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| SNVHE.OB > SEC Filings for SNVHE.OB > Form 10QSB on 18-May-2007 | All Recent SEC Filings |
18-May-2007
Quarterly Report
All references in this Quarterly Report on Form 10-QSB to "we," "our," "us," or the "Company," or words of similar import, mean Synova Healthcare Group, Inc., a Nevada corporation, and our two consolidated Delaware subsidiaries, Synova Healthcare, Inc., which is wholly owned by Synova Healthcare Group, Inc., and Synova Pre-Natal Healthcare, Inc., which is wholly owned by Synova Healthcare, Inc. In addition, on and after January 12, 2007, such references also include Allendale Pharmaceuticals, Inc., a Delaware corporation, and its three consolidated subsidiaries, which we acquired through our merger with Allendale on January 12, 2007.
Forward-Looking Information
Except for the historical information presented herein, the matters discussed in this Quarterly Report contain "forward-looking statements" that relate to future events or future financial performance. These statements can be identified by the use of forward-looking terminology such as "believes," "plans," "intends," "scheduled," "will," "future," "potential," "continue," "estimates," "hopes," "goal," "objective," "expects," "may," "should," "could" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We caution you that no statements contained in this Quarterly Report should be construed as a guarantee or assurance of future performance or results. These forward-looking statements involve risks and uncertainties, including those discussed in this section and elsewhere throughout this Quarterly Report, as well as the risks and uncertainties described in our Annual Report on Form 10-KSB for the year ended December 31, 2006, as filed with the SEC on February 26, 2007 (the "Annual Report"), and in our Registration Statement on Form SB-2 (File No. 333-140889), as declared effective by the Securities and Exchange Commission on April 17, 2007 (the "Registration Statement"). The actual results that we achieve may differ materially from any forward-looking statements due to the effect of such risks and uncertainties. These forward-looking statements are based on current expectations, and, except as required by law, we assume no obligation to update this information whether as a result of new information, future events or otherwise. Readers are urged to carefully review and consider the various disclosures made by us in this Quarterly Report, the Annual Report, the Registration Statement, and our other reports filed with the Securities and Exchange Commission, that attempt to advise interested parties of the risks that may affect our business, financial condition and results of operations.
History and Background
We were formed as a Nevada corporation on September 1, 1998 under the name Centaur Capital Group, Inc. Our initial business strategy was to use human genetics in order to discover novel pharmaceuticals, but this business never developed and was abandoned in 2001. We changed our name numerous times since our original formation, but as of December 31, 2004, our name was Advanced Global Industries Corporation. We were a development stage company with no active business from the time of our original formation until our acquisition by Synova Healthcare, Inc., the entity that, prior to this acquisition, operated our non-invasive diagnostic healthcare products business.
In December 2004, we entered into a letter of intent to merge with Synova Healthcare, Inc. In connection with the merger, on January 12, 2005, we changed our name to Synova Healthcare Group, Inc. On February 10, 2005, our wholly owned subsidiary, Synova AGBL Merger Sub, Inc., a Delaware corporation, merged with Synova Healthcare, Inc., with Synova Healthcare, Inc. surviving the merger. As a result of the merger, Synova Healthcare, Inc. became our wholly owned operating subsidiary.
Following this merger, we began to concentrate our efforts on developing and growing our business and line of women's healthcare products. Historically, however, our revenues from operations have not been sufficient to meet our capital and cash flow needs. To date, we have obtained the necessary funds to develop, operate and grow our business primarily through the sale of our equity and debt securities. During 2005 and 2006, we raised an aggregate of approximately $8.2 million in total proceeds from private offerings of units consisting of shares of common stock and warrants to purchase common stock. We also sold a total of $1.7 million in convertible promissory and bridge notes and related warrants in private transactions in August and September 2005, and in July, September and October 2006.
We have also sought to grow our business and develop new products through strategic acquisitions. On January 31, 2006, through Synova Pre-Natal, we acquired 25% of the issued and outstanding ordinary shares of Bio Pad Ltd., an Israeli research and development company, on a fully-diluted basis, excluding options to purchase up to 10% of Bio Pad's ordinary shares that may be granted to employees of Bio Pad, for approximately $2.6 million in cash. This share purchase was effected in connection with our September 2005 distribution agreement with Bio Pad pursuant to which we and Bio Pad agreed to jointly develop certain fetal monitoring products. The cash purchase price was paid in several installments into an escrow account, with the final installment of $1.9 million paid into escrow on January 31, 2006 in connection with the closing of the share purchase. Amounts may be released from escrow to Bio Pad upon the completion of specific milestones and otherwise as set forth in the terms of the share purchase agreement. We and Bio Pad continue to work together to develop this fetal monitoring technology. See " - Business Overview - New Business Development."
On January 12, 2007, we acquired Allendale Pharmaceuticals, Inc., a company that has the rights to manufacture and distribute the Today® Sponge. Each former stockholder of Allendale, except for certain non-accredited investors, had the right to receive approximately 2.275 shares of our common stock for each share of Allendale common stock. Holders of outstanding warrants, options and similar rights to acquire stock of Allendale are entitled to acquire shares of our common stock upon the payment of the exercise price provided for in such warrants, options or similar rights, as adjusted for the merger. We have issued in the aggregate approximately 15.5 million shares in the merger, of which 1 million shares were received by three former stockholders of Allendale in exchange for their indemnification obligations. The indemnification shares were placed in escrow for one year. Approximately 145,000 shares of our common stock issuable to one former stockholder of Allendale remain to be issued.
As a condition to the merger, on January 12, 2007, we completed the private placement of our 6.5% convertible senior promissory notes due January 12, 2012 in the original aggregate principal amount of $15 million and warrants to purchase, in the aggregate, 16.5 million shares of our common stock. The senior notes are convertible, including any accrued and unpaid interest, if any, into shares of our common stock, commencing on January 12, 2007, at an initial rate of $1.00 per share. See "- Liquidity and Capital Resources - Contractual Obligations." Pursuant to the terms of the warrants, a holder is entitled to purchase shares of our common stock at an exercise price of $1.00 per share, on or after January 12, 2007 and on or prior to the close of business on January 12, 2012.
Business Overview
We are focused on the development, distribution, marketing and sales of women's healthcare products relating to contraception, vaginal health, menopause management, fertility planning, obstetrics and personal care. Our products are designed to deliver a meaningful improvement in healthcare management for women. Our goal is to provide healthcare solutions that address every stage of a woman's reproductive life.
We distribute and sell our products over the counter, or OTC, to retail customers through drug stores, grocery stores and other retail outlets. Certain of our products are also distributed for use by healthcare professionals at the point of care, or POC, through medical supply companies. Historically, we marketed and sold our products only in the United States. Since acquiring Allendale on January 12, 2007, we also market and sell the Today® Sponge in the United States and Canada and are seeking to do so in Europe and in other countries worldwide. Our products are also available for purchase via the Internet.
We currently market and sell our products under the brand names Today®, Fem-V™, MenoCheck® and MenocheckPro®. The Today® Sponge is a non-hormonal contraceptive device that combines barrier and spermicidal methods to prevent conception. Fem-V™ is a non-invasive diagnostic test designed to assist women in detecting and diagnosing the presence of elevated vaginal acidity, often indicating a vaginal infection. MenoCheck® and MenocheckPro® are in-home and in-office non-invasive diagnostic tests used to detect and diagnose the onset of menopause.
Existing Products
The Today ® Sponge. In January 2007, in connection with our acquisition of Allendale, we acquired the rights to manufacture and sell the Today® Sponge. Made of soft, disposable polyurethane foam, the Today® Sponge contains the widely-used spermicide nonoxynol-9. The Today® Sponge provides contraceptive protection by killing sperm, blocking entry of sperm into the cervix and absorbing and trapping sperm. We believe that non-hormonal birth control products, including the Today® Sponge, condoms and other spermicides, are essential for women who cannot use or tolerate hormonal birth control products.
Since our acquisition of the Today® Sponge, we have embarked upon our plans to re-launch this product to both consumers and healthcare professionals. Market research has recently revealed a high level of brand awareness of the Today® Sponge among consumers and healthcare professionals. Research also uncovered that physicians and other healthcare professionals are ready to recommend this once-popular non-hormonal contraceptive option to their patients again.
We also have focused a significant portion of our re-launch efforts on the packaging and branding of the Today® Sponge. Consumer research confirmed a need to contemporize the product's packaging and branding to meet the demands and expectations of today's women. After extensive testing, with multiple package designs and concepts, we have developed and finalized new branding and packaging designs which we believe will increase the product's impact on and appeal to today's women.
Having completed these efforts, in May 2007, we re-launched the Today® Sponge to healthcare professionals during the 55th Annual Meeting of the American College of Obstetrics and Gynecology. Healthcare professionals attending this meeting confirmed their interest in recommending the Today® Sponge to women seeking an alternative to hormonal methods of contraception. We will also begin a national consumer launch of the Today® Sponge in July, featuring the unveiling to consumers of our new product packaging, a full scale advertising campaign and an Internet-based marketing program, all supported by consumer and professional public relations campaigns.
Fem-V™. In the second quarter of 2006, we began to distribute and sell the Fem-V™ Vaginal Infection Test. This product is a convenient, easy-to-use non-invasive self-test for women who believe their vaginal discharge to be abnormal and who suspect the presence of a vaginal infection. Fem-V™ has been developed in a convenient pantiliner design, with a removable diagnostic test strip. This test is intended to give an initial indication regarding the potential causes of abnormal vaginal discharge and assists women in determining whether a doctor visit is required, or whether an OTC treatment may be considered for the treatment of the symptoms.
MenoCheck® and MenocheckPro®. MenoCheck® and MenocheckPro® are in-home and in-office, respectively, non-invasive urine tests for use in detecting and diagnosing the onset of menopause. MenoCheck® is an OTC product that enables women to easily and accurately determine whether they have entered the menopausal stage of their lives. MenoCheck® functions in a manner similar to the OTC pregnancy tests that are commonly used today. MenocheckPro®is an FDA-approved diagnostic for POC testing that enables physicians to quickly and accurately determine whether their patients have entered menopause.
New Business Development
The ongoing introduction of new products and the expansion of our product portfolio is a key strategic objective for us, and is considered critical to our long-term success. We believe that, in order to be successful, we must develop, license or acquire additional products for sale through our various points of distribution. As a result, a substantial amount of management time and effort was expended in 2006 and the first three months of 2007, and we anticipate will continue to be spent in the future, on new business development.
On January 12, 2007, we acquired Allendale, which owns the rights to manufacture and sell the Today® Sponge. The Today® Sponge is the subject of an FDA-approved new drug application owned by Allendale and is manufactured in a facility owned and operated by OSG Norwich Pharmaceuticals, Inc. Allendale owns all of the machinery and equipment used to make the Today® Sponge.
We also have entered into additional distribution agreements with respect to products we intend to develop and market in the future:
• Bio Pad Ltd.: We and Bio Pad Ltd., an early stage Israeli research and development company, have agreed to jointly develop a non-invasive fetal monitoring medical device. We will be the exclusive distributor of this product in the United States, Canada and Mexico. We also hold a right of first offer in all other global geographic territories.
In connection with this distribution agreement, on January 31, 2006, through Synova Pre-Natal, we acquired 25% of the issued and outstanding ordinary shares of Bio Pad on a fully-diluted basis, excluding options to purchase up to 10% of Bio Pad's ordinary shares that may be granted to employees of Bio Pad, for $2.63 million in cash. The cash purchase price was paid in several installments into an escrow account, with the final installment of approximately $1.9 million paid into escrow on January 31, 2006 in connection with the closing of the share purchase. Amounts may be released from escrow to Bio Pad upon the completion of specific milestones and otherwise as set forth in the terms of the share purchase agreement.
In March 2006, Synova Pre-Natal and Bio Pad successfully completed the development and testing of a data logging system for use with the non-invasive fetal monitor. The data logging system is an integral part of the fetal monitor's ability to collect and integrate data from multiple sources, including ultrasound, and the completion of this system satisfied a necessary first step to the development and marketing of this product.
• QuantRx Biomedical Corporation. Formerly known as A-Fem Medical Corporation, QuantRx, as an outsourced development partner, is developing certain products on our behalf that we expect will allow us to expand our non-invasive diagnostic portfolio in the women's healthcare industry. QuantRx has access to proprietary technology and the manufacturing capacity to rapidly develop and efficiently produce non-invasive diagnostic tests for both the OTC and POC distribution channels. In the third quarter of 2006, we entered into a distribution agreement with QuantRx giving us, for a period of approximately five years, the exclusive right to distribute, market and sell an OTC product designed to treat and provide relief from hemorrhoids. Upon signing this agreement, we paid QuantRx a non-refundable cash fee of $500,000.
• Ovulation Tester, LLC. In the third quarter of 2006, we entered into a distribution agreement with Ovulation Tester, LLC to market and sell its ovulation testing products.
There can be no assurance that we will be successful in selling any of the above products, or that we will generate enough sales from the sale of these products to recover our significant investment of our resources in these relationships. Management expects to continue to expend a substantial amount of time and effort pursuing other opportunities to obtain rights to sell products through our points of distribution. Also, the markets for these products are characterized by evolving industry and regulatory requirements which may result in product or technology obsolescence. There can be no assurance that we can successfully identify new product opportunities and develop and bring new products and services to the market in a timely manner. Furthermore, we have had little historical operating background in this business, and thus the likelihood that we may succeed at these efforts cannot presently be determined.
Management expects that it will pursue other licensing or acquisition opportunities in the future as part of its business development efforts. There can be no assurance that we will be able to complete any such opportunities or that we will have the funds or other capital necessary to complete any such acquisitions.
Critical Accounting Policies and Estimates
We prepared our consolidated financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions that we believe are reasonable are based upon the information available at the time the estimates or assumptions are made. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition. We sell our products to a number of leading national and regional retailers and wholesalers, both directly and through the services of external sales brokers. In accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition, we recognize revenue when:
• persuasive evidence of a customer or distributor arrangement exists or acceptance occurs;
• a retailer, distributor or wholesaler receives the goods;
• the price is fixed or determinable; and
• collectibility of the sales revenues is reasonably assured.
Subject to these criteria, except with respect to retailers, distributors or wholesalers that buy products from us on pay-on-scan terms and except as otherwise described below, we will generally recognize revenue at the time our merchandise is received by the retailer, distributor or wholesaler.
We recognize revenue from pay-on-scan sales when we are notified of the sales of goods by the retailer to its customer through weekly sales data.
Another exception to our general revenue recognition policy stated above exists when we have entered into an arrangement with a retailer, wholesaler or distributor that has the right to return to us any product that was not sold or otherwise failed to meet the customer's expectations. Under these terms, the sale of product to the retail customer would be considered contingent upon the retail customer's resale of the product to its customer. Therefore, the recognition of revenue upon actual shipment of product to such retail customer is not permitted in accordance with SAB 104 until the retail customer's actual resale of the product. We are generally notified of sales by these retailers through a third party's publication of weekly sales data.
Based on the monitoring of sales activity and the reordering patterns of our major customers, we have established an allowance for returned product. We have experienced returns in the normal course of business and expect to do so in future periods. We will continue to monitor sales activity and our customer ordering patterns to determine whether the return allowance amount is reasonable in the future based upon actual and expected return activity.
Allowance for Doubtful Accounts. As amounts become uncollectible, they will be charged to an allowance or operations in the period when a determination of uncollectibility is made. Any estimates of potentially uncollectible customer accounts receivable will be made based on an analysis of individual customer and historical write-off experience. Our analysis includes the age of the receivable, creditworthiness of the customer and general economic conditions. We believe the actual results of collection could be materially different from our estimates if historical trends do not reflect actual results or if economic conditions worsen.
Inventory and Product Return Allowance. Inventory consists of diagnostic medical devices and is stated at the lower of cost - determined by the first-in, first-out method - or market. An allowance has been provided for expired product and product which will expire by November 2007.
We have a formal policy for returns, solely for unsaleable product. We use a return allowance procedure to issue authorizations to retailers to destroy or return damaged or expired product. This ensures that we can effectively govern and oversee the amounts and reasons for any return of unsaleable product. The method we use to determine return exposure for unsaleable product in a distribution channel consists of analyzing the orders from our customers to ensure that they correlate with the product movement at the point of sale. In order to do this effectively, many different factors are considered, including:
• Ex-factory sales analysis
• We assess the size and frequency of the orders, by customer.
• We verify that the size and frequency of the orders correlate with our current channel estimates.
• Point-of-Sale Analysis
• We receive actual sales information from our customers, either directly or indirectly.
• We receive indirect customer sales information from two different data sources.
• Metric Analysis
• Using data obtained from similar customers, we are able to reasonably estimate point-of-sale levels at a retailer that does not report sales.
• We use a metric, such as estimated units sold per store or retailer, upon which we base our estimates.
• We validate these estimates with reports that we obtain from the retailer.
• Business Planning
• Each year we establish a business plan for each customer, which includes sales estimates and cooperative advertising estimates.
• When we assess inventory levels, we also consider upcoming promotional activities and co-operative advertising initiatives, as these efforts may cause periodic increases in sales.
• For example, if a retailer is having a promotion to drive sales, we can reasonably expect based on prior experience that the retailer will order more product during that period.
• Similarly, historical evidence suggests that when we launch major marketing initiatives, we cause sales to rise at the point of sale.
• As a result of these efforts, existing inventory for the channel would normally diminish, which would trigger an increase in order activity from channel customers.
Using the above information, along with management guidance, we can readily determine exposure due to returns that may result from unsaleable product and record an allowance for product returns, if deemed necessary.
Impairment of Long-Lived Assets. Beginning in fiscal year 2006, we began to evaluate our long-term investment, namely our interest in Bio Pad, for impairment on an annual basis and will perform evaluations for impairment more frequently if required. The impairment loss, if any, is recognized in earnings and measured by the difference between the carrying amount of this investment and its fair value based on the best information available, including discounted cash flow analysis or other financial metrics that management utilizes to help determine fair value. Judgments made by management related to the fair value of our long-term investments are affected by factors such as the ongoing financial performance of the investment and additional capital raises by the investee, as well as general changes in the economy.
We will periodically evaluate the recoverability of the carrying amount of all of our other long-lived assets (including property, plant and equipment and intangible assets with determinable lives) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. We will evaluate events or changes in circumstances based mostly on actual historical operating results, but business plans, forecasts, general and industry trends, and anticipated cash flows are also considered. We will also continually evaluate the estimated useful lives of all long-lived assets and, when warranted, revise such estimates based on current events.
Advertising Expenses. Advertising costs are expensed as incurred. In accordance with Statement of Position 93-7, Reporting on Advertising Costs, prepaid advertising represents advertising, distribution and monitoring costs with respect to advertisements in various media that have not yet aired.
We treat temporary price reduction, or TPR, programs, merchandising fees, co-operative advertising and slotting expenses as a reduction to our gross sales. We record the liability for TPR expenses when persuasive evidence exists that we and the customer or distributor have reached agreement and that an advertising action will result in an expense to us in the near future. The liability is maintained until the customer takes the deduction against payments due. In addition, in accordance with Emerging Issues Task Force Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer, if the TPR recorded is in excess of gross sales for any retailer, the amount in excess will be recorded as a marketing expense.
EITF 01-09 requires that cash consideration, including sales incentives, given by a vendor to a customer is presumed to be a reduction of the selling price and, therefore, should be characterized as a reduction to gross sales. This presumption is overcome and the consideration would be characterized as an expense incurred if the vendor receives an identifiable benefit in exchange for the consideration and the fair value of that identifiable benefit can be reasonably estimated. Furthermore, under EITF 01-09, if the consideration recorded is in excess of gross sales for any retailer, the amount in excess will be recorded as a marketing expense.
Stock-Based Compensation. On January 1, 2006, we adopted SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS No. 123R, using the modified prospective method as permitted under SFAS No. 123R. Under this transition method, compensation cost recognized during the first quarter of 2006 includes . . .
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