UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
------------------ ------------------
COMMISSION FILE NO. 000-23399
NOVADEL PHARMA INC.
(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, including area code
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of
the Exchange Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
Check whether the issuer (1) has 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 ___
Check if there is no disclosure of delinquent filings pursuant to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ].
State the issuer's revenues for its most recent fiscal year: $466,000
The aggregate market value of the voting and non-voting common equity of
the registrant held by non-affiliates of the registrant at November 9, 2004 was
approximately $ 46,081,507 based upon the closing sale price of $1.60 for the
Registrant's Common Stock, $.001 par value, as reported by the American Stock
Exchange on November 9, 2004.
As of November 9, 2004, the Registrant had 33,491,437 shares of Common
Stock, $.001 par value, outstanding.
NOVADEL PHARMA INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED JULY 31, 2004
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Description of Business. 1
Item 2. Description of Property. 18
Item 3. Legal Proceedings. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities. 19
Item 6. Management's Discussion and Analysis or Plan of Operation. 20
Item 7. Financial Statements. 46
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure. 46
Item 8A. Controls and Procedures. 46
Item 8B. Other Information. 48
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act. 49
Item 10. Executive Compensation. 53
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters. 58
Item 12. Certain Relationships and Related Transactions. 61
Item 13. Exhibits. 62
Item 14. Principal Accountant Fees and Services. 62
SIGNATURES 63
ii
NOTE: RESTATED FINANCIAL STATEMENTS
The Registrant, its Audit Committee and its current and former independent
registered public accounting firms have agreed that certain of the Company's
issued and outstanding stock options should be subject to variable plan
accounting treatment under applicable accounting standards, and, accordingly,
previously unrecognized compensation expense should be 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). Accordingly, management has restated the Company's financial
statements for the first three quarters of fiscal 2004, the interim periods of
fiscal 2002 and 2003, and for the fiscal years 2002 and 2003. This report
contains restated financial information for all of the above fiscal periods. The
reasons for, and financial impact of, the adjustments are described in Note 3 of
the Notes to Financial Statements set forth herein and in Item 6 "Management's
Discussion and Analysis or Plan of Operation". Previously issued financial
statements for such periods should not be relied upon.
Unless the context otherwise requires, all references to "we," "us," "our," and
the "Company" include NovaDel Pharma Inc. ("NovaDel").
SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Annual Report includes "forward-looking statements", including statements
regarding the expectations, beliefs, intentions or strategies for the future and
our internal controls and procedures and outstanding financial reporting
obligations and other accounting issues. We intend 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 our views as of the date they are made with respect to
future events and financial performance. Forward-looking statements are subject
to many risks and uncertainties which could cause our actual results to differ
materially from any future results expressed or implied by the 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 we are
developing; possible changes in our financial condition; the progress of our
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 our clinical
trials; the impact of development of competing therapies and/or technologies by
other companies; our ability to obtain additional required financing to fund our
research programs; our ability to enter into agreements with collaborators and
the failure of collaborators to perform under their agreements with us; the
progress of the FDA approvals in connection with the conduct of our clinical
trials and the marketing of our products; the additional costs and delays which
may result from requirements imposed by the FDA in connection with obtaining the
required approvals; and the risks related to our internal controls and
procedures.
iii
Except to the extent required by applicable laws or rules, we do not undertake
any obligation or duty to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
iv
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
NovaDel Pharma Inc., is engaged in the development of novel application drug
delivery systems for presently marketed prescription, over-the-counter ("OTC")
and veterinary drugs. Our 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. Our proprietary delivery system potentially enhances and
greatly accelerates the onset of the therapeutic benefits within minutes of
administration. Our development efforts for our novel drug delivery system are
concentrated on making it 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, we
believe that our 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.
In light of the material expense and delays associated with independently
developing and obtaining approval of pharmaceutical products, we continue to
develop a number of such products through collaborative arrangements with major
pharmaceutical and veterinary companies, such pharmaceutical companies providing
the funding for the development of specified drug products. To date, other than
license agreements with (i) Manhattan Pharmaceuticals, Inc., in connection with
propofol, (ii) Velcera Pharmaceuticals, Inc., in connection with veterinary
applications for currently marketed veterinary drugs, (iii) Par Pharmaceutical,
Inc., for the marketing rights in the United States and Canada for our
nitroglycerin lingual spray, and (iv) Hana Biosciences Inc., for the marketing
rights in the United States and Canada for our ondansetron lingual spray, we
have not entered into any material development arrangements with any
pharmaceutical companies. The lack of any such further arrangements and our
limited revenues and low level of working capital has restricted our ability to
pursue aggressively our product development strategy. We believe that we will
require additional financing and/or additional alliances with well-funded
development partners to undertake and maintain our business plan.
At our inception in 1982, NovaDel, then known as Pharmaconsult, consulted to the
pharmaceutical industry, focusing on product development activities of various
European pharmaceutical companies. Since 1992, we have used our consulting
revenues to fund our own product development activities. Our focus on developing
our own products evolved naturally out of our consulting experience for other
pharmaceutical companies. Substantially all of our revenues previously were
derived from our consulting activities. Consulting activities are no longer a
material part of our business. In 1991, we changed our name to Flemington
Pharmaceutical Corporation. Effective October 1, 2002, we changed our name to
NovaDel Pharma Inc. Our principal business address is 25 Minneakoning Road,
Flemington, New Jersey, 08822, and our telephone number is (908) 782-3431.
1
On May 11, 2004, our common stock was listed for trading on the American Stock
Exchange (AMEX) under the symbol "NVD".
PRODUCT DEVELOPMENT
The Company has identified six (6) tier-one priority products for development,
namely nitroglycerin, sumatriptan, alprazolam, zolpidem, ondansetron and
propofol.
CARDIOVASCULAR (NITROGLYCERIN)
We have formulated our nitroglycerin product and completed stability testing of
such product. A United States patent was issued in 1999 and a European patent
was issued in 2003. We filed an IND with the FDA in early 2002 and began
clinical trials in July 2002, which were completed in December 2002. We filed an
NDA, under the guidelines of Section 505(b)(2) of the Federal Food, Drug and
Cosmetic (FFDC) Act, as amended (21 U.S.C. 301 et. Seq.), with the FDA on June
16, 2004. The FDA had some outstanding administrative issues to clarify before
registering the filing, namely, the status of our User Fee Exemption. The date
that the issue was brought to closure is the date that our Prescription Drug
User Fee Act (PDUFA) clock began (August 4, 2004). Ultimately, it was determined
that a PDUFA User Fee was not required for this submission. The expected
timeframe for review has been determined as 10 months, making the PDUFA date
June 4, 2005. On September 27, 2004, the FDA accepted our NDA for filing.
MIGRAINE (SUMATRIPTAN) LINGUAL SPRAY
We have formulated our sumatriptan lingual spray and performed a pilot
pharmacokinetic study thereof during the second quarter of calendar year 2004.
On October 13, 2004, we announced the preliminary results from such
pharmacokinetic study. The study indicated that the sumatriptan lingual spray
achieved serum concentrations of sumatriptan in the therapeutic range. The pilot
pharmacokinetic study involved nine healthy, fasting volunteers and was
conducted in Europe. The study was designed to evaluate the pharmacokinetic
profile of various doses of a sumatriptan lingual spray (dose range: 2.5 mg - 30
mg) in comparison to the 50 mg oral tablet and 6 mg subcutaneous injection. For
a majority of doses, we successfully delivered sumatriptan via the lingual spray
into the expected therapeutic range of serum concentrations. The study
demonstrated a clear dose-concentration relationship for major pharmacokinetic
parameters over the evaluated range of lingual spray doses from 2.5 to 30
milligrams. Dose-normalized peak serum concentrations (Cmax) and
areas-under-the-curve (AUC) reached with some of the doses were at least similar
to the 50 mg sumatriptan (Imitrex(R)) tablet in this study, and appear to be
greater than those published for the approved 20 mg Imitrex nasal spray.
Absorption of the lingual spray through the oral mucosa was demonstrated by the
observation that for some doses, overall bioavailability of sumatriptan appeared
to be greater than previously reported for that of either the tablet or nasal
spray formulations. Additionally, double concentration peaks detected in a
number of subjects with the lingual spray provided further evidence of initial
drug absorption through the oral mucosa. Drug levels in what is regarded as the
therapeutic range were achieved in as little as 9 to 15 minutes in a number of
subjects with the lingual spray. Furthermore, the mean time to reach maximal
serum concentrations (Tmax) at the 15 mg lingual spray dose was approximately 20
minutes shorter than that achieved with the 50 mg Imitrex(R) tablet in this
study. The total amount of drug delivered over the first 30 minutes post-dosing
(as measured by AUC normalized for dose) was approximately 40% higher for the 15
mg lingual spray dose when compared to the 50 mg Imitrex tablet. The mean
concentration levels reached at 3, 6 and 9 minutes post-dosing were appreciably
higher (162%, 122% and 45% increase, respectively) for the 30 mg spray dose
administered sublingually when compared to the 50 mg Imitrex tablet. The Tmax
seen with the spray (< 1 hr) was faster than that reported for the tablet at 25,
50, or 100 mg in migraine sufferers (~1.5 hrs). The sumatriptan lingual spray
had a favorable safety profile and was well-tolerated. None of the nine subjects
dropped out of the study. Based on these results, we are proceeding toward the
submission of an IND with the FDA and plan to move the product forward into full
development, with the expectation of eventually filing an NDA under Section
505(b)(2) of the FFDC Act. We plan to optimize the current formulation going
forward with appropriate modifications, including enhancements to the taste
characteristics.
2
ANXIOLYTIC (ALPRAZOLAM) LINGUAL SPRAY
We have formulated an alprazolam lingual spray and on September 23, 2004, we
announced the initiation of a pilot pharmacokinetic feasibility study in humans.
Results are expected late in the fourth quarter of calendar year 2004. The study
involves the administration of test drug in a range of doses into human subjects
to document the profile of blood levels achieved using our proprietary lingual
spray formulation of alprazolam.
HYPNOTIC (ZOLPIDEM) LINGUAL SPRAY
We have formulated a zolpidem lingual spray and we are currently conducting
stability testing of the zolpidem lingual spray. A pilot pharmacokinetic study
is planned for initiation late in the fourth quarter of calendar year 2004.
ANTI-EMETIC (ONDANSETRON) LINGUAL SPRAY
We have formulated an ondansetron lingual spray and we are currently conducting
stability testing of the ondansetron lingual spray. A pilot pharmacokinetic
study of the ondansetron lingual spray is planned for the first quarter of
calendar year 2005.
ANESTHETIC (PROPOFOL) LINGUAL SPRAY
We have formulated a propofol lingual spray and we completed a Phase I
randomized, double-blind, placebo-controlled dose-escalating study in the second
quarter of calendar year 2004. Accordingly, Manhattan Pharmaceuticals, our
licensee and co-developer of the propofol lingual spray, has directed us to
proceed with dose optimization and other formulation modifications to support
full human clinical testing, targeted to start in the United States during early
calendar year 2005. Manhattan Pharmaceuticals said it plans to file an IND with
the FDA by the end of calendar year 2004 for an expanded-use version of the
popular anesthetic agent. The experimental product would become the first known
needle-less formulation of propofol, the world's leading intravenous anesthetic,
marketed as Diprivan(R). We believe that the propofol lingual spray will
potentially make propofol, with its established record of safety, available for
dosing in office-based and other ambulatory settings where use of an intravenous
catheter is not appropriate or desirable. We believe that a propofol lingual
spray, in an appropriate sedative dose, has the potential to enable clinicians
to better control the onset, duration and depth of sedation with high
reliability and accuracy. The intended benefits of such properly timed sedation
should facilitate achievement of the best procedural outcomes while avoiding
unnecessary costs and anxiety.
3
The Company also has identified a number of other development initiatives, but
which are currently less of a priority than our six (6) tier-one priority
programs. These initiatives include, among other products, clemastine,
loratadine, and estradiol and progesterone lingual sprays.
ANTIHISTAMINE (CLEMASTINE) LINGUAL SPRAY
We have revised the formulation of our clemastine lingual spray and filed an
IND. We initiated a pilot nasal challenge efficacy study in the second quarter
of calendar year 2000 which was completed in the fourth quarter of 2000. This
study tested the relative response of subjects challenged with allergy producing
substances to an OTC tablet (1.34 mg) and a lingual spray dose of 0.68 mg. The
antihistamine was administered 15 minutes prior to the challenge. The results
showed that the spray had the same antihistaminic effect as the tablet when
compared to placebo at 45 minutes after dosing even though the dose was only
half that of the tablet. Eight of the parameters measured in the study showed a
clear trend that the spray was better than the tablet and the tablet was better
than placebo. Even though the study was only a pilot study, we feel that the
results support the concept that a clemastine lingual spray could be an OTC
non-sedating antihistamine product in that there were two cases of drowsiness
when the tablet was given and one with the placebo but none when the lingual
spray was administered. A larger confirmatory study, as well as other pilot
studies, is needed.
Our antihistamine projects have been put on hold as the perceived commercial
opportunity has been greatly diminished by the entry of generic versions of
loratadine and clemastine into the marketplace and the switch of loratadine and
clemastine from prescription to over-the-counter status.
ANTIHISTAMINE (LORATADINE) LINGUAL SPRAY
We have developed a formulation for our loratadine lingual spray formulation
which has successfully undergone stability testing. We filed an IND in the
fourth quarter of calendar year 2000 and a pharmacokinetic study was completed
in the second quarter of calendar year 2001. We have completed a phase II
clinical trial.
4
ESTRADIOL AND PROGESTERONE LINGUAL SPRAYS
We have formulated a lingual spray version of estradiol and have filed two INDs
with the FDA in connection therewith. We have also formulated a lingual spray
version of progesterone. We have performed pharmacokinetic studies in connection
with both of these therapies, the results of which have confirmed our ability to
deliver each of these hormones with enhanced bioavailability and with
versatility in kinetic profile than with comparative solid oral dosage forms.
This project has been put on hold due to questions that recently have been
raised within medical literature about the proper therapeutic level of estrogen
therapy.
BUSINESS DEVELOPMENT
AGREEMENT WITH MANHATTAN PHARMACEUTICALS
In April 2003, we entered into a 10-year license and development agreement with
Manhattan Pharmaceuticals for the worldwide, exclusive rights to our lingual
spray technology to deliver propofol for pre-procedural sedation. Manhattan
Pharmaceuticals is a development stage company and has no revenues to date. The
terms of the agreement require Manhattan Pharmaceuticals to achieve certain
milestones and to make certain up-front license fee payments to us, the first
$500,000 of which we received from June 2003 through November 2003.
LICENSE AND SUPPLY AGREEMENT WITH PAR PHARMACEUTICAL
In July 2004, we entered into a ten-year license and supply agreement with Par
Pharmaceutical, Inc., a wholly owned subsidiary of Pharmaceutical Resources,
Inc., whereby Par Pharmaceutical has the exclusive rights to market, sell and
distribute our nitroglycerin lingual spray in the United States and Canada. The
terms of the agreement call for an upfront license fee which was paid to us in
July 2004, a milestone payment made to us upon the FDA's acceptance of an NDA
for our nitroglycerin lingual spray for review in September 2004, other
potential milestone payments if and when the NDA is approved for marketing in
the United States; and royalties on net sales of the product in the United
States and Canada in double-digit percentages. We are responsible for obtaining
regulatory approval for the product and for supplying the product to Par
Pharmaceutical.
AMENDED AGREEMENT WITH VELCERA PHARMACEUTICALS, INC. (FORMERLY VETCO)
On September 14, 2004, we announced the granting of an exclusive worldwide
20-year license for our proprietary lingual spray technology to Velcera
Pharmaceuticals, Inc. of Langhorne, PA (formerly Vetco Pharmaceuticals) for
development of innovative veterinary medicines. Velcera is a development-stage,
privately-held animal health company headed by former senior executives at the
animal units of Merial, Merck and Schering-Plough. We received an equity stake
of 592,500 shares of common stock in Velcera Pharmaceuticals, representing
approximately 15% of its outstanding common stock as of October 23, 2003, along
with an upfront cash technology fee of $1,500,000 (which will be recognized as
income by the Company over the 20-year term of the agreement) in September 2004.
The agreement, which amends an earlier agreement, provides that Velcera
Pharmaceuticals shall make certain milestone payments upon regulatory approval
on the first NDA filing and European filing. Velcera will be obligated to make
additional similar payments to us for each product developed by it, and
double-digit royalty payments on product sales will be due to us. Products will
be formulated in our labs, at Velcera Pharmaceutical's expense, and Velcera
Pharmaceuticals will fund all development and regulatory expenses. We will
manufacture and supply Velcera Pharmaceuticals with the resulting pharmaceutical
products. We expect our technology will help pet owners overcome the well known
problem of compliance with the administration of pills to their pets. A trial
conducted at an independent facility sponsored by Velcera Pharmaceuticals showed
that our delivery technology was well accepted by cats and dogs. The animal
health market is estimated to be valued at about $14 billion per annual
worldwide. The companion pet category is the fasted growing segment, currently
valued at about $5 billion per annual worldwide. Drug development by Velcera
Pharmaceuticals will focus on formulating veterinary medicines that are already
being marketed.
5
AMENDED AGREEMENT WITH HANA BIOSCIENCES, INC.
In October 2004, we entered into a 20-year license and development agreement
with Hana Biosciences, Inc. Hana will develop and market the Company's lingual
spray version of ondansetron, the most widely prescribed anti-emetic for
preventing chemotherapy-induced nausea and vomiting. Under the agreement, Hana
has exclusive rights to market, sell and distribute the Company's ondansetron
lingual spray in the United States and Canada. We are entitled to receive
milestone development payments at several junctures of development, including
completion of a pharmacokinetic study, filing of an IND, FDA acceptance of the
NDA and NDA approval. Double-digit royalties may be due to us on sales of the
lingual spray version of ondansetron. In October 2004, in exchange for $1
million, Hana purchased 400,000 newly issued shares of our common stock, at a
price of $2.50 per share, and has issued to us, for no additional consideration,
73,121 shares of its common stock, valued at $500,000 based upon the average
price of Hana's common stock during the 10 business days prior to the effective
date of the agreement ($6.84 per share).
BUSINESS STRATEGY
Our strategy is to concentrate our product development activities primarily on
pharmaceutical products for which there already are significant prescription
sales, where the use of our 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. We have
completed pilot pharmacokinetic studies for two antihistamine lingual sprays
(loratadine and clemastine), an estradiol lingual spray, a progesterone lingual
spray, a nitroglycerin lingual spray, a propofol lingual spray and a sumatriptan
lingual spray. In addition, a phase 2 clinical trial was completed for the
nitroglycerin and clemastine lingual sprays. Additional development work on
loratadine, clemastine, estradiol and progesterone has been put on hold due to
changes in the marketplace which have significantly reduced the market potential
for these compounds. We filed a Section 505(b)(2) NDA for our nitroglycerin
lingual spray in June 2004 which was accepted for filing by the FDA in September
2004. We plan to conduct pilot pharmacokinetic studies on our remaining Tier I
priority products during the second half of calendar year 2004 and first quarter
of calendar year 2005. The Tier I products, other than the nitroglycerin lingual
spray, are lingual spray formulations of sumatriptan for which the
pharmacokinetic study is complete, alprazolam for which the pharmacokinetic
study has been initiated, propofol for which the pharmacokinetic study is
complete. The pharmacokinetic studies for ondansetron and zolpidem are expected
to be commenced during calendar year 2005. The goal of these pilot
pharmacokinetic studies is to determine whether or not a specific lingual spray
can achieve therapeutic blood levels of an active ingredient via administration
through the oral mucosa. If blood levels are not achieved, it could result in
the need to reformulate the lingual spray and/or to terminate work on a specific
compound which could have a material adverse effect on our operations.
6
Companies in the pharmaceutical and biotechnology industries have suffered
significant setbacks in advanced clinical trials, even after obtaining promising
results in earlier trials. Data obtained from tests are susceptible to varying
interpretations which may delay, limit or prevent regulatory approval. In
addition, companies may be unable to enroll patients quickly enough to meet
expectations for completing clinical trials. The timing and completion of
current and planned clinical trials of our product candidates depend on, among
other factors, the rate at which patients are enrolled, which is a function of
many factors, including:
--the number of clinical sites;
--the size of the patient population;
--the proximity of patients to the clinical sites;
--the eligibility criteria for the study;
--the existence of competing clinical trials; and
--the existence of alternative available products.
Delays in patient enrollment in clinical trials may occur, which would likely
result in increased costs, program delays or both.
In light of the material expense and delays associated with independently
developing and obtaining approval of pharmaceutical products, we intend to
develop some such products through collaborative arrangements with major
pharmaceutical companies, which will fund that development. Our lack of working
capital has impaired our ability to pursue such strategy. See Item 6
"Management's Discussion and Analysis or Plan of Operation."
7
PATENTED AND PATENT PENDING DELIVERY SYSTEMS
(LINGUAL (ORAL) SPRAY).
We have certain patents and pending patent applications for our lingual spray
delivery system. FDA approval is not a prerequisite for patent approval. The
expected year of marketability of a given product will vary depending upon the
specific drug product with which the delivery system will be utilized. Each
individual use of the delivery system will require registration with and/or
approval by the FDA or other relevant health authority prior to marketability,
and the amount of regulatory oversight required by the FDA or other regulatory
agencies will also depend on the specific type of drug product for which the
delivery system is implemented. Our aerosol and pump spray formulations release
drugs in the form of a fine mist into the mouth for rapid absorption into the
bloodstream via the mucosal membranes. We believe that this delivery system
offers certain advantages, including more rapid delivery of drugs to the
bloodstream, improving the safety profile of certain drugs by lowering the
required dosage to be administered, improving dose reliability, allowing
medication to be taken without water and improved patient convenience and
compliance. Drug absorption through the mucosal membranes of the mouth is rapid
and minimizes the first-pass metabolism effect (i.e., total or partial
inactivation of a drug as it passes through the gastrointestinal tract and
liver).
PROPOSED PRODUCTS
Our proposed products are subjected to laboratory testing and stability studies
and tested for therapeutic comparison to the originators' products by qualified
laboratories and clinics. To the extent that two drug products with the same
active ingredients are substantially identical in terms of their rate and extent
of absorption in the human body (bioavailability), they are considered
bioequivalent. If the accumulated data demonstrates bioequivalency, submission
is then made to the FDA (through the filing of an ANDA) for its review and
approval to manufacture and market. If the accumulated data demonstrates that
there are differences in the two drugs' rate and extent of absorption into the
human body, or if it is intended to make additional or different claims
regarding therapeutic effect for the newly developed product, submission is made
to the FDA via an NDA for its review and approval under Section 505(b)(1) or
Section 505(b)(2) of the FFDC Act. An NDA submitted under Section 505(b)(2) of
the FFDC Act, is generally less complex than an ordinary Section 505(b)(1) NDA.
We expect that the majority of our products in development will require the
filing of these Section 505(b)(2) NDA's because, although such products are
known chemical entities, we or our licensees will be making new claims as to
therapeutic effects or lessened side effects, or both.
We estimate that development of new formulations of pharmaceutical products,
including formulation, testing and obtaining FDA approval, generally takes three
to five years for the Section 505(b)(2) NDA or ANDA Section 505(j) process.
Development of products requiring additional clinical studies under full NDA's,
may take four to seven years. Our determination regarding the availability of
ANDA's or Section 505(b)(2) NDA's for our products under development may not be
accurate and pre-marketing approval for our proposed products might not be
obtained on a timely basis, if at all. See Item 1 "Description of Business -
Government Regulation."
MARKETING AND DISTRIBUTION
We intend, generally, to license products developed with our technology to other
drug companies or to market our products to pharmaceutical wholesalers, drug
distributors, drugstore chains, hospitals, United States governmental agencies,
health maintenance organizations and other drug companies. We anticipate that
promotion of our proposed products will be characterized by an emphasis on their
distinguishing characteristics, such as dosage form and packaging, as well as
possible therapeutic advantages of such products. We intend to position our
proposed products as alternatives or as line extensions to brand-name products.
We believe that to the extent our formulated products are patent-protected, such
formulations may offer brand-name manufacturers the opportunity to expand their
product lines. Alternatively, products which are not patented may be offered to
brand-name manufacturers as improved substitute products after patent protection
on existing products expire.
8
Inasmuch as we do not have the financial or other resources to undertake
extensive marketing activities, we generally intend to seek to enter into
marketing arrangements, including possible joint ventures or license or
distribution arrangements, with third parties.
We believe that such third-party arrangements will permit us to maximize the
promotion and distribution of pharmaceutical products while minimizing our
direct marketing and distribution costs. Except for our agreements with
Manhattan Pharmaceuticals, Par Pharmaceutical, Velcera Pharmaceuticals and Hana
Biosciences, Inc., we have not entered into any agreements or arrangements with
respect to the marketing of our proposed products and we may not be able to
enter into additional agreements in the future. See Item 1 "Description of
Business - Business Development". If we are unable to enter into additional
agreements, we may not be able to market successfully our proposed products.
We have not yet determined strategies relating to marketing of our other
proposed formulated products; these will be formulated in advance of anticipated
completion of development activities relating to the particular formulated
product. As a company, we have no experience in marketing or distribution of our
proposed proprietary products, and our ability to fund such marketing activities
will require us to raise additional funds and/or consummate a strategic alliance
or combination with a well-funded business partner.
MANUFACTURING
We intend to both internalize and contract out the manufacturing of our proposed
products. Presently, we have established a pilot manufacturing facility at one
of our present locations which we believe is adequate for our needs with respect
to our requirements for formulation development, stability testing and clinical
supplies. We have also leased a new, larger facility, which will have adequate
space for our future foreseeable requirements for production, manufacturing and
warehouse space. We began to occupy this new space during the third quarter of
calendar year 2003. The manufacture of our pharmaceutical products is subject to
current Good Manufacturing Practices (cGMP) prescribed by the FDA and
pre-approval inspections by the FDA and foreign authorities prior to the
commercial manufacture of any such products. See Item 1 "Description of Business
- Government Regulation" and "- Raw Materials and Suppliers." Since we cannot
construct such a manufacturing and warehousing facility in compliance with cGMP
in time to support the potential launch of our nitroglycerin lingual spray, for
which an NDA has been submitted, we will use a third party contract manufacturer
to satisfy our requirements. We may not be able to enter into arrangements with
third party manufacturers, or be able to do so on terms favorable to us. Failure
by us to complete successfully the internalization of our manufacturing
requirements or to conclude an alternative contract manufacturing arrangement
could have an adverse effect our efforts to obtain regulatory approval for or to
commercialize our products.
9
RAW MATERIALS AND SUPPLIERS
We believe that the active ingredients used in the manufacture of our proposed
pharmaceutical products are presently available from numerous suppliers located
in the United States, Europe and Japan and delivered to our manufacturing
facility by such suppliers. We intend to enter into arrangements with such
third-party suppliers for supplies of active and inactive pharmaceutical
ingredients and packaging materials used in the manufacture of our proposed
products. Accordingly, we may be subject to various import duties applicable to
both finished products and raw materials and may be affected by various other
import and export restrictions as well as other developments impacting upon
international trade. These international trade factors will, under certain
circumstances, have an impact on the manufacturing cost (which will, in turn,
have an impact on the cost of our proposed products). To the extent that
transactions relating to the purchase of raw materials involve currencies other
than United States dollars (e.g., Swiss francs and Euros), our operating results
will be affected by fluctuations in foreign currency exchange rates.
Generally, certain raw materials, including inactive ingredients, are available
from a limited number of suppliers and certain packaging materials intended for
use in connection with our lingual spray products may be available only from
sole source suppliers. Although we believe that we will not encounter
difficulties in obtaining the inactive ingredients or packaging materials
necessary for the manufacture of our products, we may not be able to enter into
satisfactory agreements or arrangements for the purchase of commercial
quantities of such materials. A failure to enter into agreements or otherwise
arrange for adequate or timely supplies of principal raw materials and the
possible inability to secure alternative sources of raw material supplies could
have a material adverse effect on our ability to manufacture formulated
products.
Development and regulatory approval of our pharmaceutical products are dependent
upon our ability to procure active ingredients and certain packaging materials
from FDA-approved sources. Since the FDA approval process requires manufacturers
to specify their proposed suppliers of active ingredients and certain packaging
materials in their applications, FDA approval of a supplemental application to
use a new supplier would be required if active ingredients or such packaging
materials were no longer available from the specified supplier, which could
result in manufacturing delays. Accordingly, we intend to locate alternative FDA
approved suppliers.
GOVERNMENT REGULATION
The development, manufacture and commercialization of pharmaceutical products
are generally subject to extensive regulation by various federal and state
governmental entities. The FDA, which is the principal United States regulatory
authority, has the power to seize adulterated or misbranded products and
unapproved new drugs, to request their recall from the market, to enjoin further
manufacture or sale, to publicize certain facts concerning a product and to
initiate criminal proceedings. As a result of federal statutes and FDA
regulations, pursuant to which new pharmaceuticals are required to undergo
extensive and rigorous testing, obtaining pre-market regulatory approval
requires extensive time and expenditures.
10
Under FFDC Act, a new drug may not be commercialized or otherwise distributed in
the United States without the prior approval of the FDA or pursuant to an
applicable exemption from the FFDC Act.
The FDA approval process relating to a new drug differs, depending on the nature
of the particular drug for which approval is sought. With respect to any drug
product with active ingredients not previously approved by the FDA, a
prospective drug manufacturer is required to submit an NDA, including complete
reports of pre-clinical, clinical and laboratory studies to prove such product's
safety, quality and efficacy. The NDA process generally requires, before the
submission of the NDA, submission of an IND pursuant to which permission is
sought to begin preliminary clinical testing of the new drug. An NDA based on
published safety and efficacy studies conducted by others may also be required
to be submitted for a drug product with a previously approved active ingredient,
if the method of delivery, strength or dosage is changed. Alternatively, a drug
having the same active ingredients as a drug previously approved by the FDA may
be eligible to be submitted under an ANDA, which is significantly less stringent
than the NDA approval process.
While the ANDA process requires a manufacturer to establish bioequivalence to
the previously approved drug, it permits the manufacturer to rely on the safety
and efficacy studies contained in the NDA for the previously approved drug.
The NDA approval process generally requires between 10 to 24 months from NDA
submission to pre-marketing approval, although in the case of an NDA submitted
pursuant to Section 505(b)(2) of the FFDC Act this time frame may be
significantly shorter. We believe that most products developed in lingual spray
delivery systems (dosage forms) usually will require submission of an NDA under
Section 505(b)(2). This is because the safety and efficacy of the drug compound
used in the lingual spray formulation generally can be established in previous
trials in NDA submissions and publications.
We estimate that the development of new formulations of pharmaceutical products,
including formulation, testing and obtaining FDA approval, generally takes four
to seven years for the NDA process, although NDA's submitted under Section
505(b)(2) are generally less complex than an ordinary NDA and may be acted upon
by the FDA in a shorter period of time. Our determinations regarding the
availability of ANDA's for our proposed products may not be accurate and
pre-marketing approval for our proposed products might not be obtained on a
timely basis, if at all. The FDA application procedure has become more rigorous
and costly and the FDA currently performs pre-approval and periodic inspections
of each finished dosage form and each active ingredient.
11
The manufacture of our pharmaceutical products will be subject to cGMP
prescribed by the FDA, pre-approval inspection by the FDA before beginning
commercial manufacture of such products and periodic cGMP compliance inspections
by the FDA thereafter.
COMPETITION
The markets which we intend to enter are characterized by intense competition.
We will be competing against established pharmaceutical companies which
currently market products which are equivalent or functionally similar to those
we intend to market. Prices of drug products are significantly affected by
competitive factors and tend to decline as competition increases. In addition,
numerous companies are developing or may, in the future, engage in the
development of products competitive with our proposed products. We expect that
technological developments will occur at a rapid rate and that competition is
likely to intensify as enhanced delivery system technologies gain greater
acceptance. Additionally, the markets for formulated products which we have
targeted for development are intensely competitive, involving numerous
competitors and products. We intend to enhance our competitive position by
focusing our efforts on our novel dosage forms.
We are aware of several companies that are selling or developing lingual spray
products. First Horizon Pharmaceutical Corporation, headquartered in Alpharetta,
Georgia, currently markets Nitrolingual(R) Pumpspray, a nitroglycerin lingual
spray which is in an "air" propelled dispensing system (our nitroglycerin
lingual spray is in a "propellant" based dispensing system). Generex
Biotechnology Corporation, based in Toronto, Canada, is developing an insulin
formulation that is delivered directly into the mouth via their RapidMist(TM)
device. They also state that they have begun research on four specific target
molecules for their RapidMist delivery system: morphine, fentanyl, heparin and
flu vaccine. Sirus Pharmaceuticals Ltd., based in the United Kingdom, also
claims to be developing drugs to be delivered sublingually via an aerosol spray.
Sirus is working in the areas of pain and emesis. There are several other
companies that we are aware of that market lingual spray products containing
vitamins and homeopathic ingredients.
We also face, and will continue to face, competition from colleges,
universities, governmental agencies and other public and private research
organizations. These competitors are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of technology
that they have developed. Some of these technologies may compete directly with
the technologies that we are developing. These institutions will also compete
with us in recruiting highly qualified scientific personnel. We expect that
developments in the areas in which we are active may occur at a rapid rate and
that competition will intensify as advances in this field are made. As a result,
we need to continue to devote substantial resources and efforts to research and
development activities.
12
PATENTS AND PROTECTION OF PROPRIETARY INFORMATION
We have applied for United States and foreign patent protection for our buccal
spray delivery systems which are the primary focus of our development activities
as well as for our delayed contact allergy topical formulations. Five United
States patents and four European patents have been issued and other applications
are pending. Additional patent applications may not be granted, or, if granted,
may not provide adequate protection to us. We also intend to rely on whatever
protection the law affords to trade secrets, including unpatented know-how.
Other companies, however, may independently develop equivalent or superior
technologies or processes and may obtain patents or similar rights with respect
thereto.
Although we believe that we have developed our technology independently and have
not infringed, and do not infringe, on the patents of others, third parties may
make claims, however, that our technology does infringe on their patents or
other intellectual property. In the event of infringement, we may, under certain
circumstances, be required to modify our infringing product or process or obtain
a license. We may not be able to do either of those things in a timely manner if
at all, and failure to do so could have a material adverse effect on our
business. In addition, we may not have the financial or other resources
necessary to enforce a patent infringement or proprietary rights violation
action or to defend ourselves against such actions brought by others. If any of
the products we develop infringe upon the patent or proprietary rights of
others, we could, under certain circumstances, be enjoined or become liable for
damages, which would have a material adverse effect on our business.
We also rely on confidentiality and nondisclosure agreements with our licensees
and potential development candidates to protect our technology, intellectual
property and other proprietary property. Pursuant to the foregoing and for other
reasons, we face the risk that our competitors may acquire information which we
consider to be proprietary, that such parties may breach such agreements or that
such agreements will be inadequate or unenforceable.
BUCCAL NONPOLAR SPRAYS. On April 12, 1996, we filed an application with the
United States Patent and Trademark Office ("USPTO") with claims directed to our
buccal spray composition containing certain amounts of propellant, a non-polar
solvent, and certain classes of drugs, as well as specific drugs within those
classes. The application also included claims directed to soft-bite gelatin
capsules containing these drugs. On September 1, 1998, the USPTO allowed the
claims directed to buccal spray propellant compositions, but rejected the claims
directed to the capsules. In November 1998, we deleted the capsule claims from
this application to pursue issuance of a patent with claims directed to the
buccal non-polar spray compositions and methods of administering the class of
drugs using the buccal spray compositions. On September 21, 1999, U.S. Patent
No. 5,955,098 was issued to us with claims directed to the above-described
buccal non-polar spray propellant compositions and methods. This patent expires
in September 2019.
On February 21, 1997, we filed an application under the Patent Cooperation
Treaty (the "PCT") for the above-subject matter. The International Preliminary
Examination Authority issued an International Preliminary Examination Report
alleging that the subject matter of the invention lacked novelty and/or lacked
an inventive step. This opinion, with which we disagree, is not dispositive. The
opinion, however, may be persuasive to individual national patent offices in
countries where we enter the national phase.
13
With respect to the above PCT application, in October and November 1998, we
entered the national phase in Canada and Europe, respectively, with claims
directed to the above subject matter. On April 16, 2003, European patent no. EP
0 904 055 was granted to us with claims directed to propellant containing buccal
non-polar spray compositions containing similar drugs to those in the
corresponding issued U.S. patent. This European patent has been validated in the
United Kingdom, Germany, France, Italy, Belgium, Switzerland/Liechtenstein,
Austria, Sweden, Denmark, Finland, Luxembourg, the Netherlands, Spain, Greece,
Monaco, Portugal and Ireland so that there is patent protection in these
countries. We have filed a divisional application based on this European patent
with claims directed to a buccal spray composition containing a propellant, a
non-polar solvent and an active compound selected from alkaloids and analgesics.
With respect to the Canadian application, we filed a request for examination
with the Canadian Patent Office on February 7, 2002. We received an Office
Action from the Canadian Patent Office dated April 13, 2004, pursuant to which
we were requested to elect for prosecution either claims directed to buccal
spray compositions or claims to the soft-bite gelatin capsules. We elected to
prosecute the claims directed to buccal spray compositions.
BUCCAL POLAR SPRAYS. On April 12, 1996, we filed an application with the USPTO
with claims directed to propellant free buccal polar spray compositions
containing certain amounts of a polar solvent and certain classes of drugs, as
well as specific drugs within those classes. The application also contained
claims to soft-bite gelatin capsules containing such drugs. A
continuation-in-part ("CIP") application was filed directed to this subject
matter before the original application was allowed to go abandoned. The USPTO
initially rejected the claims in the CIP application. We deleted the claims from
this application (including the soft-bite capsule claims) and replaced them with
claims directed to methods of using the above-described propellant free buccal
polar spray compositions to administer the drugs. On August 29, 2000, U.S.
Patent No. 6,110,486 was issued to us with claims directed to the
above-described methods of administering the drugs. This patent expires August
2020.
On February 21, 1997, we filed an application under the PCT for the
above-described subject matter. The International Preliminary Examination
Authority issued an International Preliminary Examination Report alleging that
the subject matter of the invention lacked novelty and/or lacked an inventive
step. This opinion, with which we disagree, is not dispositive. The opinion,
however, may be persuasive to individual national patent offices in countries
where we enter the national phase.
With respect to the above PCT application, in October and November 1998, we
entered the national phase in Canada and Europe, respectively, with claims
directed to the above subject matter. On April 16, 2003, European patent no. EP
0 904 055 was granted to us with claims directed to propellant containing buccal
non-polar spray compositions containing similar drugs to those in the
corresponding issued U.S. patent. This European patent has been validated in the
United Kingdom, Germany, France, Italy, Belgium, Switzerland/Liechtenstein,
Austria, Sweden, Denmark, Finland, Luxembourg, the Netherlands, Spain, Greece,
Monaco, Portugal and Ireland so that there is patent protection in these
countries. We have filed a divisional application based on this European patent
with claims directed to a buccal spray composition containing a propellant, a
non-polar solvent and an active compound selected from alkaloids and analgesics.
With respect to the Canadian application, we filed a request for examination
with the Canadian Patent Office on February 7, 2002. We received an Office
Action from the Canadian Patent Office dated April 13, 2004, pursuant to which
we were requested to elect for prosecution either claims directed to buccal
spray compositions or claims to the soft-bite gelatin capsules. We elected to
prosecute the claims directed to buccal spray compositions.
14
BUCCAL NONPOLAR SPRAY FOR NITROGLYCERIN. On April 12, 1996, we filed an
application with the USPTO with claims directed to a buccal spray containing
certain amounts of nitroglycerin, a non-polar solvent, and a propellant. The
claims were allowed and on February 9, 1999, the USPTO issued U.S. Patent No.
5,869,082 to us for said nitroglycerin buccal spray. This patent expires in
February 2019.
On February 21, 1997, we filed a PCT application directed to the above-described
subject matter. The International Preliminary Examination Authority issued an
International Preliminary Examination Report alleging that the subject matter of
the invention lacks an inventive step. This opinion, with which we disagree, is
not dispositive. The opinion, however, may be persuasive to individual national
patent offices in countries where we enter the national phase. Nevertheless,
Greek Patent, GRO904055 was issued on March 18, 2004, for our nitroglycerin
buccal, non-polar spray or capsule.
In October 1998, we entered the national phase in Canada. We filed a request for
examination on February 7, 2002. The Canadian Patent Office issued an Office
Action to us dated July 21, 2004. We are in the process of responding to such
Office Action.
In November 1998, we entered the national phase in Europe. A European patent was
granted to us on April 16, 2003, with claims directed to a buccal spray
containing certain amounts of nitroglycerin, a non-polar solvent and a
propellant. This European patent has been validated in the United Kingdom,
Germany, France, Italy, Belgium, Switzerland/Liechtenstein, Austria, Sweden,
Denmark, Finland, Luxembourg, the Netherlands, Spain, Greece, Monaco, Portugal
and Ireland so that there is patent protection in these countries.
BUCCAL POLAR/NONPOLAR SPRAYS OR CAPSULES. On October 1, 1997, we filed a PCT
application designating a large number of countries including the United States,
directed to the buccal sprays and soft-bite capsules. The application included
claims directed to: (A) a buccal spray composition containing either (1) a polar
solvent with certain classes of drugs, as well as specific drugs in those
classes with or without a propellant or (2) a non-polar solvent with or without
a propellant with certain classes of drugs, as well as specific drugs in those
classes; (B) buccal spray composition containing a non-polar solvent, a
flavoring agent and certain classes of drugs; and (C) methods of administering
these drugs using the buccal spray compositions. The application also contained
claims to soft-bite gelatin capsules containing such drugs. This application
differs from the first three applications, discussed above, in that the claimed
compositions include different classes of drugs from those described in the
first three applications. The International Preliminary Examination Authority
issued an International Preliminary Examination Report alleging that the subject
matter of the invention lacked novelty and/or lacked an inventive step. This
opinion, with which we disagree, is not dispositive. The opinion, however, may
be persuasive to individual national patent offices in countries where we enter
the national phase.
15
On March 29, 2000, we entered the national phase in the United States by filing
a CIP of the above-identified PCT application with the USPTO. The CIP
application included claims directed to propellant free buccal spray
compositions containing certain amounts of polar or non-polar solvents, and
certain classes of drugs, as well as specific drugs in those classes; buccal
spray compositions containing certain amounts of a propellant, a polar or
non-polar solvent and certain classes of drugs, as well as specific drugs in
those classes; and methods of administering said drugs using these types of
buccal spray compositions. The application is currently being prosecuted with
claims directed to the propellant free buccal spray compositions and methods of
administering said drugs using these types of buccal spray compositions.
Subsequently, we filed two divisional applications claiming priority to the CIP.
The first divisional application is currently being prosecuted with claims
directed to the buccal spray compositions containing certain amounts of a
propellant, a polar or non-polar solvent and certain classes of drugs, as well
as specific drugs in those classes and methods of administering said drugs using
these types of buccal spray compositions. The second divisional application was
issued to us as U.S. Patent No. 6,676,931. This patent expires in January 2024.
The claims of this patent are directed to a propellant free pump spray
composition containing certain amounts of a polar solvent, certain amounts of a
flavoring agent and certain amounts of cyclosporin or ondansetron hydrochloride.
Another application has been filed directed to the additional classes of drugs
and specific drugs that were not included in the claims of U.S. Patent No.
6,676,931.
Based on the above-identified PCT application, we entered the national phase in
Canada on March 29, 2000. We filed a request for examination in Canada on August
29, 2002. An office action has not been received from the Canadian Patent
Office. Based on the above-identified PCT application, we also entered the
national phase in Japan on April 3, 2000. We have filed a request for
examination of this Japanese application on September 30, 2004.
Based on the above-identified PCT application, we also entered the national
phase in Europe in April 2000. The European application includes claims directed
to propellant free buccal spray compositions containing certain amounts of a
polar solvent and certain classes of drugs, as well as specific drugs in those
classes and the use thereof to prepare a medicament for use as a buccal spray
for transmucosal administration. We have filed three applications related to
this application in Europe. The first application included claims directed to
buccal spray compositions containing certain amounts of a non-polar solvent, a
propellant and certain classes of drugs as well as specific drugs in those
classes and the use thereof to prepare a medicament for use as a buccal spray
for transmucosal administration. The second application included claims directed
to propellant free buccal spray compositions containing certain amounts of a
non-polar solvent and certain classes of drugs, as well as specific drugs in
those classes. The third application included claims directed to a buccal spray
composition containing certain amounts of a polar solvent, a propellant and
certain classes of drugs, as well as specific drugs in those classes. Each of
the above-identified European applications is currently being prosecuted.
Furthermore, in August 2002, we filed a number of U.S. patent applications
directed to buccal spray compositions containing certain classes of drugs as
well as specific drugs for treating particular types of disorders. In August
2003, we filed PCT applications related to these U.S. applications. We are
currently prosecuting these applications.
16
ANTIHISTAMINE SYRUP AND OINTMENT. On November 10, 1997, we filed an application
with the USPTO with claims directed to a spray composition for topical
administration containing an antihistamine and a polar solvent or an
antihistamine, a non-polar solvent and a propellant. In October 1998, the PTO
rejected the claims. The claims were deleted and replaced with a claim directed
to a method of controlling the occurrence of delayed contact dermatitis by
applying a lotion composition containing certain amounts of certain
antihistamines in certain amounts of a polar or non-polar solvent. On May 21,
2002, U.S. Patent No. 6,391,282 was issued to us for the above-described method.
This patent expires in May 2022.
On November 9, 1998, we filed the above-identified application with the Canadian
Patent Office and on October 29, 2002, a request for examination was filed. We
have not yet received an office action from the Canadian Patent Office.
GENERAL COMMENT WITH RESPECT TO ENTERING THE NATIONAL PHASE FOR EACH OF THE
FOREGOING PCT APPLICATIONS. In addition to our patents and patent applications
in the United States, we are interested in entering the national phase and
obtaining patent protection in Europe and Canada. At the present time, it is not
possible to accurately predict the expenses involved in pursuing the foregoing
applications in Canada and Europe. For example, we anticipate that, in the case
of the European applications, it may become necessary to file appeals with the
Board of Appeals in Munich. Expenses may exceed $100,000 (in the aggregate)
before a final disposition is obtained. We expect that this process may take
between two and four years.
EMPLOYEES
As of November 1, 2004, we had 28 full-time employees, two part-time employees,
four of whom serve as our executive officers, 21 of whom are laboratory or
support personnel and three of whom are engaged in administrative functions. Our
success is dependent, in part, upon our ability to hire and retain additional
manufacturing and research and development personnel; however, we may not be
able to hire or retain such necessary personnel.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file with the Commission at the Commission's public reference
rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, 233 Broadway, New York,
New York 10279, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661- 2511. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Our Commission filings are
also available to the public from the Commission's Website at
"http://www.sec.gov." We make available free of charge our annual, quarterly and
current reports, proxy statements and other information upon request. To request
such materials, please send an e-mail to bcohen@NovaDel.com or contact Barry
Cohen, our Vice President of Business & Product Development at our address as
set forth above or at 908-782-3431 ext. 2160
17
We maintain a Website at "http://www.NovaDel.com" (this is not a hyperlink, you
must visit this website through an Internet browser). Our Website and the
information contained therein or connected thereto are not incorporated into
this Annual Report on Form 10-KSB.
ITEM 2. DESCRIPTION OF PROPERTY.
Our executive offices are located at 25 Minneakoning Road, Flemington, New
Jersey. The facility, constituting approximately 31,800 square feet, is occupied
under a 10-year lease. Presently, we are only occupying a portion of the office
space in the building; the remaining office, laboratory, manufacturing and
warehousing space is still being fitted out. We also have approximately 4,500
square feet of laboratory and office space at 31 Route 12 West, Flemington, New
Jersey, which also formerly housed our executive offices. We occupy that space
under a five-year lease expiring in September 2005. During fiscal 2004, we paid
rent for both facilities of approximately $477,000 including real estate taxes.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings to which we are a party and we are not aware of
any possible pending proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal year 2004, no matters were submitted to a
vote of security holders, through the solicitation of proxies or otherwise.
18
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
(A) MARKET INFORMATION. Since May 11, 2004, our common stock has been
traded on the AMEX under the ticket symbol "NVD". Prior thereto, our common
stock was traded in the over-the-counter market on the OTC Bulletin Board under
the ticker symbol "NVDL". The following table sets forth the range of high and
low closing sales prices of our common stock as reported by the AMEX and the OTC
Bulletin Board for each fiscal quarter for the past two fiscal years.
CLOSING SALES PRICES
--------------------
($)
---
HIGH LOW
---- ---
FISCAL 2004
First Quarter (August 1, 2003 through October 31, 2003) 2.45 1.54
Second Quarter (November 1, 2003 through January 31, 2004) 1.99 1.29
Third Quarter (February 1, 2004 through April 30, 2004) 2.23 1.43
Fourth Quarter (May 1, 2004 through July 31, 2004) 2.45 1.35
FISCAL 2003
First Quarter (August 1, 2002 through October 31, 2002) 1.90 1.13
Second Quarter (November 1, 2002 through January 31, 2003) 2.80 1.44
Third Quarter (February 1, 2003 through April 30, 2003) 2.43 1.50
Fourth Quarter (May 1, 2003 through July 31, 2003) 2.20 1.50
The closing sales price of our common stock as reported by the AMEX was $1.71 on
July 31, 2004.
(B) HOLDERS. As of July 31, 2004 there were approximately 156 record
holders of our common stock.
(C) DIVIDENDS. We have never declared or paid a dividend on our common
stock and management expects that all or a substantial portion of our future
earnings will be retained for expansion or development of our business. The
decision to pay dividends, if any, in the future is within the discretion of our
Board of Directors and will depend upon our earnings, capital requirements,
financial condition and other relevant factors such as contractual obligations.
Management does not anticipate that we will pay dividends on our common stock in
the foreseeable future. Moreover, we may never issue dividends in the future.
19
(D) RECENT SALES OF UNREGISTERED SECURITIES. During the fourth quarter of
fiscal 2004, a total of 26,677 shares of our common stock were issued in
connection with the cashless exercise of 29,689 options. We relied upon the
exemption from registration of Section 4(2) of the Securities Act of 1933 for
each of such transactions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The Management's Discussion and Analysis or Plan of Operation for the years
ended July 31, 2004 and 2003 presented below reflects certain restatements to
the Company's previously reported results of operations for these periods. See
Note 3 of the Notes to Financial Statements for a discussion of these
restatements.
GENERAL
Since its inception, substantially all of the Company's revenues have been
derived from consulting activities, 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
July 31, 2004 of approximately $24,941,000. 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 license
agreements with drug companies who will market and distribute the final
products.
The Company currently has cash and investment balances of approximately
$9,400,000, which the Company believes is sufficient to maintain operating costs
until the end of the calendar year 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 may, depending upon market
conditions, pursue a financing by the end of the second calendar quarter of
2005. See "Liquidity and Capital Resources" below.
Over the next fiscal year, the Company will continue to stay focused on its six
tier-one priority products: nitroglycerin, sumatriptan, ondansetron, zolpidem,
alprazolam and propofol.
Nitroglycerin. The Company will continue to work with the FDA concerning its
review of the nitroglycerin NDA by providing any further information or support
to the FDA in order to meet the PDUFA date of June 4, 2005 for anticipated
approval.
20
Sumatriptan. The Company plans to request a pre-IND meeting with the FDA with an
anticipated goal for filing the IND during first half of calendar year 2005.
Subsequent to the IND submission, the Company plans to develop the clinical
protocol and administer clinical trials for the sumatriptan lingual spray
product.
Zolpidem and Ondansetron. The Company plans to initiate pilot pharmacokinetic
studies on both of these lingual sprays with anticipated results from those
studies in first calendar quarter of 2005. Depending on the results of these
studies, the Company intends to develop the appropriate clinical protocol and
administer the relevant trials.
Alprazolam. The Company is awaiting results of its pilot pharmacokinetic study
initiated in the third quarter calendar of 2004. Depending on the results of
this study, we expect to consider taking steps to file an IND and initiate full
clinical development.
Propofol. We continue to support our partner, Manhattan Pharmaceuticals, in
preparation of filing an IND with the FDA. Manhattan Pharmaceuticals will
oversee all clinical development for this product.
Our veterinary initiatives are being undertaken with our partner, Velcera
Pharmaceuticals, to determine a designated compound for formulations. It is
believed that one compound will be identified by the first calendar quarter of
2005 and formulation by NovaDel is expected to be initiated subsequently.
The Company is building laboratory space in its existing headquarters (See Item
2 - "Description of Property") to handle its research and development and
formulation endeavors.
The Company plans to hire a new Head of Pharmaceutical Sciences and a Chief
Financial Officer as soon as practical. There also will be a need to hire
additional employees in the laboratory to support our research and development
efforts going forward, however, we do not believe that a significant number of
overall new employees will be required in the next 12 months.
RESULTS OF OPERATIONS
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003
Consulting revenues for fiscal 2004 increased approximately $451,000 to $453,000
from $2,000 for fiscal 2003. This revenue increase for fiscal 2004 was primarily
attributable to an increase in consulting assignments and revenue attributable
to our arrangements with Manhattan Pharmaceuticals.
Research and development expenses increased approximately $1,405,000 to
$2,492,000 from $1,087,000 for fiscal 2003. Consulting, selling, general and
administrative expenses decreased approximately $1,377,000 or 23% to $4,627,000
from $6,004,000 for fiscal 2003.
21
Total costs and expenses for fiscal 2004 increased approximately $28,000 to
approximately $7,119,000 compared to fiscal 2003. This increase was attributable
to increased payroll expense primarily due to the hiring and recruitment of
additional employees and rent expense due to the leasing and occupying of
additional space for our operations. These increases were offset by a $736,000
decrease in compensation expense related to variable accounting adjustments to
certain of our stock options, as well as the decreases for the fiscal 2004
period, as compared to the fiscal 2003 period, of approximately $1,147,000 in
consulting fees primarily due to non-cash charges for options issued to two
consultants during the fiscal 2003 period, and lower costs of clinical studies
primarily due to fewer studies during the fiscal 2004 period.
Interest income increased approximately $49,000 or 100% to $98,000 for fiscal
2004 from $49,000 for fiscal 2003 due to an increased average cash balance.
Deferred income tax benefit for fiscal 2004 was approximately $214,000 compared
to approximately $84,000 for fiscal 2003. These benefits resulted from the sale
of our net operating losses for New Jersey income tax purposes.
The resulting net loss for fiscal 2004 was $6,341,000 compared to a net loss of
$6,956,000 for fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
From its inception, the Company's principal sources of capital were consulting
revenues, private placements and a public offering of its securities, as well as
loans and capital contributions from the Company's principal stockholders. At
July 31, 2004, we had working capital of approximately $7,676,000 as compared to
working capital of $2,799,000 at July 31, 2003, representing a net increase in
working capital of approximately $4,877,000. During fiscal 2004, the Company
successfully closed an offering of its common stock and warrants to purchase
shares of its common stock ("Private Placement"). The Private Placement provided
for the sale of approximately 13.3 million shares of common stock, par value
$.001 per share (the "Common Stock") and warrants to purchase 3,999,940 shares
of Common Stock. The Company received proceeds, net of offering costs, of
approximately $12,785,000.
Net cash used in operating activities was approximately $6,120,000 for fiscal
2004 compared to net cash used in operating activities of approximately
$4,320,000 for fiscal 2003. Net cash used in operating activities for fiscal
2004 was primarily attributable to the net loss of $6,341,000 including the
impact of variable plan accounting ($736,000).
The Company believes that its current cash levels together with revenues from
operations, will be sufficient to satisfy its cash requirements through the end
of calendar 2005. However, beyond this point the Company will likely have to
obtain additional financing and/or consummate a strategic alliance with a
well-funded business partner. Although the Company is actively seeking
additional financing and strategic alliances, there are a number of risks and
uncertainties related to its attempt to complete a financing or strategic
partnering arrangement that are outside its control. The Company may not be able
to successfully obtain additional financing on terms acceptable to it, or at
all.
22
CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES - The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
This requires the Company's management to make estimates about the future
resolution of existing uncertainties and that affects the reported amounts of
assets, liabilities, revenues and expenses which in the normal course of
business are subsequently adjusted to actual results. Actual results could
differ from such estimates. In preparing these financial statements, management
has made its best estimates and judgments of the amounts and disclosures
included in the financial statements giving due regard to materiality.
REVENUE RECOGNITION, ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS -
Revenue is recognized as earned. Invoices, for client project costs, are created
and presented at the end of each month, for that month. Accounts receivable
reflects these invoices at the end of the month in which the invoice was
created. Consulting revenues from contract clinical research are recognized as
earned. The Company also receives milestone and upfront payments which are
initially deferred and subsequently amortized into revenue over the contractual
period.
STOCK-BASED COMPENSATION - The Company uses the intrinsic value method
prescribed by APB Opinion No. 25 to measure compensation expense. As a result of
cashless exercise provisions in its employee stock option agreements, the
Company has used variable accounting treatment under the Financial Accounting
Standards Board's Interpretation 44, for issued and outstanding stock options
since January 2002. By the second fiscal quarter of 2005, the Company expects
that it will no longer be required to use variable plan accounting for stock
options because the cashless exercise provision giving rise to such accounting
treatment has been rescinded for outstanding options.
CAPITAL EXPENDITURES - The Company anticipates that the lab facilities in the
new corporate location will be completed by the end of the first quarter of
calendar 2005. The Company estimates that the costs of the build-out and
necessary equipment are approximately $1,300,000.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the years ended July 31, 2004 and 2003
were $2,492,000 and $1,087,000, respectively. Our 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 following
expenses.
23
Research and Pre-Clinical Operations and Direct Expenses - Clinical Trials
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.
The following summarizes our research and development expenses by the foregoing
categories for the fiscal years ended July 31, 2004 and 2003:
FISCAL YEAR ENDED
JULY 31,
-------------------------------------
2004 2003
------------------ ----------------
RESEARCH AND DEVELOPMENT EXPENSES:
Research and pre-clinical operations $2,414,000 $905,000
Direct clinical trial expenses 78,000 182,000
------------------ ----------------
RESEARCH AND DEVELOPMENT EXPENSES $2,492,000 $1,087,000
================== ================
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 interpretation 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 our drug product candidates are available for commercial
sale. All of our potential products are in regulatory review, clinical
development or pre-clinical development. The status of each of our six (6)
tier-one priority products is discussed in "General," above. Successful
completion of development of our six (6) tier-one priority programs is
contingent on numerous risks, uncertainties, and other factors, which are
described in detail in the section entitled "Risk Factors". 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
o Obtaining adequate supplies of surfactant raw materials on
commercially reasonable terms
24
o Obtaining capital necessary to fund our operations, including our
research and development efforts, manufacturing requirements and
clinical trials
o Performance of third-party collaborators on whom we rely heavily for
the commercialization and manufacture of drug product
o Obtaining manufacturing, sales and marketing capabilities for which
we presently have limited resources
As a result of the amount and nature of these factors, many of which are outside
our control, the success, timing of completion, and ultimate cost of development
of any of our 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 we do not successfully complete clinical trials, we will not receive
regulatory approval to market our six (6) tier-one priority products. If we do
not obtain and maintain regulatory approval for our products, we will not
generate any revenues from the sale of our products and the value of our company
and our 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.
The Company presently has four major agreements with Manhattan, Par, Velcera and
Hana. We are 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any so-called "off-balance sheet arrangements" that
have or are reasonably likely to have a current or future effect on its
financial condition, results of operations, liquidity or capital resources.
25
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires that a liability be
recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a rollforward of the entity's product warranty liabilities.
The Company does not expect FIN 45 to have a material impact on its financial
position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value base method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in tabular format. Additionally, SFAS No. 148 requires disclosure of the pro
forma effect in interim financial statements. The transition and annual
disclosure requirements are effective for our 2003 fiscal year. The interim
disclosure requirements are not effective. The Company does not expect the
adoption of SFAS NO. 148 to have a material impact on its financial position,
results of operations or cash flows.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. This Interpretation clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 applies to variable interest entities created after January 31, 2003, and
is effective as of July 31, 2003 for variable interest entities created prior to
February 1, 2003. The Company does not expect the adoption of FIN 46 to have a
material effect on its financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, for
implementation issues related to the definition of a derivative and other FASB
projects related to financial instruments. SFAS No. 149 requires that contracts
with comparable characteristics be accounts for in a similar fashion. SFAS No.
149 applies prospectively to contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The Company
does not expect the adoption of SFAS No. 149 to have a material effect on its
financial position, results of operations or cash flows.
26
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that financial instruments within the scope of SFS No. 150 be
classified as a liability or an asset. SFAS No. 150 is effective for all
financial instruments entered into after May 31, 2003 and otherwise, the
beginning of the first interim period after June 15, 2003. The Company does not
expect the adoption of SFAS No. 150 to have a material effect on its financial
position, results of operations or cash flows.
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this Annual Report before investing in our common
stock. Investing in our common stock involves a high degree of risk. Any of the
following risks could adversely affect our business, financial condition and
results of operations and could result in a complete loss of your investment.
The risks and uncertainties described below are not the only ones we may face.
WE ARE A PRE-COMMERCIALIZATION COMPANY, HAVE A LIMITED OPERATING HISTORY AND
HAVE NOT GENERATED ANY REVENUES FROM THE SALE OF PRODUCTS TO DATE.
We are a pre-commercialization biopharmaceutical company. Therefore, you must
evaluate us in light of the uncertainties and complexities present in such
companies. We have not generated any revenue from the commercial sale of our
proposed products and do not expect to receive such revenue in the near future.
We have no material licensing or royalty revenue or products ready for use or
licensing in the marketplace. This limited history may not be adequate to enable
one to fully assess our ability to develop our technologies and proposed
products, obtain FDA approval and achieve market acceptance of our proposed
products and respond to competition. We cannot be certain as to when to
anticipate commercializing and marketing any of our proposed products in
development, if at all, and do not expect to generate sufficient revenues from
proposed product sales to cover our expenses or achieve profitability in the
near future.
We had an accumulated deficit as of July 31, 2004 of approximately $24,941,000.
We incurred losses in each of our last eight fiscal years, including a net loss
of approximately $6,341,000 for the fiscal year ended July 31, 2004. Because we
increased our product development activities, we anticipate that we will incur
substantial operating expenses in connection with continued research and
development, clinical trials, testing and approval of our proposed products, and
expect these expenses will result in continuing and, perhaps, significant
operating losses until such time, if ever, that we are able to achieve adequate
product sales levels. Our ability to generate revenue and achieve profitability
depends upon our ability, alone or with others, to complete the development of
our proposed products, obtain the required regulatory approvals and manufacture,
market and sell our proposed products.
27
WE WILL REQUIRE SIGNIFICANT CAPITAL FOR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION.
The research, development, testing and approval of our proposed products involve
significant expenditures and accordingly we require significant capital to fund
such expenditures. We anticipate, based on our current proposed plans and
assumptions relating to our operations (including the timetable of, and costs
associated with, new product development), our existing capital resources should
be sufficient to satisfy our contemplated cash requirements through calendar
year 2005. Due to our small revenue base, low level of working capital and until
recently, our relative inability to increase the number of development
agreements with pharmaceutical companies, we have been unable to pursue
aggressively our product development strategy. We will require significant
additional financing and/or a strategic alliance with a well-funded development
partner to aggressively pursue our business plan. We have no current
arrangements with respect to, or sources of, additional financing, and
additional financing may not be available to us on acceptable terms, if at all.
Unless we raise additional financing, we may not have sufficient funds and we
may not be able to complete development and commercialization of our proposed
products or continue operating.
OUR ADDITIONAL FINANCING REQUIREMENTS COULD RESULT IN DILUTION TO EXISTING
STOCKHOLDERS.
The additional financings we require may be obtained through one or more
transactions which effectively dilute the ownership interests of our
stockholders. Further, we may not be able to secure such additional financing on
terms acceptable to us, if at all. We have the authority to issue additional
shares of common stock, as well as additional classes or series of ownership
interests or debt obligations which may be convertible into any one or more
classes or series of ownership interests. We are authorized to issue a total of
100,000,000 shares of common stock and 1,000,000 shares of preferred stock. Such
securities may be issued without the approval or other consent of our
stockholders. In addition, certain of our stockholders who purchased shares of
common stock in a private placement completed by us in April and May 2003 are
entitled to, until the second anniversary of the closing of each such
stockholder's purchase of our common stock, purchase additional shares of our
common stock in connection with subsequent offerings by us so as to maintain
their prior ownership percentages. See "Risk Factors--Additional authorized
shares of common stock and preferred stock available for issuance may adversely
affect the market."
28
OUR TECHNOLOGY PLATFORM IS BASED SOLELY ON OUR PROPRIETARY DRUG DELIVERY
TECHNOLOGY. OUR ONGOING CLINICAL TRIALS FOR CERTAIN OF OUR PRODUCT CANDIDATES
MAY BE DELAYED, OR FAIL, WHICH WILL HARM OUR BUSINESS.
Our strategy is to concentrate our product development activities primarily on
pharmaceutical products for which there already are significant prescription
sales, where the use of our 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. We have
completed pilot pharmacokinetic studies for two antihistamine lingual sprays
(loratadine and clemastine), an estradiol lingual spray, a progesterone lingual
spray, a nitroglycerin lingual spray, a propofol lingual spray and a sumatriptan
lingual spray. In addition, we completed phase 2 clinical trials for the
clemastine and nitroglycerin lingual sprays.
Additional development work on loratadine, clemastine, estradiol and
progesterone has been put on hold due to changes in the marketplace which have
significantly reduced the market potential for these compounds. We filed an NDA
for our nitroglycerin lingual spray on June 21, 2004, which was accepted for
filing by the FDA on September 29, 2004. We have initiated a pharmacokinetic
study of an anxiolytic lingual spray and plan to conduct pilot pharmacokinetic
studies on our other Tier I priority products during late calendar year 2004 and
early calendar year 2005. These products are lingual spray formulations of
ondansetron and zolpidem. The goal of these pilot pharmacokinetic studies is to
determine whether or not a specific lingual spray can achieve therapeutic blood
levels of an active ingredient via administration through the oral mucosa. If
blood levels are not achieved, it could result in the need to reformulate the
lingual spray and/or to terminate work on a specific compound which would have a
material adverse effect on our operations.
Companies in the pharmaceutical and biotechnology industries have suffered
significant setbacks in advanced clinical trials, even after obtaining promising
results in earlier trials. Data obtained from tests are susceptible to varying
interpretations which may delay, limit or prevent regulatory approval. In
addition, companies may be unable to enroll patients quickly enough to meet
expectations for completing clinical trials. The timing and completion of
current and planned clinical trials of our product candidates depend on, among
other factors, the rate at which patients are enrolled, which is a function of
many factors, including:
--the number of clinical sites;
--the size of the patient population;
--the proximity of patients to the clinical sites;
--the eligibility criteria for the study;
--the existence of competing clinical trials; and
--the existence of alternative available products.
Delays in patient enrollment in clinical trials may occur, which would likely
result in increased costs, program delays or both.
29
THERE ARE CERTAIN INTERLOCKING RELATIONSHIPS AND POTENTIAL CONFLICTS OF
INTEREST.
Lindsay A. Rosenwald, M.D., a significant stockholder of NovaDel, is the
Chairman of the Paramount Capital, Inc., the placement agent for the private
placements we completed during calendar year 2003, and the Managing Member of
BioMedical Investment Group, LLC, also a major stockholder of NovaDel. In the
regular course of its business and the business of its affiliates, and outside
of its arrangement with us, Paramount and/or its affiliates identify, evaluate
and pursue investment opportunities in biomedical and pharmaceutical products,
technologies and companies. In addition, Dr. Rosenwald may be deemed to
beneficially own approximately 33% of our outstanding common stock (assuming
exercise of certain warrants beneficially owned by Dr. Rosenwald). As such, Dr.
Rosenwald, BioMedical Investment Group and Paramount may be deemed to be our
affiliates. Generally, Delaware corporate law requires that any transactions
between us and any of our affiliates be on terms that, when taken as a whole,
are substantially as favorable to us as those then reasonably obtainable in an
arms length transaction from a person who is not an affiliate. Nevertheless,
neither such affiliates nor Paramount or BioMedical Investment Group are
obligated pursuant to any agreement or understanding with us to make any
additional products or technologies available to us, nor can there be any
assurance, and we do not expect and our stockholders should not expect, that any
biomedical or pharmaceutical product or technology identified by such
affiliates, Paramount or BioMedical Investment Company in the future will be
made available to us. In addition, certain of our current officers and directors
or any officers or directors hereafter appointed by us may from time to time
serve as officers or directors of other biopharmaceutical or biotechnology
companies. Such other companies may have interests in conflict with our
interests.
OUR BUSINESS AND REVENUE IS DEPENDENT ON THE SUCCESSFUL DEVELOPMENT OF OUR
PRODUCTS.
Revenue received from our product development efforts consists of payments by
pharmaceutical companies for research and bioavailability studies, pilot
clinical trials and similar milestone-related payments. Our future growth and
profitability will be dependent upon our ability successfully to raise
additional funds to complete the development of, obtain regulatory approvals for
and license out or market our proposed products. Accordingly, our prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered in connection with the establishment of a new business in a highly
competitive industry, characterized by frequent new product introductions. We
anticipate that we will incur substantial operating expenses in connection with
the development, testing and approval of our proposed products and expect these
expenses to result in continuing and significant operating losses until such
time, if ever, that we are able to achieve adequate levels of sales or license
revenues. We may not be able to raise additional financing, increase revenues
significantly, or achieve profitable operations. See "Risk Factors - We Will
Require Significant Capital Requirements for Product Development and
Commercialization" and "- Our Strategy, In Many Cases, Is To Enter Into
Collaboration Agreements With Third Parties and We May Require Additional
Collaboration Agreements. If We Fail To Enter Into These Agreements or If We or
The Third Parties Do Not Perform Under Such Agreements, It Could Impair Our
Ability To Commercialize Our Proposed Products."
30
WE DO NOT HAVE COMMERCIALLY AVAILABLE PRODUCTS.
Our principal efforts are the development of, and obtaining regulatory approvals
for, our proposed products. We anticipate that marketing activities for our
proprietary products, whether by us or one or more of our licensees, if any,
will not begin until late in calendar year 2005 at the earliest. Accordingly, it
is not anticipated that we will generate any revenues from royalties or sales of
proprietary products until regulatory approvals are obtained and marketing
activities begin. Any one or more of our proposed proprietary products may not
prove to be commercially viable, or if viable, may not reach the marketplace on
a basis consistent with our desired timetables. The failure or the delay of any
one or more of our proposed products to achieve commercial viability would have
a material adverse effect on us. See Item 1 "Description of Business - Product
Development," "Proposed Products" and "Government Regulation."
WE HAVE NOT COMPLETED PRODUCT DEVELOPMENT.
We have not completed the development of our proposed products and we will be
required to devote considerable effort and expenditures to complete such
development. In addition to obtaining adequate financing, satisfactory
completion of development, testing, government approval and sufficient
production levels of such products must be obtained before the proposed products
will become available for commercial sale. We do not anticipate generating
material revenue from product sales until perhaps late in calendar year 2005 or
thereafter. Other potential products remain in the conceptual or very early
development stage and remain subject to all the risks inherent in the
development of pharmaceutical products, including unanticipated development
problems and possible lack of funds to undertake or continue development. These
factors could result in abandonment or substantial change in the development of
a specific formulated product. We may not be able to successfully develop any
one or more of our proposed products or develop such proposed products on a
timely basis. Further, such proposed products may not be commercially accepted
if developed. The inability to successfully complete development, or a
determination by us, for financial or other reasons, not to undertake to
complete development of any proposed product, particularly in instances in which
we have made significant capital expenditures, could have a material adverse
effect on our business and operations.
WE DO NOT HAVE DIRECT CONSUMER MARKETING EXPERIENCE.
We have no experience in marketing or distribution at the consumer level of our
proposed products. Moreover, we do not have the financial or other resources to
undertake extensive marketing and advertising activities. Accordingly, we intend
generally to rely on marketing arrangements, including possible joint ventures
or license or distribution arrangements with third parties. Except for our
agreements, with Par Pharmaceutical, Manhattan Pharmaceuticals, Velcera
Pharmaceuticals, Inc. and Hana Biosciences, we have not entered into any
significant agreements or arrangements with respect to the marketing of our
proposed products. We may not be able to enter into any such agreements or
similar arrangements in the future and we may not be able to successfully market
our products. If we fail to enter into these agreements or if we or the third
parties do not perform under such agreements, it could impair our ability to
commercialize our products. If we do not develop a marketing force of our own,
then we will depend on arrangements with corporate partners or other entities
for the marketing and sale of our remaining products. Our strategy to rely on
third party marketing arrangements could adversely affect our profit margins.
See Item 1 "Description of Business - Marketing and Distribution."
31
WE MUST COMPLY WITH GOOD MANUFACTURING PRACTICES.
The manufacture of our pharmaceutical products under development will be subject
to current Good Manufacturing Practices (cGMP) prescribed by the FDA,
pre-approval inspections by the FDA or comparable foreign authorities, or both,
before commercial manufacture of any such products and periodic cGMP compliance
inspections thereafter by the FDA. We, or any of our third party manufacturers,
may not be able to comply with cGMP or satisfy pre- or post-approval inspections
by the FDA or comparable Foreign authorities in connection with the manufacture
of our proposed products. Failure or delay by us or any such manufacturer to
comply with cGMP or satisfy pre- or post-approval inspections would have a
material adverse effect on our business and operations. See Item 1 "Description
of Business - Manufacturing."
WE ARE DEPENDENT ON OUR SUPPLIERS.
We believe that the active ingredients used in the manufacture of our proposed
pharmaceutical products are presently available from numerous suppliers located
in the United States, Europe, India and Japan. We believe that certain raw
materials, including inactive ingredients, are available from a limited number
of suppliers and that certain packaging materials intended for use in connection
with our spray products currently are available only from sole source suppliers.
Although we do not believe we will encounter difficulties in obtaining the
inactive ingredients or packaging materials necessary for the manufacture of our
proposed products, we may not be able to enter into satisfactory agreements or
arrangements for the purchase of commercial quantities of such materials. We
have a written supply agreement with Dynamit Nobel for certain raw materials for
our nitroglycerin lingual spray and a purchase order agreement in place with
INyX Pharmaceuticals, located in Manchester, United Kingdom. With respect to
other suppliers, we operate primarily on a purchase order basis beyond which
there is no contract memorializing our purchasing arrangements. The inability to
enter into agreements or otherwise arrange for adequate or timely supplies of
principal raw materials and the possible inability to secure alternative sources
of raw material supplies, or the failure of Dynamit Nobel to comply with its
supply obligations to us, could have a material adverse effect on our ability to
arrange for the manufacture of formulated products. In addition, development and
regulatory approval of our products are dependent upon our ability to procure
active ingredients and certain packaging materials from FDA-approved sources.
Since the FDA approval process requires manufacturers to specify their proposed
suppliers of active ingredients and certain packaging materials in their
applications, FDA approval of a supplemental application to use a new supplier
would be required if active ingredients or such packaging materials were no
longer available from the originally specified supplier, which may result in
manufacturing delays. If we do not maintain important manufacturing
relationships, we may fail to find a replacement manufacturer or to develop our
own manufacturing capabilities. If we cannot do so, it could delay or impair our
ability to obtain regulatory approval for our products and substantially
increase our costs or deplete any profit margins. If we do find replacement
manufacturers, we may not be able to enter into agreements with them on terms
and conditions favorable to us and, there could be a substantial delay before a
new facility could be qualified and registered with the FDA and foreign
regulatory authorities. See Item 1 "Description of Business - Raw Materials and
Suppliers."
32
OUR INTERNAL CONTROLS AND PROCEDURES HAVE BEEN MATERIALLY DEFICIENT, AND WE ARE
BEGINNING THE PROCESS OF CORRECTING INTERNAL CONTROL DEFICIENCIES.
In October 2004, the Company and its independent registered public accounting
firm recognized that the Company's internal controls had material weaknesses.
These material weaknesses led in part to the delay in the production of our
audited financial statements for fiscal 2004. We have restated our results of
operations for the fiscal years ended July 31, 2002, and July 31, 2003, and for
the Company's quarterly results in fiscal years 2004, 2003 and 2002. Our
independent registered public accounting firm has advised us of material
weaknesses noted during their audit of our 2004 financial statements. For
further information concerning our internal controls, see Item 8A - "Controls
and Procedures".
If we cannot rectify these material weaknesses through remedial measures and
improvements to our systems and procedures, management may encounter
difficulties in timely assessing business performance and identifying incipient
strategic and oversight issues. Management is currently focused on remedying
internal control deficiencies, and this focus will require management from time
to time to devote its attention away from other planning, oversight, and
performance functions.
We will apply substantial resources at all relevant managerial levels toward the
task of improving our internal control environment. We cannot provide assurances
as to the timing of the completion of these efforts or estimates of the
prospective costs of these efforts, either in dollar terms or in the form of
management attention. We cannot be certain that the measures we take will ensure
that we implement and maintain adequate internal controls in the future. Any
failure to implement required new or improved controls, or difficulties
encountered in their implementation, could harm our operating results or cause
us to fail to meet our reporting obligations.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH
SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS AND OPERATING RESULTS. IN ADDITION, CURRENT AND POTENTIAL
STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR STOCK PRICE.
Effective internal controls are necessary for us to provide reliable financial
reports and effectively prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, our operating results could be harmed.
We will be required to document and test our internal control procedures in
order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act,
which requires annual management assessments of the effectiveness of our
internal controls over financial reporting and a report by our independent
registered public accounting firm addressing these assessments. During the
course of our testing we may identify deficiencies which we may not be able to
remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for
compliance with the requirements of Section 404. In addition, if we fail to
maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.
Failure to achieve and maintain an effective internal control environment could
also cause investors to lose confidence in our reported financial information,
which could have a material adverse effect on our stock price.
33
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations
and AMEX rules, are creating uncertainty for companies such as ours. These new
or changed laws, regulations and standards are subject to varying
interpretations in many cases due to their lack of specificity, and as a result,
their application in practice may evolve over time as new guidance is provided
by regulatory and governing bodies, which could result in continuing uncertainty
regarding compliance matters and higher costs necessitated by ongoing revisions
to disclosure and governance practices. We are committed to maintaining high
standards of corporate governance and public disclosure. As a result, our
efforts to comply with evolving laws, regulations and standards have resulted
in, and are likely to continue to result in, increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. In particular, our
efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the
related regulations regarding our required assessment of our internal controls
over financial reporting and our independent registered public accounting firm's
audit of that assessment will require the commitment of significant financial
and managerial resources. In addition, it has become more difficult and more
expensive for us to obtain director and officer liability insurance, and we have
purchased reduced coverage at substantially higher cost than in the past. We
expect these efforts to require the continued commitment of significant
resources. Further, our board members, Chief Executive Officer and Interim
Principal Financial Officer could face an increased risk of personal liability
in connection with the performance of their duties. As a result, we may have
difficulty attracting and retaining qualified board members and executive
officers, which could harm our business. If our efforts to comply with new or
changed laws, regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to practice, our
reputation may be harmed.
WE FACE INTENSE COMPETITION.
The markets which we intend to enter are characterized by intense competition.
We or our licensees may be competing against established pharmaceutical
companies which currently market products which are equivalent or functionally
similar to those we intend to market. Prices of drug products are significantly
affected by competitive factors and tend to decline as competition increases. In
addition, numerous companies are developing or may, in the future, engage in the
development of products competitive with our proposed products. We expect that
technological developments will occur at a rapid rate and that competition is
likely to intensify as enhanced dosage from technologies gain greater
acceptance. Additionally, the markets for formulated products which we have
targeted for development are intensely competitive, involving numerous
competitors and products. Most of our prospective competitors possess
substantially greater financial, technical and other resources than we do.
Moreover, many of these companies possess greater marketing capabilities than we
do, including the resources necessary to enable them to implement extensive
advertising campaigns. We may not be able to compete successfully with such
competitors. See Item 1 "Description of Business - Competition."
34
Accordingly, our competitors may succeed in obtaining patent protection,
receiving FDA or comparable foreign approval or commercializing products before
us. If we commence commercial product sales, we will compete against companies
with greater marketing and manufacturing capabilities who may successfully
develop and commercialize products that are more effective or less expensive
than ours. These are areas in which, as yet, we have limited or no experience.
In addition, developments by our competitors may render our product candidates
obsolete or noncompetitive.
We are aware of several companies that are selling or developing lingual spray
products. First Horizon Pharmaceutical Corporation, headquartered in Alpharetta,
Georgia, currently markets Nitrolingual(R) Pumpspray, a nitroglycerin lingual
spray which is in an "air" propelled dispensing system (our nitroglycerin
lingual spray is in a "propellant" based dispensing system). Generex
Biotechnology Corporation, based in Toronto, Canada, is developing an insulin
formulation that is delivered directly into the mouth via their RapidMist(TM)
device. They also state that they have begun research on four specific target
molecules for their RapidMist delivery system: morphine, fentanyl, heparin and
flu vaccine. Sirus Pharmaceuticals Ltd., based in the United Kingdom, also
claims to be developing drugs to be delivered sublingually via an aerosol spray.
Sirus is working in the areas of pain and emesis. There are several other
companies that we are aware of that market lingual spray products containing
vitamins and homeopathic ingredients.
We also face, and will continue to face, competition from colleges,
universities, governmental agencies and other public and private research
organizations. These competitors are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of technology
that they have developed. Some of these technologies may compete directly with
the technologies that we are developing. These institutions will also compete
with us in recruiting highly qualified scientific personnel. We expect that
developments in the areas in which we are active may occur at a rapid rate and
that competition will intensify as advances in this field are made. As a result,
we need to continue to devote substantial resources and efforts to research and
development activities.
35
LIMITED PRODUCT LIABILITY INSURANCE COVERAGE MAY AFFECT OUR BUSINESS.
We may be exposed to potential product liability claims by end-users of our
products. We presently maintain minimal product liability insurance coverage.
Although we will seek to obtain additional product liability insurance per
contractual obligations, before the commercialization of any of our proposed
products, we cannot guarantee such insurance will be sufficient to cover all
possible liabilities to which we may be exposed. Any product liability claim,
even one that was not in excess of our insurance coverage or one that is
meritless and/or unsuccessful, could adversely affect our cash available for
other purposes, such as research and development. In addition, the existence of
a product liability claim could affect the market price of our common stock. In
addition, certain food and drug retailers require minimum product liability
insurance coverage as a condition precedent to purchasing or accepting products
for retail distribution. Product liability insurance coverage includes various
deductibles, limitations and exclusions from coverage, and in any event might
not fully cover any potential claims. Failure to satisfy such insurance
requirements could impede the ability of us or our distributors to achieve broad
retail distribution of our proposed products, which could have a material
adverse effect on us.
EXTENSIVE GOVERNMENT REGULATION MAY AFFECT OUR BUSINESS.
The development, manufacture and commercialization of pharmaceutical products is
generally subject to extensive regulation by various federal and state
governmental entities. The FDA, which is the principal United States regulatory
authority over pharmaceutical products, has the power to seize adulterated or
misbranded products and unapproved new drugs, to request their recall from the
market, to enjoin further manufacture or sale, to publicize certain facts
concerning a product and to initiate criminal proceedings. As a result of
federal statutes and FDA regulations pursuant to which new pharmaceuticals are
required to undergo extensive and rigorous testing, obtaining pre-market
regulatory approval requires extensive time and expenditures. Under the FFDC
Act, a new drug may not be commercialized or otherwise distributed in the United
States without the prior approval of the FDA or pursuant to an applicable
exemption from the FFDC. The FDA approval processes relating to new drugs
differ, depending on the nature of the particular drug for which approval is
sought. With respect to any drug product with active ingredients not previously
approved by the FDA, a prospective drug manufacturer is required to submit a new
drug application an NDA, which includes complete reports of pre-clinical,
clinical and laboratory studies to prove such product's safety and efficacy. The
NDA process generally requires, before the submission of the NDA, submission of
an investigative new drug application, an IND, pursuant to which permission is
sought to begin preliminary clinical testing of the new drug. An NDA, based on
published safety and efficacy studies conducted by others, may also be required
to be submitted for a drug product with a previously approved active ingredient
if the method of delivery, strength or dosage form is changed. Alternatively, a
drug having the same active ingredients as a drug previously approved by the FDA
may be eligible to be submitted under an ANDA, which is significantly less
stringent than the NDA approval process. While the ANDA process requires a
manufacturer to establish bioequivalence to the previously approved drug, it
permits the manufacturer to rely on the safety and efficacy studies contained in
the NDA for the previously approved drug. We believe that the products we
develop in spray dosage form will require the submission of an NDA. We estimate
that the development of new formulations of pharmaceutical products, including
formulation, testing and obtaining FDA approval, generally takes four to seven
years for the NDA process. Our determinations may prove to be inaccurate or
pre-marketing approval relating to our proposed products may not be obtained on
a timely basis, if at all. The failure by us to obtain necessary regulatory
approvals, whether on a timely basis or at all, would have a material adverse
effect on our business.
36
THE CLINICAL TRIAL AND REGULATORY APPROVAL PROCESS FOR OUR PRODUCTS IS EXPENSIVE
AND TIME CONSUMING, AND THE OUTCOME IS UNCERTAIN.
In order to sell our proposed products, we must receive separate regulatory
approvals for each product. The FDA and comparable agencies in foreign countries
extensively and rigorously regulate the testing, manufacture, distribution,
advertising, pricing and marketing of drug products like our products. This
approval process includes preclinical studies and clinical trials of each
pharmaceutical compound to establish its safety and effectiveness and
confirmation by the FDA and comparable agencies in foreign countries that the
manufacturer maintains good laboratory and manufacturing practices during
testing and manufacturing. Clinical trials generally take two to five years or
more to complete. Even if favorable testing data is generated by clinical trials
of drug products, the FDA may not accept an NDA submitted by a pharmaceutical or
biotechnology company for such drug product for filing, or if accepted for
filing, may not approve such NDA. Accordingly, although the FDA has accepted our
NDA for nitroglycerin lingual spray for filing, the FDA may not complete its
review in a timely manner or may reject the NDA.
The approval process is lengthy, expensive and uncertain. It is also possible
that the FDA or comparable foreign regulatory authorities could interrupt, delay
or halt any one or more of our clinical trials. If we, or any regulatory
authorities, believe that trial participants face unacceptable health risks, any
one or more of our trials could be suspended or terminated. We also may not
reach agreement with the FDA and/or comparable foreign agencies on the design of
any one or more of the clinical studies necessary for approval. Conditions
imposed by the FDA and comparable agencies in foreign countries on our clinical
trials could significantly increase the time required for completion of such
clinical trials and the costs of conducting the clinical trials. Data obtained
from clinical trials are susceptible to varying interpretations which may delay,
limit or prevent regulatory approval.
Delays and terminations of the clinical trials we conduct could result from
insufficient patient enrollment. Patient enrollment is a function of several
factors, including the size of the patient population, stringent enrollment
criteria, the proximity of the patients to the trial sites, having to compete
with other clinical trials for eligible patients, geographical and geopolitical
considerations and others. Delays in patient enrollment can result in greater
costs and longer trial timeframes. Patients may also suffer adverse medical
events or side effects.
The FDA and comparable foreign agencies may withdraw any approvals we obtain.
Further, if there is a later discovery of unknown problems or if we fail to
comply with other applicable regulatory requirements at any stage in the
regulatory process, the FDA may restrict or delay our marketing of a product or
force us to make product recalls. In addition, the FDA could impose other
sanctions such as fines, injunctions, civil penalties or criminal prosecutions.
To market our products outside the United States, we also need to comply with
foreign regulatory requirements governing human clinical trials and marketing
approval for pharmaceutical products. The FDA and foreign regulators have not
yet approved any of our products under development for marketing in the United
States or elsewhere. If the FDA and other regulators do not approve any one or
more of our products under development, we will not be able to market such
products.
37
WE EXPECT TO FACE UNCERTAINTY OVER REIMBURSEMENT AND HEALTHCARE REFORM.
In both the United States and other countries, sales of our products will depend
in part upon the availability of reimbursement from third party payors, which
include government health administration authorities, managed care providers and
private health insurers. Third party payors are increasingly challenging the
price and examining the cost effectiveness of medical products and services.
OUR STRATEGY, IN MANY CASES, IS TO ENTER INTO COLLABORATION AGREEMENTS WITH
THIRD PARTIES AND WE MAY REQUIRE ADDITIONAL COLLABORATION AGREEMENTS. IF WE FAIL
TO ENTER INTO THESE AGREEMENTS OR IF WE OR THE THIRD PARTIES DO NOT PERFORM
UNDER SUCH AGREEMENTS, IT COULD IMPAIR OUR ABILITY TO COMMERCIALIZE OUR PROPOSED
PRODUCTS.
Our strategy for the completion of the required development and clinical testing
of our proposed products and for the manufacturing, marketing and
commercialization of such products, in many cases, depends upon entering into
collaboration arrangements with pharmaceutical companies to market,
commercialize and distribute the products. We have entered into a license
agreement with Manhattan Pharmaceuticals for the worldwide, exclusive rights to
our lingual spray technology to deliver propofol for pre-procedural sedation; an
exclusive worldwide license for our proprietary lingual spray technology with
Velcera Pharmaceuticals for the development of innovative veterinary medicines
pursuant to which we are entitled to milestone payments for each product
developed by Velcera and royalties on product sales and Velcera will fund all
development and regulatory expenses; a license and supply agreement with Par
Pharmaceutical pursuant to which Par Pharmaceutical has the exclusive rights to
market, sell and distribute our nitroglycerin lingual spray in the United States
and Canada; and a licensed agreement with Hana Biosciences for the marketing
rights in the United States and Canada for our ondansetron lingual spray. Our
success depends upon obtaining additional collaboration partners and maintaining
our relationships with our current partners. In addition, we may depend on our
partners' expertise and dedication of sufficient resources to develop and
commercialize our proposed products. We may, in the future, grant to
collaboration partners, rights to license and commercialize pharmaceutical
products developed under collaboration agreements. Under these arrangements, our
collaboration partners may control key decisions relating to the development of
the products. The rights of our collaboration partners would limit our
flexibility in considering alternatives for the commercialization of the
products. If we fail to successfully develop these relationships or if our
collaboration partners fail to successfully develop or commercialize any of our
products, it may delay or prevent us from developing or commercializing our
proposed products in a competitive and timely manner and would have a material
adverse effect on our business.
38
IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY, OTHER COMPANIES COULD USE OUR
TECHNOLOGY IN COMPETITIVE PRODUCTS. IF WE INFRINGE THE INTELLECTUAL PROPERTY
RIGHTS OF OTHERS, OTHER COMPANIES COULD PREVENT US FROM DEVELOPING OR MARKETING
OUR PRODUCTS.
We seek patent protection for our technology so as to prevent others from
commercializing equivalent products in substantially less time and at
substantially lower expense. The pharmaceutical industry places considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Our success will depend in part on our ability and that
of parties from whom we license technology to:
--defend our patents and otherwise prevent others from infringing on our
proprietary rights;
--protect trade secrets; and
--operate without infringing upon the proprietary rights of others, both in the
United States and in other countries.
The patent position of firms relying upon biotechnology is highly uncertain and
involves complex legal and factual questions for which important legal
principles are unresolved. To date, the United States Patent and Trademark
Office has not adopted a consistent policy regarding the breadth of claims that
the United States Patent and Trademark Office allows in biotechnology patents or
the degree of protection that these types of patents afford. As a result, there
are risks that we may not develop or obtain rights to products or processes that
are or may seem to be patentable.
EVEN IF WE OBTAIN PATENTS TO PROTECT OUR PRODUCTS, THOSE PATENTS MAY NOT BE
SUFFICIENTLY BROAD AND OTHERS COULD COMPETE WITH US.
We, and the parties licensing technologies to us, have filed various United
States and foreign patent applications with respect to the products and
technologies under our development, and the United States Patent and Trademark
Office and foreign patent offices have issued patents with respect to our
products and technologies. These patent applications include international
applications filed under the Patent Cooperation Treaty. Our pending patent
applications, those we may file in the future or those we may license from third
parties may not result in the United States Patent and Trademark Office or
foreign patent office issuing patents. Also, if patent rights covering our
products are not sufficiently broad, they may not provide us with sufficient
proprietary protection or competitive advantages against competitors with
similar products and technologies. Furthermore, if the United States Patent and
Trademark Office or foreign patent offices issue patents to us or our licensors,
others may challenge the patents or circumvent the patents, or the patent office
or the courts may invalidate the patents. Thus, any patents we own or license
from or to third parties may not provide any protection against competitors.
Furthermore, the life of our patents is limited. Such patents, which include
relevant foreign patents, expire on various dates. We have filed, and when
possible and appropriate, will file, other patent applications with respect to
our products and processes in the United States and in foreign countries. We may
not be able to develop additional products or processes that will be patentable
or additional patents may not be issued to us. See also "Risk Factors - If we
cannot meet requirements under our license agreements, we could lose the rights
to our products."
39
INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES COULD LIMIT OUR ABILITY TO MARKET
OUR PRODUCTS.
Our commercial success also significantly depends on our ability to operate
without infringing the patents or violating the proprietary rights of others.
The United States Patent and Trademark Office keeps United States patent
applications confidential while the applications are pending. As a result, we
cannot determine which inventions third parties claim in pending patent
applications that they have filed. We may need to engage in litigation to defend
or enforce our patent and license rights or to determine the scope and validity
of the proprietary rights of others. It will be expensive and time consuming to
defend and enforce patent claims. Thus, even in those instances in which the
outcome is favorable to us, the proceedings can result in the diversion of
substantial resources from our other activities. An adverse determination may
subject us to significant liabilities or require us to seek licenses that third
parties may not grant to us or may only grant at rates that diminish or deplete
the profitability of the products to us. An adverse determination could also
require us to alter our products or processes or cease altogether any related
research and development activities or product sales.
IF WE CANNOT MEET REQUIREMENTS UNDER OUR LICENSE AGREEMENTS, WE COULD LOSE THE
RIGHTS TO OUR PRODUCTS.
We depend, in part, on licensing arrangements with third parties to maintain the
intellectual property rights to our products under development. These agreements
may require us to make payments and/or satisfy performance obligations in order
to maintain our rights under these licensing arrangements. All of these
agreements last either throughout the life of the patents, or with respect to
other licensed technology, for a number of years after the first commercial sale
of the relevant product.
In addition, we are responsible for the cost of filing and prosecuting certain
patent applications and maintaining certain issued patents licensed to us. If we
do not meet our obligations under our license agreements in a timely manner, we
could lose the rights to our proprietary technology.
In addition, we may be required to obtain licenses to patents or other
proprietary rights of third parties in connection with the development and use
of our products and technologies. Licenses required under any such patents or
proprietary rights might not be made available on terms acceptable to us, if at
all.
40
WE RELY ON CONFIDENTIALITY AGREEMENTS THAT COULD BE BREACHED AND MAY BE
DIFFICULT TO ENFORCE.
Although we believe that we take reasonable steps to protect our intellectual
property, including the use of agreements relating to the non-disclosure of
confidential information to third parties, as well as agreements that purport to
require the disclosure and assignment to us of the rights to the ideas,
developments, discoveries and inventions of our employees and consultants while
we employ them, the agreements can be difficult and costly to enforce. Although
we seek to obtain these types of agreements from our consultants, advisors and
research collaborators, to the extent that they apply or independently develop
intellectual property in connection with any of our projects, disputes may arise
as to the proprietary rights to this type of information. If a dispute arises, a
court may determine that the right belongs to a third party, and enforcement of
our rights can be costly and unpredictable. In addition, we will rely on trade
secrets and proprietary know-how that we will seek to protect in part by
confidentiality agreements with our employees, consultants, advisors or others.
Despite the protective measures we employ, we still face the risk that:
--they will breach these agreements;
--any agreements we obtain will not provide adequate remedies for this type of
breach or that our trade secrets or proprietary know-how will otherwise become
known or competitors will independently develop similar technology; and
--our competitors will independently discover our proprietary information and
trade secrets.
WE ARE DEPENDENT ON EXISTING MANAGEMENT.
Our success is substantially dependent on the efforts and abilities of the
principal members of our management team, especially our President and Chief
Executive Officer, Gary A. Shangold, M.D., our directors and our scientific
advisory board members. Decisions concerning our business and our management are
and will continue to be made or significantly influenced by these individuals.
The loss or interruption of their continued services would have a materially
adverse effect on our business operations and prospects. Although our employment
agreements with members of management generally provide for severance payments
that are contingent upon the applicable officer's refraining from competition
with us, the loss of any of these persons' services would adversely affect our
ability to develop and market our products and obtain necessary regulatory
approvals, and the applicable noncompetition provisions can be difficult and
costly to monitor and enforce. Further, we do not maintain key-man life
insurance.
Our future success also will depend in part on the continued service of our key
scientific and management personnel and our ability to identify, hire and retain
additional personnel, including scientific, development and manufacturing staff.
We experience intense competition for qualified personnel, and the existence of
non-competition agreements between prospective employees and their former
employers may prevent us from hiring those individuals or subject us to suit
from their former employers.
While we attempt to provide competitive compensation packages to attract and
retain key personnel, some of our competitors are likely to have greater
resources and more experience than we have, making it difficult for us to
compete successfully for key personnel.
41
WE ARE CONTROLLED BY CURRENT STOCKHOLDERS, OFFICERS AND DIRECTORS.
Our directors, executive officers and principal stockholders and certain of our
affiliates have the ability to influence the election of our directors and most
other stockholder actions. Management and our affiliates currently beneficially
own (including shares they have the right to acquire) greater than 50% of our
common stock. Specifically, Dr. Rosenwald has the ability to exert significant
influence over the election of the Board and other matters submitted to our
stockholders for approval. Such positions may discourage or prevent any proposed
takeover of NovaDel, including transactions in which our stockholders might
otherwise receive a premium for their shares over the then current market
prices. Our directors, executive officers and principal stockholders may
influence corporate actions, including influencing elections of directors and
significant corporate events.
THE MARKET PRICE OF OUR STOCK AND OUR EARNINGS MAY BE ADVERSELY AFFECTED BY
MARKET VOLATILITY.
The market price of our common stock, like that of many other development stage
pharmaceutical or biotechnology companies, has been and is likely to continue to
be volatile. In addition to general economic, political and market conditions,
the price and trading volume of our stock could fluctuate widely in response to
many factors, including:
--announcements of the results of clinical trials by us or our competitors;
--adverse reactions to products;
--governmental approvals, delays in expected governmental approvals or
withdrawals of any prior governmental approvals or public or regulatory
agency concerns regarding the safety or effectiveness of our products;
--changes in the United States or foreign regulatory policy during the period of
product development;
--developments in patent or other proprietary rights, including any third party
challenges of our intellectual property rights;
--announcements of technological innovations by us or our competitors;
--announcements of new products or new contracts by us or our competitors;
--actual or anticipated variations in our operating results due to the level of
development expenses and other factors;
--changes in financial estimates by securities analysts and whether our earnings
meet or exceed the estimates;
--conditions and trends in the pharmaceutical and other industries;
--new accounting standards; and
--the occurrence of any of the risks described in these Risk Factors.
Our common stock has been listed for quotation on the AMEX since May 11, 2004.
Prior to May 11, 2004, our common stock was traded on the OTC Bulletin Board(R)
of the National Association of Securities Dealers, Inc. During the 12-month
period ended July 31, 2004, the price of our common stock has ranged from $1.35
to $2.45. We expect the price of our common stock to remain volatile. The
average daily trading volume in our common stock varies significantly. For the
12-month period ended July 31, 2004, the average daily trading volume in our
common stock was approximately 96,390 shares. Our relatively low average volume
and low average number of transactions per day may affect the ability of our
stockholders to sell their shares in the public market at prevailing prices and
a more active market may never develop.
42
In addition, our earnings and losses may be volatile because of our need to
account for compensation expense on a variable accounting basis on certain of
our outstanding stock options through the first fiscal quarter of 2005. The
impact on our earnings and losses because of such expense will vary in relation
to the volatility of our stock price during such quarter. (See Note 3 of the
Notes to Financial Statements.)
In addition, we may not be able to continue to adhere to the strict listing
criteria of the AMEX. If our common stock were no longer listed on the AMEX,
investors might only be able to trade on the OTC Bulletin Board(R) or in the
Pink Sheets(R) (a quotation medium operated by the National Quotation Bureau,
LLC). This would impair the liquidity of our securities not only in the number
of shares that could be bought and sold at a given price, which might be
depressed by the relative illiquidity, but also through delays in the timing of
transactions and reduction in media coverage.
In the past, following periods of volatility in the market price of the
securities of companies in our industry, securities class action litigation has
often been instituted against companies in our industry. If we face securities
litigation in the future, even if meritless or unsuccessful, it would result in
substantial costs and a diversion of management attention and resources, which
would negatively impact our business.
PENNY STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF OUR
SECURITIES.
The Commission has adopted regulations which generally define a "penny stock" to
be any equity security that has a market price of less than $5.00 per share or
an exercise price of less than $5.00 per share, subject to certain exceptions.
As a result, the common stock is subject to rules that impose additional sales
practice requirements on broker dealers who sell such securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with their spouse). For transactions covered by such rules, the broker
dealer must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a risk disclosure document mandated by the Commission relating to the penny
stock market. The broker dealer must also disclose the commission payable to
both the broker dealer and the registered representative, current quotations for
the securities and, if the broker dealer is the sole market maker, the broker
dealer must disclose this fact and the broker dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. In addition, the Commission currently intends to
create additional obligations with respect to the transfer of penny stocks. Most
importantly, the Commission proposes that broker-dealers must wait two business
days after providing buyers with disclosure materials regarding a security
before effecting a transaction in such security. Consequently, the "penny stock"
rules may restrict the ability of broker dealers to sell our securities and may
affect the ability of investors to sell our securities in the secondary market
and the price at which such purchasers can sell any such securities, thereby
affecting the liquidity of the market for our common stock.
43
Stockholders should be aware that, according to the Commission, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include:
--control of the market for the security by one or more broker-dealers that are
often related to the promoter or issuer;
--manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases;
--"boiler room" practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales persons;
--excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
--the wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with the
inevitable collapse of those prices with consequent investor losses.
Our management is aware of the abuses that have occurred historically in the
penny stock market.
ADDITIONAL AUTHORIZED SHARES OF OUR COMMON STOCK AND PREFERRED STOCK AVAILABLE
FOR ISSUANCE MAY ADVERSELY AFFECT THE MARKET.
We are authorized to issue a total of 100,000,000 shares of our common stock. As
of July 31, 2004, there were 33,091,467 shares of common stock issued and
outstanding. However, the total number of shares of our common stock issued and
outstanding does not include shares reserved in anticipation of the exercise of
options or warrants. As of July 31, 2004, we had outstanding stock options and
warrants to purchase approximately 21,399,541 shares of our common stock, the
exercise price of which range between $.63 per share to $3.18 per share, and we
have reserved shares of our common stock for issuance in connection with the
potential exercise thereof. Of the reserved shares, a total of 2,302,500 shares
are currently reserved for issuance in connection with our 1992, 1997 and 1998
Stock Option Plans, respectively, of which options to purchase an aggregate of
500,000, 500,000 and 1,570,500, shares have been issued under the respective
stock option plans. Another 4,618,000 shares are reserved for issuance and
available for the non-plan options granted pursuant to the terms of the
employment agreements of various of our current and former officers. To the
extent such options or warrants are exercised, the holders of our common stock
will experience further dilution. In addition, in the event that any future
financing should be in the form of, be convertible into or exchangeable for,
equity securities, and upon the exercise of options and warrants, investors may
experience additional dilution. See "Risk Factors - Our Additional Financing
Requirements Could Result in Dilution to Existing Stockholders."
The exercise of the outstanding derivative securities will reduce the percentage
of common stock held by our stockholders in relation to our aggregate
outstanding capital stock. Further, the terms on which we could obtain
additional capital during the life of the derivative securities may be adversely
affected, and it should be expected that the holders of the derivative
securities would exercise them at a time when we would be able to obtain equity
capital on terms more favorable than those provided for by such derivative
securities. As a result, any issuance of additional shares of common stock may
cause our current stockholders to suffer significant dilution which may
adversely affect the market.
44
In addition to the above referenced shares of common stock which may be issued
without stockholder approval, we have 1,000,000 shares of authorized preferred
stock, the terms of which may be fixed by our Board of Directors. We presently
have no issued and outstanding shares of preferred stock and while we have no
present plans to issue any shares of preferred stock, our Board of Directors has
the authority, without stockholder approval, to create and issue one or more
series of such preferred stock and to determine the voting, dividend and other
rights of holders of such preferred stock. The issuance of any of such series of
preferred stock may have an adverse effect on the holders of common stock.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.
From time to time, certain of our stockholders may be eligible to sell all or
some of their shares of common stock by means of ordinary brokerage transactions
in the open market pursuant to Rule 144, promulgated under the Securities Act,
subject to certain limitations. In general, pursuant to Rule 144, a stockholder
(or stockholders whose shares are aggregated) who has satisfied a one year
holding period may, under certain circumstances, sell within any three month
period a number of securities which does not exceed the greater of 1% of the
then outstanding shares of common stock or the average weekly trading volume of
the class during the four calendar weeks prior to such sale. Rule 144 also
permits, under certain circumstances, the sale of securities, without any
limitation, by our stockholders that are non-affiliates that have satisfied a
two year holding period. Any substantial sale of our common stock pursuant to
Rule 144 or pursuant to any resale prospectus may have material adverse effect
on the market price of our securities.
LIMITATION ON DIRECTOR/OFFICER LIABILITY.
As permitted by Delaware law, our certificate of incorporation limits the
liability of our directors for monetary damages for breach of a director's
fiduciary duty except for liability in certain instances. As a result of our
charter provision and Delaware law, stockholders may have limited rights to
recover against directors for breach of fiduciary duty. In addition, our
certificate of incorporation provides that we shall indemnify our directors and
officers to the fullest extent permitted by law.
WE HAVE NO HISTORY OF PAYING DIVIDENDS ON OUR COMMON STOCK.
We have never paid any cash dividends on our common stock and do not anticipate
paying any cash dividends on our common stock in the foreseeable future. We plan
to retain any future earnings to finance growth. If we decide to pay dividends
to the holders of our common stock, such dividends may not be paid on a timely
basis.
45
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW COULD DEFER A
CHANGE OF OUR MANAGEMENT WHICH COULD DISCOURAGE OR DELAY OFFERS TO ACQUIRE US.
Provisions of our Certificate of Incorporation and Delaware law may make it more
difficult for someone to acquire control of us or for our stockholders to remove
existing management, and might discourage a third party from offering to acquire
us, even if a change in control or in management would be beneficial to our
stockholders. For example, our Certificate of Incorporation allows us to issue
shares of preferred stock without any vote or further action by our
stockholders. Our Board has the authority to fix and determine the relative
rights and preferences of preferred stock. Our Board also has the authority to
issue preferred stock without further stockholder approval, including large
blocks of preferred stock. As a result, our Board could authorize the issuance
of a series of preferred stock that would grant to holders the preferred right
to our assets upon liquidation, the right to receive dividend payments before
dividends are distributed to the holders of common stock and the right to the
redemption of the shares, together with a premium, prior to the redemption of
our common stock.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this Item are included as a separate
section of this report commencing on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure 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.
Our Chief Executive Officer and our Interim Principal Financial Officer have
evaluated the effectiveness of the design and operation of our 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 annual report on Form
10-KSB. Based on this evaluation, our Chief Executive Officer and our Interim
Principal Financial Officer concluded that as of the end of the period covered
by this report, except as set forth below, our disclosure controls and
procedures were effective in their design to ensure that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
46
In connection with its audit of our financial statements for the fiscal year
ended July 31, 2004, J.H. Cohn LLP, our independent registered public accounting
firm, 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 our 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
commencing at Page F-1 of this report.
J.H. Cohn LLP 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 generally accepted accounting principles and
SEC rules, a lack of an appropriate system of policies and procedures for the
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 LLP 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 our
internal controls, commencing in the first quarter of our 2005 fiscal year, we
are beginning to undertake a review of our disclosure, financial information and
internal controls and procedures. This review will include efforts by our
management and directors, as well as the use of additional outside resources. We
are committed to addressing our control environment and reporting procedures.
Our management, including our Chief Executive Officer and 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 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 limitation of a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
47
(b) Changes in internal controls
Subsequent to the date of the evaluation referenced above, the Company
recognized certain material weaknesses in its internal controls and procedures:
o Failure to record and retain comprehensive option grants that have
been issued by the Company.
o Inability to prepare financial statements and footnotes in
accordance with generally accepted accounting principles and SEC
rules.
o Lack of an appropriate system of policies and procedures for the
internal review of financial reports, including inadequate staffing,
training and expertise.
o 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".
We have rescinded our cashless exercise provision for all outstanding option
grants pursuant to a resolution adopted by the Board of Directors of the Company
on October 20, 2004. Thus, we expect that variable accounting will no longer be
required after the end of the Company's fiscal quarter ended October 31, 2004.
Nonetheless, 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.
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 our company have been 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.
ITEM 8B. OTHER INFORMATION.
Not applicable.
48
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The names and ages of our Directors and Executive Officers are set out below.
All Directors are elected annually, to serve until the next annual meeting of
stockholders and until their successors are duly elected and qualified. Officers
are elected annually by the Board of Directors and serve at the Board of
Directors' pleasure.
----------------------------------- ------------- -------------------------------------------
NAME AGE POSITION WITH THE COMPANY
----------------------------------- ------------- -------------------------------------------
Gary A. Shangold, M.D. 51 President, Chief Executive Officer and
Director
----------------------------------- ------------- -------------------------------------------
Harry A. Dugger, III, Ph.D. 68 Chief Scientific Officer
----------------------------------- ------------- -------------------------------------------
Robert F. Schaul, Esq. 65 Secretary and Director
----------------------------------- ------------- -------------------------------------------
Donald J. Deitman 62 Chief Financial Officer
----------------------------------- ------------- -------------------------------------------
Mohammed Abd El Shafy 49 Vice President,
Pharmaceutical Development
----------------------------------- ------------- -------------------------------------------
William F. Hamilton, Ph.D. 65 Director
----------------------------------- ------------- -------------------------------------------
Lawrence J. Kessel, M.D., FACP 51 Director
----------------------------------- ------------- -------------------------------------------
Mark H. Rachesky, M.D. 45 Director
----------------------------------- ------------- -------------------------------------------
Charles Nemeroff, M.D., Ph.D. 55 Director
----------------------------------- ------------- -------------------------------------------
Robert G. Savage 51 Director
----------------------------------- ------------- -------------------------------------------
Barry Cohen 41 Vice President - New Business and Product
Development
----------------------------------- ------------- -------------------------------------------
Jean W. Frydman 51 Vice President-General Counsel
----------------------------------- ------------- -------------------------------------------
GARY SHANGOLD, M.D., President, Chief Executive Officer and Director. Dr.
Shangold joined NovaDel in December 2002 and was elected as a Director in March
2003. Previously he had been Vice President and Regulatory Head of Drug
Development at Johnson & Johnson Pharmaceutical Research and Development, LLC.
Before joining the Johnson & Johnson family of companies in 1992, he had been
Medical Director of Obstetrics, Gynecology & Infertility at Serono Laboratories,
Inc. and had been a member of the faculty of Obstetrics and Gynecology at the
University of Chicago's Pritzker School of Medicine from 1983 to 1991. Dr.
Shangold also was an Associate Clinical Professor at the Harvard University
School of Medicine and a Clinical Associate at Massachusetts General Hospital.
Dr. Shangold is a graduate of the University of Pennsylvania and received his
M.D. from Columbia University's College of Physicians and Surgeons.
HARRY A. DUGGER, III, PH.D., Chief Scientific Officer. Dr. Dugger is the founder
of NovaDel and served as its President and a Director from its inception in May
1982 until December 2002. Prior to founding NovaDel, from June 1980 to November
1982, Dr. Dugger was employed as Vice President of Research and Development by
Bauers-Kray Associates, a company engaged in the development of pharmaceutical
products. From 1964 to 1980, Dr. Dugger was Associate Section Head for Research
and Development at Sandoz Pharmaceuticals Corporation. Dr. Dugger received an
M.S. in Chemistry from the University of Michigan in 1960 and received a Ph.D.
in Chemistry from the University of Michigan in 1962.
49
DONALD DEITMAN, Former Chief Financial Officer. Mr. Deitman joined NovaDel in
1998. From 1988 until joining NovaDel, Mr. Deitman was employed as a business
consultant implementing multi-module MRP II software systems. From 1982 to 1988,
Mr. Deitman was corporate controller for FCS Industries, Inc., of Flemington,
New Jersey. Mr. Deitman received a B.S. in Accounting from Rutgers University in
1972. Mr. Deitman retired from the Company in September 2004.
ROBERT F. SCHAUL, ESQ., Former Secretary and Director. Mr. Schaul had been a
Director of NovaDel since November 1991 and Vice President, Secretary and
General Counsel of NovaDel from November 1991 to February 1995. He advised
NovaDel since its formation. Mr. Schaul is also a part-time Municipal Court
Judge for a number of New Jersey municipalities. From 1995 to 1998, Mr. Schaul
was Vice President and General Counsel of Landmark Financial Corp. Mr. Schaul
received a B.A. from New York University in 1961 and a J.D. from Harvard
University in 1964. Mr. Schaul left the Company in July 2004.
WILLIAM F. HAMILTON, PH.D., Director. Dr. Hamilton was elected to our Board in
March 2003. Dr. Hamilton has served on the University of Pennsylvania faculty
since 1967, and is the Landau Professor of Management and Technology, and
Director of the Jerome Fisher Program in Management and Technology at The
Wharton School and the School of Engineering and Applied Science. He serves as a
director of Neose Technologies, Inc., a company developing a drug manufacturing
process and proprietary drugs. Dr. Hamilton received his B.S. and M.S. in
chemical engineering and his M.B.A. from the University of Pennsylvania, and his
Ph.D. in applied economics from the London School of Economics. Dr. Hamilton is
a member of the Board's Audit Committee of which he is our Chairman, as well as
our Corporate Governance and Nominating Committee and Compensation Committee.
LAWRENCE JAY KESSEL, M.D., FACP, Director. Dr. Kessel was elected to our Board
in March 2003. Dr. Kessel, a physician, is President of Lawrence J. Kessel,
M.D., & Associates, PC, a five physician practice specializing in Internal
Medicine and Geriatrics since 1984. He received a B.S. degree from the
University of Pittsburgh with honors in Biology and subsequently graduated with
an M.D. degree from Temple Medical School. He completed a formal residency in
Internal Medicine at Abington Memorial Hospital, and is Board Certified in
Internal Medicine with added qualification as a diplomat in Geriatric Medicine.
He is an active staff attending and Clinical Instructor at Chestnut Hill
Hospital (University of Pennsylvania affiliate) and Roxborough Memorial Hospital
in Philadelphia, Pennsylvania. Dr. Kessel is a Board Reviewer for the American
Board of Internal Medicine, as well as a Fellow of the American College of
Physicians. He also serves on the advisory board of Independence Blue Cross and
is a Clinical Assistant Professor in the Department of Medicine at Temple
University Medical School. Dr. Kessel presently serves as a director of Keryx
Biopharmaceuticals, Inc. and BioPharma, Inc. He previously served on the Board
of Directors of Genta Incorporated. He is a member of our Compensation Committee
and Corporate Governance and Nominating Committee.
50
MOHAMMED ABD EL SHAFY, PH.D., Vice President-Pharmaceutical Development. Dr.
El-Shafy joined NovaDel in May 2002. From 1999 to 2002 he was employed as a Team
Leader and Senior Scientist with Nastech Pharmaceutical Inc., Hauppauge, New
York. From 1998 to 1999 Dr. El-Shafy was a Post-Doctoral Fellow at the
University of Wisconsin's School of Pharmacy. He received his doctorate in 1997
from the School of Pharmacy, University of Wales, Cardiff, Wales, UK. From 1983
to 1993 he was an Assistant Lecturer of Pharmaceutical Sciences on the Faculty
of Pharmacy, Al-Azhar University, Cairo, Egypt.
BARRY COHEN, Vice President of New Business and Product Development. Mr. Cohen
joined NovaDel in May 2003. Before joining NovaDel, he was Vice
President-Business Development at Keryx Biopharmaceuticals Inc., and before that
held several executive marketing and business development positions at Novartis
Consumer Health. Mr. Cohen holds a B.B.A. in Marketing from Hofstra University
and an M.B.A in Marketing from Pace University.
JEAN W. FRYDMAN, J.D., Vice President, Secretary and General Counsel. Ms.
Frydman joined NovaDel in May 2004, bringing more than 20 years experience in
the pharmaceutical, medical device and biotechnology industries. She has been
part of Counsel's Office for several major companies such as Abbott
Laboratories, Knoll Pharmaceuticals, Pharmacia Corp. and most recently with
Pfizer Inc. Ms. Frydman also practiced law with the firm of Fenwick & West, LLP
in its Washington D.C. office where she specialized in regulatory law for
biotechnology companies. She is currently Adjunct Professor at Seton Hall Law
School.
MARK H. RACHESKY, M.D., Director. Dr. Rachesky joined our Board in June 2003.
Dr. Rachesky is the founder and President of MHR Fund Management LLC and
affiliates, investment managers of various private investment funds that invest
in inefficient market sectors, including special situation equities and
distressed investments. Dr. Rachesky is currently on the board of directors of
Neose Technologies, Inc. a company developing a drug manufacturing process and
proprietary drugs. Dr. Rachesky is a graduate of Stanford University School of
Medicine, and Stanford University School of Business. Dr. Rachesky graduated
from the University of Pennsylvania with a B.S. in Molecular Aspects of Cancer.
CHARLES NEMEROFF, M.D., PH.D., Director. Dr. Nemeroff joined our Board in
September 2003. Dr. Nemeroff has been the Reunette W. Harris Professor and
Chairman of the Department of Psychiatry and Behavioral Sciences at the Emory
University School of Medicine in Atlanta, Georgia, since 1991. He has served on
the Mental Health Advisory Council of the National Institute of Mental Health
and the Biomedical Research Council for NASA. Dr. Nemeroff is a past President
of the American College of Psychiatrists and a past President of the American
College of Neuropsychopharmacology and is Editor-in-Chief of
Neuropsychopharmacology. He has served as Editor-in-Chief of the
Psychopharmacology Bulletin, Associate Editor of Biological Psychiatry and as
the Co-Editor-in-Chief of both Critical Reviews in Neurobiology and Depression
and Anxiety. Dr. Nemeroff serves on the Scientific Advisory Board of numerous
pharmaceutical companies, including Acadia Pharmaceuticals, Astra-Zeneca
Pharmaceuticals, Forest Laboratories, Janssen, Organon, Glaxo-SmithKline Beecham
and Wyeth-Ayerst. Dr. Nemeroff has received numerous awards for his research,
including the Bowis Award from the American College of Psychiatrists and the
Menninger Prize from the American College of Physicians. In 2002, he was elected
to the Institute of Medicine. He is a member of the Compensation Committee.
51
ROBERT G. SAVAGE, M.B.A., Director. From March 2002 to April 2003, Mr. Savage
was Group Vice President and President for the General Therapeutics and
Inflammation Business, of Pharmacia Corporation, a research-based pharmaceutical
firm acquired by Pfizer Inc. in April 2003. From September 1996 to January 2002,
Mr. Savage held several senior positions with Johnson & Johnson, including
Worldwide Chairman for the Pharmaceuticals Group during 2001, Company Group
Chairman responsible for the North America pharmaceuticals business from 2000 to
2001, President, Ortho-McNeil Pharmaceuticals, from 1998 to 2000 and Vice
President Sales & Marketing from 1996 to 1998. From 1985 to 1996, Mr. Savage
held several positions at Hoffmann-La Roche, Inc., a healthcare firm. Mr. Savage
also serves as a director for Noven Pharmaceuticals, a leader in the development
of advance drug delivery technologies, and Medicines Company, a specialty
pharmaceutical company. Mr. Savage received a B.S. in biology from Upsala
College and an M.B.A. from Rutgers University. He is a member of our Audit
Committee and Corporate Governance and Nominating Committee.
CODE OF ETHICS
Our Board of Directors adopted a Code of Ethics to be applicable to all
employees. The Code of Ethics is intended to be designed to deter wrong-doing
and promote honest and ethical behavior, full, fair, timely, accurate and
understandable disclosure, and compliance with applicable laws. The Board
adopted the Code of Ethics before the end of calendar year 2003 and a subsequent
revised Code of Ethics was adopted by the Board in August 2004. A copy of the
Code of Ethics can be obtained and will be provided to any person without charge
upon written request to our Secretary at our executive offices, 25 Minneakoning
Road, Flemington, New Jersey 08822.
The Code of Business Conduct can be obtained on NovaDel's
website,"http://www.NovaDel.com" (this is not a hyperlink; you must visit this
website through an Internet browser). Our Website and the information contained
therein or connected thereto are not incorporated into this Annual Report on
Form 10-KSB.
AUDIT COMMITTEE
The Audit Committee consists of Robert Savage and Dr. William Hamilton
(Chairman). The Audit Committee selects the independent registered public
accounting firm, review the results and scope of the audit and other services
provided by the Company's independent registered public accounting firm, and
reviews and evaluates the Company's internal control functions.
At this time, we do not have on our Audit Committee an "audit committee
financial expert" within the meaning of the Federal laws. We are presently
seeking to identify an individual willing to serve on our Board who would
qualify as an audit committee financial expert.
52
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires officers, directors and other persons
who own more than 10% of a class of equity securities registered pursuant to
Section 12 of the Exchange Act to file reports of ownership and changes in
ownership with both the SEC and the principal exchange upon which such
securities are traded or quoted. Officers, directors and persons holding greater
than 10% of our outstanding common stock ("Reporting Persons") are also required
to furnish us with copies of any such reports filed pursuant to Section 16(a) of
the Exchange Act. Based solely on a review of the copies of such forms furnished
to us, we believe that from August 1, 2003, to July 31, 2004, Gary A. Shangold,
Barry C. Cohen and Mohammed Abd El Shafy were not in compliance with their
respective Section 16(a) filing requirements. We have revised our administrative
procedures to enhance the ability of our Reporting Person comply with such
requirements. All others required to file reports have done so.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth a summary for the fiscal years ended July 31,
2004, 2003 and 2002, respectively, of the cash and non-cash compensation
awarded, paid or accrued by the Company to our Chief Executive Officer and our
four most highly compensated officers other than the CEO who served in such
capacities at the end of fiscal 2004 (collectively, the "Named Executive
Officers"). There were no restricted stock awards, long-term incentive plan
payouts or other compensation paid during fiscal 2002, 2003 and 2004 to the
Named Executive Officers, except as set forth below:
SUMMARY COMPENSATION TABLE
------------------------------------------- ------------------------------------ -------------------------------------- ------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------- ---------- ------------ --------------------------- ----------
AWARDS PAYOUTS
--------------------------- ----------
SECURITIES ALL
OTHER RESTRICTED UNDERLYING LTIP OTHER
ANNUAL STOCK OPTIONS/ PAYOUTS COMPEN-
NAME AND FISCAL SALARY BONUS COMPENSATION AWARD(S) SAR(1) SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
Gary A. Shangold, M.D.
President and CEO 2004 350,000 150,000 125,000
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
2003 350,000 249,780 0 0 1,000,000 0 0
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
Harry A. Dugger, III, Ph.D. 2004 274,000 -- -- -- 50,000
Chief Scientific Officer,
formerly President and CEO
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
2003 246,900 0 0 0 275,000 0 12,000
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
2002 347,000 0 0 0 0 0 10,000
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
Donald Deitman 2004 138,000
Chief Financial Officer
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
2003 124,200 0 0 0 0 0 7,200
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
2002 104,400 0 0 0 0 0 4,200
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
Mohammed Abd El Shafy, Ph.D.,
Vice President - Formulation 2004 200,000 20,000 0 0 50,000 0 0
Development
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
2003 144,000 0 0 0 100,000 0 5,400
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
Jean W. Frydman 2004 42,308 * 0 0 0 100,000 0 0
Vice President, Secretary &
General Counsel
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
* Partial year
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
Barry C. Cohen 2004 193,754 0 0 0 75,000 0 12,000
Vice President - New Business &
Product Development
------------------------------------------- ------------ ---------- ------------ ------------- ------------- ---------- ------------
(1) No Stock Appreciation Rights have been issued.
53
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
The following table sets forth information with respect to the Named Executive
Officers concerning grants of options during fiscal 2004:
----------------------------------------------------------------------------------------------------------------------------------
OPTION/SAR GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------------------------------------------------------------------------
Individual Grants
----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Name Number of Securities % of Total Options/SARs Exercise or Base Expiration
Underlying Options/SARs Granted to Employees in Price ($/Sh) Date
Granted (#) Fiscal Year
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Gary A. Shangold, M.D. 125,000 9.5% $1.82 22 Feb. 2009
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Harry A. Dugger III, Ph.D. 50,000 3.8% $1.82 22 Feb. 2009
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Donald J. Deitman 0 N/A N/A N/A
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Mohammed Abd El Shafy, Ph.D. 50,000 3.8% $1.65 22 Feb. 2009
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Barry C. Cohen 75,000 5.7% $1.65 22 Feb. 2009
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
Jean W. Frydman 100,000 7.6% $1.98 16 May 2009
---------------------------------- -------------------------- -------------------------- ---------------------- ------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the Named Executive
Officers concerning the exercises of options during fiscal 2004 and the number
and value of unexercised options held as of the end of fiscal 2004.
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY OPTIONS AT
SHARES VALUE NUMBER OF SECURITIES UNDERLYING FISCAL YEAR END ($);
NAME OF EXECUTIVE ACQUIRED ON REALIZED UNEXERCISED OPTIONS AT FISCAL YEAR (EXERCISABLE/
OFFICER EXERCISE ($) END; (EXERCISABLE/UNEXERCISABLE) UNEXERCISABLE)
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
Harry A. Dugger, III, Ph.D. 0 - 970,000/0 379,200/0
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
Gary A. Shangold, M.D. 0 - 458,333/667,000 0/0
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
Donald Deitman 0 - - -
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
Mohammed Abd El Shafy, Ph.D. 0 - 200,000/50,000 13,000/0
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
Barry Cohen 0 - 20,000/130,000 4,500/0
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
Jean Frydman 0 0/100,000 0/0
------------------------------------ -------------- ------------ ------------------------------------- ----------------------------
54
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
GARY A. SHANGOLD, M.D. In December 2002, we entered into a three-year employment
agreement with Dr. Shangold pursuant to which he agreed to serve as our
President and Chief Executive Officer. We agreed to pay Dr. Shangold an annual
base salary of $350,000 and a guaranteed bonus of $150,000. In addition, Dr.
Shangold is eligible to receive: (i) an annual discretionary bonus of up to
$262,500, which shall be determined at the sole discretion of the Board; and
(ii) an investment and fee bonus equal to 5% of all amounts up to an aggregate
of $7,500,000 (I.E., $375,000 in bonus) invested in, or earned by, NovaDel
during the term of his agreement. We paid Dr. Shangold a contractual bonus of
$200,000 during the fourth quarter of fiscal year 2003 and $49,780 in calendar
year 2004. Pursuant to the agreement, Dr. Shangold was also granted Non-plan
options to purchase 1,000,000 shares of our common stock (at an exercise price
of $1.93 per share) which vest over a three-year period.
HARRY A. DUGGER, III, PH.D. In February 2002, effective January 1, 2002, we
entered into a new three-year employment agreement with Dr. Dugger at a base
salary, for the first year, of $248,500 per year (which increases each year by
the greater of the CPI index or 5%). His agreement will expire January 2005, at
which time it is expected that he will retire and no longer be an employee of
the Company.
DONALD DEITMAN. In February 2002, effective January 1, 2002, we entered into a
three year employment agreement with Mr. Deitman pursuant to which he agreed to
serve as our Chief Financial Officer. The agreement provided for a base salary,
for the first year, of $125,000 per year (which increases each year by the
greater of the CPI index or 5%). At the end of the fiscal year his salary was
137,812 per year. Mr. Deitman subsequently retired in September 2004.
MOHAMMED ABD EL SHAFY, PH.D. In May 2002, we entered into a three year
employment agreement with Dr. El-Shafy, who was appointed Vice
President-Pharmaceutical Development. Pursuant to the agreement, he received a
base salary, for the first year, of $110,000, which increased in April 2003 to
$180,000. In April 2004, he entered into an amended employment agreement for an
additional three year term at a base salary of 200,000 per year. Since his
employment, he has been granted 150,000 Non-plan options at $3.02 per share and
an additional 50,000 options at $1.51 per share and another 50,000 options at
$1.65 per share under the 1998 Option Plan.
55
BARRY COHEN. In May 2003, we entered into a three year employment agreement with
Barry Cohen, who was appointed Vice President-New Business and Product
Development. Pursuant to the agreement, he receives a base salary of $185,000,
plus incentive bonuses. Pursuant to the agreement, he was issued 75,000 options
(exercisable at $2.04 per share) under the 1998 Plan. 60,000 of such options
vest in three equal installments commencing May 2004. These options expire in
May 2008. The balance of such options vest upon achievement of certain
objectives. In January 2004, Mr. Cohen was given an increase of salary to
$200,000 per year and an additional stock option grant of 75,000 shares at a
price of $1.65 per share.
JEAN FRYDMAN. In May 2004, The Company entered into a three-year employment
agreement with Jean W. Frydman, Esq. pursuant to which she agreed to serve as
the Company's Vice President and General Counsel. The Company agreed to pay Ms.
Frydman an annual base salary of $200,000. Pursuant to the agreement, Ms.
Frydman was also granted Non-plan options to purchase 100,000 shares of the
Company's common stock at an exercise price of $1.98 per share (110% of the fair
market value on the grant date) which vest, subject to conditions, over a
three-year period. Such options have a term of 10 years.
The foregoing agreements also provide for certain non-competition and
non-disclosure covenants on the part of such executive. However, with respect to
the non-competition covenants, a court may determine not to enforce such
provisions or only partially enforce such provisions. Additionally, each of the
foregoing agreements provides for certain fringe benefits, such as inclusion in
pension, profit sharing, stock option, savings, hospitalization and other
benefit plans at such times as we may adopt them.
STOCK OPTION PLANS
We have three stock option plans, adopted in 1992, 1997 and 1998, respectively
(collectively referred to as the "Plans"). The 1992 and 1997 Plans each provide
for the issuance of options to purchase 500,000 shares of common stock, and the
1998 Plan provides for the issuance of options to purchase 3,400,000 shares of
common stock, for a total of 4,400,000 shares. The 1997 Stock Option Plan is
administered by William Hamilton, Lawrence Kessel and Charles Nemeroff who
constitute the Compensation Committee of the Board of Directors ("Committee"),
and the 1992 Stock Option Plan and 1998 Stock Option Plan are administered by
the entire Board of Directors. For purposes of the following discussion, the
term "Committee" will be used to reference the Committee with respect to the
1997 Stock Option Plan and the entire Board of Directors with respect to the
1992 Stock Option Plan and 1998 Stock Option Plan, as applicable. The Committee
has sole discretion and authority, consistent with the provisions of the Plans,
to select the Eligible Participants to whom options will be granted under the
Plans, the number of shares which will be covered by each option and the form
and terms of the agreement to be used. All of our employees and officers are
eligible to participate in the Plans.
At July 31, 2004, 0, 0 and 1,829,500 shares of our common stock were reserved
for issuance pursuant to the 1992, 1997 and 1998 Plans, respectively. The
exercise prices for the outstanding options reserved under the 1992 and 1997
Plans range between $.63 and $2.00 per share; and the exercise prices for the
outstanding options reserved under the 1998 Plan range between $1.30 and $1.99
per share.
56
The Committee is empowered to determine the exercise price of options granted
under the Plans, but the exercise price of ISOs must be equal to or greater than
the fair market value of a share of common stock on the date the option is
granted (110% with respect to optionees who own at least 10% of our outstanding
common stock). The Committee has the authority to determine the time or times at
which options granted under the Plans become exercisable, but options expire no
later than ten years from the date of grant (five years with respect to
Optionees who own at least 10% of our outstanding common stock). Options are
nontransferable, other than by will and the laws of descent, and generally may
be exercised only by an employee while employed by us or within 90 days after
termination of employment (one year from termination resulting from death or
disability).
No ISO may be granted to an employee if, as the result of such grant, the
aggregate fair market value (determined at the time each option was granted) of
the shares with respect to which ISOs are exercisable for the first time by such
employee during any calendar year (under all such plans of NovaDel and any
parent and subsidiary) exceeds $100,000. The Plans do not confer upon any
employee any right with respect to the continuation of employment by us, nor do
the Plans interfere in any way with the employee's right or our right to
terminate the employee's employment at any time.
NON-PLAN OPTIONS
As of July 31, 2004, we had 3,950,000 Non-plan options outstanding as follows:
600,000 options exercisable at $1.84 per share; 1,050,000 options exercisable at
$.75 per share; 1,000,000 options exercisable at $1.93 per share; 200,000
options exercisable at $1.30 per share; 200,000 options exercisable at $1.51 per
share; 250,000 options exercisable at $3.18 per share; and 150,000 options
exercisable at $3.02 per share; 300,000 options exercisable at $1.95 per share;
100,000 options exercisable, at $1.85 and 100,000 options exercisable at $1.65
per share.
COMPENSATION OF DIRECTORS
Our Directors are elected annually and serve until the next annual meeting of
stockholders and until a successor shall have been duly elected and qualified.
Effective September 2003, our Directors who are not employees or consultants
receive fees of $2,000 for each meeting of the Board of Directors attended in
person or $1,000 if participated in by telephone. Directors are also compensated
$3,000 per annum for serving or $5,000 per annum for chairing a committee of the
Board of Directors. Such Directors also are awarded 100,000 Non-plan Options
upon their election to the Board of Directors, to vest in three equal annual
installments beginning on the first anniversary of their appointment. In
addition, such Directors are to be awarded an additional 50,000 Non-plan Options
at the time of their re-election of the Board, i.e., at the annual meeting. Such
annually awarded options also vest over a three-year period. Such Directors are
also reimbursed for expenses incurred in connection with their attendance at
meetings of the Board of Directors or committees. Directors may be removed with
or without cause by a vote of the majority of the stockholders then entitled to
vote.
57
In March 2003, we issued 100,000 Non-plan Options to each of Dr. Hamilton and
Dr. Kessel upon their being elected to the Board of Directors. In March 2003, we
also issued 10,000 options to each of Messrs. Schaul and a former director under
the 1998 Plan. All of these options have an exercise price of $1.51; the options
issued to Messrs. Schaul and a former director vested immediately, those issued
to Drs. Hamilton and Kessel vest in three equal annual installments beginning in
March 2004 and expire in March 2008. In April 2004, both Dr. Hamilton and Dr.
Kessel were issued 50,000 options, respectively at an exercise price of $1.95.
These options will vest in three equal annual installments.
In June, 2003, we issued 100,000 Non-plan Options to Dr. Rachesky upon his being
appointed to the Board of Directors. These options have an exercise price of
$2.15 and vest in three equal annual installments beginning in June 2004 and
expire in June 2008. Dr. Rachesky was issued an additional 50,000 options at an
exercise price of $1.95. These options will vest in three equal annual
installments.
In September 2003, we issued 100,000 Non-plan Options to Dr. Nemeroff upon his
being elected to the Board of Directors. Strike price for these options is
$1.95. These options vest in three equal annual installments and expire in
September 2008. Dr. Nemeroff was than granted 50,000 Non-plan Options on April
2004, at a strike price of $1.95. These options will expire in April, 2009 and
vest annually over the next three years.
An additional member, Robert Savage, was appointed to the Board of Directors in
early calendar 2004. Upon appointment, he received 100,000 options at an
exercise price of $1.65 per share. The options vest in three equal annual
installments. The option grants expire February, 2009. He received an additional
50,000 Non-plan Options on April 2004 at a strike price of $1.95. These options
expire in April, 2009 and vest annually over the next three years.
There were no other arrangements pursuant to which any Director was compensated
during fiscal 2004 for any services provided as a Director.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED MATTERS.
The following table sets forth information, as of July 31, 2004, with respect to
the beneficial ownership of the outstanding shares of our common stock as of
such date plus, where relevant for particular beneficial owners, shares which
such beneficial owner has the right to acquire within 60 days, by (i) any holder
known to us owning more than five percent (5%) of the outstanding shares; (ii)
our officers and directors; and (iii) the directors and officers of NovaDel as a
group:
58
--------------------- ------------------------------------------ ----------------------------------- --------------------
TITLE OF NAME AND ADDRESS OR AMOUNT AND NATURE OF PERCENTAGE OF
CLASS NUMBER IN GROUP(1) BENEFICIAL OWNERSHIP CLASS
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Harry A. Dugger, III, Ph.D. 2,154,003(2) 6.3%
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Gary A. Shangold, M.D. 458,333(3) 1.4%
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Robert Savage 0(4) *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Donald Deitman 0 *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Jean W. Frydman, Esq. 0(5) *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Mohammed Abd El Shafy, Ph.D. 250,000(6) *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock William F. Hamilton, Ph.D. 33,333(7) *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Lawrence J. Kessel, M.D., FACP 33,333(7) *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Barry Cohen 95,000(8) *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Mark H. Rachesky, M.D. 1,119,047(9) 3.3%
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Charles Nemeroff, M.D., Ph.D. 0(10) *
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Lindsay A. Rosenwald, M.D. 13,233,334(11) 32.9%
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock Biomedical Investment Group, LLC 5,333,334(12) 14.8%
--------------------- ------------------------------------------ ----------------------------------- --------------------
Common Stock All Executive Officers and Directors as 4,109,716 (2)(3)(4) (6)(7)(8)(9) 11.78%
a group (11 persons) (10)
--------------------- ------------------------------------------ ----------------------------------- --------------------
* DENOTES LESS THAN ONE PERCENT (1%).
(1) The address of all holders listed herein is c/o NovaDel Pharma Inc., 25
Minneakoning Road, Flemington, New Jersey 08822.
(2) Includes options to purchase 200,000 shares of common stock (exercisable at
$.70 per share) issued under the 1992 Stock Option Plan which expire in July
2006; options to purchase 50,000 shares of common stock (exercisable at $.70 per
share) under the 1997 Stock Option Plan which expire in December 2006; options
to purchase 95,000 shares of common stock (exercisable at $.70 per share) issued
under the 1998 Stock Option Plan which expire in January 2005; options to
purchase 300,000 shares of common stock issued outside of the Plans (exercisable
at $1.84 per share) which expire November 2007; options to purchase 200,000
shares of common stock issued outside of the Plans (exercisable at $1.30 per
share) which expire October 2007; options to purchase 75,000 shares of common
stock (exercisable at $1.30 per share) issued under the 1998 Stock Option Plan,
which expire in October 2007; options to purchase 50,000 shares of common stock
(exercisable at $1.82 per share) issued under the 1998 Stock Option Plan which
expire in February 22, 2009; 152,000 shares owned by his daughter Christina
Dugger; and 152,000 shares owned by his son Andrew Dugger.
(3) Does not include two-thirds of Non-plan Options, issued in December 2002, to
purchase 1,000,000 shares of common stock at an exercise price of $1.93 per
share. These options vest in three equal annual installments, beginning in
December 2003, and expire in December 2007. It includes one-third of the
1,000,000 shares and additional options to purchase 125,000 shares of common
stock (exercisable at $1.82 per share issued under the 1998 Stock Option Plan,
which expire in February 2009.
(4) Mr. Savage was granted Non-plan options to purchase 100,000 shares of common
stock at an exercisable price of $1.65 per share, which shall vest in three
annual installments beginning in February 2005. Not included were an additional
grant of 50,000 shares of Non-plan Options at an exercisable price of $1.95 per
share which shall vest in three annual installments beginning April 2005.
(5) Does not include 100,000 Non-plan Options exercisable at $1.98 per share.
These options vest in three equal annual installments beginning in May 2005 and
expire May 2014.
(6) Includes 150,000 Non-plan Options exercisable at $3.02 per share; These
options expire in May 2012. Also includes 50,000 options issued under the 1998
Option Plan to purchase common stock at an exercise price of $1.51 per share,
expiring in March 2008 and 50,000 options issued under the 1998 Option Plan to
purchase common stock at an exercise price of $1.65 per share expiring in
February 2009.
59
(7) Does not include options to purchase 66,667 shares of common stock at an
exercise price of $1.51 per share, which shall vest in two annual installments
beginning March 2005. The options expire in March 2008. Does not include options
to purchase 50,000 shares of common stock at an exercise price o $1.95 which
will vest in three annual installments beginning April 2005.
(8) Does not include 55,000 options issued under the 1998 Plan, to purchase
common stock at an exercise price of $2.01 per share. The options expire in May
2008 and vest subject to certain conditions.
(9) Does not include options to purchase 66,667 shares of common stock at an
exercise price of $2.15 per share, which shall vest in two annual installments
beginning in June 2005. Does not include 50,000 Non-plan Options exercisable at
$1.95 per share, which shall vest in three annual installments beginning April
2005. Includes 952,380 shares of common stock and warrants to purchase 166,667
shares of common stock at an exercise price of $2.00 per share which expire in
April 2008. Such shares and warrants are held by MHR Capital Partnership, LP,
which is controlled by Dr. Rachesky.
(10) Does not include options to purchase 100,000 shares of common stock at an
exercise price of $1.85 per share, which shall vest in three annual installments
beginning September 2004. Does not include 50,000 Non-plan Options exercisable
price of $1.95 per share which shall vest in three annual installments beginning
April 2005.
(11) Includes 3,950,000 shares of common stock and warrants to purchase
3,950,000 shares of common stock at an exercise price of $.75 per share which
expire in December 2008. Also includes 2,666,667 shares of common stock and
2,666,667 warrants to purchase 2,666,667 shares of common stock, which expire in
February 2009, owned by Biomedical Investment Group.
(12) Includes warrants to purchase 2,666,667 shares of common stock at an
exercise price of $.75 per share which expire in February 2009.
SHAREHOLDER APPROVAL OF EQUITY COMPENSATION PLANS
The following table sets forth information as of the end of fiscal 2004 with
respect to the number of shares of our common stock issuable pursuant to equity
compensation plans which have and have not been approved by our stockholders.
EQUITY COMPENSATION PLAN INFORMATION
=============================== ============================ ============================ ============================
Number of securities to be Weighted average exercise
issued upon exercise of price of outstanding Number of securities
Plan Category outstanding options, options, warrants and remaining available for
warrants and rights rights future issuance
=============================== ============================ ============================ ============================
(a) (b) (c)
=============================== ============================ ============================ ============================
Equity compensation plans
approved by security holders 0 N/A N/A
=============================== ============================ ============================ ============================
Equity compensation plans not
approved by security holders 3,717,472 $1.658 N/A
=============================== ============================ ============================ ============================
TOTAL 3,717,472 $1.658 N/A
=============================== ============================ ============================ ============================
60
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
To the best of management's knowledge, other than (i) compensation for services
as officers and directors described under Item 10 or (ii) as set forth below,
there were no material transactions, or series of similar transactions, or any
currently proposed transactions, or series of similar transactions, to which we
were or are to be a party, in which the amount involved exceeds $60,000, and in
which any director or executive officer, or any security holder who is known by
us to own of record or beneficially more than 5% of any class of our common
stock, or any member of the immediate family of any of the foregoing persons,
has an interest.
During December 2001, we received net proceeds of approximately $3,000,000 from
a private placement of 4,000,000 units, which were purchased by Dr. Rosenwald.
Each unit consisted of one share of common stock, and a warrant (which expires
December 2008) to purchase an additional share of our common stock at an
exercise price of $.75. As part of the purchase agreement, we agreed to elect to
the Board of Directors, a Director to be nominated by Dr. Rosenwald (as of the
date hereof, no such nominee had been selected) and to permit Dr. Rosenwald or a
representative of his to attend meetings of our Board of Directors. Appropriate
confidentiality and non-disclosure agreements are in place to protect our
confidential information.
In March 2002, we received net proceeds of approximately $2,000,000 from a
private placement of 2,666,667 additional units at a sale price of $.75 per
unit. These units were purchased by Biomedical Investment Group which is
affiliated with Dr. Rosenwald. These warrants expire in March 2009.
In April and May 2003, we engaged Paramount Capital to assist us in the
placement of units on a "best efforts" basis in connection with a private
placement. In connection with this offering, we entered into a non-exclusive
Placement Agent Agreement dated as of January 15, 2003, with Paramount Capital,
pursuant to which we paid to Paramount for its services, a cash payment equal to
approximately $360,000 and issued to Paramount or its designees 160,017 warrants
with an exercise price equal to $1.65 per share and warrants to purchase 40,004
shares of common stock at an exercise price equal to $2.00 per share. We also
agreed to pay to Paramount a non-accountable expense allowance equal to $25,000
to reimburse Paramount for its out-of-pocket expenses. Lastly, we agreed to
indemnify Paramount against certain liabilities, including liabilities under the
Securities Act.
In November 2003, we engaged Paramount Capital to assist us in the placement of
units on a "best efforts" basis in connection with a private placement. In
connection with this offering, we entered into a non-exclusive Placement Agent
Agreement dated as of January 15, 2003, with Paramount Capital, pursuant to
which we made a cash payment equal to approximately $850,000 and issued to
Paramount Capital (and its designees) unit purchase options to purchase
1,330,303 shares of common stock at an exercise price equal to $1.40 per share
and warrants to purchase an additional 399,091 shares of common stock at an
exercise price of $1.40 per share. We also paid Paramount Capital a
non-accountable expense allowance of $25,000 to reimburse Paramount Capital for
its out-of- pocket expenses. Lastly, we agreed to indemnify Paramount against
certain liabilities, including liabilities under the Securities Act.
61
In April 2003, we entered into a license and development agreement with
Manhattan Pharmaceuticals for the worldwide, exclusive rights to our lingual
spray technology to deliver propofol for pre-procedural sedation. In September
2004, we entered into a license and development agreement with Velcera
Pharmaceuticals Inc. a veterinary company. In October 2004, we entered into a
license agreement with Hana Biosciences for the marketing rights in the United
States and Canada for our ondansetron lingual spray technology. Dr. Rosenwald
may be deemed to be an affiliate of Manhattan, Velcera and Hana.
During fiscal 2004, we paid Mr. Schaul, a former director, approximately
$195,000, and approximately $160,000 for fiscal 2003, for legal services
rendered.
During fiscal 2004, we paid Mr. Klein, our former Chairman of the Board,
approximately $186,000 and approximately $300,000 for fiscal 2003, pursuant to
our consulting agreement with Mr. Klein , as well as additional finder fees
relating to the Company's licensing agreements. The amount of the additional
fees will be determined by the net revenue received by us in connection with the
Par Pharmaceutical agreement. The amount of fees paid to Mr. Klein will
fluctuate over the term of the agreement, primarily dependent on the amount of
milestone payments received by the Company. At no time will the fees be more
than four percent (4%) of the net revenue received by the Company in connection
with the Par Pharmaceutical agreement.
ITEM 13. EXHIBITS.
Exhibits are listed on the Index to Exhibits, pages E-1 through E-4, at the end
of this Annual Report. The exhibits required by Item 601 of Regulation S-B,
listed on such Index in response to this Item, are incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth fees billed to us by our independent registered
public accounting firms during the fiscal years ended July 31, 2004, and July
31, 2003, for: (i) services rendered for the audit of our annual financial
statements and the review of our quarterly financial statements; (ii) services
by our independent registered public accounting firms that are reasonably
related to the performance of the audit or review of our financial statements
and that are not reported as Audit Fees; (iii) services rendered in connection
with tax compliance, tax advice and tax planning; and (iv) all other fees for
services rendered.
JULY 31, 2003 JULY 31, 2004
------------- -------------
Audit Fees $21,541 $20,000
Audit Related Fees $ -- $11,802
Tax Fees $ 5,000 $ 1,790
All Other Fees $ 6,675 $ --
62
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NovaDel Pharma Inc.
Date: November 15, 2004 By: /S/ GARY A. SHANGOLD
-----------------------
Gary A. Shangold, M.D.
and Chief Executive Officer
In accordance with the Exchange Act , this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/S/ GARY A. SHANGOLD President and Chief Executive Officer November 15, 2004
--------------------------------- (Principal Executive Officer) and Director
Gary A. Shangold, M.D.
/S/ HOWARD KANCE Interim Principal Financial Officer November 15, 2004
--------------------------------- (Principal Financial Officer)
Howard Kance
/S/ WILLIAM F. HAMILTON Director November 15, 2004
---------------------------------
William F. Hamilton, Ph.D.
/S/ LAWRENCE J. KESSEL Director November 15, 2004
---------------------------------
Lawrence J. Kessel, M.D., FACP
/S/ MARK H. RACHESKY Director November 15, 2004
---------------------------------
Mark H. Rachesky, M.D.
/S/ CHARLES NEMEROFF Director November 15, 2004
---------------------------------
Charles Nemeroff, M.D., Ph.D.
/S/ROBERT G. SAVAGE Director November 15, 2004
---------------------------------
Robert G. Savage
63
INDEX TO FINANCIAL STATEMENTS AND
RESTATEMENT OF QUARTERLY DATA
The following financial statements are included in Part II, Item 7:
Reports of Independent Registered Public Accounting Firms F-1
Balance Sheets F-3
Statements of Operations F-4
Statements of Changes in Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
Restatement of Quarterly Data (Unaudited) F-22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and
Board of Directors of
NovaDel Pharma Inc.
We have audited the accompanying balance sheet of NovaDel Pharma Inc. as of July
31, 2004, and the related statements of operations, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 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 audit provides 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 NovaDel Pharma Inc. as of July
31, 2004, and its results of operations and cash flows for the year then ended,
in conformity with accounting principles generally accepted in the United States
of America.
/S/ J.H. COHN LLP
Roseland, New Jersey
November 11, 2004
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of
NovaDel Pharma Inc.
We have audited the restated financial statements of NovaDel Pharma Inc.,
(formerly Flemington Pharmaceutical Corporation) as of July 31, 2003 and 2002
and for the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 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 NovaDel Pharma Inc. at July 31,
2003 and 2002, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 3 to the financial statements, previously unrecognized
compensation expenses were discovered in the current year affecting the fiscal
2003 and 2002 financial statements. Accordingly, the accompanying balance sheets
as of July 31, 2003 and 2002 and related statements of operations, stockholders'
equity and cash flows for the years then ended have been restated.
/s/ WISS & COMPANY, LLP
Livingston, New Jersey
September 8, 2003, except for Notes 2 and 3
which are as of November 11, 2004
F-2
NOVADEL PHARMA INC.
BALANCE SHEETS
AS OF JULY 31, 2004 AND 2003
July 31, 2003
ASSETS July 31, 2004 As Restated (Note 3)
------------ ------------
Current Assets:
Cash and cash equivalents $ 2,166,000 $ 3,086,000
Short term investments 6,211,000 --
Accounts receivable - trade 130,000 2,000
Prepaid expenses and other current assets 255,000 168,000
------------ ------------
Total Current Assets 8,762,000 3,256,000
Property and equipment, net 1,066,000 714,000
Long term investments 1,307,000 --
Other Assets 351,000 357,000
------------ ------------
TOTAL ASSETS $ 11,486,000 $ 4,327,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 241,000 $ 139,000
Accrued expenses and other current liabilities 798,000 318,000
Current portion of deferred revenue 19,000 --
Current portion of capitalized lease obligation 28,000 --
------------ ------------
Total Current Liabilities 1,086,000 457,000
Non current portion of deferred revenue 343,000 --
Non current portion of capitalized lease obligation 34,000 --
------------ ------------
Total Liabilities 1,463,000 457,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value:
Authorized 1,000,000 shares, none issued -- --
Common stock, $.001 par value:
Authorized 100,000,000 shares,
Issued 33,091,467 and 17,972,760 shares at July
31, 2004 and 2003, respectively 33,000 18,000
Additional paid-in capital 34,937,000 22,452,000
Accumulated deficit (24,941,000) (18,600,000)
Less: Treasury stock, at cost, 3,012 shares in 2004 (6,000) --
------------ ------------
Total Stockholders' Equity 10,023,000 3,870,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,486,000 $ 4,327,000
============ ============
See accompanying notes to financial statements.
F-3
NOVADEL PHARMA INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31,
2004 AND 2003
For The Year
Ended
7/31/03 As
For The Year Restated
Ended 7/31/04 (Note 3)
------------ ------------
License Fee $ 13,000 $ --
Consulting Revenues 453,000 2,000
------------ ------------
Total Revenues 466,000 2,000
------------ ------------
Research and Development Expenses 2,492,000 1,087,000
Consulting, Selling, General and Administrative Expenses 4,627,000 6,004,000
------------ ------------
Total Expenses 7,119,000 7,091,000
------------ ------------
Loss From Operations (6,653,000) (7,089,000)
Interest Income 98,000 49,000
------------ ------------
Loss Before Income Taxes (6,555,000) (7,040,000)
Deferred Income Tax Benefit (214,000) (84,000)
------------ ------------
Net Loss $ (6,341,000) $ (6,956,000)
============ ============
Basic and Diluted Loss Per Common Share $ (.24) $ (.45)
============ ============
Weighted Average Number of Common Shares Outstanding 26,269,000 15,419,000
============ ============
See accompanying notes to financial statements.
F-4
NOVADEL PHARMA INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2004 AND 2003
AS RESTATED (NOTE 3)
Common Stock
---------------------------
Additional Total
Shares Amount Paid-in Accumulated Treasury Stockholders'
Capital Deficit Stock Equity
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, July 31, 2002,
as previously reported 14,448,817 $ 14,000 $ 13,322,000 $ (9,813,000) $ -- $ 3,523,000
Restatement adjustment (Note 3) -- -- 1,831,000 (1,831,000) -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, July 31, 2002, as restated 14,448,817 14,000 15,153,000 (11,644,000) -- 3,523,000
Stock issued in connection
with private placements, net of costs 3,200,345 3,000 4,333,000 -- -- 4,336,000
Stock issued for options exercised 210,577 -- -- -- -- --
Stock issued for warrants exercised 113,021 1,000 19,000 -- -- 20,000
Options issued for services -- -- 1,674,000 -- -- 1,674,000
Warrants issued for services -- -- 7,000 -- -- 7,000
Impact of variable plan accounting -- -- 1,141,000 -- -- 1,141,000
Equity investment from related party -- -- 125,000 -- -- 125,000
Net Loss -- -- -- (6,956,000) -- (6,956,000)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, July 31, 2003, as restated 17,972,760 18,000 22,452,000 (18,600,000) -- 3,870,000
Stock issued in connection
with private placements, net of costs 13,333,333 14,000 12,771,000 -- -- 12,785,000
Stock issued to 2003 private investors
in connection with reset provision 1,371,549 1,000 (1,000) -- -- --
Stock issued for options exercised 229,719 -- 200,000 -- (6,000) 194,000
Stock issued for warrants exercised 184,106 -- 251,000 -- -- 251,000
Impact of variable plan accounting -- -- (736,000) -- -- (736,000)
Net Loss -- -- -- (6,341,000) -- (6,341,000)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JULY 31, 2004 33,091,467 $ 33,000 $ 34,937,000 $(24,941,000) $ (6,000) $ 10,023,000
============ ============ ============ ============ ============ ============
See accompanying notes to financial statements.
F-5
NOVADEL PHARMA INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2004 AND 2003
2003
As Restated
2004 (Note 3)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,341,000) $ (6,956,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Options issued for services -- 1,674,000
Warrants issued for services -- 7,000
Impact of variable plan accounting (736,000) 1,141,000
Depreciation and amortization 222,000 81,000
Allowance for doubtful accounts -- (88,000)
Changes in operating assets and liabilities:
Accounts receivable-trade (128,000) 87,000
Prepaid expenses and other current assets (87,000) (72,000)
Other assets 6,000 (335,000)
Accounts payable - trade 102,000 14,000
Accrued expenses and other current liabilities 480,000 127,000
Deferred revenue 362,000 --
------------ ------------
Net cash used in operating activities (6,120,000) (4,320,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (487,000) (389,000)
Purchase of investments (9,560,000) --
Maturities of investments 2,042,000 --
------------ ------------
Net cash used in investing activities (8,005,000) (389,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds received from issuance of common stock through
private placements 12,785,000 4,336,000
Cash received from warrants exercised 251,000 20,000
Cash received from options exercised 194,000 --
Capital contributions from related parties -- 125,000
Payments of capitalized lease obligation (25,000) --
------------ ------------
Net cash provided by financing activities 13,205,000 4,481,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (920,000) (228,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,086,000 3,314,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,166,000 $ 3,086,000
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capitalized lease obligation $ 87,000 $ --
============ ============
Treasury stock acquired $ 6,000 $ --
============ ============
See accompanying notes to financial statements.
F-6
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS - NovaDel Pharma Inc. (the "Company"), which was
formerly known as Flemington Pharmaceutical Corporation, is incorporated
in the State of Delaware. The Company is engaged in the development of
novel pharmaceutical products combining presently marketed drugs with
patents and pending patents with oral dosage delivery systems of the
Company, designed to enhance and accelerate the onset of the therapeutic
benefits which the drugs are intended to produce. The Company has entered
into collaboration agreements with other pharmaceutical and veterinary
companies for development and marketing its delivery systems.
REVENUES AND COSTS - Consulting revenues from contract clinical research
are recognized as earned provided collection is probable. Consulting
contract costs normally consist of fees paid to outside clinics for
studies and an allocable portion of the Company's operating expenses.
General and administrative costs pertaining to contracts are charged to
expense as incurred. Revenues from collaboration agreements consist of
upfront payments and milestone payments which are initially deferred and
subsequently recognized as revenues are earned. Such agreements have costs
consisting of operating costs for goods and services required to meet
obligations under the collaboration agreements which are charged to
expense as incurred.
CASH EQUIVALENTS AND INVESTMENTS - Cash equivalents include certificates
of deposit and money market instruments purchased with original maturities
of three months or less when purchased. Short-term investments with
original maturities greater than three months and less than one year and
long-term investments with maturities greater than one year consist of
certificates of deposit are valued at cost which approximates fair market
value.
FINANCIAL INSTRUMENTS - Financial instruments include cash and cash
equivalents, investments, accounts receivable, accounts payable and
accrued expenses. The amounts reported for financial instruments are
considered to be reasonable approximations of their fair values.
PROPERTY AND EQUIPMENT - Property and equipment, including leasehold
improvements, are stated at cost. The Company provides for depreciation
and amortization using the straight-line method, based upon estimated
useful lives of five to 10 years or the lease term, if shorter.
F-7
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
expensed as incurred.
INCOME TAXES - Temporary differences between financial statement and
income tax reporting result primarily from net operating losses. As a
result of these temporary differences, the Company has recorded a deferred
tax asset with an offsetting valuation allowance for the same amount.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when realization of
deferred tax assets is not considered more likely than not.
DEFINED CONTRIBUTION RETIREMENT PLANS - During January 2004, the Company
established a 401(k) retirement plan, available to all employees and
requiring contributions by the Company. During the year ended July 31,
2004, the Company contributed approximately $56,000 to this plan. Prior to
January 2004, the Company had a Simple IRA retirement plan, available to
all employees and providing for contributions at management's discretion.
During the years ended July 31, 2004 and 2003, the Company made
contributions to this Simple IRA of approximately $37,000 and $15,000,
respectively.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States,
require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EARNINGS (LOSS) PER SHARE - Statement of Financial Accounting Standards
(FAS) No. 128, "Earnings Per Share" requires the disclosure of both basic
and diluted earnings (loss) per share. Basic earnings (loss) per share is
based on the weighted average of all common shares outstanding. The
computation of diluted earnings (loss) per share does not assume the
conversion, exercise or contingent issuance of potentially dilutive
securities that would have an antidilutive effect. The amount of
potentially dilutive securities includes options and warrants exercisable
for 20,044,000 shares of common stock at July 31, 2004 and 18,766,000
shares of common stock at July 31, 2003.
F-8
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION - 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 in accounting
for its employee stock options. Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" (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 not required under FAS
123 for companies following APB 25. 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). Because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of
grant, no compensation expense is initially recognized under APB 25. The
Registrant, its Audit Committee and its current and former independent
registered public accounting firms have agreed that certain of the
Company's issued and outstanding stock options that permit cashless
exercise should be subject to variable plan accounting treatment under
applicable accounting standards, and, accordingly, previously unrecognized
compensation expenses should be 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 No. 25" (Issue Date 3/00).
Accordingly, management has restated the Company's 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. This report
contains restated financial information for all of the above fiscal
periods. The reasons for, and financial impact of, the adjustments are
described in Note 3.
The fair values of options granted in 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 the expected
market price of the Company's common stock of 56% in 2004 and 74% in 2003,
and an expected life of the options of six years and five years in 2004
and 2003, respectively.
If the Company had elected to recognize compensation cost for all
outstanding options granted by the Company to employees by applying the
fair value recognition provisions of FAS No. 123 to stock-based employee
compensation using the Black Scholes option pricing model, net loss and
net loss per share would have been increased or decreased to the pro forma
amounts indicated below:
F-9
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
Years ended July 31
------------------------------
2004 2003 As
Restated
(See Note 3)
----------- -----------
Net loss - basic and diluted, as reported $(6,341,000) $(6,956,000)
Compensation expense (credit) resulting from variable plan accounting (736,000) 1,141,000
Total stock-based employee compensation expense using the fair (795,000) (486,000)
value based method for all awards ----------- -----------
Pro forma $(7,872,000) $(6,301,000)
=========== ===========
Basic and diluted net loss per common share:
As reported $ (.24) $ (.45)
Pro forma $ (.30) $ (.41)
NOTE 2 - LIQUIDITY
The Company has reported a net loss of $6,341,000 for the year ended July
31, 2004 and a net loss of $6,956,000 for the year ended July 31, 2003 as
restated (see Note 3). Management believes that the Company will continue
to incur net losses through at least July 31, 2005. Based on the Company's
resources available at July 31, 2004, management believes these resources
are adequate to fund the operations through at least July 31, 2005. As of
July 31, 2004, the Company had working capital of $7,676,000, cash and
cash equivalents of $2,166,000 and short term investments of $6,211,000.
Until and unless the Company's operations generate significant revenues,
the Company will attempt to continue to fund operations from cash on hand
and through the sources of capital described below. 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.
F-10
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS
In connection with the preparation of the 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 are subject to variable plan accounting treatment under applicable
accounting standards, and, accordingly, previously unrecognized
compensation expenses should be 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 has identified certain
adjustments that necessitate 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 adjustments to the Company's financial statements for the
years ended July 31, 2003 and 2002, respectively, are summarized as
follows:
F-11
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
RESTATED BALANCE SHEETS
AS OF JULY 31, 2003 AND 2002
As Previously Restatement As Previously Restatement
Reported Adjustment As Restated Reported Adjustment As Restated
7/31/03 7/31/03 7/31/03 7/31/02 7/31/02 7/31/02
------------ ------------ ------------ ------------ ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,086,000 $ -- $ 3,086,000 $ 3,314,000 $ -- $ 3,314,000
Accounts receivable - trade 2,000 -- 2,000 1,000 -- 1,000
Prepaid expenses and other
current assets 168,000 -- 168,000 96,000 -- 96,000
------------ ------------ ------------ ------------ ------------ ------------
Total Current Assets 3,256,000 -- 3,256,000 3,411,000 -- 3,411,000
Property and Equipment, net 714,000 -- 714,000 406,000 -- 406,000
OTHER ASSETS 357,000 -- 357,000 22,000 -- 22,000
------------ ------------ ------------ ------------ ------------ ------------
TOTAL ASSETS $ 4,327,000 $ -- $ 4,327,000 $ 3,839,000 $ -- $ 3,839,000
============ ============ ============ ============ ============ ============
CURRENT LIABILITIES:
Accounts payable-trade $ 139,000 $ -- $ 139,000 $ 125,000 $ -- $ 125,000
Accrued expenses and other
current liabilities 318,000 -- 318,000 191,000 -- 191,000
------------ ------------ ------------ ------------ ------------ ------------
Total Liabilities 457,000 -- 457,000 316,000 -- 316,000
------------ ------------ ------------ ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock -- -- -- -- -- --
Common stock 18,000 -- 18,000 14,000 -- 14,000
Additional paid-in capital 19,480,000 2,972,000 22,452,000 13,322,000 1,831,000 15,153,000
Accumulated deficit (15,628,000) (2,972,000) (18,600,000) (9,813,000) (1,831,000) (11,644,000)
------------ ------------ ------------ ------------ ------------ ------------
Total Stockholders' Equity 3,870,000 -- 3,870,000 3,523,000 -- 3,523,000
------------ ------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,327,000 $ -- $ 4,327,000 $ 3,839,000 $ -- $ 3,839,000
============ ============ ============ ============ ============ ============
F-12
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
RESTATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2003 AND 2002
For The Year For The Year
Ended Ended For The For The Year For The Year For The
7/31/03 7/31/03 Year 7/31/02 7/31/02 Year Ended
As Previously Restatement 7/31/03 As Previously Restatement 7/31/02
Reported Adjustment As Restated Reported Adjustment As Restated
------------ ------------ ------------ ------------ ------------ ------------
LICENSE FEE $ -- $ -- $ -- $ -- $ -- $ --
CONSULTING REVENUES 2,000 -- 2,000 339,000 -- 339,000
------------ ------------ ------------ ------------ ------------ ------------
TOTAL REVENUES 2,000 -- 2,000 339,000 -- 339,000
------------ ------------ ------------ ------------ ------------ ------------
RESEARCH AND DEVELOPMENT EXPENSES 1,048,000 39,000 1,087,000 962,000 11,000 973,000
CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,902,000 1,102,000 6,004,000 3,799,000 1,820,000 5,619,000
------------ ------------ ------------ ------------ ------------ ------------
TOTAL EXPENSES 5,950,000 1,141,000 7,091,000 4,761,000 1,831,000 6,592,000
------------ ------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (5,948,000) (1,141,000) (7,089,000) (4,422,000) (1,831,000) (6,253,000)
INTEREST INCOME 49,000 -- 49,000 44,000 -- 44,000
------------ ------------ ------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (5,899,000) (1,141,000) (7,040,000) (4,378,000) (1,831,000) (6,209,000)
DEFERRED INCOME TAX BENEFIT (84,000) -- (84,000) (88,000) -- (88,000)
------------ ------------ ------------ ------------ ------------ ------------
NET LOSS $ (5,815,000) $ (1,141,000) $ (6,956,000) $ (4,290,000) $ (1,831,000) $ (6,121,000)
============ ============ ============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.38) $ (0.07) $ (0.45) $ (0.38) $ (0.16) $ (0.54)
============ ============ ============ ============ ============ ============
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,419,000 15,419,000 15,419,000 11,361,000 11,361,000 11,361,000
============ ============ ============ ============ ============ ============
F-13
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
July 31, 2004 July 31, 2003
----------------- ----------------
Equipment $ 303,000 $ 713,000
Furniture and fixtures 1,054,000 122,000
Leasehold improvements 184,000 131,000
----------------- ----------------
1,541,000 966,000
Less: Accumulated depreciation and
amortization 475,000 252,000
================= ================
$1,066,000 $714,000
================= ================
NOTE 5 - RELATED PARTY TRANSACTIONS
LEGAL FEES - The Company has incurred legal fees charged by a former
officer and director of the Company. These fees approximated $195,000 and
$160,000 for the years ended July 31, 2004 and 2003, respectively.
CONSULTING AGREEMENT - Mr. John H. Klein's, the former Chairman of the
Company's Board of Directors, consulting agreement ceased on January 31,
2004. During fiscal 2004, we paid Mr. Klein, our former Chairman of the
Board, approximately $186,000, and we paid him approximately $300,000 for
fiscal 2003, pursuant to our consulting agreement with Mr. Klein
(including finder fees relating to the Company's licensing agreements).
The amount of the fees is determined according to the net revenue received
by us in connection with the Par Pharmaceutical agreement. The amount of
fees paid to Mr. Klein will fluctuate over the term of the agreement,
primarily dependent on the amount of milestone payments received by the
Company. At no time will the fees be more than four percent (4%) of the
net revenue received by the Company in connection with the Par
Pharmaceutical agreement.
LICENSE AGREEMENTS WITH RELATED PARTIES (SEE NOTE 7) - In April 2003, the
Company entered into a license and development agreement with Manhattan
Pharmaceuticals, Inc. (Manhattan) for the worldwide, exclusive rights to
the Company's proprietary lingual spray technology to deliver propofol for
pre-procedural sedation.
In June 2004, the Company entered into a 20-year worldwide exclusive
license agreement with Velcera Pharmaceuticals, Inc. (Velcera), a
veterinary company.
F-14
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
The license agreement is for the exclusive rights to the Company's
proprietary lingual spray technology in animals.
In October 2004, the Company entered into a license and development
agreement with Hana Biosciences, Inc. (Hana) to develop and market the
Company's lingualspray version of ondansetron. The agreement is an
exclusive license for the United States and Canada.
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 6 - STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS:
In January 2004, the Company completed a private placement and received
net proceeds of $12,785,000 from the sale of a total of 140 units of the
Company's securities. Each unit consisted of 95,238 common shares, par
value $.001, and 28,571 warrants. Each warrant entitles the holder to
purchase an additional share of the Company's common stock at an exercise
price of $1.40 within five years. The sale price of each unit was
$100,000. A total of 13,333,333 shares and approximately 4,000,000
warrants were issued.
The securities were sold through Paramount Capital, Inc. (Paramount), a
NASD broker-dealer. For its services as placement agent, the Company paid
Paramount a commission of 7% of the aggregate amount raised and also
issued to Paramount (and its designees) unit purchase options to purchase
1,330,303 shares of common stock at an exercise price of $1.40 per share
and warrants to purchase an additional 399,091 shares of common stock at
an exercise price of $1.40 per share. The Company also paid Paramount a
non-accountable expense allowance of $25,000 to reimburse Paramount for
its out-of- pocket expenses. A significant stockholder of the Company is a
controlling principal of Paramount.
In May 2003, the Company completed a private placement and received net
proceeds of approximately $4,336,000 from the placement of a total of
48.01 units of the Company's securities. Each unit consisted of 66,666-2/3
common shares, par value $.001, and 16,666-2/3 warrants. Each warrant
entitles the holder to purchase an additional share of the Company's
common stock at an exercise price
F-15
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
of $2.00 within five (5) years. The sale price of each unit was $100,000
($1.50 per share). In connection with the Company's May 2003 private
placement, the Company had agreed, for a period of one year, that if the
Company issued shares of common stock at a par share price less than $1.50
(the price per share in such offering) that such investors would receive
"reset price" shares without any additional consideration being paid to
the Company (so that those investors would receive additional shares as if
they purchased their shares at such lower per share purchase price). The
per share sale price of the January 2004 offering triggered the reset
rights of such investors and 1,371,549 shares of common stock were issued
to these investors for no additional consideration. The reset provisions
expire in May 2004.
PREFERRED STOCK - The Company's Certificate of Incorporation authorizes
the issuance of up to 1,000,000 shares of Preferred Stock. None of such
Preferred Stock has been designated or issued through July 31, 2004. The
Board is authorized to issue shares of Preferred Stock from time to time
in one or more series and to establish and designate any such series and
to fix the number of shares and the relative conversion rights, voting,
terms of redemption and liquidation.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AND CONSULTING AGREEMENTS - At July 31, 2004, the Company had
employment agreements with six officers of the Company providing for an
aggregate annual salary of $1,356,000.
Each of these employment agreements has a three year term. They are due to
expire on the following schedule: Dr. Dugger's agreement in January 2005,
Dr. Shangold's agreement in December 2005, Mr. Cohen's agreement in May
2006, Dr. El Shafy's agreement in January 2007, and Ms. Frydman's
agreement in May 2007. Mr. Deitman resigned from his position as Chief
Financial Officer on September 30, 2004. The employment agreements of Dr.
Shangold, Dr. El Shafy and Mr. Cohen automatically extend for additional
one-year periods unless either party to the agreement advises the other to
the contrary in writing at least 90 days prior to the expiration of their
term.
All of the foregoing employment agreements provide for the issuance of
bonuses based on certain factors. The agreements with Dr. Shangold, Ms.
Frydman, Dr. El Shafy and Mr. Cohen provide for the grant of options to
purchase shares of the Company's common stock, vesting ratably over the
term of the agreement.
F-16
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
Additionally, at July 31, 2004, the Company had a consulting agreement
with Robert C. Galler providing for an annual salary of $180,000. The
agreement terminates in February 2005.
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 year ended July 31,
2004, the Company invoiced Manhattan approximately $400,000 for the
Company's 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.
In June 2004, the Company entered into a 20-year worldwide exclusive
license agreement with Velcera, a veterinary company. The license
agreement is for the exclusive rights to the Company's propriety lingual
spray technology in animals. In September 2004, the Company received
$1,500,000 from Velcera as an upfront payment in connection with the
commercialization agreement. The upfront payment has been included in
deferred revenue and will be 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 July 2004, the Company entered into a licensing agreement with Par
Pharmaceutical, Inc. (Par Pharmaceutical) for the exclusive right to
market, sell and distribute nitroglycerin lingual spray in the United
States and Canada. The Company has received $250,000 in upfront and
milestone payments and may receive additional fees and royalty payments
over the 10-year term of the license. The upfront payment has been
included in deferred revenue and will be recognized in income over the
10-year term of the agreement.
In October 2004, the Company entered into a license and development
agreement with Hana to develop and market the Company's lingual spray
version of ondansetron. The agreement is an exclusive license for the
United States and Canada. Pursuant to the terms of the agreement, in
exchange for $1,000,000, Hana purchased 400,000 shares of Company common
stock at a per share price of $2.50. Hana issued to the Company $500,000
of common stock of Hana (73,121 shares at $6.84 per share) for no
additional consideration. The proceeds received from Hana will be included
in deferred revenue and recognized over the period of the development
agreement. The Company may receive additional license fees and royalties
over the 20-year term of the agreement.
F-17
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
LEASES - In August 2000, the Company entered into a five-year lease
agreement, effective October 2000, for approximately 4,500 square feet of
office, laboratory and manufacturing space. Annual rent is approximately
$63,000 plus real estate taxes, currently estimated to be approximately
$11,000 annually.
In March 2003, the Company entered into a 10-year lease for approximately
31,500 square feet of office, laboratory, manufacturing and warehouse
space. During the first five years of the lease, the annual rent is
approximately $332,000 plus a proportionate share of real estate taxes and
common areas. Beginning in the sixth year and continuing through the tenth
year of the lease, the annual rent will be approximately $365,000 plus a
proportionate share of real estate taxes and common areas.
Future minimum rental payments subsequent to July 31, 2004 are as follows:
Years Ending July 31,
---------------------
2005 $506,000
2006 $443,000
2007 $476,000
2008 $476,000
2009 $476,000
Thereafter $476,000
----------
$2,853,000
==========
NOTE 8 - INCOME TAXES
The significant components of the Company's net deferred tax asset are
summarized as follows:
Year ended July 31
---------------------------------
2004 2003
As Restated
----------- -----------
Net operating loss carryforwards ......... $ 8,001,000 $ 5,300,000
Valuation allowance ...................... (8,001,000) (5,300,000)
----------- -----------
Net deferred tax asset ................... $ -- $ --
=========== ===========
F-18
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
The following is a reconciliation of the income tax benefit computed at
the statutory rate to the provision for income taxes:
Year ended July 31
-------------------------------
2004 2003
As Restated
(Note 3)
----------- -----------
Federal tax at statutory rate of 34%...... $(2,228,000) $(2,393,000)
State income tax ......................... (393,000) (422,000)
Non deductible options issued for services (294,000) 1,126,000
Sale of net operating losses ............. (214,000) (84,000)
Increase in valuation allowance .......... 2,915,000 1,689,000
----------- -----------
$ (214,000) $ (84,000)
=========== ===========
At July 31, 2004, the Company has federal and state net operating loss
carryforwards for financial reporting and income tax purposes of
approximately $23,029,000 and $13,648,000, respectively, which can be used
to offset current and future taxable income, if any, through 2024. The
Company has provided valuation allowances to offset its deferred tax
assets due to the significant uncertainties related to its ability to
generate future taxable income.
During December 2003, the Company received approximately $214,000 as
consideration for transferring approximately $2,854,000 of New Jersey net
operating loss tax benefits to a third party corporation buyer. During
December 2002, the Company received approximately $84,000 from this
program.
NOTE 9 - STOCK OPTIONS
At July 31, 2004, the Company had three plans which allow for the issuance
of stock options and other awards, the 1992 Stock Option Plan, the 1997
Stock Option Plan and the 1998 Stock Option Plan (the Plans). The total
number of shares of common stock reserved for issuance, either as
incentive stock options (ISOs) under the Internal Revenue Code or as
non-qualified options, under the 1992 and 1997 Plans is 500,000 shares
each and 1,829,500 under the 1998 Plan. ISOs may be granted to employees
and officers of the Company and non-qualified options may be granted to
consultants, directors, employees and officers of the Company. Options to
purchase the Company's common stock may not be granted at a price less
than the fair market value of the common stock at the date of grant and
will expire not more than 10 years from the date of grant. ISOs granted to
a 10% or more stockholder may not be for less than 110% of fair market
value or for a term of more than five years.
F-19
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
The Plans had provisions that permitted the cashless exercise of stock
options. The accompanying restated financial statements reflect the use of
variable plan accounting for such options (see Note 3). The Company's
Board of Directors rescinded the cashless exercise provisions for all
outstanding options in October 2004, and variable plan accounting will not
be required after the quarter ended October 31, 2004.
At July 31, 2004, there were 4,618,000 non-plan options reserved for
issuance.
Information with respect to stock option activity is as follows (in
thousands, except exercise price amounts):
Outstanding Options
----------------------------
Number of Weighted Average
Options Exercise Price
------- --------------
Balance at August 1, 2002 ......... 4,478 $1.61
Additional Shares reserved ........ -- --
Grants ............................ 2,159 1.60
Exercises ......................... 445 .94
Cancellation ...................... -- --
-----
Balance at July 31, 2003 .......... 6,192 $1.66
=====
Additional Shares reserved ........ -- $-
Grants ............................ 1,308 1.75
Exercises ......................... 260 .99
Cancellations ..................... 1,195 2.31
-----
Balance at July 31, 2004 .......... 6,045 $1.60
===== =====
The following table summarizes information related to options outstanding
at July 31, 2004:
Outstanding Options Options Exercisable
----------------------------------------------- ------------------------------
RANGE OF EXERCISE PRICES Weighted Weighted
----------------------- Average Average Weighted
Options Remaining Exercise Options Average
000's Life in Years Price 000's Exercise Price
---------- -------------- ------------ --------- ---------------
$0.01 - $1.00.............. 1,775 5.9 $ .73 1,775 $ .73
$1.01 - $2.00.............. 3,373 4.8 1.77 1,949 1.81
$2.01 - $3.00.............. 497 7.7 2.34 363 2.45
$3.01 - $4.00.............. 400 7.8 3.12 350 3.10
----------
6,045 6.5 $1.60 4,437 $1.53
========== ============== ============ ========= ===============
F-20
NOVADEL PHARMA INC.
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information related to warrants outstanding
at July 31, 2004:
REMAINING NUMBER OF
NUMBER CONTRACTUAL OPTIONS
PRICE RANGE OUTSTANDING LIFE (YEARS) EXERCISABLE
----------- ----------- ------------ -----------
$0.01-1.00 7,343,140 5.40 7,343,140
$1.01-1.99 6,556,397 3.95 6,556,397
$2.00 100,004 3.28 100,004
---------- ----------
Totals 13,999,541 13,999,541
========== ==========
F-21
RESTATEMENT OF QUARTERLY DATA (UNAUDITED)
In connection with the preparation of the 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 are subject to variable plan accounting treatment under applicable
accounting standards, and, accordingly, previously unrecognized
compensation expenses should be 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 has identified certain
adjustments that necessitate 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 (see Note 3 to
financial statements).
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 following table shows the effects of the restatement on the Company's
quarterly results of operations. In the tables that follow, the columns
labeled "Restatement Adjustments" represent adjustments for compensation
expense (credit) previously not recognized.
F-22
NOVADEL PHARMA INC.
RESTATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED APRIL 30, 2004
As Previously Restatement
Reported Adjustment As Restated
For The Qtr For The Qtr For The Qtr
Ended Ended Ended
4/30/04 4/30/04 4/30/04
------------ ------------ ------------
LICENSE FEE $ 5,000 $ -- $ 5,000
CONSULTING REVENUES 11,000 -- 11,000
------------ ------------ ------------
TOTAL REVENUES 16,000 -- 16,000
------------ ------------ ------------
RESEARCH AND DEVELOPMENT EXPENSES 587,000 (6,000) 581,000
CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,218,000 (193,000) 1,025,000
------------ ------------ ------------
TOTAL EXPENSES 1,805,000 (199,000) 1,606,000
------------ ------------ ------------
LOSS FROM OPERATIONS (1,789,000) 199,000 (1,590,000)
INTEREST INCOME 59,000 -- 59,000
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,730,000) 199,000 (1,531,000)
DEFERRED INCOME TAX BENEFIT -- -- --
------------ ------------ ------------
NET LOSS $ (1,730,000) $ 199,000 $ (1,531,000)
============ ============ ============
BASIC LOSS PER COMMON SHARE $ (0.05) $ 0.00 $ (0.05)
============ ============ ============
SHARES USED IN COMPUTATION OF
BASIC LOSS PER COMMON SHARE 32,866,531 32,866,531 32,866,531
============ ============ ============
F-23
NOVADEL PHARMA INC.
RESTATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED JANUARY 31, 2004 AND OCTOBER 31, 2003
As Previously Restatement As Previously Restatement
Reported Adjustment As Restated Reported Adjustment As Restated
For The Qtr For The Qtr For The Qtr For The Qtr For The Qtr For The Qtr
Ended Ended Ended Ended Ended Ended
1/31/04 1/31/04 1/31/04 10/31/03 10/31/03 10/31/03
------------ ------------ ------------ ------------ ------------ ------------
LICENSE FEE $ 3,000 $ -- $ 3,000 $ -- $ -- $ --
CONSULTING REVENUES 18,000 -- 18,000 -- 2,000 2,000
------------ ------------ ------------ ------------ ------------ ------------
TOTAL REVENUES 21,000 -- 21,000 -- 2,000 2,000
------------ ------------ ------------ ------------ ------------ ------------
RESEARCH AND DEVELOPMENT EXPENSES 389,000 (3,000) 386,000 -- (24,000) (24,000)
CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,265,000 (72,000) 1,193,000 1,733,000 (671,000) 1,062,000
------------ ------------ ------------ ------------ ------------ ------------
TOTAL EXPENSES 1,654,000 (75,000) 1,579,000 1,733,000 (695,000) 1,038,000
------------ ------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,633,000) 75,000 (1,558,000) (1,733,000) 697,000 (1,036,000)
INTEREST INCOME 5,000 -- 5,000 6,000 -- 6,000
------------ ------------ ------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,628,000) 75,000 (1,553,000) (1,727,000) 697,000 (1,030,000)
DEFERRED INCOME TAX BENEFIT (214,000) -- (214,000) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
NET LOSS $ (1,414,000) $ 75,000 $ (1,339,000) $ (1,727,000) $ 697,000 $ (1,030,000)
============ ============ ============ ============ ============ ============
BASIC LOSS PER COMMON SHARE $ (0.06) $ 0.00 $ (0.06) $ (0.10) $ 0.04 $ (0.06)
============ ============ ============ ============ ============ ============
SHARES USED IN COMPUTATION OF
BASIC LOSS PER COMMON SHARE 23,247,336 23,247,336 23,247,336 17,972,760 17,972,760 17,972,760
============ ============ ============ ============ ============ ============
F-24
NOVADEL PHARMA INC.
RESTATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED JULY 31, 2003 AND APRIL 30, 2003
As Previously Restatement As Previously Restatement
Reported Adjustment As Restated Reported Adjustment As Restated
For The Qtr For The Qtr For The Qtr For The Qtr For The Qtr For The Qtr
Ended Ended Ended Ended Ended Ended
7/31/03 7/31/03 7/31/03 4/30/03 4/30/03 4/30/03
------------ ------------ ------------ ------------ ------------ ------------
LICENSE FEE $ -- $ -- $ -- $ -- $ -- $ --
CONSULTING REVENUES 2,000 -- 2,000 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
TOTAL REVENUES 2,000 -- 2,000 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
RESEARCH AND DEVELOPMENT EXPENSES 1,048,000 16,000 1,064,000 264,000 (68,000) 196,000
CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 424,000 1,437,000 1,861,000 614,000 (2,296,000) (1,682,000)
------------ ------------ ------------ ------------ ------------ ------------
TOTAL EXPENSES 1,472,000 1,453,000 2,925,000 878,000 (2,364,000) (1,486,000)
------------ ------------ ------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,470,000) (1,453,000) (2,923,000) (878,000) 2,364,000 1,486,000
INTEREST INCOME 9,000 -- 9,000 7,000 -- 7,000
------------ ------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,461,000) (1,453,000) (2,914,000) (871,000) 2,364,000 1,493,000
DEFERRED INCOME TAX BENEFIT (84,000) -- (84,000) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,377,000) $ (1,453,000) $ (2,830,000) $ (871,000) $ 2,364,000 $ 1,493,000
============ ============ ============ ============ ============ ============
BASIC INCOME (LOSS) PER COMMON SHARE $ (0.09) $ (0.09) $ (0.18) $ (0.06) $ 0.16 $ 0.10
============ ============ ============ ============ ============ ============
SHARES USED IN COMPUTATION OF
BASIC INCOME (LOSS) PER COMMON SHARE 15,419,000 15,419,000 15,419,000 15,155,662 15,155,662 15,155,662
============ ============ ============ ============ ============ ============
F-25
NOVADEL PHARMA INC.
RESATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED JANUARY 31, 2003 AND OCTOBER 31, 2002
As Previously Restatement As Previously Restatement
Reported Adjustment As Restated Reported Adjustment As Restated
For The Qtr For The Qtr For The Qtr For The Qtr For The Qtr For The Qtr
Ended Ended Ended Ended Ended Ended
1/31/03 1/31/03 1/31/03 10/31/02 10/31/02 10/31/02
------------ ------------ ------------ ------------ ------------ ------------
LICENSE FEE $ -- $ -- $ -- $ -- $ -- $ --
CONSULTING REVENUES -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
TOTAL REVENUES -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
RESEARCH AND DEVELOPMENT EXPENSES 348,000 56,000 404,000 -- (12,000) (12,000)
CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,523,000 2,413,000 3,936,000 1,729,000 (405,000) 1,324,000
------------ ------------ ------------ ------------ ------------ ------------
TOTAL EXPENSES 1,871,000 2,469,000 4,340,000 1,729,000 (417,000) 1,312,000
------------ ------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,871,000) (2,469,000) (4,340,000) (1,729,000) 417,000 (1,312,000)
INTEREST INCOME 18,000 -- 18,000 15,000 -- 15,000
------------ ------------ ------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES $ (1,853,000) $ (2,469,000) $ (4,322,000) $ (1,714,000) $ 417,000 $ (1,297,000)
DEFERRED INCOME TAX BENEFIT (84,000) -- (84,000) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
NET LOSS $ (1,769,000) $ (2,469,000) $ (4,238,000) $ (1,714,000) $ 417,000 $ (1,297,000)
============ ============ ============ ============ ============ ============
BASIC LOSS PER COMMON SHARE $ (0.12) $ (0.17) $ (0.29) $ (0.12) $ 0.03 $ (0.09)
============ ============ ============ ============ ============ ============
SHARES USED IN COMPUTATION OF
BASIC LOSS PER COMMON SHARE 14,542,821 14,542,821 14,542,821 14,509,523 14,509,523 14,509,523
============ ============ ============ ============ ============ ============
F-26
NOVADEL PHARMA INC.
RESTATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED JULY 31, 2002 AND APRIL 30, 2002
As Previously Restatement As previously Restatement
Reported Adjustment As Restated Reported Adjustment As Restated
For The Qtr For The Qtr For The Qtr For The Qtr For The Qtr For The Qtr
Ended Ended Ended Ended Ended Ended
7/31/02 7/31/02 7/31/02 4/30/02 4/30/02 4/30/02
------------ ------------ ------------ ------------ ------------ ------------
LICENSE FEE $ -- $ -- $ -- $ -- $ -- $ --
CONSULTING REVENUES 4,000 -- 4,000 81,000 -- 81,000
------------ ------------ ------------ ------------ ------------ ------------
TOTAL REVENUES 4,000 -- 4,000 81,000 -- 81,000
------------ ------------ ------------ ------------ ------------ ------------
RESEARCH AND DEVELOPMENT EXPENSES 962,000 (154,000) 808,000 -- 76,000 76,000
CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 756,000 (5,126,000) (4,370,000) 2,139,000 3,475,000 5,614,000
------------ ------------ ------------ ------------ ------------ ------------
TOTAL EXPENSES 1,718,000 (5,280,000) (3,562,000) 2,139,000 3,551,000 5,690,000
------------ ------------ ------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,714,000) 5,280,000 3,566,000 (2,058,000) (3,551,000) (5,609,000)
INTEREST INCOME 12,000 -- 12,000 17,000 -- 17,000
------------ ------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,702,000) 5,280,000 3,578,000 (2,041,000) (3,551,000) (5,592,000)
DEFERRED INCOME TAX BENEFIT -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,702,000) $ 5,280,000 $ 3,578,000 $ (2,041,000) $ (3,551,000) $ (5,592,000)
============ ============ ============ ============ ============ ============
BASIC INCOME (LOSS) PER COMMON SHARE
$ (0.15) $ 0.46 $ 0.31 $ (0.15) $ (0.27) $ (0.42)
============ ============ ============ ============ ============ ============
SHARES USED IN COMPUTATION OF
BASIC INCOME (LOSS) PER COMMON SHARE 11,361,000 11,361,000 11,361,000 13,432,765 13,432,765 13,432,765
============ ============ ============ ============ ============ ============
F-27
NOVADEL PHARMA INC.
RESTATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JANUARY 31, 2002
As Previously Restatement
Reported Adjustment As Restated
For The Qtr For The Qtr For The Qtr
Ended Ended Ended
1/31/02 1/31/02 1/31/02
----------- ----------- -----------
LICENSE FEE $ -- $ -- $ --
CONSULTING REVENUES 183,000 -- 183,000
----------- ----------- -----------
TOTAL REVENUES 183,000 -- 183,000
----------- ----------- -----------
RESEARCH AND DEVELOPMENT EXPENSES -- 89,000 89,000
CONSULTING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 548,000 3,471,000 4,019,000
----------- ----------- -----------
TOTAL EXPENSES 548,000 3,560,000 4,108,000
----------- ----------- -----------
LOSS FROM OPERATIONS (365,000) (3,560,000) (3,925,000)
BUY-OUT OF CONSULTANT'S CONTRACT (33,000) -- (33,000)
INTEREST INCOME 10,000 -- 10,000
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (388,000) (3,560,000) (3,948,000)
DEFERRED INCOME TAX BENEFIT (88,000) -- (88,000)
----------- ----------- -----------
NET LOSS $ (300,000) $(3,560,000) $(3,860,000)
=========== =========== ===========
BASIC LOSS PER COMMON SHARE $ (0.03) $ (0.36) $ (0.39)
=========== =========== ===========
SHARES USED IN COMPUTATION OF
BASIC LOSS PER COMMON SHARE 9,942,291 9,942,291 9,942,291
=========== =========== ===========
F-28
INDEX TO EXHIBITS
The following exhibits are included with this Annual Report. All management
contracts or compensatory plans or arrangements are marked with an asterisk.
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
3.1 Restated Certificate of Incorporation of Incorporated by reference to Exhibit 3.1 of the
the Company Company's Quarterly Report on Form 10-QSB, as filed
with the SEC on June 14, 2004
3.2 Amended and Restated By-laws of the Company Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form SB-2, as
filed with the SEC on August 8, 1997 (File No.
333-33201)
4.1 Form of Class C Warrant for the Purchase of Incorporated by reference to Exhibit 4.1 to the
Shares of Common Stock Company's Current Report on Form 8-K, as filed with
the SEC on January 12, 2004
10.1 *1992 Stock Option Plan Incorporated by reference to the Company's
Registration Statement on Form SB-2, as filed with
the SEC on August 8, 1997 (File No. 333-33201)
10.2 *Form of Incentive Stock Option Agreement Incorporated by reference to the Company's
under the 1992 Stock Option Plan Registration Statement on Form SB-2, as filed with
the SEC on August 8, 1997 (File No. 333-33201)
10.3 *1997 Stock Option Plan Incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form SB-2, as
filed with the SEC on August 8, 1997 (File No.
333-33201)
10.4 *Form of Non-Qualified Option Agreement under Incorporated by reference to the Company's
the 1997 Stock Option Plan Registration Statement on Form SB-2, as filed with
the SEC on August 8, 1997 (File No. 333-33201)
E-1
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
10.5 *1998 Stock Option Plan Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8, as
filed with the SEC on June 18, 2004 (File No.
333-116665)
10.6 *Form of Stock Option Agreement under the Incorporated by reference to Exhibit 4.2 to the
1998 Stock Option Plan Company's Registration Statement on Form S-8, as
filed with the SEC on June 18, 2004 (File No.
333-116665)
10.7 *Form of Nonqualified Stock Option Agreement Incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-8, as
filed with the SEC on June 18, 2004 (File No.
333-116665)
10.8 Common Stock and Warrant Purchase Agreement, Incorporated by reference to Exhibit A to the
dated December 12, 2001, by and among the Schedule 13D as filed by Lindsay A. Rosenwald with
Company and certain purchasers the SEC on December 21, 2001
10.9 Amendment No. 1, dated January 6, 2002, to Incorporated by reference to Exhibit 10.25 to the
the Common Stock and Warrant Purchase Company's Registration Statement on Form SB-2, as
Agreement dated December 12, 2001 between filed with the SEC on April 15, 2002 (File No.
the Company and certain purchasers 333-86262)
10.10 Lease Agreement, dated March 19, 2003, by Incorporated by reference to Exhibit 10.28 to the
and between the Company and Macedo Business Company's Quarterly Report on Form 10-QSB for the
Park, II, L.L.C. period ended April 30, 2003, as filed with the SEC
on June 19, 2003
10.11 Form of Amendment Number 1 to Lease Incorporated by reference to Exhibit 10.29 to the
Agreement dated March 19, 2003 between Company's Quarterly Report on Form 10-QSB for the
Macedo Business Park, II, L.L.C. and the period ended April 30, 2003, as filed with the SEC
Company, dated as of March 19, 2003 on June 19, 2003
10.12 License and Development Agreement, effective Incorporated by reference to Exhibit 10.31 to the
as of April 4, 2003, by and between the Amendment No. 1 to the Company's Annual Report on
Company and Manhattan Pharmaceuticals, Inc. Form 10-KSB, as filed with the SEC on March 11, 2004
E-2
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
10.13 Development, Manufacturing and Supply Filed herewith
Agreement, dated July 28, 2004, by and
between the Company and Par Pharmaceutical,
Inc.
10.14 Second Amendment to License and Development Filed herewith
Agreement, dated as of June 22, 2004, by and
between the Company and the Veterinary
Company, Inc.
10.15 *Employment Agreement, dated as of January Incorporated by reference to Exhibit 10.1 to the
1, 2002, between the Company and Harry A. Company's Registration Statement on Form SB-2, as
Dugger III, Ph.D. filed with the SEC on April 15, 2002 (File No.
333-86262)
10.16 *Employment Agreement, dated as of December Incorporated by reference to Exhibit 10.26 of the
3, 2002, by and between the Company and Gary Company's Quarterly Report on Form 10-QSB for the
Shangold period ending January 31, 2003, as filed with the
SEC on March 10, 2003
10.17 *Amendment Number 1, dated December 22, Incorporated by reference to Exhibit 10.27 of the
2002, to the Employment Agreement dated Company's Quarterly Report on Form 10-QSB for the
December 3, 2002, between the Company and period ending January 31, 2003, as filed with the
Gary Shangold SEC on March 10, 2003
10.18 *Employment Agreement, dated as of May 23, Incorporated by reference to Exhibit 10.30 to the
2003, by and between the Company and Barry Company's Quarterly Report on Form 10-QSB for the
Cohen period ended April 30, 2003, as filed with the SEC
on June 19, 2003
10.19 *Amendment to Mohammed Abd El-Shafy Incorporated by reference to Exhibit 10.32 of the
Employment Agreement, dated as of April 9, Company's Quarterly Report on Form 10-QSB, as filed
2004, between the Company and Mohammed Abd with the SEC on June 14, 2004
El-Shafy, Ph.D.
10.20 *Employment Agreement, dated as of April 9, Filed herewith
2004, by and between the Company and Jean
Frydman
E-3
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
23.1 Consent of J.H. Cohn LLP Filed herewith
23.2 Consent of Wiss & Company, LLP Filed herewith
31.1 Certification of Chief Executive Officer Filed herewith
under Rule 13a-14(a)
31.2 Certification of Interim Principal Financial Filed herewith
Officer under Rule 13a-14(a)
32 Certifications of the Chief Executive Filed herewith
Officer and Interim Principal Financial
Officer under 18 USC 1350
E-4