2
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
September 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 September 30, 2000, 23,207,564 shares of common stock were
outstanding.
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NOVA PHARMACEUTICAL, INC
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
Balance Sheets - September 30, 2000 and 3
December 31, 1999
Statements of Operations and Accumulated
Deficit for the Nine Months ended September 30
2000, and 1999 and for Quarters ended
September 30, 2000 and 1999 4
Statements of Cash Flows for the Nine Months
Ended September 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
4
NOVA PHARMACEUTICAL, INC.
BALANCE SHEETS
(Unaudited)
Assets
Sept 30, 2000 Dec 31, 1999
Current Assets
Cash $ 0 $ 23,928
Accounts Receivable, Net 51,362 130,292
Inventory 109,387 72,548
Prepaid Expenses 599,137 256,425
Other Receivables - Related Party 15,000 15,000
Debt Restructuring Trust Fund 105,390 0
----------- ---------
Total Current Assets 880,276 498,193
Property and Equipment 37,949 45,700
Other Assets
Formulations 436,900 430,000
Prepaid Royalties 182,898 183,724
Prepaid Licensing 245,000 260,000
Refundable Deposits 6,089 6,089
----------- ---------
Total Other Assets 870,887 879,813
----------- ---------
Total Assets $1,789,112 $1,423,706
=========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Current Portion of Long Term Debt $ 0 $ 5,000
Accounts Payable and
Accrued Expenses 1,288,447 1,183,083
--------- ---------
Total Current Liabilities 1,288,447 1,188,083
Long Term Debt - Related Party 76,415 1,011,497
Stockholders' Equity
Common Stock $.001 Par Value, 100,000,000
Shares Authorized, 23,207,564 and
12,715,282 shares issued in 2000 and 1999
respectively 23,208 12,715
Additional Paid in Capital 8,220,768 2,317,577
Accumulated Deficit (7,819,726) (3,106,166)
----------- ----------
Total Stockholders' Equity 424,250 (775,874)
---------- ---------
Total Liabilities and Stockholders' Equity $1,789,112 $1,423,706
=========== ==========
See Notes to Financial Statements
5
NOVA PHARMACEUTICAL, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
For the Nine For the Nine For the Three For the Three
Months Ended Months Ended Months Ended Months Ended
Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
---------- ----------- ----------- -----------
Revenues $ 173,454 $ 616,830 $ 23,791 $ (2,205)
Cost of Sales
Beginning Inventory 72,548 66,751 130,596 66,289
Direct Labor 17,587 31,957 7,268 9,687
Purchases 131,523 530,311 691 347,657
Total Available 221,658 629,019 138,555 423,633
Less: Ending Inventory (109,387) (412,297) (109,387) (412,297)
--------- -------- -------- -------
Total Cost of Sales 112,271 216,722 29,168 11,336
--------- -------- -------- -------
Gross Profit 61,183 400,108 (5,377) (13,541)
Operating Expenses
Sales & Marketing 431,639 830,555 243,939 208,401
General &
Administrative 2,936,820 1,105,275 484,269 381,132
Royalty Expense
Related Party 826 3,519 156 3,519
--------- --------- ---------- -------
Total Operating Expenses
3,369,285 1,939,349 728,364 593,052
Non Operating Expenses
Interest Expense 417,379 49,711 128,358 10,820
Interest Expense
Related Party 371,349 249,878 4,050 18,355
Write Off Deferred
Organizational Expense 7,375 0 0
Market Value Loss (Gain)
Debt Restructuring
Trust Fund 616,730 (44,391) 0
--------- --------- -------- --------
Total Non Operating
Expenses 1,405,458 306,964 88,017 29,175
--------- --------- -------- --------
Loss Before Income
Tax Provision (4,713,560) (1,846,205) (821,758) (635,768)
Provision for
Income Taxes 0 1,600 0 0
----------- ---------- ----------- ---------
Net Loss (4,713,560) (1,847,805) (821,758) (635,768)
=========== =========== =========== =========
Deficit, Beginning
of Period (3,106,166) (582,184) (6,997,968) (1,794,221)
Accumulated Deficit,
End of Period $(7,819,726) $(2,429,989) (7,819,726) $(2,429,989)
Net Loss per Share $ (.28) $ (.15) $(.04) $(.05)
Weighted Average Shares Outstanding
Fully Diluted 16,587,818 12,682,699 19,587,668 12,791,096
See Notes to Financial Statements
6
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
Sept 30, 2000 Sept 30, 1999
Cash Flows from Operating Activities:
Net Loss $(4,713,560) $(1,847,805)
Adjustments to Reconcile Net Income to
Net Cash Used by Operating Activities
Depreciation 7,751 6,697
Other Asset Amortization 40,426 41,019
Non-Cash Expenses
Professional Fees Paid by Common Stock 2,330,859 376,228
Write Off Deferred Organization Expense 0 7,375
Imputed Interest Expense on Debt Conversion
To Common Stock 757,148 214,286
Market Value Decline in Trust Fund 616,730
Change in Assets and Liabilities
(Increase) Decrease in:
Accounts Receivable 78,930 289,399
Inventory (36,839) (345,546)
Prepaid Expenses 77,760 9,923
Other Receivable 0 736
Other Assets 0 (3,489)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses 351,987 488,851
-------- --------
Net Cash Used by Operating Activities (488,808) (762,326)
Cash Flow from Investing Activities
Purchase of Property and Equipment 0 (16,685)
-------- -------
Net Cash Used by Investing Activities 0 (16,685)
Cash Flow from Financing Activities
Shareholder Debt 464,880 675,367
-------- -------
Net Cash Provided from Financing Activities 464,880 675,367
-------- -------
Net Increase (Decrease) in Cash (23,928) (103,644)
Cash at Beginning of Period 23,928 103,644
-------- --------
Cash at End of Period $ 0 $ 0
========= ========
Supplemental Disclosure:
Interest Paid $ 788,728 $ 299,589
========= ========
See Notes to Financial Statements
7
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS - (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In the nine months ended September 30, 2000, the Company issued
4,481,371 shares of common stock for professional, legal and investor
relation services. The shares were recorded at a market value
$2,768,816 and either expensed, or deferred depending on the terms of
the related contracts.
In the nine months ended September 30, 2000, the Company executed a
voluntary debt restructuring program. In conjunction with this
restructuring, the Company exchanged 4,518,176 shares of common stock
for $2,337,748 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 ($757,848) 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 September 30, 2000, the market value of the Company's common
stock in the Debt Restructuring Trust Fund had declined $616,730. A
non operatingexpense 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.
In the nine months ended September 30, 1999 the Company exchanged
204,082 shares of common stock for $500,000 long term debt to a
shareholder. The difference between the value of the debt and the
market value of the shares ($214,286) was recorded as interest expense.
In the nine months ended September 30, 1999 the Company issued 87,014
shares of common stock for investor relation services. The shares were
recorded at a market value of $309,549, and either expensed, or
deferred as a prepaid expense, depending on the terms of the related
contracts.
In the nine months ended September 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 expensed or deferred as a prepaid expense
depending on the terms of the related contracts.
In the nine months ended September 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.
See Notes to Financial Statements
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NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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.
Nova maintains executive and sales offices at Lake Elsinore, California.
The accompanying unaudited financial information of Nova Pharmaceutical
Inc. as of September 30, 2000 and 1999, and for the nine months ended
September 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
nine months ended September 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
September 30, we had no cash and cash equivalents and a negative working
capital of $408 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 $4.7 million for the nine months ended
September 30, 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.
In order to raise sufficient capital to manage current cash flow and
invest in our brands, we are attempting to sell shares in the
Company through a 506d Private Placement Memorandum. Should additional
funding from this effort be unsuccessful, we have obtained a commitment
from a shareholder to fund the development of an infomercial, which, if
successful, may allow us to manage current cash flow problems and to
invest in the expansion of our brands. In addition, the shareholder
has committed to fund minimum operating expenses required while the
infomercial is under development. The shareholder commitment is subject
to availability of funds from other business ventures. We have reduced
operating staff and expenses to the minimum level required to take
advantage of its branded opportunities upon receipt of additional
funding.
Nova is in default on substantially all trade debt outstanding. Our
ability to recover financially through the above plan is dependent upon
continued patience by these vendors. In the event that one or more of
the vendors representing significant debt takes aggressive legal action,
our ability to survive would be seriously compromised. These factors,
among others, may indicate that we 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.
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NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
NOTE 3 - DEBT RESTRUCTURING PLAN
In the nine months ended September 30, 2000, the Company completed a
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 $ 2,241,857
Conversion of accounts payable to common stock 95,891
Total debt converted to equity $ 2,337,748
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
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 September 30, 2000, the market value of the Company's common
stock in the Debt Restructuring Trust Fund had declined $616,730. 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. Because of the decline in value of the Trust
Fund shares and because of the lack of volume in Nova's common stock,
the Trust has not been able to sell shares and make the planned payments
on the restructured debt. As a result, Nova is in default on the
restructured debt payments. See NOTE 2 - GOING CONCERN
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.
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NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
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. The purpose of the plan is to provide an incentive
to attract and retain 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.
In the nine months ended September 30, 2000, the Board approved options
for attorneys and consultants to purchase 402,355 shares of common stock
at the market price. The shares were tendered in exchange for services
amounting to $244,883.
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
continued to request additional assistance from the shareholders to
compensate 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 - RELATED PARTY TRANSACTIONS
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.
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NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
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.
Ralph Mann has lent Nova additional funds of $76,415 for operating funds.
The Company has accrued interest in the amount of $17,165 on these and
prior 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.
NOTE 8 - LEGAL ISSUES
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. The financial statements
contain a provision for this settlement.
Litigation - Nutri Pharmaceutical, Inc v Nova Pharmaceutical Inc. et al.
District Court Clark County Nevada. Nutri Pharmaceutical, Inc (NPI) alleges
that Nova has not paid $161 thousand for product manufactured by NPI, and
that failure to pay on a timely basis has caused damages in excess of
$20,000 plus legal fees. Nova has alleged that the product has not been
delivered, and has disputes with respect to the amount stated. Nova is
attempting to settle the dispute without substantial further litigation.
The financial statements contain a provision deemed adequate by Nova for
this settlement.
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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
September 30, we had no cash and cash equivalents and a negative working
capital of $408 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 $4.7 million for the nine months ended
September 30, 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. We 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.
We have successfully concluded a debt restructuring plan in which
$2,337,748 of shareholder and vendor debt was converted into 4,433,166
shares of common stock. Past due vendor debt of $363,499 was agreed to
be converted to payment plans over 12 to 18 months beginning June 1,
2000. Nova had not been successful in obtaining additional capital in
time to begin restructured debt payments 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. Because of the
decline in value of the Trust Fund shares and because of the lack of
volume in Nova's common stock, the Trust has not been able to sell
shares and make the planned payments on the restructured debt. As a
result, Nova is in default on the restructured debt payments.
In order to raise sufficient capital to manage current cash flow and
invest in our brands, we are attempting to sell shares in the
Company through a 506d Private Placement Memorandum. Should additional
funding from this effort be unsuccessful, Nova has obtained a commitment
from a shareholder to fund the development of an infomercial, which, if
successful, may allow us to manage current cash flow problems and to
invest in the expansion of our brands. In addition, the shareholder
has committed to fund minimum operating expenses required while the
infomercial is under development. The shareholder commitment is subject
to availability of funds from other business ventures. We have reduced
operating staff and expenses to the minimum level required to take
advantage of its branded opportunities upon receipt of additional
funding.
Our liquidity is currently limited because generation of additional
capital from outside investors has been delayed for so long. The current
operations are being conducted with minimum funding support of
shareholders. Inability to support sales through continued advertising
and promotion has resulted in a serious reduction in sales to current
customers, and our national expansion plans have been delayed.
We are in default on substantially all trade debt outstanding. Our
ability to recover financially through the above plan is dependent upon
continued patience by our vendors. In the event that one or more of
the vendors representing significant debt takes aggressive legal action,
our ability to survive would be seriously compromised. These factors,
among others, may indicate that we 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.
13
In the nine months ended September 30, 2000, Nova used cash from
operations in the amount of $488 thousand. Funding for this
investment has been obtained through increased long term borrowing
from shareholders of $465 thousand, and from reduction in cash in the
amount of $24 thousand. In the nine months ended September 30, 2000,
accounts receivable was reduced by $79 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 $352 thousand.
In the nine months ended September 30, 2000, non-cash consulting
expenses totaled $2.3 million due to issuance of common stock in
payment for outside services performed. Non-cash interest expense was
recorded in the amount of $758 thousand due to concessions made in the
debt restructuring exchange of common stock for shareholder loans and
vendor payables. In addition a non-cash expense of $661 thousand was
recorded in non operating expense to reflect the decline in market
value of the Nova common stock in the Debt Restructuring Trust Fund.
In the nine months ended September 30, 1999, Nova used cash from
operations in the amount of $762 thousand. The funding for this
investment has been obtained through increased long term borrowing
from major shareholders of $675 thousand and a reduction of cash of
$103 thousand. In the nine months ended September 30, 1999, accounts
receivable was reduced by $289 thousand as a result of lower sales in
1999 versus 1998. In the nine months ended September 30, 2000 inventory
increased $346 thousand due to inventory purchased in support of
the Gold's Gym line. The accounts payable increase of $489 thousand is
due substantially to the increase in inventory.
Results of Operations
Revenues for the nine months ended September 30, 2000 totaled $173
thousand, a decrease of $444 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 nine months ended September 30, 2000 totaled $61
thousand, a decrease of $339 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 $432 thousand in the nine months
ended September 30, 2000, a decline of $399 thousand from the same period
in 1999. Advertising in the first nine months of 2000 totaled only $5
thousand, $444 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 $2.9 million in the nine
months ended September 30, 2000, an increase of $1.8 million from the
same period in 1999. The increase is due to legal, accounting and
consulting fees 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 $789 thousand in the nine months ended
September 30, 2000, an increase of $489 thousand over the prior year.
The increase is due to imputed interest expense from the conversion of
debt to common stock.
The provision for income taxes reflects minimum tax payment
requirements. The tax benefit of operating losses from inception to
September 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.
14
During the nine months ended September 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 nine months ended September 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 first quarter.
During the nine months ended September 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 nine months ended
September 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 nine months ended September 30, 2000 and 1999, Nova incurred
losses of $4.7 million and $1.8 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 would be attained with expansion to approximately
35,000 of the 117,000 potential retail outlets.
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. Nova
has signed a Settlement Agreement in which Nova agrees to pay $1,000
per month for the next twelve months.
Nutri Pharmaceutical, Inc , a Nevada corporation, v Nova Pharmaceutical
Inc., a Nevada corporation, et al., District Court Clark County Nevada.
Nutri Pharmaceutical, Inc (NPI) alleges that Nova has not paid $161
thousand for product manufactured by NPI, and that failure to pay on a
timely basis has caused damages in excess of $20,000 plus legal fees.
Nova has alleged that the product has not been delivered, and has
disputes with respect to the amount stated. Nova is attempting to
15
settle the dispute without substantial further litigation. The
financial statements contain a provision deemed adequate by Nova for
settlement of this dispute.
Nova is a defendant in other minor matters 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. The
financial statements contain a provision deemed adequate by Nova for
these matters.
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 nine 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
Exchange of 144 restricted
common stock for debt 4,852,426 2,839,123
Contribution of 144 restricted
common stock to Debt
Restructuring Trust Fund 390,335 722,120
Exchange of 144 restricted
common stock for consulting
and legal expenses 4,847,166 2,622,966
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
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 nine months ended September 30, 2000, the
Board approved options for attorneys and consultants to purchase 402,355
shares of common stock at the market price. The shares were tendered in
exchange for services amounting to $244,883.
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:
16
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: November 7, 2000 By: RALPH MANN
----------------------------
Ralph Mann, President & Chief
Executive Officer