UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2004
| | TRANSITION REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number 001-32177
NOVADEL PHARMA INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-2407152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Minneakoning Road
Flemington, New Jersey 08822
(Address of Principal Executive Offices) (Zip Code)
(908) 782-3431
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 33,491,437 shares of common
stock outstanding as of December 2, 2004.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Item 2. Management's Discussion and Analysis or Plan of Operation............11
Item 3. Controls and Procedures..............................................16
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........19
Item 3. Defaults Upon Senior Securities......................................19
Item 4. Submission of Matters to a Vote of Security Holders..................19
Item 5. Other Information....................................................19
Item 6. Exhibits.............................................................19
Signatures....................................................................20
ii
SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Current Report on Form 10-QSB includes "forward-looking statements",
including statements regarding the Company's expectations, beliefs, intentions
or strategies for the future and the Company's internal controls and procedures
and outstanding financial reporting obligations and other accounting issues. The
Company intends that all forward-looking statements be subject to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are only predictions and reflect the Company's
views as of the date they are made with respect to future events and financial
performance. In particular, the "Management's Discussion and Analysis or Plan of
Operation" section in Part I, Item 2 of this Quarterly Report includes
forward-looking statements that reflect the Company's current views with respect
to future events and financial performance. The Company uses words such as
"expect," "anticipate," "believe," and "intend" and similar expressions to
identify forward-looking statements. A number of important risks and
uncertainties could, individually or in the aggregate, cause actual results to
differ materially from those expressed or implied in any forward-looking
statements.
Examples of the risks and uncertainties include, but are not limited to: the
inherent risks and uncertainties in developing products of the type the Company
is developing; possible changes in the Company's financial condition; the
progress of the Company's research and development; clinical trials require
adequate supplies of drug substance and drug product, which may be difficult or
uneconomical to procure or manufacture; timely obtaining sufficient patient
enrollment in the Company's clinical trials; the impact of development of
competing therapies and/or technologies by other companies; the Company's
ability to obtain additional required financing to fund its research programs;
the Company's ability to enter into agreements with collaborators and the
failure of collaborators to perform under their agreements with the Company; the
progress of the FDA approvals in connection with the conduct of the Company's
clinical trials and the marketing of the Company's products; the additional
costs and delays which may result from requirements imposed by the FDA in
connection with obtaining the required approvals; the risks related to the
Company's internal controls and procedures; and the risks identified under the
section entitled "Risk Factors" following Item 5 in Part II of the Company's
Annual Report on Form 10-KSB for the fiscal year ended July 31, 2004, and other
reports, including this report and other filings filed with the Securities and
Exchange Commission from time to time.
iii
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NOVADEL PHARMA INC.
CONDENSED BALANCE SHEETS
AS OF OCTOBER 31, 2004 AND JULY 31, 2004
October 31, July 31,
2004 2004
As Restated
(Unaudited) (Notes 1 and 3)
--------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,835,000 $ 2,166,000
Short-term investments 6,439,000 6,211,000
Accounts receivable - trade 65,000 130,000
Prepaid expenses and other current assets 281,000 255,000
----------------------------------
Total Current Assets 8,620,000 8,762,000
Property and equipment, net 1,472,000 1,066,000
Long-term investments 1,548,000 1,307,000
Other assets 351,000 351,000
Other investment 500,000 -
----------------------------------
TOTAL ASSETS $12,491,000 $ 11,486,000
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 275,000 $ 241,000
Accrued expenses and other current liabilities 827,000 798,000
Current portion of deferred revenue 162,000 19,000
Current portion of capitalized lease obligation - 28,000
----------------------------------
Total Current Liabilities 1,264,000 1,086,000
Non current portion of deferred revenue 2,795,000 343,000
Non current portion of capitalized lease obligation - 34,000
----------------------------------
Total Liabilities 4,059,000 1,463,000
----------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value:
Authorized 1,000,000 shares, none issued
Common stock, $.001 par value: Authorized - 100,000,000 shares
Issued and outstanding 33,491,437 shares at October 31, 2004 and
33,091,467 shares at July 31, 2004 33,000 33,000
Additional paid-in capital 35,602,000 34,937,000
Accumulated deficit (27,197,000) (24,941,000)
Less: Treasury stock, at cost, 3,012 shares (6,000) (6,000)
----------------------------------
Total Stockholders' Equity 8,432,000 10,023,000
----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,491,000 $ 11,486,000
==================================
See accompanying notes to condensed financial statements.
NOVADEL PHARMA INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
October 31,
----------------------------------------------
2004 2003
As Restated (Note 3)
----------------------- --------------------
LICENSE FEE $19,000 $ -
CONSULTING REVENUES 99,000 2,000
----------------------- -------------------
TOTAL REVENUES 118,000 2,000
----------------------- -------------------
RESEARCH AND DEVELOPMENT
EXPENSES 660,000 269,000
CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,736,000 769,000
----------------------- -------------------
TOTAL EXPENSES 2,396,000 1,038,000
----------------------- -------------------
LOSS FROM OPERATIONS (2,278,000) (1,036,000)
INTEREST INCOME 22,000 6,000
----------------------- -------------------
NET LOSS $ (2,256,000) $ (1,030,000)
======================= ===================
BASIC AND DILUTED LOSS PER SHARE $(.07) $(.06)
======================= ===================
SHARES USED IN COMPUTATION OF
BASIC AND DILUTED LOSS PER
SHARE 33,100,163 17,972,760
======================= ===================
See accompanying notes to condensed financial statements.
2
NOVADEL PHARMA INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Note 3)
Common Stock
-------------------------
Additional Total
Shares Amount Paid-in Accumulated Treasury Stockholders'
Capital Deficit Stock Equity
------------ --------- -------------- -------------- ----------- -------------
BALANCE, August 1, 2004 33,091,437 $33,000 $34,937,000 $(24,941,000) $(6,000) $10,023,000
Impact of variable plan accounting - - 29,000 - - 29,000
Shares issued to Hana Biosciences Inc. per -
license agreement 400,000 - 636,000 - 636,000
Net Loss - - - (2,256,000) - (2,256,000)
------------ --------- -------------- -------------- ----------- -------------
BALANCE, October 31, 2004 33,491,437 $33,000 $35,602,000 $(27,197,000) $(6,000) $ 8,432,000
============ ========= ============== ============== =========== =============
See accompanying notes to condensed financial statements.
3
NOVADEL PHARMA INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
October 31,
---------------------------------
2004 2003
As Restated
(Note 3)
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,256,000) $ (1,030,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Impact of variable plan accounting 29,000 (695,000)
Depreciation and amortization 107,000 49,000
Changes in operating assets and liabilities:
Accounts receivable 65,000 -
Prepaid expenses and other current assets (26,000) (100,000)
Other assets - 2,000
Accounts payable - trade 34,000 226,000
Accrued expenses and other current liabilities 29,000 86,000
Deferred revenue 2,095,000 -
-------------- --------------
Net cash provided by (used in) operating activities 77,000 (1,462,000)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (4,280,000) -
Maturities of investments 3,811,000
Purchase of property and equipment (513,000) (308,000)
-------------- --------------
Net cash used in investing activities (982,000) (308,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares of common stock issued to Hana Biosciences 636,000 -
Payments on capital lease obligation (62,000) -
-------------- --------------
Net cash provided by financing activities 574,000 -
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (331,000) (1,770,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,166,000 3,086,000
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,835,000 $1,316,000
============== ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquired under capitalized lease obligation $ - $ 81,000
============== ==============
Investment in Hana Biosciences common stock received in connection with
license agreement $500,000 $ -
============== ==============
See accompanying notes to condensed financial statements.
4
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
THE COMPANY - NovaDel Pharma Inc. (the "Company"), is engaged in the
development of novel application drug delivery systems for presently
marketed prescription, over-the-counter ("OTC") and veterinary drugs.
The Company's patented and patent-pending delivery system is a lingual
spray potentially enabling drug absorption through the oral mucosa and
more rapid absorption into the bloodstream than presently available
oral delivery systems. The Company's proprietary delivery system
potentially enhances and greatly accelerates the onset of the
therapeutic benefits within minutes of administration. The Company's
development efforts for its novel drug delivery system are concentrated
on making such system available for drugs that are already available
and proven in the marketplace. In addition to increasing the
bioavailability of a drug by avoiding metabolism by the liver before
entry into the bloodstream, the Company believes that its proprietary
drug delivery system offers the following significant advantages: (i)
more rapid delivery of drugs to the bloodstream allowing for quicker
onset of therapeutic effects compared to conventional oral dosage
forms; (ii) improved drug safety profile by reducing the required
dosage, including possible reduction of side-effects; (iii) improved
dosage reliability; (iv) allowing medication to be taken without water;
and (v) improved patient convenience and compliance.
The Company's strategy is to concentrate its product development
activities primarily on pharmaceutical products for which there already
are significant prescription sales, where the use of the Company's
proprietary, novel drug delivery technology will greatly enhance speed
of onset of therapeutic effect, reduce side effects through a reduction
of the amount of active drug substance required to produce a given
therapeutic effect and improve patient convenience or compliance.
The Company has identified six tier-one priority products for
development, namely nitroglycerin, sumatriptan, alprazolam, zolpidem,
ondansetron and propofol. The Company also has identified a number of
other development initiatives which are currently less of a priority
than the Company's six tier-one priority programs. These initiatives
include, among other products, clemastine, loratadine and estradiol and
progesterone lingual sprays.
To date, the Company has entered into strategic license agreements with
(i) Manhattan Pharmaceuticals, Inc. ("Manhattan"), in connection with
propofol, (ii) Velcera Pharmaceuticals, Inc. ("Velcera"), in connection
with veterinary applications for currently marketed veterinary drugs,
(iii) Par Pharmaceutical, Inc. ("Par"), for the marketing rights in the
United States and Canada for the Company's nitroglycerin lingual spray,
and (iv) Hana Biosciences Inc. ("Hana"), for the marketing rights in
the United States and Canada for the Company's ondansetron lingual
5
spray. Recently, the Company entered into an agreement with INyX USA,
Ltd. for the manufacture and supply of the Company's nitroglycerin
lingual spray (see Note 7). The Company has not entered into any
material development arrangements with any pharmaceutical companies.
The Company believes that it will require additional financing and/or
additional alliances with development partners to undertake and
maintain its business plan.
BASIS OF PRESENTATION - The balance sheet at July 31, 2004, the end of
the preceding fiscal year, has been derived from the audited balance
sheet contained in the previously filed Annual Report on Form 10-KSB of
the Company for the fiscal year ended July 31, 2004, and is presented
for comparative purposes. All other financial statements are unaudited.
The condensed financial statements are presented on the basis of
accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management
to make certain estimates and assumptions that affect reported
earnings, financial position and various disclosures. Actual results
could differ from those estimates. In the opinion of management, all
adjustments, which include only normal recurring adjustments necessary
to present fairly the financial position, results of operations and
cash flows for all periods presented, have been made in the interim
financial statements. Results of operations for interim periods are not
necessarily indicative of the operating results to be expected for a
full fiscal year.
Certain footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in
the United States have been omitted in accordance with the published
rules and regulations of the Securities and Exchange Commission. The
condensed financial statements in this report should be read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB for the fiscal year ended
July 31, 2004.
The Company has reported a net loss of $2,256,000 for the three months
ended October 31, 2004 and a net loss of $1,030,000 for the three
months ended October 31, 2003, as restated (see Note 3). Management
believes that the Company will continue to incur net losses through at
least October 31, 2005. Management believes that the Company's capital
resources will be adequate to fund operations through at least October
31, 2005. As of October 31, 2004, the Company had working capital of
$7,356,000, cash and cash equivalents of $1,835,000 and short-term
investments of $6,439,000. Until and unless the Company's operations
generate significant revenues, the Company will attempt to continue to
fund operations from cash on hand and marketable investments. The
Company's long-term liquidity is contingent upon achieving sales and/or
obtaining additional financing. The most likely sources of financing
include private placements of the Company's equity or debt securities
or bridge loans to the Company from third party lenders.
6
Management of the Company believes that no later than the fiscal
quarter ending January 31, 2006, it will be necessary for the Company
to obtain additional financing and/or consummate a strategic alliance
with a business partner. There are a number of risks and uncertainties
related to the Company's attempt to complete a financing or strategic
partnering arrangement that are outside the control of the Company. The
Company may not be able to successfully obtain additional financing on
terms acceptable to the Company, or at all.
NOTE 2 - LOSS PER COMMON SHARE
Loss per common share is computed pursuant to SFAS No. 128, "Earnings
Per Share." Basic loss per share is computed as net loss divided by the
weighted average number of common shares outstanding for the period.
Diluted net loss per common share is the same as basic net loss per
common share, since potentially dilutive securities from the assumed
exercise of all outstanding options and warrants would have an
antidilutive effect because the Company incurred a net loss during each
period presented. As of October 31, 2004 and 2003, there were
20,119,000 and 15,507,000 shares, respectively, issuable upon exercise
of options and warrants which were excluded from the diluted loss per
share computation.
NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS
In connection with the preparation of the Company's Annual Report on
Form 10-KSB of the Company for the fiscal year ended July 31, 2004, the
Company's independent registered public accounting firm brought to the
attention of the Company that certain of the Company's issued and
outstanding stock options should have been subject to variable plan
accounting treatment under applicable accounting standards and,
accordingly, previously unrecognized compensation expenses should have
been recognized in the Company's previously issued financial statements
under the Financial Accounting Standards Board's Interpretation 44,
"Accounting for Certain Transactions involving Stock Compensation-an
interpretation of APB Opinion No. 25" (Issue Date 3/00). After
reviewing the matter with its current and former independent registered
public accounting firms, the Company identified certain adjustments
that necessitated the restatement of its financial statements for the
first three quarters of fiscal 2004, the interim periods of fiscal 2003
and 2002, and for the fiscal years 2003 and 2002.
These adjustments reflect variable plan accounting treatment of the
affected stock options for the relevant periods, resulting from
cashless exercise provisions applicable to options held by employees
and directors. Under variable plan option accounting, compensation
expense is increased or decreased as a result of changes in the market
price of the Company's common stock. The restatement adjustment for the
three months ended October 31, 2003 resulted in credits to Research &
Development and Consulting, Selling, General and Administrative
Expenses of $24,000 and $671,000, respectively. For the three months
ended October 31, 2003, net loss decreased by $695,000 as a result of
the variable plan accounting treatment adjustment.
7
On October 20, 2004, the Board of Directors of the Company rescinded
the Company's cashless exercise provision for all of the Company's
outstanding option grants. Thus, the Company expects that variable
accounting will no longer be required after the end of the Company's
fiscal quarter ended October 31, 2004.
NOTE 4 - INVESTMENTS
Investments include short-term investments, long-term investments and
an investment in common stock received from a licensee (See Note 6).
Short-term investments are carried at amortized cost, which
approximates fair market value, and consist of certificates of deposit
and US treasury securities with original maturities greater than three
months and less than one year. Long-term investments are carried at
amortized cost, which approximates fair market value, and consist of
certificates of deposit, and US treasury securities with maturities
greater than one year. Unregistered, nonmarketable common stock
received from the licensee is carried at cost.
NOTE 5 - STOCK OPTIONS AND WARRANTS
The Company uses the intrinsic value method of accounting for stock
options pursuant to the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its employee stock options. Because the exercise price
of the Company's stock options equals or exceeds the market price of
the underlying stock on the date of grant, no compensation expense is
initially recognized under APB 25. Compensation expense and credits
were recorded as a result of variable plan accounting for options with
cashless exercise provisions. Had compensation costs been determined
using the Black-Scholes option pricing model in accordance with the
fair value method prescribed by "Accounting for Stock-Based
Compensation" (SFAS 123) for all options issued to SFAS No. 123,
employees and amortized over the vesting period, the Company's net loss
applicable to common shares and net loss per common share (basic and
diluted) would have been increased to the pro forma amounts indicated
below.
8
THREE MONTHS ENDED
OCTOBER 31,
-----------------------------------------
2004 2003
------------------- ------------------
Net loss, as reported $ (2,256,000) $ (1,030,000)
Compensation expense (credit) resulting
from variable plan accounting 29,000 (695,000)
Total Stock-based employee compensation
expense using the fair-value based
method for all awards (171,000) (10,000)
------------------- ------------------
Pro forma net loss $(2,398,000) $(1,735,000)
=================== ==================
Loss per share:
Basic and diluted, as reported $(.07) $(.06)
=================== ==================
Basic and diluted, pro forma $(.07) $(.10)
=================== ==================
The fair market value of options granted during the three-month period
ended October 31, 2004 and 2003 were estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions, respectively: risk-free interest rates of
4.0%; dividend yield of 0.0%; volatility factors of 61% for the three
months ended October 31, 2004; 55-67% for the three months ended
October 31, 2003; and a weighted-average expected life of the options
of five to 10 years for the three months ended October 31, 2004 and
2003.
During the fiscal quarter ended October 31, 2004, the Company granted
60,000 options to an employee under the 1998 Stock Option Plan. These
options vest equally over three years and expire in 10 years. The
exercise price of the options granted during this fiscal quarter is
$1.82. During such quarter, the Company also issued 10,000 options to a
former board member. These options have an exercise price of $1.72 and
vested immediately.
NOTE 6 - RELATED PARTY TRANSACTIONS - LICENSE AND DEVELOPMENT AGREEMENTS
In April 2003, the Company entered into a license and development
agreement with Manhattan for the worldwide, exclusive rights to the
Company's proprietary lingual spray technology to deliver propofol for
pre-procedural sedation. The terms of the agreement call for certain
milestone and other payments, the first $125,000 of which was partially
received during June 2003. During the fiscal year ended July 31, 2004,
the Company invoiced Manhattan approximately $400,000 for reimbursable
expenses. In November 2003, the Company received $375,000 from
Manhattan for license fees. The Company has included these license fees
in deferred revenue and is recognizing these license fees over the
20-year term of the license. During the three months ended October 31,
9
2004, the Company invoiced Manhattan approximately $65,000 for
reimbursable expenses.
In June 2004, the Company entered into a 20-year worldwide exclusive
license agreement with Velcera, a veterinary company. The agreement is
for the exclusive rights to the Company's propriety lingual spray
technology for animals. In September 2004, the Company received
$1,500,000 from Velcera in connection with the agreement. The upfront
payment has been included in deferred revenue and is being recognized
in income over the 20-year term of the agreement. The Company may
receive additional milestone payments and royalty payments over the
20-year term of the agreement.
In October 2004, the Company entered into a license and development
agreement pursuant to which, the Company granted to Hana an exclusive
license to develop and market the Company's lingual spray version of
ondansetron in the United States and Canada. Pursuant to the terms of
the agreement, in exchange for $1,000,000, Hana purchased 400,000
shares of the Company's common stock at a per share price of $2.50, a
premium of $.91 per share or $364,000 over the then market value of the
Company's common stock. The Company accounted for this premium as
deferred revenue related to the license. In connection with the
agreement, Hana issued to the Company $500,000 worth of common stock of
Hana (73,121 shares based on a market value of $6.84 per share). The
proceeds received from Hana attributable to the premium are included in
deferred revenue and are being recognized over the period of the
agreement. The Company may receive additional license fees and
royalties over the 20-year term of the agreement.
Lindsay A. Rosenwald, M.D., a significant stockholder of the Company,
may be deemed to be an affiliate of the Company, Manhattan, Velcera and
Hana. Companies affiliated with Dr. Rosenwald have provided financial
and other services unrelated to the Company's agreements with the
parties to such agreements from time to time.
NOTE 7 - SUBSEQUENT EVENTS
On November 18, 2004, the Company entered into a manufacturing and
supply agreement with INyX USA, Ltd. ("INyX"), whereby INyX will
manufacture and supply the Company's nitroglycerin lingual spray. For a
five-year period beginning November 18, 2004, INyX will be the
exclusive provider of the nitroglycerin lingual spray to the Company
worldwide, excluding Poland, Byelorussia, the former Russian Republics
of Ukraine, Latvia, Lithuania, Estonia and the United Arab Emirates.
Pursuant to the terms and conditions of the agreement, it will be
INyX's responsibility to manufacture, package and supply the
nitroglycerin lingual spray in such territories. Thereafter, INyX will
have a non-exclusive right to manufacture such spray for an additional
five years. The targeted date for INyX to commence production is
presently mid-2005.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Since the Company's inception, substantially all of its revenues have been
derived from consulting activities and license fees, primarily in connection
with product development for various pharmaceutical companies. The Company has
had a history of recurring losses from operations, giving rise to an accumulated
deficit at October 31, 2004, of approximately $27,197,000. Although
substantially all of the Company's revenues to date have been derived from its
consulting business, the future growth and profitability of the Company will be
principally dependent upon its ability to successfully develop its products and
to enter into additional license agreements with drug companies who will market
and distribute the final products.
Over the next fiscal year, the Company intends to continue to stay focused on
its six tier-one priority products: nitroglycerin, sumatriptan, ondansetron,
zolpidem, alprazolam and propofol. The Company currently has cash and marketable
investment balances of approximately $9,822,000, which the Company believes are
sufficient to maintain operating costs until at least October 31, 2005. The
Company continues to seek collaborative arrangements with pharmaceutical
companies for joint development of delivery systems and the successful marketing
of these delivery systems. In view of the Company's limited resources, its
anticipated expenses (resulting in significant operating losses) and the
competitive environment in which the Company operates, the Company anticipates
that it will need to pursue a financing by the end of the fiscal quarter ending
January 31, 2006. See "Liquidity and Capital Resources" below.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED OCTOBER 2004 (THE "2005 PERIOD") COMPARED TO OCTOBER 2003
(THE "2004 PERIOD")
Consulting and license fee revenues for the 2005 Period increased approximately
$116,000 to $118,000 from $2,000 for the 2004 Period. This revenue increase for
the 2005 Period was attributable to an increase in consulting assignments and
revenue attributable to the Company's arrangements with Manhattan in addition to
amortization of deferred revenue from license fees received.
Research and development expenses increased approximately $391,000 to $660,000
from $269,000 for the 2005 Period. The increase in research and development
expenses is primarily related to outsourced manufacturing fees, purchases of
additional laboratory and manufacturing supplies and increased Pharmacokinetic
study activities for the Company's tier-one products.
Consulting, selling, general and administrative expenses increased approximately
$967,000 to $1,736,000 from $769,000 for the 2005 Period. The increase in
consulting, selling, general and administrative expenses is related to increased
payroll, recruiting and relocation expenses as a result of hiring additional
employees, higher accounting and legal fees, increased travel and trade show
attendance, increased rent expense due to the leasing and occupying of
additional space for the Company's operations and a $671,000 decrease in
compensation expense related to variable accounting adjustments to certain of
11
the Company's outstanding stock options in the 2004 Period. As a result of the
factors described above, total costs and expenses for the 2005 Period increased
approximately $1,358,000 to approximately $2,396,000 compared to the 2004
Period.
Interest income increased approximately $16,000 to $22,000 for the 2005 Period
from $6,000 for the 2004 Period as a result of the $12.8 million received from
the January 2004 private placement of the Company's common stock, the remaining
portion of which is invested in liquid securities.
The resulting net loss for the 2005 Period was $2,256,000 compared to a net loss
of $1,030,000 for the 2004 Period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities approximated $77,000 for the 2005
Period compared to net cash used in operating activities of approximately
$1,462,000 for the 2004 Period. Net cash used in operating activities for both
the 2005 and 2004 periods was primarily attributable to the net loss of
$2,256,000 and $1,030,000, respectively, offset by an increase in deferred
revenue for the 2005 Period of $2,095,000. For the 2005 Period, $981,000 was
used for investing activities, principally for capital expenditures and
purchases of liquid investments, net of maturities, compared to $308,000 for the
2004 Period. For the 2005 Period, financing activities provided approximately
$574,000, which consisted of cash received for shares issued to Hana offset by
payments on a capital lease.
The Company has reported a net loss of $2,256,000 for the three months ended
October 31, 2004 and a net loss of $1,030,000 for the three months ended October
31, 2003, as restated (see Note 3). Management believes that the Company will
continue to incur net losses through at least October 31, 2005. Management
believes that the Company's capital resources will be adequate to fund
operations through at least October 31, 2005. As of October 31, 2004, the
Company had working capital of $7,356,000, cash and cash equivalents of
$1,835,000 and short-term investments of $6,439,000. Until and unless the
Company's operations generate significant revenues, the Company will attempt to
continue to fund operations from cash on hand and marketable investments. The
Company's long-term liquidity is contingent upon achieving sales and/or
obtaining additional financing. The most likely sources of financing include
private placements of its equity or debt securities or bridge loans to the
Company from third party lenders.
Management of the Company believes that by the end of the fiscal quarter ending
January 31, 2006, it will be necessary for the Company to obtain additional
financing and/or consummate a strategic alliance with a business partner. There
are a number of risks and uncertainties related to the Company's attempt to
complete a financing or strategic partnering arrangement that are outside the
control of the Company. The Company may not be able to successfully obtain
additional financing on terms acceptable to the Company, if at all.
12
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the first quarter 2005 Period and the 2004
Period were $660,000 and $269,000, respectively. The Company's research and
development costs are expensed as incurred. These include all internal costs,
external costs related to services contracted by the Company and research
services conducted for others. Research and development costs consist primarily
of salaries and benefits, contractor fees, clinical drug supplies of preclinical
and clinical development programs, consumable research supplies and allocated
facility and administrative costs. These cost categories typically include the
expenses discussed below. The increase in research and development expenses is
primarily related to outsourced manufacturing fees, purchases of additional
laboratory and manufacturing supplies and increased Pharmacokinetic study
activities for the Company's tier-one products.
RESEARCH AND PRE-CLINICAL OPERATIONS
Research and pre-clinical operations reflect activities associated with research
prior to the initiation of any potential human clinical trials. These activities
predominantly represent projects associated with the formulation development of
lingual sprays which may include animal safety studies and validation testing.
DIRECT EXPENSES - CLINICAL TRIALS
Direct expenses of clinical trials include patient enrollment costs, external
site costs, expense of clinical drug supply and external costs such as contract
research consultant fees and expenses.
MANUFACTURING DEVELOPMENT
Manufacturing Development primarily reflects costs incurred to prepare current
good manufacturing procedures (cGMP) manufacturing capabilities in order to
provide clinical scale drug supply. These costs primarily reflect activities
with external contract manufacturing resources. Included in manufacturing
development are personnel costs, depreciation, expenses associated with
technology transfer, process development and validation, quality control and
assurance activities, and analytical services.
UNALLOCATED DEVELOPMENT - CLINICAL AND REGULATORY OPERATIONS
Clinical and regulatory operations reflect the preparation, implementation and
management of the Company's clinical trial activities in accordance with current
good clinical practice (cGCP). Included in unallocated clinical development and
regulatory operations are costs associated with personnel, supplies, facilities,
fees to consultants, other related costs for clinical trial implementation and
management, clinical quality control, regulatory compliance activities, data
management and biostatistics.
The following summarizes the Company's research and development expenses by the
foregoing categories for the fiscal quarters ended October 31, 2004 and 2003:
13
QUARTER ENDED
October 31,
--------------------------
2004 2003
------------- -----------
RESEARCH AND DEVELOPMENT EXPENSES:
Research and pre-clinical operations $ 15,000 $ 16,000
Direct clinical trial expenses 132,000 66,000
Manufacturing development 30,000 -
Unallocated development 483,000 187,000
------------- -----------
RESEARCH AND DEVELOPMENT EXPENSES $660,000 $269,000
============= ===========
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements within the meaning of SEC
rules.
INFLATION
The Company does not believe that inflation has had a material effect on its
results of operations during the past three fiscal years. There can be no
assurance that the Company's business will not be affected by inflation in the
future.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Due to the significant risks and uncertainties inherent in the clinical
development and regulatory approval processes, the nature, timing and costs of
the efforts necessary to complete projects in development are not reasonably
estimated. Results from clinical trials may not be favorable. Data from clinical
trials are subject to varying interpretations and may be deemed insufficient by
the regulatory bodies reviewing applications for marketing approvals. As such,
clinical development and regulatory programs are subject to risks and changes
that may significantly impact cost projections and timelines.
Currently, none of the Company's drug product candidates are available for
commercial sale. All of the Company's potential products are in regulatory
review, clinical development or pre-clinical development. The status of each of
the Company's six tier-one priority products is discussed in "General," above.
Successful completion of development of the Company's six tier-one priority
programs are contingent on numerous risks, uncertainties, and other factors,
which are described in the section entitled "Risk Factors" in Item 5 of Part II
of the Company's Annual Report on Form 10-KSB for the fiscal year ended July 31,
2004. These factors include:
o Completion of pre-clinical and clinical trials of the product candidate
with the scientific results that support further development and/or regulatory
approval
o Receipt of necessary regulatory approvals
14
o Obtaining adequate supplies of sufficient raw materials on commercially
reasonable terms
o Obtaining capital necessary to fund the Company's operations, including
the Company's research and development efforts, manufacturing requirements and
clinical trials
o Performance of third-party collaborators on whom the Company relies
heavily for the commercialization and manufacture of drug product
o Obtaining manufacturing, sales and marketing capabilities for which
the Company presently has limited resources
As a result of the amount and nature of these factors, many of which are outside
the Company's control, the success, timing of completion and ultimate cost of
development of any of the Company's product candidates is highly uncertain and
cannot be estimated with any degree of certainty. The timing and cost to
complete drug trials alone may be impacted by, among other things:
o Slow patient enrollment
o Long treatment time required to demonstrate effectiveness
o Lack of sufficient clinical supplies and material
o Adverse medical events or side effects in treated patients
o Lack of effectiveness of the product candidate being tested
o Lack of sufficient funds
If the Company does not successfully complete clinical trials, the Company will
not receive regulatory approval to market its six tier-one priority products. If
the Company does not obtain and maintain regulatory approval for its products,
the Company will not generate any revenues from the sale of its products and the
Company's value and its financial condition and results of operations will be
substantially harmed.
The Company is engaged in research and development activities which often
provide services and transfer rights under complex licensing agreements. The
arrangements may include payment terms that include receipt of up-front fees and
milestone payments. The Company has entered into such arrangements which contain
multiple elements including up-front fees, milestone payments, royalty fees and
equity issuances, among others. Different methods of accounting for revenue and
expense recognition may be appropriate under each of these arrangements. It is
currently expected that upfront and milestone payments will be recognized over
the life of the relevant agreements.
15
The Company presently has four major agreements with each of Manhattan, Par,
Velcera and Hana. The Company is entitled to certain milestone payments and
double-digit royalties, generally on either net sales or gross revenues. It is
speculative as to when any such payments or royalties will be earned or paid, if
at all. On November 18, 2004, the Company entered into a Manufacturing and
Supply Agreement with INyX, whereby INyX will be the exclusive provider of the
nitroglycerin lingual spray to the Company worldwide, excluding Poland,
Byelorussia, the former Russian Republics of Ukraine, Latvia, Lithuania, Estonia
and the United Arab Emirates. See Note 7 to the Financial Statements.
ITEM 3. CONTROLS AND PROCEDURES.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that the information required to be disclosed by a company in
the reports that it files or submits under the Securities Exchange Act of 1934
("Exchange Act") is recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in the reports that a company
files or submits under the Exchange Act is accumulated and communicated to the
company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
The Company's Chief Executive Officer and its Interim Principal Financial
Officer have evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and
Rule 15d-15(e) of the Exchange Act as of the end of the period covered by this
Quarterly Report on Form 10-QSB. Based on this evaluation, the Company's Chief
Executive Officer and its Interim Principal Financial Officer concluded that as
of the end of the period covered by this report, except as set forth below, the
Company's disclosure controls and procedures were effective in their design to
ensure that information required to be disclosed by us in the reports that the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
In connection with its audit of the Company's financial statements for the
fiscal year ended July 31, 2004, J.H. Cohn LLP, the Company's independent
registered public accounting firm ("J.H. Cohn"), brought to the attention of the
Company that certain issued and outstanding options that permit "cashless
exercise" should be subject to variable plan accounting treatment under
applicable accounting standards, and, accordingly, previously unrecognized
compensation expense needed to be recognized as compensation expense in the
Company's previously issued financial statements under the Financial Accounting
Standards Board's Interpretation 44, "Accounting for Certain Transactions
Involving Stock Compensation--an interpretation of APB Opinion No. 25" (Issue
Date 3/00). See Note 3 to Notes to Financial Statements.
J.H. Cohn also advised the Audit Committee and management of certain material
weaknesses, including the failure to record and retain comprehensive option
grants issued by the Company, inability to prepare financial statements and
footnotes in accordance with U.S. generally accepted accounting principles and
SEC rules, a lack of an appropriate system of policies and procedures for the
16
internal review of financial reports, including inadequate staffing, training
and expertise and improper accounting procedures for grants with "cashless
exercise" provisions per Financial Accounting Standards Board's Interpretation
44, "Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25". J.H. Cohn indicated that they considered
these deficiencies to be material weaknesses as that term is defined under
standards established by the Public Company Accounting Oversight Board (United
States). These material weaknesses also included the following: a lack of
effective documentation for stock options and other compensatory equity grants;
the absence of a procedure to obtain from officers and directors information
required to be disclosed about such persons; the absence or ineffectiveness of a
rule compliance checking procedure for SEC filings; and lack of effective record
keeping and compliance assistance for reports required under Section 16(a) of
the Exchange Act.
In light of the need for a restatement and the material weaknesses in the
Company's internal controls, commencing in the first quarter of the Company's
2005 fiscal year, the Company began to undertake a review of the Company's
disclosure, financial information and internal controls and procedures. This
review will include increased diligence by the Company's management and
directors, as well as the use of additional outside resources. The Company is
committed to addressing its control environment and reporting procedures.
The Company believes that the hiring of a new Chief Financial Officer is
important to its efforts to improve its internal controls, particularly with
respect to its need to comply with Section 404 of the Sarbanes-Oxley Act of
2002. The Company has completed its search for a new Chief Financial Officer and
has identified a potential candidate for the position. Although there can be no
assurance, the Company anticipates employing the new Chief Financial Officer by
the end of the calendar year.
To address the weaknesses identified in the Company's internal controls and
disclosure practices, the Company has drafted written disclosure controls and
procedures applicable to periodic reports and certain public communications. By
the end of the calendar year, the Company will have a Disclosure Committee,
which will be chaired by the Company's Vice President and General Counsel and
comprised of other executives. The Disclosure Committee will establish,
maintain, monitor and evaluate the Company's written disclosure controls and
procedures and coordinate the preparation of the Company's periodic reports and
certain other of its public communications pursuant to formal written disclosure
controls and procedures.
On October 20, 2004, the Board of Directors of the Company rescinded the
cashless exercise provision for all of the Company's outstanding option grants.
Thus, the Company expects that variable accounting will no longer be required
after the Company's fiscal quarter ended October 31, 2004. To address weakness
in recordkeeping related to issued option grants, the Company is planning to
evaluate, test and install software to assist in the reconciliation of options
and warrants issued by the Company.
The Company's management, including its Chief Executive Officer and its Interim
Principal Financial Officer, does not expect that disclosure controls or
internal controls over financial reporting will prevent all errors or all
instances of fraud, even as the same are improved to address any deficiencies.
The design of any system of controls is based in part upon certain assumptions
17
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system's
objectives will be met. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with policies
or procedures. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected.
Because of the inherent limitation of a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS.
Exhibit No. Description
10.33 *License and Development Agreement, dated as of October
27, 2004, by and between the Company and Hana
Biosciences, Inc.
10.34 Manufacturing and Supply Agreement, dated as of November
18, 2004, by and between the Company and INyX USA, Ltd.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Certification under 18 U.S.C. 1350
32.2 Certification under 18 U.S.C. 1350
*Confidential treatment requested as to certain portions of this exhibit. Such
portions have been redacted and filed separately with the SEC.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NOVADEL PHARMA INC.
Dated: December 15, 2004 By: /s/ Gary A. Shangold, M.D.
-------------------------------------
Gary A. Shangold, M.D.
President & Chief Executive Officer
Dated: December 15, 2004 By: /s/ Howard D. Kance
-------------------------------------
Howard D. Kance
Interim Principal Financial Officer
20