SEC Company Response from POLYDEX PHARMACEUTICALS — Dec 9, 2005
POLYDEX PHARMACEUTICALS LTD/BAHAMAS (CIK 0000317158)
Date: Dec. 9, 2005 · CIK: 0000317158 · Accession: 0001144204-05-039296
AI Filing Summary & Sentiment
Referenced dates: November 23, 2005
Letter
VIA EDGAR Securities and Exchange Commission Form 10-K for Fiscal Year Ended January 31, 2005 Forms 10-Q for Fiscal Quarters Ended April 30, 2005 and July 31, 2005 File No. 1-08366
Dear Mr. Rosenberg:
Set forth below are the responses of Polydex Pharmaceuticals Limited (the “Company”), to your letter of comment dated November 23, 2005, relating to the above referenced Form 10-K for the Company’s fiscal year ended January 31, 2005 (the “Form 10-K”) and Forms 10-Q for the Company’s fiscal quarters ended April 30, 2005 and July 31, 2005 (the “Forms 10-Q”). For your convenience, each of the Staff’s consecutively numbered comments is set forth therein (in italics), followed by the Company’s response.
Form 10-K For the Fiscal Year Ended January 31, 2005
Financial Statements
Consolidated Statements of Operations
1.
It appears from your disclosure that depreciation and amortization related to products sold is not classified in cost of goods sold. If true, please revise your disclosure to reclassify the appropriate amounts to cost of goods sold.
Alternatively, expand the cost of goods sold caption to include parenthetical disclosure, indicating that depreciation and amortization related to products sold is excluded and disclose such excluded amounts. Please refer to SAB Topic 11:B. In addition, please revise your gross profit analysis in MD&A to disclose the gross profit amounts, including depreciation and amortization. Please revise your fiscal 2006 Forms 10-Q, accordingly.
Response:
The Company acknowledges this comment and agrees to amend the Form 10-K and the Forms 10-Q to classify depreciation and amortization related to products sold in cost of goods sold, as set forth in Exhibit A attached hereto. The Company also agrees to amend the Management’s Discussion and Analysis section of the Form 10-K and the Forms 10-Q to disclose the gross profit amounts including depreciation and amortization, as set forth in Exhibit A attached hereto.
2.
Please refer to your disclosures in Note 12a. Please explain to us why the sale of the finished product veterinary pharmaceutical business, including your interest in the joint venture is classified as continuing operations. Please address paragraphs 41 and 42 of SFAS 144.
Response:
The sale by the Company of the finished product veterinary pharmaceutical business, including the Company’s interest in the joint venture, is classified as continuing operations because the conditions required by paragraph 42 of SFAS 144 for reporting discontinued operations were not met. Condition (a) in paragraph 42 of SFAS 144 requires that the operations and cash flows of the component have been eliminated from the ongoing operations of the entity as a result of the disposal transaction. This is not the case. The Chemdex component of the Company continues to have cash flows from the sale of ferric hydroxide and hydrogenated dextran solution to the purchaser of the finished product veterinary pharmaceutical business under an exclusive supply agreement entered into as a part of the disposal transaction. The Company continues to report the operations of its Chemdex component in continuing operations due to the presence of these cash flows.
3.
Please tell us what is netted against your interest expense on your statements of operations as interest expense should be presented on a gross basis. Please see Rule 5-03(b)(8) of Regulation S-X.
Response:
No amounts are netted against the Company’s interest expense on its statements of operations. The word “net” was erroneously included therein. The Company agrees to amend the Form 10-K and the Forms 10-Q to correct this error, as set forth in Exhibit A attached hereto.
4.
Please revise your statements of operations to remove the line item “Income (loss) before the following” as this sub-total is a non-GAAP measure. In addition, please reclassify the legal fees, litigation, and other costs associated with the interest you sold in the joint venture and the allowance on the amount due from Sparhawk, included in other income (expense), to the appropriate categories within expenses.
Response:
The Company acknowledges this comment and agrees to amend the Form 10-K and the Forms 10-Q to remove the line item “Income (loss) before the following”, as set forth in Exhibit A attached hereto. The Company also agrees to amend the Form 10-K and the Forms 10-Q to reclassify to general and administrative expense the legal fees, litigation and other costs associated with the interest the Company sold in the joint venture and the allowance on the amount due from Sparhawk, as set forth in Exhibit A attached hereto.
Consolidated Statements of Cash Flows
5.
Please revise your statements to ensure that the ending cash and cash equivalents balances agree to the reported amounts of cash and cash equivalents on your balance sheets as required by paragraph 7 of SFAS 95.
Response:
The Company acknowledges this comment and agrees to amend the Form 10-K and the Forms 10-Q to ensure that the ending cash and cash equivalents balances agree to the reported amounts of cash and cash equivalents on the Company’s balance sheets by reflecting cash included in assets subject to sale agreement as a use of cash for investing activities in the statement of cash flows, as set forth in Exhibit A attached hereto.
Notes to Consolidated Financial Statements
Note 12a. Sparhawk Laboratories, Inc., page 15
6.
Please clarify for us why you disclose a deferral of $350,000 of gain on the sale of your joint venture interest rather than a full valuation allowance against your $350,000 promissory note from Sparhawk. Please tell us where the deferred gain and promissory note are presented on your consolidated balance sheet and how you account for the interest on this note. If the deferral of the gain is a valuation allowance, please revise your fiscal 2005 Form 10-K to provide Schedule II - Valuation and Qualifying Accounts as required Rule 5-04 of Regulation S-X.
Response:
SAB Topic 5:U states that when, as part of an asset disposal, the vendor holds a security, such as the note receivable from Sparhawk, issued by a purchaser that is thinly capitalized and highly leveraged, then the portion of the gain that relates to the security held must be deferred until such time as the purchaser has sufficient cash flows from operations to fund debt service. The business sold has not historically produced cash flows from operations sufficient to fund debt service requirements. Therefore, in accordance with SAB Topic 5:U, the portion of the gain relating to the note receivable was deferred and netted against the promissory note from Sparhawk. Thus, the Company does not view this as a valuation allowance, but rather a deferred gain. The Company believes that Schedule II - Valuation and Qualifying Accounts would not result in the disclosure of significant information not otherwise disclosed in the Company’s audited financial statements, and respectfully submit that the inclusion of such Schedule in the Form 10-K is unnecessary.
Interest income on the promissory note from Sparhawk is fully provided for until such time as the Company’s knows that a payment will be received. Under the terms of the promissory note, Sparhawk has the option of adding the annual interest to the outstanding principal balance of the note instead of paying such amount on a current basis. The first annual interest payment was due in March 2005, and was received prior to the completion of the Company’s financial statements included in the Form 10-K. Therefore, at January 31, 2005, the Company accrued interest on this note from March 4, 2004 to January 31, 2005. The balance of this interest payment was reflected in income for the fiscal quarter ended April 30, 2005. Since that time, no interest has been accrued because it is uncertain whether Sparhawk will make the next scheduled interest payment due March 2006, or whether Sparhawk will add such interest amount to the outstanding principal of the note. As noted above, Sparhawk continues to be thinly capitalized and highly leveraged.
The Company hereby acknowledges that:
1.
the Company is responsible for the adequacy and accuracy of the disclosure in the filing;
2.
staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
3.
the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
The Company believes the responses above address the comments raised in your letter of November 23, 2005. Please do not hesitate to contact our primary outside counsel, Mark D. Guidubaldi, Esq., Katten Muchin Rosenman LLP, 525 West Monroe Street, Chicago, IL 60661, (312) 902-5354 (phone), (312) 577-4536 (fax), if you have further questions.
Sincerely,
POLYDEX
PHARMACEUTICALS LIMITED
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POLYDEX
PHARMACEUTICALS LIMITED
421
Comstock Road
Toronto,
Ontario, Canada M1L 2H5
December
9, 2005
VIA
EDGAR
Securities
and Exchange Commission
Jim
B.
Rosenberg
Senior
Assistant Chief Accountant
Mail
Stop
6010
100
F
Street, N.E.
Washington,
DC 20549
RE: Polydex
Pharmaceuticals Limited
Form
10-K for Fiscal Year Ended January 31, 2005
Forms
10-Q for Fiscal Quarters Ended
April
30, 2005 and July 31, 2005
File
No. 1-08366
Dear
Mr.
Rosenberg:
Set
forth
below are the responses of Polydex Pharmaceuticals Limited (the “Company”), to
your letter of comment dated November 23, 2005, relating to the above referenced
Form 10-K for the Company’s fiscal year ended January 31, 2005 (the “Form 10-K”)
and Forms 10-Q for the Company’s fiscal quarters ended April 30, 2005 and July
31, 2005 (the “Forms 10-Q”). For your convenience, each of the Staff’s
consecutively numbered comments is set forth therein (in italics), followed
by
the Company’s response.
Form
10-K For the Fiscal Year Ended January 31, 2005
Financial
Statements
Consolidated
Statements of Operations
1.
It
appears from your disclosure that depreciation and amortization related
to
products sold is not classified in cost of goods sold. If true, please
revise your disclosure to reclassify the appropriate amounts to cost
of
goods sold.
Alternatively,
expand the cost of goods sold caption to include parenthetical disclosure,
indicating that depreciation and amortization related to products
sold is
excluded and disclose such excluded amounts. Please refer to SAB
Topic
11:B. In addition, please revise your gross profit analysis in MD&A to
disclose the gross profit amounts, including depreciation and
amortization. Please revise your fiscal 2006 Forms 10-Q,
accordingly.
Response:
The
Company acknowledges this comment and agrees to amend the Form 10-K and the
Forms 10-Q to classify depreciation and amortization related to products sold
in
cost of goods sold, as set forth in Exhibit
A
attached
hereto. The Company also agrees to amend the Management’s Discussion and
Analysis section of the Form 10-K and the Forms 10-Q to disclose the gross
profit amounts including depreciation and amortization, as set forth in
Exhibit
A
attached
hereto.
2.
Please
refer to your disclosures in Note 12a. Please explain to us why the
sale
of the finished product veterinary pharmaceutical business, including
your
interest in the joint venture is classified as continuing operations.
Please address paragraphs 41 and 42 of SFAS
144.
Response:
The
sale
by the Company of the finished product veterinary pharmaceutical business,
including the Company’s interest in the joint venture, is classified as
continuing operations because the conditions required by paragraph 42 of SFAS
144 for reporting discontinued operations were not met. Condition (a) in
paragraph 42 of SFAS 144 requires that the operations and cash flows of the
component have been eliminated from the ongoing operations of the entity as
a
result of the disposal transaction. This is not the case. The Chemdex component
of the Company continues to have cash flows from the sale of ferric hydroxide
and hydrogenated dextran solution to the purchaser of the finished product
veterinary pharmaceutical business under an exclusive supply agreement entered
into as a part of the disposal transaction. The Company continues to report
the
operations of its Chemdex component in continuing operations due to the presence
of these cash flows.
3.
Please
tell us what is netted against your interest expense on your statements
of
operations as interest expense should be presented on a gross basis.
Please see Rule 5-03(b)(8) of Regulation S-X.
Response:
No
amounts are netted against the Company’s interest expense on its statements of
operations. The word “net” was erroneously included therein. The Company agrees
to amend the Form 10-K and the Forms 10-Q to correct this error, as set forth
in
Exhibit
A
attached
hereto.
4.
Please
revise your statements of operations to remove the line item “Income
(loss) before the following” as this sub-total is a non-GAAP measure. In
addition, please reclassify the legal fees, litigation, and other
costs
associated with the interest you sold in the joint venture and the
allowance on the amount due from Sparhawk, included in other income
(expense), to the appropriate categories within
expenses.
2
Response:
The
Company acknowledges this comment and agrees to amend the Form 10-K and the
Forms 10-Q to remove the line item “Income (loss) before the following”, as set
forth in Exhibit
A
attached
hereto. The Company also agrees to amend the Form 10-K and the Forms 10-Q to
reclassify to general and administrative expense the legal fees, litigation
and
other costs associated with the interest the Company sold in the joint venture
and the allowance on the amount due from Sparhawk, as set forth in Exhibit
A
attached
hereto.
Consolidated
Statements of Cash Flows
5.
Please
revise your statements to ensure that the ending cash and cash equivalents
balances agree to the reported amounts of cash and cash equivalents
on
your balance sheets as required by paragraph 7 of SFAS
95.
Response:
The
Company acknowledges this comment and agrees to amend the Form 10-K and the
Forms 10-Q to ensure that the ending cash and cash equivalents balances agree
to
the reported amounts of cash and cash equivalents on the Company’s balance
sheets by reflecting cash included in assets subject to sale agreement as a
use
of cash for investing activities in the statement of cash flows, as set forth
in
Exhibit
A
attached
hereto.
Notes
to Consolidated Financial Statements
Note
12a. Sparhawk Laboratories, Inc., page 15
6.
Please
clarify for us why you disclose a deferral of $350,000 of gain on
the sale
of your joint venture interest rather than a full valuation allowance
against your $350,000 promissory note from Sparhawk. Please tell
us where
the deferred gain and promissory note are presented on your consolidated
balance sheet and how you account for the interest on this note.
If the
deferral of the gain is a valuation allowance, please revise your
fiscal
2005 Form 10-K to provide Schedule II - Valuation and Qualifying
Accounts
as required Rule 5-04 of Regulation
S-X.
Response:
SAB
Topic
5:U states that when, as part of an asset disposal, the vendor holds a security,
such as the note receivable from Sparhawk, issued by a purchaser that is thinly
capitalized and highly leveraged, then the portion of the gain that relates
to
the security held must be deferred until such time as the purchaser has
sufficient cash flows from operations to fund debt service. The business sold
has not historically produced cash flows from operations sufficient to fund
debt
service requirements. Therefore, in accordance with SAB Topic 5:U, the portion
of the gain relating to the note receivable was deferred and netted against
the
promissory note from Sparhawk. Thus, the Company does not view this as a
valuation allowance, but rather a deferred gain. The Company believes that
Schedule II - Valuation and Qualifying Accounts would not result in the
disclosure of significant information not otherwise disclosed in the Company’s
audited financial statements, and respectfully submit that the inclusion of
such
Schedule in the Form 10-K is unnecessary.
3
Interest
income on the promissory note from Sparhawk is fully provided for until such
time as the Company’s knows that a payment will be received. Under the terms of
the promissory note, Sparhawk has the option of adding the annual interest
to
the outstanding principal balance of the note instead of paying such amount
on a
current basis. The first annual interest payment was due in March 2005, and
was
received prior to the completion of the Company’s financial statements included
in the Form 10-K. Therefore, at January 31, 2005, the Company accrued interest
on this note from March 4, 2004 to January 31, 2005. The balance of this
interest payment was reflected in income for the fiscal quarter ended April
30,
2005. Since that time, no interest has been accrued because it is uncertain
whether Sparhawk will make the next scheduled interest payment due March 2006,
or whether Sparhawk will add such interest amount to the outstanding principal
of the note. As noted above, Sparhawk continues to be thinly capitalized and
highly leveraged.
The
Company hereby acknowledges that:
1.
the
Company is responsible for the adequacy and accuracy of the disclosure
in
the filing;
2.
staff
comments or changes to disclosure in response to staff comments do
not
foreclose the Commission from taking any action with respect to the
filing; and
3.
the
Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
The
Company believes the responses above address the comments raised in your letter
of November 23, 2005. Please do not hesitate to contact our primary outside
counsel, Mark D. Guidubaldi, Esq., Katten Muchin Rosenman LLP, 525 West Monroe
Street, Chicago, IL 60661, (312) 902-5354 (phone), (312) 577-4536 (fax), if
you
have further questions.
Sincerely,
POLYDEX
PHARMACEUTICALS LIMITED
\s\
George G. Usher
George
G.
Usher,
Chairman,
President and Chief Executive Officer
cc: Mark
D.
Guidubaldi, Esq.
4
EXHIBIT
A
Please
see attached.
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
_________________
FORM
10-Q/A
(Mark
One)
[X]
QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
For
the
quarterly period ended July 31, 2005
[ ]
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
For
the transition period from to ______________________ to
________________________
Commission file number
1-8366
POLYDEX
PHARMACEUTICALS LIMITED
______________________________________________________________________________________________________
(Exact
name of registrant as specified in its charter)
Commonwealth
of the Bahamas
None
(State
or Other
Jurisdiction of Incorporation or Organization)
(I.R.S.
Employer
Identification No.)
421
Comstock Road, Toronto, Ontario, Canada
M1L
2H5
(Address
of
principal executive offices)
(Zip
Code)
Registrant’s
telephone number, including area code: (416)
755-2231
______________________________________________________________________________________________________
Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report
Indicate
by check
whether the registrant (1) has filed all reports required to be filed by
Section
13 or 15(d) of the Securities 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. Yes [X] No [ ]
Indicate
by check
whether the registrant is an accelerated filer (as defined in Exchange Act
Rule
12b-2). Yes [X] No [ ]
Indicate
by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange
Act).
Yes [X] No [ ]
Indicate
the number of
shares outstanding of each of the issuer’s classes of common shares, as of the
latest practicable date.
Common
Shares,
$.0167 Par Value
3,052,296
shares
(Title
of
Class)
(Outstanding
at
September 12, 2005)
POLYDEX PHARMACEUTICALS LIMITED
Consolidated Statements of Operations and Comprehensive
Income (Loss) (Unaudited)
(Expressed in United States dollars)
Three Months
Ended
July 31
2005
Three Months
Ended
July 31
2004
Six Months
Ended
July 31
2005
Six Months
Ended
July 31
2004
Sales
$
1,273,470
$
1,338,409
$
2,596,154
$
3,860,203
Cost of goods sold
1,147,446
976,474
2,346,811
2,735,176
126,024
361,935
249,343
1,125,027
Expenses:
General and administrative
305,863
278,656
760,799
738,411
Depreciation
12,030
7,390
23,398
14,820
Research and development
26,574
16,636
58,903
30,060
Interest expense
20,135
19,608
39,917
50,299
Selling and promotion
33,487
23,459
54,835
48,626
Foreign exchange (gain) loss
(13,950
)
(26,493
)
(9,790
)
(11,133
)
Amortization
—
—
—
8,518
Gain on sale of assets (note