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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment 2 to
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities
Exchange Act of 1934
Nova Pharmaceutical, Inc.
<TABLE>
<S> <C> <C>
Nevada 2834 51-0380412
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) No.)
31712 Casino Drive, Suite 7B,
Lake Elsinore, CA 92530, 909-245-4657
(Address and telephone number of principal executive offices)
31712 Casino Drive, Suite 7B,
Lake Elsinore, CA 92530, 909-245-4657
(Address of Principal place of business or intended principal place
of business)
Samuel Wierdlow
1400 Colorado St
Boulder City, NV 89005
(Name, address, and telephone number of agent for service)
Securities to be registered pursuant to Section 12(b) of the
Act:
Title of each class
Name of each exchange on which to be so registered each class
is to be registered
None
Securities to be registered pursuant to Section 12(g) of the
Act:
Common Stock
(Title of class)
Preferred Stock
(Title of class)
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PART I
Item 1. Description of Business.
Organization.
Nova Pharmaceutical, Inc., a Nevada corporation, was incorporated on
January 8, 1998. On January 8, 1998, subsequent to incorporation, the
Company 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 Pharmaceutical, Inc.
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 the Company.
Dr. Carlos Schmidt is a Director of the Company. 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 world wide 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. 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 (Patent Number 5,925,377) on July 20, 1999. 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.
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 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 the company.
Industry Overview.
According to the Nutrition Business Journal (NBJ), 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.
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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.
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 its branded products in three principal categories of
nutritional supplements: sports nutrition; vitamins, minerals and
herbs; and diet. Nova believes that offering its customers a wide
variety of products provides Nova 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. Nova plans to launch its 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."
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. 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
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.
The price range of these products is, retail $7.00 to $14.60 with a
wholesale of $3.50 to $7.30
Diet
According to the Information Resources Inc. report (24 week ending
June 20, 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 12 selling diet item. NxTrim utilizes amino acids,
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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, its 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.
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, Smith's
Health food stores - General Nutrition Center (GNC)
Customers exceeding 10% of Nova's volume in the year ended 12-31-98
include Longs.
Drug Stores, American Stores, and Wal-Mart.
These chains are among the first in which Nova attained distribution.
As Nova's expansion into other chains continues into the first half of
1999, there are 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's 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 houses 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 it's leadership ability in the
supplement industry through NxTrim's attainment of the number one
ranking in the California drug trade, and number 12 nationally. Nova
intends to broaden its leadership position in the nutritional
supplement industry. Nova's strategy includes:
Expanding distribution of its portfolio of established brands through
effective consistent advertising to increase its 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.
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Increasing national distribution through effective management of broker
network.
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.
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 $658,327 in fiscal
1998. Nova has promoted its 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 markets newspaper (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 an Internet web site at www.novanx.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. Management of the Company verifies, through product sample
review, reference checks, and production equipment review, that the
manufacturers are capable of obtaining the highest quality raw
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 its 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 by 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.
Nova believes 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 its commitment to research and development, Nova
utilizes the capabilities of its 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 innovative 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.
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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 six months 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 134,000
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.
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 innovative and 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 it's 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. As a
result of this process, Nova believes that it can function profitably
while competing with other nutritional supplement companies.
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 its 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
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have on its 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, it faces 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
its products by consumers, or the marketing, distribution and resale of
its products by its 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.
Patent and Trademarks
Nova has received a patent on the formula for NxTrim as a 100% all
natural weight loss aid with a composition containing amino acids,
minerals, vitamins, herbs, and essential nutrients along with gentle
diuretics and digestive enzymes. Patent number 5,925,377 was obtained
on July 20, 1999.
The following table displays Nova's current US trademark status:
Mark Registration Date Serial / Reg. No Status
PHENTRIM 04/06/99 2,237,644 REGISTERED
NOVA NATURALS 08/11/97 75/338,870 PENDING
NXTRIM 12/31/97 75/413,422 PENDING
RC90 03/29/99 75/671,036F PENDING
Nova relies on common law trademark rights to protect its unregistered
trademarks. Common law trademark rights do not provide Nova with the
same level of protection as afforded by a United States federal
registration of a trademark. In addition, common law trademark rights
are limited to the geographic area in which the trademark is actually
used, while a United States federal registration of a trademark enables
the registrant to stop the unauthorized use of the trademark by any
third party anywhere in the United States even if the registrants never
used the trademark in the geographic area wherein the unauthorized use
is being made; provided however, that an unauthorized third party user
has not, prior to the registration date, perfected its common law
rights in the trademark in that geographical area. Nova intends to
register its trademarks in certain foreign jurisdictions where Nova's
products are sold. However, the protection available in such
jurisdictions may not be as extensive as the protection available to
Nova in the United States.
Employees
Nova currently has ten (10) full time employees: Receptionist /
Accounts Receivable Clerk, Chief Financial Officer, Accountant, Three
(3) key Account Representatives, Vice President of Operations, Product
Development / Media Coordinator, CEO, Vice President of Sales and
Marketing.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Nova believes that statements in this Report concerning the Company's
outlook or future economic performance; anticipated profitability,
revenues, expenses and other financial items; and statements concerning
assumptions made or exceptions to any future events, conditions,
performance or other matters are "forward looking" as that term is
defined in Federal Securities Laws. The safe harbor for
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"forward looking" statements does not apply to initial public
offerings or this particular filing. Forward looking
statements are subject to risks, uncertainties, and other factors,
which would cause actual results to differ materially from those stated
in such statements. Such risks, uncertainties and
factors include, but are not limited to:
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are outside the control of the Company,
(i) the Company has grown rapidly and there can be no assurance that
the Company will continue to be able to grow profitably or manage it's
growth, (ii) the Company's quarterly operating results have fluctuated
in the past and are expected to fluctuate in the future, (iii) the
Company's business experiences seasonality, (iv) the loss of services
of key individuals could have a material adverse effect on the
Company's business, financial condition, or operating results,
The time frame for market success for the Company's new products is
potentially long and uncertain. There can be no assurance that the
retail trade will accept the Company's new products, or if accepted,
whether the Company's marketing efforts will result in consumer initial
and repeat purchase of these products.
Changing government regulations relative to the Company's products
could result in the inability to continue marketing one or more of it's
products, or could cause changes in packaging, resulting in unfavorable
affect on the financial position or results of operations of the
Company.
The Company faces substantial competition from a variety of sources,
most of which are better capitalized and have more resources than the
Company. There can be no assurance that the efforts of one or more of
these competitors will not render one or more of the Company's products
non-competitive in the marketplace.
The Company relies on third party organizations for its manufacturing,
distribution, and sales. There can be no assurances that these
organizations will continue to meet the Company's growing need to
expand it's product lines on a commercially feasible basis. Should
one or more of these critical organizations not fulfill the growing
needs, there can be no assurance that the Company will be able to find
an economically feasible replacement on a timely basis.
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 30,1999, the Company had no cash or cash equivalents, and
negative working capital of $172 thousand. The Company generated a net
loss of $582 thousand for the fiscal year ended December 31, 1998, and
a net loss of $1.8 million for the nine months ended September 30,
1999. Because of the advertising and promotion investment required to
expand nationally, the Company is anticipating a net loss for the
remainder of 1999 as well. 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 has obtained a verbal commitment from major shareholders to
continue to infuse minimum working capital in order to maintain the
company's operations until such time as the external funding efforts
are successful. The shareholders' estimated that funding for the
minimum working capital would be available for approximately six
months. The shareholders' verbal commitments are not legally binding.
Due to lack of advertising and promotion funds current sales levels are
not sufficient to sustain the current operations. Potential new
investment in Nova is becoming increasingly difficult due to the
magnitude of funds required to satisfy current liabilities, and to
support Nova's expansion of NxTrim and the Gold's Gym Nutrition line.
Nova is planning for the need to restructure debt in the event
additional funding is not available by the end of this fiscal year.
The contemplated debt restructuring would include; conversion of
current liabilities to long term debt, to six month payment plans, or
conversion to common stock, conversion of long term debt to major
shareholders to common stock, and exchange of debt to customers for
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product inventory. It is Nova's belief that, should additional funding
not be obtained by the end of this fiscal year, acceptance of a debt
restructuring by Nova's creditors would be a requirement for survival
of the company.
At this time, there are two potential investors conducting due
diligence in anticipation of making a $1.5 to $5 million dollar
investment/loan. The specific format of the investment /loan being
considered by the aforementioned investors would be negotiated
subsequent to successful completion of the due diligence process. A
requirement of one of these potential investors is that Nova
restructure it's debt by reducing liabilities and increasing long term
debt or equity.
These factors, among others, may indicate that the Company would be
unable to continue as a going concern beyond the current fiscal year.
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 June 20,1999, NxTrim is the number one selling weight control aid
in the California markets, and number 19 nationally.
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. In the nine months ended
September 30, 1999, accounts receivable was reduced by $289 thousand as
a result of lower sales in the third quarter of 1999. In the nine
months ended September 30, 1999, accounts payable was increased by $489
due to increased inventory for the Gold's Gym Nutrition introduction
and due to increased NxTrim inventory.
On March 31, 1999, the Company negotiated with a shareholder to
exchange of 204,082 shares of common stock for $500,000 in long term
notes payable. The shares were issued at the market price based on the
NQB Pink Sheets at March 31, 1999. The difference between the carrying
value of the notes payable, and the market value of the shares, which
totaled $214 thousand, was recorded as interest expense on March 31,
1999.
In the nine months ended September 30,1999, Nova issued shares of
common stock for consulting services related to SEC filings and
industrial relations services. The shares were issued at the NQB Pink
Sheet market value ($310 thousand), and either expensed, or deferred as
a prepaid expense, based on the term of the related contract. In the
same period, Nova shareholders contributed shares of common stock to
investor relation firms on behalf of Nova. The market value of these
shares on the date of transfer ($453 thousand) was recorded as an
expense, or deferred as a prepaid expense, with a corresponding offset
to paid in capital.
Nova issued 100,000 shares of common stock, and accrued $45 thousand
for services rendered in the sale of stock, and for the subsequent
15c211 registration of that stock in March of 1999. Shares were issued
at market value ($350 thousand), with a corresponding entry to reduce
paid in capital for both the accrued amount and the shares issued.
In the nine months ended September 30, 1998, the Company used cash from
operations in the amount of $323 thousand. The funding of this
investment was obtained substantially through shareholder loans.
Accounts receivable increased due to revenue growth. Inventory was
reduced due to working off an initial large inventory purchase through
the revenue growth. Prepaid expense increased due to deferral of
advertising and promotion services to the period of actual
usage of the purchased services.
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Results of Operations
Revenues for the nine months ended Septembr 30, 1999 totaled $617
thousand a decline of $752 thousand from the nine months ended
September 30, 1998. The decline is due to a highly successful
promotional event, which generated $406 thousand in revenues in the
prior year and did not occur in the current year. Additional 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 nine months ended September 30, 1999 totaled $400
thousand, a decline of $473 thousand from the same period of 1998.
Reduction in revenue caused the gross profit decline,
Selling and marketing expenses totaled $831 thousand in the first nine
months of 1999, an increase of $47 thousand from the same period in the
prior year. The increase is substantially due to a first quarter
national advertising campaign totaling $254 thousand, which did not
occur in the prior year. This was offset by reduced advertising and
promotional expense in the second and third quarters of 1999
versus the same periods last year. The reduction of advertising and
promotion expenditures is due the delay in obtaining additional capital
to support the planned national expansion programs.
General and Administrative expenses totaled $1,1 million for the first
nine months of 1999, an increase of $636 thousand from the prior year.
The increase is due to legal, accounting and professional fees of $463
thousand related to obtaining a bridge loan, preparing and executing a
private placement memorandum, preparing SEC documents to become a
reporting public company, and to investor relations programs. The
professional fees noted above were funded by shareholder contributions
of common stock in the amount of $188 thousand, by issuance of common
stock $188 thousand, and by current operating funds of $87 thousand.
Shareholder contributions to consultants for the above professional
fees were made with no repayment requirement by Nova. The remaining
increase in general and administrative expense resulted from an
accumulation of smaller dollar amounts in the areas of, salary, rent,
insurance and travel related to building the organizational infra
structure required to execute Nova's aggressive growth plans.
Interest expense totaled $300 thousand for the nine months ended
September 30, 1999, $255 thousand greater than the same period in the
prior year. The increase is substantially due to imputed interest
expense of $214 thousand generated from the conversion of shareholder
long term debt to common stock in the first quarter of 1999. The
remainder of the increase in interest resulted from higher borrowings
on long term notes payable in the first nine months of 1999 than in the
same period in the prior year.
The provision for income taxes reflects minimum tax payment
requirements. The tax benefits of operating losses from inception to
date have not been recorded. Recognition of any tax benefits from the
losses will be delayed until such time a Nova's operating results
indicate the ability to take advantage of the losses through future
earnings.
During the fiscal year ended December 31, 1998, quarterly revenues
have grown steadily as a result of increasing distribution to new
customers, and repeat sales to existing customers. This trend is
masked in the third quarter by an end cap display program with Longs,
Savons, and Wal-Mart. The end cap program generated sales of 20 to 29
cases per store displayed on an end cap featuring a tv/vcr combination
showing a loop tape on the NxTrim product. The program resulted in the
second quarter being unusually high due to the large quantity sold in,
and the third quarter being lower due to lack of repeat sales while the
end caps sold through. In addition, third quarter revenues were
lowered by return quantities from end caps, which did not sell through
completely in selected stores.
For the fiscal year ended December 31, 1998, cost of sales as a percent
of revenues declined steadily each quarter as the higher cost first
quarter purchase prices were sold through. The cost of product was
significantly reduced due to the lower cost of a new supplier as well
as purchases of greater quantities. Net revenues were reduced in the
third and fourth quarters due to introductory off invoice programs
related to new distribution deals. The off invoice reduction of
<PAGE>12
revenues resulted in an increase in the cost of sales as a percent of
revenues, partially offsetting the percentage decline in cost of sales
due lower cost product.
During the fiscal year ended December 31, 1998, sales and marketing
expenses fluctuated significantly from quarter to quarter due to the
timing of advertising relative to the sales to the trade. End cap
promotion sales late in the second quarter were supported by
advertising in the third quarter, causing an increase of advertising
and promotion to 79% of revenues in the third quarter. End cap
promotions in December, supported by advertising in the first quarter
of 1999 caused a lower percentage of sales and marketing expense in the
fourth quarter of 1998. Throughout the year, the Company increased the
selling expenses, building to the point at which an experienced Senior
Vice President of Sales and Marketing was on board with a sales staff
capable of managing the national network of brokers.
General and Administrative expenses increased steadily throughout the
year ended December 31, 1998, as the Company built the infrastructure
required to support the planned rapid revenue growth. In the fourth
quarter administrative expenses grew significantly due to travel
expenses for presentations to new customers, legal, accounting and
consulting fees related to becoming a public company, and insurance
costs related to large increase in revenues, and to becoming a public
company.
Tax benefits of current year and prior year losses are not reflected in
the financial statements. A valuation reserve is provided for deferred
tax assets because as a development stage company, the ability to
realize deferred tax assets through future operations has not yet been
demonstrated
For the twelve months ended December 31, 1998, Nova incurred a loss of
$582,184, and the nine months ended September 30, 1999, a loss of
$1,847,805. Nova has reflected losses in the results of operations due
to, the advertising and promotional expenditures to build brand equity,
and to the selling and administrative expenditures necessary to build
the organizational infrastructure required to accomplish the aggressive
growth plans for Nova's products. In the nine months ended September
30, 1999, Nova has additionally incurred significant expenses
related to investment counseling and investor relations consulting fees
in order to raise much needed capital and in order to communicate to
potential shareholders the growth opportunity in Nova. It is Nova's
belief that, given success in the efforts to raise additional capital,
Nova will expand its revenues significantly to new markets and increase
the sales per store in all markets through continued advertising and
promotion. Profitability will be attained with expansion to
approximately 35,000 of the 134,000 potential retail outlets. Because
of the selling and administrative staffing already committed, expansion
beyond that level begins to incrementally add significant profit
without significant added general and administrative costs.
Year 2000 Issues
The Company could be impacted by the year 2000 issue, which results
from computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's, or their critical
supplier's computer programs could fail and result in a system failure,
or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send
invoices, or engage in normal business activities.
The Company is prepared as of this date for the year 2000 according to
our software suppliers. The cost of compliance has been upgrades to PC
software costing under $1,000 in total. The risk is that the software,
stated to be compliant, does not function properly. The Company's
contingency plan is to revert to manual systems until such time as the
software problems are solved.
Due to the size of the Company and the number of daily transactions,
reversion to manual procedures for all major business systems is very
feasible. If Nova's suppliers or other material third parties are not
Year 2000 compliant, Nova is prepared to revert to telephone and fax
transactions in order to continue doing business. At this stage of
Nova's development,transactions with third parties are not so numerous
that reversion to manual transaction processing would not be feasible.
<PAGE>13
Item 3. Description of Property.
Nova owns no property. Nova currently leases a 3,800 square foot
office suite. Under an operating lease terminating June 11, 2002, Nova
pays monthly rental of $2,750 plus Common Area Maintenance of $1,084
per month.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership of our Common Stock as of June 30,1999 by:
Each shareholder known by us to own beneficially more than 5% of the
common stock
Each director and all directors and executive officers as a group:
Name Number of Shares(1) Percentage
Ralph Mann, Chief Executive
Officer and Director
3811 Stone Meadow
Murrieta, Ca 92562 5,600,000 43.91%
Showtime Partners, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 4,354,082 34.14%
Carlos Schmidt M.D., Director
613 Avenida Acapulco
San Clemente, Ca 92672 250,000 1.96%
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)
Charles Braden, Director
38002 Calle De Lobo
Murrieta, Ca 92562 - 0%
All Directors and Officers
as a group (6 persons) 5,850,700 45.88%
(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 12,753,139
shares of Common Stock outstanding as of June 30,1999.
(2) Showtime Partners is a general partnership consisting of 21
irrevocable trusts whose beneficiaries are relatives of Ralph Mann,
Director and Chief Executive Officer
(3) Individual owns less than 1%
Item 5. Directors and Executive Officers.
The names and ages of our executive officers and directors as of June
30, 1999, are as follows:
</TABLE>
<TABLE>
<CAPTION>
Name Age Position Term
<S> <C> <C> <C>
Ralph Mann 58 CEO/Director From Inception to
Present
James Ayres 28 Senior Vice President
& Secretary/Director From Inception to
present
<PAGE>14
Robert Eggering 55 Chief Financial Officer From 4-30-98 to
present
Fred Zinos 56 Senior Vice President of
Sales & Marketing From 11-2-98 to
present
Carlos Schmidt, M.D. 52 Director From inception to
present
Charles Braden 56 Director From 5-20-99 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.
Mr. Charles Braden, Director joined us as a Director in May of 1999.
Mr. Braden brings 35 years of experience in general management with an
emphasis on real estate, property management, marketing, financial
controls and human resources. From February 1994 to present Mr. Braden
has been President of CBS and Associates, a real estate, insurance, and
general management consulting firm. Prior to this assignment, Mr.
Braden was employed for 14 years by Fidelity Federal Bank, finishing
his career there as an Executive Vice President. From September of
1987 to present, Mr. Braden has served on the Board of Directors of
Health Net (California's third largest HMO). From January 1994 to
December 1997, Mr. Braden served on the Board of Directors of Health
Systems, Inc, a $35 billion dollar NYSE company. In addition to
serving as a member of the Board, Mr. Braden also served as Chairman of
the Audit and Finance Committee, and as a member of the Executive
Committee.
<PAGE>15
Item 6. Executive Compensation.
The following table sets forth summary information concerning the
compensation received for services rendered to us during the year ended
December 31, 1998 by the chief executive officer. No other executive
officers received aggregate compensation during our last fiscal year,
which exceeded $100,000. Other annual compensation consists of health
insurance premiums paid for by us on behalf of the named officers, and
in some cases, the spouse and dependents of the named officers.
SUMMARY COMPENSATION TABLE
</TABLE>
<TABLE>
<CAPTION>
Name and Principal Position Year Annual Compensation All Other
Salary Bonus Compensation
<S> <C> <C> <C> <C>
Ralph Mann, President 1998 $32,756 N/A $2,852 *
</TABLE>
* Other compensation includes payment for medical and dental benefits.
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.
Board Composition and Related Matters
Directors are elected annually at our annual meeting of stockholders
and serve for a term of one year. Our Bylaws currently provide for a
Board of Directors comprised of seven members. Originally, the bylaws
provided for one director. On 5-20-99, a special meeting of the board
of directors was held to amend the bylaws to increase the number of
Directors to seven. Pursuant to Nevada law, consent was obtained from
87.8% of the shareholders to approve the change in the bylaws.
(Reference 3.5 in the attached exhibits) Nova is currently in the
process of amending our governing documents to provide for up to seven
directors.
Our officers are appointed by the Board of Directors and serve at the
Board's discretion.
At this time, we have no compensation committee or other board
committee performing equivalent functions. Mr. Mann, our current chief
executive officer, has established a salary of $50,000 annually for
himself.
Board Compensation
Our directors do not receive cash compensation for their services as
directors, although some directors are reimbursed for reasonable
expenses incurred in attending Board meetings.
Item 7. Certain Relationships and Related 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 its 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
<PAGE>16
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 the Company and a licensing group
consisting of Showtime Partners (shareholder), Ralph Mann (Director,
Chief Executive Officer, shareholder), and Ralph Mann Trusts 1-21
(partners in Showtime Partners). The terms of the royalty agreement
were outlined in the Organization section above. The company amortized
the prepaid royalty of $4,008 in the six months ended June 30, 1999,
and $6,464 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 $341,000 at June 30,
1999 and zero at December 31, 1998. Interest accrued totaled $3,980 at
June 30, 1999. The terms of the Note Payable include an annual
interest rate of 6%, principal and accrued interest due and payable on
May 9, 2003
Showtime Partners has lent Nova money for operating funds under a note
payable agreement. Showtime Partners is a shareholder in Nova. 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 Nova). The principal balance of
the Note was $219,358 at June 30, 1999 and $625,730 at December 31,
1998. Interest accrued totaled $26,282 at June 30, 1999 and $13,025 at
December 31, 1999. 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. On December 10,1998 the CEO, Ralph Mann
negotiated with Showtime Partners trustee to convert the notes payable
to Nova into preferred stock. Ralph Mann, CEO, presented the argument
that, since the Company's equity had diminished significantly as a
result of the marketing investment in NxTrim, the Company's ability to
generate much needed additional funding from the private sector would
be significantly enhanced with the commitment for additional equity by
major shareholders. Conversion of the debt to equity would improve the
amount of positive equity in the company, and be possibly viewed by
potential new investors as a vote of confidence in the future of the
company by existing shareholders. At that time, Showtime agreed to
convert $500,000 of the notes payable to preferred stock. In March of
1999, the Company determined with their financial consultants that the
best approach to obtaining additional funding would be a private
placement memorandum for preferred stock convertible to common. The
terms of the preferred in the private placement memorandum would
include immediate conversion to common stock with no dividend
provision. Because of the complexity of establishing two layers of
preferred stock and the undesirability of complex preferred stock
arrangements to potential new investors, 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.
As of December 31, 1998 and June 30, 1999, 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 Pharmaceutical
prior to the reverse acquisition with Nalbando Enterprises, Inc in May
of 1998.
As of December 31, 1998 and June 30, 1999, 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. The
Company has agreed to extend the principal and accrued interest payment
date to March 5, 2000. As of December 31, 1998 and June 30, 1999, the
Company also holds a Promissory Note Receivable dated March 5, 1998
<PAGE>17
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 six months ended June 30, 1999.
We believe that the above transactions were entered into on terms no
less favorable than w\ould be obtained from unrelated third parties.
Item 8. Description of Securities.
All significant provisions of our capital stock are summarized in this
prospectus. We have filed copies of the appropriate articles of
incorporation and bylaws as exhibits to this registration statement.
Common Stock
Of the 12,753,139 common shares issued, 1,800,000 are registered for
trading on the National Quotations Board Pink Sheets, and 10,953,139
are Rule 144 restricted shares. Officers, directors and related
parties currently control 10,204,282 of the 10,953,139 Rule 144
restricted shares outstanding at June 30, 1999, and 800 of the
1,800,000 common shares registered for trading on the National
Quotations Board Pink Sheets. Nova has entered into agreements with
investor relations, market maker, and investment banking firms to
educate the investing public on Nova's stock, to become a SEC reporting
company traded on the OTC bulletin board, and to prepare and execute a
five million dollar private placement offering. In conjunction with
these contracts, Nova has committed to pay $40,000, to issue
approximately 544,551 shares of common stock and to issue warrants to
purchase 100,000 shares of common stock at $1.00. The number of shares
to be eventually committed are dependent on stock value at date of
issue and the attainment of target levels of Nova's stock volume and
price performance. In conjunction with the above consulting
agreements, non affiliated shareholders, in order to facilitate the
Company's attainment of its business plans, have paid a portion of the
consulting fees without cost to the Company. The market value of the
shares contributed by non affiliated shareholders have been recorded on
the Company's books as an expense with a corresponding entry to paid in
capital.
Authorized shares of common stock: 25,000,000 with a par value of
$.001 per share.
Issued shares of common stock: 12,753,139 shares at June 30, 1999.
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 the Company's creditors.
There are no preemptive rights to purchase additional shares offered by
the Company.
Preferred Stock
In May of 1999, the Company authorized 10,000,000 Preferred Stock, none
are issued, or outstanding. The Company is currently executing a
private placement offering of 2,000,000 shares of preferred stock at
$2.50 per share. Fees and expenses of offering are estimated at 10% of
$5,000,000 gross proceeds. The certificate of designations,
preferences, and rights of the preferred shares are included in the
exhibits to this filing.
Our board of directors can issue preferred stock at any time with any
legally permitted rights and preferences without your approval.
<PAGE>18
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
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.
<PAGE>19
PART II
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters.
In February of 1999, Nova's common stock was cleared for quotation on
the National Quotations Board Pink Sheets. Nova's common shares began
trading publicly in March 1999. We are currently trading under the
symbol NOVX.
The high and low bid prices for our stock for each full quarterly
period within the two most recent fiscal years, which we traded are set
forth below.
Quarterly Period Ending High Low
3-31-99 4.00 3.50
6-30-99 3.50 1.00
As of June 30, 1999 we had 68 shareholders of our common stock.
We have never paid any dividends and do not expect to do so in the
foreseeable future.
Transfer Agent and Registrar
The transfer agent /registrar for the common stock is Signature Stock
Transfer Inc. The transfer agent's address and telephone number is
14675 Midway Road - Suite 221 Dallas, TX 75244 972-788-4193 fax
972-788-4194 Contact: Jason Bogutski
Item 2. 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). The action was allegedly served on September 14, 1999,
although defendants are of the opinion that the service on Nova was
insufficient. Discovery has not yet begun. At the time of this
writing, defendants have not yet filed their answer to the complaint,
but intend to deny the relevant material allegations of the complaint
and expect to file a cross complaint for intentional interference with
contractual relations and breach of contract. Defendants believe the
action is generally without merit, that they will prevail on their
cross complaint and have a very good chance to prevail on a claim for
malicious prosecution. Should the outcome of this litigation be
resolved in favor the plaintiff, it could have a materially adverse
effect on the Company's results of operations.
Item 3. Changes in and Disagreements with Accountants.
None
<PAGE>20
Item 4 Recent Sales of Unregistered Securities.
The following sets forth information relating to all previous sales of
Common Stock by the Registrant which sales were not registered under
the Securities Act of 1933.
A. Name of Purchaser
B. Securities Sold, Type and Amount
C. Date
D. Consideration Cash or specify Fair Value of Services
E. Exemption from registration claimed
A B C D E
Fordee Management Co.
500,000 common shares 4-10-98 $5,000 504 (1)
The Gerald Romero Trust
300,000 common shares 4-27-98 $3,000 504 (1)
The Bull Dragon Trust
10.000 common shares 8-31-98 $100 504 (1)
The A-Z Creative Trust
10,000 common shares 8-31-98 $100 504 (1)
Chad Lee 10,000 common shares 9-3-98 $100 504 (1)
Sharmen Vigouret
10,000 common shares 9-3-98 $100 504 (1)
Marlene Schluter
7,000 common shares 9-3-98 $70 504 (1)
Elizabeth A Lee
10,000 common shares 9-3-98 $ 100 504 (1)
Cary Lee 10,000 common shares 9-3-98 $ 100 504 (1)
Corby Lee 10,000 common shares 9-3-98 $100 504 (1)
Diane Lee 7,000 common shares 9-3-98 $ 70 504 (1)
Deborah Jacobsen
10,000 common shares 9-3-98 $100 504 (1)
Danny Chang 10,000 common shares 9-3-98 $100 504 (1)
Loretta Barner 8,000 common shares 9-3-98 $ 80 504 (1)
Edward Ratnarajah
8,000 common shares 9-3-98 $ 80 504 (1)
Todd Marston 8,000 common shares 9-3-98 $ 80 504 (1)
Lance Momotani 8,000 common shares 9-3-98 $ 80 504 (1)
Mitchell Ponak 5,000 common shares 9-3-98 $ 50 504 (1)
Darin Wong 8,000 common shares 9-3-98 $ 80 504 (1)
Kristen Wong 8,000 common shares 9-3-98 $ 80 504 (1)
Nicole Wong 8,000 common shares 9-3-98 $ 80 504 (1)
Norman Chin 6,000 common shares 9-3-98 $ 60 504 (1)
Ron Chin 6,000 common shares 9-3-98 $ 60 504 (1)
Fred Chang 10,000 common shares 9-3-98 $ 100 504 (1)
John Ljuljovic 8,000 common shares 9-3-98 $ 80 504 (1)
Yun Gerbrandt 8,000 common shares 9-3-98 $ 80 504 (1)
Ray Wada 8,000 common shares 9-3-98 $ 80 504 (1)
Bantu Sukul 7,000 common shares 9-3-98 $ 70 504 (1)
Luigi Scaglione 7,000 common shares 9-3-98 $ 70 504 (1)
Onkar Sandhu 7,000 common shares 9-3-98 $ 70 504 (1)
Harry Reck 7,000 common shares 9-3-98 $ 70 504 (1)
Tia Hoy 9,000 common shares 9-3-98 $ 90 504 (1)
Shaun Chin 2,000 common shares 9-3-98 $ 20 504 (1)
Leigh Ivancoe 2,000 common shares 9-3-98 $ 20 504 (1)
Jess Sarber 5,000 common shares 9-3-98 $ 50 504 (1)
Dave Lambert 5,000 common shares 9-3-98 $ 50 504 (1)
Sandra A. Collins
5,000 common shares 9-3-98 $ 50 504 (1)
Terri Schollen 4,000 common shares 9-3-98 $ 40 504 (1)
Dave Hihashitani4,000 common shares 9-3-98 $ 40 504 (1)
Chris Ramsami 4,000 common shares 9-3-98 $ 40 504 (1)
Mike Denike 4,000 common shares 9-3-98 $ 40 504 (1)
Erik Davidson 3,000 common shares 9-3-98 $ 30 504 (1)
Rae Wong 8,000 common shares 9-3-98 $ 80 504 (1)
Wayne Chow 6,000 common shares 9-3-98 $ 60 504 (1)
The Gerald Romero Trust
200,000 common shares 9-4-98 $2,000 504 (1)
The Diana Snow Trust
500,000 common shares 9-17-98 $5,000 504 (1)
Al Andrade (4) 100 common shares 1-4-99 $250 4(2)
Robert Eggering (4) 100 common shares 1-4-99 $ 250 4(2)
Debra Mann (4) 100 common shares 1-4-99 $250 4(2)
Fredrick Zinos (4)100 common shares 1-41-99 $250 4(2)
<PAGE>21
Jennifer Spriet (4) 100 common shares 1-4-99 $250 4(2)
James Ayres (4) 100 common shares 1-4-99 $250 4(2)
John Kleinpeter (4) 100 common shares 1-4-99 $250 4(2)
John Normandeau (4) 100 common shares 1-4-99 $250 4(2)
Keith Ayres (4) 100 common shares 1-4-99 $250 4(2)
Sandra Tranquill (4) 100 common shares 1-4-99 $250 4(2)
Antionette Lamkin(4) 100 common shares 1-4-99 $250 4(2)
Steven G. Trapp & Co.
(2) 5000 common shares 12-25-99 $12,250 4(2)
Showtime Partners (3) 204,082 common shares 3-31-99 $500,000 4(2)
EBI Securities (2) 40,000 common shares 3-31-99 $140,000 4(2)
Ron Blekicki (2) 60,000 common shares 3-31-99 $210,000 4(2)
National Broker Dealer Service
(2) 42,857 common shares 5-11-99 $150,000 4(2)
Note: (1) With respect to the 504d sale of stock: Sales were made to
accredited investors based on completed questionnaires. No
commissions were paid. All appropriate state laws were observed. The
Form D was filed with the Securities and Exchange Commission.
Note: (2) Consultants are sophisticated investors and as such is
under Section 4(2).
Note: (3) Showtime Partners is a general partnership consisting of 21
irrevocable trusts established in 1989 whose beneficiaries are all
related to Ralph Mann, Director and CEO.
Shares were issued under section 4(2), Showtime Partners is a
sophisticated investor.
Note: (4) Employees are deemed to be sophisticated investors with
respect Nova Pharmaceutical, Inc. and as such are under Section 4(2).
Item 5. Indemnification of Directors and Officers.
Our Bylaws do not contain a provision entitling any director or
executive officer to indemnification against liability under the
Securities Act of 1933. The Nevada Revised Statutes allow a company to
indemnify its officers, directors, employees, and agents from any
threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, except under certain
circumstances. Indemnification may only occur if a determination has
been made that the officer, director, employee, or agent acted in good
faith and in a manner, which such person believed to be in the best
interests of the company. A determination may be made by the
shareholders; by a majority of the directors who were not parties to
the action, suit, or proceeding confirmed by opinion of independent
legal counsel; or by opinion of independent legal counsel in the event
a quorum of directors who were not a party to such action, suit, or
proceeding does not exist. Provided the terms and conditions of these
provisions under Nevada law are met, officers, directors, employees,
and agents of the Company may be indemnified against any cost, loss, or
expense arising out of any liability under the '33 Act. Insofar as
indemnification for liabilities arising under the '33 Act may be
permitted to directors, officers and controlling persons of the
Company. The Company has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against
public policy and is, therefore, unenforceable.
<PAGE>22
Part F/S
Financial Statements and Supplementary Data.
a) Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report dated April 12, 1999 22
Balance Sheet as of December 31, 1998 23
Statement of Operations and Accumulated Deficit
for the Year ended December 31, 1998 24
Statement of Stockholders' Equity for the Year
ended December 31, 1998 25
Statement of Cash Flows for the Year ended December 31, 1998 26
Notes to Financial Statements 28
Unaudited Balance Sheet as of June 30, 1999 and 1998 33
Unaudited Statement of Operations for the six months ended June 30,
1999 and 1998 34
Unaudited Statement of Changes in Stockholders' Equity 35
Unaudited Statement of Cash Flows for the three months ended
June 30, 1999 and 1998 36
Notes to Unaudited Financial Statements 38
a) Supplementary Financial Information - Not Applicable
<PAGE>23
To the Board of Directors
Nova Pharmaceutical, Inc.
We have audited the accompanying balance sheet of Nova Pharmaceutical,
Inc., a development stage company, as of December 31, 1998 and the
related statements of operations and accumulated deficit, changes in
stockholders' equity, and statement of cash flows for the year 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, 1998, and the result of its
operations, changes in stockholders' equity and cash flows for the year
ended December 31, 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. Nova Pharmaceutical,
Inc. has minimal cash reserves and requires continual capital
infusements to pay operating expenses. This factor together with
capital deficiencies raise substantial doubt about Nova Pharmaceutical,
Inc.'s ability to continue as a going concern. These financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
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
April 12, 1999
<PAGE>24
NOVA PHARMACEUTICAL, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1998
ASSETS
Current Assets
Cash $ 103,644
Accounts Receivable, Net 399,527
Inventory 66,751
Prepaid Expenses 146,251
Other Receivables - Related Party 15,736
-----------
Total Current Assets $ 731,909
Property and Equipment 39,490
Other Assets
Formulations 460,000
Prepaid Royalties 188,136
Prepaid Licensing 280,000
Organizational Costs 7,375
Refundable Deposits 2,600
----------
Total Other Assets 938,111
----------
Total Assets $1,709,510
==========
Liabilities and Stockholders' Equity
Current Liabilities
Current Portion of Long Term Debt $ 5,000
Accounts Payable and
Accrued Expenses 694,565
----------
Total Current Liabilities $ 699,565
Long Term Debt - Related Party 625,730
Stockholders' Equity
Common Stock
$.001 Par Value,
25,000,000 Shares Authorized,
12,400,000 Shares Issued 12,400
Additional Paid in Capital 953,999
Accumulated Deficit <582,184>
----------
Total Stockholders' Equity 384,215
----------
Total Liabilities and Stockholders' Equity $1,709,510
==========
See Notes to Financial Statements
<PAGE>25
NOVA PHARMACEUTICAL, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1998
Revenues $ 1,934,529
Cost of Sales
Beginning Inventory $ 0
Direct Labor 28,045
Purchases 732,507
Total Available 760,552
Less: Ending Inventory <66,751>
---------
Total Cost of Sales 693,801
---------
Gross Profit 1,240,728
---------
Operating Expenses
Sales and Marketing 985,044
General and Administrative 748,028
Royalty Expense - Related Party 11,864
Interest Expense 64,951
Interest Expense - Related Party 13,025
---------
Total Operating Expenses <1,822,912>
---------
Loss Before Provision for
Income Taxes <582,184>
Provision for Income Taxes <0>
--------
Net Loss <582,184>
========
Deficit, Beginning
of Year <0>
Accumulated Deficit, End of Year $<582,184>
Net Loss per Share $ <0.05>
=========
Weighted Average Shares Outstanding 11,733,333
==========
See Notes to Financial Statements
<PAGE>26
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
</TABLE>
<TABLE>
<CAPTION>
Common Stock Preferred Stock
--------------- ----------------- Additional Total
Par Value $.001 Par Value .01 Paid in Accumulated
Stockholder's
Shares Amount Shares Amount Capital Deficit Equity
------------------ ------------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock Issued
Commencement of
Operations 2,500,000 $ 2,500 500,000 $ 5,000 945,335 $952,835
Retirement of
Preferred Stock (500,000) $(5,000) (5,000)
Reverse Acquisition
and Recapitalization-
Nalbando Enterprises,
Inc. 8,900,000 8,900 (336) 8,564
Sale of Common Stock
Reg D Rule 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 - - $953,999 $(582,184) $384,215
========== ======== ======== ======== ========= ========= =========
</TABLE>
See Notes to Financial Statements
<PAGE>27
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
Cash Flows from Operating Activities:
Net Loss $(582,184)
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation 5,245
Royalty Expense Amortization 11,864
Other Asset Amortization 51,231
Cash Acquired - Weight Loss Supplement Business 23,208
Change in Assets and Liabilities Net Effect from
Purchase of Weight Loss Supplement Business
in 1998 (Increase) Decrease in:
Accounts Receivable (397,428)
Inventory 47,721
Prepaid Expenses (129,155)
Other Receivable (9,428)
Other Assets (3,606)
Increase in:
Accounts Payable and
Accrued Expenses 518,245
--------
Net Cash Used by Operating Activities (464,287)
--------
Cash Flow from Investing Activities
Acquisition of Formulations (40,000)
Purchase of Property and Equipment (37,364)
--------
Net Cash Used by Investing Activities (77,364)
--------
Cash Flow from Financing Activities
Debt Financing 630,730
Issuance of Common Stock 14,565
--------
Net Cash Provided from Financing Activities 645,295
--------
Net Increase in Cash 103,644
Cash at Beginning of Period -0-
---------
Cash at End of Period $ 103,644
==========
See Notes to Financial Statements
<PAGE>28
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS - (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 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.
See Notes to Financial Statements
<PAGE>29
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 world wide 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 including 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 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.
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
<PAGE>30
NOVA PHARMACEUTICAL
NOTES TO FIANANCIAL STATEMENTS - CONTINUED
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 31,1998 the
Company had cash and equivalents of $103,644 and a working capital
surplus of $32,344. However, the Company generated a loss of $582,184
for the fiscal year ended December 31,1998 and is anticipating losses
throughout most of 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 a $5 million private placement offering, and seeking a
$700,000 bridge loan, however, 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 verbal commitment from major shareholders to continue to loan
the minimum working capital funds required to maintain operations,
should the search for additional funding be delayed. 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.
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.
<PAGE>31
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT.
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.
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, 1998 no stock options had been granted under this plan.
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, 1998
were $574,095.
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 70% of the receivable balance and the company
<PAGE>32
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, 1998 consists of:
Note payable stockholder, unsecured, accruing
interest at a rate of 6% per annum. Principal
in the amount of $500,000, by written agreement
with stockholder, to be converted to 100,000
shares of preferred stock at March 31, 1999.
Preferred stock to be convertible to common
stock at $5.00 per share three years from
date of issuance, and earning dividends at
an annual rate of 7% until conversion. All
remaining principal and accrued interest
balance of long-term debt to stockholder is
due on January 31, 2001. This note payable
contains a contingency clause that requires
payment in full of the then outstanding
balance of principal and accrued interest
at such time as the Company raises capital
from the sale of Company securities totaling
$4,000,000 or more. $ 625,730
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. $ 5,000
---------
Total 630,730
Less amount included in current liabilities <5,000>
--------
Net Long Term Debt $ 625,730
NOTE 4 - PROVISION FOR INCOME TAXES
The provision for income taxes for the year ended December 31, 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 12-31-98
Reserve for bad debts $ 6,800
Reserve for obsolescence 4,000
Operating losses 222,074
Valuation reserve $ (232,874)
----------
Total deferred income tax assets $ -
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, 1998, the Company had a net operating loss
carryforward for income tax purposes of $555,184, which will be
available to offset future taxable income through the year 2018.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The company leases sales and office space under a noncancellable
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:
<PAGE>33
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES CONT.
Amounts
Year Office Furniture and Equipment
1999 $ 33000 $ 5194
2000 $ 33000 $ 4128
2001 $ 33000 $ 1996
2002 $ 16500 $ 1996
2003 $ 0 $ 1331
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.
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 $25,000 for each of the next nine
years.
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, 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, 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 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, 1998. Interest expense totaled $195 for the twelve months ended
December 31, 1999. 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
Notes Payable - Related Party
Showtime Partners has lent Nova money for operating funds under a note
payable agreement. Showtime Partners is a shareholder in Nova. 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 Nova). The principal balance of
the Note was $625,730 at December 31, 1998. Interest accrued totaled
$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.
Royalty Expense - Related Party
A royalty agreement exists between the Company and a licensing group
consisting of Showtime Partners (shareholder), Ralph Mann (Director,
Chief Executive Officer, shareholder), and Ralph Mann Trusts 1-21
(partners in Showtime Partners). Under the terms of the agreement, the
Company obtained world wide 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
<PAGE>34
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 $6,464 in the year ended
December 31, 1998.
NOTE 7 - SUBSEQUENT EVENTS
In February 1999 the Company was cleared for quotation on the NQB Pink
Sheets. Nova common shares began trading publicly in March 1999.
<PAGE>35
SUPPLEMENTAL INFORMATION
NOVA PHARMACEUTICAL, INC.
STATEMENT OF OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998
Sales and Marketing
Advertising $ 574,095
Commissions 129,959
Promotional Expense 84,232
Printing 36,673
Salaries 134,690
Telephone Expense 25,395
---------
Total Sales and Marketing $ 985,044
General and Administrative
Allowance for Uncollectable Accounts $ 20,133
Amortization Expense 51,231
Bank Charges 4,568
Depreciation Expense 5,245
Employers Tax Expense 39,971
Insurance Expense 74,517
Legal and accounting 63,630
Licenses, Permits and Fees 3,177
Office Supplies, Postage, Office Exps 34,128
Product Testing 1,792
Rent Expense 27,779
Royalty Expense 11,864
Salaries - Administration 230,670
Shipping Expenses - Samples 122,345
Travel and Trade Shows 66,673
Utilities 2,169
---------
Total General and Administrative $ 759,892
See Notes to Consolidated Financial Statements
<PAGE>36
NOVA PHARMACEUTICAL INC
BALANCE SHEETS AT SEPTEMBER 30
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash - -
Accounts Receivable-Net 110,128 175,347
Inventory 412,297 33,298
Prepaid Expenses 497,557 161,590
Loans Receivable - Related Party 15,000 18,630
-------- --------
TOTAL CURRENT ASSETS 1,034,982 388,865
FURNITURE AND FIXTURES 49,478 41,481
OTHER ASSETS
Formulae 437,500 427,500
Prepaid royalties 184,617 191,593
Licensing and Registration 265,000 285,000
Organization Expenses - 7,805
Refundable Deposits 6,089 2,600
--------- ---------
TOTAL OTHER ASSETS 893,206 914,498
--------- ---------
TOTAL ASSETS 1,977,666 1,344,844
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Portion of Long Term Debt 5,000 5,000
Accounts Payable and Accrued Expenses 1,202,416 465,323
-------- --------
TOTAL CURRENT LIABILITIES 1,207,416 470,323
LONG TERM DEBT - RELATED PARTIES 801,097 339,730
STOCKHOLDERS' EQUITY
Common Stock, par value $.001;
25,000,000 Authorized; 12,791,096
and 12,400,000 shares issued and
outstanding 12,791 12,400
Paid In Capital 2,386,351 955,036
Retained Earnings ( deficit ) (2,429,989) (432,645)
TOTAL STOCKHOLDERS' EQUITY (30,847) 534,791
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 1,977,666 1,344,844
========= =========
</TABLE>
See Notes to Financial Statements
<PAGE>37
NOVA PHARMACEUTICAL INC
STATEMENTS OF INCOME
Nine Months Ended September 30
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Revenues 616,830 1,368,977
Cost of Sales
Beginning Inventory 66,751 5,075
Direct Labor 31,957 15,708
Purchases 530,311 508,127
Total Available 629,019 528.910
Less Ending Inventory (412,297) (33,298)
--------- --------
Total Cost of Sales 216,722 495,612
--------- --------
Gross Profit 400,108 873,365
Operating Expenses
Sales and Marketing 830,555 784,470
General and Administrative 1,105,275 468,767
Royalty Expense - Related Party 3,519 8,407
--------- --------
Total Operating Expenses 1,939,349 1,261,644
--------- --------
Income from Operations (1,539,241) (388,279)
Other Expense
Interest Expense 49,711 40,030
Interest Expense - Related Party 249,878 4,336
Write Off Deferred
Organizational Expense 7,375 -
---------- --------
Total 306,964 44,366
Provision for Income Taxes 1,600 -
Net Loss (1,847,805) (432,645)
========= ========
Net Loss per Share (0.15) (0.04)
==== ====
Weighted Average Shares Outstanding 12,670,046 11,511,111
========== ==========,,,
</TABLE>
See Notes to Financial Statements
<PAGE>38
NOVA PHARMACEUTICAL INC
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999
UNAUDITED
<TABLE>
<CAPTION>
Common Stock Additional Total
Par Value $.001 Paid in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance January 1, 1999 12,400,000 12,400 955,000 (582,184) 385,216
Common Stock Issued For
Professional Contracts 87,014 87 309,462 309,549
Consulting Contracts For 504 D
Private Placement & 15c211
Filing 100,000 100 (45,100) (45,000)
Conversion of Notes Payable
to Common Stock 204,082 204 714,082 714,286
Shareholder Contributions to
Investor Relation Contracts 452,907 452,907
Net Loss (1,847,805) (1,847,805)
Balance June 31, 1999 12,791,096 12,791 2,386,351 (2,429,989) (30,847)
</TABLE>
See Notes to Financial Statements
<PAGE>39
NOVA PHARMACEUTICAL INC
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss (1,847805) (432,645)
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation 6,697 1,624
Royalty Expense Amortization 3,519 8,407
Other Asset Amortization 37,500 38,300
Non Cash Expense -
Consulting Fees for Common Stock 376,228 -
Non Cash Expense - Accounting Change 7,375 -
Non Cash Expense - Interest Debt
Conversion to Common Stock 214,286 -
Cash Acquired - Weight Loss
Supplement Business - 23,208
Change in Assets and Liabilities Net of
Effects from Purchase of Weight Loss
Supplement Business in 1998 (Increase)
Decrease In:
Accounts Receivable 289,399 (173,248)
Inventory (345,546) 81,174
Prepaid Expenses 9,923 (144,494)
Other Receivable 736 (12,322)
Other Assets (3,489) (3,606)
Increase (Decrease ) In
Accounts Payable and
Accrued Expenses 488,851 291,042
------- -------
Net Cash Used by Operating Activities (762,326) (322,560)
------- -------
Cash Flow from Investing Activities
Purchase of Property and Equipment (16,685) (35,734)
-------- -------
Net Cash Provided from
Investing Activities (16,685) (35,734)
-------- -------
Cash Flows from Financing Activities
Debt Financing 675,367 339,730
Issuance of Common Stock - 18,564
------- -------
Net Cash Provided from
Financing Activities 675,367 358,294
------- -------
Net Increase in Cash (103,644) -
Cash at Beginning of Period 103,644 -
-------- -------
Cash at End of Period - -
======== =======
Supplemental Disclosure of
Cash Flow Information:
Interest Paid 299,589 44,366
</TABLE>
See Notes to Financial Statements
<PAGE>40
NOVA PHARMACEUTICAL INC
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES
For the Nine Months Ended September 30, 1999 and 1998
UNAUDITED
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 notes and the market value of the
shares ($214,286) was recorded as interest expense.
In the nine months ended Septembr 30, 1999, the Company issued 87,014
shares of common stock for consulting services related to SEC filings
and investor relations services. The shares were recorded at market
value ($309,549) and either expensed or deferred as a prepaid expense
depending on the terms of the related contract.
In the nine months ended September 30, 1999, shareholders contributed
shares of common stock to investor relations and investment counseling
firms on behalf of the Company. The market value of these shares
($452,906) was recorded as an expense or deferred as a prepaid expense
depending on the terms of the related contract.
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 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.
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 -
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.
See Notes to Financial Statements.
<PAGE>41
NOVA PHARMACEUTICAL, INC
NOTES TO FINANCIAL STATEMENTS
JUNE 30,1999
(UNAUDITED)
NOTE 1 - DESCRIPTION OF THE 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 September 30, 1999, and for the nine months
ended September 30, 1999 and 1998 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 the financial position at such date and the operating
results and cash flows for such periods. Operating results for the
nine month period ended September 30, 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 annual financial statements for
the year ended December 31, 1998 included in this Form 10 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 30,1999, the Company had no cash or cash equivalents, and
negative working capital of $172 thousand. The Company generated a net
loss of $582 thousand for the fiscal year ended December 31, 1998, and
a net loss of $1.8 million for the nine months ended September 30,
1999. Because of the advertising and promotion investment required to
expand nationally, the Company is anticipating a net loss for the
remainder of 1999 as well. 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 has obtained a verbal commitment from major shareholders to
continue to infuse minimum working capital in order to maintain the
company's operations until such time as the external funding efforts
are successful. The shareholders' estimated that funding for the
minimum working capital would be available for approximately six
months. The shareholders' verbal commitments are not legally binding.
Due to lack of advertising and promotion funds current sales levels are
not sufficient to sustain the current operations. Potential new
investment in Nova is becoming increasingly difficult due to the
magnitude of funds required to satisfy current liabilities, and to
support Nova's expansion of NxTrim and the Gold's Gym Nutrition line.
Nova is planning for the need to restructure debt in the event
additional funding is not available by the end of this fiscal year.
The contemplated debt restructuring would include; conversion of
current liabilities to long term debt, to six month payment plans, or
conversion to common stock, conversion of long term debt to major
shareholders to common stock, and exchange of debt to customers for
product inventory. It is Nova's belief that, should additional funding
not be obtained by the end of this fiscal year, acceptance of a debt
restructuring by Nova's creditors would be a requirement for survival of the
company.
At this time, there are two potential investors conducting due
diligence in anticipation of making a $1.5 to $5 million dollar
investment/loan. The specific format of the investment /loan being
considered by the aforementioned investors would be negotiated
subsequent to successful completion of the due diligence process. A
requirement of one of these potential investors is that Nova
restructure it's debt by reducing liabilities and increasing long term
debt or equity.
<PAGE>42
These factors, among others, may indicate that the Company would be
unable to continue as a going concern beyond the current fiscal year.
NOTE 3 - INCOME TAXES
Deferred income taxes have been provided for in the accompanying
balance sheets as follows:
Deferred income tax assets 9-30-98 9-30-99
Reserve for bad debts $ - $ 6,800
Reserve for obsolescence - 4,000
Operating losses 173,058 875,481
Valuation reserve $(173,058) $ (886,281)
Total deferred income
tax assets $ - $ -
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. On March 31, 1999, the
Company exchanged 204,082 shares of common stock for $500,000 in long
term debt to a shareholder. The $214,286 difference between the
carrying value of the notes and the market value of the shares has been
treated as non-deductible for income taxes and as such reflects a
permanent timing difference between financial income and taxable
income. A tax loss carryforward in the amount of $582 thousand will be
available to offset future taxable income through the year 2018, and
$1.6 million through 2019.
NOTE 4 - RELATED PARTY TRANSACTIONS
Notes Receivable - Related Party
As of September 30, 1998 and 1999, 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 September 30, 1998 and 1999, 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, an officer, director, and shareholder, has lent Nova money
for operating funds under a note payable agreement. The principal
balance of the Note was $495,000 at September 30, 1999. Interest
expense totaled $10,510 for the nine months ended September 30, 1999.
The terms of the Note Payable include an annual interest rate of 6%,
with principal and accrued interest due and payable on May 9, 2003.
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 September
30, 1999 and 1998. Interest expense totaled $225 for the nine months
ended September 30, 1999, and $105 for 1998. 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.
Showtime Partners has lent Nova money for operating funds under a note
payable agreement. Showtime Partners is a shareholder in Nova. 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 Nova). The principal balance of
the Note was $311,097 at September 30, 1999 and $340,159 at September
30, 1998. Interest expense for the nine months ended September 30,
1999 totaled $24,857,and $4,336 for the nine months ended Septembr 30,
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. The note payable contains a contingency clause that
requires payment in full of the then outstanding balance of principal
and accrued interest at such time as the Company raises capital from
the sale of securities totaling $4,000,000 or more. On March 31, 1999,
the Company exchanged 204,082 shares of common stock for $500,000 long
<PAGE>43
term debt to Showtime. The difference between the carrying value of
the notes and the market value of the shares ($214,286) was recorded as
interest expense - related party.
Royalty Expense - Related Party
A royalty agreement exists between the Company and a licensing group
consisting of Showtime Partners (shareholder), Ralph Mann (Director,
Chief Executive Officer, shareholder), and Ralph Mann Trusts 1-21
(partners in Showtime Partners). Under the terms of the agreement, the
Company obtained world wide 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 $3,519 in the nine months
ended September 30, 1999, and $8,407 for the nine months ended
September 30, 1998.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company entered into an agreement with Gold's Gym
International, Inc to exclusively market and manufacture a line of
nutritional, sports enhancement, and health supplements under the
Gold's Gym name and logo. In conjunction with that agreement the
Company has committed to minimum royalty payments as follows:
March 1, 1999 to June 1, 2000 $140,000
June 2, 2000 to June 1, 2001 $280,000
June 2, 2001 to June 1, 2002 $420,000
The Company's Board of Directors approved contracts with
various financial consulting firms to prepare and market a $5 million
dollar private placement offering, to generate a $700,000 bridge loan
in advance of the private placement, to provide investment banking
services, and to provide investor relations services. Compensation for
these services includes the potential issue of up to 400,000 shares of
common stock depending on various levels of performance.
Litigation
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.
NOTE 6 - ADVERTISING EXPENSE
Advertising expenses incurred for the nine months ended September 30,
1998 were $487,560, and $449,098 for the same period in 1999.
<PAGE>44
PART III
Index to Exhibits Page
3.1 Articles of Incorporation incorporated by reference to Form
10-SB filed on October 13, 1999, SEC file No. 0-30288
3.2 Bylaws incorporated by reference to Form 10-SB filed on
October 13, 1999, SEC file No. 0-30288
3.3 Articles of Merger incorporated by reference to Form 10-SB
filed on October 13, 1999, SEC file No. 0-30288
3.4 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
10.1 Employment Contract - Fred Zinos incorporated by reference to
Form 10-SB filed on October 13, 1999, SEC file No. 0-30299
10.2 Employment Contract - Robert 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
Merchandise License Agreement incorporated by reference to
Form 10-SB filed on October 13, 1999, SEC file No. 0-30288
10.5 Nutri Pharmaceutical, 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 Carlos Schmidt, M.D., Director incorporated by
reference to Form 10-SB filed on October 13, 1999, SEC file No. 0-30288
10.11 Note Payable to Ralph Mann incorporated by reference to Form
10-SB filed on october 13, 1999, SEC file No. 0-30288
10.12 License and Royalty Agreement - NxTrim incorporated by
reference to Amendment 1 to Form 10-SB filed on November 24, 1999
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly
authorized.
Nova Pharmaceutical Inc.
/s/ Ralph Mann
Director, Chief Executive Officer
/s/ Robert Eggering
Chief Financial Officer
Date: December 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 125,128
<ALLOWANCES> 0
<INVENTORY> 412,297
<CURRENT-ASSETS> 1,034,982
<PP&E> 49,478
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,034,982
<CURRENT-LIABILITIES> 1,207,416
<BONDS> 0
<COMMON> 12,791
0
0
<OTHER-SE> (74,485)
<TOTAL-LIABILITY-AND-EQUITY> 1,977,666
<SALES> 616,830
<TOTAL-REVENUES> 616,830
<CGS> 216,722
<TOTAL-COSTS> 216,722
<OTHER-EXPENSES> 1,939,349
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 299,589
<INCOME-PRETAX> (1,849,405)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (1,847,805)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,847,805)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
