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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 September 30, 2002
Commission file number 0-22245
NEXMED, INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 87-0449967
- ----------------------------------------------------- -----------------------
(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 [ ]
Check whether the issuer an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act):
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: as of November 12, 2002,
28,261,604 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 September 30, 2002 and
December 31, 2001 ............................................................................. 1
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and September 30, 2001...................................................... 2
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2002 and September 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..................................... 13
Item 4. Procedures and Controls ....................................................................... 13
Part II. OTHER INFORMATION....................................................................................... 14
Item 6. Exhibits and Reports on Form 8-K............................................................... 14
Signature........................................................................................................ 15
Exhibit Index.................................................................................................... 18
NexMed, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
September 30 December 31
2002 2001
Assets
- ------
Current assets:
Cash and cash equivalents $ 4,813,223 $ 12,913,803
Certificates of Deposit - 3,564,373
Marketable securities 1,006,957 2,265,529
Notes receivable, current 195,402 -
Prepaid expenses and other assets, net 587,661 879,491
-------------------------------------
Total current assets 6,603,243 19,623,196
Land, buildings, furniture and equipment, net 11,497,824 7,691,517
Debt Issuance cost, net of accumulated amortization
of $31,113 233,900 -
Notes Receivable 89,207 -
--------------------------------------
Total assets $ 18,424,174 $ 27,314,713
======================================
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,336,174 $ 2,194,730
Capital lease obligation 501,749 287,541
--------------------------------------
Total current liabilities 1,837,923 2,482,271
Long Term liabilities:
Convertible note payable 4,273,471 -
Capital lease obligation, net of current portion 988,621 724,577
--------------------------------------
Total Long Term Liabilities 5,262,092 724,577
--------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000
shares authorized, none issued and outstanding - -
Common stock, $.001 par value, 80,000,000
shares authorized, 28,261,604 shares and
25,541,934 shares issued and outstanding at
September 30, 2002 and December 31, 2001 28,262 25,542
Additional paid-in capital 71,248,491 64,538,838
Accumulated deficit (59,741,798) (40,346,450)
Deferred compensation (4,877) (6,704)
Unrealized loss marketable securities (206,023) (103,719)
Cumulative translation adjustments 104 358
--------------------------------------
Total stockholders' equity 11,324,159 24,107,865
--------------------------------------
Total liabilities and stockholders' equity $ 18,424,174 $ 27,314,713
======================================
See notes to unaudited condensed consolidated financial statements
1
NexMed, Inc.
Condensed Consolidated Statement of Operations (Unaudited)
For the nine months For the three months
ended September 30, ended September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenue
Product sales, royalties and development fees $ 145,019 $ - $ 78,175 $ -
--------------- --------------- -------------- -------------
Total revenues 145,019 0 78,175 0
--------------- --------------- -------------- -------------
Operating expenses
Cost of product sales 27,033 - - -
Selling, general and administrative 4,193,004 3,315,852 1,238,262 1,118,029
Research and development 15,229,345 7,823,185 5,582,531 2,560,700
--------------- --------------- -------------- -------------
Total operating expenses 19,449,382 11,139,037 6,820,793 3,678,729
--------------- --------------- -------------- -------------
Loss from operations $ (19,304,363) (11,139,037) (6,742,618) (3,678,729)
--------------- --------------- -------------- -------------
Other Income (expense)
Interest income (expense), net (99,522) 1,064,379 (122,591) 342,593
Other income (expense) 8,537 (183,688) (10,188) (120,995)
--------------- --------------- -------------- -------------
Total Other income (expense) (90,985) 880,691 (132,779) 221,598
--------------- --------------- -------------- -------------
Net loss $ (19,395,348) $ (10,258,346) $ (6,875,397) $ (3,457,131)
--------------- --------------- -------------- -------------
Other comprehensive income
Foreign currency translation adjustments (254) (3) 96 412
Unrealized loss on available-for-sale securities (102,304) (37,711) (48,127) 51,571
--------------- --------------- -------------- -------------
Total other comprehensive income (102,558) (37,714) (48,031) 51,983
--------------- --------------- -------------- -------------
Comprehensive Loss $ (19,497,906) $ (10,296,060) $ (6,923,428) $ (3,405,148)
=============== =============== ============== =============
Basic and diluted loss per share $ (0.73) $ (0.40) $ (0.24) $ (0.14)
--------------- --------------- -------------- -------------
Weighted average common shares outstanding
used for basic and diluted loss per share 26,472,909 25,357,166 28,245,979 25,476,499
--------------- --------------- -------------- -------------
See notes to unaudited condensed consolidated financial statements
2
NexMed, Inc.
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the nine months
ended September 30,
-------------- --------------
2002 2001
---- ----
Cash flows from operating activities
Net loss $ (19,395,348) $ (10,258,346)
Adjustments to reconcile net loss to net cash from operating
activities
Depreciation and amortization 699,697 382,473
Non-cash compensation expense 78,767 506,443
Loss on disposal of assets - 112,687
Net loss on sale of marketable securities - 137,824
(Increase)/decrease in prepaid expenses and other assets 377,572 (355,081)
(Decrease)/Increase in accounts payable
and accrued expenses (858,557) (104,702)
-------------- --------------
Net cash used in operating activities (19,097,868) (9,578,702)
-------------- --------------
Cash flow from investing activities
Increase in notes receivable, net (284,609) -
Capital expenditures (3,629,179) (2,253,100)
Purchase of marketable securities (1,227,769) (462,298)
Purchase of certificates of deposit (384,000) (4,716,000)
Sales of marketable securities 2,377,148 811,128
Maturities of certificates of deposit 3,944,000 3,460,000
-------------- --------------
Net cash provided by (used in) investing activities 795,591 (3,160,270)
-------------- --------------
Cash flow from financing activities
Issuance of common stock, net of offering
costs 5,750,371 957,200
Return of gain on stock by former employee - 37,602
Issuance of notes payable, net of debt issue cost 4,696,399 -
Repayment of capital lease obligations (244,818) (41,685)
-------------- --------------
Net cash from financing activities 10,201,952 953,117
-------------- --------------
Net increase in cash (8,100,326) (11,785,855)
Effect of foreign exchange on cash (254) (3)
Cash, beginning of period 12,913,803 27,702,585
-------------- --------------
Cash, end of period $ 4,813,223 $ 15,916,727
============== ==============
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 nine months ended September 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 $59,741,798 at September 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 is completing the
ongoing pivotal 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. If additional financing cannot be obtained on reasonable terms, future
operations will need to be scaled back or discontinued. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty
2. LOSS PER SHARE
At September 30, 2002 and 2001, respectively, options to acquire 4,103,200 and
3,489,025 shares of common stock with exercise prices ranging from $.25 to
$16.25 per share and warrants to acquire 3,390,399 and 2,206,549 shares of
common stock with exercise prices ranging from $1.00 to $14.85 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 will 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. 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
September 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 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. In
addition, all professional fees associated with the closing of the Note are
being amortized over the term of the Note.
For the nine months ended September 30, 2002, the Company recorded amortization
of $69,172 and $31,113 of the debt discount and closing costs respectively.
5. 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.
6. 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.
5
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 September 30, 2002, there was an outstanding balance
due GE of $799,120 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
third quarter of 2002, the Company accessed $335,313 of the credit line. As of
September 30, 2002, there was an outstanding balance due GE of $691,250 under
the January 2002 facility, and $2,256,384 remains available to the Company to
finance future equipment purchases. Balances due are payable in 42 monthly
installments from the date of take-down.
In October 2002, the Company accessed an additional $367,811 of the credit line
leaving $1,888,573 available to the Company to finance future equipment
purchases.
7. RELATED PARTY TRANSACTION
In July 2001, the Company advanced $100,000 to Vivian Liu, the Company's Vice
President and Secretary. The advance was 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 bore
interest at 5% per annum and had a new due date of December 31, 2002. As of
September 30, 2002, the principal amount of $100,000 was repaid along with all
interest due.
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 September 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".
8. WARRANTS.
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.
9. CO-DEVELOPMENT AGREEMENT
In August 2002, the Company entered into an research and development agreement
with a Japanese pharmaceutical company. Pursuant to the terms of this agreement,
the Company will develop a new tape/patch treatment for urinary dysfunction
which incorporates the Japanese partner's proprietary drug compound with the
NexACT(Registered Trademark) technology. The Company received an upfront payment
of 10 million Japanese Yen (approximately $90,000) with future periodic payments
to be made based on the achievement of certain research and development
milestones. Total payments under the agreement could aggregate up to 50 million
Japanese Yen, or approximately $450,000 and the Company will retain the right to
manufacture and commercialize the new product worldwide except in Japan.
Revenues earned under this research contract are recognized in accordance with
the cost-to-cost method outlined in Staff Accounting Bulletin No. 101 whereby
the extent of progress toward completion is measured on the cost-to-cost basis;
however, revenue recognized at any point will not exceed the cash received. When
the current estimates of total contract revenue and contract cost indicate a
loss, a provision for the entire loss on the contract is made.
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, our ability to raise additional required financing
on acceptable terms, 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(Registered Trademark),
which may enable an active drug to be better absorbed through the skin. The
NexACT(Registered Trademark) 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(Registered Trademark) technology would improve
therapeutic outcomes and reduce gastrointestinal or other systemic side effects
that often accompany oral and injectable medications.
Currently, we are focusing our application of the NexACT(Registered
Trademark) technology to Alprox-TD(Registered Trademark) and Femprox(Registered
Trademark) creams, for the treatment of male erectile dysfunction and female
sexual arousal disorder, respectively. Our clinical studies have demonstrated
that NexACT(Registered Trademark) enhancers promote the rapid absorption of
alprostadil, a drug well recognized for treating erectile dysfunction, and
improve clinical responses. We are also exploring the application of the
NexACT(Registered Trademark) 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
treatment for pain and inflammation, and a topical anti-nausea treatment for the
prevention of nausea and vomiting associated with post-operative surgical
procedures and cancer chemotherapy.
Alprox-TD(Registered Trademark) is an alprostadil-based cream treatment
intended for patients with mild to severe erectile dysfunction. In November
2001, we initiated our Phase 3 clinical development program for
Alprox-TD(Registered Trademark) 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(Registered Trademark) in patients with
various degrees of erectile dysfunction. The open-label study, which we
initiated in March 2002, is to confirm the safety of Alprox-TD(Registered
Trademark) 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 elect to continue using Alprox-TD(Registered Trademark) for an additional
period. As of November 1, 2002, over 1,250 patients have completed testing and
approximately 100 more patients are actively completing testing in our two
pivotal studies, which we anticipate will be completed in December 2002.
7
On November 13, 2002, we announced that the FDA has advised us to stop
the ongoing open-label study of the Alprox-TD(Registered Trademark) cream until
certain issues surrounding NexMed's 26-week transgenic mice study have been
resolved. The FDA is permitting us to continue our two fully- enrolled Phase 3
pivotal studies of Alprox-TD(Registered Trademark), which will be completed in
December 2002.
The FDA's decision was based on the results of the 26-Week Dermal
Carcinogenicity Study in transgenic mice. The permeation excipient formulated in
Alprox-TD(Registered Trademark), which is the penetration enhancement agent,
produced positive results in the transgenic mouse study and was associated with
an increase in benign dermal papillomas at the highest concentrations tested.
The results were negative, however, at the lowest concentration tested. Active
drug was not used in this mouse study and the result does not suggest a safety
issue with alprostadil.
We have requested a meeting with the FDA to review its decision and if
necessary, initiate an appeal process. We anticipate that the FDA's decision is
likely to result in a delay in the submission of our New Drug Application for
approximately 12 months, to the second half of 2004. The length of the delay
will depend on the FDA's final decision on when we can reinitiate the open-label
study even though the completion of the open-label study is not a prerequisite
for the filing of our New Drug Application. It is possible that we may never
successfully complete our studies or receive FDA approval on a timely basis, if
at all.
Internationally, in April 2002, our Asian licensee launched
Befar(Registered Trademark), which is the Asian trademark for our proprietary
erectile dysfuncton treatment in Hong Kong. Befar(Registered Trademark) has been
available in China since July 2001, which along with the currently approved oral
erectile dysfunction product, are currently classified in China 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 erectile dysfunction treatments. We also have
a New Drug Application pending for Befar in Singapore. Befar(Registered
Trademark) 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(Registered Trademark) is an alprostadil-based cream product
intended for the treatment of female sexual arousal disorder. We have completed
a Phase 2 "at home use" clinical study with Femprox(Registered Trademark). This
multi-center study was randomized, double-blind, placebo-controlled, and
designed to investigate the efficacy and safety of the Femprox(Registered
Trademark) cream in 98 pre-menopausal women diagnosed with female sexual arousal
disorder. We have completed our review and analysis of the clinical results and
submitted them to the FDA for their review and comment. Pending the availability
of financing, we intend to initiate a second Phase 2 study which will examine
the efficacy and safety of the Femprox(Registered Trademark) cream in
pre-menopausal and post-menopausal women.
Patents.
We have seven U.S. patents either acquired or received out of a series
of patent applications that we have filed in connection with our
NexACT(Registered Trademark) technology and our NexACT-based products under
development, such as Alprox-TD(Registered Trademark), Femprox(Registered
Trademark), and our non-steroidal anti-inflammatory cream. We have three U.S.
patents issued on the Viratrol(Registered Trademark) device and one patent
application pending with respect to the technology, inventions and improvements
that are significant to the Viratrol(Registered Trademark) device. To further
strengthen our global patent position on our proprietary products under
development, and to expand the patent protection to other markets, we have filed
under the Patent Cooperation Treaty, corresponding international applications
for our issued U.S. patents and pending U.S. patent applications.
The following table identifies our seven U.S. patents and the year of
expiration for each patent:
8
Patent Name Expiration Date
----------- ---------------
Prostaglandin Composition and Methods of Treatment of Male ED 2020
Topical Compositions for PGE1 Delivery 2017
Topical Compositions for Non-Steroidal Anti-Inflamatory Drug Delivery 2017
Biodegradable Absorbation Enhancers 2012
Biodegradable Absorbation Enhancers 2010
Medicament Dispenser 2019
Crystalline Salts of dodecyl 2-(N, N-Dimethylamino) 2019
Research and Development.
Governmental authorities in the U.S. and other countries heavily
regulate the testing, manufacture, labeling, distribution, advertising and
marketing of our proposed products. None of our proprietary products under
development, including the Alprox-TD(Registered Trademark) and
Femprox(Registered Trademark) creams utilizing the NexACT(Registered Trademark)
technology as well as the Viratrol(Registered Trademark) device, has been
approved for marketing in the U.S. Before we market any products we develop, we
must obtain FDA and comparable foreign agency approval through an extensive
clinical study and approval process.
The studies involved in the approval process are conducted in three
phases. In Phase 1 studies, researchers assess safety or the most common acute
adverse effects of a drug and examine the size of doses that patients can take
safely without a high incidence of side effects. Generally, 20 to 100 healthy
volunteers or patients are studied in the Phase 1 study for a period of several
months. In Phase 2 studies, researchers determine the drug's efficacy with
short-term safety by administering the drug to subjects who have the condition
the drug is intended to treat, assess whether the drug favorably affects the
condition, and begin to identify the correct dosage level. Up to several hundred
subjects may be studied in the Phase 2 study for approximately 6 to 12 months,
depending on the type of product tested. In Phase 3 studies, researchers further
assess efficacy and safety of the drug. Several hundred to thousands of patients
may be studied during the Phase 3 studies for a period of from 12 months to
several years. Upon completion of Phase 3 studies, a NDA is submitted to the FDA
or foreign governmental regulatory authority for review and approval.
Our failure to obtain requisite governmental approvals timely or at all
will delay or preclude us from licensing or marketing our products or limit the
commercial use of our products, which could adversely affect our business,
financial condition and results of operations.
Because we intend to sell and market our products outside the U.S., we
will be subject to foreign regulatory requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursements. These
requirements vary widely from country to country. Our failure to meet each
foreign country's requirements could delay the introduction of our proposed
products in the respective foreign country and limit our revenues from sales of
our proposed products in foreign markets.
Successful commercialization of our products may depend on the
availability of reimbursement to the consumer from third-party healthcare
payers, such as government and private insurance plans. Even if we succeed in
bringing one or more products to market, reimbursement to consumers may not be
available or sufficient to allow us to realize an appropriate return on our
investment in product development or to sell
9
our products on a competitive basis. In addition, in certain foreign markets,
pricing or profitability of prescription pharmaceuticals is subject to
governmental controls. In the U.S., federal and state agencies have proposed
similar governmental control and the U.S. Congress has recently considered
legislative and regulatory reforms that may affect companies engaged in the
healthcare industry. Pricing constraints on our products in foreign markets and
possibly in the U.S. could adversely effect our business and limit our revenues.
Comparison of Results of Operations Between the Three Months Ended September 30
of 2002 and of 2001.
Revenues. We recorded $78,175 in revenue during the third quarter of
2002 as compared to no revenue during the same period in 2001. The 2002 revenues
include royalty on sales received from our Asian licensee and also revenue
recognized on our co-development agreement with a Japanese pharmaceutical
company. Pursuant to the terms of this agreement, we will develop a new
tape/patch treatment for urinary dysfunction which incorporates the Japanese
partner's proprietary drug compound with the NexACT(Registered Trademark)
technology. Payments under this contract include an upfront payment of 10
million Japanese Yen (approximately $90,000). Periodic payments of up to an
additional 40 million Japanese Yen (approximately $360,000) would be made based
on the achievement of certain research and development milestones. We have
retained the right to manufacture and commercialize the new product worldwide
except in Japan.
Cost of Products Sold. Our cost of products sold was nil during the
third quarter of 2002 and nil during the same period in 2001. Our Asian licensee
had sufficient inventory of the manufacturing supplies during the third quarter
of 2002 and so, made no purchases from us.
Research and Development Expenses. Our research and development
expenses for the third quarter of 2002 and 2001 were $5,582,531 and $2,560,700,
respectively. Research and development expenses attributable to
Alprox-TD(Registered Trademark) and Femprox(Registered Trademark) in the third
quarter of 2002 were $4,153,850 and $91,254, respectively, as compared to
$690,722 and $307,089,respectively during the same period in 2001. The increase
is attributable to the pre-clinical and clinical expenses for
Alprox-TD(Registered Trademark), 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 2002 will increase significantly compared to 2001,
primarily associated with completing the ongoing Phase 3 clinical development
program for Alprox-TD(Registered Trademark). We anticipate increasing our
efforts and resources in the application of the NexACT(Registered Trademark)
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 $1,238,262 during the third quarter of 2002 as
compared to $1,118,029 during the same period in 2001. The increase is largely
attributed to additional expenses for legal fees related to financing and 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 fourth quarter
of 2002 will decrease with the reduction in expenditures and non-essential
personnel as discussed in Liquidty and Capital Resources.
Interest Income. We had interest expense of $122,591 during the third
quarter of 2002, as compared to an income of $342,593 during the same period in
2001. The decrease is a result of 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 $6,875,397 or $0.24 per share for the third
quarter of 2002, as compared to $3,457,131 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
10
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 Nine Months Ended September 30
of 2002 and of 2001.
Revenues. We recorded $145,019 in revenue during the first nine months
of 2002 as compared to no revenue during same period in 2001. The 2002 revenues
include revenues from royalty on sales and from product sales received from our
Asian licensee and revenue recognized on our co-development agreement with a
Japanese pharmaceutical company. Pursuant to the terms of this agreement, we
will develop a new tape/patch treatment for urinary dysfunction which
incorporates the Japanese partner's proprietary drug compound with the
NexACT(Registered Trademark) technology. Payments under this contract include an
upfront payment of 10 million Japanese Yen (approximately $90,000). Periodic
payments of up to an additional 40 million Japanese Yen (approximately $360,000)
would be made based on the achievement of certain research and development
milestones. We have retained the right to manufacture and commercialize the new
product worldwide except in Japan.
Cost of Products Sold. Our cost of products sold was $27,033 during the
first nine months 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 during the first six months of the year for
the production of Befar(Registered Trademark) in China.
Research and Development Expenses. Our research and development
expenses for the first nine months of 2002 and 2001 were $15,229,345 and
$7,823,185, respectively. $10,894,654 and $579,576 of the 2002 research and
development expenses were attributable to Alprox-TD(Registered Trademark) and
Femprox(Registered Trademark), respectively as compared to $2,554,608 and
$734,177,respectively during the same period in 2001. The increase is
attributable to the pre-clinical and clinical expenses for Alprox-TD(Registered
Trademark), 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 2002 will increase
significantly compared to 2001, primarily associated with completing the ongoing
Phase 3 clinical development program for Alprox-TD(Registered Trademark). We
anticipate increasing our efforts and resources in the application of the
NexACT(Registered Trademark) 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 $4,193,004 during the first nine months of 2002 as
compared to $3,315,852 during the same period in 2001. The increase is largely
attributed to additional expenses for legal fees related to financing and 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 decrease with the
reduction in expenditures and non-essential personnel as discussed in Liquidity
and Capital Resources.
Interest Income. Interest expense was $99,522 during the first nine
months of 2002, as compared to an income of $1,064,379 during the same period in
2001. The decrease is a result a significant 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 $19,395,348 or $0.73 per share for the first
nine months of 2002, as compared to $10,258,346 or a loss of $0.40 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.
11
Liquidity and Capital Resources.
We have experienced net losses and negative cash flow from operations
each year since our inception. Through September 30, 2002, we had an accumulated
deficit of $59,741,798. 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.
In August 2002, we entered into a co-development agreement with a major
Japanese pharmaceutical company. Pursuant to the terms of this agreement, we
will develop a new tape/patch treatment for urinary dysfunction which
incorporates the Japanese partner's proprietary drug compound with the
NexACT(Registered Trademark) technology. We received a modest upfront payment
with future periodic payments to be made based on the achievement of certain
research and development milestones, and will retain the right to manufacture
and commercialize the new product worldwide except in Japan.
At September 30, 2002, we recorded significantly 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 nine months in 2002, we recorded an amortization of debt
discount due to the issuance of the convertible notes in June 2002. At September
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. During the first nine months in 2002, we had an increase in debt
issuance cost as a result of the issuance of the convertible notes in June 2002.
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 September 30, 2002, we had cash and cash equivalents, certificates
of deposit and investments in marketable securities of approximately $5.8
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(Registered Trademark) 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 $55 million
on the Alprox-TD(Registered Trademark) development program. We anticipate that
at least an additional $10 million on Alprox-TD(Registered Trademark) will have
to be spent prior to the submission of our New Drug Application, which we
anticipate to take place in the second half of 2004, depending upon final
resolution of the FDA's decision to stop our open-label study. To date we have
spent $2.4 million on the Femprox(Registered Trademark) development program and
pending the availability of financing, we intend to initiate a second Phase 2
study which will examine the efficacy and safety of the Femprox(Registered
Trademark) cream in pre-menopausal and post-menopausal women. 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(Registered Trademark) 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 Capital credit
line. The $5 million credit line expired in March 2002 and as of September 30,
2002, there was an outstanding balance due GE Capital of $799,120, which we are
repaying in monthly installments through various dates in 2004. In
12
January 2002, GE Capital approved a new $3 million credit line, which expires on
December 31, 2002. We accessed $335,313 of the credit line during the third
quarter of operations in 2002 and $2,256,384 remains available to us under the
credit line. The GE Capital 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.
We anticipate that the FDA's decision will have an adverse impact on
our financing efforts. As such, we have implemented a cash conservation program,
which includes a significant reduction in expenditures and in non-essential
personnel. We believe that our current cash reserves along with marketable
securities are sufficient to support an additional four months of operations at
the reduced levels. As a result we will require additional financing to continue
such operations beyond that time. We intend to seek 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(Registered Trademark) and other NexACT(Registered
Trademark)-based products under development, which, if successfully entered
into, could result in substantial licensing and milestone payments paid to us by
the partner. However, the timeframe and payment amounts may be adversely
affected as a result of the delay in our New Drug Application filing. 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 raise additional
financing, or enter into a significant licensing and/or marketing agreement,
future operations will need to be scaled back further or discontinued.
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.
ITEM 4. PROCEDURES AND CONTROLS
Within the 90 days prior to the date of filing of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management (including the Company's Chief
Executive Officer and Acting Chief Financial Officer, its principal executive
officer and principal financial officer, respectively), of the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and Acting Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic Securities
and Exchange Commission filings. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Description
Number -----------
- ------
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 - Acting Chief Financial
Officer.
(b) REPORTS ON FORM 8-K
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.
14
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: November 13, 2002 /s/ Y. Joseph Mo
---------------------- ----------------
Y. Joseph Mo
Chairman of the Board of Directors,
President and C.E.O.
15
CERTIFICATION
-------------
I, Y. Joseph Mo, Chief Executive Officer of NexMed, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of NexMed, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Y. Joseph Mo
----------------
Y. Joseph Mo
Chief Executive Officer
16
CERTIFICATION
I, Vivian H. Liu, Chief Financial Officer of NexMed, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of NexMed, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Vivian H. Liu
-----------------
Vivian H. Liu
Acting Chief Financial Officer
17
EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------ -----------
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 - Acting Chief Financial
Officer.
18