UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10Q-SB
Quarterly Report Under Section 13 or 15 (d) of
The Securities Exchange Act of 1934
NOVA PHARMACEUTICAL, INC.
(Exact name of registrant as specified in its charter)
For the Quarter Ended Commission File Number
June 30, 2000 0001089612
NEVADA
(State of Incorporation)
51-0380412
(I. R. S. Employer Identification Number)
31712 CASINO DRIVE SUITE 7B
LAKE ELSINORE, CA 92530
(Address of principal executive offices)
909-245-4657
(Registrant's telephone Number)
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES ( X ) NO ( )
State the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of June 30, 2000, 17,732,720 shares of common stock were
outstanding.
2
NOVA PHARMACEUTICAL, INC
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
Balance Sheets - June 30, 2000 and 3
December 31, 1999
Statements of Operations and Accumulated
Deficit for the Six Months ended June 30
2000, and 1999 and for Quarters ended
June 30, 2000 and 1999 4
Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999 5
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis or
Plan of Operation 11
PART II
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
3
NOVA PHARMACEUTICAL, INC.
BALANCE SHEETS
(Unaudited)
Assets
June 30, 2000 Dec 31, 1999
Current Assets
Cash $ 4,220 $ 23,928
Accounts Receivable, Net 20,033 130,292
Inventory 130,596 72,548
Prepaid Expenses 540,233 256,425
Other Receivables - Related Party 15,000 15,000
Debt Restructuring Trust Fund 60,999 0
----------- ---------
Total Current Assets 771,081 498,193
Property and Equipment 40,532 45,700
Other Assets
Formulations 415,000 430,000
Prepaid Royalties 183,054 183,724
Prepaid Licensing 250,000 260,000
Refundable Deposits 6,089 6,089
----------- ---------
Total Other Assets 854,143 879,813
----------- ---------
Total Assets $1,665,756 $1,423,706
=========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Current Portion of Long Term Debt $ 0 $ 5,000
Accounts Payable and
Accrued Expenses 1,105,817 1,183,083
--------- ---------
Total Current Liabilities 1,105,817 1,188,083
Long Term Debt - Related Party 75,715 1,011,497
Stockholders' Equity
Common Stock $.001 Par Value, 100,000,000
Shares Authorized, 17,732,720 and
12,715,282 shares issued in 2000 and 1999
respectively 17,732 12,715
Additional Paid in Capital 7,464,460 2,317,577
Accumulated Deficit (6,997,968) (3,106,166)
----------- ----------
Total Stockholders' Equity <Deficit> 484,224 (775,874)
---------- ---------
Total Liabilities and Stockholders' Equity $1,665,756 $1,423,706
=========== ==========
See Notes to Financial Statements
4
NOVA PHARMACEUTICAL, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
For the Six For the Six For the Three For the Three
Months Ended Months Ended Months Ended Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------- ----------- ----------- -----------
Revenues $ 149,663 $ 619,035 $ (16,736) $ 157,899
Cost of Sales
Beginning Inventory 72,548 66,751 35,172 72,548
Direct Labor 10,319 22,270 4,745 11,338
Purchases 130,831 182,654 101,359 30,351
Total Available 213,698 271,675 141,276 114,237
Less: Ending Inventory (130,596) (66,289) (130,596) (53,072)
--------- -------- -------- -------
Total Cost of Sales 83,102 205,386 10,680 61,165
--------- -------- -------- -------
Gross Profit 66,561 413,649 (27,416) 96,734
Operating Expenses
Sales & Marketing 187,700 622,154 85,131 206,925
General &
Administrative 2,452,551 720,145 1,863,574 516,341
Royalty Expense
Related Party 671 3,998 161 1,991
--------- --------- ---------- -------
Total Operating Expenses
2,640,922 1,346,297 1,948,866 725,257
Non Operating Expenses
Interest Expense 264,319 38,891 119,239 13,753
Interest Expense
Related Party 392,002 231,523 1,702 11,331
Write Off Deferred
Organizational Expense 7,375
Market Value Loss
Debt Restructuring
Trust Fund 661,121 661,121
--------- --------- -------- --------
Total Non Operating
Expenses 1,317,441 277,789 782,062 25,084
--------- --------- -------- --------
Loss Before Income
Tax Provision (3,891,802) (1,210,437) (2,758,344) (653,607)
Provision for
Income Taxes 0 1,600 0 1,600
----------- ---------- ----------- ---------
Net Loss (3,891,802) (1,212,037) (2,758,344) (655,207)
=========== =========== =========== =========
Deficit, Beginning
of Period (3,106,166) (582,184) (4,239,624) (1,139,014)
Accumulated Deficit,
End of Period $(6,997,968) $(1,794,221) (6,997,968) $(1,794,221)
Net Loss per Share $ (.25) $ (.10) $(.16) $(.05)
Weighted Average Shares Outstanding
Fully Diluted 15,737,894 12,622,340 17,179,352 12,738,853
See Notes to Financial Statements
5
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30, 2000 June 30, 1999
Cash Flows from Operating Activities:
Net Loss $(3,891,802) $(1,212,037)
Adjustments to Reconcile Net Income to
Net Cash Used by Operating Activities
Depreciation 5,168 4,105
Other Asset Amortization 25,670 29,008
Non-Cash Expenses
Consulting Fees exchanged for Common Stock 2,130,085 243,981
Write Off Deferred Organization Expense 0 7,375
Imputed Interest Expense on Debt Conversion
To Common Stock 630,990 214,286
Market Value Decline in Trust Fund 661,121
Change in Assets and Liabilities
(Increase) Decrease in:
Accounts Receivable 110,259 350,651
Inventory (58,048) 462
Prepaid Expenses 74,383 30,482
Other Receivable 0 736
Other Assets 0 (2,500)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses 111,951 (95,945)
-------- --------
Net Cash Used by Operating Activities (200,223) (429,396)
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 180,515 440,623
-------- -------
Net Cash Provided from Financing Activities 180,515 440,623
-------- -------
Net Increase (Decrease) in Cash (19,708) 5,343
Cash at Beginning of Period 23,928 103,644
-------- --------
Cash at End of Period $ 4,220 $ 108,987
========= ========
Supplemental Disclosure:
Interest Paid $ 656,321 $ 270,414
========= ========
See Notes to Financial Statements
6
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS - (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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 6 months ended June 30, 1999 the Company issued 49,057 shares
of common stock for investor relation services. The shares were
recorded at a market value of $171,699, and either expensed, or deferred
as a prepaid expense, depending on the terms of the related contracts.
In the 6 months ended June 30, 1999, shareholders contributed shares of
common stock for consulting services related to SEC filings and investor
relation services. The shares were recorded at market value of $452,906,
and either expense or deferred as a prepaid expense depending on the
terms of the related contracts.
In the six months ended June 30, 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 for the subsequent 15c211 registration of that stock in March
1999. The common shares were issued at a market value of $350,000. An entry
was made to reduce paid in capital for both the amount accrued and the market
value of the common stock.
In the 6 months ended June 30, 2000, the Company issued 2,127,616 shares of
common stock for sales, legal and investor relation services. The shares
were recorded at a market value $2,582,486, 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. In conjunction
with this restructuring, the Company exchanged 2,155,882 shares of common stock
for $1,717,795 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 ($630,990) 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.
As of June 30, 2000, the market value of the Company's common stock in
the Debt Restructuring Trust Fund had declined $661,121. A non operating
expense was recorded for the decline in value.
In March of 2000, the Company issued 343,605 shares of common stock to
shareholders to compensate them for shares contributed to the investor
investor relation consultants on behalf of the Company in the previous
fiscal year. An entry of $515,408 was made to reduce paid in capital for
the market value of the shares issued.
See Notes to Financial Statements
7
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 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 June 30, 2000, and for the six months
ended June 30, 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 six
months ended June 30, 2000 and 1999 are not necessarily indicative of the
results that may be expected for the entire year. These financial statements
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 June
30, we had cash and cash equivalents of $4,220 and a negative working
capital of $335 thousand. We generated a net loss of $582 thousand
for the fiscal year ended December 31, 1998, $2.5 million for the year
ended December 31, 1999, and $3.9 million for the six months 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 is preparing a 506d Private Placement Memorandum in order to
raise sufficient capital to manage current cash flow problems and to
invest in the expansion of Nova's brands.
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 the six months ended June 30, 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 $ 1,628,375
Conversion of accounts payable to common stock 89,420
Total debt converted to equity $ 1,717,795
8
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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 has filed a SB-2 registration statement to
register the trust share for trading on the OTC Bulletin Board.
As of June 30, 2000, the market value of the Company's common stock in
the Debt Restructuring Trust Fund had declined $661,121. A non operating
expense was recorded for the decline in value. A corresponding entry was
made to reduce the value of the asset - Debt Restructuring Trust Fund.
NOTE 4 - INCREASE IN AUTHORIZED COMMON AND PREFERRED STOCK
On January 4, 2000, the shareholders approved a change to the Articles
of Incorporation to increase the number of authorized common shares to
100,000,000 and to increase the number of authorized preferred shares
to 25,000,000.
NOTE 5 - STOCK OPTION PLAN
In January of 2000, the Company's shareholders approved a Stock
Option plan. Under this plan, 2,000,000 shares of common stock
have been reserved for issuance according to the following terms:
- The purpose of the plan is to aid as an incentive to attracting and
retaining employees and consultants whose services are considered
valuable to the Company.
- The plan is effective as of January 4, 2000 and shall expire on
January 4th of 2010.
- The Company's Board of Directors is empowered to designate plan
participants and to determine the provisions and terms of the options
granted within the general guidelines of the plan.
- Eligible persons are Officers, Directors, full and part-time
employees of Nova, or any person or corporation not employed by the
Company, but performing services to the Company.
- Option price shall be no less than 85% of the fair market value on
date of issue.
- The exercise period shall be a term of not more than 10 years from
date of granting, but shall automatically terminate upon termination
of employees employment with the Company.
On January 4 of 2000, the Board approved options for four employees to
purchase 650,000 shares of common stock at the then market price of
$.15 per share. The options may be exercised over five years with a
maximum of 20% per Year.
9
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
NOTE 5 - STOCK OPTION PLAN (CONTINUED)
In February of 2000, the Company filed an S-8 registration statement with
the Securities and Exchange Commission to register the 2,000,000 shares
provided for in the stock option plan.
In the six months ended June 30, 2000, the Board approved options for
attorneys and consultants to purchase 102,355 shares of common stock at the
market price. The shares were tendered in exchange for services amounting
to $190,883.
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.
Ralph Mann has lent Nova additional funds of $76,415 for operating funds.
The Company has accrued interest in the amount of $1,563 on these notes.
The terms of the note include interest at 6% with principal and interest
due on December 31, 2001
Notes Payable - Related Party
Showtime Partners, shareholder, has lent Nova money for operating
funds under a note payable agreement. Showtime Partners is a general
partnership consisting of 21 irrevocable trusts whose beneficiaries are
all related to Ralph Mann, shareholder, officer and director of the
Company. The principal balance of the Note was $361,097 at March 31,
2000, and accrued interest expense totaled $35,623. On March 31,
2000, the Company converted the principal and interest on this note to
common stock in conjunction with a debt restructuring plan conducted
by the Company.
10
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
Notes Payable - Shareholders
In May of 2000, the Company exchanged shares of common stock for debt to
shareholders. Principal and interest on the debt totaled $104,618. A
difference of $104,617 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 9 - SUBSEQUENT EVENTS
Litigation - D & F Industries, Inc. v. Nova Pharmaceutical, Inc, et al.
Orange County Superior Court. In July of 2000, the Company entered into a
Settlement Agreement which requires Nova to pay $1,000 per month for twelve
months beginning September 1, 2000.
11
Item 2. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At June
30, 2000, we had cash and cash equivalents totaling $4 thousand and
negative working capital of $365 thousand. 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 $3.9 million for the six months ended June 30, 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.
As of June 30, 2000, the market value of the Company's common stock in
the Debt Restructuring Trust Fund had declined $661,121. A non operating
expense was recorded for the decline in value.
Nova is preparing a 506d Private Placement Memorandum in order to
raise sufficient capital to manage current cash flow problems and to
invest in the expansion of Nova's brands.
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
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.
12
In the six months ended June 30, 2000, Nova used cash from operations
in the amount of $200 thousand. The funding for this investment has
been obtained through increased long term borrowing from major
shareholders of $180 thousand, and from reduction in cash in the
amount of $20 thousand. In the six months ended June 30, 2000,
accounts receivable was reduced by $110 thousand as a result of lower
sales in 2000 versus 1999. In the same period additional funding was
obtained through an increase in accounts payable of $112 thousand.
In the six months ended June 30, 2000, non-cash consulting expenses
totaled $2.1 million due to issuance of common stock in payment for
outside services performed. In addition, non-cash interest expense
was recorded in the amount of $631 thousand due to concessions made in
the debt restructuring exchange of common stock for shareholder loans
and vendor payables.
In the six months ended March 31, 1999, Nova used cash from operations
in the amount of $429 thousand. The funding for this investment has
been obtained through increased long term borrowing from major
shareholders of $441 thousand. In the six months ended June 30, 1999,
accounts receivable was reduced by $351 thousand as a result of lower
sales in 1999 versus 1998. In the same period accounts payable
decreased by $95 thousand.
Results of Operations
Revenues for the six months ended June 30, 2000 totaled $150 thousand,
a decrease of $469 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. In addition, sales
have been reduced by returns of the product NxBloc from most retail
outlets. The product is being returned due to slow movement, which is
the result of the Company's inability to support the product with
advertising.
Gross profit for the six months ended June 30, 2000 totaled $67
thousand, a decrease of $437 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 $188 thousand in the six months
ended June 30, 2000, a decline of $434 thousand from the same period
in 1999. Advertising in the first six months of 2000 totaled only $5
thousand, $363 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. The remainder of the decline is due to reduction of
shipping expenses and commissions which are related to the revenue
decline.
General and Administrative expenses totaled $2.5 million in the six
months ended June 30, 2000, an increase of $1.7 million from the same
period in 1999. The increase is due to legal, accounting and
consulting fees of $1.8 million related to seeking funding in the
public markets, preparing SEC documents, and to investor relations
consulting. The professional fees noted above were substantially
funded by issuance of common stock.
Interest expense totaled $656 thousand in the six months ended June
30, 2000, an increase of $385 thousand over the prior year. The
increase is due to imputed interest expense of, (i) $480 thousand from
the conversion of debt to common stock, (ii) $150 thousand imputed
interest expense on the replacement of common stock to a shareholder
who sold his stock at a substantial discount in order to provide for
the Company's imminent operating cash requirements, and (iii) offset
by $214 thousand in imputed interest in 1999 due to conversion of
shareholder debt into common stock.
The provision for income taxes reflects minimum tax payment
requirements. The tax benefit of operating losses from inception to
June 30, 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.
13
During the six months ended June 30, 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 first quarter.
For the six months ended June 30, 1999, cost of sales as a percent of
revenues was lower because fewer significant promotional allowances,
which reduce net sales, were required due to the strong advertising
program in the quarter.
During the six months ended June 30, 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 six months ended
June 30, 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 have
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 six months ended June 30, 2000 and 1999, Nova incurred losses
of $3.9 million and $1.2 million 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.
14
PART II
Item 1. Legal Proceedings
D & F Industries, Inc. a California Corporation v. Nova
Pharmaceuticals [sic] Inc., a Nevada Corporation, et. al. Orange
County Superior Court Case No. 814076.
This is an action by a former contract supplier. Plaintiff contends
that defendant Nova agreed to use plaintiff D & F to supply the
products under the Gold's Gym contract, that D & F prepared certain
formulations to accommodate that contract, that Nova breached the
contract by not using D & F to supply the products under the Gold's
Gym contract and that Nova misappropriated plaintiff's trade secrets
by using plaintiffs formulations to fulfill the Gold's Gym contract.
Plaintiff also claims that Nova owes it for some product shipped. The
complaint states that it alleges six causes of action: two for breach
of contract, one for common counts, one for misappropriation of trade
secrets, one for unfair business practices, and one for interference
with economic advantage. Plaintiff seeks an injunction against the
use of the trade secrets and damages of lost profits (which of course
would depend on what Nova sells under the Gold's Gym contract),
unstated punitive damages, statutory damages, attorneys fees, and the
amount allegedly due for the product shipped and not yet paid for
(claimed to be $52,000). At the time of this writing, Nova has signed
a Settlement Agreement in which Nova agrees to pay $1,000 per month
for the next twelve months.
Nova is a defendant in two other minor matter of litigation in the
area of debt collection. As of this time, litigation has been
suspended pending Nova's compliance with agreed upon payment terms.
Should the outcome of this litigation be resolved in favor the
plaintiff, it would not have a materially adverse effect on the
Company's results of operations.
Item 2. Changes in Securities
Change in Number of Shares Authorized
On January 4, 2000, the shareholders approved a change to the Articles
of Incorporation to increase the number of authorized common shares to
100,000,000, and to increase the number of authorized preferred shares
to 25,000,000.
Recent Sales of Unregistered Securities
Following is a summary of sales of unregistered securities for the
first six months of 2000. All securities were issued as restricted
common shares, which are subject to Rule 144 of the Securities and
Exchange Commission. Generally Rule 144 requires shareholders to hold
the shares for a minimum of one year before sale. In addition,
officers, directors and more than 10% shareholders are further
restricted in their ability to sell such shares. There have been no
underwriters of these securities and no commissions or underwriting
discounts have been paid.
Shares Value
Transaction Description Issued Received
Sale of 144 restricted common
stock for cash 150,000 $ 75,000
Exchange of 144 restricted
common stock for debt 2,396,217 2,364,915
Exchange of 144 restricted
common stock for consulting
and legal expenses 2,368,866 2,907,011
The above transactions qualified for exemption from registration under
Sections 3(b) or 4(2) of the Securities Act of 1933. Private
placements for cash were non-public transactions. The Company
15
believes that all such investors are either accredited or, either
alone or with their purchaser representative , have such knowledge and
experience in financial and business matters that they are capable of
evaluating the merits and risks of the prospective investment.
Stock Option Plan
In January of 2000, the Company's shareholders approved a Stock Option
plan. Under this plan, 2,000,000 shares of common stock have been reserved
for issuance. On January 4th of 2000, the Board approved options for four
employees to purchase 650,000 shares of common stock at the then market price
of $.15 per share. The options may be exercised over five years with a
maximum of 20% per year. In February of 2000, the Company filed an S-8
registration statement with the Securities and Exchange Commission to register
the 2,000,000 shares provided for in the stock option plan. In the six months
ended June 30, 2000, the Board approved options for attorneys and consultants
to purchase 102,355 shares of common stock at the market price. The shares
were tendered in exchange for services amounting to $190,883.
Item 4. Submission of Matters to a Vote of Security Holders
On January 4, 2000, a special meeting of shareholders was held.
Shareholders present for the meeting held 10,204,082 shares, or 80%
of the outstanding shares common stock. The shareholders present
unanimously approved the following issues:
The number of common shares authorized was increased from 25,000,000
to 100,000,000. The number of authorized preferred shares was
increased from 10,000,000 to 25,000,000.
The Nova Pharmaceutical, Inc. 2000 Non-Statutory Stock Option Plan
was approved as presented by the Board of Directors.
The language of the May 20, 1999 Shareholders Meeting minutes was
amended as follows: "Resolved that the By Laws of the Corporation
shall be amended to increase the number of Directors to up to seven
Directors.
Item 6. Exhibits and Reports on Form 8-K
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVA PHARMACEUTICAL, INC.
Date: August 15, 2000 By: RALPH MANN
----------------------------
Ralph Mann, President & Chief
Executive Officer