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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2002
Commission file number 0-22245
NEXMED, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 87-0449967
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
350 Corporate Boulevard, Robbinsville, NJ 08691
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(Address of Principal Executive Offices)
(609) 208-9688
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No[ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: as of August 12, 2002,
28,211,604 shares of Common Stock, par value $0.001 per share, were outstanding.
Table of Contents
Page
Part I. FINANCIAL INFORMATION.............................................................................. 1
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet at June 30, 2002 and
December 31, 2001 ....................................................................... 1
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2002 and June 30, 2001.................................................... 2
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and June 30, 2001.......................................................... 3
Notes to Condensed Consolidated Unaudited Financial Statements........................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 11
Part II. OTHER INFORMATION................................................................................. 11
Item 2. Changes in Securities and Use of Proceeds................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders...................................... 12
Item 6. Exhibits and Reports on Form 8-K......................................................... 13
Signature.................................................................................................. 14
Exhibit Index.............................................................................................. 15
PART I. FINANCIAL INFORMATION
ITEM 1, FINANCIAL STATEMENTS
NexMed, Inc.
Unaudited Condensed Consolidated Balance Sheets
June 30, December 31,
2002 2001
------------- ------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 11,430,244 $ 12,913,803
Certificates of Deposit 672,479 3,564,373
Marketable Securities 1,081,353 2,265,529
Notes Receivable 155,144 -
Prepaid expenses and other assets, net 674,159 879,491
------------- ------------
Total current assets 14,013,379 19,623,196
Furniture and equipment, net 10,554,441 7,691,517
Debt Issuance cost, net of accumulated amortization
of $4,651 365,811 -
Notes Receivable, net of current portion 129,465 -
------------- ------------
Total assets $ 25,063,096 $ 27,314,713
============= ============
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 2,029,331 $ 2,194,730
Capital lease obligation 405,284 287,541
------------- ------------
Total current liabilities 2,434,615 2,482,271
------------- ------------
Long Term liabilities:
Convertible Note Payable 4,216,635 -
Capital lease obligation, net of current portion 863,522 724,577
------------- ------------
Total Long Term Liabilities 5,080,157 724,577
------------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000
shares authorized, none issued and outstanding - -
Common stock, $.001 par value, 40,000,000
shares authorized, 28,211,604 shares and 25,541,934 shares
issued and outstanding at June 30, 2002 and December 31, 2001 28,212 25,542
Additional paid-in capital 71,173,981 64,538,838
Subscription receivable (624,094) -
Accumulated deficit (52,866,401) (40,346,450)
Deferred compensation (5,486) (6,704)
Unrealized loss marketable securities (157,896) (103,719)
Cumulative translation adjustments 8 358
------------- ------------
Total stockholders' equity 17,548,324 24,107,865
------------- ------------
Total liabilities and stockholders' equity $ 25,063,096 27,314,713
============= ============
See notes to unaudited condensed consolidated financial statements
1
NexMed, Inc.
Unaudited Condensed Consolidated Statements of Operations
For the six months ended For the three months ended
June 30, June 30,
------------------------ --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenue
Product sales and royalties $ 66,844 $ - $ 21,563 $ -
---------- ---------- ---------- ----------
Total revenues 66,844 - 21,563 -
---------- ---------- ---------- ----------
Operating expenses
Cost of product sales 27,033 - 7,965 -
Selling, general and administrative 2,954,742 2,197,823 1,540,013 1,104,988
Research and development 9,646,814 5,262,485 5,398,227 2,708,101
---------- ---------- ---------- ----------
Total operating expenses 12,628,589 7,460,308 6,946,205 3,813,089
---------- ---------- ---------- ----------
Loss from operations (12,561,745) (7,460,308) (6,924,642) (3,813,089)
Other Income (expense)
Interest income (expense), net 23,069 721,786 (17,464) 313,513
Other income (expense) 18,725 (62,693) 1,003 (88,656)
---------- ---------- ---------- ----------
Total Other income (expense) 41,794 659,093 (16,461) 224,857
Net loss (12,519,951) (6,801,215) (6,941,103) (3,588,232)
---------- ---------- ---------- ----------
Other comprehensive income
Foreign currency translation adjustments (350) (415) (54) (143)
Unrealized loss on available-for-sale securities (54,177) (89,282) (35,626) (196,691)
---------- ---------- ---------- ----------
Total other comprehensive income (54,527) (89,697) (35,680) (196,834)
Comprehensive Loss $(12,574,478) $(6,890,912) $(6,976,783) $(3,785,066)
=========== ========== ========== ==========
Basic and diluted loss per share $ (0.49) $ (0.31) $ (0.27) $ (0.14)
---------- ---------- ---------- ----------
Weighted average common shares outstanding
used for basic and diluted loss per share 25,586,617 22,017,394 25,630,815 25,408,906
---------- ---------- ---------- ----------
See notes to unaudited condensed consolidated financial statements
2
NexMed, Inc.
Unaudited Condensed Consolidated Statement of Cash Flows
For the six months ended
June 30,
-------------------------------
2002 2001
----------- -----------
Cash flows from operating activities
Net loss $(12,519,951) $ (6,801,215)
Adjustments to reconcile net loss to net cash from operating
activities, net of effects of sale of subsidiary
Depreciation and amortization 362,825 246,652
Non-cash compensation expense 37,380 379,675
Amortization of unearned compensation 1,218 1,218
Amortization of Debt Discount 12,336 -
Loss on disposal of assets - 112,687
Increase in notes receivable (284,609) -
(Increase)/decrease in prepaid expenses and other assets 157,205 (106,126)
Decrease in account payable and accrued expenses (165,399) (140,420)
----------- -----------
Net cash used in operating activities (12,398,995) (6,307,529)
----------- -----------
Cash flow from investing activities
Capital expenditures (2,770,414) (2,319,141)
Purchase of marketable securities (1,210,446) (267,411)
Purchase of certificates of deposit (384,000) (2,884,000)
Sales of marketable securities 2,338,725 534,316
Sales of certificates of deposit 3,272,000 1,528,000
----------- -----------
Net cash used in investing activities 1,245,865 (3,408,236)
----------- -----------
Cash flow from financing activities
Issuance of common stock, net of offering costs 5,113,777 732,200
Issuance of notes payable, net of debt issuance cost 4,696,399 -
Return of gain on stock by former employee - 37,602
Repayment of capital lease obligations (140,256) -
----------- -----------
Net cash from financing activities 9,669,920 769,802
----------- -----------
Net increase (decrease) in cash (1,483,211) (8,945,963)
Effect of foreign exchange on cash (350) (415)
Cash, beginning of period 12,913,803 27,702,585
----------- -----------
Cash, end of period $ 11,430,242 $ 18,756,207
=========== ===========
See notes to unaudited condensed consolidated financial statements
3
NEXMED, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002. These financial statements should be read in conjunction with
the financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
The Company has an accumulated deficit of $52,866,401 at June 30, 2002 and
expects that Alprox-TD clinical development expenses for the year 2002 will be
substantially higher than for 2001, as the product candidate continues ongoing
Phase 3 clinical trials. As a result, the Company expects to incur increasing
operating losses in 2002 over those incurred in 2001. These circumstances raise
substantial doubt about the Company's ability to continue as a going concern.
Management anticipates that it will require additional financing, which it is
actively pursuing, to fund operations including continued research, development
and clinical trials of the Company's product candidates. Although management
continues to pursue these plans, there is no assurance that the Company will be
successful in obtaining financing on terms acceptable to the Company. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
2. LOSS PER SHARE
At June 30, 2002 and 2001, respectively, options to acquire 4,081,300 and
3,582,675 shares of common stock with exercise prices ranging from $.25 to
$16.25 per share and warrants to acquire 3,390,399 and 2,191,549 shares of
common stock with exercised prices ranging from $1.00 to $16.20 were excluded
from the calculation of diluted loss per share, as their effect would be
antidilutive.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, SFAS No. 146, entitled "Accounting for Costs Associated with Exit
or Disposal Activities" was issued, replacing EITF 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." FAS 146, requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. FAS
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company does not expect the adoption of SFAS 146
to have a material impact on the Company's financial condition or results of
operations.
4
4. NOTES RECEIVABLE
The Company has advanced its Asian licensee funds to finance the purchase of
certain equipment. In February 2002, the Company received a note, in the
original principal amount of $309,575, to evidence these advances. The note
bears interest at 6% per annum and is payable monthly through February 2004.
5. CAPITAL LEASE OBLIGATIONS
In February 2001, the Company entered into a financial arrangement with GE
Capital Corporation for a line of credit, which provided for the financing of up
to $5 million of equipment (i) for its new East Windsor, NJ manufacturing
facility and (ii) for its expanded corporate and laboratory facilities in
Robbinsville, NJ. Equipment financed through this facility has been in the form
of a 42 month capital lease. As of December 31, 2001, the Company had financed
$1,113,459 of equipment purchases under the GE credit line. The $5 million
credit line expired in March 2002, and as of June 30, 2002, there is an
outstanding balance due GE of $871,862 under this facility. This balance is
payable in monthly installments through various dates in 2004.
In January 2002, GE approved a new credit line, which provides for the financing
of up to $3 million of equipment and expires on December 31, 2002. During the
second quarter of 2002, the Company accessed $396,944 of the credit line. As of
June 30, 2002, there is an outstanding balance due GE of $396,944 under the
January 2002 facility, and $2,603,056 remains available to the Company to
finance future equipment purchases. Balances due are payable in 42 monthly
installments from the date of take-down.
6. RELATED PARTY TRANSACTION
In July 2001, the Company advanced $100,000 to Vivian Liu, the Company's Vice
President and Secretary. The full amount of $100,000 remained outstanding as of
June 30, 2002. The advance is evidenced by a promissory note, which bears
interest at 5% per annum and was due on May 24, 2002. Prior to the due date, the
principal amount due was rolled into a new promissory note, which bears interest
at 5% per annum and has a new due date of December 31, 2002. Interest due on the
promissory note has been paid on a timely basis. The note receivable is included
in the Condensed Consolidated Balance Sheet under "Prepaid Expenses and Other
Assets".
In April 2002, the Company advanced $150,000 to James L. Yeager, Ph.D., the
Company's Senior Vice President for Scientific Affairs and a director. The full
amount of $150,000 remained outstanding as of June 30, 2002. The advance is
evidenced by a promissory note, which bears interest at 5% per annum and is due
on November 15, 2002. Interest due on the promissory note has been paid on a
timely basis. The note receivable is included in the Condensed Consolidated
Balance Sheet under "Prepaid Expenses and Other Assets".
7. CONVERTIBLE PROMISSORY NOTE
On June 11, 2002, the Company issued a convertible note (the "Note") with a face
value of $5 million to two purchasers. The Note is payable on November 30, 2005
and is collateralized by the Company's manufacturing facility in East Windsor,
New Jersey. Book value of the facility was approximately $7.25 million at June
30, 2002. The Note is initially convertible into shares of the Company's common
stock at a conversion price initially equal to $4.08 per share (1,225,490
shares). If the Company were to issue shares of its common stock subsequent to
September 30, 2002 at per share prices lower than the conversion price of the
Note, the conversion price may be adjusted lower. Interest accretes on the Note
on a semi-annual basis at a rate of 5% per annum, and the Company may pay such
amounts in cash or by effecting the automatic conversion of such amount into the
Company's common stock at a 10% discount to the then average market prices.
Subject to certain exceptions, the Company has prepayment rights for portions of
the
5
principal amount, payable in cash or by conversion into common stock at a
10% discount to average market prices. The purchasers also received warrants to
purchase 389,408 shares of common stock (the "Warrants") at an exercise price
equal to the conversion price of the Note and a term of five years from the date
of issuance. The Company has valued the warrants using the Black-Scholes pricing
model and allocated $795,701 of the proceeds from the Note, based upon the
relative fair value of the Note and the Warrants, to the Warrants and has
recorded such amount as discount on the Note. The discount is being amortized to
interest expense over the term of the Note. Assumptions utilized in the
Black-Scholes model to value the Warrants were: exercise price of $4.08 per
share; fair value of the Company's common stock on date of issuance of $3.00 per
share; volatility of 100%; term of five years and a risk-free interest rate of
3%.
In the event the Company were to issue common stock subsequent to September 30,
2002 at per share prices less than $4.08 resulting in the conversion price of
the Note to be adjusted lower, or if the Company were to repay all or a portion
of the interest or Note in common stock, the Company may be required to record
charges to operations in future periods.
In addition, the Company paid a placement agent $125,000 in cash and issued the
placement agent warrants to acquire 38,941 shares of the Company's common stock
at an exercise price of $4.01 per share and a term of three years from the date
of issuance. The Company valued the placement agent's warrants at $66,861 using
the Black-Scholes pricing model with the following assumptions: exercise price
of $4.01 per share; fair value of the Company's common stock on date of issuance
of $3.00 per share; volatility of 100%; term of three years and a risk-free
interest rate of 2.7%. The Company has recorded the $125,000 cash payment and
the fair value of the warrants issued to the placement agent as a debt discount,
which is being amortized to interest expense over the term of the Note.
8. PRIVATE PLACEMENT
On June 28, 2002, the Company completed a private placement of its securities to
institutional and accredited individual investors. The Company issued a total of
2,666,670 shares of its common stock and warrants to purchase 533,334 shares of
common stock , pursuant to a Unit Purchase Agreement. Gross proceeds from the
private placement were $5,000,000. The investors paid $11.25 per unit and
received five shares of NexMed common stock and a two-year warrant for the right
to purchase one share of common stock at $2.81.
In connection with the private placement, the Company paid a placement agent
$249,938 in cash and issued the placement agent warrants to purchase 222,167
shares of the Company's common stock at an exercise price of $2.81 per share and
a term of three years from the date of issuance.
9. SUBSEQUENT EVENT
In July and through August 14, 2002, warrants to purchase 1,282,891 shares of
common stock with exercise prices between $13.50 and $16.20, which were issued
in connection with a 2000 private equity placement, expired without exercise in
accordance with their terms due to the expiration of their exercise period.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Disclosures Regarding Forward-Looking Statements.
The following should be read in conjunction with the consolidated
financial statements and the related notes that appear elsewhere in this
document. This report includes forward-looking statements made based on current
management expectations pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees of
future performance and actual outcomes may differ materially from what is
expressed or forecasted. There are many factors that affect the Company's
business, consolidated financial position, results of operations and cash flows,
including but not limited to successful completion of clinical development
programs, FDA review and approval, product development and acceptance,
manufacturing, partnering, competition and/or other factors, some of which are
outside the control of the Company.
General.
We have been in existence since 1987. Since 1994, we have positioned
ourselves as a pharmaceutical and medical technology company with a focus on
developing and commercializing therapeutic products based on proprietary
delivery systems. We, together with our subsidiaries, are focusing our efforts
on new and patented topical pharmaceutical products based on a penetration
enhancement drug delivery technology known as NexACT(R), which may enable an
active drug to be better absorbed through the skin. The NexACT(R) transdermal
drug delivery technology is designed to enhance the absorption of an active drug
through the skin, overcoming the skin's natural barrier properties and enabling
high concentrations of the active drug to rapidly penetrate the desired site of
the skin or extremity. Successful application of the NexACT(R) technology would
improve therapeutic outcomes and reduce gastrointestinal or other systemic side
effects that often accompany oral medications.
Currently, we are focusing our application of the NexACT(R) technology
to Alprox-TD(R) and Femprox(R) creams, for the treatment of male erectile
dysfunction ("ED") and female sexual arousal disorder ("FSAD"), respectively.
Our clinical studies have demonstrated that NexACT(R) enhancers promote the
rapid absorption of alprostadil and improve clinical responses. We are also
exploring the application of the NexACT(R) technology to other drug compounds
and delivery systems, and are in the early stage of developing new products such
as a topical treatment for nail fungus, a topical non-steroidal
anti-inflammatory drug ("NSAID") treatment for pain and inflammation, and a
topical anti-emetic treatment for the prevention of nausea and vomiting
associated with post-operative surgical procedures and cancer chemotherapy.
Alprox-TD(R) is an alprostadil-based cream treatment intended for
patients with mild to severe ED. In November 2001, we initiated our Phase 3
clinical development program for Alprox-TD(R) which includes two pivotal studies
and one open label study and will enroll up to 2,500 patients at approximately
82 sites throughout the U.S. The two pivotal studies, which we initiated in
November 2001, are randomized, double-blind, placebo-controlled, and designed to
confirm the efficacy and safety of Alprox-TD(R) in patients with various degrees
of ED. The open-label study, which we initiated in March 2002, is to confirm the
safety of Alprox-TD(R) in patients on a longer term basis and includes new
patients as well as those who have completed testing in one of the two pivotal
Phase 3 studies and elected to continue using Alprox-TD(R) for an additional
period. As of August 12, 2002, over 1,000 patients have completed testing and
approximately 300 more patients are actively completing testing in our two
pivotal studies which we anticipate that we will
7
complete by December 2002. We have over 700 patients enrolled and being tested
in our open-label study. If our Phase 3 clinical results are successful, we will
submit the New Drug Application ("NDA") to the FDA during 2003. Completion of
the open-label study is not a prerequisite for our NDA submission; however there
is no assurance that we will be successful nor is there any assurance that we
will receive FDA approval on a timely basis.
Internationally, in April 2002, our Asian licensee launched Befar(R),
which is the Asian trademark in Asia for our proprietary ED treatment in Hong
Kong. Preliminary sales results indicate the product is well received as a
viable alternative to the currently marketed oral ED treatment. Befar(R) has
been available in China since July 2001. Befar(R) along with the currently
approved oral ED product, are currently classified as controlled substances, and
their distribution is limited to prescription by certain urologists and
dispensing through hospitals. In addition, China has a limited number of
patients who can afford ED treatments. We also have an NDA pending for Befar in
Singapore. Befar(R) is manufactured in China and marketed in Asia by our Asian
licensee. We receive royalty payments and payments for the sale of active
ingredients and other manufacturing supplies from our Asian licensee.
Femprox(R) is an alprostadil-based cream product intended for the
treatment of FSAD. We have completed a Phase 2 "at home use" clinical study with
Femprox(R). This multi-center study was randomized, double-blind,
placebo-controlled, and designed to investigate the efficacy and safety of the
Femprox(R) cream in 98 pre-menopausal women diagnosed with FSAD. Upon completion
of our review and analysis of the clinical results, we will submit them to the
FDA for their review and comment.
Another product we are developing is the Viratrol(R) device, a
hand-held, non-invasive therapeutic medical device for the treatment of herpes
simplex lesions without the use of drugs. The FDA has provided us with comments
on our proposed clinical protocol for an efficacy study. Pending the
availability of financing, we may elect to initiate the study.
Comparison of Results of Operations Between the Three Months Ended June 30 of
2002 and of 2001.
Revenues. We recorded $21,563 in revenue during the second quarter of
2002 as compared to no revenue during the same period in 2001 and as compared to
$45,281 in the first quarter of 2002. The latter decline is due to lower margins
received by our Asian licensee for sales in Hong Kong. We anticipate that
Befar(R) sales revenue for our Asian licensee in subsequent quarters in 2002
will increase modestly with the availability of the product in new markets in
China and in Hong Kong. We anticipate that royalty revenues that we receive from
our Asian licensee will increase accordingly but our product sales revenue will
remain consistent as a result of inventory build-up by our Asian licensee,
resulting in only modest growth in product sales and royalties on our
Consolidated Statements of Operations.
Cost of Products Sold. Our cost of products sold was $7,965 during the
second quarter of 2002 and nil during the same period in 2001, and is
attributable to our cost for the active ingredients and other manufacturing
supplies sold to our Asian licensee for the production of Befar(R) in China and
in Hong Kong.
Research and Development Expenses. Our research and development
expenses for the second quarter of 2002 and 2001 were $5,398,227 and $2,708,101,
respectively. The increase is attributable to the pre-clinical and clinical
expenses for Alprox-TD(R) and Femprox(R), additional research and development
personnel, and the increased depreciation for our scientific equipment and
amortization for the expansion of our facility in Robbinsville, NJ. We expect
that total research and development spending for the remainder of 2002 will
increase significantly compared to 2001, primarily associated with completing
the ongoing Phase 3 clinical development program for Alprox-TD(R). We anticipate
increasing our efforts and resources in the application of the NexACT(R)
technology to other drug compounds and delivery systems for the development of
new products.
8
Selling, General and Administrative Expenses. Our general and
administrative expenses were $1,540,013 during the second quarter of 2002 as
compared to $1,104,988 during the same period in 2001. The increase is largely
attributed to additional expenses for legal fees related to SEC matters and
other operational activities, accounting, deprecation and amortization, and the
expansion of investor and shareholder relations programs. We expect that total
general and administrative spending for the remainder of 2002 will remain at
current levels.
Interest Income. We had interest expense of $17,464 during the second
quarter of 2002, as compared to $313,513 of interest income during the same
period in 2001. The decrease is a result a reduction in our cash position, lower
interest rates in the current period, and an increase in interest expense due to
borrowings under our GE Capital facility and the convertible notes issued in
June 2002.
Net Loss. The net loss was $6,941,103 or $0.27 per share for the second
quarter of 2002, as compared to $3,588,232 or a loss of $0.14 per share for the
same period in 2001. The increase in net loss is primarily attributable to the
acceleration of U.S. development activities including U.S. clinical studies and
the increase to our infrastructure to support these activities. We also used our
resources to fund ongoing operations and finance the construction of additional
research and development and manufacturing facilities.
Comparison of Results of Operations Between the Six Months Ended June 30 of 2002
and of 2001.
Revenues. We recorded $66,844 in revenue during the first six months of
2002 as compared to no revenue during same period in 2001. We anticipate that
Befar(R) sales revenue for our Asian licensee in subsequent quarters in 2002
will increase modestly with the availability of the product in new markets in
China and in Hong Kong. We anticipate that royalty revenues that we receive from
our Asian licensee will increase accordingly but our product sales revenue will
remain consistent as a result of inventory build-up by our Asian licensee,
resulting in only modest growth in product sales and royalties on our
Consolidated Statements of Operations.
Cost of Products Sold. Our cost of products sold was $27,033 during the
first half of 2002 and nil during the same period in 2001, and is attributable
to our cost for the active ingredients and other manufacturing supplies sold to
our Asian licensee for the production of Befar(R) in China.
Research and Development Expenses. Our research and development
expenses for the first six months of 2002 and 2001 were $9,646,814 and
$5,262,485, respectively. The increase is attributable to the pre-clinical and
clinical expenses for Alprox-TD(R) and Femprox(R), additional research and
development personnel, and the increased depreciation for scientific equipment
in our facilities in New Jersey and Kansas and amortization for the expansion of
our facility in Robbinsville, NJ. We expect that total research and development
spending for the remainder of 2002 will increase significantly compared to 2001,
primarily associated with completing the ongoing Phase 3 clinical development
program for Alprox-TD(R). We anticipate increasing our efforts and resources in
the application of the NexACT(R) technology to other drug compounds and delivery
systems for the development of new products.
Selling, General and Administrative Expenses. Our general and
administrative expenses were $2,954,742 during the first six months of 2002 as
compared to $2,197,823 during the same period in 2001. The increase is largely
attributed to additional expenses for legal fees related to SEC matters and
other operational activities, educational grants and the expansion of investor
and shareholder relations programs. We expect that total general and
administrative spending for the remainder of 2002 will remain at current levels.
Interest Income. Interest income was $23,069 during the first six
months of 2002, as compared to $721,786 during the same period in 2001. The
decrease is a result of a reduction in our cash position, lower
9
interest rates in the current period, and an increase in interest expense due to
borrowings under our GE Capital facility and the convertible notes issued in
June 2002.
Net Loss. The net loss was $12,519,951 or $0.49 per share for the first
half of 2002, as compared to $6,801,215 or a loss of $0.31 per share for the
same period in 2001. The increase in net loss is primarily attributable to the
acceleration of U.S. development activities including U.S. clinical studies and
the increase to our infrastructure to support these activities. We also used our
resources to fund ongoing operations and finance the construction of additional
research and development and manufacturing facilities.
Liquidity and Capital Resources.
We have experienced net losses and negative cash flow from operations
each year since our inception. Through June 30, 2002, we had an accumulated
deficit of $52,866,401. Our operations have principally been financed through
private placements of equity securities and debt financing. Funds raised in past
periods should not be considered an indication of our ability to raise
additional funds in any future periods.
At June 30, 2002, we recorded less non-cash compensation expense as a
result of a reduction in the number of stock options granted to consultants and
non-employee directors and the full amortization of stock options previously
granted to consultants and non-employee directors. During the first six months
in 2002, we recorded no loss on the disposal of assets while during the same
period in 2001, we recorded $112,687 as a result of disposing fixed assets which
were not in use anymore. At June 30, 2002, we had a decrease in the amount of
prepaid expenses and other assets primarily as a result of the reclassification
of the note receivable as discussed in Note 4 in the Notes to Unaudited
Condensed Consolidated Financial Statements.
We have attempted to reduce cash flow requirements by renting
scientific equipment and research and development facilities and using
consultants, where appropriate. However, we expect to incur additional future
expenses, resulting in significant losses, as we continue and expand our
research and development activities and undertake additional pre-clinical and
clinical trials for our proprietary topical treatments under development. We
also expect to incur substantial expenses relating to the filing, maintenance,
defense and enforcement of patent and other intellectual property claims.
At June 30, 2002, we had cash and cash equivalents, certificates of
deposit and investments in marketable securities of approximately $13.2 million
as compared to $19 million at December 31, 2001. We have allocated our cash
reserves for our operational requirements, and for the ongoing U.S. clinical
studies on Alprox-TD(R) and the validation of our new manufacturing facility
for compliance with Good Manufacturing Practices (GMP) as required by the FDA.
To date, we have spent approximately $51 million on the Alprox-TD(R) development
program, and anticipate that we will spend an additional $7.5 million prior to
NDA submission. We have spent approximately $8 million in total for the land,
building and GMP development as related to our East Windsor manufacturing. We
intend to initiate additional clinical studies for Femprox(R) and other products
under development, pending the availability of financing through a licensing
arrangement and/or through issuance and sale of equity or debt.
At December 31, 2001, we accessed $1,113,459 of the GE credit line. The
$5 million credit line expired in March 2002, leaving a balance due GE of
$871,862, which we are repaying in monthly installments through various dates in
2004. In January 2002, GE approved a new $3 million credit line, which expires
on December 31, 2002. We accessed $396,944 of the credit line during the second
quarter of operations in 2002 and $2,603,056 million remains available to us
under the credit line. The GE leases generally have a 42 month term and balances
under this facility are payable in monthly installments over the 42 month term
of the applicable lease. In June 2002, we completed one round of debt financing
through
10
the issuance of convertible notes and warrants and one round of equity financing
through the issuance of common stocks and warrants to purchase shares of our
common stock. We received a total of approximately $11 million in gross proceeds
from these financings.
We believe that our current cash reserves, which include the proceeds
received from recent financing activities and other liquid reserves plus our
credit line, are sufficient to support an additional approximately four months
of operations at current levels. As a result we will require additional
financing to continue such operations beyond that time. We are seeking financing
from equity or debt and from private and public sources. In addition, we are in
discussions with various third parties regarding collaborative licensing and/or
marketing arrangements for Alprox-TD(R) and Femprox(R), which, if successfully
entered into, could result in substantial licensing and milestone payments paid
to us by the partner. There is no assurance we will be able to raise additional
financing or enter into such licensing and/or marketing arrangements.
If we do not obtain additional funding or enter into such licensing
and/or marketing arrangements, we will need to significantly modify our business
objectives or reduce or cease certain or all of our clinical trials, our product
development programs and other operations. Our cash requirements may also vary
materially from those now planned because of changes in focus and direction of
our research and development programs, competitive and technical advances,
patent developments or other developments.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to our exposures to market risk
since December 31, 2001.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 11, 2002, we issued a 42-month convertible note (the "Note"),
which is secured by our manufacturing facility in East Windsor, New Jersey. The
Note is convertible into shares of our common stock at a conversion price
initially equal to $4.08 (the "Conversion Price"). Interest accretes on the Note
on a semi-annual basis at a rate of 5% per annum, and we may pay such amounts in
cash or by effecting the automatic conversion of such amount into our common
stock at a 10% discount to average market prices. The purchasers also received
warrants to purchase 389,408 shares of common stock at a price equal to the
Conversion Price. The Note and warrants were issued pursuant to an exemption
provided by Section 4(2) of the Securities Act of 1933. We received $5 million
in gross proceeds, which have been and are being used to fund general corporate
overhead expenses and ongoing U.S. clinical studies.
On June 28, 2002, we completed a private placement of our securities to
institutional and accredited individual investors, pursuant to an exemption from
registration under the Act provided by Rule 506 of Regulation D. Each Unit was
sold for $11.25, and consisted of 5 shares of common stock and a two-year
warrant to purchase one share of common stock at $2.81 per share. The Company
received $6 million in gross proceeds, which have been and are being used to
fund general corporate overhead expenses and ongoing U.S. clinical studies.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
These are the results of voting by stockholders present or represented
by proxy at our annual meeting on June 21, 2002:
Item 1. Election of Directors. The stockholders elected the following persons to
serve as directors of the Company until the annual meeting in 2005 or until
their successors are elected:
Name of Director Votes For Votes Withheld
- ---------------- --------- --------------
Y. Joseph Mo 19,735,464 388,078
Joseph L. Yeager 19,781,764 341,778
Item 2. Proposal to approve the Amended and Restated Articles of Incorporation.
The stockholders did not approve this proposal. There were 7,229,165 votes for
the proposal, 134,669 votes against, 252,400 votes abstaining, and 12,507,308
broker non-votes. Under applicable Nevada law, the affirmative vote of the
shareholders holding a majority of the outstanding shares of common stock is
required for approval of the proposed amendment to our Articles of
Incorporation. Consequently, abstentions from voting on the proposal and broker
non-votes had the same effect as a negative vote on the proposal to amend and
restate our Articles of Incorporation.
Item 3. Ratification of Selection of Independent Accountants. The stockholders
ratified the Board's selection of PricewaterhouseCoopers LLP as the Company's
independent accountants for fiscal year 2002. There were 19,803,306 votes for
ratification; 89,611 votes against; 230,625 votes abstaining; and no broker
non-votes.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
Number Description
- ------- -----------
4.1 Form of 5% Convertible Note dated June 11, 2002 (incorporated herein by reference to Exhibit 4.2 to
the Company's S-3 filed with the Securities and Exchange Commission on July 19, 2002).
4.2 Form of Warrant dated June 11, 2002 (incorporated herein by reference to Exhibit 4.3 to the Company's
S-3 filed with the Securities and Exchange Commission on July 19, 2002).
4.3 Form of Unit Warrant dated June 28, 2002 (incorporated herein by reference to Exhibit 4.5 to the
Company's S-3 filed with the Securities and Exchange Commission on July 19, 2002).
4.4 Form of Placement Agent Warrant dated June 28, 2002 (incorporated herein by reference to Exhibit 4.6
to the Company's S-3 filed with the Securities and Exchange Commission on July 19, 2002).
10.1 Purchase Agreement between the Company and The Tailwind Fund Ltd. and Solomon Strategic Holdings,
Inc. dated June 11, 2002.
10.2 Registration Rights Agreement between the Company and The Tailwind Fund Ltd. and Solomon Strategic
Holdings, Inc. dated June 11, 2002.
10.3 Subsidiary Guaranty by NexMed (U.S.A.), Inc., a wholly owned subsidiary of the Company, in favor of
The Tailwind Fund Ltd. and Solomon Strategic Holdings, Inc. dated June 11, 2002.
10.4 Mortgage, Security Agreement and Assignment of Leases and Rents by NexMed (U.S.A.), Inc., a wholly
owned subsidiary of the Company, in favor of The Tailwind Fund Ltd. and Solomon Strategic Holdings,
Inc. dated June 11, 2002.
10.5 Form of Unit Purchase Agreement dated June 28, 2002.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer.
(b) REPORTS ON FORM 8-K
We filed a Form 8-K on June 12, 2002, announcing the issuance of the $5
million convertible note, which is collateralized by our manufacturing facility
in East Windsor, New Jersey.
We filed a Form 8-K on July 2, 2002, announcing the issuance of common
stock and warrants in the private placement completed on June 28, 2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEXMED, INC.
Date: August 14, 2002 /s/ Y. Joseph Mo
---------------------- ----------------
Y. Joseph Mo
Chairman of the Board of Directors,
President and C.E.O.
14
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
4.1 Form of 5% Convertible Note dated June 11, 2002 (incorporated herein by reference to Exhibit 4.2 to
the Company's S-3 filed with the Securities and Exchange Commission on July 19, 2002).
4.2 Form of Warrant dated June 11, 2002 (incorporated herein by reference to Exhibit 4.3 to the Company's
S-3 filed with the Securities and Exchange Commission on July 19, 2002).
4.3 Form of Unit Warrant dated June 28, 2002 (incorporated herein by reference to Exhibit 4.5 to the
Company's S-3 filed with the Securities and Exchange Commission on July 19, 2002).
4.4 Form of Placement Agent Warrant dated June 28, 2002 (incorporated herein by reference to Exhibit 4.6
to the Company's S-3 filed with the Securities and Exchange Commission on July 19, 2002).
10.1 Purchase Agreement between the Company and The Tailwind Fund Ltd. and Solomon Strategic Holdings,
Inc. dated June 11, 2002.
10.2 Registration Rights Agreement between the Company and The Tailwind Fund Ltd. and Solomon Strategic
Holdings, Inc. dated June 11, 2002.
10.3 Subsidiary Guaranty by NexMed (U.S.A.), Inc., a wholly owned subsidiary of the Company, in favor of
The Tailwind Fund Ltd. and Solomon Strategic Holdings, Inc. dated June 11, 2002.
10.4 Mortgage, Security Agreement and Assignment of Leases and Rents by NexMed (U.S.A.), Inc., a wholly
owned subsidiary of the Company, in favor of The Tailwind Fund Ltd. and Solomon Strategic Holdings,
Inc.
10.5 Form of Unit Purchase Agreement dated June 28, 2002.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer.
15