it relates to indirect or more facility and administrative type costs representing indirect salaries.

Selling, general and administrative expenses include management and general office salaries, taxes and benefits, advertising and promotional expenses, non-manufacturing and non-pharmaceutical equipment and machinery depreciation and amortization, stock

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Interest expense, net, consists of interest expense associated with credit lines, convertible debt, borrowings to finance capital equipment expenditures and other working capital needs and is partially offset by interest income earned on our funds held at banks.

Effective March 31, 2009, we discontinued our distribution segment operations which included Breakthrough Engineered Nutrition and BOSS. For the three months ended June 30, 2009 and 2008, the following amounts, which are included in our consolidated statement of operations as discontinued operations, were attributable to our Distribution segment:

 

•

Distribution segment revenue of approximately $4.7million and $13.6 million, respectively;

 

•

Distribution segment gross profits of approximately $627,900 and $2.95 million, respectively;

 

•

Distribution segment selling, general and administrative expenses of approximately $1.5 million and $2.9 million respectively.

Results of Operations

The table and the comparative analysis below for results of operations of the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, excludes the results of operations of our discontinued operations, the Distribution segment, effective March 31, 2009.

The following table sets forth selected unaudited consolidated statements of operations data as a percentage of revenues for the periods indicated.

 

		Three Months Ended June 30,
		2009			2008
Revenues		100.0	%		100.0	%
Cost of goods sold		74.8	%		87.7	%
Gross profit		25.2	%		12.3	%
Depreciation and amortization		8.8	%		9.3	%
Stock compensation expense		16.3	%		0.5	%
Selling, general and administrative expenses		49	%		45.6	%
Other income (expense), net		(8.5	)%		(3.5	)%
Income (loss) before discontinued operations, minority interest, income taxes, preferred dividends		(57.5	)%		(50.9	)%
Income tax benefit (expense)		—	%		10.1	%
Preferred stock dividends		1.1	%		2.3	%
Noncontrolling interest benefit		3.7	%		3.1	%
Net income (loss) from continuing operations		(54.9	)%		(43.2	)%

Three Months Ended June 30, 2009, Compared to Three Months Ended June 30, 2008

Our analysis of the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, excludes the results of discontinued operations of the Distribution segment, discontinued on March 31, 2009.

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Revenues

Our total revenues decreased approximately $1.2 million, or 18.8%, to approximately $5.2 million for the three months ended June 30, 2009, from approximately $6.4 million for the three months ended June 30, 2008.

Manufacturing revenues decreased approximately $1.7 million, or 27%, to approximately $4.6 million for the three months ended June 30, 2009, as compared to approximately $6.3 million for the three months ended June 30, 2008. During the three months ended June 30, 2009, we experienced a decrease in sales volume driven by the significant weakening of demand for the products that we manufacture for our customers, due to the global economic downturn, which has negatively impacted end user demand for the products we produce in addition to the change in Company policy related to accepting manufacturing orders based on more stringent customer credit policies and related gross profits and margins. Manufacturing capacities and capabilities continue to be increased as we continue to enhance our existing core manufacturing equipment and standard operating procedures. We believe the reduction in demand for the products we produce could continue for some time. Consequently, based on continued economic uncertainty, we believe that it is possible that our manufacturing revenues may decline further in the near future.

Pharmaceutical revenues were approximately $583,000 for the three months ended June 30, 2009 as compared to approximately $124,000 for the previous three month period ended June 30, 2008. Pharmaceutical revenues were comprised of sales of Vetprofen ™ , the Company’s brand of Carprofen, which was approved by the FDA during November 2007. Our Carprofen is sold in three different strengths: 25 mg, 75 mg and 100 mg. Of the total pharmaceutical revenues for the three months ended June 30, 2009, sales were comprised of 493 cases of 25 mg, 502 cases of 75 mg and 250 cases of 100 mg of Carprofen. Of the total pharmaceutical revenues for the three months ended June 30, 2008, sales were comprised of 32 cases of 25 mg, 187 cases of 75 mg and 56 cases of 100 mg of Carprofen

Gross Profit

Our total gross profit increased approximately $515,000 or 65.6%, to approximately $1.3 million for the three months ended June 30, 2009, as compared to approximately $785,000 for the three months ended June 30, 2008. Total gross margins increased to 25.2% for the three months ended June 30, 2009 from 12.2% for the three months ended June 30, 2008.

Manufacturing gross profit remained constant at approximately $1.6 million for both June 30, 2009 and 2008 with manufacturing gross margin increasing to 34.5% for the three months ended June 30, 2009 from 25% for the three months ended June 30, 2008. Gross profit remained constant and gross margin have improved based on a more stringent cost and profitability analysis of possible manufacturing jobs as well as more increased scrutiny on more efficient uses of labor. Tightening overhead costs are in line with our planned improvements surrounding enhanced standard operating and manufacturing procedures in all of our manufacturing plants. We expect that these improvements will continue to increase our visibility in the marketplaces that we compete in for additional business for the upcoming fiscal year.

Pharmaceutical gross profits increased approximately $525,000, or 64.7%, to a gross profit deficit of approximately ($286,000) for the three months ended June 30, 2009, as compared to approximately ($811,000) in gross profit deficit for this business segment for the three months ended June 30, 2008. This was based primarily on the Cephalasporin and Beta-Lactam facilities that have no revenue streams but have costs associated with overall research and product development, and production and laboratory direct labor costs. The Largo, Florida generic drug plant has continued manufacturing and shipping Vetprofen ™ , its branded generic Carprofen, which has assisted in offsetting some of the costs associated with other research and product development, production and laboratory direct costs related to the pharmaceutical segment. The Largo, Florida Cephalasporin and generic drug plants incurred approximately $772,000 of costs with the Baltimore, Maryland Beta-Lactam facility having incurred approximately $96,000 of costs with revenue offsets of approximately $583,000. The drug revenues derived were generated from our generic drug plant in Largo, Florida. We are awaiting FDA facility approval of both the Baltimore, Maryland Beta-Lactam and the Largo, Florida Cephalosporin drug facility plants and we estimate and anticipate that we will begin to derive revenues during the second or third quarter of the fiscal year ending March 31, 2010.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consist of advertising and promotional expenses; stock compensation costs, insurance costs, research and development costs associated with the generic drug segment, personnel costs related to general management functions, finance, accounting and information systems, payroll expenses and sales commissions; professional fees related to legal, audit and tax matters; and non- manufacturing and non-pharmaceutical machinery and equipment depreciation and amortization expenses. Selling, general and administrative expenses, inclusive of stock compensation and depreciation and amortization expenses, increased approximately $35,000, or 1.0%, to approximately $3.9 million for the three months ended June 30, 2009, as compared to approximately $3.8 million for the three months ended June 30, 2008. An increase of approximately $35,000 was due to the increase approximately $543,000 increase in the stock compensation expense directly related to the issuance of 3-year restricted stock awards; all of which were partially offset by a decrease of approximately $89,000 in Accounting and Legal expenses, a decrease of approximately $140,000 in salaries and consulting fees; a decrease of approximately $32,000 in repair and maintenance; a decrease of approximately $49,000 in travel related expenses, a decrease in office expense of $11,000, a decrease in license fees of $42,000 related to Belcher Pharmaceutical manufacturing locations and a decrease in depreciation of $137,000. As a percentage of sales, selling, general and administrative expenses increased to 65.8% for the three months ended June 30, 2009, from 57.1% for the three months ended June 30, 2008.

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Operating Income (Loss)

Operating loss was approximately $2.5 million, or 49% of revenues for the three months ended June 30, 2009, compared to an operating loss of approximately $3.0 million, or 47.4% of revenues for the three months ended June 30, 2008. Although we have instituted cost reduction initiatives, the continued economic uncertainty and potential further decline in our revenues could cause us to operate in an operating loss position in the near future.

Other Income (Expense), Net

Other income (expense), net was approximately $(442,000) for the three months ended June 30, 2009, compared to approximately $(226,000) for the three months ended June 30, 2008. Interest income (expense), net, was approximately $(455,000) for the three months ended June 30, 2009, compared to approximately $(378,000) for the three months ended June 30, 2008. The increase in interest expense was primarily attributable to interest expense associated with our convertible debt in addition to our short-term obligations issued during fiscal 2008, and was partially offset by interest capitalized on our generic pharmaceutical leasehold construction during 2008. For the three months ended June 30, 2009, and 2008 other income (expense), net, of approximately $12,000 and $153,000, primarily consisted of allowances on prior year vendor balances.

Income Tax Benefit (Expense)

For the three months ended June 30, 2009, we had recorded approximately $0 of income tax benefit as compared to approximately $634,000 of income tax benefit for the three months ended June 30, 2008. The change in tax benefit was based on our tax calculation of temporary and permanent differences using the effective tax rates applied to our net loss for the period, changes in information gained related to underlying assumptions about our future operations, as well as the utilization of available operating loss carryforwards. In accordance with SFAS No. 109, “Accounting for Income Taxes,” we have evaluated whether it is more likely than not that the deferred tax asset will be realized.

Inflation and Seasonality

We believe that there was no material effect on our operations or our financial condition as a result of inflation as of and for the three months ended June 30, 2009 and 2008. We also believe that our business is not seasonal, however significant promotional activities can have a direct impact on our sales volume in any given quarter.

Economic and Industry Conditions

We believe the global economy is in recession and we first began to see significant adverse effects of this during our quarter ended December 31, 2008, as there was a significant reduction in end user demand for the products we manufacture and distribute, primarily based on the decline of end user discretionary income available for spending. We believe our financial results for the quarter ended June 30, 2009 reflect the continuation and acceleration of a softening of demand for our products driven by the global economic downturn. We believe the decline in our revenues generally was consistent with the decrease in overall industry demand. We believe that the significant decline in economic and industry conditions has had a negative effect, that we are unable to quantify, on our operations and our financial condition as of and for the three months ended June 30, 2009. There are many factors that make it difficult for us to predict future revenue trends for our business, including the duration of the global economic downturn and quarter to quarter changes in customer orders regardless of industry strength. Should there be a continued material deterioration of economic or industry conditions, our results of operations could further be impacted in any given quarter.

Strategic and Other Activities

To address the impact of the economic downturn on our business, commencing in December 2008, we have taken actions intended to improve and optimize our operating effectiveness and to reduce our costs.

We renegotiated our national freight contract which encompasses freight-in and freight-out at all levels of delivery for each of our segments. We have also reduced annual, merit-based salary increases, and taken other steps to reduce or eliminate certain discretionary expenses, including reducing our workforce. These actions, together with those indicated below, are intended to improve our operating effectiveness during the current economic downturn. We are prepared to take additional actions as needed if this soft economic environment continues or worsens.

For our manufacturing segment, we have shortened work schedules to reduce overtime costs and staggered working hours to more closely match production of our products with demand from our customers. With this approach, we retain the flexibility to ramp our production up or down to meet customer demand while managing our production costs. In addition, we have instituted certain other cost reduction initiatives. Since we believe the skills and expertise of our employees are key to our Company’s success, our initial cost management actions have been directed at minimizing expenses without incurring an extensive workforce reduction, but we are prepared to take more severe actions in the future if appropriate.

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For our distribution segment, we have lowered our prices to be more competitive, yet are not experiencing any decrease in our product costs. We are working on changing vendor imposed purchasing requirements, as well as obtaining additional financing so that we may be able to once again take advantage of discounts related to mass volume purchases, resulting in cost savings. We are also working with our vendors to improve our product mix by obtaining products that are in greater demand by our customers.

During December 2008 and January 2009, we closed two of BOSS’s distribution facilities, the Rhode Island and Texas locations, thereby consolidating distribution facilities, resulting in transparent transition to our customers, as those customers are now being serviced through our Pennsylvania, Nevada and Florida locations. We expect this to result in substantial decreases in SG&A expenses in the foreseeable future, estimated to be in excess of $100,000 per quarter, commencing with our fourth fiscal quarter ended March 31, 2009. Although anticipated, some of the cost savings may not be realized in the near future.

Financial Condition, Liquidity and Capital Resources

We had approximately $75,000 of cash and cash equivalents as of June 30, 2009, a decrease from approximately $90,000 as of March 31, 2009. We had a working capital deficit of approximately $12 million as of June 30, 2009, inclusive of current portion of convertible and other long-term obligations. As of March 31, 2009, we had working capital deficit of approximately $9.2 million, inclusive of current portion of long-term obligations. As of June 30, 2009 and March 31, 2009, our liquidity is affected by our certificates of deposit of approximately $5.4 million for both periods which is included in current assets of which $5 million is pledged as collateral for our short-term obligation to First Community Bank of America.

We have financed our operations and growth primarily through cash flows from operations, borrowing under our revolving credit facility, operating leases, trade payables, the issuance of short-term obligations, and the receipt of $15 million of gross private placement proceeds based on our April 2008 $5 million and our April 2007 $10 million convertible preferred stock private placement together with our March 2004 $5 million convertible preferred stock.

On April 5, 2007, we closed on $12.5 million financing with Whitebox Pharmaceutical Growth Fund, Ltd. (“Whitebox”), comprised of 8%, 6 year Convertible Debt together with $2.5 million of our $0.01 par value common stock together with 400,000 warrants as related to the $2.5 million in common stock. The $10 million of debt is convertible into our common stock at $4.36 with the 400,000 warrants convertible into our common stock at $5.23.

The Company and Whitebox entered into two registration rights agreements dated April 5, 2007, one related to 573,395 shares of common stock of the Company owned by Whitebox and the other related to the shares of common stock of the Company issuable upon conversion, or as payment of interest and principal with regard to, the $10,000,000 8% Secured Convertible Promissory Note dated April 5, 2007. In compliance with the foregoing, the Company filed a registration statement (file no. 333-142369) with the Securities and Exchange Commission (the “SEC”) and caused it to become effective on December 7, 2007, pursuant to which the Company registered 1,931,395 shares, consisting of the 573,395 shares owned by Whitebox, up to 1,214,597 shares issuable upon the conversion of the note, up to 143,403 shares issuable upon the exercise of warrants owned by Rodman & Renshaw.

On April 24, 2008, the Company and Whitebox Pharmaceutical Growth Fund, Ltd. (“Whitebox”) entered into an Amended and Restated Note Purchase Agreement (the “Restated Note Purchase Agreement”), Amended and Restated Convertible Promissory Note (the “Restated Note”), and Amended and Restated Registration Rights Agreement (the “Restated Registration Rights Agreement” and collectively with the “Restated Note Purchase Agreement and “Restated Note,” the “Restated Agreements”), all of which collectively serve to amend and restate the Original Note, Original Note Purchase Agreement and the Original Registration Rights Agreements. The material amendments contained in the Restated Agreements include the following:

 

•

The Additional Notes contemplated by the Original Note Purchase Agreement have been eliminated and replaced by adding the principal amount of the Additional Notes ($5,000,000) to the Restated Note, thus increasing the total principal amount of the Restated Note to $15,000,000.

 

•

The terms and conditions necessary to satisfy the issuance of the Subsequent Notes contemplated by the Original Note Purchase Agreement have been modified so that Whitebox is now required to make such loan upon the Company’s acquisition of the real estate related to its Beta-Lactam facility (which it currently leases) in Baltimore, Maryland and the satisfaction or waiver of certain other closing conditions related thereto.

 

•

All interest that had accrued on the Original Note from its original issue date (April 5, 2007) through April 24, 2008, in the amount of $865,058, has been converted by Whitebox into a total of 389,666 shares of the Company’s Common Stock in full satisfaction of such accrued interest.

 

•

The interest rate on the Restated Note from and after April 24, 2008 has been increased to 12%, but all of such interest may now be paid, at the option of the Company in shares of common stock of the Company valued at 95% of the volume weighted average market price of the shares during the 5 trading days immediately preceding the payment of interest, provided that certain “Equity Conditions” (as defined in the Restated Note) have been satisfied. If the Company does not meet the Equity Conditions, and if funds are legally available for the payment of interest, then the Company must pay such interest in cash.

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•

All requirements that the Company meet certain minimum EBITDA targets have been deleted and replaced by a requirement that the Company’s Current Assets (defined as the sum of (w) 100% of the Company’s cash, plus (x) 100% of the Company’s net accounts receivables plus (y) 50% of the Company’s net inventory plus (z) 30% of the Company’s net property, plant and equipment) exceeds the Company’s Total Debt (defined as indebtedness of the Company and its subsidiaries (x) to Whitebox, (y) under the $4,000,000 revolving promissory note with Wachovia Bank, National Association and (z) under the $5,000,000 promissory note with First Community Bank of America.) If the Company fails to satisfy the foregoing Current Assets Test as of the required date for filing any Form 10-K or Form 10-Q, as applicable (the “Current Assets Test Measurement Date”), Whitebox may require the Company to redeem up to $2,000,000 of the principal amount of the Restated Note as of such Current Assets Test Measurement Date. In addition, if the Company’s Total Debt exceeds the Company’s Current Assets by more than $2,000,000 as of the Current Assets Test Measurement Date, such shortfall will constitute an Event of Default under the Restated Note, in which case the entire outstanding principal amount (including any Accreted Principal or Make-Whole Amounts (as defined by the Restated Note)) under the Restated Note will be due and payable on the 30 th day after the occurrence of such default if the Company is unable to cure such default within such thirty (30) day period. The Company is in default of the Current Asset Test requirement as of December 31, 2008.

 

•

The provision of the Original Note Purchase Agreement that allowed Whitebox to put 1/10th of the outstanding principal amount of the Original Note (including any accreted interest) to the Company at par if (A) the sum of the Company’s (i) net accounts receivable, plus (ii) cash and cash equivalents, plus (iii) marketable securities at the end of any quarterly period were less than $7,000,000, or (B) the Company’s revenues were less than $5,000,000 for the most recently reported quarterly period, has been deleted.

 

•

The Company agreed to register all of the shares issuable pursuant to the Restated Note (whether as a result of a conversion or otherwise) to the extent permitted by the SEC in accordance with its rules and regulations.

 

•

The Company paid to Whitebox a $1,400,000 financing fee in cash.

The offering and sale of the Restated Note (as well as the Original Note and the shares issuable to Whitebox pursuant thereto) were deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offering and sale were made only to one accredited investor, and transfer of the securities has been restricted in accordance with the requirements of the Securities Act of 1933. The Company received written representations from Whitebox regarding, among other things, its accredited-investor status and investment intent.

The Company has received notices from Whitebox alleging two separate defaults under the Restated Note.

The first default letter, dated November 25, 2008, relates to an alleged failure by the Company to use its commercially reasonable efforts to obtain a second priority lien on the assets owned by BOSS, which the Company cannot do without the prior written consent of Wachovia Bank, National Association (“Wachovia”). Wachovia is the primary lender to BOSS. The Company’s obligations to Wachovia matured on December 31, 2008 and are currently in default. Whitebox also takes the position in this letter that as a result of the forgoing alleged default, the Restated Note has been incurring default interest at a rate of 18% since September 20, 2008. Whitebox has since agreed to the interest rate remaining at 12% until March 1, 2009.

The second Whitebox default letter, dated December 5, 2008, relates to an alleged failure by the Company to redeem $2,000,000 of the Restated Note as a result of the Company’s alleged failure to satisfy the Current Asset Test as of September 30, 2008. The Note Purchase Agreement provides that if the Company’s Total Debt exceeds its Current Equity at the end of any fiscal quarter, Whitebox may require the Company to redeem up to $2,000,000 of the principal amount of the Restated Note.

Whitebox could seek repayment, but has given no indication of doing so. The Company is actively involved in negotiations with Whitebox to reach a mutually acceptable arrangement to restructure the financing. There can be no assurance that the Company and Whitebox will reach a mutually acceptable arrangement. If repayment is required, the Company would not have sufficient funds and Whitebox could take legal action to recover amounts due from our assets. Meanwhile, the Company will continue to attempt to reduce expenses and to explore alternate financing arrangements with other potential lenders to refinance all of the Company’s facilities. Again, there can be no assurance that the Company will be able to obtain additional or alternative financing on terms acceptable to it or at all, particularly in light of the current economic and financial market environment, in which event the Company will need to consider all available alternatives.

On October 12, 2007, BOSS issued a revolving Promissory Note (“Note”) to Wachovia, in the amount of $4 million or such sum as may be advanced and outstanding from time to time, pursuant to the Loan Agreement. Interest shall accrue on the unpaid principal balance and varies based on the LIBOR Market Index Rate plus 1.75%, for any day. The note is due and payable in consecutive monthly payments of accrued interest only, commencing on November 20, 2007, and continuing on the same day of each month thereafter until fully paid. In any event, all principal and accrued interest shall be due and payable on August 31, 2008. On March 28, 2008, the Company entered into loan modification agreements with Wachovia, whereby the amount of the October 12, 2007 revolving Note to Wachovia was reduced from $4 million to $2.5 million, or such sum as may be advanced and outstanding from time to time, and $750,000 of the principal balance of the revolving Note was converted to a term Promissory Note (“Term Note”), both maturing on August 31, 2008. In addition, the rate of interest was modified whereby interest shall accrue on the unpaid principal balance and varies based on the LIBOR Market Index Rate plus 3.15%, for

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any day. Certain terms of the loan were modified including the financial covenant in regards to the liquidity ratio. The Term Note is due and payable in consecutive monthly payments of principal equal to $50,000 plus accrued interest, commencing on May 1, 2008 and continuing on the same day of each month thereafter until fully paid. On April 25, 2008, we entered into a Modification Number 001 To Loan Agreement and a Modification Number 001 To Promissory Note with Wachovia, whereby certain terms of the loan were modified, including the financial covenant in regards to liquidity ratio.

On August 28, 2008, we entered into an Allonge to Promissory Note with Wachovia, with respect to the $2.5 million revolving Note, whereby the rate of interest was modified so that interest shall accrue on the unpaid principal balance and varies based on the Prime Rate plus 2%. “Prime Rate” shall mean the floating annual rate of interest that is designated from time to time by Wachovia as the “Prime Rate” and is used by Wachovia as a reference based with respect to interest rates charged to borrowers.

In addition, on August 28, 2008, we entered into an Allonge to Promissory Note with Wachovia, with respect to the $750,000 Term Note, whereby the rate of interest was modified so that interest shall accrue on the unpaid principal balance and varies based on the Prime Rate plus 2%. “Prime Rate” shall mean the floating annual rate of interest that is designated from time to time by Wachovia as the “Prime Rate” and is used by Wachovia as a reference based with respect to interest rates charged to borrowers.

The Company is in default on its outstanding obligations to Wachovia under the revolving Note and the Term Note (see Note 8 and Note 9). The notes have not been satisfied since their maturity on December 31, 2008. On January 28, 2009, a Judgment By Confession was entered in favor of Wachovia and against the Company, to compel the Company to satisfy its obligations to Wachovia under the notes, in the amount of $2,753,361, including principal and unpaid interest as of January 21, 2009, damages, costs and attorneys’ fees. The Company is seeking to refinance these obligations with other potential lenders, however there can be no assurance that the Company will be able to obtain alternative financing on terms acceptable to it or at all, particularly in light of the current economic and financial market environment, in which event the Company will need to consider all available alternatives.

On April 6, 2008, we entered into a Change In Terms Agreement with First Community Bank of America (“FCB”), whereby the $3,500,000 promissory note issued to FCB on October 1, 2007 was modified and consolidated with the $500,000 promissory note issued to FCB on December 20, 2007 and the $1,000,000 promissory note issued to FCB on January 18, 2008. In accordance with the modified terms, interest on the note is payable monthly in arrears, commencing May 6, 2008, at the rate of 5.15% per annum, with the entire principal payment of $5,000,000 plus interest being due on October 6, 2008. In connection with the promissory note, we assigned, as collateral security for the note, a certificate of deposit account with FCB in the approximate balance of $6 million as of March 31, 2008, including interest thereon. On October 6, 2008, the Company entered into a Change In Terms Agreement with FCB, whereby the terms of the promissory note were modified so that interest on the note is payable monthly in arrears, commencing November 6, 2008, at the rate of 5.21% per annum, with the entire principal payment of $5,000,000 plus interest being due on October 6, 2009.

On June 18, 2008, the Compensation Committee of the Company’s Board of Directors, with the approval of the Company’s Board of Directors, awarded the Company’s management a total of 1,532,256 shares of 3-year restricted Company common stock pursuant to the 2005-2008 Compensation Incentive Plan. As a result, the Company recorded a deferred compensation asset of approximately $2,221,771, which is being amortized over 36 months to stock compensation expense within selling, general and administrative expenses on the Company’s statements of operations.

In September 2008, Jugal Taneja, the Company’s Chairman of the Board of Directors, loaned the Company $150,000. Interest on the note is at the rate of 7% per annum. The balance of the note, together with accrued interest, is due and payable on or before March 31, 2010. Proceeds were used for working capital.

On September 30, 2008, the Company issued an $800,000 promissory note to First Community Bank of America. The note is payable in six consecutive monthly payments of accrued interest only, commencing on October 30, 2008, and 54 monthly consecutive principal and interest payments of approximately $17,166, commencing April 30, 2009, at the rate of 6.5% per annum. In any event, all principal and accrued interest shall be due and payable on September 30, 2013. The note is secured by equipment as described in a Commercial Security Agreement issued to FCB on September 30, 2008. In addition, Jugal Taneja, the Company’s Chairman of the Board of Directors, assigned, as collateral security for the note, his certificate of deposit account with FCB in the amount of $400,000. Proceeds of the note were used for the purchase of equipment. Future advances under the note are to be used for equipment purchases. The principal balance of the note was $737,824 at June 30, 2009.

On December 8, 2008, a holder of 1,025 shares of Company 6% convertible preferred stock, Series B, $.01 par value, converted such shares into 235,092 shares of Company common stock, at a set conversion price of $4.36 per common share. The closing price of the Company’s common stock was $.40 at the close of business for the Nasdaq Capital Market on December 5, 2008.

On June 25, 2009 the Compensation Committee awarded the company’s management and directors as a portion of its compensation for the fiscal year ending March 31, 2010, 2,225,000 shares with a fair market value of $1,757,750 based on the closing price on Nasdaq on the date of grant. The Company has not issued those shares as of June 30, 2009 and therefore have recorded a liability for the same amount.

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THREE MONTH ENDED JUNE 30, 2009 CASH FLOW ANALYSIS

The following table summarizes our cash flows from operating, investing and financing activities for each of the three months ended June 30, 2009 and 2008:

 

Three Months Ended June 30,		2009				2008
Total cash provided by (used in):
Operating activities		$	326,230			$	(1,736,717	)
Investing activities		$	(213,728	)		$	(1,864,849	)
Financing activities		$	(128,343	)		$	5,081,344
Increase (decrease) in cash and cash equivalents		$	(15,841	)		$	1,479,778

Operating Activities

Net cash provided in operating activities was approximately $326,000 for the three months ended June 30, 2009, as compared to net cash used in operating activities of approximately $1.7 million for the three months ended June 30, 2008.

We incurred a net loss before preferred stock dividends of approximately $3.8 million for the three months ended June 30, 2009, compared to a net loss before preferred stock dividends of approximately $2.6 million for the nine months ended June 30, 2008. The changes in operating assets and liabilities were due primarily to the decrease in accounts receivable, inventories, prepaid expenses and other current assets, and an increase in accrued expenses and other payables, all of which were partially offset by an decrease in accounts payable. The decrease in accounts receivable was primarily due to a decrease in credit sales and our increased collection efforts. Inventories decreased primarily due to changes in our product mix and our efforts to improve our levels of inventory on hand. The decrease in prepaid expenses and other current assets was primarily due to the timing of insurance policy renewals. The increase in accrued expenses and other payables resulted from the timing of vendor payments. The decrease in accounts payable resulted primarily from the timing of vendor payments.

Investing Activities

Net cash used in investing activities was approximately $214,000 for the three months ended June 30, 2009, as compared to net cash used of approximately $1.9 million for the three months ended June 30, 2008. The change in the three months ended June 30, 2009 was due primarily to leasehold improvement purchases and usage related to the minority interest associated with American Antibiotics plant in Baltimore, Maryland.

Financing Activities

Net cash used by financing activities was approximately $128,000 for the three months ended June 30, 2009, as compared to net cash provided by financing activities of approximately $5.1 million for the three months ended June 30, 2008. The change in the three months ended June 30, 2009 was primarily attributable to payments of short-term obligations.

In light of curing our default on our obligations with Wachovia and Whitebox, we believe that cash expected to be generated from operations, current cash reserves, and existing financial arrangements is not sufficient to meet our capital expenditures and working capital needs for our operations as presently conducted. Our future liquidity and cash requirements will depend on a wide range of factors, including the level of business in existing operations, expansion of facilities, expected results from recent procedural changes surrounding the acceptance of manufacturing sales orders, and possible acquisitions. In particular, we have added additional manufacturing lines and have purchased additional fully automated manufacturing equipment to meet our present and future growth. Our plans may require the leasing of additional facilities and/or the leasing or purchase of additional equipment in the future to accommodate further expansion of our manufacturing, warehousing and related storage needs.

If we are unable to achieve consistent profitability, additional steps will have to be taken in order to maintain liquidity, including plant consolidations and additional work force reductions (see Strategic and Other Activities above). Instability in the financial markets, as a result of a recession or other factors, also may affect the cost of capital and our ability to raise capital. We are already experiencing the impact of both. The uncertainty in the capital and credit markets may hinder our ability to generate additional financing in the type or amount necessary to pursue our objectives.

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Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are not exposed to significant interest rate or foreign currency exchange rate risk.

 

Item 4.

CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

Our principal executive and principal financial officers have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report. They have concluded that, based on such evaluation, our disclosure controls and procedures were effective as of June 30, 2009, as further described below.

Management’s Quarterly Report on Internal Control Over Financial Reporting

Overview

Internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our board of directors, management and other personnel, 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. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management has used the framework set forth in the report entitled “Internal Control — Integrated Framework” published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of June 30, 2009.

Management’s Assessment

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives and we are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management evaluated, under the supervision and with the participation of our CEO and our CFO, the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2009.

Based upon this evaluation, our CEO and CFO have concluded that our current disclosure controls and procedures are effective to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and accumulated and communicated to our senior management, including our CEO and CFO, to allow timely decisions regarding required disclosures. This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s 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 management’s report in this Quarterly Report.

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PART II—OTHER INFORMATION

 

Item 1.

LEGAL PROCEEDINGS.

On September 29, 2006, Schering Corporation (“Schering”) filed an action in the United States District Court for the District of New Jersey, against Belcher Pharmaceuticals, Inc. and GeoPharma, Inc. (along with nineteen other defendants) alleging that the filing of Belcher Pharmaceuticals’ Abbreviated New Drug Application (“ANDA”) for 5 mg Desloratadine Tablets, AB-rated to Clarinex ^® , infringed U.S. Patent No. 6,100,274 (“the ‘274 patent”) Case No. 3:06-cv-04715-MLC-TJB. On November 8, 2006, Belcher filed a motion to dismiss in the New Jersey case for lack of jurisdiction. On October 5, 2006 Schering filed an action in the United States District Court for the Middle District of Florida, Tampa Division, Case No. 8:06-cv-01843-SCB-EAJ, against Belcher Pharmaceuticals, Inc. and GeoPharma, Inc. alleging that the filing of Belcher Pharmaceuticals’ ANDA for 5 mg Desloratadine Tablets, AB-rated to Clarinex ^® , infringed the ‘274 patent. On February 14, 2008 Belcher and Schering entered into a stipulation to withdraw the motion to dismiss the New Jersey action and to consolidate the New Jersey and Florida actions.

On February 20, 2008, Sepracor Inc. and University of Massachusetts (“Sepracor”) filed an action in the United States District Court for the District of New Jersey, against Belcher Pharmaceuticals, Inc. and GeoPharma, Inc. alleging that the filing of Belcher Pharmaceuticals’ ANDA for 5 mg Desloratadine Tablets, AB-rated to Clarinex ^® , infringed U.S. Patent No. 7,214,683 (“the ‘683 patent”) and U.S. Patent No. 7,214,684 (“the ‘684 patent”) Case No. 3:08-cv-00945-MLC-TJB.

The Company had earlier filed a Paragraph IV certification to, among other, U.S. Patent Nos. 6,100,274, 7,214,683 and 7,214,684, contesting that these patents were either invalid or had not been infringed upon, which resulted in the subsequent litigation by Schering and Sepracor.

On January 15, 2009, the Company and Belcher reached an agreement with Schering and Sepracor settling all Hatch-Waxman litigation relating to Desloratadine tablets (5 mg), with the Company receiving a license under all relevant parents.

Under the terms of the settlement, the Company can commercially launch its generic Desloratadine product, with 6 month marketing co-exclusivity, on July 1, 2012, or earlier in certain circumstances. The new product launch may be a prescription or over-the-counter (OTC) product depending on its status at the time of launch. The Company’s product is pending FDA approval and seeks an AB-rating as equivalent to Schering’s Clarinex ^® tablets indicated for the treatment of seasonal allergic rhinitis and perennial allergic rhinitis.

During September 2006, the Company, through its 51% owned subsidiary, American Antibiotics, LLC, filed in the Circuit Court for Anne Arundel County, Maryland, Case No. C-06-117230, naming defendents Consolidated Pharmaceutical Group (“CPG”), the directors of CPG and two other individuals acting on behalf of CPG (collectively “the Defendents”). The litigation arises from and relates to agreements entered into between American Antibiotics and CPG for the purchase by American Antibiotics all of CPG’s rights, title and interest in various pharmaceutical Abbreviated New Drug Applications (“ANDAs”) and for the Baltimore Maryland facility lease (the “Lease”). The Suit brought by the Company alleges that the Defendents breached the ANDA agreement with certain misrepresentations and by failing to perform all the required improvements and modifications to the Baltimore, Maryland facility. Consolidated with American Antibiotic’s lawsuit is a separate action file against it by CPG, alleging that American Antibiotics has failed to pay rent that is due and owing under the Lease. Both cases have been stayed pending the outcome of settlement discussions, which are ongoing between the parties.

On May 1, 2006 Esther Krausz and Sharei Yeshua (“Note Holders”) filed an action against Dynamic Health Products, Inc. in the Circuit Court of Broward County, Florida (Index No. 06-6187) alleging Dynamic Health Products, Inc. defaulted on note payment obligations. The face amount of the note alleged to be held by Ester Krausz totals $280,000, the face amount of the note alleged to be held by Sharei Yeshua totals $220,000. The notes contain an interest rate of 8% per annum. Preliminary discovery has been conducted. Dynamic Health Products, Inc. filed a third party action against the agent for the Note Holders seeking indemnity and that action was settled in May 2008. The Note Holders have filed a request for trial with the court but no date has been set. Dynamic Health Products, Inc. is investigating whether the purported agent made any payments to the Note Holders on behalf of Dynamic Health Products, Inc. without disclosing those payments. To date, Plaintiffs have not provided copies of the notes to Dynamic Health Products, Inc. or made a specific monetary demand. Dynamic Health Products, Inc. intends to vigorously defend itself in this action.

From time to time the Company is subject to litigation incidental to its business including possible product liability claims. Such claims, if successful, could exceed applicable insurance coverage.

The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of the claims that were outstanding as of June 30, 2009 and March 31, 2009 should have a material adverse impact on its financial condition or results of operations.

 

Item 1A.

RISK FACTORS.

In addition to other information set forth in this Report, you should carefully consider the risk factors previously disclosed in “Item 1A. to Part I” of our Annual Report on Form 10-K for the year ended March 31, 2009. We do not believe there have been any material changes in our risk factors since the filing of our Annual Report on Form 10-K for the year ended March 31, 2009 other than additional risks related to

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worldwide economic and industry conditions. However, we may update our risk factors in our SEC filings from time to time for clarification purposes or to include additional information, at management’s discretion, even when there have been no material changes. The following risk factor is being added to provide additional information.

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The Demand for Our Products and Our Business May be Adversely Affected by Worldwide Economic and Industry Conditions: Our business is affected by economic and industry conditions and our revenues are dependent upon demand for our products. Demand, in turn, is impacted by industry cycles and the availability of end user discretionary income, both of which can dramatically affect our business. These cycles may be characterized by decreases in product demand, excess customer inventories, and accelerated erosion of prices. The global economy is currently in recession and we first began to see adverse effects of this in our fiscal quarter ended December 31, 2008, as the reduction in end user demand for our products caused a reduction in demand for our products by our customers. We believe the further weakening of the U.S. and global economy and the continued stress in the financial markets has deepened the current economic downturn and caused a significant decrease in demand for our products during the fiscal quarter ended June 30, 2009, as our revenues decreased over 18% from the June 2008 fiscal quarter.

If global economic conditions remain uncertain or deteriorate further, we may experience additional material adverse effects on our future revenues, cash flows and financial position. A prolonged global recession may have other adverse effects on us, such as:

 

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The ability of our customers to pay their obligations to us may be adversely affected, which could cause a negative impact on our cash flows and our results of operations;

 

•

The carrying value of our goodwill and other intangible assets may decline in value, which could harm our financial position and results of operations;

 

•

Our suppliers may not be able to fulfill their obligations to us, which could harm our manufacturing process and our business; and

 

•

The uncertainty in the capital and credit markets may hinder our ability to generate additional financing in the type or amount necessary to meet our obligations or pursue our objectives.

 

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

 

Item 3.

DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

 

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable

 

Item 5.

OTHER INFORMATION.

 

(a)

Not applicable.

 

(b)

None.

 

Item 6.

EXHIBITS

Exhibits

The following Exhibits are filed as part of this Report:

 

31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		GeoPharma, Inc.
Date: August 14, 2009		By:		/s/ Mihir K. Taneja
				Mihir K. Taneja
				Chief Executive Officer, Secretary and Director
				(Principal Executive Officer)
Date: August 14, 2009		By:		/s/ Carol Dore-Falcone
				Carol Dore-Falcone
				Senior Vice President, Chief Financial Officer and Director
				(Principal Financial and Accounting Officer)