UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10Q-SB
Quarterly Report Under Section 13 or 15 (d) of
The Securities Exchange Act of 1934
NOVA PHARMACEUTICAL, INC.
(Exact name of registrant as specified in its charter)
For the Quarter Ended Commission File Number
March 31, 2000 0001089612
NEVADA
(State of Incorporation)
51-0380412
(I. R. S. Employer Identification Number)
31712 CASINO DRIVE SUITE 7B
LAKE ELSINORE, CA 92530
(Address of principal executive offices)
909-245-4657
(Registrant's telephone Number)
Securities registered pursuant to Section 12 (b) of the Act:
NONE
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.
YES ( X ) NO ( )
State the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 31, 2000, 15,508,741 shares of common stock were
outstanding.
2
NOVA PHARMACEUTICAL, INC
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
Balance Sheets - March 31, 2000 and 3
December 31, 1999
Statements of Operations and Accumulated
Deficit for the Quarters ended March 31,
2000 and 1999 4
Statements of Cash Flows for the Quarters
Ended March 31, 2000 and 1999 5
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis or
Plan of Operation x
PART II
Item 1. Legal Proceedings x
Item 2. Changes in Securities and Use of Proceeds x
Item 4. Submission of Matters to a Vote of
Security Holders x
Item 5. Other Information x
Item 6. Exhibits and Reports on Form 8-K x
3
NOVA PHARMACEUTICAL, INC.
BALANCE SHEETS
(Unaudited)
Assets
Mar 31, 2000 Dec 31, 1999
Current Assets
Cash $ 0 $ 23,928
Accounts Receivable, Net 83,325 130,292
Inventory 35,172 72,548
Prepaid Expenses 1,551,514 256,425
Other Receivables - Related Party 15,000 15,000
Debt Restructuring Trust Fund 722,120 0
----------- ---------
Total Current Assets 2,407,131 498,193
Property and Equipment 43,116 45,700
Other Assets
Formulations 422,500 430,000
Prepaid Royalties 183,215 183,724
Prepaid Licensing 255,000 260,000
Refundable Deposits 6,089 6,089
----------- ---------
Total Other Assets 866,804 879,813
----------- ---------
Total Assets $3,317,051 $1,423,706
=========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Current Portion of Long Term Debt $ 0 $ 5,000
Accounts Payable and
Accrued Expenses 964,570 1,183,083
--------- ---------
Total Current Liabilities 964,570 1,188,083
Long Term Debt - Related Party 17,648 1,011,497
Stockholders' Equity
Common Stock $.001 Par Value, 100,000,000
Shares Authorized, 15,508,741 and
12,715,282 shares issued in 2000 and 1999
respectively 15,509 12,715
Additional Paid in Capital 6,558,948 2,317,577
Accumulated Deficit <4,239,624> <3,106,166>
----------- ----------
Total Stockholders' Equity <Deficit> 2,334,833 <775,874>
---------- ---------
Total Liabilities and Stockholders' Equity $3,317,051 $1,423,706
=========== ==========
See Notes to Financial Statements
4
NOVA PHARMACEUTICAL, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
For the Three Months Ended
March 31,2000 March 31, 1999
--------- ----------
Revenues $ 166,399 $ 461,136
Cost of Sales
Beginning Inventory 72,548 66,751
Direct Labor 5,574 10,932
Purchases 29,472 116,038
Total Available 107,594 193,721
Less: Ending Inventory < 35,172> <53,072>
--------- --------
Total Cost of Sales 72,422 140,649
--------- --------
Gross Profit 93,977 320,487
Operating Expenses
Sales and Marketing 102,568 389,443
General and Administrative 588,977 233,152
Royalty Expense - Related Party 510 2,017
--------- ---------
Total Operating Expenses 692,055 624,612
--------- ---------
Interest Expense 519,739 233,999
Interest Expense - Related Party 15,641 11,331
Write Off Deferred Organizational
Expense 7,375
--------- ---------
Total 535,380 252,705
Loss Before Provision for Income Taxes <1,133,458> <556,830>
Provision for Income Taxes 0 0
--------- -------
Net Loss <1,133,458> <556,830>
========= =======
Deficit, Beginning of Period <3,106,166> <582,184>
Accumulated Deficit, End of Period $<4,239,624> $<1,139,014>
Net Loss per Share $ <0.07> $ <0.04>
Weighted Average Shares Outstanding 15,508,741 in 2000, and 12,505,827
in 1999.
See Notes to Financial Statements
5
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31, 2000 March 31, 1999
Cash Flows from Operating Activities:
Net Loss $(1,133,458) $(556,830)
Adjustments to Reconcile Net Income to
Net Cash Used by Operating Activities
Depreciation 2,584 2,003
Other Asset Amortization 13,009 12,500
Non-Cash Expenses
Consulting Fees exchanged for Common Stock 558,147 0
Write Off Deferred Organization Expense 0 7,375
Imputed Interest Expense on Debt Conversion
To Common Stock 376,372 214,286
Change in Assets and Liabilities
(Increase) Decrease in:
Accounts Receivable 46,967 157,935
Inventory 37,376 13,679
Prepaid Expenses <51,720> 36,823
Other Receivable 0 474
Other Assets 0 2,016
Decrease in:
Accounts Payable and Accrued Expenses <120,853> <121,545>
-------- --------
Net Cash Used by Operating Activities <271,576> <231,284>
Cash Flow from Investing Activities
Purchase of Property and Equipment 0 <5,884>
-------- -------
Net Cash Used by Investing Activities 0 <5,884>
Cash Flow from Financing Activities
Debt Financing 22,648 168,884
Issuance of Common Stock 225,000 0
-------- -------
Net Cash Provided from Financing Activities 247,648 168,884
-------- -------
Net Increase (Decrease) in Cash <23,928> <68,284>
Cash at Beginning of Period 23,928 103,644
-------- --------
Cash at End of Period $ 0 $ 35,360
========= ========
Supplemental Disclosure:
Interest Paid $ 9,008 $ 31,014
========= ========
See Notes to Financial Statements
6
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS - (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
On March 31, 1999 the Company exchanged 204,082 shares of common stock
for $500,000 long term debt to a shareholder. The difference between
the carrying value of the debt and the market value of the shares
($214,286) was recorded as interest expense.
In the 3 months ended March 31, 1999 the Company issued 7,200 shares
of common stock for investor relation services. The shares were
recorded at a market value $21,700, and either expensed, or deferred
as a prepaid expense, depending on the terms of the related contracts.
In the 3 months ended March 31, 2000, the Company issued 1,061,666
shares of common stock for legal and investor relation services. The
shares were recorded at a market value $1,741,516, and either expensed,
or deferred as a prepaid expense, depending on the terms of the
related contracts.
The Company executed a voluntary debt restructuring program which was
finalized in March of 2000. In conjunction with this restructuring,
the Company exchanged 807,853 shares of common stock for $1,494,528
long term debt to shareholders and trade debt to the Company's
vendors. The difference between the carrying value of the debt and
the market value of the shares ($376,372) was recorded as interest
expense.
In March of 2000, the board of directors established the Nova
Pharmaceutical Debt Restructuring Trust Fund for the sole purpose of
selling shares of the Company's common stock to pay restructured trade
debt. The debt undertaken by the trust totaled $703,620, plus an
additional $18,500 for trust expenses. This amount was funded on
March 31, 2000 by Nova through a contribution to the trust of 390,335
shares of Nova's common stock. The market value of the stock
contributed to the trust was recorded as a current asset. The
liabilities undertaken by the trust were retained on the balance sheet.
In March of 2000, the Company issued 343,605 shares of common stock to
shareholders to compensate them for shares contributed to the investor
investor relation consultants on behalf of the Company in the previous
fiscal year. An entry of $515,408 was made to reduce paid in capital for
the market value of the shares issued.
See Notes to Financial Statements
7
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS
Nova Pharmaceutical, Inc. ("the Company" or "Nova") was incorporated
under the laws of the State of Nevada. The Company markets a line of
weight loss, health, and sports enhancement supplement products. The
products are manufactured and packaged on a contract basis by others.
The Company maintains executive and sales offices at Lake Elsinore,
California.
The accompanying unaudited financial information of Nova
Pharmaceutical, Inc. as of March 31, 2000, and for the three months
ended March 31, 2000 and 1999 has been prepared in accordance with the
instructions to form 10-Q. In the opinion of management, such
financial information includes all adjustments (consisting only of
normal recurring adjustments) considered necessary for fair
presentation of financial position at such date and the operating
results and cash flows for such periods. Operating results for the
three months ended March 31, 2000 and 1999 are not necessarily
indicative of the results that may be expected for the entire year.
These financial statement and the related notes should be read in
conjunction with the Company's audited financial statements for the
year ended December 31, 1999 included in the Company's Form 10K-SB
filing.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At
March 31, we had no cash and cash equivalents and working capital of
$1.4 million. We generated a net loss of $582 thousand for the fiscal
year ended December 31, 1998, $2.4 million for the year ended December
31, 1999, and $1.1 million for the quarter ended March 31, 2000.
Because of the advertising and promotion investment required to expand
nationally, we are anticipating net losses to continue for the
remainder of fiscal 2000. Nova will require a significant amount of
capital to continue our planned operations. Accordingly, our ability
to continue as a going concern is dependent upon our ability to secure
an adequate amount of capital to finance our anticipated losses and
planned principal operations.
Nova has obtained written commitments from major shareholders to
purchase up to $1.5 million of additional SEC Rule 144 restricted
common shares. The purchase commitment is for stock purchases during
the period February 14th to May 31st 2000. Purchase commitment is
contingent upon Nova's ability to create an active market for Nova's
common stock on the OTC Bulletin Board. An active market is defined
as average daily trading volume of 10-20 thousand shares per day.
In the event Nova receives minimal or no proceeds from these efforts,
Nova will seek alternative funding sources and would adjust
expenditures required for implementing our planned operations. However
these factors, among others, may indicate that Nova would be unable to
continue as a going concern for a period of time in excess of six
months from the date of this filing.
NOTE 3 - DEBT RESTRUCTURING PLAN
In March 2000, the Company completed a written debt restructuring with
current vendors and shareholders. The Company obtained the following
concessions from vendors and shareholders:
Conversion of shareholder debt, including
accrued interest expense to common stock $ 1,071,854
Conversion of accounts payable to common stock 46,301
Total debt converted to equity $ 1,118,155
8
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
NOTE 5 - DEBT RESTRUCTURING PLAN (CONTINUED)
Conversion of currently due accounts payable
To twelve month payment plan beginning June 2000 $ 76,852
Conversion of currently due accounts payable
To eighteen month payment plan beginning June 2000 286,647
Total current debt converted to extended
payment terms $ 363,499
As of March 31, 2000, Nova had not been successful in obtaining the
additional capital. In the board of directors' opinion, Nova would
not be able to attract additional capital, and reestablish a positive
cash flow by the time the restructured debt payments were to begin in
June of 2000. Therefore, the board of directors established the Nova
Pharmaceutical Debt Restructuring Trust Fund. This trust has
received shares of common stock from Nova for the sole purpose of
selling the shares to pay restructured trade debt over an 18 month
period beginning June 1, 2000. The trust fund is an irrevocable
trust, managed by a trustee completely independent of Nova. The
restructured trade debt undertaken by the trust totaled $703,620, with
an additional $18,500 provided for trust expenses. This amount was
funded on March 31, 2000 by Nova through a contribution of 390,335
shares of common stock. The value of the common stock was based on
the closing price of $1.85 per share on the OTC Bulletin Board,
March 31, 2000. Nova will file a SB-2 registration statement to
register the trust share for trading on the OTC Bulletin Board.
NOTE 4 - INCREASE IN AUTHORIZED COMMON AND PREFERRED STOCK
On January 4, 2000, the shareholders approved a change to the Articles
of Incorporation to increase the number of authorized common shares to
100,000,000 and to increase the number of authorized preferred shares
to 25,000,000.
NOTE 5 - STOCK OPTION PLAN
In January of 2000, the Company's shareholders approved a Stock
Option plan. Under this plan, 2,000,000 shares of common stock
have been reserved for issuance according to the following terms:
- The purpose of the plan is to aid as an incentive to attracting and
retaining employees and consultants whose services are considered
valuable to the Company.
- The plan is effective as of January 4, 2000 and shall expire on
January 4th of 2010.
- The Company's Board of Directors is empowered to designate plan
participants and to determine the provisions and terms of the options
granted within the general guidelines of the plan.
- Eligible persons are Officers, Directors, full and part-time
employees of Nova, or any person or corporation not employed by the
Company, but performing services to the Company.
- Option price shall be no less than 85% of the fair market value on
date of issue.
- The exercise period shall be a term of not more than 10 years from
date of granting, but shall automatically terminate upon termination
of employees employment with the Company.
On January 4 of 2000, the Board approved options for four employees to
purchase 650,000 shares of common stock at the then market price of
$.15 per share. The options may be exercised over five years with a
maximum of 20% per Year.
9
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
NOTE 5 - STOCK OPTION PLAN (CONTINUED)
In February of 2000, the Company filed an S-8 registration statement with
the Securities and Exchange Commission to register the 2,000,000 shares
provided for in the stock option plan.
On March 31, 2000, the Board approved options for three attorneys to
purchase 90,000 shares of common stock at the then market price of
$1.94 per share. The shares were tendered in exchange for legal
services amounting to $174,600.
NOTE 6 - SHARES CONTRIBUTED TO THE COMPANY'S CONSULTANTS BY
SHAREHOLDERS
In March of 2000, the Company issued 343,605 shares of common stock to
shareholders to compensate them for shares contributed to investor
relation consultants on behalf of the Company in the previous
fiscal year. These shares had been contributed to the Company's
consultants by the shareholders with no requirement for compensation.
At that time, both the Company and the shareholders were operating
under the assumption that no significant additional shares would be
requested by the Company. In the first quarter of 2000, the Company has
continued to request additional assistance from the shareholders in
compensating consultants, therefore, the shareholders have requested,
and the Company has agreed to compensate the shareholders for past
contributions. An entry of $515,408 was made to reduce paid in capital
for the market value of the shares issued.
NOTE 7 - SALE OF COMMON STOCK TO SHAREHOLDER
In March of 2000, a shareholder sold shares of Nova stock at a discount
in order to provide for imminent cash needs of the Company. The Company
issued 150,000 shares of Common Stock at a market value of $225,000 to
replace the shares sold by the shareholder. A difference of $150,000
between the proceeds tendered to the Company from the shareholder sale,
and the market value of the shares issued was recorded as interest
expense.
NOTE 8 - RELATED PARTY TRANSACTIONS
Notes Payable - Related Party
Ralph Mann exchanged a note payable for shares of preferred stock on
May 7, 1998. The principal balance of the Note was $5,000 at
March 31, 2000, and accrued interest on the note totaled $495. On
March 31, 2000, the Company converted the principal and interest on
this note to common stock in conjunction with a debt restructuring
plan conducted by the Company.
Notes Payable - Related Party
Ralph Mann, officer, director, and shareholder, has lent Nova money
for operating funds under a note payable agreement. The principal
balance of the Note was $650,400 at March 31, 2000 and accrued interest
payable totaled $19,239. On March 31, 2000, the Company converted the
principal and interest on this note to common stock in conjunction with
a debt restructuring plan conducted by the Company.
Notes Payable - Related Party
Showtime Partners, shareholder, has lent Nova money for operating
funds under a note payable agreement. Showtime Partners is a general
partnership consisting of 21 irrevocable trusts whose beneficiaries are
all related to Ralph Mann, shareholder, officer and director of the
Company. The principal balance of the Note was $361,097 at March 31,
2000, and accrued interest expense totaled $35,623. On March 31,
2000, the Company converted the principal and interest on this note to
common stock in conjunction with a debt restructuring plan conducted
by the Company.
10
Item 2. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At
March 31, 2000, we had no cash and cash equivalents of and working
capital of $1.4 million. We generated a net loss of $582 thousand for
the fiscal year ended December 31, 1998, a net loss of $2.4 million
for the year ended December 31, 1999, and a net loss of $1.1 million
for the quarter ended March 31, 2000. Because of the advertising and
promotion investment required to expand nationally, we are
anticipating net losses to continue for the first remainder of fiscal
2000. Nova will require a significant amount of capital to continue
our planned operations. Accordingly, our ability to continue as a
going concern is dependent upon our ability to secure an adequate
amount of capital to finance our anticipated losses and planned
principal operations.
Nova has successfully concluded a written debt restructuring plan in
which $1,118,155 of shareholder and vendor debt was agreed to be
converted into common stock, and $363,499 of past due vendor debt was
agreed to be converted to payment plans over 12 to 18 months beginning
June 1, 2000. In order to meet required payments to all vendors, Nova
must raise additional capital, and reestablish a positive cash flow
from continuation of the advertising and support for it's brands.
As of March 31, 2000, Nova had not been successful in obtaining the
additional capital. In the board of directors' opinion, Nova would
not be able to attract additional capital, and reestablish a positive
cash flow by the time the restructured debt payments were to begin in
June of 2000. Therefore, the board of directors established the Nova
Pharmaceutical Debt Restructuring Trust Fund. This trust has received
shares of common stock from Nova for the sole purpose of selling the
shares to pay restructured trade debt over an 18 month period
beginning June 1, 2000. The trust fund is an irrevocable trust,
managed by a trustee completely independent of Nova. The
restructured trade debt undertaken by the trust totaled $703,620, with
an additional $18,500 provided for trust expenses. This amount was
funded on March 31, 2000 by Nova through a contribution of 390,335
shares of common stock. The value of the common stock was based on
the closing price of $1.85 per share on the OTC Bulletin Board, March
31, 2000.
Nova has obtained written commitments from major shareholders to
purchase up to $1.5 million of additional SEC Rule 144 restricted
common shares. The purchase commitment is for stock purchases during
the period February 14th to May 31st 2000. Purchase commitment is
contingent upon Nova's ability to create an active market for Nova's
common stock on the OTC Bulletin Board. An active market is defined
as average daily trading volume of 10-20 thousand shares per day.
During late 1999 and the first quarter of 2000, Nova has established a
group of investor relation consultants who are substantially
compensated with Nova's common stock. This group is poised to execute
an extensive investor relation program, which will educate potential
investors about what Nova believes to be excellent business
opportunities - the product NxTrim, and the Gold's Gym Nutrition line
of products. Should these consultants be successful in generating an
active market for Nova's stock on the OTC Bulletin Board, Nova's
shareholders have committed to purchasing up to $1.5 million dollars
of Nova's common stock. In addition, Nova's Debt Restructuring Trust
would then be able to reduce Nova's excess trade debt.
In the event Nova receives minimal or no proceeds from these efforts,
Nova will seek alternative funding sources and would adjust
expenditures required for implementing our planned operations. However
these factors, among others, may indicate that Nova would be unable to
continue as a going concern for a period of time in excess of six
months from the date of this filing.
Nova's liquidity is currently limited because generation of additional
capital from outside investors has been delayed. The current
operations are being conducted with minimum funding support of major
11
shareholders. Accordingly, Nova's national expansion plans have been
delayed because Nova has substantially reduced the advertising and
promotion funds. This reduction of support has resulted in a
reduction in sales to current customers and a reduction in sales
generated from new accounts.
Nova has communicated the funding delays to brokers and key customers
in explanation of the reduced support that is evident in their
respective markets. Despite the reduction of support, the continuing
strong I R I data on NxTrim's movement has generally swayed Nova's
brokers and most key customers to remain patient, and await the
additional marketing support promised after Nova's successful
attainment of additional funds. I R I data referred to above
indicates that, in the drug trade for the 52 weeks ended October
10,1999, NxTrim is the number one selling weight control aid in the
California markets, and number 18 nationally.
In the three months ended March 31, 2000, Nova used cash from
operations in the amount of $272 thousand. The funding for this
investment has been obtained through increased long term borrowing
from major shareholders of $23 thousand, and from the sale of stock in
the amount of $225 thousand. In the quarter ended March 31, 2000,
accounts receivable was reduced by $47 thousand as a result of lower
sales in 2000 versus 1999. In the same period accounts payable was
decreased by $121 thousand due to the need to reduce past due
liabilities.
In the three months ended March 31, 2000, non cash consulting expenses
totaled $558 thousand due to issuance of common stock in payment for
outside services performed. In addition, non cash interest expense
was recorded in the amount of $376 thousand due to concessions made in
the debt restructuring exchange of common stock for shareholderloans
and vendor payables.
In the three months ended March 31, 1999, Nova used cash from
operations in the amount of $231 thousand. The funding for this
investment has been obtained through increased long term borrowing
from major shareholders of $169 thousand, and through a reduction in
cash in the amount of $68 thousand. In the quarter ended March 31,
1999, accounts receivable was reduced by $158 thousand as a result of
lower sales in 1999 versus 1998. In the same period accounts payable
was decreased by $122 thousand due to the need to reduce past due
liabilities.
In March of 1999, Nova exchanged common stock for shareholder debt. A
non cash expense of $214 thousand was recorded for the excess of
market value of the stock over the face value of the debt exchanged.
Results of Operations
Revenues for the three months ended March 31, 2000 totaled $166
thousand, a decrease of $295 thousand from the same period in the
prior year. The revenue decline is due to the reduction of
advertising and promotion funding related to delay in obtaining
additional capital to support the planned national expansion programs.
Gross profit for the quarter ended March 31, 2000 totaled $72
thousand, a decrease of $69 thousand from the same period in the prior
year. Reduction of revenues substantially caused the gross profit
decline. Gross profit margin declined on a percentage basis due to
added cost of sales related to a "Buy one, Get one free" promotional
event featured in the current year.
Selling and marketing expenses totaled $103 thousand in the quarter
ended March 31, 2000, a decline of $287 thousand from the same period
in 1999. Advertising in the first quarter of 2000 totaled only $3
thousand, $287 less than the previous year. The national advertising
program was halted due delay in obtaining additional capital for
continued expansion, resulting in reduced sales in both existing and
new markets.
General and Administrative expenses totaled $589 thousand in the
quarter ended March 31, 2000, an increase of $356
12
thousand from the same period in 1999. The increase is due to legal,
accounting and consulting fees of $363 thousand related to seeking
funding in the public markets, preparing SEC documents, and to
investor relations consulting. The professional fees noted above were
funded by issuance of common stock.
Interest expense totaled $535 thousand in the quarter ended March 31,
2000, an increase of $290 thousand over the prior year. The increase
is due to imputed interest expense of (i)$376 thousand from the
conversion of debt to common stock in conjunction with the debt
restructuring program, (ii) $150 thousand imputed interest expense on
the replacement of common stock to a shareholder who sold his stock at
a substantial discount in order to provide for the Company's imminent
operating cash requirements, and (iii) offset by $214 thousand in
imputed interest in 1999 due to conversion of shareholder debt into
common stock.
The provision for income taxes reflects minimum tax payment
requirements. The tax benefit of operating losses from inception to
March 31, 2000 has not been recorded. Recognition of any tax benefits
from losses will be delayed until such time as Nova's operating
results indicate the ability to take advantage of the losses through
future earnings.
During the quarter ended March 31, 1999, revenues were strong as a
result of increasing distribution to new customers, and repeat sale to
existing customers. These sales were substantially resulting from a
strong advertising program in the quarter.
For the fiscal year ended March 31, 1999, cost of sales as a percent
of revenues was lower because no significant promotional allowances,
which reduce net sales, were required due to the strong advertising
program in the quarter.
During the quarter ended March 31, 1999, sales and marketing expenses
were high due to the hiring of an experienced Senior Vice President of
Sales and Marketing and a sales staff capable of managing the national
network of brokers.
General and Administrative expenses were high in the quarter ended
March 31, 1999 because the Company was building the infrastructure
required to support the planned rapid revenue growth.
The provision for income taxes reflects minimum tax payment
requirements. The tax benefit of operating losses from inception to
March 31, 1999 had not been recorded. Recognition of any tax benefits
from losses have been delayed until such time as Nova's operating
results indicate the ability to take advantage of the losses through
future earnings.
For the three months ended March 31, 2000 and 1999, Nova incurred
losses of $1.1 million and $557 thousand respectively. In 2000 Nova
has expended significant amounts for investment counseling fees to
raise additional capital, for investor relations fees in order to
communicate to potential shareholders the growth opportunity in Nova,
and for imputed interest expense related to a successful debt
restructuring program. In 1999, Nova has reflected losses in the
results of operations due to the advertising and promotional
expenditures to build brand equity, and due to the selling and
administrative expenditures necessary to build the organizational
infrastructure required to accomplish Nova's aggressive growth plans.
It is Nova's belief that, given success in the efforts to raise
additional capital, Nova will be able to expand its revenues
significantly to new markets, and increase the sales per store in all
markets through continued advertising and promotion. Nova also
believes that continuation of the national advertising program would
result in rapid expansion into new accounts. At the 35,000 store
level, the national advertising costs are substantially covered.
Stores above that would require significantly less additional
advertising dollars. Because of the selling and administrative
staffing already committed, expansion begins to incrementally add
profit without significant additional general and administrative
costs. Profitability will be attained with expansion to approximately
35,000 of the 117,000 potential retail outlets.
13
PART II
Item 1. Legal Proceedings
D & F Industries, Inc. a California Corporation v. Nova
Pharmaceuticals [sic] Inc., a Nevada Corporation, et. al. Orange
County Superior Court Case No. 814076.
This is an action by a former contract supplier. Plaintiff contends
that defendant Nova agreed to use plaintiff D & F to supply the
products under the Gold's Gym contract, that D & F prepared certain
formulations to accommodate that contract, that Nova breached the
contract by not using D & F to supply the products under the Gold's
Gym contract and that Nova misappropriated plaintiff's trade secrets
by using plaintiffs formulations to fulfill the Gold's Gym contract.
Plaintiff also claims that Nova owes it for some product shipped. The
complaint states that it alleges six causes of action: two for breach
of contract, one for common counts, one for misappropriation of trade
secrets, one for unfair business practices, and one for interference
with economic advantage. Plaintiff seeks an injunction against the
use of the trade secrets and damages of lost profits (which of course
would depend on what Nova sells under the Gold's Gym contract),
unstated punitive damages, statutory damages, attorneys fees and the
amount allegedly due for the product shipped and not yet paid for
(claimed to be $52,000). Discovery has not yet begun. At the time of
this writing, defendants have filed their answer to the complaint,
which denies the relevant material allegations of the complaint and
filed a cross complaint for intentional interference with contractual
relations and breach of contract. Defendants believe the action is
generally without merit, that they will prevail on their cross
complaint and have a very good chance to prevail on a claim for
malicious prosecution. Should the outcome of this litigation be
resolved in favor the plaintiff, it could have a materially adverse
effect on the Company's results of operations.
Nova is a defendant in two other minor matter of litigation in the
area of debt collection. As of this time, litigation has been
suspended pending Nova's compliance with agreed upon payment terms.
Should the outcome of this litigation be resolved in favor the
plaintiff, it would not have a materially adverse effect on the
Company's results of operations.
Item 2. Changes in Securities
Change in Number of Shares Authorized
On January 4, 2000, the shareholders approved a change to the Articles
of Incorporation to increase the number of authorized common shares to
100,000,000, and to increase the number of authorized preferred shares
to 25,000,000.
Recent Sales of Unregistered Securities
Following is a summary of sales of unregistered securities for the
first three months of 2000. All securities were issued as restricted
common shares, which are subject to Rule 144 of the Securities and
Exchange Commission. Generally Rule 144 requires shareholders to hold
the shares for a minimum of one year before sale. In addition,
officers, directors and more than 10% shareholders are further
restricted in their ability to sell such shares. There have been no
underwriters of these securities and no commissions or underwriting
discounts have been paid.
Shares Value
Transaction Description Issued Received
Sale of 144 restricted common
stock for cash 150,000 $ 75,000
Exchange of 144 restricted
common stock for debt 1,198,188 2,216,648
Exchange of 144 restricted
common stock for consulting
and legal expenses 1,355,271 2,142,324
The above transactions qualified for exemption from registration under
Sections 3(b) or 4(2) of the Securities Act of 1933. Private
placements for cash were non-public transactions. The Company
14
believes that all such investors are either accredited or, either
alone or with their purchaser representative , have such knowledge and
experience in financial and business matters that they are capable of
evaluating the merits and risks of the prospective investment.
Stock Option Plan
In January of 2000, the Company's shareholders approved a Stock
Option plan. Under this plan, 2,000,000 shares of common stock
have been reserved for issuance. On January 4th of 2000, the Board
approved options for four employees to purchase 650,000 shares of
common stock at the then market price of $.15 per share. The options
may be exercised over five years with a maximum of 20% per year. In
February of 2000, the Company filed an S-8 registration statement with
the Securities and Exchange Commission to register the 2,000,000
shares provided for in the stock option plan. On March 31, 2000, the
Board approved options to purchase 90,000 shares of common stock at
the then market price of $1.94 per share. The shares were tendered in
exchange for legal services amounting to $174,600.
Item 4. Submission of Matters to a Vote of Security Holders
On January 4, 2000, a special meeting of shareholders was held.
Shareholders present for the meeting held 10,204,082 shares, or 80%
of the outstanding shares common stock. The shareholders present
unanimously approved the following issues:
The number of common shares authorized was increased from 25,000,000
to 100,000,000. The number of authorized preferred shares was
increased from 10,000,000 to 25,000,000.
The Nova Pharmaceutical, Inc. 2000 Non-Statutory Stock Option Plan
was approved as presented by the Board of Directors.
The language of the May 20, 1999 Shareholders Meeting minutes was
amended as follows: "Resolved that the By Laws of the Corporation
shall be amended to increase the number of Directors to up to seven
Directors.
Item 6. Exhibits and Reports on Form 8-K
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVA PHARMACEUTICAL, INC.
Date: May 10, 2000 By: RALPH MANN
----------------------------
Ralph Mann, President & Chief
Executive Officer