Table of Contents





UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
quarterly period ended September 30, 2009





or





o 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. 001-32177





NOVADEL
PHARMA INC.


(Exact
name of registrant as specified in its charter)








Delaware
            22-2407152(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)








25
MINNEAKONING ROAD, FLEMINGTON, NEW JERSEY 08822


(Address
of principal executive offices) (Zip Code)





(908)
782-3431


Registrant’s
telephone number, including area code





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).




Yes o No  o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o (Do
      not check if a smaller reporting company)
            Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x





As of
November 2, 2009, the issuer had 64,106,374 shares of common stock, $.001 par
value, outstanding.





Table of Contents








NOVADEL
PHARMA INC.


QUARTERLY
REPORT ON FORM 10-Q


FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009





TABLE OF CONTENTS








PART
      I – Financial Information
            PAGEItem 1.
            Financial Statements.
            2Item 2
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations.
            17Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk.
            33Item 4T.
            Controls and Procedures.
            33Item 1A.
            Risk Factors.
            34Item 6.
            Exhibits.
            58Signatures
            59








-i-
 Table of Contents








SAFE HARBOR STATEMENTS UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995





This
Quarterly Report on Form 10-Q includes “forward-looking statements”, including
statements regarding NovaDel Pharma Inc.’s (the “Company,” “we,” “us” or
“NovaDel”) expectations, beliefs, intentions or strategies for the future and
the Company’s internal controls and procedures and outstanding financial
reporting obligations and other accounting issues. The Company intends that all
forward-looking statements be subject to the safe-harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are only predictions and reflect the Company’s views as of the date
they are made with respect to future events and financial performance. In
particular, the “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” section in Part I, Item 2 of this Quarterly Report on
Form 10-Q includes forward-looking statements that reflect the Company’s current
views with respect to future events and financial performance. The Company uses
words such as “expect,” “anticipate,” “believe,” “intend” and similar
expressions to identify forward-looking statements. You can also identify
forward-looking statements by the fact that they do not relate strictly to
historical or current facts. A number of important risks and uncertainties
could, individually or in the aggregate, cause actual results to differ
materially from those expressed or implied in any forward-looking
statements.




Examples
of the risks and uncertainties include, but are not limited to: the inherent
risks and uncertainties in developing products of the type the Company is
developing (independently and through collaborative arrangements); the inherent
risks and uncertainties in completing the pilot pharmacokinetic feasibility
studies being conducted by the Company; possible changes in the Company’s
financial condition; the progress of the Company’s research and development;
inadequate supplies of drug substance and drug product; timely obtaining
sufficient patient enrollment in the Company’s clinical trials; the impact of
development of competing therapies and/or technologies by other companies; the
Company’s ability to obtain additional required financing to fund its research
programs; the Company’s ability to enter into agreements with collaborators and
the failure of collaborators to perform under their agreements with the Company;
the progress of the U.S. Food and Drug Administration, or FDA, approvals in
connection with the conduct of the Company’s clinical trials and the marketing
of the Company’s products; the additional costs and delays which may result from
requirements imposed by the FDA in connection with obtaining the required
approvals; acceptance for filing by the FDA does not mean that the New Drug
Application, or NDA, has been or will be approved, nor does it represent an
evaluation of the adequacy of the data submitted; the risks related to the
Company’s internal controls and procedures; and the risks identified under the
section entitled “Risk Factors” included as Item 1A in Part II of this Quarterly
Report on Form 10-Q and other reports, including this report and other filings
filed with the Securities and Exchange Commission from time to
time.










1
 Table of Contents





PART
I – FINANCIAL INFORMATION





ITEM 1. FINANCIAL STATEMENTS


NOVADEL
PHARMA INC.


CONDENSED
BALANCE SHEETS


AS
OF SEPTEMBER 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008











ASSETS
            
            September
      30, 2009 (unaudited)
            
            
            December
      31, 2008 (Note 2)Current
      Assets:Cash
      and cash equivalents
            
            $
            327,000
            
            
            $
            4,328,000Assets
      held-for-sale
            
            
            299,000
            
            
            
            299,000Deferred
      financing costs, net of accumulated amortization of $238,000 and $213,000,
      respectively
            
            
            —
            
            
            
            25,000Prepaid
      expenses and other current assets
            
            
            553,000
            
            
            
            958,000Total  Current
      Assets
            
            
            1,179,000
            
            
            
            5,610,000Property
      and equipment, net
            
            
            1,060,000
            
            
            
            1,447,000Other
      assets
            
            
            32,000
            
            
            
            259,000TOTAL
      ASSETS
            
            $
            2,271,000
            
            
            $
            7,316,000LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCurrent
      Liabilities:Secured
      convertible notes payable, net of unamortized debt discount of zero and
      $403,000, respectively
            
            $
            3,000,000
            
            
            $
            3,597,000Notes
      payable
            
            
            159,000
            
            
            
            —Accounts
      payable
            
            
            924,000
            
            
            
            654,000Accrued
      expenses and other current liabilities
            
            
            1,019,000
            
            
            
            924,000Current
      portion of deferred revenue
            
            
            266,000
            
            
            
            266,000Current
      portion of capital lease obligations
            
            
            34,000
            
            
            
            122,000Total
      Current Liabilities
            
            
            5,402,000
            
            
            
            5,563,000Non-current
      portion of deferred revenue
            
            
            4,269,000
            
            
            
            4,468,000Non-current
      portion of capital lease obligations
            
            
            7,000
            
            
            
            26,000Total
      Liabilities
            
            
            9,678,000
            
            
            
            10,057,000COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      DEFICIENCYPreferred
      stock, $.001 par value:Authorized
      1,000,000 shares, none issued
            
            
            —
            
            
            
            —Common
      stock, $.001 par value:Authorized
      200,000,000, issued  63,606,374 and 60,692,260 shares at
      September 30, 2009 and December 31, 2008, respectively
            
            
            64,000
            
            
            
            60,000Additional
      paid-in capital
            
            
            72,925,000
            
            
            
            72,034,000Accumulated
      deficit
            
            
            (80,390,000
            )
            
            
            (74,829,000
            )Less:
      treasury stock, at cost, 3,012 shares
            
            
            (6,000
            )
            
            
            (6,000
            )Total
      Stockholders’ Deficiency
            
            
            (7,407,000
            )
            
            
            (2,741,000
            )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
            
            $
            2,271,000
            
            
            $
            7,316,000





See
accompanying notes to condensed financial statements.





2
 Table of Contents





NOVADEL
PHARMA INC.


CONDENSED
STATEMENTS OF OPERATIONS


FOR
THE THREE MONTHS AND NINE MONTHS ENDED


SEPTEMBER
30, 2009 AND SEPTEMBER 30, 2008


(UNAUDITED)








Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30, 2009
            
            
            September
      30, 2008
            
            
            September
      30, 2009
            
            
            September
      30, 2008License
      Fees and Milestone Fees Earned
            
            $
            223,000
            
            
            $
            104,000
            
            
            $
            356,000
            
            
            $
            258,000Research
      and Development Expenses
            
            
            530,000
            
            
            
            705,000
            
            
            
            1,980,000
            
            
            
            3,151,000Consulting,
      Selling, General and Administrative Expenses
            
            
            973,000
            
            
            
            1,164,000
            
            
            
            3,167,000
            
            
            
            3,473,000Loss
      on Assets Held-for-Sale
            
            
            —
            
            
            
            9,000
            
            
            
            —
            
            
            
            351,000Total
      Expenses
            
            
            1,503,000
            
            
            
            1,878,000
            
            
            
            5,147,000
            
            
            
            6,975,000Loss
      From Operations
            
            
            (1,280,000
            )
            
            
            (1,774,000
            )
            
            
            (4,791,000
            )
            
            
            (6,717,000
            )Other
      Income
            
            
            —
            
            
            
            —
            
            
            
            301,000
            
            
            
            —Interest
      Expense
            
            
            (81,000
            )
            
            
            (750,000
            )
            
            
            (717,000
            )
            
            
            (1,044,000
            )Interest
      Income
            
            
            —
            
            
            
            21,000
            
            
            
            6,000
            
            
            
            84,000Net
      Loss
            
            $
            (1,361,000
            )
            
            $
            (2,503,000
            )
            
            $
            (5,201,000
            )
            
            $
            (7,677,000
            )Basic
      and Diluted Loss Per Common Share
            
            $
            (0.02
            )
            
            $
            (0.04
            )
            
            $
            (0.09
            )
            
            $
            (0.13
            )Weighted
      Average Number of Common Shares Used in Computation of Basic and Diluted
      Loss Per Common Share
            
            
            61,385,722
            
            
            
            59,592,000
            
            
            
            60,458,548
            
            
            
            59,592,000























See
accompanying notes to condensed financial statements.














3
 Table of Contents





NOVADEL
PHARMA INC.


CONDENSED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009


(UNAUDITED)














Common
      StockShares
            
            
            Amount
            
            
            Additional
      Paid-In Capital
            
            
            Accumulated
              Deficit
            
            
            Treasury
      Stock
            
            
            Total
      Stockholders’ DeficiencyBALANCE,
      December 31, 2008
            
            
            60,692,260
            
            
            $
            60,000
            
            
            $
            72,034,000
            
            
            $
            (74,829,000
            )
            
            $
            (6,000
            )
            
            $
            (2,741,000
            )Share-based
      compensation expense
            
            
            
            
            
            
            
            
            
            
            251,000
            
            
            
            
            
            
            
            
            
            
            
            251,000Cumulative
      effect for the adoption of ASC 815-40-15 relating to outstanding warrants
      indexed to the  entity’s own stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (360,000
            )
            
            
            
            
            
            
            (360,000
            )Restricted
      stock cancelled
            
            
            (575,000
            )Cashless
      exercise of warrants
            
            
            489,114
            
            
            
            1,000
            
            
            
            (1,000
            )Issuance
      of Common Stock
            
            
            3,000,000
            
            
            
            3,000
            
            
            
            641,000
            
            
            
            
            
            
            
            
            
            
            
            644,000Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,201,000
            )
            
            
            
            
            
            
            (5,201,000
            )BALANCE,
      September 30, 2009
            
            
            63,606,374
            
            
            $
            64,000
            
            
            $
            72,925,000
            
            
            $
            (80,390,000
            )
            
            $
            (6,000
            )
            
            $
            (7,407,000
            )

















See accompanying notes to condensed
financial statements.





4
 Table of Contents





NOVADEL
PHARMA INC.


CONDENSED
STATEMENTS OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2008


(UNAUDITED)








Nine
      Months EndedSeptember
      30, 2009
            
            
            September
      30, 2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (5,201,000
            )
            
            $
            (7,677,000
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Share-based
      compensation expense
            
            
            251,000
            
            
            
            600,000Expiration
      of warrants
            
            
            (360,000
            )Amortization
      of debt discount and deferred financing fees
            
            
            428,000
            
            
            
            968,000Depreciation
      and amortization
            
            
            287,000
            
            
            
            397,000Loss
      on assets held for sale
            
            
            
            
            
            
            351,000Loss
      on disposition of fixed assets
            
            
            59,000Changes
      in operating assets and liabilities:Prepaid
      expenses and other current assets
            
            
            405,000
            
            
            
            127,000Other
      assets
            
            
            227,000
            
            
            
            36,000Accounts
      payable
            
            
            270,000
            
            
            
            (1,181,000
            )Accrued
      expenses and other current liabilities
            
            
            254,000
            
            
            
            (1,569,000
            )Deferred
      revenue
            
            
            (199,000
            )
            
            
            2,822,000Net
      cash used in operating activities
            
            
            (3,579,000
            )
            
            
            (5,126,000
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from sale of fixed assets
            
            
            41,000
            
            
            
            —CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of convertible notes
            
            
            —
            
            
            
            1,475,000Proceeds
      from issuance of common stock
            
            
            644,000Deferred
      financing costs
            
            
            —
            
            
            
            (195,000
            )Payments
      of convertible note obligation
            
            
            (1,000,000
            )
            
            
            —Payments
      of capital lease obligations
            
            
            (107,000
            )
            
            
            (129,000
            )Net
      cash (used in) provided by financing activities
            
            
            (463,000
            )
            
            
            1,151,000DECREASE
      IN CASH AND CASH EQUIVALENTS
            
            
            (4,001,000
            )
            
            
            (3,975,000
            )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            4,328,000
            
            
            
            6,384,000CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            327,000
            
            
            $
            2,409,000SUPPLEMENTAL
      DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:Warrants
      – discount and beneficial conversion feature
            
            
            —
            
            
            $
            1,210,000Registration
      Penalty Notes Issued
            
            $
            159,000
            
            
            
            —








See
accompanying notes to condensed financial statements.





5
 Table of Contents





NOVADEL
PHARMA INC.


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS





NOTE
1 - NATURE OF THE BUSINESS





NovaDel
Pharma Inc. (the “Company”) is a specialty pharmaceutical company developing
oral spray formulations for a broad range of marketed drugs.  The
Company’s proprietary technology offers, in comparison to conventional oral
dosage forms, the potential for faster absorption of drugs into the bloodstream
leading to quicker onset of therapeutic effects and possibly reduced first pass
liver metabolism, which may result in lower doses.  Oral sprays
eliminate the requirement for water or the need to swallow, potentially
improving patient convenience and adherence.  The Company’s oral spray
technology is focused on addressing unmet medical needs for a broad array of
existing and future pharmaceutical products, with the most advanced oral spray
candidates targeting angina, nausea, insomnia, migraine headaches and disorders
of the central nervous system.





NOTE
2 – BASIS OF PRESENTATION AND LIQUIDITY





The
balance sheet at December 31, 2008 has been derived from the audited balance
sheet contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008, as amended, and is presented for comparative purposes. All
other financial statements are unaudited. The condensed financial statements are
presented on the basis of accounting principles generally accepted in the United
States of America for interim financial statements.  However, certain
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted in accordance with the published rules and regulations
of the Securities and Exchange Commission. The condensed financial statements in
this report should be read in conjunction with the financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008, as amended.


The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect reported loss, financial position
and various disclosures. Actual results could differ from those estimates. In
the opinion of management, all adjustments, which include only normal recurring
adjustments, necessary to present fairly the financial position, results of
operations and cash flows for all periods presented, have been made in the
interim financial statements. Results of operations for interim periods are not
necessarily indicative of the operating results to be expected for a full fiscal
year.





The
Company has reported a net loss of $5,201,000 and $7,677,000 and negative cash
flows from operating activities of $3,579,000 and $5,126,000 for the nine months
ended September 30, 2009 and September 30, 2008, respectively.  As of
September 30, 2009, the Company had negative working capital of $4,223,000 and
cash and cash equivalents of $327,000.  Until and unless the Company’s
operations generate significant revenues and cash flow, 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 positive cash flows from operating activities, and/or
obtaining additional financing. The most likely sources of financing include
private placements of the Company’s equity or debt securities or bridge loans to
the Company from third-party lenders, license payments from current and future
partners, and royalty payments from sales of approved product candidates by
partners. The Company can give no assurances that any additional capital that it
is able to obtain will be sufficient to meet its needs, or on terms favorable to
it. During the fourth quarter of 2007 and continuing through the current date,
the Company significantly reduced clinical development activities on its product
candidate pipeline, as it did not believe that it had sufficient cash to sustain
such activities. Despite this reduction in expenditures for clinical activities,
the Company requires capital to sustain its existing organization until such
time as clinical activities can be resumed. The Company received $1,475,000 in
gross proceeds on May 30, 2008 from the Initial Closing of a convertible note
financing with certain funds affiliated with ProQuest Investments and received
$2,525,000 in gross proceeds on October 17, 2008 from the Subsequent Closing of
such convertible note financing.  The convertible notes issued in the
Initial Closing matured on November 30, 2008 and, in the Subsequent Closing,
matured on April 17, 2009. On November 30, 2008, with respect to the Initial
Closing, and on April 17, 2009, with respect to the Subsequent Closing, the
noteholders did not either convert the convertible notes issued in such closing
into shares of common stock or demand payment of the outstanding principal
balance, plus accrued and unpaid interest at a rate of 10% per annum. There can
be no assurance whether the noteholders will convert their notes or demand
immediate repayment of the convertible notes. The convertible notes are secured
by all of the assets of the Company, other than certain excluded assets. On
April 29, 2009, the Company remitted $1,000,000 to ProQuest Investments and
related entities against the $4,000,000 of convertible notes issued during
2008.





6
 Table of Contents





On July
16, 2009, the Company received approval from the NYSE Amex LLC to issue up to
12,000,000 shares over the next twelve (12) months.  The Company has
entered into an agreement with Seaside 88, LP, whereby Seaside 88, LP will
purchase 500,000 shares of common stock in a series of closings occurring every
two weeks for a total of up to 26 closings, provided that the 3 day volume
weighed average price prior to the scheduled closing is greater than or equal to
the stated floor price of $0.25 per share.  The Company has received
$693,000 in gross proceeds (approximately $644,000 net proceeds) for the
closings that have occurred as of September 30, 2009.  The scheduled
closing on October 9, 2009 did not occur because the floor price was not
met. Consequently, the total number of shares issuable under the
agreement has been reduced by 500,000 shares.





On
October 27, 2009, the Company entered into a licensing agreement with
privately-held Mist Acquisition, LLC to manufacture and commercialize the
NitroMistTM
lingual spray version of nitroglycerine, a widely-prescribed and leading
short-acting nitrate for the treatment of angina pectoris.  Under the
terms of the agreement, the Company received a $1,000,000 licensing fee upon
execution of the agreement, and will receive milestone payments totaling an
additional $1,000,000 over the next twelve months and ongoing performance
payments of up to seventeen percent (17%) of net sales subject to potential
reduction based upon the terms of the Agreement. The Agreement contains
customary termination provisions. In addition, the Agreement may be terminated
by Mist for any reason upon written notice to the Company, which will be
effective 180 days from the date of receipt of such notice, provided that Mist
may not terminate until the second anniversary after the first commercial sale
of NitroMistTM by Mist or its affiliates.





Through a
separate license agreement with Mist, Akrimax Pharmaceuticals, LLC will receive
the exclusive right to manufacture, distribute, market and sell NitroMistTM in North America.
Under the terms of the Agreement, the Company will receive a percentage of any
income received by Mist under any sublicense agreement relating to
NitroMistTM.




TM TM co-promote
zolpidem tartrate oral spray in the United States and Canada with ECR’s consent,
and retains commercialization rights for all other territories. ECR will assume
responsibility for manufacturing the product for commercialization in the United
States and Canada, including any activities required from the date of the
Agreement. The Agreement contains customary termination
provisions.  In addition, the agreement may be terminated by ECR for
any reason upon written notice to the Company, which will be effective 180 days
from the date of receipt of such notice, provided that ECR may not terminate
until the second anniversary after the first commercial sale of ZolpiMistTM by
ECR or its affiliates.






At the
Company’s current level of spending, which excludes any product development
efforts, assuming that ProQuest does not demand payment under the notes and
assuming that the remaining 7,500,000 shares are issued to Seaside 88, LP, the
Company estimates that it will have sufficient cash on hand to fund operations
through fourth quarter 2010.


The
Company may also determine that it is appropriate to increase development
activities on its product candidate pipeline. An increase in development
activities would significantly increase cash outflows and thereby require
additional funding in order to sustain operations. The Company may choose to
raise additional capital in 2009 and 2010 to fund future development activities
or to take advantage of other strategic opportunities. This could include the
securing of funds through new strategic partnerships and/or the sale of common
stock or other securities.





Given the
recent and continuing downturn in the economy, uncertainty in the financial
community, and the Company’s current cash position, there can be no assurance
that additional public or private capital will be available to the Company on
favorable terms, or at all.  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 obtain additional financing on terms acceptable to it, or at
all.  If the Company is unsuccessful at obtaining additional financing
as needed, it may be required to significantly curtail or cease operations. The
Company will need additional financing thereafter until it achieves
profitability, if ever.


The
Company’s audited financial statements for the fiscal year ended December 31,
2008, were prepared under the assumption that the Company will continue its
operations as a going concern. The Company was incorporated in 1982, and has a
history of losses. As a result, the Company’s independent registered public
accounting firm in their audit report has expressed substantial doubt about the
Company’s ability to continue as a going concern. The Company believes that the
cash inflows that have been generated from our financing transactions and our
licensing transactions and any additional potential cash inflows that may be
received during 2009 and 2010 will improve its ability to continue its
operations as a going concern.  Continued operations are dependent on
the Company’s ability to complete product licensing agreements, equity or debt
financing activities or to generate profitable operations. Such capital
formation activities may not be available or may not be available on reasonable
terms. The Company’s financial statements do not include any adjustments that
may result from the outcome of this uncertainty.








7
 Table of Contents











NOTE
3 – CONVERTIBLE NOTES





On May 6,
2008, the Company entered into a binding Securities Purchase Agreement by and
among ProQuest Investments II, L.P., ProQuest Investments II Advisors Fund,
L.P., and ProQuest Investments III, L.P., referred to herein as the Purchasers,
as amended pursuant to Amendment No. 1 to the Securities Purchase Agreement,
dated May 28, 2008, by and among the Company and the Purchasers, to sell up to
$4,000,000 of secured convertible promissory notes, referred to herein as the
convertible notes, and accompanying warrants to such Purchasers, referred to
herein as the 2008 Financing.  Mr. Steven Ratoff, the Company’s Chairman,
Interim President, Chief Executive Officer and Interim Chief Financial Officer,
is a private investor in, and since December 2004 has served as a venture
partner with, ProQuest Investments.




On May
30, 2008, the Company closed the initial portion of the transaction, referred to
herein as the Initial Closing, for $1,475,000, representing no more than
5,000,000 shares of the common stock underlying the convertible notes, upon
receipt of approval from the NYSE Amex LLC, and satisfaction of customary
closing conditions. The 5,000,000 shares, along with the prior securities owned
by the Purchasers, represented 19.8% of the Company’s outstanding common stock
upon execution of the Securities Purchase Agreement. At its Annual Stockholders’
Meeting on September 8, 2008, the Company sought and received stockholder
approval to fund additional amounts such that the total commitment, inclusive of
the amount at the Initial Closing, equals up to $4,000,000, referred to herein
as the Subsequent Closing and together with the Initial Closing, the
Closings.  On October 17, 2008, the Company closed the Subsequent
Closing, for gross proceeds of $2,525,000.




In the
Initial Closing, the Company issued the convertible notes, which convert into
its common stock at a fixed price of $0.295 per share subject to certain
adjustments, and five-year warrants to purchase 3,000,000 shares of its common
stock, with an exercise price of $0.369 per share. The maturity date of the
convertible notes issued in the Initial Closing was November 30,
2008.


8
 Table of Contents




In the
Subsequent Closing, the Company issued the convertible notes, which convert into
10,744,681 shares of its common stock at a fixed price of $0.235 per share
subject to certain adjustments, and five-year warrants to purchase 6,446,809
shares of its common stock, with an exercise price of $0.294 per share. The
maturity date of the convertible notes issued in the Subsequent Closing was
April 17, 2009.




The
convertible notes accrue interest on their outstanding principal balances at an
annual rate of 10%.  All unpaid principal, together with any accrued but
unpaid interest and other amounts payable under the convertible notes, shall be
due and payable upon the earliest to occur of (i) when such amounts are declared
due and payable by the Purchasers on or after the date that is 180 days after
the date of issuance; or (ii) upon the occurrence of any change of control
event.  At the option of the Purchasers, interest may be paid in cash
or in common stock of the Company.  If the Company pays interest in common
stock, the stock will be valued at the related conversion price for such
convertible note. Therefore, on November 30, 2008, with respect to the Initial
Closing and on April 17, 2009, with respect to the Subsequent Closing, the
noteholders may either convert the convertible notes issued in such closing into
shares of common stock or demand payment of the outstanding principal balance,
plus accrued and unpaid interest at a rate of 10% per annum. There can be no
assurance whether the noteholders will convert their notes or demand immediate
repayment of the convertible notes issued at maturity.




At its option, the Company can redeem without penalty or premium a
portion of, or all of, the principal owed under the convertible notes by
providing the Purchasers with at least 5 days’ written notice; provided that the
Purchasers shall retain conversion rights in respect of the convertible notes
for such period of 5 days after the Company has given such notice. Each
prepayment shall be accompanied by the payment of accrued and unpaid interest on
the amount being prepaid, through the date of the prepayment.  On
April 29, 2009, the Company remitted $1.0 million to ProQuest Investments and
related entities against the $4.0 million of convertible notes issued during
2008.





The
Company’s obligations under the convertible notes are secured by all of its
assets and intellectual property, with the exception of certain excluded assets,
as evidenced by the Security and Pledge Agreement, executed on May 6,
2008.  Excluded assets of the Company are (i) those assets that are
the subject of its existing capital leases (approximately $321,000 in net book
value of fixed assets as of September 30, 2009, on which $41,000  of
capital lease obligations exist at September 30, 2009); (ii) the assets marked
as “Assets held for sale” on its balance sheets as of December 31, 2008 and
September 30, 2009, which represented assets associated with our NitroMistTM
product which is currently being targeted for sale, the amount  for
which was $299,000 as of September 30, 2009; and (iii) the assets marked as
“other assets” on its balance sheets as of September 30, 2009 and December 31,
2008, which represented restricted cash held as security for its letters of
credit and leased assets, the amount for which was $32,000 and $259,000
respectively.




The
conversion rate of each convertible note and the exercise price of the warrants
are subject to adjustment for certain events, including dividends, stock splits
and combinations.




The
Company filed an initial registration statement with the Securities Exchange
Commission (“SEC”) to register the resale of common stock issuable in connection
with the Initial Closing (excluding interest shares), referred to herein as the
initial registrable shares, on June 26, 2008, which registration statement
became effective as of July 16, 2008.  These registration rights will cease
once the initial registrable shares are eligible for sale by the Purchasers
without restriction under Rule 144.  Upon certain events, the Company has
agreed to pay as liquidated damages an amount equal to 1.0% of the aggregate
purchase price paid by the Purchasers for any convertible notes then held by the
Purchasers, but these payments may not exceed 10% of the aggregate purchase
price paid by the Purchasers.




The
Company has entered into agreements with the holders of our common stock that
requires us to continuously maintain as effective, a registration statement
covering the underlying shares of common stock. Such registration statements
were declared effective on January 26, 2007, May 30, 2006 and July 28, 2005 and
must continuously remain effective for a specified term. If we fail to
continuously maintain such a registration statement as effective throughout the
specified term, the Company may be subject to liability to pay liquidated
damages.





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With
respect to the subsequent closing of the 2008 private placement, we agreed to
file a registration statement with the SEC to register the resale of 17,978,724
shares of common stock issuable pursuant to the 2008 private placement, referred
to herein as the subsequent registrable shares, within 30 days of the related
closing. Also, we agreed to respond to all SEC comment letters as promptly as
reasonably possible and to use our best efforts to have the registration
statement declared effective within 90 days of the related closing. However, we
were unable to register 9,044,649 of the subsequent registrable shares in
accordance with the rules and regulations of the SEC. Therefore, we have filed
the registration statement with the SEC to register the resale of 8,934,075
subsequent registrable shares issuable pursuant to the 2008 private placement.
In connection with our reduction of subsequent registrable shares being
registered on the registration statement, in January 2009 we had agreed with the
purchasers to pay, as liquidated damages, an amount equal to 1.0% of the
aggregate purchase price paid by the purchasers for the shares that we are not
able to register for resale under the registration statement. Such liquidated
damages equaled $12,703 for each 30 day period during which the shares remain
unregistered, beginning on February 15, 2009 and ending on the date on which
such subsequent registrable shares are registered.  However, these
payments could not exceed 10% of the aggregate purchase price paid by the
purchasers, or $127,030, which the Company had recorded as a
liability.  The registration statement for the 8,934,075 shares did
not become effective until May 5, 2009.  Consequently, the Company
renegotiated the registration penalty with the purchasers due to the delay in
registering the 8,934,075 shares.  As a result, the Company agreed to
pay the purchasers a registration penalty for the full amount of shares
(17,978,924) for the period beginning on January 19, 2009 and ending on May 5,
2009.  This resulted in an increase in the registration penalty of
$44,770, for a maximum registration penalty of $171,800.  The
liquidated damages will be paid in the form of a non-convertible promissory
note, which accrues interest at a rate of 10% per annum and all interest and
principal will become due and payable upon the earlier to occur of (i) the
maturity date, which is twelve months following the date of issuance or (ii) a
change of control (as defined in the liquidated damages note).  As of
September 30, 2009, the Company has issued $159,000 in non-convertible
promissory notes to the purchasers.  Accordingly, such amount has been
reflected as a non cash transaction in the accompanying condensed statements of
cash flows.





The
Purchasers represented that they are “accredited investors” and agreed that the
securities issued in the 2008 Financing bear a restrictive legend against resale
without registration under the Securities Act.  The convertible notes and
warrants were sold pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act and Regulation D thereunder.




The value
of the warrants issued to the investors was calculated relative to the total
amount of the debt offering.  The relative fair value of the warrants
issued to the investors in the Initial Closing was determined to be $467,000, or
31.7% of the total offering. This was determined using the Black Scholes Model
and the following key assumptions were used; a discount rate of 3.41%,
volatility of 80.26%, 5 year expected term, and dividend yield of
0%.





The
relative fair value of the warrants issued in the Initial Closing (equaling
$467,000), along with the effective beneficial conversion feature of the debt in
the Initial Closing of $743,000 (calculated as the difference between the
conversion price specified in the Securities Purchase Agreement and the
calculated intrinsic value of the conversion feature) total $1,210,000 and are
not in excess of the face value of the debt.  The Company is using the
straight-line method to amortize the debt discount and beneficial conversion
feature through the maturity dates of the convertible notes, which result does
not differ materially from the effective interest rate method. For the nine
months ended September 30, 2009, the Company has recorded additional interest
expense of $403,000, related to the amortization of the debt discount for the
Initial Closing.





The
      balance of the convertible debt as of September 30, 2009 is summarized as
      follows:Face
      amount
            
            $
            3,000,000Total
      debt discount and beneficial conversion feature
            
            
            1,900,000Amortization
      of debt discount and beneficial conversion feature
            
            
            1,900,000Net
      unamortized debt discount and beneficial conversion
feature
            
            
            —Net
      debt recorded at September 30, 2009
            
            $
            3,000,000





On April
29, 2009, the Company remitted $1,000,000 to ProQuest Investments and related
entities against the $4,000,000 of convertible notes issued during
2008.





10
 Table of Contents





Related
to the issuance of the closings, the Company paid debt finance costs totaling
$238,000, which were capitalized as deferred financing costs. These costs were
amortized into interest expense using straight line method, which result did not
differ materially from the effective interest rate method. For the nine months
ended September 30, 2009, the Company had recorded expense of $25,000 related to
the amortization of the deferred financing costs.





The
Company has accounted for the gross proceeds from the Subsequent Closing
beginning in the fourth quarter 2008, in a manner comparable to that described
above for the Initial Closing.





The
$1,475,000 in gross proceeds from the Initial Closing, and the $2,525,000 in
gross proceeds from the Subsequent Closing, were deposited into a new bank
account with an account control agreement which provides that the bank will
comply with the withdrawal requests originated by the Company without further
consent by the Purchasers.  However, if Purchasers notify the bank
that the Purchasers will exercise exclusive control over the account due to an
event of default on the convertible notes (a “Notice of Exclusive Control”), the
bank is required to cease complying with withdrawal requests or other directions
concerning the account originated by the Company.  This agreement was
signed by NovaDel, Purchasers and the bank. The parties entered into this
agreement to perfect the Purchasers’ security interest in this
account.  There is no provision for the bank to monitor or restrict
the use of proceeds for a particular purpose, absent a Notice of Exclusive
Control as described above.  Accordingly, this agreement is no
different than any other collateral lien on assets.  Therefore, the
Company has classified these funds as part of cash and cash equivalents. As of
September 30, 2009, the balance in this account is zero.





NOTE
4 – CASH EQUIVALENTS





Cash
equivalents include certificates of deposit and money market instruments with
maturities of three months or less when purchased. At times, such investments
may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance
limit.  Generally, these deposits may be redeemed and are maintained
with high quality financial institutions, therefore reducing credit
risk.





NOTE
5 – LOSS PER SHARE





The
Company’s basic loss per share is computed as net loss divided by the weighted
average number of common shares outstanding for the period. Diluted loss per
common share is the same as basic loss per common share, since potentially
dilutive securities from the assumed exercise of all outstanding options and
warrants, and from the conversion of the convertible notes, would have an
anti-dilutive effect because the Company incurred a net loss during each period
presented. As of September 30, 2009 and September 30, 2008, there were
25,500,000 and 40,800,000 common shares, respectively, issuable upon exercise of
options and warrants, the vesting of non-vested restricted common stock, and the
conversion of the convertible notes, which were excluded from the diluted loss
per share computation.





NOTE
6 – STOCK-BASED COMPENSATION





At
September 30, 2009, the Company had two plans which allow for the issuance of
stock options and other awards: the 1998 Stock Option Plan, as amended, and the
2006 Equity Incentive Plan, as amended (the “Plans”). On January 17, 2006, the
stockholders of the Company, upon the recommendation of the Board of Directors
of the Company, approved the NovaDel Pharma Inc. 2006 Equity Incentive Plan (the
“2006 Plan”). The 2006 Plan authorizes the grant of several types of stock-based
awards, including stock options, stock appreciation rights and stock (including
restricted stock).  The number of shares of common stock originally
reserved for issuance under the 2006 Plan was 6 million shares.  These
Plans are administered by the Compensation Committee of the Board of Directors.
Incentive Stock Options (“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. Vesting is determined by the Compensation Committee of the
Board of Directors. 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. As of
September 30, 2009, there were approximately 3,900,000 shares available for
issuance under the Plans.





The
Company calculates the fair value of stock based compensation using the
Black-Scholes method. Stock based compensation costs are recorded as earned for
all unvested stock options outstanding. The charge is being recognized in
research and development and consulting, selling, general and administrative
expenses over the remaining service period after the adoption date based on the
original estimate of fair value of the options as of the grant
date.








11
 Table of Contents





Information
with respect to stock option activity for the nine months ended September 30,
2009 is as follows:








Options
            
            Shares
      (000)
            
            
            Weighted-Average
      Exercise Price
            
            
            Weighted-Average
      Remaining Contractual Terms (Years)
            
            
            Aggregate
      Intrinsic Value ($000)Outstanding
      at December 31, 2008
            
            
            5,467
            
            
            $
            1.59
            
            
            
            5.4Grants
            
            
            2,163
            
            
            
            0.34ExercisesForfeitures
            
            
            (2,202
            )
            
            
            1.42Outstanding
      at September 30, 2009
            
            
            5,428
            
            
            
            1.16
            
            
            
            4.5
            
            
            
            —Vested
      and expected to vest at September 30, 2009
            
            
            4,615
            
            
            
            1.38
            
            
            
            3.8
            
            
            
            —Exercisable
      at September 30, 2009
            
            
            3,337
            
            
            
            1.38
            
            
            
            3.8
            
            
            
            —





The
Company recorded share-based compensation expense of approximately $98,000 or
$0.002 per share, and $251,000 or $0.004 per share, for the three and nine
months ended September 30, 2009, respectively, and $184,000 or $0.003 per share,
and $600,000 or $0.01 per share, for the three and nine months ended September
30, 2008, respectively.  All such amounts are included in the
Company’s net loss for each period.  Share-based compensation expense
for the current quarter and year-to-date was reduced due to headcount reductions
taken during the second quarter of 2009.





On
February 6, 2008, the Company’s Board of Directors, upon the recommendation of
the Compensation Committee, approved grants of 750,000 shares of restricted
common stock to the executive officers of the Company and an additional 350,000
shares of restricted stock to other employees of the Company. The restricted
stock was awarded from the Company’s 1998 Stock Option Plan.  The
restrictions on the restricted stock shall lapse over a three-year period,
subject to reduction as follows: (1) in the event of a $5.0 million non-dilutive
financing by the Company on or before December 31, 2008, the three-year
restriction shall be accelerated such that the restrictions on the restricted
stock shall lapse over a two-and-one-half year period; (2) in the event of an
additional $5.0 million (or $10.0 million in the aggregate) non-dilutive
financing by the Company on or before December 31, 2008, the three-year
restriction shall be accelerated such that the restrictions on the restricted
stock shall lapse over a two-year period; and (3) in the event of a $20.0
million (or $20.0 million in the aggregate) non-dilutive financing by the
Company, the restrictions shall immediately lapse. Additionally, the Board, upon
the recommendation of the Compensation Committee, agreed that, in the case of
Mr. Ratoff, an additional 200,000 shares of restricted stock shall be granted as
follows: (1) upon achieving a $5.0 million non-dilutive financing by the Company
on or before December 31, 2008, an additional 100,000 shares of restricted stock
shall be granted; and (2) upon achieving an additional $5.0 million (or $10.0
million in the aggregate) in non-dilutive financing by the Company on or before
December 31, 2008, an additional 100,000 shares of restricted stock shall be
granted. The restrictions on such additional shares of restricted stock shall
lapse over a three-year period. However, the Company did not achieve such
non-dilutive financings on or before December 31, 2008 and, as a result, the
additional shares of restricted common stock were not granted to Mr.
Ratoff.





A summary
of the status of the Company’s non-vested restricted common stock as of
September 30, 2009 and changes during the nine months ended September 30, 2009
is presented below:








Non-Vested
      Restricted Common Stock
            
            Shares
      (000)
            
            
            Weighted
      Average Grant-Date Fair ValueJanuary
      1, 2009
            
            
            1,133
            
            
            $
            0.51Cancellations
            
            
            (575
            )
            
            $
            0.47September
      30, 2009
            
            
            558
            
            
            $
            0.46











12
 Table of Contents





As of
September 30, 2009, unamortized share-based compensation expense of $0.8 million
remains to be recognized, which is comprised of $0.3 million related to
non-performance based stock options to be recognized over a weighted average
period of 1.2 years, $0.2 million related to restricted stock to be recognized
over a weighted average period of 1.3 years, and $0.3 million related to
performance-based stock options which vest upon reaching certain milestones.
Expenses related to the performance-based stock options will be recognized if
and when the Company determines that it is probable that the milestone will be
reached.





The
Company used the following weighted average assumptions in determining fair
value under the Black-Scholes model for grants of all stock options in the
respective periods:




Three
      Months Ended
            
            Nine
      Months EndedSeptember
      30, 2009
            September
      30, 2008
            
            September
      30, 2009
            September
      30, 2008Expected
      volatility
            —
            83%
            
            85%
            83%Dividend
      yield
            —
            0%
            
            0%
            0%Expected
      term (years)
            —
            3.7
            
            3.06
            3.7Risk-free
      interest rate
            —
            2.3%
            
            1.7%
            2.3%







The above
table represents the weighted-average assumptions for all stock options granted
during the three and nine months ended September 30, 2009 and September 30,
2008.  The Company did not grant any stock options during the three
months ended September 30, 2009.





Expected
volatility is based on historical volatility of the Company’s common stock. The
expected term of options is estimated based on the average of the vesting period
and contractual term of the option. The risk-free rate is based on U.S. Treasury
yields for securities in effect at the time of grant with terms approximating
the expected term until exercise of the option.  In addition, the fair
value of stock options granted is recognized as expense over the service period,
net of estimated forfeitures. The Company is utilizing a 5% forfeiture rate,
which it believes is a reasonable assumption to estimate forfeitures. However,
the estimation of forfeitures requires significant judgment, and to the extent
actual results or updated estimates differ from its current estimates, the
effects of such resulting adjustment will be recorded in the period estimates
are revised. The weighted average grant date fair value of options granted was
$0.34 during the nine months ended September 30, 2009.  No options
were exercised during the three months ended September 30, 2009 or during the
three months ended September 30, 2008.





NOTE
7 - RELATED PARTY TRANSACTIONS AND LICENSE AND DEVELOPMENT
AGREEMENTS





Related
Party Transactions





In
September 2006, the Company’s Board of Directors appointed Steven B. Ratoff as
Chairman of the Board. In connection with Mr. Ratoff’s appointment as Chairman
of the Board, the Board entered into a consulting arrangement to compensate Mr.
Ratoff for his efforts. This arrangement is on a month-to-month basis and has
compensated Mr. Ratoff at a rate of between $10,000 and $17,500 per month
depending upon the amount of his involvement at the Company.  The rate
as of September 30, 2009 is $17,500 per month. Pursuant to this consulting
arrangement, the Company paid Mr. Ratoff $52,500 and $157,500 for the three and
nine months ended September 30, 2009, respectively, and $52,500 and $157,500 for
the three and nine months ended September 30, 2008, respectively, for services
rendered during such periods. Additionally, Mr. Ratoff is a private investor in,
and since December 2004 has served as a venture partner with, ProQuest
Investments.








13
 Table of Contents





License
and Development Agreements




BioAlliance.On May
19, 2008, the Company and BioAlliance Pharma SA or BioAlliance, entered into an
agreement where BioAlliance acquired the European rights for NovaDel’s
Ondansetron oral spray.  Under the terms of the agreement, BioAlliance
paid NovaDel a license fee of $3,000,000 upon closing. The Company is eligible
for additional milestone payments totaling approximately $24 million (an
approval milestone of $5,000,000 and sales-related milestone payments of
approximately $19 million) as well as a royalty on net sales. BioAlliance and
the Company anticipate collaborating in the completion of development activities
for Europe, with BioAlliance responsible for regulatory and pricing approvals
and then commercialization throughout Europe. The Company will be responsible
for supplying the product.  The upfront payment has been included in
deferred revenue and is being recognized in income over the term of the
agreement (nineteen and one half-years).  During the three and nine
months ended September 30, 2009 and 2008, the Company recognized $38,642 and
$115,926; $38,462 and $57,693 respectively, of income related to this
contract.




Hana Biosciences, Inc/Par
Pharmaceutical, Inc.In October 2004, the Company entered into
a license and development agreement pursuant to which the Company granted to
Hana Biosciences, Inc. (“Hana Biosciences”) an exclusive license to develop and
market ZensanaTM, the Company’s oral spray version of ondansetron in the U.S. and
Canada. Pursuant to the terms of the agreement, in exchange for $1,000,000, Hana
Biosciences purchased 400,000 shares of the Company’s common stock at a per
share price equal to $2.50, a premium of $0.91 per share or $364,000 over the
then market value of the Company’s common stock. The Company accounted for this
premium as deferred revenue related to the license. In connection with the
agreement, Hana Biosciences issued to the Company $500,000 worth of common stock
of Hana Biosciences (73,121 shares based on a market value of $6.84 per
share).  The fair value of the common stock received from Hana
Biosciences was included in deferred revenue and was being recognized over the
20-year term of the agreement.





In July
2007, the Company, entered into a Product Development and Commercialization
Sublicense Agreement (the “Sublicense Agreement”) with Hana Biosciences and Par
Pharmaceutical, Inc. (“Par”), pursuant to which Hana Biosciences granted a
non-transferable, non-sublicenseable, royalty-bearing, exclusive sublicense to
Par to develop and commercialize ZensanaTM.  In connection therewith,
the Company and Hana Biosciences amended and restated their existing License and
Development Agreement, as amended, relating to the development and
commercialization of ZensanaTM (the “Amended and Restated License Agreement”) to
coordinate certain of the terms of the Sublicense Agreement.  Under
the terms of the Sublicense Agreement, Par is responsible for all development,
regulatory, manufacturing and commercialization activities of ZensanaTM in the
United States and Canada.  The Company retains its rights to ZensanaTM
outside of the United States and Canada.





In
addition, under the terms of the Amended and Restated License Agreement, Hana
Biosciences relinquished its right to pay reduced royalty rates to the Company
until such time as Hana Biosciences had recovered one-half of its costs and
expenses incurred in developing ZensanaTM from sales of ZensanaTM and the Company
agreed to surrender for cancellation all 73,121 shares of the Hana Biosciences
common stock, with a fair value of $140,000, that had been acquired by the
Company in connection with execution of the original License
Agreement.





During
the three months ended March 31, 2007, the Company recorded a $360,000
impairment charge to the statement of operations, the only component of other
loss, to establish a new cost basis of $140,000 for the investment as of March
31, 2007. The remaining investment balance was written off in the quarter ended
September 30, 2007, to reflect the surrender of the Company’s 73,121 shares to
Hana in connection with the Amended and Restated License
Agreement.  The Company may receive additional milestone payments and
royalties over the term of the agreement.








14
 Table of Contents





Velcera.  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 oral 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 is being recognized in income over the 20-year
term of the agreement. In addition, the Company received an equity stake of
529,500 shares of common stock in Velcera which did not have a material value.
Such investment continues to be carried at its cost basis of $0 as of September
30, 2009.  In February 2007, Velcera merged with Denali Sciences,
Inc., a publicly reporting Delaware corporation.  In June 2007,
Velcera announced that it had entered into a global license and development
agreement with Novartis Animal Health.  The agreement called for
Novartis Animal Health to develop, register and commercialize a novel canine
product utilizing Velcera’s PromistTM platform, which is based on its patented
oral spray technology.  The Company may receive additional milestone
payments and royalty payments over the 20-year term of the
agreement.  In November 2007, the common stock of the merged companies
began trading on the OTC bulletin board. On March 5, 2008, Velcera announced
that it had received notice from Novartis Animal Health that it was terminating
the agreement, without cause.  On October 17, 2008, Velcera announced
that it had filed a Form 15 with the SEC, as a result of which Velcera’s
obligation to file reports with the SEC has terminated. On August 24, 2009, the
Company issued a press release to announce that it received a milestone payment
of approximately $150,000 from Velcera, Inc. relating to its license agreement.
This milestone payment resulted from Velcera’s recently announced global
licensing agreement for the first canine pain management product delivered in a
transmucosal mist form.





Manhattan Pharmaceuticals,
Inc.  In April 2003, the Company entered into a license and
development agreement with Manhattan Pharmaceuticals for the worldwide,
exclusive rights to the Company’s proprietary oral spray technology to deliver
propofol for pre-procedural sedation. The terms of the agreement call for
certain license, milestone and other payments, the first $125,000 of which was
received in June 2003. In November 2003, the Company received $375,000 from
Manhattan Pharmaceuticals 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 July 2007, Manhattan Pharmaceuticals,
the Company’s partner for its propofol oral spray product candidate, announced
that as part of its change in strategic focus it intends to pursue appropriate
sub-licensing opportunities for this product candidate.





INyX/DPT
Laboratories.  On November 18, 2004, the Company entered into a
manufacturing and supply agreement with INyX whereby INyX manufactures and
supplies NitroMistTM. For a five-year period that began November 18, 2004, INyX
was to be the exclusive provider of the nitroglycerin lingual spray to the
Company substantially worldwide. Pursuant to the terms and conditions of the
agreement, it would be INyX’s responsibility to manufacture, package and supply
NitroMistTM in such territories. Thereafter, INyX would have a non-exclusive
right to manufacture such spray for an additional five years. In July 2007, INyX
announced it filed for protection under the Chapter 11 bankruptcy laws. The
Company was informed by the trustees for INyX in June 2008 that the facility in
Puerto Rico where manufacturing operations for NitroMistTM were conducted would
be ceasing operations as of the end of July 2008. As a result, the Company
selected an alternative contract manufacturing company, DPT Laboratories Inc
(“DPT”), and has transferred manufacturing operations for NitroMistTM to
DPT.  In connection with transferring such operations, the Company
determined during the quarter ended June 30, 2008 that approximately $183,000 of
the remaining equipment and $129,000 of the inventory in Puerto Rico would no
longer be of any value for continued production at the alternative manufacturing
location. The total amount of the equipment and inventory disposal, inclusive of
approximately $30,000 for the anticipated costs of disposal, was recognized as a
loss on disposal of assets totaling $342,000 during the quarter ended June 30,
2008.





NOTE
8 – OTHER INCOME / (EXPENSE)





In June
2008, the FASB issued Accounting Standards Codification (“ASC”) 815-40-15, which
provides guidance in assessing whether an equity-linked financial instrument (or
embedded feature) is indexed to an entity’s own stock for purposes of
determining the appropriate accounting treatment.  ASC 815-40-15 was
effective as of the beginning of our 2009 fiscal year. The adoption resulted in
an adjustment to opening accumulated deficit in the amount of $360,000 to
account for the reclassification of the fair value of certain outstanding
warrants from stockholders’ deficiency to liability.  The warrants
affected by the adoption expired during the first quarter of 2009 and, as a
result, the fair value of the warrant liability was reduced to zero as of the
end of the reporting period.  Also included in Other Income /
(Expense) is a loss on the sale of fixed assets of $59,000.








15
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NOTE
9 – NEW ACCOUNTING PRONOUNCEMENTS





In June
2009, the FASB issued FASB ASC 105,Generally Accepted Accounting
Principles (“GAAP”), which establishes the FASB Accounting Standards
Codification as the sole source of authoritative generally accepted accounting
principles. Pursuant to the provisions of FASB ASC 105, the Company has updated
references to GAAP in its financial statements issued for the period ended
September 30, 2009. The adoption of FASB ASC 105 did not impact the Company’s
financial position or results of operations.





NOTE
10 – SUBSEQUENT EVENTS





Seaside
Closings





Under the
common stock purchase agreement with Seaside 88, LP, the Company has received
$243,000 in gross proceeds for the closings that have occurred after September
30, 2009 through the date hereof.





Mist License
Agreement





On
October 27, 2009, the Company entered into a licensing and distribution
agreement with privately-held Mist Acquisition, LLC to manufacture and
commercialize the NitroMistTM lingual spray
version of nitroglycerine, a widely-prescribed and leading short-acting nitrate
for the treatment of angina pectoris.  Under the terms of the
agreement, NovaDel received a $1,000,000 licensing fee upon execution of the
agreement, and will receive milestone payments totaling an additional $1,000,000
over the next twelve months and ongoing performance payments of up to seventeen
percent (17%) of net sales subject to potential reduction based upon the terms
of the Agreement. The Agreement contains customary termination provisions. In
addition, the Agreement may be terminated by Mist for any reason upon written
notice to the Company, which will be effective 180 days from the date of receipt
of such notice, provided that Mist may not terminate until the second
anniversary after the first commercial sale of NitroMistTM by Mist or its
affiliates.





Through a
separate license agreement with Mist, Akrimax Pharmaceuticals, LLC will receive
the exclusive right to manufacture, distribute, market and sell NitroMistTM in North America.
Under the terms of the Agreement, the Company will receive a percentage of any
income received by Mist under any sublicense agreement relating to
NitroMistTM.




ECR License
Agreement




TM TM co-promote
zolpidem tartrate oral spray in the United States and Canada with ECR’s consent,
and retains commercialization rights for all other territories. ECR will assume
responsibility for manufacturing the product for commercialization in the United
States and Canada, including any activities required from the date of the
Agreement. The
Agreement contains customary termination provisions.  In addition, the
agreement may be terminated by ECR for any reason upon written notice to the
Company, which will be effective 180 days from the date of receipt of such
notice, provided that ECR may not terminate until the second anniversary after
the first commercial sale of ZolpiMistTM by ECR or its
affiliates.
  We
evaluated subsequent events through the time of filing these financial
statements with the SEC on November 16, 2009.  Accordingly, all
necessary accounting and disclosures for events occurring subsequent to
September 30, 2009 through November 16, 2009 are reflected in these
financial statements.








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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





The
following discussion of our financial condition and result of operations should
be read in conjunction with the financial statements and the notes to those
statements included elsewhere in this Quarterly Report on Form 10-Q. The
discussion includes forward-looking statements that involve risks and
uncertainties. As a result of many factors, such as those set forth in Item 1A.
“Risk Factors” of this Quarterly Report on Form 10-Q, our actual results may
differ materially from those anticipated in these forward looking
statements.





GENERAL





NovaDel
Pharma Inc. is a specialty pharmaceutical company developing oral spray
formulations for a broad range of marketed drugs.  Our proprietary
technology offers, in comparison to conventional oral dosage forms, the
potential for faster absorption of drugs into the bloodstream leading to quicker
onset of therapeutic effects and possibly lower doses.  Oral sprays
eliminate the requirement for water or the need to swallow, potentially
improving patient convenience and compliance. Our oral spray technology is
focused on addressing unmet medical needs for a broad array of existing and
future pharmaceutical products.  Our most advanced oral spray
candidates target angina, nausea, insomnia, migraine headaches and disorders of
the central nervous system. We plan to develop these and other products
independently and through collaborative arrangements with pharmaceutical and
biotechnology companies. Currently, we have nine patents which have been issued
in the U.S. and 69 patents which have been issued outside of the U.S.
Additionally, we have over 80 patents pending around the world. We look for drug
compounds that are off patent or are coming off patent in the near future, and
we formulate these compounds in conjunction with our proprietary drug delivery
method.  Once formulated, we file for new patent applications on these
formulated compounds that comprise our product candidates.  Our patent
portfolio includes patents and patent applications with claims directed to the
pharmaceutical formulations, methods of use and methods of manufacturing for our
product candidates.





We have
had a history of recurring losses, giving rise to an accumulated deficit as of
September 30, 2009 of $80,390,000, as compared to $74,829,000 as of December 31,
2008. We have had negative cash flow from operating activities of
$3,579,000  and $5,126,000 for the nine months ended September 30,
2009 and 2008, respectively.  As of September 30, 2009, we had
negative working capital of $4,223,000 as compared to $47,000 as of December 31, 2008,
representing a net decrease in working capital of approximately
$4,269,000.





Since the
fourth quarter 2007 and continuing throughout 2009, we have significantly
reduced clinical development activities on our product candidate pipeline, such
that we have limited our expenditures primarily to those required to support our
two approved products NitroMistTM and ZolpimistTM and minor expenditures to
support formulation development activities for certain other products, as we did
not believe that we had sufficient cash to sustain such activities.





Despite
this reduction in expenditures for clinical activities, we require capital to
sustain our existing organization until such time as clinical activities can be
resumed.  We received $1,475,000 in gross proceeds on May 30, 2008
from the initial closing of a convertible note financing with certain funds
affiliated with ProQuest Investments, and received $2,525,000 in gross proceeds
on October 17, 2008, from the subsequent closing of such convertible note
financing, collectively referred to herein as the 2008 Financing. The
convertible notes issued in the initial closing matured on November 30, 2008
and, in the subsequent closing, matured on April 17, 2009. On November 30, 2008,
with respect to the initial closing and on April 17, 2009, with respect to the
subsequent closing, the noteholders did not convert the convertible notes issued
in such closing into shares of common stock or demand payment of the outstanding
principal balance, plus accrued and unpaid interest at a rate of 10% per annum.
There can be no assurance whether the noteholders will convert their notes or
demand immediate repayment of the convertible notes at maturity. The convertible
notes are secured by all of our assets, other than certain excluded
assets.





During
the second quarter of 2008, we also entered into a European partnership for our
ondansetron oral spray with BioAlliance, as a result of which we received an
immediate non-refundable license fee of $3,000,000.





We have
entered into a common stock purchase agreement with Seaside 88, LP, whereby
Seaside 88, LP will purchase 500,000 shares of common stock in a series of
closings occurring every two weeks for a total of up to 26 closings, provided
that the 3 day volume weighed average price prior to the scheduled closing is
greater than or equal to the stated floor price of $0.25 per share. We have
received $693,000 in gross proceeds for the closings that have occurred as of
September 30, 2009.








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We are
seeking to raise additional capital in 2009 and 2010 to fund future development
activities through a license agreement or by taking advantage of other strategic
opportunities. These opportunities could include the securing of funds through
new strategic partnerships or collaborations, the sale of common stock or other
equity securities or the issuance of debt.  In the event we do not
enter into a license agreement or other strategic transaction in which we
receive an upfront fee or payment, or we do not undertake a financing of debt or
equity securities, we may not have sufficient cash on hand to fund operations.
We can give no assurances that we will be able to enter into a strategic
transaction or raise any additional capital or if we do, that such additional
capital will be sufficient to meet our needs, or on terms favorable to
us.  Our ability to fund operations is also dependent on whether
ProQuest Investments, or ProQuest, to which we have $3.0 million of outstanding
secured convertible notes relating to fiscal 2008, now consist of $.5 million of
notes issued in the initial closing on May 30, 2008, the Initial Closing Notes,
and $2.5 million of notes issued in the subsequent closing on October 17, 2008,
the Subsequent Closing Notes, demands payment under such notes. This reflects
$1.0 million payment made to ProQuest Investments on April 29,
2009.





Given our
current level of spending, if ProQuest demands payment under the Initial Closing
Notes and/or the Subsequent Closing Notes, we will not be able to repay the
notes in full, unless we are successful prior to that time in securing funds
through new strategic partnerships and/or the sale of common stock or other
securities. If ProQuest fully converts the Initial Closing Notes and Subsequent
Closing Notes into shares of our common stock, we
estimate that we will have sufficient cash on hand to fund operations
through third quarter 2010.












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In
addition, we have agreed to pay ProQuest, as liquidated damages, an amount equal
to 1.0% of the aggregate purchase price paid by ProQuest for the shares that we
are not able to register for resale in connection with subsequent closing,
referred to herein as subsequent registrable shares. Such liquidated damages
equal $12,703 for each 30-day period during which the shares remain
unregistered, beginning on February 15, 2009 and ending on the date on which
such subsequent registrable shares are registered. However, these payments could
not exceed 10% of the aggregate purchase price paid by the purchasers, or
$127,030, which we had recorded as a liability.  The registration
statement for the 8,934,075 shares did not become effective until May 5,
2009.  Consequently, we renegotiated the registration penalty with the
purchasers due to the delay in registering the 8,934,075 shares.  As a
result, we agreed to pay the purchasers a registration penalty for the full
amount of shares (17,978,924) for the period beginning on January 19, 2009 and
ending on May 5, 2009.  This resulted in an increase in the
registration penalty of $44,770, for a maximum registration penalty of
$171,800.  The liquidated damages will be paid in the form of a
non-convertible promissory note, which accrues interest at a rate of 10% per
annum and all interest and principal will become due and payable upon the
earlier to occur of (i) the maturity date, which is twelve months following the
date of issuance or (ii) a change of control (as defined in the liquidated
damages note).  As of September 30, 2009, the Company has issued
$159,000 in non-convertible promissory notes to the purchasers.





Given the
recent downturn in the economy, uncertainty in the financial community, and our
current cash position, there can be no assurance that public or private capital
will be available to us on favorable terms, or at all. There are a number of
risks and uncertainties related to our attempt to complete a financing or
strategic partnering arrangement that are outside our control.  We may
not be able to obtain additional financing on terms acceptable to us, or at all.
If we are unsuccessful at obtaining additional financing as needed, we may be
required to significantly curtail or cease operations. We will need additional
financing thereafter until we achieve profitability, if ever.





Our
audited financial statements for the fiscal year ended December 31, 2008 were
prepared under the assumption that we will continue our operations as a going
concern. We were incorporated in 1982, and have a history of losses. As a
result, our independent registered public accounting firm in their audit report
has expressed substantial doubt about our ability to continue as a going
concern. We believe that the cash inflows that have been generated from our
financing transactions and our licensing transactions and any additional
potential cash inflows that may be received during 2009 and 2010 will improve
our ability to continue our operations as a going concern.  Continued
operations are dependent on our ability to complete equity or debt formation
activities or to generate profitable operations. Such capital formation
activities may not be available or may not be available on reasonable terms. Our
financial statements do not include any adjustments that may result from the
outcome of this uncertainty.







19
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Since
inception, substantially all of our revenues have been derived from consulting
activities, primarily in connection with product development for various
pharmaceutical companies. More recently, we have begun to derive revenues from
license fees and milestone payments stemming from our partnership
agreements.  Our future growth and profitability will be principally
dependent upon our ability to successfully develop our products and to market
and distribute the final products either internally or with the assistance of a
strategic partner.




Highlights
for the nine months ended September 30, 2009, and additionally through the date
of filing of this Quarterly Report on Form 10-Q, include the
following:





Other





·
            Announced
      that Michael E. Spicer resigned as Chief Financial Officer and Corporate
      Secretary, effective April 1, 2009. Our Board of Directors appointed Deni
      M. Zodda, our Chief Business Officer, to serve as Interim Chief Financial
      Officer, Principal Financial Officer and Corporate Secretary, effective
      April 1, 2009. We also hired Joseph M. Warusz as a consultant to serve as
      Principal Accounting Officer, effective April 1,
  2009.





·
            On
      April 28, 2009, we executed a lease amendment modifying certain terms to
      the existing lease.  The amendment converts the lease term to
      month to month commencing on July 1, 2009 with a provision that either
      party may terminate the lease upon thirty days written notice. We have
      released the lease escrow of $226,000 to the landlord in order to satisfy
      rent payments through June 30,
2009.





·
            Effective
      April 30, 2009, Deni M. Zodda, Ph.D., Chief Business Officer, Interim
      Chief Financial Officer and Corporate Secretary, agreed to leave the
      Company resulting from a reorganization of the executive
      team.  Mr. Zodda has entered into a Separation, Consulting and
      General Release Agreement under which he received a one-time fee of
      $137,500 and will provide us with certain consulting services through
      October 31, 2009. Steven B. Ratoff, our Chairman, Interim President and
      Chief Executive Officer, has been appointed our Interim Chief Financial
      Officer.





·
            On
      June 15, 2009, we entered into an agreement with Arthur W. Wood Company,
      Inc., or AWW, pursuant to which AWW agreed to assist us as a non-exclusive
      financial advisor for the purposes of seeking capital related to the
      Seaside offering, referred to herein as the Placement. In consideration of
      AWW’s services, we agreed to pay AWW upon closing of a capital-raising
      transaction, a fee equal to three percent (3%) of the aggregate value of
      the proceeds paid or payable in the
Placement.





·
            On
      October 27, 2009, we entered into a licensing agreement with
      privately-held Mist Acquisition, LLC to manufacture and commercialize the
      NitroMistTM lingual
      spray version of nitroglycerine, a widely-prescribed and leading
      short-acting nitrate for the treatment of angina
      pectoris.  Under the terms of the agreement, we
      received  a $1,000,000 licensing fee upon execution of the
      agreement, and will receive milestone payments totaling an additional
      $1,000,000 over the next twelve months and ongoing performance payments of
      up to seventeen percent (17%) of net sales subject to potential
      reduction based upon the terms of the Agreement.




·
            On November 13, 2009, the Company entered into an exclusive license
      and distribution agreement with ECR Pharmaceuticals Company, Inc. to
      commercialize and manufacture the Company's ZolpiMistTM in the
      United States and Canada. ZolpiMistTM is the
      Company's oral spray formulation of zolpidem tartrate, which was approved
      by the FDA in December of 2008. Under the terms of the agreement, ECR will
      pay the Company $3,000,000 upon the execution of the agreement and ongoing
      performance payments of up to 15% of net sales on branded products and a
      lesser percent of net sales on authorized generic products, subject to the
      terms of the Agreement.





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Drug
development in the U.S. and most countries throughout the world is a process
that includes several steps defined by the U.S. Food and Drug Administration, or
FDA, or comparable regulatory authorities in foreign countries. 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, or NDA, which
includes complete reports of pre-clinical, clinical and laboratory studies to
prove such product’s safety and efficacy. Prior to submission of the NDA, it is
necessary to submit an Investigational New Drug, or IND, to obtain permission to
begin clinical testing of the new drug. Given that our current product
candidates are based on a new technology for formulation and delivery of active
pharmaceutical ingredients that have been previously approved and that have been
shown to be safe and effective in previous clinical trials, we believe that we
will be eligible to submit what is known as a 505(b)(2) NDA. We estimate that
the development of new formulations of our pharmaceutical product candidates,
including formulation, testing and submission of an NDA, will require
significantly less time and lower investments in direct research and development
expenditures than is the case for the discovery and development of new chemical
entities. However, our estimates 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, and research and development expenditures may significantly
exceed management’s expectations.





It is not
anticipated that we will generate any revenues from royalties or sales of our
product candidates until regulatory approvals are obtained and marketing
activities begin. Any one or more of our product candidates may not prove to be
commercially viable, or if viable, may not reach the marketplace on a basis
consistent with our desired timetables, if at all. 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.




The
successful development of our product candidates is highly uncertain. Estimates
of the nature, timing and estimated expenses of the efforts necessary to
complete the development of, and the period in which material net cash inflows
are expected to commence from any of our product candidates are subject to
numerous risks and uncertainties, including:





·
            the
      scope, rate of progress and expense of our clinical trials and other
      research and development
activities;





·
            results
      of future clinical trials;





·
            the
      expense of clinical trials for additional
  indications;





·
            the
      terms and timing of any collaborative, licensing and other arrangements
      that we may establish;





·
            the
      expense and timing of regulatory approvals or changes in the regulatory
      approval process;





·
            the
      expense of establishing clinical and commercial supplies of our product
      candidates and any products that we may
develop;





·
            the
      effect of competing technologies and market developments;
    and





·
            the
      expense of filing, prosecuting, defending and enforcing any patent claims
      and other intellectual property
rights.








21
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We expect
to spend significant amounts on the development of our product candidates and we
expect our costs to increase if we restart programs to develop and ultimately
commercialize our product candidates.  The following table summarizes
our product candidates:








Active
      Ingredient or Class of Molecule
            Indications
            Stage
      of Development
            PartnerApproved
      ProductsNitroMistTM
            nitroglycerin
            Angina
      Pectoris
            FDA
      Approved
            Mist
      Acquisition, LLCZolpimistTM
            zolpidem
            Insomnia
            FDA
      Approved
            ECR
      Pharmaceuticals Co., Inc.Product
      CandidatesZensanaTM
            ondansetron
            Nausea/Vomiting
            Clinical
      development
            Hana
      Biosciences/Par Pharmaceutical, Inc./BioAlliance Pharma
    S.A.ZolpimistTM
            zolpidem
            Middle-of-the-Night
      Awakening
            Clinical
      development
            -NVD-301
            Midazolam
            Pre-Procedure
      Anxiety
            Preclinical
      development
            -NVD-401
            Sildenafil
            Erectile
      Dysfunction
            Preclinical
      development
            -NVD-501
            Fentanyl
            Breakthrough
      Pain
            Preclinical
      development
            -








NitroMistTM (nitroglycerin lingual
aerosol). This product is indicated for acute relief of an attack or
acute prophylaxis of angina pectoris due to coronary artery disease, and was
approved by the FDA in November 2006.  Previously, this product was
partnered with Par Pharmaceutical, Inc., or Par; however, on August 1, 2007, we
announced that Par returned the rights to NitroMistTM to us as part of Par's
strategy to concentrate its resources on supportive care in AIDS and oncology
markets. Our former contract manufacturer for NitroMistTM, INyX Pharma, filed for
protection under the Chapter 11 bankruptcy laws in 2007, and ceased operations
at its facility in Puerto Rico where our product was to be manufactured during
2008.  As a result, we selected an alternative contract manufacturer,
DPT Laboratories, and are in the process of transferring manufacturing
operations to DPT. On October 27, 2009, the Company entered into a licensing and
distribution agreement with privately-held Mist Acquisition, LLC (“Mist”)to
manufacture and commercialize the NitroMist lingual spray version of
nitroglycerine, a widely-prescribed and leading short-acting nitrate for the
treatment of angina pectoris.  Under the terms of the agreement, Mist
paid a $1,000,000 licensing fee upon execution of the agreement, milestone
payments totaling an additional $1,000,000 over the next twelve months and
ongoing performance payments of up to seventeen percent (17%) of net
sales.  In addition, Mist will assume the activities and costs
necessary for the completion of the product transfer to DPT
Laboratories.





ZolpimistTM (zolpidem oral
spray). Zolpidem is the active ingredient in Ambien®, the leading
hypnotic marketed by Sanofi-Aventis. A pilot pharmacokinetic, or PK, study in
zolpidem oral spray with 10 healthy subjects, completed in the first half of
calendar 2005, suggested that our formulation of zolpidem oral spray had a
comparable PK profile to the Ambien® tablet but with a more rapid time to
detectable drug levels. In October 2006, we announced positive results from a
pilot pharmacokinetic study comparing our formulation of ZolpimistTM to Ambien®
tablets.  In the study, 10 healthy male volunteers received ZolpimistTM
or Ambien® tablets in 5mg or 10mg doses. For fasting subjects, fifteen minutes
after dosing, 80% of subjects using ZolpimistTM achieved blood concentrations of
greater than 20 ng/ml, compared to 33% of subjects in the 5mg Ambien® tablet
group and 40% of subjects in the 10mg Ambien® tablet group. The difference
between the oral spray groups and tablet groups was statistically significant
(p=0.016). Twenty ng/ml is a level generally believed to approximate the lower
limit of the therapeutic range for zolpidem. Additionally, drug concentrations
were measured at five and ten minutes post-dosing. At these early time points,
the oral spray groups achieved drug levels five-to-thirty times greater than
subjects in the corresponding tablet groups. These differences were also
statistically significant. ZolpimistTM has the potential to provide patients with
the meaningful benefit of faster onset of sleep as compared to existing sleep
remedies should future studies validate the already completed Pilot PK
study.  We submitted the NDA for our zolpidem product candidate in the
second half of 2007, and the FDA indicated acceptance of this NDA filing in
January 2008.  On September 18, 2008, we announced that the FDA had
requested an extension of up to three months on our NDA in order to complete
their review.  On December 22, 2008, we announced that we had received
approval from the FDA for our NDA for ZolpimistTM for the short-term treatment of
insomnia. In October 2009, we received a Notice of Allowance from the United
States Patent and Trademark Office (USPTO) for claims which cover a method of
treating insomnia by administering zolpidem to humans utilizing NovaMistTM Oral
Spray spray technology. On November 13, 2009, we entered into an exclusive
license and distribution agreement with ECR Pharmaceuticals Company, Inc. to
commercialize and manufacture ZolpiMistTM in the United
States and Canada. Under the terms of the agreement, we received a $3,000,000
licensing fee and will receive ongoing performance payments of up to 15% of net
sales on branded products and a lesser percent of net sales on authorized
generic products.


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ZensanaTM (ondansetron oral
spray). Ondansetron is the active ingredient in Zofran®, the leading
anti-emetic marketed by GlaxoSmithKline, or GSK.  Through July 31,
2007, this product candidate was licensed to Hana Biosciences, who was
overseeing all clinical development and regulatory approval activities for this
product in the U.S. and Canada.  On July 31, 2007, we entered into a
Product Development and Commercialization Sublicense Agreement with Hana
Biosciences and Par, pursuant to which Hana Biosciences granted a sublicense to
Par to develop and commercialize ZensanaTM.  Par is responsible for all
development, regulatory, manufacturing and commercialization activities of
ZensanaTM in the United States and Canada, including the development and
re-filing of the NDA in the United States.  In addition, we entered
into an Amended and Restated License Agreement with Hana Biosciences, pursuant
to which Hana Biosciences relinquished its right to pay reduced royalty rates to
us until such time as Hana Biosciences had recovered one-half of its costs and
expenses incurred in developing ZensanaTM from sales of ZensanaTM and we agreed to
surrender for cancellation all 73,121 shares of the Hana Biosciences common
stock we acquired in connection with execution of the original license agreement
with Hana Biosciences.  Par had previously announced that it expected
to complete clinical development on the revised formulation of ZensanaTM during
2008, and expected to submit a new NDA for ZensanaTM by the end of
2008.  However, Par announced that it had completed bioequivalency
studies on ZensanaTM with mixed results, with bioequivalence to reference drug
(Zofran® tablets) achieved in some of the studies and not achieved in others. We
are working with Par to carefully review and better understand the results from
these studies before determining the next steps for ZensanaTM.





In
January 2006, Hana Biosciences announced positive study results of a pivotal
clinical trial for ZensanaTM. Hana Biosciences submitted its NDA on June 30, 2006
and such NDA was accepted for review by the FDA in August
2006.  Previously, Hana Biosciences targeted final approval from the
FDA and commercial launch in calendar 2007. However, on February 20, 2007, we
announced that Hana Biosciences notified us that ongoing scale-up and stability
experiments indicate that there is a need to make adjustments to the formulation
and/or manufacturing process, and that there is likely to be a delay in the FDA
approval and commercial launch of ZensanaTM as a result thereof.  On March
23, 2007, Hana Biosciences announced its plan to withdraw, without prejudice,
its pending NDA for ZensanaTM with the FDA.





We will
receive a milestone payment from Hana Biosciences upon final approval from the
FDA.  In addition, we will receive double-digit royalty payments based
upon a percentage of net sales.  We retain the rights to our ondansetron
oral spray outside of the U.S. and Canada.





On May
19, 2008, we entered into an agreement with BioAlliance Pharma S.A., whereby
BioAlliance acquired the European rights for our ondansetron oral spray. Under
the terms of the agreement, BioAlliance paid us a license fee of $3,000,000 upon
closing. We are eligible for additional milestone payments totaling
approximately $24 million (an approval milestone of $5,000,000 and sales-related
milestone payments of approximately $19 million) as well as a royalty on net
sales. We anticipate collaborating with BioAlliance in the completion of
development activities for Europe, with BioAlliance responsible for regulatory
and pricing approvals and then commercialization throughout Europe. We will be
responsible for supplying the product.





Sumatriptan
oral spray (NVD-201). Sumatriptan is the active ingredient in Imitrex® which is
the largest selling migraine remedy marketed by GSK. A pilot PK study of NVD-201
with 9 healthy subjects, completed in the second half of calendar 2004,
suggested that the formulation achieved plasma concentrations of sumatriptan in
the therapeutic range. In September 2006 we announced positive results from an
additional pilot pharmacokinetic study, with NVD-201 which demonstrated that
NVD-201 achieves a statistically significant increase in absorption rate as
compared with Imitrex®
tablets. The rate of drug absorption is believed to be the most important
predictor of the degree and speed of migraine relief.  NVD-201 was
evaluated in a four-arm, crossover pharmacokinetic study comparing 50mg
Imitrex®
tablets to 20mg and 30mg of the NVD-201  in 10 healthy male volunteers
under fasting conditions. At least 90% of subjects receiving NVD-201 had
detectable drug levels at three minutes post-dosing, while at the same
timepoint, only 10% of subjects receiving 50mg Imitrex® tablets had detectable
drug levels. These differences are statistically significant.  At 3 to 6
minutes post dosing, all NVD-201 groups had statistically significantly higher
mean concentration levels compared to 50mg Imitrex® tablets.   Using
published data for the currently marketed Imitrex® nasal spray as a proxy for
therapeutic blood levels, we observed that by 6 minutes post-dosing, 100% of the
20mg NVD-201 users achieved these critical plasma concentration levels while
none of the subjects from the Imitrex® tablet group did so by this
timepoint. This result was also statistically significant. Furthermore, the
study indicates up to a 50% increase in relative bioavailability of NVD-201 in
comparison to the Imitrex® tablet.  Additionally, the pharmacokinetics of
20mg NVD-201 after a meal were evaluated. NVD-201 was well
tolerated.








23
 Table of Contents





While
Imitrex® nasal spray was not included in this clinical study, the following
represents a discussion of the results of our clinical study as compared to
published data for Imitrex® nasal spray. Time to the first peak plasma
concentration of sumatriptan -- which represents drug absorbed directly across
the oral mucosa -- was approximately 70% faster with the 20mg NVD-201 than what
has been reported in the literature for the same dose of the Imitrex® nasal
spray (6 min. vs. 20 min.).  The mean concentration level achieved during
this critical first phase of absorption is approximately 30% greater for the
NVD-201 than what was observed in published studies of the nasal spray (10.9
ng/mL vs. 8.5 ng/mL).  Relative bioavailability after administration of
20mg NVD-201 appears to be greater than published estimates for the same dose of
the Imitrex® nasal spray.





In
September 2008, we announced the results from a pilot efficacy study for
NVD-201.This was a multi-center, active control, open-label, dose-ranging,
efficacy and safety study.  Subjects received up to 5 treatments,
comprising single doses of the following: Imigran® 50-mg tablets, Imigran®
100-mg tablets, NVD-201 20-mg, NVD-201 30-mg, and NVD-201 40-mg.  Their
response to Imigran® 50-mg tablets determined whether they were eligible to
receive the other four treatments.  Patients recorded the severity of each
migraine attack on the same 4-point scale immediately before dosing and at 15,
30, 60, 90, 120, and 240 minutes, and at 24 hours post-dosing.  Associated
symptoms (nausea, vomiting, photophobia, and phonophobia) were also recorded
immediately before dosing and at 30, 60, 90 and 120 minutes
post-dosing.  All dosing was done on an outpatient basis and patients
returned to the clinic between migraine attacks.





In the
primary analysis of efficacy, the percentage of patients responding to treatment
at or before 60 minutes post-dosing, there was a statistically significant
greater percentage of subjects receiving the 30- and 40-mg doses of NVD-201 with
a reduction in headache pain compared to those receiving the 50-mg s Imigran®
tablet (42% and 46%, respectively, vs 12%; P<0.011), and was
comparable to the percentage who responded to the higher (100 mg) dose of
the tablet formulation (42%).   Significantly more patients had
responded to all three doses of NVD-201 than to 50-mg Imigran® tablet by 90
minutes post-dosing (57% to 70.0% vs 32%; P<0.028) and all
three oral spray doses were comparable to the 100-mg tablet.  There were no
treatment differences by 2 hours after dosing, when 68% to 77% of patients had
responded irrespective of treatment.





Compared
to 50-mg Imigran® tablet, at least one dose of NVD-201 also significantly
increased percentage of patients who were pain free by 1 to 2 hours post-dosing,
with the response ratio indicating significantly faster complete pain relief for
the 40-mg dose, and significantly more patients had complete pain relief without
use of rescue medication after receiving any dose of NVD-201.  In addition,
after one or more doses of NVD-201, the percentage of patients who were
asymptomatic was significantly increased, and the percentages who experienced
nausea, photophobia, or phonophobia were significantly decreased.  NVD-201
was comparable to the 100-mg tablet on all the above measures.




We
believe NVD-201 may provide clinical benefits to migraine sufferers including,
possibly, faster relief than Imitrex® tablets as well as greater tolerability
than triptan nasal sprays. Further, if proven to be safe and effective, we
believe NVD-201 may be attractive to patients who have trouble taking oral
medications due to nausea and vomiting caused by the migraine attack.
Previously, we were targeting an NDA submission for our sumatriptan product
candidate in the first half of calendar 2008; however, due primarily to funding
constraints, at the present time, in view of the  other higher
priority associated with our current product pipeline, we do not anticipate
further efforts  on the project.




Since the
fourth quarter 2007 and continuing throughout 2009, we have significantly
reduced clinical development activities on our product candidate pipeline, such
that we have limited our expenditures primarily to those required to support our
two approved products NitroMistTM and ZolpimistTM and minor expenditures to
support formulation development activities for certain other products, as we did
not believe that we had sufficient cash to sustain other
activities.  As of the current date, we have not yet secured
sufficient additional financing, and have therefore not resumed clinical
development activity. There can be no assurances that we will be able to secure
additional capital, and as a result, there can be no assurances as to whether,
and when, we will be able to resume our clinical development
activities.




ZolpimistTM for Middle-of-the-Night
Awakenings (MOTN).Clinical studies have demonstrated that a low dose of
zolpidem is effective in treating a subset of insomnia patients who wake up
during the night and have difficulty falling back to sleep. We have begun
development of a lower dose version of ZolpimistTM with the intent of performing
clinical trials to demonstrate the benefit of an easy-to-use oral spray form of
zolpidem in this important and large patient population.  We will
continue to evaluate this program when sufficient additional funding becomes
available.





24
 Table of Contents





Midazolam oral spray
(NVD-301).   NVD-301 contains midazolam which is the
leading benzodiazepine used for sedation during diagnostic, therapeutic and
endoscopic procedures.  We believe that NVD-301 has the potential to be an
easy-to use, rapid onset product useful to relieve the pre-procedure anxiety
suffered by many patients prior to undergoing a wide variety of procedures
performed in hospitals, imaging centers, ambulatory surgery centers and dental
offices.




Annually,
there are approximately 40 million invasive procedures performed in the
ambulatory surgical setting, > 25 million MRI/CT scans and over 90 million
pediatric dental procedures performed.  Pre- procedure anxiety occurs in
approximately 60% of children undergoing surgery and is associated with an
increase in post-surgical complications including delirium, pain and sleep
disorders, as well as higher levels of use of post-surgical medications. 
Anxiety interferes with approximately 30% of MRI scans with 5-10% of scans not
completed due to anxiety.  Pre-procedure anxiety is the number one reason
for the use of sedation in dental procedures.




We are
completing development of a clinical formulation and expect to enter the clinic
in 2010 with NVD-301, assuming that funding for such trials is
available.




Sildenafil oral spray
(NVD-401).NVD-401 contains sildenafil, the leading
PDE-5 inhibitor for the treatment of erectile dysfunction marketed under the
brand name Viagra®.  We believe that an oral spray of sildenafil has the
potential of a faster onset of action and a lower dose compared to
tablets.




Erectile
dysfunction occurs in approximately 18% of the male population with prevalence
of over 50% in men over 65 years of age.  PDE-5 inhibitors are effective in
approximately 75% of the erectile dysfunction population.  Sildenafil is
the most popular molecule with over 50% market share in a erectile dysfunction
market of over $3 billion.




Development
is in progress for a formulation to be used in future clinical trials to begin
in 2010, assuming that funding for such trials is available.




Fentanyl oral spray
(NVD-501).  NVD-501 contains Fentanyl, a leading opiate for the
treatment of pain. We plan to develop NVD-501 as a fast acting, easy-to-use
product for the treatment of break through pain in cancer patients.




Pain is a
common morbidity in cancer patients occurring in approximately 30% of newly
diagnosed patients and 65-85% of advanced cancer patients.  Opiates are
commonly used to treat cancer pain, however approximately 65% of opiate treated
cancer patients have acute pain episodes, called breakthrough cancer pain, which
requires the use of a short-acting drug on top of the patients’ basic pain
therapy regimen.  There are two products approved in the United States for
the treatment of breakthrough cancer pain with combined sales of approximately
$500 million. The global market for breakthrough cancer products is
predicted to grow to over $2 billion by 2016.




Formulation
development is postponed while we focus efforts on other programs.





Ondansetron oral spray
(Europe).On May 19, 2008, we entered into a European
partnership for our ondansetron oral spray for the treatment of nausea with
BioAlliance Pharma SA.  The agreement with BioAlliance resulted in an
immediate non-refundable license fee to us of $3 million, with up to an
aggregate of $24 million in additional milestones in addition to royalties
expected upon the approval and commercialization of the product by
BioAlliance.





Tizanidine oral
spray.  Tizanidine is indicated for the treatment of
spasticity, a symptom of several neurological disorders, including multiple
sclerosis, spinal cord injury, stroke and cerebral palsy, which leads to
involuntary tensing, stiffening and contracting of muscles. Tizanidine treats
spasticity by blocking nerve impulses through pre-synaptic inhibition of motor
neurons. This method of action results in decreased spasticity without a
corresponding reduction in muscle strength. Because patients experiencing
spasticity may have difficulty swallowing the tablet formulation of the drug,
our tizanidine oral spray may provide patients suffering from spasticity with a
very convenient solution to this serious treatment problem. We were previously
targeting an NDA submission for our tizanidine product candidate in calendar
2008. However, in view of the higher priority associated with our current
product pipeline as described above, we do not anticipate further development of
tizanidine oral spray due to commercial and operational priorities.








25
 Table of Contents





Ropinirole oral
spray.  Ropinirole is indicated for the treatment of the signs
and symptoms of idiopathic Parkinson's disease. Ropinirole oral spray is ideal
for the geriatric population who may be suffering from dysphagia (difficulty
swallowing); 85% of sufferers of Parkinson's are 65 years of age or older and it
is estimated that 45% of elderly people have some difficulty in swallowing. Our
formulation of ropinirole oral spray may represent a more convenient way for the
patient or healthcare provider to deliver ropinirole to patients suffering
stiffness and/or tremors. We were previously targeting an NDA submission for our
ropinirole product candidate in calendar 2008. However, in view of the higher
priority associated with our current product pipeline as described above, we do
not anticipate further development of ropinirole oral spray due to commercial
and operational priorities.





Propofol oral spray. Propofol
is the active ingredient in Diprivan®, a leading intravenous anesthetic marketed
by AstraZeneca. We continue to support our partner, Manhattan Pharmaceuticals,
Inc., or Manhattan Pharmaceuticals, who will oversee all clinical development
and regulatory approval for this product candidate.  On July 10, 2007,
Manhattan Pharmaceuticals announced its intention to pursue appropriate
sub-licensing opportunities for this product candidate.





Veterinary.Our
veterinary initiatives are being carried out largely by our partner, Velcera,
Inc., or Velcera.  In June 2007, Velcera announced that it had entered
into a global license and development agreement with Novartis Animal
Health.  The agreement calls for Novartis Animal Health to develop,
register and commercialize a novel canine product utilizing Velcera’s PromistTM
platform, which is based on our patented oral spray technology.  On
March 5, 2008, Velcera announced that it had received notice from Novartis that
it was terminating the agreement without cause.  On August 24, 2009,
we issued a press release to announce that we received a milestone payment of
approximately $150,000 from Velcera, Inc. relating to our License and
Development agreement dated June 22, 2004. This milestone payment resulted from
Velcera’s recently announced global licensing agreement for the first canine
pain management product delivered in a transmucosal mist form.





As
discussed above, certain of our product candidates are in early stages of
clinical development and some are in preclinical testing. These product
candidates are continuously evaluated and assessed and are often subject to
changes in formulation and technology. As a result, these product candidates are
subject to a more difficult, time-consuming and expensive regulatory path in
order to commence and complete the preclinical and clinical testing of these
product candidates as compared to other product candidates in later stages of
development.





CRITICAL
ACCOUNTING POLICIES





USE OF
ESTIMATES - The accompanying condensed financial statements have been prepared
in conformity with accounting principles generally accepted in the U.S. This
requires our management to make estimates about the future resolution of
existing uncertainties that affect 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 condensed financial statements, management has made its best
estimates and judgments of the amounts and disclosures included in the condensed
financial statements giving due regard to materiality.





CASH AND
CASH EQUIVALENTS – Cash equivalents include certificates of deposit and money
market instruments with original maturities of three months or less when
purchased. We maintain our cash and cash equivalents with several financial
institutions.  Deposits held with banks may exceed the amount of
insurance provided on such deposits.  Generally, these deposits may be
redeemed on demand and are maintained with high quality financial institutions,
therefore reducing credit risk.





REVENUE
RECOGNITION – We receive revenue from consulting services and license
agreements. Consulting revenues from contract clinical research are recognized
in the period in which the services are rendered, provided that collection is
reasonably assured. Upfront license agreement payments are initially deferred
and subsequently amortized into revenue over the contractual
period.  Milestone payments related to license agreements are
recognized as revenue when earned.





DEFERRED
FINANCING COSTS – We capitalize the costs related to the issuance of our
convertible notes, and amortize such deferred costs to interest expense on a
straight-line basis over the life of the related notes. We capitalized
approximately $238,000 of deferred financing costs associated with the issuance
of our convertible notes during 2008. We amortized approximately $25,000 to
expense during the nine months ended September 30, 2009,  upon which
these costs are fully amortized.








26
 Table of Contents





WARRANTS
ISSUED WITH CONVERTIBLE NOTES – The value of warrants and the intrinsic value of
beneficial conversion rights arising from the issuance of convertible notes are
determined by allocating an appropriate portion of the proceeds received from
the debt instruments to the debt and warrants based on their relative fair
value, which was determined using the Black-Scholes model.  The
Company adopted Accounting Standards Codification (“ASC”) 815-40-15 on January
1, 2009.  ASC 815-40-15 provides guidance in assessing whether an
equity-linked financial instrument (or embedded feature) is indexed to an
entity’s own stock.  The adoption of ASC 815-40-15 resulted in an
adjustment to opening accumulated deficit in the amount of $360,000 to
reclassify the fair value of certain outstanding warrants from stockholders’
deficiency to liability.  The warrants affected expired during the
first quarter of 2009 and, as a result, the fair value of the warrant liability
was reduced to zero and recognition of Other Income of $360,000 at the end of
the reporting period.





VALUATION
OF LONG-LIVED ASSETS – We assess the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Our long-lived assets as of September 30, 2009 were represented by
property and equipment, as we have no intangible assets on our balance sheet.
Factors we consider important which could trigger an impairment review include
the following:





·
            significant
      underperformance relative to expected historical or projected future
      operating results;





·
            significant
      changes in the manner of our use of the acquired assets or the strategy
      for our overall business;





·
            significant
      negative industry or economic trends;
and





·
            significant
      decrease in the market value of the
assets.





The
impairment test is based upon a comparison of the estimated undiscounted cash
flows to the carrying value of the long-lived assets. If we determine that the
carrying value of long-lived assets may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we measure any
impairment based on projected discounted cash flows. The cash flow estimates
used to determine the impairment, if any, contain management’s best estimate
using appropriate assumptions and projections at that time. Net long-lived
property and equipment as of September 30, 2009 was $1,060,000. We reviewed our
long-lived property and equipment as of September 30, 2009, and have determined
that their estimated fair value exceeds the carrying amount of such assets;
therefore, we have not recognized an impairment loss for our long-lived property
and equipment.





STOCK-BASED
COMPENSATION –The Company calculates the fair value of stock based compensation
using the Black-Scholes method. Stock based compensation costs are recorded as
earned for all unvested stock options outstanding. The charge is being
recognized in research and development and consulting, selling, general and
administrative expenses over the remaining service period after the adoption
date based on the original estimate of fair value of the options as of the grant
date.  We recorded share-based compensation expense of $98,000 or
$.002 per share and $251,000, or $.004 per share, for the three and nine months
ended September 30, 2009 and $184,000, or $0.003 per share, and $600,000, or
$0.01 per share, for the three and nine months ended September 30, 2008,
respectively. We will continue to incur share-based compensation charges in
future periods. As of September 30, 2009, unamortized share-based compensation
expense of $0.8 million remains to be recognized, which is comprised of $0.3
million related to non-performance based stock options to be recognized over a
weighted average period of 1.2 years, $0.2  million related to
restricted stock to be recognized over a weighted average period of 1.3 years,
and $0.3 million related to performance-based stock options which vest upon
reaching certain milestones. Expenses related to the performance-based stock
options will be recognized if and when the Company determines that it is
probable that the milestone will be reached.








27
 Table of Contents





We used
the following weighted average assumptions in determining fair value under the
Black-Scholes model for grants of all stock options in the respective
periods:








Three
      Months Ended
            
            Nine
      Months EndedSeptember
      30, 2009
            September
      30, 2008
            
            September
      30, 2009
            September
      30, 2008Expected
      volatility
            —
            83%
            
            85%
            83%Dividend
      yield
            —
            0%
            
            0%
            0%Expected
      term (years)
            —
            3.7
            
            3.06
            3.7Risk-free
      interest rate
            —
            2.3%
            
            1.7%
            2.3%








The above
table represents the weighted-average assumptions for all stock options granted
during the three and nine months ended September 30, 2009 and September 30,
2008.  The Company did not grant any stock options during the three
months ended September 30, 2009.





Expected
volatility is based on historical volatility of our common stock. The expected
term of options is estimated based on the average of the vesting period and
contractual term of the option. The risk-free rate is based on U.S. Treasury
yields for securities in effect at the time of grant with terms approximating
the expected term until exercise of the option. In addition, the fair value of
stock options granted is recognized as expense over the service period, net of
estimated forfeitures. We are utilizing a 5% forfeiture rate, which we believe
is a reasonable assumption to estimate forfeitures. However, the estimation of
forfeitures requires significant judgment, and to the extent actual results or
updated estimates differ from our current estimates, the effects of such
resulting adjustment will be recorded in the period estimates are revised. No
options were exercised during the three and nine months ended September 30, 2009
or during the three months ended September 30, 2008.





RESEARCH
AND DEVELOPMENT EXPENSES - Research and development costs are expensed as
incurred.





NEW
ACCOUNTING PRONOUNCEMENTS – In June 2009, the FASB issued FASB ASC 105,Generally Accepted Accounting
Principles(“GAAP”), which establishes the FASB Accounting Standards
Codification as the sole source of authoritative generally accepted accounting
principles. Pursuant to the provisions of FASB ASC 105, the Company has updated
references to GAAP in its financial statements issued for the period ended
September 30, 2009. The adoption of FASB ASC 105 did not impact the Company’s
financial position or results of operations.








28
 Table of Contents





RESULTS
OF OPERATIONS





NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2008





License
fees and milestone fees earned for the nine months ended September 30, 2009 were
$356,000 as compared to $258,000 for the nine months ended September 30,
2008.





Research
and development expenses for the nine months ended September 30, 2009 were
$1,980,000 as compared to $3,151,000 for the nine months ended September 30,
2008.  Research and development costs consist primarily of salaries
and benefits, contractor and consulting fees, clinical drug supplies of
preclinical and clinical development programs, consumable research supplies and
allocated facility and administrative costs. Below is a summary of our research
and development expenses for the nine months ended September 30, 2009 and
September 30, 2008.








Nine
      Months EndedSeptember
      30, 2009
            
            
            September
      30, 2008NitroMistTM
            
            $
            427,000
            
            
            $
            96,000ZolpimistTM
            
            
            161,000
            
            
            
            775,000Sumatriptan
            
            
            170,000
            
            
            
            294,000ZensanaTM
            
            
            5,000
            
            
            
            —Tizanidine
            
            
            —
            
            
            
            37,000Other
      research and development costs
            
            
            208,000
            
            
            
            203,000Internal
      costs
            
            
            1,009,000
            
            
            
            1,746,000Total
      research and development expenses
            
            $
            1,980,000
            
            
            $
            3,151,000





In the
preceding table, research and development expenses are set forth in the
following categories:







·
            NitroMistTM,
      ZolpimistTM, Sumatriptan, Tizanidine and Ropinirole - third-party direct
      project expenses relating to the development of the respective product
      candidates. The majority of our research and development resources were
      devoted to our zolpidem and sumatriptan product candidates. During the
      fourth quarter 2007, we significantly reduced clinical development
      activities on our product candidate pipeline, as we did not believe that
      we had sufficient cash to sustain such activities. As of the current date,
      we have not yet secured sufficient additional financing, and have
      therefore not resumed clinical development activity. There can be no
      assurances that we will be able to secure additional capital, and as a
      result, there can be no assurances as to whether, and when, we will be
      able to resume our clinical development
  activities;




·
            ZensanaTM
      - third-party direct project expenses relating to the development of
      ZensanaTM. As our partner for the ZensanaTM, Par, is overseeing all clinical
      development and regulatory approval activities, we do not expect to devote
      a significant amount of resources to this product candidate. In light of
      Hana Biosciences’ announcements in February 2007 and March 2007 regarding
      the status of ZensanaTM, as described above, we devoted resources to this
      project during the nine months ended September 30, 2007, including
      approximately $204,000 in third-party
costs;





·
            Other
      research and development costs – direct expenses not attributable to a
      specific product candidate; and





·
            Internal
      costs – costs related primarily to personnel and overhead. We do not
      allocate these expenses to specific product candidates as these costs
      relate to all research and development
  activities.





Research
and development expenses in the nine months ended September 30, 2009 decreased
primarily as a result of the following items:





·
            $331,000
      increase in costs associated with our NitroMistTM product candidate
      primarily due to process validation, method transfer activities and lab
      supplies in the nine months ended September 30,
  2009;





·
            $614,000
      decrease in product development costs for our ZolpimistTM product
      candidate, as development efforts were substantially completed during the
      fourth quarter 2007, including filing of an NDA. Costs for zolpidem in the
      nine months ended September 30, 2009 related to usage and expired lab
      supplies;





·
            $124,000
      decrease in product development costs for our Sumatriptan product
      candidate, due to delayed activity on this
  project;





29
 Table of Contents


·
            $737,000
      decrease in internal costs is due to restructuring activities and
      substantially reduced efforts on R&D
  activities.





Consulting,
selling, general and administrative expenses for the nine months ended September
30, 2009 were $3,167,000 as compared to $3,473,000 for the nine months ended
September 30, 2008.  General and administrative expenses consist
primarily of salaries and related expenses for executive, finance, legal and
other administrative personnel, recruitment expenses, professional fees and
other corporate expenses. The decrease in general and administrative expenses is
primarily attributable to the Company’s employee related costs and reduction in
stock compensation expense due to decrease in headcount during the second
quarter.





Primarily
as a result of the factors described above, total expenses for the nine months
ended September 30, 2009 were $5,147,000, as compared to $6,975,000 for the nine
months ended September 30, 2008.





Other
income/(expense) for the nine months ended September 30, 2009 was $301,000 which
relates to the Company’s adoption of ASC 815-40-15 in the amount of $360,000,
offset with a loss on sale of fixed assets of $59,000.





Interest
expense for the nine months ended September 30, 2009 was $717,000 primarily
related to the convertible notes that were issued during the year ended December
31, 2008.





Interest
income for the nine months ended September 30, 2009 was $6,000 as compared to
$84,000 for the nine months ended September 30, 2008, due to lower average cash
and cash equivalent balances.





The
resulting net loss for the nine months ended September 30, 2009 was $5,201,000
as compared to $7,677,000 for the nine months ended September 30,
2008.





THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2008





License
fees and milestone fees earned for the three months ended September 30, 2009
were $223,000 as compared to $104,000 for the three months ended September 30,
2008.





Research
and development expenses for the three months ended September 30, 2009 were
$530,000 as compared to $705,000 for the three months ended September 30,
2008.  Research and development costs consist primarily of salaries
and benefits, contractor and consulting fees, clinical drug supplies of
preclinical and clinical development programs, consumable research supplies and
allocated facility and administrative costs. Below is a summary of our research
and development expenses for the three months ended September 30, 2009 and
September 30, 2008.








Three
      Months EndedSeptember
      30, 2009
            
            
            September
      30, 2008NitroMistTM
            
            $
            153,000
            
            
            $
            84,000ZolpimistTM
            
            
            105,000
            
            
            
            125,000Sumatriptan
            
            
            
            
            
            
            16,000ZensanaTM
            
            
            
            
            
            
            —Tizanidine
            
            
            
            
            
            
            —Other
      research and development costs
            
            
            28,000
            
            
            
            41,000Internal
      costs
            
            
            244,000
            
            
            
            439,000Total
      research and development expenses
            
            $
            530,000
            
            
            $
            705,000





In the
preceding table, research and development expenses are set forth in the
following categories:




·
            NitroMistTM,
      ZolpimistTM, Sumatriptan, Tizanidine and Ropinirole - third-party direct
      project expenses relating to the development of the respective product
      candidates. The majority of our research and development resources were
      devoted to our zolpidem and sumatriptan product candidates. During the
      fourth quarter 2007, we significantly reduced clinical development
      activities on our product candidate pipeline, as we did not believe that
      we had sufficient cash to sustain such activities. As of the current date,
      we have not yet secured sufficient additional financing, and have
      therefore not resumed clinical development activity. There can be no
      assurances that we will be able to secure additional capital, and as a
      result, there can be no assurances as to whether, and when, we will be
      able to resume our clinical development
  activities;




30
 Table of Contents





·
            ZensanaTM
      - third-party direct project expenses relating to the development of
      ZensanaTM. As our partner for the ZensanaTM, Par, is overseeing all clinical
      development and regulatory approval activities, we do not expect to devote
      a significant amount of resources to this product candidate. In light of
      Hana Biosciences’ announcements in February 2007 and March 2007 regarding
      the status of ZensanaTM, as described above, we devoted resources to this
      project during the nine months ended September 30, 2007, including
      approximately $204,000 in third-party
costs;





·
            Other
      research and development costs – direct expenses not attributable to a
      specific product candidate;





·
            Internal
      costs – costs related primarily to personnel and overhead. We do not
      allocate these expenses to specific product candidates as these costs
      relate to all research and development activities;
  and





·
            Research
      and development expenses in the three months ended September 30, 2009
      increased primarily due to activities in both NitroMist and Zolpmist,
      however internal costs have decreased as a result of reducing internal
      headcount.





Consulting,
selling, general and administrative expenses for the three months ended
September 30, 2009 were $973,000 as compared to $1,164,000 for the three months
ended September 30, 2008.  General and administrative expenses consist
primarily of salaries and related expenses for executive, finance, legal and
other administrative personnel, recruitment expenses, professional fees and
other corporate expenses. The decrease in general and administrative expenses is
primarily attributable to overall Company-wide decreased spending.


As a
result of the factors described above, total expenses for the three months ended
September 30, 2009 were $1,503,000, as compared to $1,878,000 for the three
months ended September 30, 2008.





Interest
expense for the three months ended September 30, 2009 was $81,000 primarily
related to the convertible notes that were issued during the year ended December
31, 2008.





The
resulting net loss for the three months ended September 30, 2009 was $1,361,000
as compared to $2,503,000 for the three months ended September 30,
2008.





LIQUIDITY
AND CAPITAL RESOURCES


From our
inception, our principal sources of capital have been consulting revenues,
private placements and public offerings of our securities, as well as loans and
capital contributions from our principal stockholders. We have had a history of
recurring losses, giving rise to an accumulated deficit as of September 30, 2009
of $80,390,000, as compared to $74,829,000 as of December 31, 2008. We have had
negative cash flow from operating activities of $3,579,000 and $5,126,000 for
the nine months ended September 30, 2009 and September 30, 2008, respectively.
As of September 30, 2009, we had working capital deficiency of $4,223,000 as
compared to working capital of $47,000 as of December 31, 2008, representing a
net decrease in working capital of approximately $4,269,000.  As
explained further below, such decrease is primarily due to the loss for the nine
months ended September 30, 2009 of $5,201,000.





Net cash
used in operating activities was $3,579,000 for the nine months ended September
30, 2009, as compared to $5,126,000 for the nine months ended September 30,
2008.  Net cash flows used in financing and investing activities were
$422,000 for the nine months ended September 30, 2009 as compared to cash flows
of $1,151,000, primarily due to payment of $1,000,000 of secured convertible
note payable partially offset by proceeds of $644,000 from issuance of common
stock for the nine months ended September 30, 2009 compared to proceeds of
$1,475,000 received on secured convertible note payable for the nine months
ended September 30, 2008.




Until and
unless our operations generate significant revenues and cash flow, we will
attempt to continue to fund operations from cash on hand and through the sources
of capital described below. Our long-term liquidity is contingent upon achieving
sales and positive cash flows from operating activities, and/or obtaining
additional financing. The most likely sources of financing include private
placements of our equity or debt securities or bridge loans to us from
third-party lenders, license payments from current and future partners, and
royalty payments from sales of approved drugs by partners. We can give no
assurances that any additional capital that we are able to obtain will be
sufficient to meet our needs.








31
 Table of Contents





We
received $1,475,000 in gross proceeds on May 30, 2008 from the Initial Closing
of a convertible note financing with certain funds affiliated with ProQuest
Investments, and received $2,525,000 in gross proceeds on October 17, 2008 from
the Subsequent Closing of such convertible note financing. The convertible notes
issued in the Initial Closing matured on November 30, 2008 and, in the
Subsequent Closing, on April 17, 2009. On November 30, 2008, with respect to the
Initial Closing and on April 17, 2009, with respect to the Subsequent Closing,
the noteholders may either convert the convertible notes issued in such closing
into shares of common stock or demand payment of the outstanding principal
balance, plus accrued and unpaid interest at a rate of 10% per annum. There can
be no assurance whether the noteholders will convert their notes or demand
immediate repayment of the convertible notes at maturity. The convertible notes
are secured by all of our assets, other than certain excluded assets. During the
second quarter of 2008, we also entered into a European partnership for our
ondansetron oral spray with BioAlliance, as a result of which we received an
immediate non-refundable license fee of $3,000,000. On April 29, 2009, we
remitted $1,000,000 to ProQuest Investments and related entities against the
$4,000,000 of convertible notes issued during 2008.





We have
entered into a common stock purchase agreement with Seaside 88, LP, whereby
Seaside 88, LP will purchase 500,000 shares of common stock in a series of
closings occurring every two weeks for a total of up to 26 closings, provided
that the 3 day volume weighed average price prior to the scheduled closing is
greater than or equal to the stated floor price of $0.25 per
share.  We have received $693,000 in gross proceeds for the closings
that have occurred as of September 30, 2009. The scheduled closing on October 9,
2009 did not occur due to the fact that the 3 day volume weighted average price
was below the stated floor price of $0.25 per share.  Consequently,
the total number of shares issuable under the agreement has been reduced by
500,000 shares.





On August
24, 2009, we received a milestone payment of approximately $150,000 from
Velcera, Inc. relating to our License and Development agreement dated June 22,
2004. This milestone payment resulted from Velcera’s recently announced global
licensing agreement for the first canine pain management product delivered in a
transmucosal mist form.





On
October 27, 2009, we entered into a licensing and distribution agreement with
privately-held Mist Acquisition, LLC to manufacture and commercialize the
NitroMistTM
lingual spray version of nitroglycerine, a widely-prescribed and leading
short-acting nitrate for the treatment of angina pectoris.  Under the
terms of the agreement, we received a $1,000,000 licensing fee upon execution of
the agreement, and will receive milestone payments totaling an additional
$1,000,000 over the next twelve months and ongoing performance payments of up to
seventeen percent (17%) of net sales subject to potential reduction based upon
the terms of the Agreement. The Agreement contains customary terminations
provisions. In addition, the Agreement may be terminated by Mist for any reason
upon written notice to us, which will be effective 180 days from the date of
receipt of such notice, provided that Mist may not terminate until the second
anniversary after the first commercial sale of NitroMistTM by Mist or its
affiliates.





Through a
separate license agreement with Mist, Akrimax Pharmaceuticals, LLC will receive
the exclusive right to manufacture, distribute, market and sell NitroMistTM in North America.
Under the terms of the Agreement, we will receive a percentage of any income
received by Mist under any sublicense agreement relating to NitroMistTM.




TM TM co-promote
zolpidem tartrate oral spray in the United States and Canada with ECR’s consent,
and retains commercialization rights for all other territories. ECR will assume
responsibility for manufacturing the product for commercialization in the United
States and Canada, including any activities required from the date of the
Agreement. The Agreement contains customary termination
provisions.  In addition, the agreement may be terminated by ECR for
any reason upon written notice to the Company, which will be effective 180 days
from the date of receipt of such notice, provided that ECR may not terminate
until the second anniversary after the first commercial sale of ZolpiMistTM by
ECR or its affiliates.





At our
current level of spending, which excludes any product development efforts,
assuming that ProQuest does not or demand payment under the notes and assuming
that the remaining 7,500,000 shares are issued to Seaside 88, LP, we
estimate that we will have sufficient cash on hand to fund operations
through fourth quarter 2010.





Given the
recent and continuing downturn in the economy, uncertainty in the financial
community, and our current cash position, there can be no assurance that
additional private or public capital will be available to us on favorable terms,
or at all. There are a number of risks and uncertainties related to our attempt
to complete another financing or strategic partnering arrangement that are
outside our control.  We may not be able to obtain additional
financing on terms acceptable to us, or at all. If we are unsuccessful at
obtaining additional financing as needed, we may be required to significantly
curtail or cease operations. We will need additional financing thereafter until
we achieve profitability, if ever.





Our
audited financial statements for the fiscal year ended December 31, 2008 were
prepared under the assumption that we will continue our operations as a going
concern. We were incorporated in 1982, and have a history of losses. As a
result, our independent registered public accounting firm in their audit report
has expressed substantial doubt about our ability to continue as a going
concern. We believe that the cash inflows that have been generated from our
financing transactions and our licensing transactions and any additional
potential cash inflows that may be received during 2009 and 2010 will improve
our ability to continue our operations as a going concern.  Continued
operations are dependent on our ability to complete equity or debt formation
activities or to generate profitable operations. Such capital formation
activities may not be available or may not be available on reasonable terms. Our
condensed financial statements do not include any adjustments that may result
from the outcome of this uncertainty.


32
 Table of Contents





As of
September 30, 2009 and as of the date hereof, we have not regained
compliance with NYSE Amex LLC listing requirements.  Unless NYSE Amex
LLC extends the targeted delisting date, we expect to receive a formal
delisting notice on or about November 16, 2009.  We will
consider our options if and when we receive a formal delisting notice,
including but not limited to, appealing any decision of the NYSE Amex
LLC.  In the event we receive a delisting notice and decide
to pursue an appeal, we cannot assure you that such appeal will be
successful.





OFF-BALANCE
SHEET ARRANGEMENTS





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, results of
operations, liquidity or capital resources.





CONTRACTUAL
OBLIGATIONS





Our major
outstanding contractual obligations relate to our operating leases, employment
agreements, consulting agreements, and license agreements with our strategic
partners. Since December 31, 2008, there have been no material changes with
respect to our contractual obligations as disclosed in our Annual Report on Form
10-K, as amended, for the year ended December 31, 2008 and as supplemented by
our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
2009, June 30, 2009 and September 30, 2009.





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





We invest
primarily in short-term, highly-rated investments, including U.S. government
securities and certificates of deposit guaranteed by banks. Our market risk
exposure consists principally of exposure to changes in interest rates. Because
of the short-term maturities of our investments, however, we do not believe that
a decrease in interest rates would have a significant negative impact on the
value of our investment portfolio.





ITEM 4T. CONTROLS AND PROCEDURES





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, or the
Exchange Act, is recorded, processed, summarized and reported, within the time
periods specified in the Rules and Forms of the Securities and Exchange
Commission, or the SEC. 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 our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.





We
carried out an evaluation, under the supervision and with the participation of
our Interim Chief Executive and Interim Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
Act) as of September 30, 2009. Based on this evaluation, Steven B. Ratoff, our
Interim Chief Executive Officer and Interim Chief Financial Officer concluded
that as of September 30, 2009, our disclosure controls and procedures wereeffective in that they
were designed to ensure that material information relating to us is made known
to Steven B. Ratoff, our Interim Chief Executive Officer and Interim Chief
Financial Officer by others within the Company, as appropriate to allow timely
decisions regarding required disclosures, and effective in that they ensure that
information required to be disclosed by us in our 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.





Changes
in Internal Controls





During
the nine months ended September 30, 2009, there were no changes in our internal
control over financial reporting (as defined in Rule 13a-15(f) and Rule
15d-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.








33
 Table of Contents





ITEM 1A. RISK FACTORS




One
should carefully consider the following risk factors and all other information
contained in this prospectus 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, results of operations,
performance, achievements and industry and could result in a complete loss of
one’s investment. The risks and uncertainties described below are not the only
ones we may face.




RISKS RELATED TO OUR
BUSINESS




OUR
AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A
GOING CONCERN.




Our
unaudited financial statements for the nine months ended September 30, 2009,
were prepared under the assumption that we will continue our operations as a
going concern. We were incorporated in 1982, and have a history of losses. As a
result, our independent registered public accounting firm in their audit report
on our 2008 Financial Statements has expressed substantial doubt about our
ability to continue as a going concern. Continued operations are dependent on
our ability to complete equity or debt formation activities or to generate
profitable operations. Given the recent downturn in the economy, such capital
formation activities may not be available or may not be available on reasonable
terms. Our condensed financial statements do not include any adjustments that
may result from the outcome of this uncertainty. If we cannot continue as a
viable entity, our stockholders may lose some or all of their investment in
us.




WE
WILL REQUIRE SIGNIFICANT ADDITIONAL CAPITAL TO FUND OUR OPERATIONS.




Our
operations to date have required significant cash expenditures. Our future
capital requirements will depend on the results of our research and development
activities, and preclinical studies.





Although
we have significantly reduced clinical development activities on our product
candidate pipeline since the fourth quarter 2007 and continuing throughout 2009,
such that we have limited our expenditures primarily to those required to
support our two approved products NitroMistTM and ZolpimistTM and minor
expenditures to support formulation development activities for certain other
products, we believe that we will need to obtain more funding in the future
through collaborations or other arrangements with research institutions and
corporate partners or public and private offerings of our securities, including
debt or equity financing.





We
received $1,475,000 in gross proceeds on May 30, 2008 from the Initial Closing
of a convertible note financing with certain funds affiliated with ProQuest
Investments and received $2,525,000 in gross proceeds on October 17, 2008 from
the Subsequent Closing of such convertible note financing. The convertible notes
issued in the Initial Closing mature on November 30, 2008 and, in the Subsequent
Closing, mature on April 17, 2009. On November 30, 2008, with respect to the
Initial Closing and on April 17, 2009, with respect to the Subsequent Closing,
the noteholders may either convert the convertible notes in such closing into
shares of common stock or demand payment of the outstanding principal balance,
plus accrued and unpaid interest at a rate of 10% per annum. There can be no
assurance whether the noteholders will convert their notes or demand immediate
repayment of the convertible notes at maturity. The convertible notes are
secured by all of our assets, other than certain excluded assets.





During
the second quarter of 2008, we also entered into a European partnership for our
ondansetron oral spray with BioAlliance, as a result of which we received an
immediate non-refundable license fee of $3,000,000.





We have
entered into a common stock purchase agreement with Seaside 88, LP, whereby
Seaside 88, LP will purchase 500,000 shares of common stock in a series of
closings occurring every two weeks for a total of up to 26 closings, provided
that the 3 day volume weighed average price prior to the scheduled closing is
greater than or equal to the stated floor price of $0.25 per
share.  We have received $693,000 in gross proceeds for the closings
that have occurred as of September 30, 2009. The scheduled closing on October 9,
2009 did not occur due to the fact that the 3 day volume weighted average price
was below the stated floor price of $0.25 per share.  Consequently,
the total number of shares issuable under the agreement has been reduced by
500,000 shares.








34
 Table of Contents





Given the
recent downturn in the economy, there are a number of risks and uncertainties
related to our attempt to complete a financing or strategic partnering
arrangement that are outside our control. We may not be able to obtain
additional financing on terms acceptable to us, or at all. We may not be able to
obtain adequate funds for our operations from these sources when needed or on
acceptable terms. Future collaborations or similar arrangements may require us
to license valuable intellectual property to, or to share substantial economic
benefits with, our collaborators. If we raise additional capital by issuing
additional equity or securities convertible into equity, our stockholders may
experience dilution and our share price may decline. Any debt financing may
result in restrictions on our spending.




If we are
unable to raise additional funds, we will need to do one or more of the
following:




·
            further
      delay, scale-back or eliminate some or all of our research and product
      development programs;




·
            license
      third parties to develop and commercialize products or technologies that
      we would otherwise seek to develop and commercialize
      ourselves;




·
            attempt
      to sell our company;




·
            cease
      operations; or




·
            declare
      bankruptcy.





We are
seeking to raise additional capital in 2009 to fund our operations and future
development activities through a license agreement or by taking advantage of
other strategic opportunities. These opportunities could include the securing of
funds through new strategic partnerships or collaborations, the sale of common
stock or other equity securities or the issuance of debt. In the event we do not
enter into a license agreement or other strategic transaction in which we
receive an upfront fee or payment, or we do not undertake a financing of debt or
equity securities, we may not have sufficient cash on hand to fund operations.
We can give no assurances that we will be able to enter into a strategic
transaction or raise any additional capital or if we do, that such additional
capital will be sufficient to meet our needs, or on terms favorable to us. Our
ability to fund operations is also dependent on whether ProQuest Investments, or
ProQuest, to which we have issued $4.0 million of secured convertible notes in
fiscal 2008, consisting of $1.5 million of notes issued in the initial closing
on May 30, 2008, the Initial Closing Notes, and $2.5 million of notes issued in
the subsequent closing on October 17, 2008, the Subsequent Closing Notes,
demands payment under such notes. The convertible notes issued in the Initial
Closing matured on November 30, 2008 and, in the Subsequent Closing, matured on
April 17, 2009. On November 30, 2008, with respect to the Initial Closing, and
on April 17, 2009, with respect to the Subsequent Closing, the noteholders did
not either convert the convertible notes issued in such closing into shares of
common stock or demand payment of the outstanding principal balance, inclusive
of accrued and unpaid interest at a rate of 10% per annum. However, on April 29,
2009, we remitted $1.0 million to ProQuest Investments and related entities
against the $4.0 million of convertible notes issued during 2008. There can be
no assurance whether the noteholders will convert their notes or demand
immediate repayment of the convertible notes. The convertible notes are secured
by all of our assets, other than certain excluded assets.





In
addition, we have agreed to pay ProQuest liquidated damages for the shares that
we are not able to register for resale in connection with subsequent closing,
referred to herein as subsequent registrable shares. Such liquidated damages
equal a maximum registration penalty of $171,800.  The liquidated
damages will be paid in the form of a non-convertible promissory note, which
accrues interest at a rate of 10% per annum and all interest and principal will
become due and payable upon the earlier to occur of (i) the maturity date, which
is twelve months following the date of issuance or (ii) a change of control (as
defined in the liquidated damages note).  As of September 30, 2009, we
have issued $159,000 in non-convertible promissory notes to the
purchasers.










35
 Table of Contents





On
October 27, 2009, we entered into a licensing agreement with privately-held Mist
Acquisition, LLC to manufacture and commercialize the NitroMist lingual spray
version of nitroglycerine, a widely-prescribed and leading short-acting nitrate
for the treatment of angina pectoris.  Under the terms of the
agreement, we received a $1,000,000 licensing fee upon execution of the
agreement, and we will receive milestone payments totaling an additional
$1,000,000 over the next twelve months and ongoing performance payments of up to
seventeen percent (17%) of net sales.




TM





At our
current level of spending, which excludes any product development efforts,
assuming that ProQuest does not demand payment under the notes and assuming that
the remaining 7,500,000 shares are issued to Seaside 88, LP, we estimate that we
will have sufficient cash on hand to fund operations through fourth quarter
2010.





We may
also determine that it is appropriate to increase development activities on our
product candidate pipeline, which activities have been significantly reduced
since the fourth quarter of 2007 and continuing throughout 2009, such that we
have limited our expenditures primarily to those required to support our two
approved products NitroMistTM and ZolpimistTM and minor expenditures to support
formulation development activities for certain other products. An increase in
development activities would significantly increase cash outflows and thereby
require additional funding in order to sustain operations. We may choose to
raise additional capital in 2009 and 2010 to fund future development activities
or to take advantage of other strategic opportunities. This could include the
securing of funds through new strategic partnerships and/or the sale of
additional common stock or other securities. Given the recent and continuing
downtown in the economy, uncertainty in the financial community, and our current
cash position, there can be no assurance that such capital will be available to
us on favorable terms, or at all.




WE
WILL REQUIRE SIGNIFICANT CAPITAL FOR PRODUCT DEVELOPMENT AND COMMERCIALIZATION
IN THE NEAR TERM.




The
research, development, testing and approval of our product candidates involve
significant expenditures, and, accordingly, we require significant capital to
fund such expenditures. 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. Until and unless our
operations generate significant revenues and cash flow, we will attempt to
continue to fund operations from cash on hand and through the sources of capital
described below. Our long-term liquidity is contingent upon achieving sales and
positive cash flows from operating activities, and/or obtaining additional
financing. The most likely sources of financing include private placements of
our equity or debt securities or bridge loans to us from third-party lenders,
license payments from current and future partners, and royalty payments from
sales of approved product candidates by partners. Given the recent and
continuing downturn in the economy, uncertainty in the financial community, and
our current cash position, we can give no assurances that any additional capital
that we are able to obtain will be sufficient to meet our needs, or on terms
favorable to us. Since the fourth quarter 2007 and continuing throughout 2009,
we have significantly reduced clinical development activities on our product
candidate pipeline, such that we have limited our expenditures primarily to
those required to support our two approved products NitroMistTM and ZolpimistTM
and minor expenditures to support formulation development activities for certain
other products, as we did not believe that we had sufficient cash to sustain
such activities.




Despite
this reduction in expenditures for clinical activities, we require capital to
sustain our existing organization until such time as clinical activities can be
resumed. We received $1,475,000 in gross proceeds on May 30, 2008 from the
Initial Closing of a convertible note financing with certain funds affiliated
with ProQuest Investments and received $2,525,000 in gross proceeds on October
17, 2008 from the Subsequent Closing of such convertible note financing. The
convertible notes issued in the Initial Closing mature on November 30, 2008 and,
in the Subsequent Closing, mature on April 17, 2009. On November 30, 2008, with
respect to the Initial Closing and on April 17, 2009, with respect to the
Subsequent Closing, the noteholders may either convert the convertible notes in
such closing into shares of common stock or demand payment of the outstanding
principal balance, plus accrued and unpaid interest at a rate of 10% per annum.
There can be no assurance whether the noteholders will convert their notes or
demand immediate repayment of the convertible notes at maturity. The convertible
notes are secured by all of our assets, other than certain excluded assets.
During the second quarter of 2008, we also entered into a European partnership
for our ondansetron oral spray with BioAlliance Pharma S.A., as a result of
which we received an immediate non-refundable license fee of
$3,000,000.





36
 Table of Contents





Given our
current level of spending, if ProQuest demands payment under the Initial Closing
Notes and/or the Subsequent Closing Notes, we will not be able to repay the
notes in full, unless we are successful prior to that time in securing funds
through new strategic partnerships and/or the sale of common stock or other
securities. The convertible notes issued in the Initial Closing matured on
November 30, 2008 and, in the Subsequent Closing, matured on April 17, 2009. On
November 30, 2008, with respect to the Initial Closing, and on April 17, 2009,
with respect to the Subsequent Closing, the noteholders did not either convert
the convertible notes issued in such closing into shares of common stock or
demand payment of the outstanding principal balance, inclusive of accrued and
unpaid interest at a rate of 10% per annum. However, on April 29, 2009, we
remitted $1.0 million to ProQuest Investments and related entities against the
$4.0 million of convertible notes issued during 2008. There can be no assurance
whether the noteholders will convert their notes or demand immediate repayment
of the convertible notes. The convertible notes are secured by all of our
assets, other than certain excluded assets.





In
addition, we have agreed to pay ProQuest liquidated damages for the shares that
we are not able to register for resale in connection with subsequent closing,
referred to herein as subsequent registrable shares. Such liquidated damages
equal a maximum registration penalty of $171,800.  The liquidated
damages will be paid in the form of a non-convertible promissory note, which
accrues interest at a rate of 10% per annum and all interest and principal will
become due and payable upon the earlier to occur of (i) the maturity date, which
is twelve months following the date of issuance or (ii) a change of control (as
defined in the liquidated damages note).  As of September 30, 2009,
the Company has issued $159,000 in non-convertible promissory notes to the
purchasers.





On July
16, 2009, we received approval from the NYSE Amex LLC to issue up to 12,000,000
shares over the next twelve (12) months.  We have entered into a
common stock purchase agreement with Seaside 88, LP, whereby Seaside 88, LP will
purchase 500,000 shares of common stock in a series of closings occurring every
two weeks for a total of up to 26 closings, provided that the 3 day volume
weighed average price prior to the scheduled closing is greater than or equal to
the stated floor price of $0.25 per share.  We have received $693,000
in gross proceeds for the closings that have occurred as of September 30, 2009.
The scheduled closing on October 9, 2009 did not occur due to the fact that the
3 day volume weighted average price was below the stated floor price of $0.25
per share. Consequently, the total number of shares issuable under the agreement
has been reduced by 500,000 shares.





On
October 27, 2009, we entered into a licensing agreement with privately-held Mist
Acquisition, LLC to manufacture and commercialize the NitroMistTM lingual spray
version of nitroglycerine, a widely-prescribed and leading short-acting nitrate
for the treatment of angina pectoris.  Under the terms of the
agreement, we received a $1,000,000 licensing fee upon execution of the
agreement, and will receive milestone payments totaling an additional $1,000,000
over the next twelve months and ongoing performance payments of up to seventeen
percent (17%) of net sales.




TM





At our
current level of spending, which excludes any product development efforts,
assuming that ProQuest does not demand payment under the notes and assuming that
the remaining 7,500,000 shares are issued to Seaside 88, LP, we estimate that we
will have sufficient cash on hand to fund operations through fourth quarter
2010.




We may
also determine that it is appropriate to increase development activities on our
product candidate pipeline, which activities have been significantly reduced
since the fourth quarter of 2007 and continuing throughout 2009, such that we
have limited our expenditures primarily to those required to support our two
approved products NitroMistTM and ZolpimistTM and minor expenditures to support
formulation development activities for certain other products. An increase in
development activities would significantly increase cash outflows and thereby
require additional funding in order to sustain operations. We may choose to
raise additional capital in 2009 and 2010 to fund future development activities
or to take advantage of other strategic opportunities. This could include the
securing of funds through new strategic partnerships and/or the sale of common
stock or other securities. Given the recent and continuing downtown in the
economy, uncertainty in the financial community, and our current cash position,
there can be no assurance that such capital will be available to us on favorable
terms, or at all.





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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 specialty pharmaceutical company developing oral spray
formulations of a broad range of marketed treatments. There are many
uncertainties and complexities with respect to 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 sale 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
U.S. Food and Drug Administration, or FDA, approval and achieve market
acceptance of our proposed products and respond to competition. The filing of a
New Drug Application, or NDA, with the FDA is an important step in the approval
process in the U.S. Acceptance for filing by the FDA does not mean that the NDA
has been or will be approved, nor does it represent an evaluation of the
adequacy of the data submitted. On November 3, 2006, we announced that we
received an approval letter from the FDA regarding our NDA for NitroMistTM.
Previously, this product was partnered with Par; however, on August 1, 2007, we
announced that Par returned the rights to NitroMistTM to us as part of Par’s
strategy to concentrate its resources on supportive care in AIDS and oncology
markets. On January 23, 2008, we announced that our NDA filing for ZolpimistTM,
our zolpidem oral spray, was accepted by the FDA. On September 18, 2008, we
announced that the FDA had requested an extension of up to three months on our
NDA filing for ZolpimistTM in order to complete their review. On December 22,
2008, we announced that we had received approval from the FDA for our NDA for
ZolpimistTM for the short-term treatment of insomnia. We have
recently obtained strategic partners for both NitroMistTM and
ZolpimistTM. We cannot be certain as to when to anticipate commercializing and
marketing any of our product candidates 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. Since the fourth quarter
2007 and continuing throughout 2009, we have significantly reduced clinical
development activities on our product candidate pipeline, such that we have
limited our expenditures primarily to those required to support our two approved
products NitroMistTM and ZolpimistTM and minor expenditures to support formulation
development activities for certain other products, as we did not believe that we
had sufficient cash to sustain such activities.




On May 6,
2008, we entered into a binding Securities Purchase Agreement, as amended
pursuant to Amendment No. 1 to the Securities Purchase Agreement, dated May 28,
2008, to sell up to $4,000,000 of secured convertible promissory notes and
accompanying warrants. On May 30, 2008, we closed on the initial portion of such
financing for $1,475,000 of convertible notes and warrants. During the second
quarter of 2008, we entered into a European partnership for our ondansetron oral
spray with BioAlliance Pharma S.A., as a result of which we received an
immediate non-refundable license fee of $3,000,000. On October 17, 2008, we
closed on the remaining portion of convertible note financing, and received
gross proceeds of $2,525,000.  In addition, we have agreed to pay
ProQuest liquidated damages for the shares that we are not able to register for
resale in connection with subsequent closing, referred to herein as subsequent
registrable shares. Such liquidated damages equal a maximum registration penalty
of $171,800.  The liquidated damages will be paid in the form of a
non-convertible promissory note, which accrues interest at a rate of 10% per
annum and all interest and principal will become due and payable upon the
earlier to occur of (i) the maturity date, which is twelve months following the
date of issuance or (ii) a change of control (as defined in the liquidated
damages note).  As of September 30, 2009, we have issued $159,000 in
non-convertible promissory notes to the purchasers.




On April
29, 2009, we remitted $1,000,000 to ProQuest Investments and related entities
against the $4,000,000 of convertible notes issued during 2008.




However,
we have not yet resumed clinical development activity, as we have not yet
determined if it is advisable to resume spending significant resources on our
development activities. Given the recent downturn in the economy, uncertainty in
the financial community, and our current cash position, there can be no
assurances that we will be able to secure additional capital, and as a result,
there can be no assurances as to whether, and when, we will be able to resume
our clinical development activities.





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We had an
accumulated deficit as of September 30, 2009 of approximately $80,390,000. We
incurred losses in each of our last ten fiscal years, including net losses of
approximately $5,201,000 for the nine months ended September 30, 2009,
$9,586,000 for the year ended December 31, 2008, $16,963,000 for the year ended
December 31, 2007, $3,805,000 for the five months ended December 31, 2006 and
$10,084,000 for the fiscal year ended July 31, 2006. Additionally, we have
reported negative cash flows from operations of approximately $3,579,000 for the
nine months ended September 30, 2009, $5,533,000 for the year ended December 31,
2008, $15,240,000 for the year ended December 31, 2007, $1,782,000 for the five
months ended December 31, 2006 and $8,855,000 for the fiscal year ended July 31,
2006. We anticipate that, even with our limited research and development
activities, we could 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 product candidates, obtain the required
regulatory approvals and manufacture, market and sell our product
candidates.




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 existing
stockholders. Given the recent downturn in the economy, 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 our 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 200,000,000 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.




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 could
potentially enhance speed of onset of therapeutic effect, could potentially
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.




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.





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THERE
ARE CERTAIN INTERLOCKING RELATIONSHIPS AND POTENTIAL CONFLICTS OF
INTEREST.




As of
November 2, 2009, ProQuest Investments, a significant stockholder, directly and
indirectly, of us, beneficially owns approximately 34.4% of our outstanding
common stock (assuming exercise of certain warrants held by ProQuest
Investments). As such, ProQuest Investments may be deemed to be our affiliate.
Mr. Steven B. Ratoff, our Chairman, Interim President, Chief Executive Officer
and Interim Chief Financial Officer, has served as a venture partner with
ProQuest Investments since December 2004, although he has no authority for
investment decisions by ProQuest Investments.




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 to successfully raise
additional funds to complete the development of, obtain regulatory approvals for
and license out or market our product candidates. 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 product candidates 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. Since the fourth quarter 2007
and continuing throughout 2009, we have significantly reduced clinical
development activities on our product candidate pipeline, such that we have
limited our expenditures primarily to those required to support our two approved
products NitroMistTM and ZolpimistTM and minor expenditures to support formulation
development activities for certain other products, as we did not believe that we
had sufficient cash to sustain such activities. During the second quarter of
2008, we entered into a European partnership for our ondansetron oral spray with
BioAlliance Pharma S.A., as a result of which we received an immediate
non-refundable license fee of $3,000,000.




On
October 27, 2009, we entered into a licensing agreement with privately-held Mist
Acquisition, LLC to manufacture and commercialize the NitroMistTM lingual spray
version of nitroglycerine, a widely-prescribed and leading short-acting nitrate
for the treatment of angina pectoris.  Under the terms of the
agreement, we received  a $1,000,000 licensing fee upon execution of
the agreement, and will receive milestone payments totaling an additional
$1,000,000 over the next twelve months and ongoing performance payments of up to
seventeen percent (17%) of net sales subject to potential reduction
based upon the terms of the Agreement.
  TM TM





However,
we have not yet resumed clinical development activity, as we have not yet
determined if it is advisable to resume spending significant resources on our
development activities. Given the recent downturn in the economy, there can be
no assurances that we will be able to secure additional capital, and as a
result, there can be no assurances as to whether, and when, we will be able to
resume our clinical development activities. See “Risk Factors - We Will Require
Significant Capital For Product Development And Commercialization In The Near
Term” and “Our Strategy Includes Entering Into Collaboration Agreements With
Third Parties For Certain of our Product Candidates 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.”





SOME
OF OUR PRODUCT CANDIDATES ARE IN EARLY STAGES OF CLINICAL DEVELOPMENT AND SOME
ARE IN PRECLINICAL TESTING, WHICH MAY AFFECT OUR ABILITY OR THE TIME WE REQUIRE
TO OBTAIN NECESSARY REGULATORY APPROVALS.




Some of
our product candidates are in early stages of clinical development and some are
in preclinical testing. These product candidates are continuously evaluated and
assessed and are often subject to changes in formulation and technology. The
regulatory requirements governing these types of products may be less well
defined or more rigorous than for conventional products. As a result, we may
experience delays with our preclinical and clinical testing, and a longer and
more expensive regulatory process in connection with obtaining regulatory
approvals of these types of product candidates as compared to others in our
pipeline at later stages of development. These delays may negatively affect our
business and operations.





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WE
DO NOT HAVE COMMERCIALLY AVAILABLE PRODUCTS.




Our
principal efforts are the development of, and obtaining regulatory approvals
for, our product candidates. We anticipate that marketing activities for our
product candidates, whether by us or one or more of our licensees, if any, will
not begin until the first half of the calendar year 2010 at the earliest. On
November 3, 2006, we announced that we received an approval letter from the FDA
regarding our NDA for NitroMistTM. Previously, this product was partnered with
Par; however, on August 1, 2007, we announced that Par returned the rights to
NitroMistTM to us as part of Par’s strategy to concentrate its resources on
supportive care in AIDS and oncology markets. On January 23, 2008, we announced
that our NDA filing for ZolpimistTM, our zolpidem oral spray, was accepted by the
FDA. On September 18, 2008, we announced that the FDA had requested an extension
of up to three months on our NDA filing for ZolpimistTM in order to complete
their review. On December 22, 2008, we announced that we had received approval
from the FDA for our NDA for ZolpimistTM for the short-term treatment of
insomnia. We have recently obtained strategic partners for both NitroMistTM
and ZolpimistTM. Our partner for ZensanaTM, Par Pharmaceuticals, recently
announced that it had completed bioequivalency studies on Zensana with mixed
results, with bioequivalence to reference drug (Zofran®
tablets) achieved in some of the studies and not achieved in others. We are
working with Par to carefully review and better understand the results from
these studies before determining the next steps for ZensanaTM. Accordingly, it is
not anticipated that we will generate any revenues from royalties or sales of
our product candidates until regulatory approvals are obtained, if ever, and
marketing activities begin. Any one or more of our product candidates 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 product candidates to achieve commercial viability
would have a material adverse effect on us. Since the fourth quarter 2007 and
continuing throughout 2009, we have significantly reduced clinical development
activities on our product candidate pipeline, such that we have limited our
expenditures primarily to those required to support our two approved products
NitroMistTM and ZolpimistTM and minor expenditures to support formulation
development activities for certain other products, as we did not believe that we
had sufficient cash to sustain such activities.




However,
we have not yet resumed clinical development activity, as we have not yet
determined if it is advisable to resume spending significant resources on our
development activities. There can be no assurances that we will be able to
secure a sufficient amount of additional capital, and as a result, there can be
no assurances as to whether, and when, we will be able to resume our clinical
development activities.




WE
HAVE NOT COMPLETED PRODUCT DEVELOPMENT.




We have
not completed the development of our product candidates 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 product candidates must be obtained before the product candidates will
become available for commercial sale. On November 3, 2006, we announced that we
received an approval letter from the FDA regarding our NDA for NitroMistTM.
Previously, this product was partnered with Par; however, on August 1, 2007, we
announced that Par returned the rights to NitroMistTM to us as part of Par’s
strategy to concentrate its resources on supportive care in AIDS and oncology
markets. On January 23, 2008, we announced that our NDA filing for ZolpimistTM,
our zolpidem oral spray, was accepted by the FDA. On September 18, 2008, we
announced that the FDA had requested an extension of up to three months on our
NDA filing for ZolpimistTM in order to complete their review. On December 22,
2008, we announced that we had received approval from the FDA for our NDA for
ZolpimistTM for the short-term treatment of insomnia. We have recently
obtained strategic partners for both NitroMistTM and ZolpimistTM. Our partner
for ZensanaTM, Par Pharmaceuticals, recently announced that it had completed
bioequivalency studies on Zensana with mixed results, with bioequivalence to
reference drug (Zofran®
tablets) achieved in some of the studies and not achieved in others. We are
working with Par to carefully review and better understand the results from
these studies before determining the next steps for ZensanaTM. 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 product candidates or
develop such product candidates on a timely basis. Further, such product
candidates 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 product
candidates, particularly in instances in which we have made significant capital
expenditures, could have a material adverse effect on our business and
operations. Furthermore, since the fourth quarter 2007 and continuing throughout
2009, we have significantly reduced clinical development activities on our
product candidate pipeline, such that we have limited our expenditures primarily
to those required to support our two approved products NitroMistTM and ZolpimistTM
and minor expenditures to support formulation development activities for certain
other products, as we did not believe that we had sufficient cash to sustain
such activities.


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However,
we have not yet resumed clinical development activity, as we have not yet
determined if it is advisable to resume spending significant resources on our
development activities. There can be no assurances that we will be able to
secure a sufficient amount of additional capital, and as a result, there can be
no assurances as to whether, and when, we will be able to resume our clinical
development activities.




WE
DO NOT HAVE DIRECT CONSUMER MARKETING EXPERIENCE.




We have
no experience in marketing or distribution at the consumer level of our product
candidates. 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 Mist, ECR, Par, Manhattan Pharmaceuticals, Velcera and Hana
Biosciences, we have not entered into any significant agreements or arrangements
with respect to the marketing of our product candidates. 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.




We have
stated our intention to possibly market our own products in the future, although
we have no such experience to date. Substantial investment will be required in
order to build infrastructure and provide resources in support of marketing our
own products, particularly the establishment of a marketing force. 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. The establishment of our own marketing force, or a strategy to rely on
third party marketing arrangements, could adversely affect our profit
margins.




WE
MUST COMPLY WITH GOOD MANUFACTURING PRACTICES.




The
manufacture of our pharmaceutical products under development will be subject to
current Good Manufacturing Practices, or 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 product candidates. 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.




WE
ARE DEPENDENT ON OUR SUPPLIERS.




We
believe that the active ingredients used in the manufacture of our product
candidates are presently available from numerous suppliers located in the U.S.,
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 product candidates,
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 written supply agreement in place with INyX USA, Ltd.,
whereby Inyx shall manufacture our nitroglycerin lingual spray in its Manatee,
Puerto Rico facility. On July 3, 2007, INyX, our manufacturer for our NitroMistTM
product candidate, announced it filed for protection under the Chapter 11
bankruptcy laws. In June 2008, the trustees for INyX informed us that the
facility in Manati, Puerto Rico would cease operations at the end of July 2008.
As a result, we selected an alternative manufacturer for NitroMistTM, DPT
Laboratories Inc, and have transferred manufacturing operations to
DPT.




In
February 2008, we entered into a Master Services Agreement with Rechon Life
Sciences (Malmo, Sweden), whereby Rechon will provide services related to the
manufacturing development and the manufacture of clinical supplies for our
products. Rechon provides these services on a fee-for-service
basis.





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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,
DPT Laboratories, or Rechon Life Sciences to comply with their 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.




FAILURE
TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION
404 OF THE SARBANES-OXLEY ACT OF 2002 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 and financial condition could be
harmed.




We are
required to document and test our internal control procedures in order to
satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which
requires annual management assessments of the effectiveness of our internal
controls over financial reporting. 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 of 2002 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 of 2002. 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 the price of our common stock.




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 regulations
promulgated by the Securities and Exchange Commission, or SEC, and NYSE Amex, or
NYSE 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
recent 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 requires 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. We expect these efforts to require the continued commitment of
significant resources. Further, our Board members, Chief Executive Officer and
Chief 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.





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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, larger and/or better
capitalized pharmaceutical companies with currently marketed 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
product candidates. 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.




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.
Our competitors may be more successful in receiving third party reimbursements
from government agencies and others for their commercialized products which are
similar to our products. If we cannot receive third party reimbursement for our
products, we may not be able to commercialize our products. 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 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.




LIMITED
PRODUCT LIABILITY INSURANCE COVERAGE MAY AFFECT OUR BUSINESS.




We may be
exposed to potential product liability claims by end-users of our products.
Although we obtain product liability insurance per contractual obligations,
before the commercialization of any of our product candidates, 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 product
candidates, which could have a material adverse effect on us.








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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 U.S. 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 Federal Food, Drug, and
Cosmetic Act, or FFDCA, as amended (21 U.S.C. 301 et. seq.), a new drug may not
be commercialized or otherwise distributed in the U.S. without the prior
approval of the FDA or pursuant to an applicable exemption from the FFDCA. 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 an NDA, which includes
complete reports of pre-clinical, clinical and laboratory studies to prove such
product’s safety and efficacy. Prior to submission of the NDA, it is necessary
to submit an Investigational New Drug, or IND, to obtain permission to begin
clinical testing of the new drug. Such clinical trials are required to meet good
clinical practices under the FFDCA. Given that our current product candidates
are based on a new technology for formulation and delivery of active
pharmaceutical ingredients that have been previously approved and that have been
shown to be safe and effective in previous clinical trials, we believe that we
will be eligible to submit what is known as a 505(b)(2). We estimate that the
development of new formulations of pharmaceutical products, including
formulation, testing and NDA submission, generally takes two to three years
under the 505(b)(2) 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. The filing of an NDA with the FDA is an important step
in the approval process in the U.S. Acceptance for filing by the FDA does not
mean that the NDA has been or will be approved, nor does it represent an
evaluation of the adequacy of the data submitted.




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
for an NDA 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.




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 fail to
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 U.S., we also need to comply with foreign regulatory
requirements governing human clinical trials and marketing approval for
pharmaceutical products. Other than the approval of NitroMistTM and ZolpMistTM, the FDA and
foreign regulators have not yet approved any of our products under development
for marketing in the U.S. 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.


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WE
EXPECT TO FACE UNCERTAINTY OVER REIMBURSEMENT AND HEALTHCARE
REFORM.




In both
the U.S. and other countries, sales of our products will depend in part upon the
availability of reimbursement from third-party payers, which include government
health administration authorities, managed care providers and private health
insurers. Third-party payers are increasingly challenging the price and
examining the cost effectiveness of medical products and services.




OUR
STRATEGY INCLUDES ENTERING INTO COLLABORATION AGREEMENTS WITH THIRD PARTIES FOR
CERTAIN OF OUR PRODUCT CANDIDATES 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
certain of our product candidates and for the manufacturing, marketing and
commercialization of such product candidates includes entering into
collaboration arrangements with pharmaceutical companies to market,
commercialize and distribute the products.




Through
June 30, 2007, we entered into strategic license agreements with: (i) Hana
Biosciences, for the marketing rights in the U.S. and Canada for our ondansetron
oral spray, (ii) Par for the marketing rights in the U.S. and Canada for our
nitroglycerin oral spray, (iii) Manhattan Pharmaceuticals, in connection with
propofol, and (iv) Velcera, in connection with veterinary applications for
currently marketed veterinary drugs. Subsequent to June 30, 2007, the following
events occurred with respect our strategic license agreements:




On July
10, 2007, Manhattan Pharmaceuticals announced that as part of its change in
strategic focus it intends to pursue appropriate out-licensing opportunities for
this product candidate.




On July
31, 2007, we entered into a Product Development and Commercialization Sublicense
Agreement with Hana Biosciences and Par, or the Sublicense Agreement, pursuant
to which Hana Biosciences granted a non-transferable, non-sublicenseable,
royalty-bearing, exclusive sublicense to Par to develop and commercialize
ZensanaTM, our oral spray version of ondansetron. In connection therewith, we and
Hana Biosciences amended and restated their existing License and Development
Agreement, as amended, relating to the development and commercialization of
ZensanaTM, or the Amended and Restated License Agreement, to coordinate certain
of the terms of the Sublicense Agreement. Under the terms of the Sublicense
Agreement, Par is responsible for all development, regulatory, manufacturing and
commercialization activities of ZensanaTM in the United States and Canada, with
us able to collaborate on development in certain instances. We retain our rights
to ZensanaTM outside of the United States and Canada. In addition, under the
terms of the Amended and Restated License Agreement, Hana Biosciences
relinquished its right to reduced royalty rates to us until such time as Hana
Biosciences had recovered one-half of its costs and expenses incurred in
developing ZensanaTM from sales of ZensanaTM or payments or other fees from a
sublicense and we agreed to surrender for cancellation all 73,121 shares of the
Hana Biosciences common stock acquired by us in connection with execution of the
original License Agreement.




On July
31, 2007, we and Par agreed to terminate the Development, Manufacturing and
Supply Agreement, dated July 28, 2004, or the DMS Agreement, relating to
NitroMistTM. Under the DMS Agreement, Par had exclusive rights to market, sell
and distribute NitroMistTM in the U.S. and Canada, with us entitled to royalty
payments based upon a percentage of net sales. We have recently obtained
a strategic partner for the commercialization of NitroMistTM.




On May
19, 2008, we entered into a European partnership for our ondansetron oral spray
for the treatment of nausea with BioAlliance. This product is currently in
clinical development in North America under sub-license to Par, who have
announced their intent to file a new drug application before the end of 2008.
The agreement with BioAlliance resulted in an immediate non-refundable license
fee to us of $3,000,000, with up to an aggregate of approximately $24 million in
additional milestones in addition to royalties expected upon the approval and
commercialization of the product by BioAlliance.




On
November 7, 2008, our partner for ZensanaTM, Par Pharmaceuticals, announced that
it had completed bioequivalency studies on Zensana with mixed results, with
bioequivalence to reference drug (Zofran®
tablets) achieved in some of the studies and not achieved in others. We are
working with Par to carefully review and better understand the results from
these studies before determining the next steps for ZensanaTM.




On
October 27, 2009, we entered into a licensing agreement with privately-held Mist
Acquisition, LLC to manufacture and commercialize the NitroMistTM lingual spray
version of nitroglycerine, a widely-prescribed and leading short-acting nitrate
for the treatment of angina pectoris.  Under the terms of the
agreement, we received  a $1,000,000 licensing fee upon execution of
the agreement, and will receive milestone payments totaling an additional
$1,000,000 over the next twelve months and ongoing performance payments of up to
seventeen percent (17%) of net sales subject to potential reduction
based upon the terms of the Agreement.
  TM TM





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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 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 could limit our flexibility in
considering alternatives for the commercialization of such product candidates.
If we fail to successfully develop these relationships or if our collaboration
partners fail to successfully develop or commercialize such product candidates,
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.




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
      our trade secrets; and




·
            operate
      without infringing upon the proprietary rights of others, both in the U.S.
      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 U.S. Patent and Trademark Office, or
USPTO, has not adopted a consistent policy regarding the breadth of claims that
the USPTO 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.




Section
505(b)(2) of the FFDCA was enacted as part of the Drug Price Competition and
Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Act.
Section 505(b)(2) permits the submission of an NDA where at least some of the
information required for approval comes from studies not conducted by or for the
applicant and for which the applicant has not obtained a right of reference. For
example, the Hatch-Waxman Act permits an applicant to rely upon the FDA’s
findings of safety and effectiveness for an approved product. The FDA may also
require companies to perform one or more additional studies or measurements to
support the change from the approved product. The FDA may then approve the new
formulation for all or some of the label indications for which the referenced
product has been approved, or a new indication sought by the Section 505(b)(2)
applicant.




To the
extent that the Section 505(b)(2) applicant is relying on the FDA’s findings for
an already-approved product, the applicant is required to certify to the FDA
concerning any patents listed for the approved product in the FDA’s Orange Book
publication. Specifically, the applicant must certify that: (1) the required
patent information has not been filed (paragraph I certification); (2) the
listed patent has expired (paragraph II certification); (3) the listed patent
has not expired, but will expire on a particular date and approval is sought
after patent expiration (paragraph III certification); or (4) the listed patent
is invalid or will not be infringed by the manufacture, use or sale of the new
product (paragraph IV certification). If the applicant does not challenge the
listed patents, the Section 505(b)(2) application will not be approved until all
the listed patents claiming the referenced product have expired, and once any
pediatric exclusivity expires. The Section 505(b)(2) application may also not be
approved until any non-patent exclusivity, such as exclusivity for obtaining
approval of a new chemical entity, listed in the Orange Book for the referenced
product has expired.




If the
applicant has provided a paragraph IV certification to the FDA, the applicant
must also send notice of the paragraph IV certification to the NDA holder and
patent owner once the NDA has been accepted for filing by the FDA. The NDA
holder and patent owner may then initiate a legal challenge to the paragraph IV
certification. The filing of a patent infringement lawsuit within 45 days of
their receipt of a paragraph IV certification automatically prevents the FDA
from approving the Section 505(b)(2) NDA until the earliest of 30 months,
expiration of the patent, settlement of the lawsuit or a decision in an
infringement case that is favorable to the Section 505(b)(2) applicant. Thus, a
Section 505(b)(2) applicant may invest a significant amount of time and expense
in the development of its products only to be subject to significant delay and
patent litigation before its products may be commercialized. Alternatively, if
the NDA holder or patent owner does not file a patent infringement lawsuit
within the required 45-day period, the applicant’s NDA will not be subject to
the 30-month stay.


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Notwithstanding
the approval of many products by the FDA pursuant to Section 505(b)(2), over the
last few years, certain brand-name pharmaceutical companies and others have
objected to the FDA’s interpretation of Section 505(b)(2). If the FDA changes
its interpretation of Section 505(b)(2), this could delay or even prevent the
FDA from approving any Section 505(b)(2) NDA that we submit.




Our
partner, Hana Biosciences, submitted an NDA under Section 505(b)(2) for ZensanaTM
in June 2006. The safety and efficacy of the drug will be based on a
demonstration of the bioequivalence of ZensanaTM to oral ondansetron, marketed
under the trade name Zofran®. This
Zofran®
formulation is protected by one unexpired patent, which is scheduled to expire
in September 2011, and is subject to a period of pediatric exclusivity expiring
in March 2012. Additionally, this Zofran®
formulation was covered by another patent which, after pediatric exclusivity,
expired in December 2006. Hana Biosciences’ Section 505(b)(2) NDA contained a
paragraph III certification acknowledging that the now expired patent would
expire in December 2006, and a paragraph IV certification to the patent which is
due to expire in March 2012. Based on the paragraph IV certification, it is
possible that the NDA holder or the patent owner will sue us and/or Hana
Biosciences for patent infringement, and that the FDA will be prevented from
approving our application until the earliest of 30 months, settlement of the
lawsuit, or a decision in an infringement case that is favorable to us. Hana
Biosciences has announced that it has not received any objections related to
these patent certifications. On March 23, 2007, Hana Biosciences announced its
plan to withdraw, without prejudice, its pending NDA for ZensanaTM with the
FDA.




We have
received a request for information from a third party in response to the
information we have set forth in the paragraph IV certification of the NDA we
have filed for NitroMistTM. Such request no longer has any effect on PDUFA dates
for such NDA. However, the request may be a precursor for a patent infringement
claim by such third party. We do not believe that we have infringed on any
intellectual property rights of such party and if such a claim is filed, we
intend to vigorously defend our rights in response to such claim.




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 U.S. and foreign
patent applications with respect to the products and technologies under our
development, and the USPTO 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. Currently,
we have nine patents which have been issued in the U.S. and 69 patents which
have been issued outside of the U.S. Additionally, we have over 80 patents
pending around the world. Our pending patent applications, those we may file in
the future and those we may license from third parties, may not result in the
USPTO or any 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 USPTO 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 product
candidates and processes in the U.S. 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.”




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 USPTO
keeps U.S. 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.





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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.




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 AND BOARD MEMBERS.




Our
success is substantially dependent on the efforts and abilities of the principal
members of our management team and our directors. 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 could 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 could 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.





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RISKS
RELATED TO OUR COMMON STOCK




WE
RECEIVED NOTICE FROM THE NYSE AMEX LLC THAT WE FAILED TO COMPLY WITH CERTAIN OF
ITS CONTINUED LISTING STANDARDS, WHICH MAY RESULT IN A DELISTING OF OUR COMMON
STOCK FROM THE EXCHANGE.




Our
common stock is currently listed for trading on the NYSE Amex LLC, or NYSE Amex,
and the continued listing of our common stock on the NYSE Amex is subject to our
compliance with a number of listing standards. As of September 30, 2009 our
net worth position was a deficit of $7,407,000 and as of December 31, 2008, our
net worth position was a deficit of $2,741,000, which are each below the minimum
net worth continued listing requirement.








WE
ARE INFLUENCED 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. As of November 2, 2009, management and our affiliates
currently beneficially own, including shares they have the right to acquire,
approximately 35.8% of the common stock on a fully-diluted basis. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. Specifically, ProQuest Investments has the ability to exert
significant influence over matters submitted to our stockholders for approval.
Such positions may discourage or prevent any proposed takeover of us, 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.





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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 common 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 U.S. 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 set forth in these Risk Factors and other
      reports, including this prospectus and other filings filed with the
      Securities and Exchange Commission from time to
  time.




Our
common stock has been listed for quotation on the NYSE Amex since May 11, 2004
under the symbol “NVD.” Prior to May 11, 2004, our common stock was traded on
the OTC Bulletin Board® of
the National Association of Securities Dealers, Inc. During the twelve-month
period ended September 30, 2009, the closing price of our common stock has
ranged from $0.06 to $0.46. We expect the price of our common stock to remain
volatile. The average daily trading volume in our common stock varies
significantly. For the twelve-month period ended September 30, 2009, the average
daily trading volume in our common stock was approximately 564,916 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.




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 without merit or unsuccessful, it would result in
substantial costs and a diversion of management attention and resources, which
would negatively impact our business.





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BECAUSE
THE AVERAGE DAILY TRADING VOLUME OF OUR COMMON STOCK IS LOW, THE ABILITY TO SELL
OUR SHARES IN THE SECONDARY TRADING MARKET MAY BE LIMITED.




Because
the average daily trading volume of our common stock on the NYSE Amex is low,
the liquidity of our common stock may be impaired. As a result, prices for
shares of our common stock may be lower than might otherwise prevail if the
average daily trading volume of our common stock was higher. The average daily
trading volume of our common stock may be low relative to the stocks of
exchange-listed companies, which could limit investors’ ability to sell shares
in the secondary trading market.




WE
LIKELY WILL ISSUE ADDITIONAL EQUITY SECURITIES, WHICH WILL DILUTE CURRENT
STOCKHOLDERS’ SHARE OWNERSHIP.




We likely
will issue additional equity securities to raise capital and through the
exercise of options and warrants that are outstanding or may be outstanding.
These additional issuances will dilute current stockholders’ share
ownership.




PENNY
STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF OUR
SECURITIES.




The SEC
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,
our 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 SEC 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. 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 restrict
the ability of broker dealers to sell our securities and 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.




Stockholders
should be aware that, according to the SEC, 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.





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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 200,000,000 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. As of November 2, 2009, there were 64,106,374
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, or the
conversion of our convertible notes. As of November 2, 2009, we had outstanding
stock options and warrants to purchase approximately 25.7 million shares of
common stock, the exercise prices of which range between $0.21 per share and
$3.18 per share, and we have reserved shares of our common stock for issuance in
connection with the potential exercise thereof.




In
addition, and not included in the above, on May 6, 2008, we entered into a
binding Securities Purchase Agreement with the Purchasers, as amended, to sell
up to $4,000,000 of secured convertible promissory notes and accompanying
warrants. In connection with this agreement, $1,475,000 of secured convertible
notes and accompanying warrants were funded on May 30, 2008. The convertible
notes are convertible into 5,000,000 shares of our common stock. Resulting from
the $1,000,000 payment made to ProQuest on April 29, 2009, the remaining
$475,000 of secured convertible notes are convertible into approximately
1,610,000 shares. We issued 3,000,000 warrants, which have an exercise price of
$0.369 per share, and are included in the total outstanding stock options and
warrants to purchase approximately 24.0 million shares of common stock as of
September 30, 2009 noted above.




On
October 17, 2008, an additional $2,525,000 of secured convertible notes and
accompanying warrants were funded. The convertible notes are convertible into
10,744,681 shares of our common stock. We issued 6,446,809 warrants, which have
an exercise price of $0.294 per share, and are included in the total outstanding
stock options and warrants to purchase approximately 27.1 million shares of
common stock as of September 30, 2009 noted above.




On July
16, 2009, we received approval from the NYSE Amex LLC to issue up to 12,000,000
shares over the next twelve (12) months.  We have entered into a
common stock purchase agreement with Seaside 88, LP, whereby Seaside 88, LP will
purchase 500,000 shares of common stock in a series of closings occurring every
two weeks for a total of up to 26 closings, provided that the 3 day volume
weighed average price prior to the scheduled closing is greater than or equal to
the stated floor price of $0.25 per share.  We have received $693,000
in gross proceeds for the closings that have occurred as of September 30, 2009.
The scheduled closing on October 9, 2009 did not occur due to the fact that the
3 day volume weighted average price was below the stated floor price of
$0.25.  Consequently, the total number of shares issuable under the
agreement has been reduced by 500,000 shares.




The
following table provides an overview of our stock options and corresponding
plans:







Plan
            Shares
      Authorized
            
            Options
      Outstanding at September 30, 2009
            
            Remaining
      Shares Available for Issuance
            
            Comments1992
      Stock Option Plan
            500,000
            
            40,000
            
            —
            
            Plan
      Closed1997
      Stock Option Plan
            500,000
            
            50,000
            
            —
            
            Plan
      Closed1998
      Stock Option Plan
            3,400,000
            
            1,439,000
            
            1,666,000
            
            —2006
      Equity Incentive Plan
            6,000,000
            
            3,284,000
            
            2,191,000
            
            —Non-Plan
            n/a
            
            581,000
            
            
            
            —Total
            10,400,000
            
            5,394,000
            
            3,857,000







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.





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See “Risk
Factors - Our Additional Financing Requirements Could Result In Dilution To
Existing Stockholders” included herein. 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 our common stock may cause our current stockholders to
suffer significant dilution which may adversely affect the market.




In
addition to the above referenced shares of our 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. 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 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 our 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 our common stock by means of ordinary brokerage transactions in
the open market pursuant to Rule 144, promulgated under the Securities Act of
1933, as amended, subject to certain limitations. In general, pursuant to Rule
144, a stockholder (or stockholders whose shares are aggregated) who has
satisfied a six-month 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 one-year holding period. Any substantial sale of our
common stock pursuant to Rule 144 or pursuant to any resale prospectus may have
a material adverse effect on the market price of our common stock.




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.




PROVISIONS
OF OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW COULD DETER 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 our common stock and the right to the redemption
of the shares, together with a premium, prior to the redemption of our common
stock.





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SALES
OF LARGE QUANTITIES OF OUR COMMON STOCK, INCLUDING THOSE SHARES ISSUABLE IN
CONNECTION WITH PRIVATE PLACEMENT TRANSACTIONS, COULD REDUCE THE PRICE OF OUR
COMMON STOCK.




On July
16, 2009, we received approval from the NYSE Amex LLC to issue up to 12,000,000
shares over the next twelve (12) months.   We have entered into a
common stock purchase agreement with Seaside 88, LP, whereby Seaside 88, LP will
purchase 500,000 shares of common stock in a series of closings occurring every
two weeks for a total of up to 26 closings, provided that the 3 day volume
weighed average price prior to the scheduled closing is greater than or equal to
the stated floor price of $0.25 per share




In
October 2008, we sold securities in the subsequent closing of the 2008
Financing, resulting in the issuance of notes convertible into 10,744,681 shares
of our common stock, and warrants to purchase 6,446,809 shares of our common
stock. The sale of the notes and warrants resulted in gross proceeds to us of
$2,525,000, before deducting certain fees and expenses.




In May
2008, we sold securities in the initial closing of the 2008 Financing, resulting
in the issuance of notes convertible into 5,000,000 shares of our common stock,
and warrants to purchase 3,000,000 shares of our common stock. The sale of the
notes and warrants resulted in gross proceeds to us of $1,475,000, before
deducting certain fees and expenses.




In
December 2006, we sold securities in a private placement transaction resulting
in the issuance of 9,823,983 shares of our common stock, and warrants to
purchase 4,383,952 shares of our common stock. The sale of the shares of common
stock and warrants resulted in gross proceeds to us of approximately $14.2
million, prior to offering expenses.




On July
20, 2006, we filed a shelf registration statement on Form S-3 registering for
sale by us of up to 14,000,000 shares of our common stock. Such shelf
registration statement was declared effective by the SEC on August 2, 2006. We
may offer and sell such shares from time to time, in one or more offerings in
amounts and at prices, and on terms determined at the time of the offering. Such
offerings of our common stock may be made through agents we select or through
underwriters and dealers we select. If we use agents, underwriters or dealers,
we will name them and describe their compensation at the time of the offering.
As of the filing date of this prospectus, such shelf registration statement is
no longer effective.




In April
2006, we sold securities in a private placement transaction resulting in the
issuance of 8,092,796 shares of our common stock, and warrants to purchase
2,896,168 shares of our common stock. The sale of the shares of common stock and
warrants resulted in gross proceeds to us of approximately $11.8 million, prior
to offering expenses.




In May
2005, we sold securities in a private placement transaction resulting in the
issuance of 6,733,024 shares of our common stock, and certain warrants to
purchase 2,693,210 shares of our common stock. The sales of the shares of common
stock and warrants resulted in gross proceeds to us of approximately $7.1
million, prior to offering expenses.




The
offering of, and/or resale of our common stock and the exercise of the warrants
described immediately above in this risk factor are subject to currently
effective registration statements filed by us on Forms S-3. There can be no
assurance as to the prices at which our common stock will trade in the future,
although they may continue to fluctuate significantly. Prices for our common
stock will be determined in the marketplace and may be influenced by many
factors, including the following:




·
            The
      depth and liquidity of the markets for our common
  stock;




·
            Investor
      perception of us and the industry in which we participate;
    and




·
            General
      economic and market conditions.




Any sales
of large quantities of our common stock could reduce the price of our common
stock. The holders of the shares may sell such shares at any price and at any
time, as determined by such holders in their sole discretion without limitation.
If any such holders sell such shares in large quantities, our common stock price
may decrease and the public market for our common stock may otherwise be
adversely affected because of the additional shares available in the
market.





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As of
November 2, 2009, we have 64,106,374 shares of common stock issued and
outstanding and approximately 25.5 million shares of common stock issuable upon
the exercise of outstanding stock options and warrants. In addition, and not
included in the above, on May 6, 2008, we entered into a binding Securities
Purchase Agreement with the Purchasers, as amended, to sell up to $4,000,000 of
secured convertible promissory notes and accompanying warrants. In connection
with this agreement, $1,475,000 of secured convertible notes and accompanying
warrants were funded on May 30, 2008. The convertible notes are convertible into
5,000,000 shares of our common stock. We issued 3,000,000 warrants, which have
an exercise price of $0.369 per share, and are included in the total outstanding
stock options and warrants to purchase approximately 25.5 million shares of
common stock noted above. On October 17, 2008, $2,525,000 of additional secured
convertible notes and accompanying warrants were funded. The convertible notes
are convertible into 10,744,681 shares of our common stock, and an additional
6,446,809 warrants were issued with an exercise price of $0.294 per share, which
warrants are included in the 25.5 million shares of common stock for options and
warrants noted above. In the event we wish to offer and sell shares of our
common stock in excess of the 200,000,000 shares of common stock currently
authorized by our certificate of incorporation, we will first need to receive
stockholder approval. Such stockholder approval has the potential to adversely
affect the timing of any potential transactions.




THE
SECURITIES ISSUED IN OUR PRIVATE PLACEMENTS ARE RESTRICTED
SECURITIES.




At the
time of the offer and sale of the common stock and the shares of common stock
underlying the convertible notes and the warrants, as applicable, in our
December 2006 private placement and 2008 private placement, the common stock was
not registered under the Securities Act or the securities laws of any state.
Accordingly, these securities may not be sold or otherwise transferred unless
such sale or transfer is subsequently registered under the Securities Act and
applicable state securities laws or unless exemptions from such registration are
available. The registration statements covering the December 2006 private
placement and the 2008 private placement were declared effective by the SEC on
January 26, 2007, and July 16, 2008 and May 5, 2009, respectively.
Notwithstanding our registration obligations regarding these securities,
investors may be required to hold these securities for an indefinite period of
time. All investors who purchase these securities are required to make
representations that it will not sell, transfer, pledge or otherwise dispose of
any of the securities in the absence of an effective registration statement
covering such transaction under the Securities Act and applicable state
securities laws, or the receipt by us of an opinion of counsel to the effect
that registration is not required.




WE
HAVE BROAD DISCRETION AS TO THE USE OF THE PROCEEDS FROM THE PRIVATE PLACEMENTS
AND THE SEASIDE OFFERING AND MAY USE THE PROCEEDS IN A MANNER WITH WHICH YOU
DISAGREE.




Our Board
and management will have broad discretion over the use of the net proceeds of
the 2008 private placement and the Seaside offering. Stockholders may disagree
with the judgment of the Board and management regarding the application of the
proceeds. We cannot predict that investments of the proceeds will yield a
favorable, or any, return.




WE
MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION DUE TO OUR EXPECTED
STOCK VOLATILITY.




In the
past, following periods of large price declines in the public market price of a
company’s stock, holders of that stock occasionally have instituted securities
class action litigation against the company that issued the stock. If any of our
stockholders were to bring this type of lawsuit against us, even if the lawsuit
is without merit, we could incur substantial costs defending the lawsuit. The
lawsuit also could divert the time and attention of our management, which would
hurt our business. Any adverse determination in litigation could also subject us
to significant liabilities.




THE
UNCERTAINTY CREATED BY CURRENT ECONOMIC CONDITIONS AND POSSIBLE TERRORIST
ATTACKS AND MILITARY RESPONSES THERETO COULD MATERIALLY ADVERSELY AFFECT OUR
ABILITY TO SELL OUR PRODUCTS, AND PROCURE NEEDED FINANCING.




Current
conditions in the domestic and global economies continue to present challenges.
We expect that the future direction of the overall domestic and global economies
will have a significant impact on our overall performance. Fiscal, monetary and
regulatory policies worldwide will continue to influence the business climate in
which we operate. If these actions are not successful in spurring continued
economic growth, we expect that our business will be negatively impacted, as
customers will be less likely to buy our products, if and when we commercialize
our products. In addition, the potential for future terrorist attacks or war as
a result thereof has created worldwide uncertainties that make it very difficult
to estimate how the world economy will perform going forward.





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OUR
INABILITY TO MANAGE THE FUTURE GROWTH THAT WE ARE ATTEMPTING TO ACHIEVE COULD
SEVERELY HARM OUR BUSINESS.




We
believe that, given the right business opportunities, we may expand our
operations rapidly and significantly. If rapid growth were to occur, it could
place a significant strain on our management, operational and financial
resources. To manage any significant growth of our operations, we will be
required to undertake the following successfully:




·
            We
      will need to improve our operational and financial systems, procedures and
      controls to support our expected growth and any inability to do so will
      adversely impact our ability to grow our business. Our current and planned
      systems, procedures and controls may not be adequate to support our future
      operations and expected growth. Delays or problems associated with any
      improvement or expansion of our operational systems and controls could
      adversely impact our relationships with customers and harm our reputation
      and brand.




·
            We
      will need to attract and retain qualified personnel, and any failure to do
      so may impair our ability to offer new products or grow our business. Our
      success will depend on our ability to attract, retain and motivate
      managerial, technical, marketing, and administrative personnel.
      Competition for such employees is intense, and we may be unable to
      successfully attract, integrate or retain sufficiently qualified
      personnel.




If we are
unable to hire, train, retain or manage the necessary personnel, we may be
unable to successfully introduce new products or otherwise implement our
business strategy. If we are unable to manage growth effectively, our business,
results of operations and financial condition could be materially adversely
affected.




WE
MAY BE OBLIGATED, UNDER CERTAIN CIRCUMSTANCES, TO PAY LIQUIDATED DAMAGES TO
HOLDERS OF OUR COMMON STOCK.




We have
entered into agreements with the holders of our common stock that requires us to
continuously maintain as effective, a registration statement covering the
underlying shares of common stock. Such registration statements were declared
effective on January 26, 2007, May 30, 2006 and July 28, 2005 and must
continuously remain effective for a specified term. If we fail to continuously
maintain such a registration statement as effective throughout the specified
term, we may be subject to liability to pay liquidated damages.




With
respect to the subsequent closing of the 2008 private placement, we agreed to
file a registration statement with the SEC to register the resale of 17,978,724
shares of common stock issuable pursuant to the 2008 private placement, referred
to herein as the subsequent registrable shares, within 30 days of the related
closing. Also, we agreed to respond to all SEC comment letters as promptly as
reasonably possible and to use our best efforts to have the registration
statement declared effective within 90 days of the related closing. However, we
were unable to register 9,044,649 of the subsequent registrable shares in
accordance with the rules and regulations of the SEC. Therefore, we are filing
the registration statement with the SEC to register the resale of 8,934,075
subsequent registrable shares issuable pursuant to the 2008 private placement.
There is no guarantee that the SEC will declare the registration statement
effective. In connection with our reduction of subsequent registrable shares
being registered on the registration statement, we have agreed with the
purchasers to pay, as liquidated damages, an amount equal to 1.0% of the
aggregate purchase price paid by the purchasers for the shares that we are not
able to register for resale under the registration statement. Such liquidated
damages equal $12,703 for each 30 day period during which the shares remain
unregistered, beginning on February 15, 2009 and ending on the date on which
such subsequent registrable shares are registered. In addition, we have agreed
to pay ProQuest, as partial liquidated damages, an amount equal to 1.0% of the
aggregate purchase price paid by ProQuest for the shares that we are not able to
register for resale in connection with subsequent closing, referred to herein as
subsequent registrable shares. Such liquidated damages equal $12,703 for each
30-day period during which the shares remain unregistered, beginning on February
15, 2009 and ending on the date on which such subsequent registrable shares are
registered. However, these payments could not exceed 10% of the aggregate
purchase price paid by the purchasers, or $127,030, which the Company had
recorded as a liability.  The registration statement for the 8,934,075
shares did not become effective until May 5, 2009.  Consequently, the
Company renegotiated the registration penalty with the purchasers due to the
delay in registering the 8,934,075 shares.  As a result, the Company
agreed to pay the purchasers a registration penalty for the full amount of
shares (17,978,924) for the period beginning on January 19, 2009 and ending on
May 5, 2009.  This resulted in an increase in the registration penalty
of $44,770, for a maximum registration penalty of $171,800.  The
liquidated damages will be paid in the form of a non-convertible promissory
note, which accrues interest at a rate of 10% per annum and all interest and
principal will become due and payable upon the earlier to occur of (i) the
maturity date, which is twelve months following the date of issuance or (ii) a
change of control (as defined in the liquidated damages note).  As of
September 30, 2009, the Company has issued $159,000 in non-convertible
promissory notes to the purchasers.







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ITEM 6.  EXHIBITS





INDEX
TO EXHIBITS





The
following exhibits are included with this Quarterly Report. All management
contracts or compensatory plans or arrangements are marked with an
asterisk.








EXHIBIT
      NO.
            
            DESCRIPTION
            
            METHOD
      OF FILING10.1
            
            Agreement,
      by and between the Company and Arthur W. Wood Company, dated June 15,
      2009.
            
            Incorporated
      by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K,
      as filed with the SEC on July 20, 2009.31.1
            
            Certification
      of Chief Executive Officer and Principal Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
            
            Filed
      herewith.32.1
            
            Certification
      of the Interim President, Chief Executive Officer and  Interim
      Chief  Financial Officer under 18 USC 1350, Section 1330 as
      adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
            
            Furnished.














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SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.








NovaDel Pharma
      Inc.Date: 
      November 16, 2009
              By:
              /s/ STEVEN
      B. RATOFFSteven
      B. RatoffInterim
      President, Chief Executive Officer and Interim Chief Financial
      Officer(principal
      executive officer)
                (principal financial officer)































59