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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under the Securities Act of 1933
NOVA PHARMACEUTICAL, INC.
(Exact name of registrant as specified in our charter)
Nevada 2834 510380412
(State of Primary Standard Industrial (Federal
Incorporation) Classification Code Number identification
Number)
Nova Pharmaceutical, Inc.
31712 Casino Drive
Suite 7B
Lake Elsinore, Ca 92530
(Address of principal executive office)
Registrant's Telephone No. with area code: 909-245-4657
Samuel Wierdlow
1400 Colorado St
Boulder City, NV 89005
(Name, address, and telephone number of agent for service)
with copy to:
Jody M Walker
Attorney at Law
7841 Garfield Way
Littleton, Co 80122
Approximate date of commencement of proposed sale to the Public: As
soon as practicable following the date on which this Registration
Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following Box: [x]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box [ ].
CALCULATION OF REGISTRATION FEE
Title of each Amount to be Proposed Proposed Amount of
Class of registered Offering Aggregate Registration
Securities Price Offering Price Fee
Common stock
$.001 par value(1) 3,795,616 1.25(3) $4,744,520 $1,318.98
Common stock
$.001 par value(2) 390,335 1.25(3) $ 487,919 $ 135.64
Total 4,185,951 $5,232,439 $1,454.62
(1) Represents common stock being registered on behalf of
Selling Security Holders
(2)Represents common stock being registered on behalf of
Nova Pharmaceutical Debt Restructuring Trust
(3)Represents closing price on the OTC Bulletin Board on
May 15, 2000.
The registrant hereby amends this registration statement on date or
dates as may be necessary to delay it effective date until the
registrant shall file a further amendment, which specifically states
that this registration statement shall thereafter become effective in
accordance with Section 8(a) of Securities Act of 1933 or until the
registration statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
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PROSPECTUS
Nova Pharmaceutical, Inc.
3,795,616 common shares on behalf of selling security holders
390,335 common shares on behalf of our Debt Restructuring Trust Fund
Nasdaq OTC Bulletin Board NOVX
Last reported sale price -
May 15, 2000 $1.25
We will not receive any cash or other proceeds in connection with the
subsequent sale by selling security holders.
Each selling security holder may be deemed to be an underwriter under
the Securities Act of 1933.
Consider carefully the risk factors beginning on page 5 in this
prospectus.
Neither the SEC nor any state securities commission has approved these
common shares or determined that this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
This prospectus is dated May 16, 2000.
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TABLE OF CONTENTS
Page
SUMMARY 5
RISK FACTORS 5
SELLING SECURITY HOLDERS 7
USE OF PROCEEDS 7
MARKET FOR COMMON STOCK 8
DIVIDEND POLICY 8
NOVA PHARMACEUTICAL,INC. 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
MANAGEMENT 16
EXECUTIVE COMPENSATION 17
PRINCIPAL STOCKHOLDERS 18
RELATED PARTY TRANSACTIONS 19
DESCRIPTION OF SECURITIES 21
PLAN OF DISTRIBUTION 21
LEGAL MATTERS 22
EXPERTS 23
WHERE YOU CAN GET INFORMATION 23
INDEX TO FINANCIAL STATEMENTS 24
PART II
INDEMNIFICATION OF OFFICERS AND DIRECTORS 48
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION 48
RECENT SALES OF UNREGISTERED SECURITIES 48
EXHIBIT INDEX 48
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SUMMARY
The following summary is qualified in our entirety by the more
detailed information, financial statements and notes to the financial
statements including the notes thereto appearing elsewhere in this
prospectus.
Nova Pharmaceutical, Inc.
31712 Casino Drive Suite 7B
Lake Elsinore, Ca 92530
909-245-4657
Nova. Nova was incorporated in Nevada on January 8, 1998.
We manufacture and market nutritional supplements
under brand names of Nova Naturals, NxTrim, NxBloc,
and Gold's Gym Nutrition. Nova's strategy is to
concentrate on product development and marketing of
nutritional supplements. Nova uses third party
contractors for manufacturing and distribution. Nova
sells our products to food, drug, health food, mass
merchandise, fitness center, and other retail chains.
We market our products directly to the consumer
through, television, radio, magazines, and newspaper
advertising.
Sales by Selling
Security Holders We are registering common shares on behalf of selling
security holders in this prospectus. We are not
selling any common shares on behalf of selling
security holders and have no control or affect on
these selling security holders.
Use of Proceeds We will not receive any proceeds from the sale of
common shares by selling shareholders.
Proceeds from the sale of the common stock
contributed to the Nova Pharmaceutical, Inc. Debt
Restructuring Trust will be used to pay down Nova's
restructured trade debt.
Dividends We have never paid a cash dividend on our common
stock and do not plan to pay any cash dividends on
our common stock in the foreseeable future.
Market for our
common stock There is a limited market for our common stock Our
common stock is quoted on the Nasdaq OTC Bulletin
Board under the symbol NOVX.
Transfer Agent Signature Stock Transfer, Inc. located at 14675
Midway Road Suite 221 Dallas Tx, 75244 acts as our
transfer agent.
RISK FACTORS
1. We have not been profitable since inception and have no certainty
of future operating results.
At March 31, 2000, we had no cash or cash equivalents and working
capital of $1.4 million. We have generated a net loss of $582,000
for the fiscal year ended December 31, 1998, a net loss of $2,423,000
for the year ended December 31, 1999, and a net loss of $1.1 million
for the quarter ended March 31, 2000.
2. If we do not receive additional financing, we may not be able to
develop our business and you could lose your entire investment.
We require a significant amount of capital to continue planned
operations. Our ability to continue as a going concern is dependent
on our ability to secure an adequate amount of capital to finance
anticipated losses and planned principal operations.
3. We rely on third party organizations for manufacturing,
distribution and sales. We cannot assure you that these organizations
will continue to meet our growing need to expand our product lines.
Our ability to expand our product line could be limited if one or more
of these critical organizations cannot fulfill our needs. We cannot
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assure you that we will be able to find an economically feasible
replacement on a timely basis.
4. The market success for our new products is potentially long and
uncertain. We cannot assure you that the retail trade will accept
our new products.
We cannot assure you that our marketing efforts will result in
consumer initial and repeat purchase of our products.
5. If our common stock has no active trading market, you may not be
able to sell your common shares easily.
We do not have an active public market for our common shares. We
cannot assure you that an active public market will ever develop.
Consequently, you may not be able to liquidate your investment in the
event of an emergency or for any other reason.
6. We have made forward looking statements that may not prove to be
correct.
The statements contained in this prospectus that are not historical
fact are forward-looking statements as the term is defined in the
Reform Act, which can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve
risks and uncertainties. The safe harbor provisions provided in
Section 27A of the Securities Act and Section 21E of the Exchange Act
do not apply to forward-looking statements made in connection with
this initial public offering.
Because of the number and range of the assumptions underlying the our
projections and forward-looking statements, many of which are subject
to significant uncertainties and contingencies that are beyond the
reasonable control of Nova, some of the assumptions inevitably
will not materialize and unanticipated events and circumstances may
occur subsequent to the date of this prospectus.
These forward-looking statements are made with the best estimates of
management prepared in good faith and based on current expectations.
We will not update this information other than required by law.
Therefore, the actual experience of Nova and results achieved
during the period covered by any particular projections or forward-
looking statements may differ substantially from those projected.
Consequently, the inclusion of projections and other forward-looking
statements should not be regarded as a representation by Nova or
any other person that we will realize these estimates and projections,
and actual results may vary materially. We cannot assure you that any
of these expectations will be realized or that any of the forward-
looking statements contained herein will prove to be accurate.
7. We do not meet the requirements for our stock to be quoted on
NASDAQ and the tradability in our stock will be limited under the
penny stock regulation.
We may never meet the requirements to be quoted on NASDAQ. We are
quoted on the OTC Bulletin Board.
If the trading price of our common stock is less than $5.00 per share,
trading in the common stock would also be subject to the requirements
of Rule 15g-9 under the Exchange Act. Under this rule, broker/dealers
who recommend low-priced securities to persons other than established
customers and accredited investors must satisfy special sales practice
requirements. The broker/dealer must make an individualized written
suitability determination for the purchaser and receive the
purchaser's written consent prior to the transaction.
SEC regulations also require additional disclosure in connection with
any trades involving a "penny stock", including the delivery, prior to
any penny stock transaction, of a disclosure schedule explaining the
penny stock market and our associated risks. Such requirements
severely limit the liquidity of the common stock in the secondary
market because few broker or dealers are likely to undertake such
compliance activities. Generally, the term penny stock refers to a
stock with a market price of less than $5.00 per share. A market in
our stock may never develop due to these restrictions.
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8. The selling security holders may have liability because of their
status as underwriters.
Under the Securities Act of 1933, the selling security holders will be
considered to be underwriters of the offering. The selling security
holders may have civil liability under Section 11 and 12 of the
Securities Act for any omissions or misstatements in the registration
statement because of their status as underwriters.
9. We have anti-takeover provisions in our certificate of
incorporation and bylaws under Nevada law which could limit the price
investors may be willing to pay in the future for our common shares.
Unless our board of directors approve a takeover or change in control,
some of the provisions of Nevada law and the our certificate of
incorporation and Bylaws may have the effect of delaying, deterring or
preventing a future takeover or change in our control unless such
takeover or change in control is approved by our Board of Directors.
These provisions also may render the removal of directors and
management more difficult. These provisions could limit the price
that certain investors might be willing to pay in the future for our
common shares.
These provisions of Nevada law and our certificate of incorporation
and bylaws may also have the effect of discouraging or preventing
certain types of transactions involving an actual or threatened change
of our control (including unsolicited takeover attempts), even though
such a transaction may offer our stockholders the opportunity to sell
their stock at a price above the prevailing market price.
- --------------------------------------
SELLING SECURITY HOLDERS
- --------------------------------------
Nova shall register pursuant to this prospectus 4,185,951 common
shares currently outstanding for the account of the following
individuals or entities. The percentage owned prior to and after the
offering reflects all of the then outstanding common shares. The
amount and percentage owned after the offering assumes the sale of
all of the common shares being registered on behalf of the selling
security holders.
Name Total Number Amount % Owned Number of % Owned
Owned Being Before Shares Owned After
Currently registered offering After offering offering
Ralph Mann, Officer,
Director 6,086,583 2,000,000 (1) 39.25% 4,086,583 26.35%
Fordee Management Co.
Consultant to Nova 500,000 250,000 3.22% 250,000 1.61%
Diana Snow Trust 756,070 476,000 4.88% 75,000 .48%
Gerald Romero Trust 527,931 332,605 3.40% 195,236 1.26%
A-Z Professional
Consultants, Inc
Consultant to Nova 771,666 696,666 4.98% 280,070 1.81%
OTC Vision, Inc
Consultant to Nova 5,000 5,000 .03% -0- 0%
The Creative
Network, Inc.
Consultant to Nova 7,920 7,920 .05% -0- 0%
Promotions Distributor
Services Corp.
Vendor to Nova 27,425 27,425 .18% -0- 0%
Nova Pharmaceutical, Inc.
Debt Restructuring
Trust 390,335 390,335 (1) 2.52% -0- 0%
(1) Shares to be sold are subject to debt service agreements, which
require sale to meet monthly payment. Payments due are relatively
evenly spread out over a twelve to eighteen month time periods.
The above table assumes the sale of all of the common shares being
registered on behalf of selling security holders.
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USE OF PROCEEDS
Nova will not receive any proceeds from the sale of the shares of
common stock by the selling security holders pursuant to this
prospectus.
On March 31, 2000, Nova established the Nova Pharmaceutical, Inc. Debt
Restructuring Trust. Upon issuance of 390,335 shares of Nova's common
stock to this trust, Nova recorded an asset entitled Debt
Restructuring Trust Fund in the amount of $703,620. The trust is
dedicated to paying down Nova's restructured trade debt over an 18
month time period. As the trust sells the shares and pays down the
restructured debt, the Debt Restructuring Trust Fund asset will be
reduced and Nova's restructured trade debt will be reduced.
MARKET FOR COMMON STOCK
Our common shares are quoted on the OTC Bulletin Board under the
symbol NOVX and trading began on January 4, 2000. Before our common
shares were quoted on the OTC Bulletin Board, our common shares were
listed on the NQB Pink Sheets starting in March of 1999. The
following table shows quarterly low and high bid information for our
common shares from inception through May 15, 2000.
Low Bid High Bid
First Qtr 1998 (1) $ 3.50 $ 4.00
Second Qtr 1998 (1) $ 3.50 $ 3.50
Third Qtr 1999 (1) $ .125 $ 3.50
Fourth Qtr 1999 (1) $ .125 $ .15
First Qtr 2000 (2) $ .125 $ 3.00
Second Qtr 2000 (3) $ .625 $ 1.97
(1) NQB Pink Sheets commencing March of 2000.
(2) OTC Bulletin Board commencing January of 2000
(3) OTC Bulletin Board through May 15, 2000
DIVEDEND POLICY
We have never paid a cash dividend on our common stock and do not plan
to pay any cash dividends on our common stock in the foreseeable
future.
NOVA
Organization.
Nova was incorporated on January 8, 1998 in Nevada. On January 8,
1998, subsequent to incorporation, we purchased a portion of the
assets and liabilities of Canyon Fitness Center, Inc., a California
corporation. Canyon Fitness Center, Inc. was doing business as Canyon
Fitness Center, Canyon Fitness Center Weight Loss Clinic, Nova Weight
Loss Clinic and Nova International. Nova purchased the assets and
liabilities related to the weight loss management and weight loss
supplement businesses.
Nova did not purchase the fitness center operations of Canyon Fitness
Center, Inc., which was then owned by Showtime Partners. Included in
the liabilities assumed in the purchase from Canyon Fitness Center was
a group of debtors, who, by converting their debt into common stock,
along with minor negotiated equity adjustments, formed the initial
capitalization of Nova.
Ralph Mann 1,400,000 shares $ 618,995 debt
Showtime Partners 1,037,000 shares $ 333,840 debt
Dr Carlos Schmidt 250,000 shares $ -
Ralph Mann is a director and chief executive officer of Nova. Dr.
Carlos Schmidt is a director of Nova. Showtime Partners is a
partnership consisting of 21 irrevocable trusts whose beneficiaries
are all related to Ralph Mann.
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Formulation ($450,000), prepaid royalties ($200,000), and prepaid
licensing ($300,000) were included in the assets purchased. The
formulation and prepaid licensing assets reflect the capitalized costs
incurred by Canyon Fitness Center in the development, testing, and
patent registration of the formula, NxTrim. These assets were
purchased subject to a license and royalty agreement.
Under the terms of the agreement, we obtained world wide manufacturing
and marketing rights to the formula, NxTrim. In exchange, we are
obligated to pay a royalty of .00625% of net sales on the product
NxTrim, after the amortization of $200,000 prepaid royalties purchased
from Canyon Fitness Center. The term of the agreement is 10 years,
with a 10-year renewal at the option of the licensor. The terms also
include a minimum annual royalty of $25,000, and a cost of living
adjustment.
The license and royalty agreement was issued to Canyon Fitness Center,
Inc. by a group consisting of Ralph Mann, Showtime Partners, and Ralph
Mann Trusts 1-21 (partners in Showtime Partners). The royalty
agreement was assigned to Nova in the asset purchase transaction. On
Aug 7, 1997, a patent application had been filed for the NxTrim
formula for use as a weight loss supplement. The patent was
subsequently issued on July 20, 1999 (Patent Number 5,925,377).
We completed a reverse acquisition as of May 7, 1998. Nalbando
Enterprises, Inc., an inactive Nevada Corporation, purchased all the
assets and liabilities of Nova Pharmaceutical, Inc. (an operating
Nevada Corporation). Nalbando Enterprises, Inc., the surviving
corporation, immediately changed our name to Nova Pharmaceutical, Inc.
The original Nova Pharmaceutical, Inc., having sold all assets and
liabilities, became an inactive corporation. Financial results as
presented represent the activity for the entire reporting period of
the original operating Nova Pharmaceutical, Inc. and the minimal
incorporation activity for Nalbando Enterprises, Inc.
To reflect the true substance of the transaction, the acquisition was
treated financially as a purchase of Nalbando stock by Nova
Pharmaceutical, Inc, accompanied by a reorganization to the resulting
Nalbando capital structure. No goodwill or intangible assets were
recorded in this transaction. The purpose of this merger was to
provide additional capital expansion opportunities to Nova.
Industry Overview.
According to the Nutrition Business Journal, the U.S. nutrition
industry grew 11% to $23.2 billion in 1997. Growth rates ranged from
13% to 16% from 1994 to 1996. Future growth is forecasted to continue
to add $2.2 to $2.8 billion a year up to the year 2001. Growth in the
past few years has been accomplished by expansion in distribution as
more products have found their way into more health food stores,
penetrated further into the mass market, and into the still expanding
non-retail channels.
NBJ has estimated the growth of the supplement segment at 13% in 1997
to $12.7 billion, which, when compared to the 6% growth in the $92
billion drug and medicine market, indicates that the expansion is
continuing at the expense of the traditional markets. Per NBJ,
continuation of this cycle could result in the nutrition industry
growing to over $90 billion or 10% of the food, drug, and health store
markets by the year 2012.
Over the past several years, public awareness of the positive effects
of nutritional supplements on health has been heightened by widely
publicized reports and medical research findings indicating a
correlation between the consumption of nutrients and the reduced
incidence of certain diseases. These reports have indicated that the
United States government and universities generally have increased
sponsorship of research relating to nutritional supplements.
In addition, Congress has established the Office of Alternative
Medicine within the National Institutes of Health to foster research
into alternative medical treatment modalities, which may include
natural remedies. Congress has also recently established the Office of
Dietary Supplements in the National Institutes of Health to conduct
and coordinate research into the role of dietary supplements in
maintaining health and preventing disease.
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According to NBJ, the percentage of U.S. households that purchase
supplements (30% for herbs to 65% for multivitamins) is expected to
rise to 50% to 75% depending on which of the many consumer surveys you
believe. The number of shoppers who have consumed supplements,
alternative medicines, or natural products, or who have a high
awareness of them are also rising, paving the way for even greater
numbers of paying customers.
Brands and Products.
Nova markets our branded products in three principal categories of
nutritional supplements:
- - sports nutrition
- - vitamins, minerals and herbs
- - diet
Nova believes that offering our customers a wide variety of products
provides us an opportunity to capture an increasing share of the
growing nutritional supplement market. Nova's brand names are
supported by significant advertising and marketing expenditures.
Sports Nutrition
Nova's Gold's Gym sports nutrition line includes a wide variety of
products designed to enhance athletic performance and support the
results derived from exercise programs. The target customers for
Nova's Gold's Gym sports nutrition products are athletes, bodybuilders
and fitness enthusiasts. Nova's Gold's Gym sports nutrition products
are intended to generally enhance the consumer's ability to control
weight, support muscle growth, lose fat and increase energy levels and
stamina. Nova's Gold's Gym sports nutrition products deliver
nutritional supplements through a variety of forms, including powdered
drink mixes, tablets, capsules, and nutrition bars. The price range
for these products is, retail $10.80 to $39.96 with a wholesale of
$5.40 to $19.98.
Nova launched our Gold's Gym Nutrition line of products in July of
1999. The Gold's Gym name has been a highly recognized name in the
health and fitness Industry. The conclusion of a consumer awareness
study conducted by Colton Bernard Inc. was: "Clearly, Gold's Gym is
perceived as a national brand by a national public. Only the
"sneaker" brands, with their huge advertising and marketing budgets
and deep product penetration of multiple tiers, have a significantly
greater awareness among consumers than Gold's Gym."
Vitamins, Mineral and Herbs
Nova markets a complete line of vitamins and minerals, including
multivitamins, multiminerals, and antioxidants. These products are
offered in various forms, including tablets, capsules, and softgels.
Herbs and phytonutrients, which are a growing category in the
nutritional supplement industry, are alternatives or complements to
over-the-counter pharmaceutical products for consumers who seek a more
natural and preventative approach to their health care.
Diet
According to the Information Resources Inc. report (52 week ending
October 10, 1999), Nova's diet aid item, NxTrim, is California's
number one selling diet item per store in the drug class of trade, and
the nation's number 18 selling diet item. NxTrim utilizes amino
acids, vitamins, and herbs to promote weight control. In a 90 day
double-blind clinical study conducted by Nova, subjects using NxTrim
combined with a sensible diet and exercise program, lost an average of
27 pounds with no adverse side-effects. Participants using a placebo
lost an average of 10 pounds. Nova is also currently marketing NxBloc,
our second release in the diet aid category. NxBloc contains a fiber
blend that is designed to bind to ingested fat, making fat particles
too large to be absorbed by the body. NxBloc is currently available
in over 5,000 retail outlets nationwide.
Nova's diet aid products are specifically formulated, packaged and
priced to appeal to a wide variety of consumers with different
demographic characteristics and physiological needs. The price range
for these products is, retail $15.99 to $19.99 with a wholesale price
of $7.50 to $12.50.
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Sales and Distribution.
Nova's products are currently sold in over 15,000 retail outlets
nationwide. Nova's customers in the mass volume retail channel
include: Mass merchandisers - Wal-Mart and Fedco; Drug stores -
American Stores, Rite Aid, Longs Drug Stores, Drug Emporium;
Supermarkets - Albertson's, Giant, Fred Meyer, Ralph's, and Smith's.
Customers exceeding 10% of Nova's volume in the year ended 12-31-98
include, Longs Drug Stores, American Stores, and Wal-Mart. Customers
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exceeding 10% of Nova's volume in the year ended 12-31-99 include,
Longs Drug Stores, American Stores, and Rite-Aid. These chains are
among the first in which Nova attained distribution. As Nova's
expansion into other chains continues, there should be no chains
exceeding 10% of the total volume. Nova pursues a multi-channel
distribution strategy in order to participate in the growth being
experienced in each of these channels
Contracted Services.
Nova has established a nation wide network of brokers which provides
existing key relationships with major chain buyers in all classes of
trade. Nova utilizes contract manufacturers to provide high quality,
effective research and manufacturing capabilities. In addition Nova
utilizes a large distribution fulfillment house to provide excellent,
cost efficient distribution services. The team of brokers,
manufacturers, and distribution specialists established by Nova
provides an efficient, competitive, cost effective, low fixed overhead
base from which Nova can effectively increase it's share of the
growing nutritional supplement markets. Nova is able to take
advantage of the experience and talent pool of these contracted larger
firms on an as needed basis without having the fixed expense of
internal staffing. In the areas of raw material and freight
purchasing, Nova is able to share in the cost savings related to the
purchasing power of their larger contractors.
Marketing and Customer Sales Support.
As noted above, Nova has demonstrated our leadership ability in the
supplement industry through NxTrim's attainment of the number one
ranking in the California drug trade, and number 18 nationally. Nova
intends to broaden our leadership position in the nutritional
supplement industry. Nova's strategy includes:
- expanding distribution of our portfolio of established brands
through effective consistent advertising to increase our share of the
nutritional supplement market,
- developing new brands and product line extensions through
efficient utilization of research capabilities of internal staff,
contract manufacturers, raw material suppliers, and consultants,
- increasing national distribution through effective management
of broker network.
A key part of Nova's strategy is to help educate consumers about
innovative, safe and beneficial nutritional supplement products.
Nova's marketing and advertising expenditures totaled $616,991 in
fiscal 1999 and $658,327 in fiscal 1998. Nova has promoted our
products in consumer magazines (VOGUE and WOMAN'S DAY), and trade
magazines (BETTER NUTRITION, LET'S LIVE, CHAIN DRUG REVIEW, NATURAL
HEALTH, AND NATURAL LIVING). In addition, Nova advertises in most
major market newspapers (LA TIMES, NEW YORK TIMES, BOSTON GLOBE, and
CHICAGO TRIBUNE). Nova also utilizes national free standing inserts,
which include a coupon, to add additional consumer incentive to
purchase Nova's products.
Nova maintains Internet web sites at www.Novanx.com, and
www.goldsgymnutrition.com.
Manufacturing and Product Quality.
Nova is very selective in choosing manufacturers, requiring
experienced technical and research staffs, sufficient manufacturing
capability, good manufacturing practices, and an excellent contract
manufacturing reputation. Our management verifies, through product
sample review, reference checks, and production equipment review, that
the manufacturers are capable of obtaining the highest quality raw
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materials in the world, and that they have the productive capability
to meet the growing demand for nutritional supplement products while
maintaining high product quality standards. In order to assure
adequate capacity and product availability Nova maintains on-going
contact with additional manufacturers of similar capabilities.
Nova's contracted manufacturers are equipped with microbiological and
quality control laboratories. Production is evaluated using state of
the art testing procedures and equipment. Additional testing includes,
shelf life stability testing to determine the effects of aging,
certified outside laboratories to evaluate Nova's manufacturers
laboratory performance and to supplement testing capabilities, and
certification of raw material quality of critical ingredients. Nova
currently utilizes two different contract manufacturers to manufacture
all of our products. Universal Nutrition,Inc. manufactures NxTrim on a
purchase order by purchase order basis. The purchase order requires
that Nova be named additional insured on their product liability
insurance policy.
The contract with Nutripharmaceuticals, Inc. requires exclusive
manufacturing right for all Gold's Gym products developed in
conjunction with Nutripharmaceuticals for the life of the Gold's
contract. Other significant terms of the contract include; price
increases are limited to raw material cost increases, termination is
due only for cause not rectifiable in 30 days, and
Nutripharmaceuticals must maintain product liability of at least
$10,000,000 and name Nova as an additional insured. Research and
development of products is done by Nutripharmaceuticals for Nova at no
charge. This service is provided in order to attain future production
revenues as a result of developing successful new products.
Product Research and Development.
We believe it is important to develop new products in the
nutritional supplement industry in order to increase market share by
capitalizing on new market opportunities, and to strengthen
relationships with customers by meeting their constantly changing
demands. To support our commitment to research and development, Nova
utilizes the capabilities of our internal staff coupled with the
staffs of each of their contract manufacturers. In addition, Nova
maintains strong relationships with raw material suppliers, who are
often the first entities to identify new opportunities. Because of
the competitiveness in the contract manufacturing industry and in the
raw material supply industry, Nova is able to obtain excellent
research and development without cost to Nova. Beyond the research
and formulation done by Nova's contract manufacturers, Nova `s
internal expenditures for research and development are estimated at
$88,000 for the year ended 12-31-98, and $30,000 for the year ended 6-
30-99.
Competition.
The market for the sale of nutritional supplements is highly
competitive. Competition is based principally upon price, quality of
products, customer service and marketing support. Nova's position on
pricing is to reach parity, unless the particular product has a
significant marketing point of difference warranting a premium to
competition. Nova's position on quality as described in the above
section is to utilize the highest quality raw materials and to have
product manufactured consistently according to good manufacturing
practices. Nova's customer service is supported by very conscientious
employees, and by a large, professional distribution fulfillment
house. Nova's marketing support includes an aggressive newspaper and
magazine advertising programs, coupons, customer cooperative
advertising, and customer product display programs.
In the future, Nova believes that it will be able to compete
effectively in the nutritional supplement industry. Essential to being
able to compete effectively is the continuation of Nova's aggressive
advertising and promotion programs, which have made NxTrim the number
one selling item in the California Drug trade. Utilizing this
approach, Nova anticipates attaining profitability when the number of
stores selling Nova products exceed 35,000 of the more than 117,000
stores in the drug, food, health, and mass merchandise trades. When
the stores exceed 35,000, the national advertising campaign costs are
covered, and stores above that number require significantly less
additional advertising dollars. Currently Nova is selling in
approximately 15,000 stores.
13
As the nutritional supplement industry grows and evolves, Nova
believes retailers will rely heavily on suppliers, such as Nova, that
can respond quickly to new opportunities, support them with production
capacity and flexibility, and provide high margin products. Nova's
staff constantly stays in tune with consumers, seeking new product
ideas from the various news sources, magazines, gyms, internet
research, suppliers, and manufacturers. Utilizing the resources of
our staff, manufacturers, and suppliers, Nova is able to quickly and
effectively develop the kind of imaginative, multi functional, value
added products which meet current consumer needs and provide high
margins required for support by the retail trades.
Government Regulation.
The manufacturing, packaging, labeling, advertising, distribution and
sale of Nova's products are subject to regulation by one or more
governmental agencies, the most active of which is the Food and Drug
Administration, which regulates Nova's products under the Federal
Food, Drug, and Cosmetic Act and related regulations. The FDCA has
been amended several times with respect to dietary supplements, most
recently, by the Nutrition Labeling and Education Act of 1990, and
DSHEA. Nova's products are also subject to regulation by the Federal
Trade Commission, the Consumer Product Safety Commission, the United
States Department of Agriculture and the Environmental Protection
Agency. Nova's activities are also regulated by various agencies of
the states, and localities to which Nova distributes our products. The
FTC, which exercises jurisdiction over the advertising of nutritional
and dietary supplements under the Federal Trade Commission Act, has in
the past several years instituted enforcement actions against several
nutritional supplement companies alleging false and misleading
advertising of certain products. These enforcement actions have
resulted in the payment of fines and/or consent decrees by certain of
the companies involved.
Nova may be subject to additional laws or regulations administered by
the FDA or other federal, state or foreign regulatory authorities, to
the repeal or amendment of laws or regulations, or to more stringent
interpretations of current laws or regulations. Nova is unable to
predict the nature of such future laws, regulations, interpretations
or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if
promulgated, would have on our business in the future. They could,
however, require reformulation of certain products to meet new
standards, recall or discontinuance of certain products not able to be
reformulated, imposition of additional record keeping requirements,
expanded documentation of the properties of certain products, expanded
or different labeling and scientific substantiation. Any or all such
requirements could have a material adverse effect on Nova's results of
operations and financial condition.
Product Liability Insurance.
Because Nova's products are ingested, we face the risk that materials
used may be contaminated with substances that may cause sickness or
other injury to persons who have used them. Although Nova's
manufacturing alliances maintain production and operating standards
designed to prevent such events, certain portions of the process of
product development, including the production, harvesting, storage and
transportation of raw materials and finished goods are not within the
control of Nova. Furthermore, sickness or injury to persons may occur
if products manufactured by Nova are ingested in a manner exceeding
the dosage recommended on the product label. Nova cannot control
misuse of our products by consumers, or the marketing, distribution
and resale of our products by our customers. With respect to product
liability claims, Nova has product liability insurance of $5 million,
and Nova's manufacturing alliances carry product liability insurance
coverage up to $10 million. Nova's product liability insurance does
not cover non-safety claims relating to Nova's products, such as
noncompliance with label claims or similar matters.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
14
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
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
15
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 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
16
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.
MANAGEMENT
The names and ages of our executive officers and directors as of May
15, 2000, are as follows:
Name Age Position Term
Ralph Mann 58 CEO/Director Inception to
Present
James Ayres 28 Sr. Vice President,
Secretary,Director Inception to
Present
17
Robert Eggering 56 Chief Financial From 4-30-98
Officer to Present
Fred Zinos 56 Sr. Vice President From 11-2-98
Sales & Marketing Present
Carlos Schmidt, M.D. 52 Director Inception to
Present
Mr. Ralph Mann, President and Chief Executive Officer, founded Nova
Pharmaceutical in January 1998 and became the Chairman of the Board in
February 1998. From September 1992 to December 1997, Mr. Mann owned
and acted as President for Canyon Fitness Center, Inc., a health club
business. From May 1975 to July 1989, Mr. Mann was the majority
shareholder and Chief Executive Officer of the Glen Ivy Financial
Group, a time share business.
Mr. James Ayres, Senior Vice President & Secretary joined us in
January 1998 and became a board member in February 1998. From November
1989 to December 1997, Mr. Ayres was Vice President and acting General
Manager of Canyon Fitness Center, Inc., a health club business. Mr.
Ayres received an Associate Arts degree and an Associate of Science
degree (1993) from San Jacinto College, California.
Mr. Robert Eggering, Chief Financial Officer, joined us in April of
1998. From May of 1997 to April of 1998, Mr. Eggering was Controller
of Coast Converters, Inc., a custom plastic bag manufacturer. From
April 1996 to April 1997, Mr. Eggering was Controller of Tempo/Pacific
Coast One Stop, a wholesale and retail recorded music distributor.
Prior to joining Pacific Coast, Mr. Eggering held positions with
ConAgra, Inc., a conglomerate with grain commodity trading, meat and
food processing businesses. Mr. Eggering received a Bachelor's Degree
(1966) in Psychology from St. Louis University and a Master's Degree
(1971) in Accounting from Missouri University.
Mr. Fred Zinos, Senior Vice President of Sales & Marketing, joined us
in November of 1998. From June of 1997 to October of 1998, Mr. Zinos
was Vice President of Sales and Marketing for Enforma Natural
Products, Inc., a natural product manufacturer. From January of 1996
to May of 1997, Mr. Zinos was Vice President of Sales for Nature's
Products Inc., a natural product manufacturer. Prior to joining
Nature's Products, Mr. Zinos held positions with Shelby Health
Systems, a natural products manufacturer. Mr. Zinos received a
Bachelor's Degree (1965) in Business Administration from the
University of Wisconsin.
Dr. Carlos Schmidt, M.D., Supervising Physician, joined us in January
of 1998, and became a board member in February of 1998. From July of
1996 to present, Dr. Schmidt is a Medical Director at the Bristol Park
Medical Group. From July of 1987 to June of 1996, Dr. Schmidt was an
ER Physician and Assistant Director of Emergency Services at Mission
Hospital. Dr. Schmidt received a Bachelor's Degree in Science and a
Medical Degree (1973) from the University of Guadalajara School of
Medicine.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation received for services rendered to us during the years
ended December 31, 1999 and 1998 by the chief executive officer, as
well as all other executive officers of Nova who received compensation
in excess of $100,000.
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Annual Compensation All Other
Salary Bonus Compensation*
Ralph Mann, President 1998 $32,756 N/A $2,852
1999 $50,104 N/A $1,146
Fred Zinos, Vice President 1999 $90,000 N/A $8,347
Robert Eggering 1999 $90,000 N/A $35,466
18
* Other compensation includes payment for medical and dental
benefits. In Mr. Eggering's case, the amounts additionally include
contracted life insurance amount of 25,808, ($15,000 for 1999 and
$10,808 payment in arrears for 1998)
During the 1998 fiscal year, we entered into an employment agreement
with Fred Zinos. The agreement is on an at-will basis. Under the
terms of the agreement, Mr. Zinos is required to devote his full time
to our business. We have agreed to pay him a base salary of $90,000
annually. We will pay him cash bonuses based upon the following: 10%
of annual salary for attainment of gross sales within 80% of plan, 20%
for 100% attainment of plan gross sales, and 30% for attainment of 20%
above gross sales plan. The plan is prepared annually by Nova
employees and approved by the president. The only deduction from
gross sales used in computing this compensation is returned goods. In
addition, we have agreed to grant him the option to purchase common
stock at $2.00 per share, based upon the following: 5,000 shares for
80% attainment of plan sales, 10,000 shares for 100% attainment of
plan gross sales, and 25,000 shares for attainment of 25% above plan
gross sales.
During the 1998 fiscal year, we entered into an employment agreement
with Robert Eggering. The agreement is on an at-will basis. Under the
terms of the agreement, Mr. Eggering is required to devote his full
time to our business. We have agreed to pay him a base salary of
$90,000 annually. In addition, we have agreed to pay him $15,000
annually toward a whole life insurance policy maintained by his spouse
on his life.
In January of 2000, options to purchase shares of common stock
at the then market price of $.15 per share were granted to
Ralph Mann (200,000 shares), James Ayres (180,000 shares),
Fred Zinos (135,000 shares), and Robert Eggering (135,000 Shares).
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of March 31, 2000 by each
shareholder known by us to own beneficially more than 5% of the common
stock and by each director and all directors and executive officers as
a group:
Number of
Name, Title & Address Shares(1) Percentage
Ralph Mann, Chief Executive
Officer and Director
3811 Stone Meadow
Murrieta, Ca 92562 4,086,583 26.35%
Ralph Mann Trust # 1, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 1,006,724 6.49%
Ralph Mann Trust # 2, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 1,006,724 6.49%
Ralph Mann Trust # 3, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 1,006,724 6.49%
Ralph Mann Trust # 21, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 1,006,724 6.49%
Ralph Mann Trust # 10, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 11, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 12, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
19
Ralph Mann Trust # 13, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 14, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 15, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 16, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 17, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 18, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 19, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 20, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 5, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 6, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 7, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 8, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Ralph Mann Trust # 9, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 5,000 (3)
Showtime Partners (4) 490,007 3.16%
31712 Casino Dr Ste 7B
Lake Elsinore, Ca 92530
Carlos Schmidt M.D., Director
613 Avenida Acapulco
San Clemente, Ca 92672 250,000 1.61%
James Ayres, Senior Vice President,
and Director
25573 Dorval Ct
Menifee, Ca 92584 100 (3)
Robert Eggering, Chief Financial Officer
23089 Joaquin Ridge Dr
Murrieta, Ca 92562 600 (3)
Fred Zinos, Senior Vice President
24375 Jackson Ave
Murrieta, Ca 92562 100 (3)
All Directors and Officers
as a group (6 persons) 6,337,383 40.86%
20
(1) This table is based upon information derived from our stock
records. Unless otherwise indicated in the footnotes to this table
and subject to community property laws where applicable, we believe
that each of the shareholders named in this table has sole or shared
voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based upon 15,508,741
shares of Common Stock outstanding as of March 31,2000.
(2) Ralph Mann Trusts #1 to #21 are irrevocable trusts whose
beneficiaries are relatives of Ralph Mann, Director and Chief
Executive Officer
(3) Individual owns less than 1%
20
(4) Showtime Partners is a partnership of 21 irrevocable
the beneficiaries of which are all related to Ralph
Mann, Director and Chief Executive Officer
RELATED PARTY TRANSACTIONS
Private Placement of Securities.
On May 8, 1998 Nova Pharmaceutical, Inc did a reverse merger with
Nalbando Enterprises, Inc. Nalbando Enterprises Inc. was the
surviving corporation and it immediately changed our name to Nova
Pharmaceutical, Inc. In conjunction with that merger, Ralph Mann,
director and president obtained 5,600,000 shares of restricted common
stock in surviving corporation, named Nova Pharmaceutical Inc. in
exchange for common stock in the former Nova Pharmaceutical, Inc. In
the same transaction, Showtime Partners (a general partnership
consisting of 21 irrevocable trusts established in 1989 whose
beneficiaries are all related to Ralph Mann) received 4,150,000 shares
of restricted common stock in the surviving corporation in exchange
for common stock in the former Nova Pharmaceutical, Inc. In
conjunction with the same transaction, Dr Carlos Schmidt, M.D.,
Director received 250,000 shares of restricted common stock in the
surviving corporation in exchange for stock in the former Nova
Pharmaceutical, Inc.
Transactions with Directors and Officers
A royalty agreement exists between Nova and a licensing group
consisting of Showtime Partners (shareholder), Ralph Mann (director,
chief executive officer, shareholder), and Ralph Mann Trusts 1-21,
shareholders and partners in Showtime Partners. The terms of the
royalty agreement were outlined in the Organization section above.
Nova amortized the prepaid royalty of $4,412 in the twelve months
ended December 31, 1999, and $11,684 in the same period of 1998.
Ralph Mann has lent Nova money for operating funds under a note
payable agreement. The principal balance of the Note was $700,400 at
December 31, 1999 and zero at December 31, 1998. Interest accrued
totaled $19,239 at December 31, 1999. The terms of the note payable
include an annual interest rate of 6%, principal and accrued interest
due and payable on January 31, 2001. On March 31, 2000, Ralph Mann
converted the principal and accrued interest expense on this note to
common stock in conjunction with a debt restructuring plan conducted
by Nova.
Showtime Partners has lent Nova money for operating funds under a note
payable agreement. Showtime, a shareholder in Nova, is a general
partnership consisting of 21 irrevocable trusts established in 1989
whose beneficiaries are all related to Ralph Mann (shareholder,
officer, and director of Nova). The principal balance of the Note was
$311,097 at December 31, 1999 and $625,730 at December 31, 1998.
Interest accrued totaled $35,623 at December 31, 1999 and $13,025 at
December 31, 1998. The original date of the note payable was May 7,
1998 in the amount of $203,000. The terms of the note payable include
an annual interest rate of 6%, principal and accrued interest due and
payable on January 31, 2001. Ralph Mann negotiated with Showtime
Partners trustee to convert $500,000 of notes payable to 204,082
shares of Rule 144 restricted common stock. The conversion was made
on March 31, 1999. Subsequent to December 31, 1999, On March 31, 2000
Showtime converted the principal and interest accrued on this note to
common stock in conjunction with a debt restructuring plan conducted
by Nova.
21
As of December 31, 1999 and December 31, 1998, Nova has a note payable
to Ralph Mann, CEO, and director in the amount of $5,000. The note,
dated May 6, 1998, bears interest at an annual rate of 7%, with
principal and interest due and payable on December 31, 1999. The note
was given in exchange for Mr. Mann's shares of preferred stock. The
preferred stock was issued and subsequently exchanged for notes by
Nova prior to the reverse acquisition with Nalbando Enterprises, Inc
in May of 1998. On March 31, 2000, Ralph Mann converted the
principal and interest accrued on this note to common stock in
conjunction with a debt restructuring plan conducted by Nova.
As of December 31, 1999 and December 31, 1998, Nova holds a promissory
note receivable dated August 31, 1998 from Dr Carlos Schmidt, MD,
Director, in the amount of $5,000. The note bears interest at an
annual rate of 6% and has a stated principal payment date of December
31, 1998. Nova has agreed to extend the principal and accrued
interest payment date to March 5, 2000. As of December 31, 1998 and
December 31, 1999, Nova also holds a promissory note receivable dated
March 5, 1998 from Dr Carlos Schmidt, MD, Director, in the amount of
$10,000. The note bears interest at an annual rate of 6% with
principal and accrued interest payable on March 5, 2000.
We have utilized the services of the J Mann Studios for professional
artwork, packaging development, printed materials, packaging samples,
and print advertising development. John Michael, owner of J Mann
Studios, is the brother of Ralph Mann, director and chief executive
officer of Nova. Payments to J Mann Studios totaled $104,682 in the
calendar year 1998, and $41,067 for the twelve months ended December
31, 1999. We believe that the above transactions were entered into on
terms no less favorable than would be obtained from unrelated third
parties.
DESCRIPTION OF SECURITIES
The following description of Nova Pharmaceutical, Inc.'s
common and preferred stock is a summary only. This summary is
qualified in our entirety by reference to the applicable
instruments and governing law, including without limitation,
Nova's Articles of Incorporation and ByLaws and the laws of
the state of Nevada.
Common Stock
Authorized shares of common stock total 100,000,000 with a par value
of $.001 per share as of March 31, 2000. Issued and outstanding
shares of common stock total 15,554,443 shares at March 31, 2000. At
March 31, 2000, there were outstanding options to purchase 650,000
shares of common stock at an option price of $.15 per share.
Each common shareholder may cast one vote for each share held of
record on all matters submitted to vote There are no cumulative voting
rights in the election of directors. Common shareholders are
entitled to receive dividends when and if declared by the Board of
Directors. Common shareholders are entitled to a share in the
distribution of assets after payment of all money owed to Nova's
creditors. There are no preemptive rights to purchase additional
shares offered by Nova.
Preferred Stock
As of March 31, Nova has authorized 25,000,000 shares of preferred
stock, none are issued, or outstanding.
Our board of directors can issue preferred stock at any time with any
legally permitted rights and preferences without your approval. Our
board of directors, without your approval, is authorized to issue
preferred stock. They can issue different classes of preferred stock,
with some or all of the following rights or any other rights they
think are appropriate and that are legal:
Voting
Dividend
Required or optional repurchase by us
Conversion into common stock, with or without
additional payment
Payments preferred stockholders will receive before
common stockholders if we go out of business forever
22
The issuance of preferred stock could provide us with flexibility for
possible acquisitions and other corporate purposes. But it also could
render meaningless your right to vote your stock on a matter that you
are entitled to vote on because preferred stockholders could own
shares with a majority of the votes required on any issue. Someone
interested in buying our company may not follow through with their
plans because they could find it more difficult to acquire, or be
discouraged from acquiring, a majority of our outstanding stock
because we issue preferred stock. The issuance of preferred stock can
adversely affect any and all the rights of the common shareholders,
depending on the preferences and terms approved by the Board of
Directors for the preferred issue.
PLAN OF DISTRIBUTION
The selling security holders may use any one or more of the
following methods when selling shares:
- ordinary brokerage transactions and transactions in which
the broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by
the broker-dealer for our account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- - privately negotiated transactions;
- - short sales;
- broker-dealers may agree with the selling security holders to
sell a specified number of such shares at a stipulated
price per share;
- a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
The selling security holders may also sell shares under Rule 144
promulgated under the Securities Act, if available, rather than
under this prospectus.
The selling security holders may also engage in short sales
against the box, puts and calls and other transactions in our
securities or derivatives of our securities and may sell or
deliver shares in connection with these trades.
The selling security holders may pledge their shares to their
brokers under the margin provisions of customer agreements. If
a selling security holder defaults on a margin loan, the broker
may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling security holder may arrange
for other broker-dealers to participate in sales. Broker-
dealers may receive commissions or discounts from the selling
stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be
negotiated.
The selling security holders and any broker-dealers or agents that
are involved in selling the shares may be deemed to be
"underwriters" within the meaning of the Securities Act in
connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on
the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares. In some circumstances, we have agreed to
indemnify the selling security holders against certain losses and
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
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
23
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 income (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 Nova'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 Nova's
results of operations.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the securities
offered hereby will be passed upon by J. M. Walker, Attorney-At-Law.
EXPERTS
The financial statements for the fiscal years ended December 31, 1999
and 1998 included in this Prospectus have been so included in reliance
on the report of Sarna & Company, independent accountants, given on
the authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement under the Act with respect to the securities
offered hereby. This prospectus does not contain all of the
information set forth in the registration statement, some parts are
omitted in accordance with the rules and regulations of the
Commission. For further information with respect to Nova and the
securities offered hereby, reference is made to the Registration
Statement. Copies of such materials may be examined without charge
at, or obtained upon payment of prescribed fees from, the Public
Reference Section of the Commission at Room 1024, telephone number 1-
800-SEC-0330, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549, at the Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and the New
York Regional Office, 7 World Trade Center, New York, New York 10048.
We will voluntarily file periodic reports in the event our
obligation to file such reports is suspended under Section
15(d) of the Exchange Act.
We will provide without charge to each person who receives a
prospectus, upon written or oral request of such person, a copy of any
of the information that was incorporated by reference in the
prospectus. Requests for copies of said documents should be directed
to Ralph Mann, President.
The Commission maintains a Web site -- //www.sec.gov -- that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. This
prospectus and our future periodic statements will be available on the
SEC website.
No dealer, salesman, agent or any other person has been authorized to
give any information or to make any representation other than those
contained in this prospectus. If given or made, this information or
24
representation must not be relied on as having been authorized by Nova
or the underwriter, if an underwriter assists in the sale of the
securities. This prospectus does not constitute an offer or a
solicitation by anyone to any person in any state, territory or
possession of the United States in which the offer or solicitation is
not authorized by the laws thereof, or to any person to whom it is
unlawful to make such offer or solicitation.
Neither the delivery of this prospectus or any sale made hereunder
shall, under any circumstances, create an implication that there has
not been any change in the facts set forth in this prospectus or in
the affairs of Nova since the date hereof.
INTERESTS OF NAMED
EXPERTS AND COUNSEL
Jody M. Walker, securities attorney for Nova owns 10,000 common
shares. These securities were issued as partial payment for services.
None of the other experts or counsel named in the prospectus are
affiliated with Nova.
Index to financial statements filed with this report
Unaudited Financial Statements
F-1 Balance Sheets as of March 31, 2000 & 1999
F-2 Statement of Operations and Accumulated Deficit for
Quarters Ended March 31, 2000 & 1999
F-3 Statement of Cash Flows for the Quarters Ended March
31, 2000 & 1999
F-4 Footnotes to the Financial Statements for the Quarter
Ended March 31, 2000
Audited Financial Statements
F-5 Report of Independent Certified Accountants
F-6 Balance Sheets as of December 31, 1999 & 1998
F-7 Statement of Operations and Accumulated Deficit for
Years Ended December 31, 1999 & 1998
F-8 Statement of Changes in Stockholders' Equity for the
Years Ended December 31, 1999& 1998
F-9 Statement of Cash Flows for the Years Ended December
31, 1999 & 1998
F-10 Footnotes to the Financial Statements for the Years
Ended December 31, 1999 & 1998
25
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
26
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
27
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
28
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
29
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
30
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.
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.
31
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)
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.
NOTE 9 - SUBSEQUENT EVENTS
Subsequent to March 31, 2000, the market value of the investment held by
the Debt Restructuring Trust Fund (Nova common stock) has declined. The
result of the decline in market value would cause a reduction of the
Trust Fund asset and a corresponding charge to operations of approximately
$234 thousand.
32
To the Board of Directors
Nova Pharmaceutical, Inc.
We have audited the accompanying balance sheet of Nova Pharmaceutical,
Inc., as of December 31, 1999 and 1998 and the related statements of
operations and accumulated deficit, changes in stockholders' deficit,
and statement of cash flows for the years then ended. These financial
statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Nova
Pharmaceutical, Inc. as of December 31, 1999 and 1998, and the result
of its operations, changes in stockholders' deficit and cash flows for
the years ended December 31, 1999 and 1998, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the company will continue as a going concern. At December 31, 1999 the
Company had cash and equivalents of $23,928, and negative working
capital of $689,890. The Company generated losses of $582,184 for the
fiscal year ended December 31, 1998 and $2,523,982 for fiscal 1999.
The Company will require a significant amount of capital to continue
its planned operations. The Company's ability to continue as a going
concern is dependent upon its ability to secure an adequate amount of
capital to finance its anticipated losses and planned principal
operations. There is no assurance that the Company will be successful
in these efforts. These factors, among others indicate that the
Company may be unable to continue as a going concern. These financial
statements do not include any adjustments that might result from the
outcome of these uncertainties.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental statement of
operating expenses is presented for the purposes of additional analysis
and is not a required part of the basic financial statements and, in
our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
Sarna & Company
Westlake Village, California
March 28, 2000
33
NOVA PHARMACEUTICAL, INC.
BALANCE SHEET
Assets DECEMBER 31,
1999 1998
Current Assets
Cash $ 23,928 $ 103,644
Accounts Receivable, Net 130,292 399,527
Inventory 72,548 66,751
Prepaid Expenses 256,425 146,251
Other Receivables - Related Party 15,000 15,736
----------- ---------
Total Current Assets 498,193 731,909
Property and Equipment 45,700 39,490
Other Assets
Formulations 430,000 460,000
Prepaid Royalties 183,724 188,136
Prepaid Licensing 260,000 280,000
Refundable Deposits 6,089 2,600
Organizational Costs 0 7,375
----------- ---------
Total Other Assets 879,813 938,111
----------- ---------
Total Assets $1,423,706 $1,709,510
=========== ==========
Liabilities and Stockholders' Deficit
Current Liabilities
Current Portion of Long Term Debt $ 5,000 $ 5,000
Accounts Payable and
Accrued Expenses 1,183,083 694,565
Total Current Liabilities 1,188,083 699,565
Long Term Debt - Related Party 1,011,497 625,730
Stockholders' Equity
Common Stock $.001 Par Value, 25,000,000
Shares Authorized, 12,715,282 and
12,400,000 shares issued in 1999 and 1998
respectively 12,715 12,400
Additional Paid in Capital 2,317,577 953,999
Accumulated Deficit <3,106,166> <582,184>
----------- ----------
Total Stockholders' Deficit <775,874> 384,215
---------- ---------
Total Liabilities and Stockholders' Deficit $1,423,706 $1,709,510
=========== ==========
See Notes to Financial Statements
34
NOVA PHARMACEUTICAL, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED
DECEMBER 31,
1999 1998
---------- -----------
Revenues $ 766,972 $ 1,934,529
Cost of Sales
Beginning Inventory 66,751 <0>
Direct Labor 42,167 28,045
Purchases 399,557 732,507
Total Available 508,475 760,552
Less: Ending Inventory < 72,548> <66,751>
--------- --------
Total Cost of Sales 435,927 693,801
--------- --------
Gross Profit 331,045 1,240,728
Operating Expenses
Sales and Marketing 969,935 985,044
General and Administrative 1,549,836 748,028
Royalty Expense - Related Party 4,412 11,864
--------- ---------
Total Operating Expenses 2,524,183 1,744,936
--------- ---------
Interest Expense 279,732 64,951
Interest Expense - Related Party 42,137 13,025
Write Off Deferred Organizational
Expense 7,375 0
--------- ---------
Total 329,244 77,976
Loss Before Provision for Income Taxes <2,522,382> <582,184>
Provision for Income Taxes <1,600> <0>
--------- -------
Net Loss <2,523,982> <582,184>
========= =======
Deficit, Beginning of Year <582,184> <0>
Accumulated Deficit, End of Year $<3,106,166> $<582,184>
Net Loss per Share $ <0.20> $ <0.05>
Weighted Average Shares Outstanding 12,690,419 in 1999, and
11,733,333 in 1998.
See Notes to Financial Statements
35
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Common Stock Preferred Stock Additional
Par Value $.001 Par Value $.01 Paid in Accumulated Total
Shares Amount Shares Amount Capital Deficit Equity
Common Stock Issued
Commencement of
Operations 2,500,000 $ 2,500 500,000 $ 5,000 $945,335 <0> $952,835
Retirement of
Preferred Stock <500,000> <5,000> <5,000>
Reverse Acquisition and
Recapitalization -
Nalbando Enterprises 8,900,000 8,900 <336> 8,564
Sale of Common Stock
Reg D 504 Private
Placement Offering 1,000,000 1,000 9,000 10,000
Net Loss Year Ended
December 31, 1998 <582,184> <582,184>
---------- ------- ---- ---- ------- -------- -------
Balance December 31,
1998 12,400,000 12,400 <0> <0> 953,999 <582,184> 384,215
Common Stock Issued
In Exchange For
Services 110,000 110 37,390 37,500
Fees For Services
Raising Capital <45,000> <45,000>
Employee Stock
Bonus 1,200 1 4,199 4,200
Conversion Debt to
Common Stock 204,082 204 714,082 714,286
Contributions to
Capital from
Shareholders 652,907 652,907
Net Loss Year Ended
December 31, 1999 <2,523,982> <2,523,982>
---------- ------- --- --- ---------- ----------- ----------
Balance December 31,
1999 12,715,282 $12,715 <0> $<0> $2,317,577 $<3,106,166> $ <775,874>
See Notes to Financial Statements
36
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED
DECEMBER 31,
1999 1998
Cash Flows from Operating Activities:
Net Loss $(2,523,982) $(582,184)
Adjustments to Reconcile Net Income to
Net Cash Used by Operating Activities
Depreciation 8,857 5,245
Royalty Expense Amortization 4,412 11,864
Other Asset Amortization 50,000 51,231
Cash Acquired - Weight Loss Supplement Business 23,208
Non-Cash Expenses
Consulting Fees exchanged for Common Stock 41,700
Consulting Fees contributed by Shareholders 95,407
Accounting Change - Write Off Organization
Expense 7,375
Imputed Interest Expense on Debt Conversion 214,286
Change in Assets and Liabilities Net Of Effects of
Purchase of Weight Loss Supplement Business
in 1998 (Increase) Decrease in:
Accounts Receivable 269,235 (397,428)
Inventory (5,797) 47,721
Prepaid Expenses 22,326 (129,155)
Other Receivable 736 (9,428)
Other Assets (3,489) (3,606)
Increase in:
Accounts Payable and Accrued Expenses 68,518 518,245
-------- --------
Net Cash Used by Operating Activities 950,416) (464,287)
Cash Flow from Investing Activities
Acquisition of Formulations (40,000)
Purchase of Property and Equipment (15,067) (37,364)
-------- -------
Net Cash Used by Investing Activities (15,067) (77,364)
Cash Flow from Financing Activities
Debt Financing 885,767 630,730
Issuance of Common Stock 14,565
-------- -------
Net Cash Provided from Financing Activities 885,767 645,295
Net Increase (Decrease) in Cash (79,716) 103,644
Cash at Beginning of Period 103,644 <0>
Cash at End of Period $ 23,928 $ 103,644
Supplemental Disclosure:
Interest Paid $ 107,583 $ 77,976
See Notes to Financial Statements
37
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS - (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company purchased assets and liabilities of the weight loss
supplement business from Canyon Fitness Center, Inc. on January 8,1998.
The initial capitalization of the Company substantially consisted of
conversion of notes payable acquired in this transaction into common
and preferred stock.
Fair Value of Assets Acquired $ 1,128,154
Notes Payable Assumed (952,835)
Liabilities Assumed (175,319)
Other Purchase Compensation $ -0-
Conversion of Notes Payable into Common Stock
Common Stock $ 2,500
Preferred Stock 5,000
Paid in Capital 945,335
Total Notes Converted $ 952,835
In May of 1998, the Company exchanged preferred stock of $5,000 for a
note payable to a shareholder. The market value of the preferred stock
was estimated to be face value at the date of the exchange.
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 12 months ended December 31, 1999 the Company issued 10,000
shares of common stock for legal and investor relation services. The
shares were recorded at a market value $37,500, and charged to legal or
consulting expenses.
In the 12 months ended December 31, 1999, Shareholders contributed
shares of common stock to investor relation and investment counseling
firms on behalf of the Company. These contributions were recorded at a
share market value of $652,907, and either expensed, or deferred as a
prepaid expense, depending on the terms of the related contracts.
In the twelve months ended December 31, 1999, the Company accrued
$45,000 and issued 100,000 shares of common stock in exchange for
services related to the sale of stock and the subsequent 15c211
registration of that stock in March of 1999. The common shares were
issued at a market value of $350,000. A corresponding entry was made
to reduce paid in capital for both the amount accrued and the market
value of the common stock.
See Notes to Financial Statements
38
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Nova Pharmaceutical, Inc. (referred to as the "Company" or "Nova"), was
incorporated on January 8, 1998 under the laws of the state of Nevada.
The incorporation consisted of a purchase of a portion of the assets
and liabilities of Canyon Fitness Center, Inc., a California
corporation. Canyon Fitness Center, Inc., was then owned by Showtime
Partners. Included in the liabilities assumed in the purchase from
Canyon Fitness Center was a group of debtors, who, by converting their
debt into common stock, along with negotiated equity adjustments,
formed the initial capitalization of Nova. The group forming the
initial capitalization of the Company includes: Ralph Mann, a Director
and Chief Executive Officer of the Company, Dr. Carlos Schmidt, a
Director of the Company, and Showtime Partners. Showtime Partners is a
partnership consisting of 21 irrevocable trusts, the beneficiaries of
which are all related to Ralph Mann. Included in the assets purchased
were: formulation ($450,000), prepaid royalties ($200,000), and prepaid
licensing ($300,000). The formulation and prepaid licensing assets
reflect the capitalized costs incurred by Canyon Fitness Center in the
development, testing, and patent registration of the formula, NxTrim.
These assets were purchased subject to a license and royalty agreement.
Under the terms of the agreement, the Company obtained worldwide
manufacturing and marketing rights to the formula, NxTrim. In exchange,
the Company is obligated to pay a royalty of .00625% of the net sales
on the product, NxTrim, after the amortization of the $200,000 prepaid
royalties purchased from Canyon Fitness Center. The term of the
agreement is 10 years, with a 10 year renewal, which includes a cost of
living adjustment at the option of the licensor. The terms also include
a minimum annual royalty of $25,000 subsequent to full amortization of
the prepaid royalty amount. The license and royalty agreement, which
was issued to Canyon Fitness Center, Inc. by a group consisting of
Ralph Mann, Showtime Partners, and Ralph Mann Trusts 1-21 (partners in
Showtime Partners), was assigned to Nova in the aforementioned asset
purchase transaction.
Merger
Nova Pharmaceutical, Inc. completed a reverse acquisition as of May
7,1998. Nalbando Enterprises, Inc. (an inactive Nevada Corporation)
purchased all the assets and liabilities of Nova Pharmaceutical,
Inc.(an operating Nevada Corporation. Nalbando Enterprises, Inc., the
surviving corporation, immediately changed its name to Nova
Pharmaceutical, Inc. The original Nova Pharmaceutical, Inc., having
sold all assets and liabilities, became an inactive corporation.
Financial results as presented represent the activity for the entire
reporting period of the original operating Nova Pharmaceutical, Inc.
and the minimal incorporation activity of Nalbando Enterprises, Inc.
To reflect the true substance of the transaction, the acquisition was
treated financially as a purchase of Nalbando stock by Nova
Pharmaceutical, Inc., accompanied by a reorganization to the resulting
Nalbando capital structure.
39
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Nature Of Operations
The Company develops and sells various licensed medical and nutritional
supplement products. Products are manufactured and packaged on a
contract basis by others. The Company maintains executive and sales
offices at Lake Elsinore, California.
Prior Operations
Nalbando Enterprises, Inc. was incorporated on February 6, 1998, and
therefore had no operations in the prior year. In the year ended
December 31, 1997, prior to Nova's purchase of the Weight Loss segment
from Canyon Fitness Center, this segment was in a start up mode,
substantially engaged in formula development, clinical testing, and
licensing the formula NxTrim. These efforts were capitalized and are
reflected on Nova's statements through Nova's purchase of assets from
Canyon Fitness Center. Operations for the same period consisted of
immaterial sales related to test marketing of the formula NxTrim.
Operations of Canyon Fitness Center Weight Loss segment prior to
January 1, 1998 were not material, and as such, are not reported in
these financial statements.
Going Concern
The accompanying financial statements have been prepared assuming that
the company will continue as a going concern. At December 31,1999 the
Company had cash and equivalents of $23,928, and negative working
capital of $689,890. The Company generated losses of $582,184 for the
fiscal year ended December 31,1998 and $2,523,982 for fiscal 1999. The
Company will require a significant amount of capital to continue its
planned operations. Accordingly, the Company's ability to continue as a
going concern is dependent upon its ability to secure an adequate
amount of capital to finance its anticipated losses and planned
principal operations. The Company's plans include sale of common stock
to existing shareholders in amounts up to $1,500,000. There is no
assurance that the Company will be successful in these efforts. In the
event the Company receives minimal or no proceeds from these efforts,
the Company will seek alternative funding sources and may adjust its
focus and expenditures required for implementing its planned
operations. The Company has obtained written commitments from major
shareholders to purchase up to 1.5 million dollars worth of additional
shares at market price of the Company's common stock during the time
period February 14th to May 31st 1999. These commitments are subject to
an active market being made in 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 order to help eliminate
aforementioned unfavorable working capital position, the Company is
planning a debt restructuring program. The program will seek to
convince existing vendors to convert current debt to either common
stock, or to l2 to 18 month payment plans. These factors, among others
indicate that the Company may be unable to continue as a going concern
for a reasonable period of time. These financial statements do not
include any adjustments that might result from the outcome of the above
mentioned uncertainties.
40
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Basis of Presentation
The Company reports revenue and expenses using the accrual method of
accounting for financial and tax reporting purposes. Revenues are
recorded upon delivery of products and expenses are recorded when
incurred
Use of Estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principals.
Those estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses.
Significant Risk and Uncertainties
Nova relies on two contract manufacturers for the production of all the
Company's products. Should the relations between the Company and one or
both the manufacturers become strained, there is a risk of interruption
of product available for sale. There are numerous other competent
manufacturers capable of handling Nova's production. Nova maintains a
line of communication with several manufacturers who are capable of
handling Nova's needs to hedge the unlikely event that relations with
current manufacturers may deteriorate.
Pro Forma Compensation Expense
Nova accounts for costs of stock-based compensation in accordance with
APB No. 25, "Accounting for Stock Based Compensation" instead of the
fair value based method in SFAS No. 123. No stock options have been
issued. Accordingly, no pro forma compensation expense is reported in
these financial statements.
Cash and Cash Equivalents
The company considers temporary, highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventory is stated at the lower of cost (first in, first out) or
market value. Inventory consists of products and packaging held for
resale.
Property and Equipment
Property and equipment are stated at historical cost.
Depreciation, Amortization and Capitalization
The Company records depreciation and amortization using both straight-
line and declining balance methods over the estimated useful life of
the assets (three to seven years). Expenditures for maintenance and
repairs are charged to expense as incurred. Additions, major renewals
and replacements that increase the property's useful life are
capitalized. Property sold or retired, together with the related
accumulated depreciation, is removed from the appropriate accounts, and
the resultant gain or loss is included in net income.
41
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Other Assets
Prepaid licenses and prepaid formulation costs are amortized on a
straight-line basis over a period of ten years. Prepaid royalty is
amortized at a rate of .00625% of net sales of the product NxTrim.
Income Taxes
The company accounts for its income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Under statement 109, a liability method is used whereby
deferred tax assets and liabilities are determined based on temporary
differences between the basis used for financial reporting and income
tax reporting purposes. Income taxes are provided based on tax rates in
effect at the time such temporary differences are expected to reverse.
A valuation allowance is provided for certain deferred tax assets if it
is more likely than not, that the Company will not realize the tax
assets through future operations.
Fair Value of Financial Instruments
Financial Accounting Standards Statement No. 107, "Disclosures About
Fair Value of Financial Instruments", requires the Company to disclose,
when reasonably attainable, the fair market values of its assets and
liabilities which are deemed to be financial instruments. The Company's
financial instruments consist primarily of cash and certain
investments.
Stock Option Plan
The company has a stock option agreement with one employee. The
agreement grants certain options to this employee based upon
achievement of predetermined levels of sales performance. Those levels
of performance are as follows: If eighty percent (80%) of the sales
volume based on the sales plan is achieved then the employee shall be
entitled to five thousand (5,000) shares of stock at a value of $2.00 a
share which will become vested immediately. If one hundred percent
(100%) of the sales volume based on the sales plan is achieved then the
employee shall be entitled to ten thousand (10,000) shares of stock at
$2.00 a share. Should one hundred and twenty five percent (125%) or
more of sales volume based on the sales plan be achieved, then the
employee shall be entitled to twenty five thousand (25,000) shares of
stock at $2.00 per share. At December 31, 1999 and 1998 no stock
options had been granted under this plan.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements will have no significant
impact on the company and its reporting methods.
42
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTTINUED
Per Share Information
The Company computes per share information by dividing the net loss for
the period presented by the weighted average number of shares
outstanding during such period.
Advertising Expense
The company generally expenses advertising costs as they are incurred.
Advertising expenses incurred for the 12 months ended December 31, 1999
and 1998 were $471,866 and $574,095 respectively.
NOTE 2 - RECEIVABLE FINANCING
The company has entered into a receivable financing arrangement whereby
the company borrows against certain receivables. The company receives
immediate advances of 50% to 70% of the receivable balance, and the
company pays interest at the approximate rate of 2% per month. Financed
receivables that are unpaid to Nova after 90 days must be replaced, or
paid by the company.
NOTE 3 - LONG TERM DEBT
Long term debt at December 31, 1999 and 1998 consists of:
Note payable stockholder, unsecured, accruing
interest at a rate of 6% per annum.
All remaining principal and accrued interest
balance of long term debt to stockholder is due
on January 31, 2001. Subsequent to year end 1999,
shareholder has agreed to convert debt and 1999 1998
accrued interest into common stock. $ 311,039 $ 625,730
Note payable stockholder, unsecured, accruing
interest at a rate of 6% per annum.
All remaining principal and accrued interest
balance of long term debt to stockholder is due
on January 31, 2001. Subsequent to year end,
shareholder has agreed to convert debt accrued
interest into common stock. 700,458 <0>
Note payable related party, unsecured, accruing
interest at a rate of 7% per annum. Principal and
accrued interest are due and payable on
December 31, 1999. Subsequent to year end, share-
holder has agreed to convert debt and accrued
interest into common stock. 5,000 5,000
Total 1,016,497 630,730
Less amount included in current liabilities <5,000> <5,000>
Net Long Term Debt $1,011,497 $625,730
43
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1999
and 1998 represents the minimum state income tax expense of the
company, which is not considered significant. Deferred income taxes
have been provided for in the accompanying balance sheets as follows:
Deferred income tax assets 12-31-99 12-31-98
Reserve for bad debts $ 8,000 $ 6,800
Reserve for obsolescence 8,000 4,000
Operating losses 1,130,034 222,074
Valuation reserve <1,146,034> $ <232,874>
Total deferred income tax assets $ <0> $ <0>
The Company established a valuation allowance to fully reserve the
deferred tax asset. The realization of the asset did not meet the
required asset recognition standard established by Financial Accounting
Standard Statement No. 109 "Accounting for Income Taxes". The company
has not yet demonstrated the ability to generate the required income to
take advantage of the deferred tax benefit. For the twelve months ended
December 31, 1999 and 1998, the Company had a net operating loss carry
forward for income tax purposes of $2,169,900 and $555,184,
respectively, which will be available to offset future taxable income
through the year 2019.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The company leases sales and office space under a non-cancelable
operating lease terminating on June 11, 2002. In connection with the
lease arrangement, the Company is obligated to make rental payments of
$2750 per month. The company also leases furniture and equipment under
various operating leases. Future annual minimum rental and lease
commitments are as follows:
Year Office Rent Furniture and Equipment
1999 $ 33000 $ 5194
2000 $ 33000 $ 4128
2001 $ 33000 $ 1996
2002 $ 16500 $ 1996
2003 $ 0 $ 1331
2004 $ 0 $ 0
Litigation
Subsequent to December 31, 1998, a lawsuit was filed against Nova by a
former supplier. Nova has responded to the lawsuit with a cross
complaint against the supplier. Nova believes that the supplier's
action is generally without merit. Since the discovery process has not
yet begun, a possible range of a gain or loss from the litigation is
not feasible at this time.
44
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 5 - COMMITMENTS AND CONTINGENCIES - CONTINUED
Licensing and Consulting Agreements
The Company has currently entered into, and will continue to enter
into, product licensing and royalty agreements that the Company's board
of directors determine will enhance the Company's ability to market
innovative products in a competitive field. Minimum annual commitments
under these agreements amount to:
YEAR AMOUNT
2000 $ 246,666
2001 $ 316,665
2002 $ 200,000
2003 $ 25,000
2004 $ 25,000
2005 $ 25,000
2006 $ 25,000
2007 $ 25,000
2008 $ 25,000
The company has also entered into various employment agreements. Known
obligations on these contracts are included on these financial
statements.
NOTE 6 - RELATED PARTY TRANSACTIONS
Notes Receivable - Related Party
As of December 31, 1999 and 1998, Nova holds a Promissory Note
Receivable dated August 31, 1998 from a Director, in the amount of
$5,000. The Note bears interest at an annual rate of 6% and has a
stated principal payment date of December 31, 1998. The Company has
agreed to extend the principal and accrued interest payment date to
March 5, 2000. As of December 31, 1999 and 1998 the Company also holds
a Promissory Note Receivable dated March 5, 1998 from the same
Director, in the amount of $10,000. The note bears interest at an
annual rate of 6% with principal and accrued interest payable on March
5, 2000.
Notes Payable - Related Party
Ralph Mann Officer, Director, and Shareholder, exchanged a note payable
for shares of preferred stock on May 7, 1998. The principal balance of
the note was $5,000 at December 31, 1999 and 1998. Interest expense
totaled $300 and $195 for the twelve months ended December 31, 1999 and
1998 respectively. The terms of the note payable include an annual
interest rate of 7%, with principal and accrued interest due and
payable on December 31, 1999. Subsequent to December 31, 1999, Ralph
Mann agreed to convert 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
45
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - RELATED PARTY TRANSACTIONS - CONTINUED
Note was $700,458 at December 31, 1999. Interest expense accrued at
December 31, 1999 was $19,240. Interest expense totaled $19,240 for
the year ended December 31, 1999. The original date of the note payable
was January 31, 1999 in the amount of $91,000. The terms of the Note
Payable include an annual interest rate of 6%, principal and accrued
interest due and payable on January 31, 2001. Subsequent to December
31, 1999, Ralph Mann agreed to convert 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 established in 1989
whose beneficiaries are all related to Ralph Mann, shareholder,
officer, and director of the Company. The principal balance of the Note
was $311,097 and $625,730 at December 31, 1999 and 1998. Interest
expense accrued was $35,623 and $13,025 at December 31, 1999 and 1998.
Interest expense totaled $22,597 and $13,025 for the years ended
December 31, 1999 and 1998. The original date of the note payable was
May 7, 1998 in the amount of $203,000. The terms of the Note Payable
include an annual interest rate of 6%, principal and accrued interest
due and payable on January 31, 2001. Subsequent to December 31, 1999,
Showtime Partners agreed to convert the principal and interest on this
note to common stock in conjunction with a debt-restructuring plan
conducted by the Company.
Royalty Expense - Related Party
A royalty agreement exists between the Company and a licensing group
consisting of Showtime Partners, a shareholder, Ralph Mann, a director,
officer, shareholder, and Ralph Mann Trusts 1-21, partners in Showtime
Partners. Under the terms of the agreement, the Company obtained
worldwide manufacturing and marketing rights to the formula, NxTrim. In
exchange, the Company is obligated to pay a royalty of .00625% of net
sales on the product NxTrim, after the amortization of $200,000 prepaid
royalties purchased from Canyon Fitness Center. The term of the
agreement is 10 years, with a 10-year renewal at the option of the
licensor. The terms also include a minimum annual royalty of $25,000,
and a cost of living adjustment. The company amortized the prepaid
royalty of $4,412 and $11,864 in the years ended December 31, 1999 and
1998.
NOTE 7 - SUBSEQUENT EVENTS
In January 2000, the Company became a fully reporting company with the
Securities and Exchange Commission. In February of 2000 Nova common
shares began trading on the OTC Bulletin Board
46
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - SUBSEQUENT EVENTS - CONTINUED
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
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
47
NOVA PHARMACEUTICAL, INC
STATEMENT OF OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31,
1999 1998
Sales and Marketing
Advertising $ 471,866 $ 574,095
Commissions 71,298 129,959
Promotional Expense 145,125 84,232
Printing 27,126 36,673
Salaries 155,280 134,690
Royalty Expense 70,002 -
Telephone Expense 29,238 25,395
Total Sales and Marketing $ 969,935 $ 985,044
General and Administrative
Allowance for Uncollectable Accounts $ 25,561 $ 20,133
Amortization Expense 50,000 51,231
Bank Charges 7,780 4,568
Contract Services 4,523 -
Depreciation Expense 9,320 5,245
Dues and Subscriptions 2,923 -
Employers Tax Expense 37,162 39,971
Insurance Expense 102,219 74,517
Legal and Accounting 154,985 63,630
Licenses, Permits & Fees 3,278 3,177
Office Supplies, Postage, Office Exps 49,460 34,128
Product Testing - 1,792
Professional Fees - Investor Relations 534,234 -
Rent Expense 52,472 27,779
Salaries - Administration 273,527 230,670
Shipping Expenses 110,684 122,345
Travel and Trade Shows 126,456 66,673
Utilities 5,252 2,169
------------ ----------
Total General and Administrative $ 1,549,836 $ 748,028
See Notes to Financial Statements
48
PART 11
Item 24. - INDEMNIFICATION OF OFFICERS AND DIRECTORS
The bylaws of Nova Pharmaceutical, Inc provides that a director of the
Nova shall have no personal liability to Nova or our stockholders for
monetary damages for breach of fiduciary duty as a director, except
for liability (a) for any breach of the director's duty of loyalty to
Nova or our stockholders, (b) for acts and omissions not in good faith
or which involve intentional misconduct or a knowing violation of law,
and (c) pursuant to Nevada law for any transaction which the director
derived an improper personal benefit. Nova's bylaws exculpates and
indemnifies the directors, officers, employees, and agents of Nova
from and against liabilities.
Item 25. - OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
ITEM AMOUNT PAYABLE
BY COMPANY
SEC Registration Fee $ 1,711
Legal Fees 3,000
Miscellaneous 18,500
Total $ 23,211
The selling shareholders will not pay any expenses in connection with
the offering.
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
In connection with a consulting agreements for investor relations,
Nova has issued 701,666 shares of SEC Rule 144 restricted common
stock.
A-Z Professional Consultants, Inc 996,666 shares
OTC Vision, Inc 5,000 shares
Nova has issued 658,605 shares to shareholders who contributed
common stock to investor relations, legal, and other
consultants on behalf of work done for Nova. Shares issued
were subjuct to SEC Rule 144 restrictions.
Diana Snow Trust 576,000 shares
Gerald Romero Trust 82,605 shares
Nova issued 150,000 SEC Rule 144 restricted common shares to a
shareholder to replace free trading shares sold by a
shareholder at a discount to provide operating cash to Nova.
Gerald Romero Trust 150,000 shares
Nova issued 807,853 shares of SEC Rule 144 restricted stock to
shareholders and vendors to exchange debt for stock in the debt
restructuring conducted by Nova. Shares were issued at a 25%
discount to market value in order to incent debtors to convert.
Ralph Mann 486,583 shares
Showtime Partners 285,925 shares
Promotions Distribution
Services Corp. 27,425 shares
Creative Network, Inc. 7,920 shares
Nova issued 390,335 shares of SEC Rule 144 restricted stock to
The Nova Pharmaceutical, Inc Debt Restructuring Trust to
provide capital to pay down debt in the debt restructuring
conducted by Nova.
All of the above issuances were made to sophisticated individuals
pursuant to an exemption from registration under Sec. 4(2) of the
Securities Act of 1933.
Item 27. Exhibit Index.
(1) Not Applicable
(2) Not Applicable
(3) Articles of Incorporation incorporated by reference
to Form 10-SB filed on October 13, 1999, SEC file
No.0-30288.
3.1 Bylaws incorporated by reference to Form 10-SB
filed on October 13, 1999, SEC file No. 0-30288.
3.2 Articles of Merger incorporated by reference to
Form 10-S filed on October 13, 1999, SEC file No.
0-30288.
49
3.3 Plan of Merger incorporated by reference to Form
10-SB filed on October 13, 1999, SEC file No. 0-
30288.
4.1 Registration rights for preferred shares
incorporated by reference to Form 10-SB filed on
October 13,1999 SEC file no. 0-30288.
(5) Not Applicable
(6) Not Applicable
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
10.1 Employment contract - Fred Zinos incorporated by
reference to Form 10-SB filed on October 13, 1999
SEC file No. 0-30288.
10.2 Employment contract - R. Eggering incorporated by
reference to Form 10-SB filed on October 13, 1999
SEC file No. 0-30288.
10.3 Master Purchase and Sale Agreement - Sun Capital
Incorporated by reference to Form 10-SB filed on
October 13, 1999 SEC file no. 0-30288.
10.4 Gold's Gym International, Inc Merchandising License
Agreement incorporated by reference to Form 10-SB filed
On October 13, 1999 SEC file no. 0-30288.
10.5 Nutripharmaceutical, Inc Manufacturing Agreement
Incorporated by reference to Form 10-SB filed on October
13, 1999 SEC file no. 0-30288.
10.6 National Broker Dealer Service Corp. Consulting
Agreement incorporated by reference to Form 10-SB
Filed on October 13, 1999 SEC file no. 0-30288.
10.7 Compass Point Group, Inc. Consulting Agreement
Investor Relations Production incorporated by reference
To Form 10-SB filed on October 13, 1999 SEC file no.
0-30288.
10.8 Compass Point Group, Inc. Consulting Agreement
Investor Relations incorporated by reference
To Form 10-SB filed on October 13, 1999 SEC file no.
0-30288.
10.9 Note Payable to Showtime Partners, Shareholder
With Amendments incorporated by reference to Form 10-SB
Filed on October 13, 1999 SEC file no. 0-30288.
10.10 Note Receivable Dr. Carlos Schmidt, M.D., Director
Incorporated by reference to Form 10-SB dated October
13, 1999 SEC file no. 0-30288.
10.11 Note Payable Ralph Mann incorporated by reference to
Form 10-SB dated October 13, 1999 SEC file no. 0-30288.
10.12 License and Royalty Agreement - NxTrim incorporated by
Reference to Form 10-SB dated November 24, 1999 SEC file
No. 0-30288.
10.13 Share Purchase Agreements - Diana Snow Trust & Gerald
Romero Trust incorporated by reference to Form 10-K for the
Year ended December 31, 1999
10.14 Consulting Agreement dated 3-7-00 between Nova
and A-Z Professional Consultants, Inc.
10.15 Trust Agreement with Farmers and Merchants Bank of
Long Beach
10.16 Services Agreement between Hawthorne Direct, Inc.
dated 2-8-00
(11) Not Applicable
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Not Applicable
(18) Not Applicable
(19) Not Applicable
(20) Not Applicable
(21) Not Applicable
(22) Not Applicable
(23) Not Applicable
(24) Consent of Sarna & Company, Certified Public Accountants
(25) Not Applicable
(26) Not Applicable
(27) Financial Data Schedule
(28) Not Applicable
50
Item 28. Undertaking.
The undersigned registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation form the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any additional or changed material information on the
plan of distribution.
(2) That, for the purpose of determining any liability under the
Securities Act, we shall treat each such post-effective amendment as a
new registration statement of the securities offered, and the offering
of the securities at that time shall be deemed to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(b) to supplement the prospectus, after the end of the subscription
period, to include the results of the subscription offer, the
transactions by the underwriters during the subscription period, the
amount of unsubscribed securities that the underwriters will purchase
and the terms of any later reoffering. If the underwriters make any
public offering of the securities on terms different from those on the
cover page of the prospecutus, we shall file a post-effective
amendment to state the terms of such offering.
(c) Not applicable.
(d) to provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit
prompt delivery to each purchaser.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
51
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2 and authorized
this registration statement to be signed on its behalf by the
undersigned, in the City of Lake Elsinore, State of California on the
25th day of May, 2000.
Nova Pharmaceutical, Inc.
/s/Ralph Mann
---------------------------
By: Ralph Mann, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the
capacities and on the dates stated.
Signature Capacity Date
/s/Ralph Mann, Principal Executive Officer May 25, 2000
- --------------- Director
Ralph Mann
/s/ Robert Eggering Chief Financial Officer May 25, 2000
- ---------------- Controller
/s/ James Ayres Director May 25, 2000
- -------------------
James Ayres
/s/Carlos Schmidt Director May 25, 2000
- ---------------------
Carlos Schmidt