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 three month period ended October 31, 2003
|_| TRANSITION REPORT UNDER SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number 000-23399
NOVADEL PHARMA INC.
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(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
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(Address of Principal Executive Offices) (Zip Code)
(908)782-3431
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(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: 17,972,760 shares of common
stock outstanding as of December 5, 2003.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one):
Yes|_| No |X|
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
NOVADEL PHARMA INC.
CONDENSED BALANCE SHEETS
October 31, July 31,
2003 2003
------------ ------------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash $ 1,316,000 $ 3,086,000
Accounts receivable - trade -- 2,000
Prepaid expenses and other current assets 268,000 168,000
------------ ------------
Total Current Assets 1,584,000 3,256,000
------------ ------------
FURNITURE, FIXTURES, AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION 1,054,000 714,000
OTHER ASSETS 355,000 357,000
------------ ------------
$ 2,993,000 $ 4,327,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable-trade $ 365,000 $ 139,000
Accrued expenses and other current liabilities 404,000 318,000
Current portion of capitalized lease obligation 25,000 --
------------ ------------
Total Current Liabilities 794,000 457,000
------------ ------------
Non current portion of capitalized lease obligation 56,000 --
------------ ------------
Total Liabilities 850,000 457,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value:
Authorized 1,000,000 shares, none issued Common stock, $.001 par value:
Authorized - 50,000,000 shares
Issued and outstanding 17,972,760 18,000 18,000
Additional paid-in capital 19,480,000 19,480,000
Accumulated deficit (17,355,000) (15,628,000)
------------ ------------
Total Stockholders' Equity 2,143,000 3,870,000
------------ ------------
$ 2,993,000 $ 4,327,000
============ ============
See accompanying notes to condensed financial statements.
2
NOVADEL PHARMA INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
October 31
---------------------------------
2003 2002
------------ ------------
CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES AND LOSS
FROM OPERATIONS $ 1,733,000 $ 1,729,000
INTEREST INCOME 6,000 15,000
------------ ------------
NET LOSS $ (1,727,000) $ (1,714,000)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (.10) $ (.12)
============ ============
SHARES USED IN COMPUTATION OF BASIC
AND DILUTED LOSS PER SHARE 17,972,760 14,509,523
============ ============
See accompanying notes to condensed financial statements.
3
NOVADEL PHARMA INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock
------------------------------
Par Paid-in Accumulated Stockholders'
Shares Value Capital Deficit Equity
------------ ------------ ------------ ------------ ------------
BALANCE, August 1, 2003 17,972,760 $ 18,000 $ 19,480,000 $(15,628,000) $ 3,870,000
Net Loss -- -- -- (1,727,000) (1,727,000)
------------ ------------ ------------ ------------ ------------
BALANCE, October 31, 2003 17,972,760 $ 18,000 $ 19,480,000 $(17,355,000) $ 2,143,000
============ ============ ============ ============ ============
See accompanying notes to condensed financial statements.
4
NOVADEL PHARMA INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
October 31
-----------------------------
2003 2002
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(1,727,000) $(1,714,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Options issued for services -- 573,000
Warrants issued for services -- 7,000
Depreciation and amortization 49,000 37,000
Changes in operating assets and liabilities:
Accounts receivable 2,000 1,000
Prepaid expenses and other current assets (100,000) (15,000)
Other assets 2,000 --
Accounts payable - trade 226,000 58,000
Accrued expenses and other current liabilities 86,000 60,000
----------- -----------
Net cash used in operating activities (1,462,000) (993,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of property and equipment (308,000) (110,000)
----------- -----------
NET DECREASE IN CASH (1,770,000) (1,103,000)
CASH, BEGINNING OF PERIOD 3,086,000 3,314,000
----------- -----------
CASH, END OF PERIOD $ 1,316,000 2,211,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF INVESTING AND
FINANCING ACTIVITIES:
Equipment acquired under capitalized lease obligation $ 81,000 $ --
=========== ===========
See accompanying notes to condensed financial statements.
5
NOVADEL PHARMA INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation:
The balance sheet at the end of the preceding fiscal year has been derived
from the audited balance sheet contained in the previously filed Form
10-KSB of NovaDel Pharma Inc. (The Company) for the year ended July 31,
2003 and is presented for comparative purposes. All other financial
statements are unaudited. 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 statements. Results
of operations for interim periods are not necessarily indicative of the
operating results to be expected for a full year.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Before December 31, 2003, it
will be necessary for the Company to obtain additional financing and/or
consummate a strategic alliance with a well-funded 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. These uncertainties raise substantial doubt as to the
Company's ability to continue as a going concern.
Certain footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been omitted in accordance with the published rules and regulations of the
Securities and Exchange Commission. The financial statements in this
report should be read in conjunction with the financial statements and
notes thereto included in the Form 10-KSB for the year ended July 31,
2003.
Loss per common share is computed pursuant to SFAS No. 128, "Earnings Per
Share."
Basic loss per share is computed as net income (loss) available to common
shareholders divided by the weighted average number of common shares
outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur from common shares issuable through stock
options, warrants and convertible dept. As of October 31, 2003, 15,506,755
of options and warrants were excluded from the diluted loss per share
computation, as their effect would be anti-dilutive.
Note 2 - Capitalized Lease Obligation:
In October 2003, the Company entered into a capital lease for laboratory
equipment. This lease requires 36 monthly payments of $2,827 each.
Note 3 - Contracts:
In August 2003, Mr. Robert C. Galler agreed to change from an employee of
the Company as Vice President - Corporate Development to a consultant and
entered into a consulting agreement with the Company at a base
compensation of $180,000 per year. The consulting agreement terminates in
February 2005.
Note 4 - Stock Options:
The Company follows the intrinsic value method of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25)
and related interpretations
6
in accounting for its employee stock options because, in the opinion of
management, as discussed below, Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. FAS 123 permits a company to elect to
follow the intrinsic value method of APB 25 rather than the alternative
fair value accounting provided under FAS 123, but requires pro forma net
income (loss) and earnings (loss) per share disclosures as well as various
other disclosures. The Company has adopted the disclosure provisions
required under Financial Accounting standards Board Statement No. 148,
"Accounting for Stock-Based Compensation Transition and Disclosure" (FAS
148). Under APB 25, because the exercise price of the Company's stock
options has equaled the market price of the underlying stock on the date
of grant, no compensation expense was recognized.
Pro forma information regarding net loss and loss per share is required by
FAS 123 and FAS 148, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
Statement 123.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, options valuation
models require the input of highly subjective input assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
3 Months Ended
October 31,
-----------------------------
2003 2002
----------- -----------
Net Loss, as reported $(1,727,000) $(1,714,000)
Stock-based employee compensation expense
under fair value method, net of related tax effects (10,000) --
----------- -----------
Pro forma net loss $(1,737,000) $(1,714,000)
=========== ===========
Loss per share:
Basic and diluted, as reported $ (.10) $ (.12)
=========== ===========
Basic and diluted, pro forma $ (.10) $ (.12)
=========== ===========
In August 2003, the Company issued 75,000 options under the 1998 Option
Plan to a new employee. These options vest equally over 3 years, beginning
August 1, 2004, have an exercise price of $2.23 and expire during July
2013.
In August 2003, the Company issued 6,000 options under the 1998 Option
Plan to a new employee. These options vest equally over 3 years, beginning
September 1, 2004, have an exercise price of $1.99 and expire during
August 2013.
Note 5 - Related Party Transactions:
In April 2003, the Company entered into a license and development
agreement with Manhattan Pharmaceuticals, Inc. for the worldwide,
exclusive rights to the Company's proprietary lingual spray technology.
One of the Company's major shareholders is also a significant shareholder
of Manhattan Pharmaceuticals, Inc.
7
During the Company's first fiscal quarter ended October 31, 2003, the
Company invoiced Manhattan Pharmaceuticals, Inc. approximately $93,000 for
the Company's reimbursable expenses. In November 2003, the Company
received $375,000, from Manhattan Pharmaceuticals, Inc., for license fees.
The Company expects to recognize these license fees over the 20 year term
of the license.
Note 6 - Subsequent Events:
On November 18, 2003, the Company's publicly traded warrants expired.
8
NOVADEL PHARMA INC.
Item 2. Management's Discussion and Analysis
Novadel Pharma Inc., a Delaware corporation (the "Company"), is engaged in
development of novel application drug delivery systems for presently marketed
prescription and over-the-counter ("OTC") drugs and has been a consultant to the
pharmaceutical industry. Since 1992, the Company has used its consulting
revenues to fund its own product development activities.
Since its inception, substantially all of the Company's revenues have been
derived from its consulting activities. The Company has had a history of
recurring losses from operations, giving rise to an accumulated deficit at
October 31, 2003 of $17,355,000. Revenues from consulting may be expected to
continue to decline in the future as the Company shifts its emphasis away from
product development consulting for its clients and towards development of its
own products.
For the reasons stated above, the Company anticipates that it will incur
substantial operating expenses in connection with the testing and approval of
its proposed delivery systems, and expects these expenses will result in
continuing and significant operating losses until such time, if ever, that the
Company is able to achieve adequate sales levels.
Results of Operations
The three months ended October 2003 [the "2003 Period"] and October 2002 [the
"2002 Period"]
Total costs and expenses for the 2003 Period increased approximately $4,000 to
$1,733,000 from $1,729,000 for the 2002 Period. Costs and expenses increases for
the 2003 Period, as compared to the 2002 Period, includes approximately:
$426,000 in payroll expense primarily due to the hiring of additional employees;
$91,000 in employee recruiting expense; $57,000 in rent expense due to the
Company's leasing of new facilities; $31,000 in outside services; $25,000 in
insurance costs due primarily to employee health insurance, $23,000 in legal and
professional fees and $21,000 in travel expense;. Decrease include
approximately: $497,000 in outside consultants fees due primarily to a reduction
in the options issued to consultants; $151,000 in laboratory testing and
clinical studies expenses due to no clinical studies being conducted during the
2003 period and $17,000 in trade shows and conferences.
Interest income decreased approximately $9,000 or 60% to $6,000 for the 2003
Period from $15,000 for the 2002 Period due to a decreased average cash balance.
The resulting net loss for the 2003 Period was $1,727,000 compared to a net loss
of $1,714,000 for the 2002 Period.
Liquidity and Capital Resources
Net cash used in operating activities approximated $1,462,000 for the 2003
Period compared to net cash used in operating activities of approximately
$993,000 for the 2002 Period. Net cash used in operating activities for both
periods was primarily attributable to the net loss of $1,727,000 and $1,714,000,
respectively. For the 2003 Period, $308,000 was used for investing activities
compared to $110,000 for the 2002 Period. Total cash for the 2003 Period
decreased approximately $1,770,000 as compared to a $1,103,000 decrease for the
2002 Period.
The Company believes that it currently has sufficient cash to satisfy its cash
requirements through December 31, 2003. However, beyond this point there is
substantial doubt about the Company's ability to continue operations without
obtaining additional financing and/or consummating a strategic alliance with a
well funded 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
9
control of the Company. We may not be able to successfully obtain additional
financing on terms acceptable to the Company, or at all. These uncertainties
raise substantial doubt as to the Company's ability to continue as a going
concern. The Company's former auditors have included in their audit opinion an
explanatory paragraph with regard to the Company's ability to continue as a
going concern.
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.
Item 3. Controls and Procedures
As of October 31, 2003, our Chief Executive Officer and Chief Financial Officer
performed an evaluation of the effectiveness of the Company's disclosure
controls and procedures (as defined in SEC Rule 13a-15(e)), which have been
designed to ensure that material information related to the Company is made
known to them and timely disclosed. The Company's management, including the CEO
and CFO, does not expect that the Company's disclosure controls or internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. 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. Notwithstanding the foregoing,
however, based upon their evaluations, our CEO and CFO concluded that the
Company's disclosure controls are effective to provide a reasonable level of
assurance that material information relating to the Company is accumulated and
communicated to management, including the CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure.
During the quarter ended October 31, 2003, there have been no significant
changes in our internal controls over financial reporting or in other factors,
which have significantly affected, or are reasonable likely to significantly
affect, our internal controls over financial reporting subsequent to such
evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Small Business Issuer Purchases of Securities
N/A
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Submissions of Matters to a Vote of Security Holders
N/A
Item 5. Other Information
N/A
10
Item 6. Exhibits and Reports on Form 8-K
a) List of Exhibits
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32.1 Certification under 18 U.S.C. 1350
Exhibit 32.2 Certification under 18 U.S.C. 1350
b) Reports on Form 8-K
None
11
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 12, 2003 By: /s/ Gary A. Shangold, M.D.
-------------------------------------
Gary A. Shangold, M.D.
President & Chief Executive Officer
Dated: December 12, 2003 By: /s/ Donald J. Deitman
-------------------------------------
Donald J. Deitman
Chief Financial Officer
12