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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 March 31, 2003.
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
- ---------------------------------- -------------------------------
(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 May 14, 2003, 29,587,536
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 March 31, 2003 and
December 31, 2002 ....................................... 1
Unaudited Condensed Consolidated Statements
of Operations for the Three Months Ended
March 31, 2003 and March 31, 2002......................... 2
Unaudited Condensed Consolidated Statements
of Cash Flows for the Three Months Ended
March 31, 2003 and March 31, 2002..........................3
Notes to Condensed Consolidated Unaudited
Financial Statements.......................................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations.............................................10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.........................................17
Item 4. Controls and Procedures...................................17
Part II. OTHER INFORMATION..................................................17
Item 1. Legal Proceedings...........................................17
Item 2. Changes in Securities and Use of Proceeds...................18
Item 6. Exhibits and Reports on Form 8-K..........................19
Signature...................................................................20
Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.................................................................21
Exhibit Index...............................................................23
Nexmed, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
March 31, December 31,
2003 2002
----------------------------
Assets
Current assets:
Cash and Cash equivalents $ 205,089 $ 1,035,149
Marketable Securities -- 539,795
Notes Receivable, current 201,338 198,348
Prepaid expenses and other assets, net 416,496 498,042
----------------------------
Total current assets 822,924 2,271,334
Fixed assets, net 11,210,531 11,507,564
Debt Issuance cost 286,427 312,888
Notes Receivable 6,859 48,341
----------------------------
Total assets $ 12,326,741 $ 14,140,127
============================
Liabilities and stockholder's equity
Current liabilities:
Accounts payable and accrued expenses $ 4,303,795 $ 4,874,441
Note payable 479,000 --
Capital lease obligation - current portion 623,947 609,676
----------------------------
Total current liailities 5,406,742 5,484,117
----------------------------
Long Term liabilities:
Convertible note payable, net of discount of
$1,883,441 and $669,693 3,137,559 4,330,307
Capital lease obligation 940,769 1,102,221
----------------------------
Total Liablilites 9,485,070 10,916,635
----------------------------
Commitment and contingencies
Stockholder's 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, 29,302,490 and 28,293,719 issued
and outstanding, respectively 29,302 28,294
Additional paid-in capital 74,259,180 71,381,751
Accumulated deficit (71,439,296) (67,987,969)
Deferred compensation (11,159) (97,562)
Unrealized loss on marketable securities -- (101,157)
Cumulative translation adjustments 3,644 135
----------------------------
Total stockholders' equity 2,841,671 3,223,492
----------------------------
Total liabilities and stockholders' equity $ 12,326,741 $ 14,140,127
============================
See notes to unaudited condensed consolidated financial statements
1
NexMed, Inc.
Condensed Consolidated Statement of Operations (Unaudited)
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FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
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Revenue
Product sales and royalties $ 1,713 $ 45,281
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Total revenues 1,713 45,281
------------ ------------
Operating expenses
Cost of product sales -- 19,068
General and administrative 1,235,046 1,414,729
Research and development 1,855,334 4,248,587
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Total operating expenses 3,090,380 5,682,384
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Loss from operations 3,088,667 5,637,103
Other Income (expense)
Interest income (expense), net (253,125) 40,533
Other income (expense) (109,535) 17,722
------------ ------------
Total Other income (expense) 362,660 58,255
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Net loss (3,451,327) (5,578,848)
------------ ------------
Other comprehensive income
Foreign currency translation adjustments 3,509 (296)
Unrealized loss on available-for-sale securities -- (18,551)
------------ ------------
Total other comprehensive income 3,509 (18,847)
------------ ------------
Comprehensive Loss (3,447,818) (5,597,695)
============ ============
Basic and diluted loss per share $ (0.12) $ (0.22)
------------ ------------
Weighted average common shares outstanding
used for basic and diluted loss per share 28,593,839 25,541,934
------------ ------------
See notes to unaudited condensed consolidated financial statements
2
NexMed, Inc.
Condensed Consolidated Statement of Cash Flows (Unaudited)
FOR THE THREE MONTHS ENDED
MARCH, 31
------------------------------
2003 2002
---- ----
Cash flows from operating activities
Net loss $ (3,451,327) $ (5,578,848)
Adjustments to reconcile net loss to net cash from operating
activities, net of effects of sale of subsidiary
Depreciation and amortization 300,786 166,097
Non-cash interest, amortization of debt discount and
deferred financing costs 204,467 --
Non-cash insurance expense 3,501 --
Non-cash compensation expense 124,597 25,109
Net loss on sale of marketable securities 94,824 --
Loss on disposal of assets 14,711 --
(Increase)/decrease in prepaid expenses and other assets 81,546 159,204
(Decrease)/Increase in account payable
and accrued expenses (570,646) (463,250)
------------------------------
Net cash used in operating activities (3,197,541) (5,691,688)
------------------------------
Cash flow from investing activities
Proceeds from notes receivable 38,491 --
Capital expenditures (21,017) (1,939,478)
Purchase of marketable securities -- (1,158,548)
Purchase of certificates of deposit -- (384,000)
Sales of marketable securities 545,200 25,043
Sales of certificates of deposit -- 2,312,000
------------------------------
Net cash provided by (used in) investing activities 562,674 (1,144,983)
------------------------------
Cash flow from financing activities
Issuance of common stock, net of offering
costs 848,469 --
Issuance of notes payable 1,100,000 --
Repayment of capital lease obligations (147,171) (69,271)
------------------------------
Net cash from financing activities 1,801,298 (69,271)
------------------------------
Net increase (decrease)in cash (833,569) (6,905,942)
Effect of foreign exchange on cash 3,509 (296)
------------------------------
Cash, beginning of period $ 1,035,149 $ 12,913,803
==============================
Cash, end of period $ 205,089 $ 6,007,565
==============================
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 three months ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2003. 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, 2002.
The Company has an accumulated deficit of $71,439,296 at March 31, 2003 and
expects that Alprox-TD(R) clinical development expenses for the year 2003 will
be less than 2002 due to the completion of the two Phase 3 pivotal studies for
Alprox-TD(R) in 2002. If the Company is successful in entering into partnering
agreements for some of its products under development using the NexACT(R)
technology, it anticipates that it will receive milestone payments, which may
offset some of its research and development expenses. As a result, the Company
expects operating losses in 2003 that are lower than those incurred in 2002. The
Company's current cash reserves 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 it. 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. As discussed in Note 11, the Company sold 800
shares of newly issued convertible preferred stock in April 2003, raising gross
proceeds of $8,000,000.
2. LOSS PER SHARE
At March 31, 2003 and 2002, respectively, options to acquire 4,950,755 and
4,162,225 shares of common stock with exercise prices ranging from $.25 to
$16.25 per share and warrants to acquire 2,170,032 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)." SFAS 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
4
lease termination costs and certain employee severance costs that are associated
with a restructuring, discontinued operation, plant closing or other exit or
disposal activity. SFAS 146 will be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS 146 did not
have any impact on the Company's financial condition or results of operations.
In December 2002, the SFASB issued Statement of Financial Accounting Standards
No. 148 ("SFAS 148"), Accounting for Stock-Based Compensation-Transition and
Disclosure. SFAS 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock based employee compensation
and the effect of the method used on reported results. The provisions of SFAS
148 are effective for financial statements for fiscal years and interim periods
ending after December 15, 2002. The disclosure provisions of SFAS 148 have been
adopted by the Company (see Note 2 of the Notes to Consolidated Financial
Statements). SFAS 148 did not require the Company to change to the fair value
based method of accounting for stock-based compensation.
In November 2002, the SFASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that at the
time a company issues a guarantee, it must recognize an initial liability for
the fair market value of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
The initial recognition and measurement provisions are effective on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of this Interpretation did not have any impact on the Company's
consolidated financial statements.
In January 2003, the SFASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN 46"). Variable Interest Entities ("VIEs") are
entities where control is achieved through means other than voting rights. FIN
46 provides guidance on the identification of and financial reporting for VIEs.
A VIE is required to be consolidated if the company is subject to the majority
of the risk of loss from the VIE's activities or is entitled to receive a
majority of the entity's residual returns, or both. The consolidation
requirements for VIEs created after January 31, 2003 are effective immediately
and consolidation requirements apply to existing entities in the first fiscal
year or interim period beginning after June 15, 2003. The adoption of this
Interpretation did not have any impact on the Company's consolidated financial
statements.
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. NOTES PAYABLE
In January and February 2003, the Company issued two short-term promissory
notes, which totaled $600,000, to one accredited investor. These promissory
notes bore interest at 12% per annum and were convertible at the noteholder's
option into the Company's securities at such time as it closed a private
placement of its securities. On March 21, 2003, the Company closed a private
placement of its shares of common stock at $1.50 per share (Note 7) and the
noteholder elected to convert the outstanding $614,064 in principal and interest
due into 409,376 shares of our common stock and 307,032 warrants to purchase
shares of our common stock.
5
In March 2003, the Company issued a short-term promissory note due May 4, 2003
for $500,000 to an accredited investor. This promissory note bears interest at
15% per annum and provides for two-year warrants to purchase 50,000 shares of
our common stock, at an exercise price of $2.00 per share. The Company has
valued the warrants using the Black-Scholes pricing model assuming a risk free
interest rate of 1.35%, dividend yield of 0% and expected volatility of 100% and
allocated $42,000 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. Pursuant to the terms of the Note, the due date of the
Note was extended one month on May 4, 2003 to June 4, 2003 at an increased
interest rate of 18%. On May 9, 2003, the Company repaid $250,000 of the
promissory note, leaving a remaining principal balance due of $250,000.
CONVERTIBLE NOTE PAYABLE
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 was initially convertible into shares of the
Company's common stock at a conversion price equal to $4.08 per share (1,225,490
shares). The terms of the Note provided that, 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%.
On February 4, 2003 the terms of the convertible notes were amended. In order to
induce the warrant holders to exercise all of their outstanding warrants in
full, the Company agreed to reduce the warrant exercise price to $1.37
(originally $4.08) per share. In addition, the Company also agreed to reduce the
conversion price of the Note to $2.75 from $4.08 per share. Pursuant to the
amendment, all of the warrants were exercised on February 4, 2003 and the
Company received cash proceeds of $533,489 from such exercise. Pursuant to the
original terms of the Note, the conversion price was further reduced to $2.71 as
a result of the March 2003 private placement discussed above. As a result of the
February 2003 amendments and the Company's sale of securities in March 2003, the
Company recorded a deemed dividend to the warrant holders of $89,564,
representing the incremental fair value of the warrant as a result of reducing
the exercise price, and recorded an additional discount on the note of
$1,305,148 reflecting the changes to the conversion price. The latter is being
amortized to interest expense over the remaining term of the Note.
As a result of the April 2003 placement (Note 11), the conversion price of the
Note has been further reduced to $2.41 and the Company recorded an additional
discount of approximately $710,000 which is being amortized to interest expense
over the remaining term of the Note.
6
For the three months ended March 31, 2003, the Company recorded amortization of
$112,401 and $26,461 of the debt discount and closing costs respectively.
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. 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 March 31, 2003, there was an
outstanding balance due GE of $648,190 under this facility, which 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. During 2002, the Company accessed $1,111,427
of the credit line. As of March 31, 2003, there was an outstanding balance due
GE of $916,527 under the January 2002 facility, which is payable in 42 monthly
installments from date of take-down. The credit facility expired on December 31,
2002.
7. SALE OF COMMON STOCK
On March 21, 2003, the Company closed a private placement of its common stock at
$1.50 per share. Pursuant to the agreement, the Company issued a total of
210,000 shares and 157,500 three-year warrants to purchase the Company's common
stock at $2.00 per share to three accredited investors and received $315,000 in
gross proceeds.
8. RELATED PARTY TRANSACTIONS
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
bore 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
amount of $115,725 remained outstanding as of March 31, 2003. The advance is
evidenced by a promissory note, which bears interest at 5% per annum and was due
on November 15, 2002. The note was not paid in full by November 15, 2002 and is
currently in default. According to the terms of the note, upon default the
interest rate increased to 15% per annum. Interest due on the promissory note at
the default rate of 15% has been paid on a timely basis. The note receivable is
included in the Condensed Consolidated Balance Sheet under "Prepaid Expenses and
Other Assets".
9. ACCOUNTING FOR STOCK BASED COMPENSATION
As provided by SFAS 123, Accounting for Stock-Based Compensation ("SFAS 123"),
the Company has elected to continue to account for its stock-based compensation
programs according to the provisions of
7
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation expense has been recognized to the extent
of employee or director services rendered based on the intrinsic value of
compensatory options or shares granted under the plans. The Company has adopted
the disclosure provisions required by SFAS 123.
Had the Company's stock-based compensation been determined by the fair-value
based method of SFAS 123, "Accounting for Stock-Based Compensation," the
Company's net loss and loss per share would have been as follows:
FOR THE THREE MONTHS ENDED
MARCH 31,
2003 2002
Net loss, as reported $(3,451,327) $(5,578,848)
Add: Stock-based compensation expense included
in reported net loss 124,597 25,109
Deduct: Total stock-based compensation expense determined
under fair-value based method for all awards (424,067) (548,518)
----------- -----------
Proforma net loss $(3,750,797) $(6,102,257)
=========== ===========
Basic and duilted loss per share:
As reported $ (0.12) $ (0.22)
Proforma $ (0.13) $ (0.24)
The fair value of each option and warrant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following assumptions were
used in the model in 2003 and 2002:
Dividend yield 0.00%
Risk-free yields 1.35%-3.00%
Expected volatility 100%
Option terms 1-10 years
10. CONSULTING AGREEMENT
On January 31, 2003, the Company entered into a 11 month consulting agreement
with a financial consultant (the "Consultant") for investor relations and
financial consulting services. The Company agreed to pay the consultant a fee of
$395,000 and pending satisfactory performance of the Consultant as judged by the
Company at its discretion, to issue the Consultant immediately exercisable
warrants to purchase 500,000
8
shares of the Company's common stock with an exercise price of $1.00. The
Company had also agreed to pay the consultant 10% of any funding as a result of
an introduction made by the Consultant, and 8% of the total aggregate
consideration paid for any acquisition or sale by the Company of any businesses.
The agreement was terminated on April 9, 2003. $125,000 of the total $395,000
fee was paid and the warrants were not issued.
11. SUBSEQUENT EVENTS
In April 2003, the Company issued a second short-term promissory note due June
9, 2003 for $250,000 to the same accredited investor indicated in the second
paragraph of Note 5 above. The promissory note bears interest at 15% per annum.
On April 22, 2003, the Company closed a private placement of its securities and
raised $8 million in gross proceeds. The Company sold 800 shares of newly issued
convertible preferred stock, with each preferred share initially convertible
into approximately 6,375 shares of its common stock (or an aggregate of
5,100,089 shares of common stock). Each preferred share in the offering had a
purchase price of $10,000 and included a warrant to purchase approximately 5,499
shares of the Company's common stock at a price of $1.43 per share. At closing,
$4 million of the proceeds were placed in escrow to fund any potential
redemption by the purchasers to which they may be entitled if the results from
our two pivotal Phase 3 studies for Alprox-TD are not determined to be
satisfactory by June 16, 2003. If such results are not satisfactory, the
purchasers will have the option until June 27, 2003, to redeem up to one-half of
their preferred stock (with the concurrent cancellation of up to one-half of
their warrants) out of the funds held in escrow. The Company is in the process
of evaluating this transaction and may be required to record charges related to
the contingent beneficial conversion feature of the preferred shares. These
charges may be material.
9
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(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 and injectable medications.
We intend to continue our efforts developing topical treatments including
cream, gel, patch and tape, based on the application of NexACT(R) technology to
drugs: (1) previously approved by the FDA, (2) with proven efficacy and safety
profiles, (3) with patents expiring or expired and (4) with proven market track
records and potential.
We are focusing our application of the NexACT(R) technology to Alprox-TD(R)
cream for the treatment of male erectile dysfunction ("ED"). We are also
developing Femprox(R) cream for female sexual arousal disorder ("FSAD"). We have
explored the application of the NexACT(R) technology to other drug compounds and
delivery systems, and are in the early stages of developing new topical
treatments for nail fungus, premature ejaculation, urinary incontinence, wound
healing, and 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, moderate or severe ED. Our clinical studies have demonstrated that
NexACT(R) enhancers promote the rapid absorption of alprostadil and improve
clinical responses. In December 2002, we completed our two pivotal Phase 3
studies for Alprox-TD(R), which tested over 1,400 patients at 82 sites
throughout the U.S. The two pivotal studies were randomized, double-blind,
placebo-controlled, and designed to confirm the efficacy and safety of
Alprox-TD(R) in patients with various degrees of ED. We are currently reviewing
and analyzing the data from the two pivotal studies and anticipate announcing
the preliminary results during the second quarter of 2003.
10
In March 2002, we initiated a Phase 3 open-label study for Alprox-TD(R).
The purpose of the new study was to confirm the safety of Alprox-TD(R) on a
longer term basis and included new patients as well as those who completed
testing in one of the two pivotal Phase 3 studies and elected to continue using
Alprox-TD(R) for an additional period. In November 2002, we halted the
open-label study of Alprox-TD(R) due to FDA concerns about results of our
26-week transgenic mice study. In January 2003, we met with the FDA and
successfully addressed their issues regarding the results of the transgenic mice
study and in February 2003, we were cleared by the FDA to continue with the
open-label study of Alprox-TD(R). However, it remains to be determined by the
FDA if any data from the halted study can be used for our filing of the New Drug
Application ("NDA") for Alprox-TD(R). Assuming that we do not include the data
from the halted study and that we have financing to initiate a new open-label
study during the second half of 2003, we anticipate that we will file the NDA
during the first half of 2004. We have previously been informed by the FDA that
completion of the open-label study is not a prerequisite for our NDA submission;
however, it is possible that we may not have successful clinical results or
receive FDA approval on a timely basis, if at all.
In April 2002, Alprox-TD(R) was launched in Hong Kong under the Befar(R)
trademark. The product, which has been selling in China since October 2001, is
manufactured and marketed by a local affiliate of Vergemont International
Limited, our Asian licensee. We receive from our Asian licensee royalty payments
and payments for manufacturing supplies in connection with the distribution of
Befar(R) in China and will receive such payments in other Asian markets once
Befar(R) is approved for marketing in such other markets. Befar(R), 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. In December 2002, our Asian licensee entered into a
licensing agreement with CJ Corporation, one of the five largest pharmaceutical
companies in South Korea. Pursuant to the terms of the agreement, CJ Corporation
will develop, file for regulatory approval, market and distribute Befar(R) in
South Korea. Our Asian licensee also has an NDA pending with the Health Science
Authority for approval to market the product in Singapore.
Femprox(R) is an alprostadil-based cream product intended for the treatment
of FSAD. We have completed the testing of 98 patients for a Phase 2 clinical
study with Femprox(R). This multi-center at home use study is randomized,
double-blind, placebo-controlled, and designed to investigate the efficacy and
safety of the Femprox(R) cream in pre-menopausal women diagnosed with FSAD. We
intend to continue with the clinical development of Femprox(R) pending the
availability of financing and/or a partnering agreement.
We are working with various pharmaceutical companies to explore the
introduction of NexACT(R) into their existing drugs as a means of developing new
patient-friendly topical products and extending patent lifespans. In August
2002, we entered into a research and 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(R) technology. We
received an upfront payment of 10 million Japanese Yen (approximately $90,000)
with future periodic payments of up to 40 million Japanese Yen (approximately
$360,000) to be made based on the achievement of certain development milestones.
We will also retain the right to manufacture and commercialize the new product
worldwide except in Japan. We anticipate that we will enter into additional R&D
agreements during 2003 but we cannot assure you that we will be able to conclude
any arrangement on a timely basis, if at all, or on terms acceptable to us.
Patents.
We have nine U.S. patents either acquired or received out of a series of
patent applications that we have filed in connection with our NexACT(R)
technology and our NexACT-based products under development, such as Alprox-TD(R)
, Femprox(R), and our non-steroidal anti-inflammatory cream. To further
strengthen our global patent position on our proprietary products under
development, and to expand the
11
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 nine U.S. patents issued for NexACT(R)
technology and/or our NexACT-based products under development, and the year of
expiration for each patent:
Patent Name Expiration Date
- ----------- ---------------
Topical Compositions Containing Prostaglandin E1 2019
Prostaglandin Composition and Methods of Treatment of Male ED 2020
Compositions and Methods for Amelioration of Human Female Sexual Dysfunction 2017
Topical Compositions for PGE1 Delivery 2017
Topical Compositions for Non-Steroidal Anti-Inflammatory Drug Delivery 2017
Biodegradable Absorption Enhancers 2009
Biodegradable Absorption Enhancers 2008
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(R) cream utilizing the NexACT(R) technology, 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
12
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 March 31 of
2003 and of 2002.
Revenues. We recorded $1,713 in revenue during the first quarter of 2003 as
compared to $45,281 during the same period in 2002. The 2003 revenues include
royalty on sales received from our Asian licensee. We received only royalty
revenue in the first quarter 2003 as compared to 2002 when we received royalty
revenue and revenue from sales of manufacturing supplies to our Asian licensee.
The royalty revenue decreased by $16,750 because our Asian licensee had reduced
sales in the first quarter 2003 as compared to 2002 as a result of an economic
downturn in Asia and as such had sufficient inventory of the manufacturing
supplies during the first quarter of 2003 and therefore, made no purchases from
us.
Cost of Products Sold. Our cost of products sold was nil during the first
quarter of 2003 and $19,068 during the same period in 2002. Our Asian licensee
had sufficient inventory of the manufacturing supplies during the first quarter
of 2003 and so, made no purchases from us.
Research and Development Expenses. Our research and development expenses
for the first quarter of 2003 and 2002 were $1,855,334 and $4,248,587,
respectively. Research and development expenses attributable to Alprox-TD(R) and
Femprox(R) in the first quarter of 2003 were $741,957 and nil, respectively, as
compared to $2,852,735 and $174,094, respectively during the same period in
2002. The decrease is attributable to the completion of the two pivotal Phase 3
trials for Alprox-TD(R) in 2002 and the reduction in expenditures and
non-essential personnel as discussed in Liquidity and Capital Resources. In
2003, we expect that total research and development spending will decrease with
the completion of the two Phase 3 pivotal studies for Alprox-TD(R). We
anticipate increasing our efforts and resources on the application of the
NexACT(R) technology to other drug compounds and delivery systems for the
development of new products.
General and Administrative Expenses. Our general and administrative
expenses were $1,235,046 during the first quarter of 2003 as compared to
$1,414,729 during the same period in 2002. The decrease is largely attributable
to our cash conservation program implemented in November 2002. Under this
program, we implemented a significant reduction in expenses and non-essential
personnel and allocated our remaining cash reserves for our operational
requirements at the reduced level. We expect that total general and
administrative spending for 2003 will decrease as compared to 2002 with the
reduction in expenditures and non-essential personnel as discussed in Liquidity
and Capital Resources.
Interest Income. We had interest expense of $253,125 during the first
quarter of 2003, as compared to interest income of $40,533 during the same
period in 2002. 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 $3,451,327 or $.12 per share for the first
quarter of 2003, as compared to a loss of $5,578,848 or $0.22 per share for the
same period in 2002. The decrease in net loss is primarily attributable to the
completion of the two pivotal Phase 3 trials for Alprox-TD(R) in 2002 and a
significant reduction in expenses and non-essential personnel under our cash
conservation program implemented in November 2002.
13
Liquidity and Capital Resources.
We have experienced net losses and negative cash flow from operations each
year since our inception. Through March 31, 2003, we had an accumulated deficit
of $71,439,296. 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 November 2002 we implemented a cash conservation program, which included
a significant reduction in expenses and non-essential personnel and allocated
our remaining cash reserves for our operational requirements at the reduced
level. At March 31, 2003, we had cash and cash equivalents, certificates of
deposit and investments in marketable securities of $205,089 as compared to
$1,574,944 at December 31, 2002.
As a result of our losses to date, working capital deficiency and
accumulated deficit, there is substantial doubt as to our ability to continue as
a going concern for a reasonable period of time, and, accordingly, our
independent accountants have modified their report on our December 31, 2002
Consolidated financial statements included in our annual report on Form 10-K in
the form of an explanatory paragraph describing the events that have given rise
to this uncertainty. Our continuation is based on our ability to generate or
obtain sufficient cash to meet our obligations on a timely basis and ultimately
to attain profitable operations. Our independent auditors' going concern
qualification may make it more difficult for us to obtain additional funding to
meet our obligations.
In January and February 2003, we issued two short-term promissory notes,
which totaled $600,000, to one accredited investor. These promissory notes bore
interest at 12% per annum and were convertible at the noteholder's option, into
our securities at such time as we closed a private placement of our securities.
On March 21, 2003, we closed a private placement of shares of our common stock
at $1.50 per share. For each share purchased, the investors received a 3-year
warrant to purchase three-quarters (3/4) of a share of common stock at an
exercise price of $2.00 per share. The noteholder elected to convert the
outstanding $614,064 in principal and interest due into 409,376 shares of our
common stock and 307,032 warrants to purchase shares of our common stock.
On March 21, 2003, the Company closed a private placement of its common
stock at $1.50 per share. Pursuant to the private placement agreement, we issued
a total of 210,000 shares and 157,500 three-year warrants to purchase shares of
our common stock at $2.00 per share to three accredited investors and received
approximately $315,000 in gross proceeds.
On February 4, 2003, we raised $533,489 in interim financing from the
exercise of 389,408 warrants to purchase shares of our common stock at an
exercise price of $1.37 per share. The warrants exercised were issued in 2002 in
connection with the issuance of convertible notes secured by a mortgage on our
manufacturing facility in East Windsor, NJ. In exchange for the early exercise
of these warrants, we agreed to reduce the conversion price of the convertible
notes from $4.08 to $2.75 per share.
In March 2003, we issued a short-term promissory note for $500,000 to an
accredited investor. This promissory note, which was due on May 4, 2003, bore
interest at 15% per annum and provided for two-year warrants to purchase 50,000
shares of our common stock, at an exercise price of $2.00 per share. In April
2003, we issued a second short-term promissory note for $250,000 to the same
accredited investor. The promissory note, which is due on June 8, 2003, bears
interest at 15% per annum. The due date of the initial promissory note was
extended one month on May 4, 2003 to June 4, 2003 at an increased interest rate
of 18%. On May 9, 2003, the Company repaid $250,000 of the initial $500,000
promissory note, leaving a remaining principal balance due of $250,000.
On April 22, 2003, we closed a private placement of our securities and
raised $8 million in gross proceeds. We sold 800 shares of newly issued
convertible preferred stock, with each preferred share
14
initially convertible into approximately 6,375 shares of its common stock (or an
aggregate of 5,100,089 shares of common stock). Each preferred share had a
purchase price of $10,000 and included a warrant to purchase approximately 5,499
shares of our common stock at a price of $1.43 per share. At closing, $4 million
of the proceeds were placed in escrow to fund any potential redemption by the
purchasers to which they may be entitled if the results from our two pivotal
Phase 3 studies for Alprox-TD(R) are not determined to be satisfactory by June
16, 2003. If such results are not satisfactory, the purchasers will have the
option until June 27, 2003 to redeem up to one-half of their preferred stock
(with the concurrent cancellation of up to one-half of their warrants) out of
the funds held in escrow.
As of April 30, 2003, we had approximately $900,000 of cash and our average
monthly "burn rate" is approximately $600,000 per month. We anticipate that, if
we are able to obtain satisfactory results for Alprox-TD(R) by June 16, 2003,
the additional $4 million to be released from escrow will enable us to continue
operating through October 2003.
To date, we have spent approximately $61.3 million on the Alprox-TD(R)
development program, and anticipate that through NDA submission during the first
half of 2004, we will require an additional $15 million. Given our current level
of cash reserves, we will not be able to fund the development of Alprox-TD(R)
through the NDA submission unless we raise additional cash reserves through
financing or partnering agreements. If we are successful in entering into
partnering agreements for Alprox-TD(R), we anticipate that we will receive
significant milestone payments, which we will use to pay for the projected
development expenses through the NDA submission, including the open label study
of Alprox-TD(R). If we are not able to enter into a licensing agreement for
Alprox-TD(R) or raise additional financing, we believe that we will have to
discontinue the development of this product. Since we cannot predict the actions
of the FDA, the level of other research and development activities we may be
engaged in, and our ability to enter into partnering agreements, we cannot
accurately predict the expenditure required for the period between NDA
submission of Alprox-TD(R) and its commercialization.
We have spent approximately $7.5 million in total for the land, building
and GMP development related to our East Windsor manufacturing facility and
estimate that we will spend an additional $500,000 prior to completion of GMP
compliance development for the facility. To date, we have spent $7.5 million on
the Femprox(R) and other NexACT(R)-based development programs. We intend to
initiate additional research and development activities for these products
pending the availability of financing or through partnering arrangements.
In February 2001, we entered into a financial arrangement with GE Capital
Corporation for a line of credit, which provided for the financing of equipment
(i) for our new East Windsor, NJ manufacturing facility and (ii) for our
expanded corporate and laboratory facilities in Robbinsville, NJ. Equipment
financed through this facility has been in the form of a 42 month capital lease.
The credit line expired in March 2002, and as of March 31, 2003, there was an
outstanding balance due GE of $648,190 under this facility, payable in monthly
installments through various dates in 2004. In January 2002, GE approved a
second credit line, which provides for the financing of up to $3 million of
equipment and expired on December 31, 2002. During 2002, we accessed $1,111,427
of the credit line. As of March 31, 2003, there was an outstanding balance due
GE of $916,527 under January 2002 facility, which is payable in 42 monthly
installments from date of take-down.
Critical Accounting Estimates
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 in the Notes to our December 31, 2002 Consolidated
Financial Statements, includes a summary of the significant accounting policies
and methods used in the preparation of our Consolidated Financial Statements.
15
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
our management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. Our accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements. Actual results could differ from these estimates. The following is a
brief description of the more significant accounting policies and related
estimate methods that we follow:
Revenue recognition -- Revenues from product sales are recognized upon
delivery of products to customers, less allowances for returns and discounts.
Royalty revenue is recognized upon the sale of the related products, provided
the royalty amounts are fixed or determinable and the amounts are considered
collectible. Revenues earned under research contracts 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.
Critical Estimate: In calculating the progress made toward completion of a
research contract, we must compare costs incurred to date to the total estimated
cost of the project. We estimate the cost of any given project based on our past
experience in product development as well as the past experience of our research
staff in their areas of expertise. Underestimating the total cost of a research
contract may cause us to accelerate the revenue recognized under such contract.
Conversely, overestimating the cost may cause us to delay revenue recognized.
Long-lived assets -- We review for the impairment of long-lived assets
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition are less than its carrying amount. If such assets are
considered impaired, the amount of the impairment loss recognized is measured as
the amount by which the carrying value of the asset exceeds the fair value of
the asset, fair value being determined based upon discounted cash flows or
appraised values, depending on the nature of the asset. We have not identified
any such impairment losses.
Critical Estimate: Estimated undiscounted future cash flows are based on
sales projections for our products under development for which the long-lived
assets are used. In 2002, we performed a review for impairment of our
manufacturing facility based on projections of sales of our product candidates,
for which the facility is anticipated to be ultimately utilized. Overestimating
the future cash flows resulting from the commercialization of Alprox TD(R) may
lead to overstating the carrying value of the manufacturing facility by not
identifying an impairment loss.
Income Taxes -- In preparing our financial statements, we make estimates of
our current tax exposure and temporary differences resulting from timing
differences for reporting items for book and tax purposes. We recognize deferred
taxes by the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for
differences between the financial statement and tax bases of assets and
liabilities at enacted statutory tax rates in effect for the years in which the
differences are expected to reverse. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date. In addition, valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Critical Estimate: In consideration of our accumulated losses and lack of
historical ability to generate taxable income to utilize our deferred tax
assets, we have estimated that we will not be able to
16
realize any benefit from our temporary differences and have recorded a full
valuation allowance. If we become profitable in the future at levels which cause
management to conclude that it is more likely than not that we will realize all
or a portion of the net operating loss carry-forward, we would immediately
record the estimated net realized value of the deferred tax asset at that time
and would then provide for income taxes at a rate equal to our combined federal
and state effective rates, which would be approximately 40% under current tax
laws. Subsequent revisions to the estimated net realizable value of the deferred
tax asset could cause our provision for income taxes to vary significantly from
period to period.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to our exposures to market risk since
December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date 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.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
There have been two complaints filed against the Company by former employees who
were laid off in November 2002.
The first was filed with the Superior court of New Jersey on March 22, 2003 by
four employees against the Company, Y. Joseph Mo, and Administaff (the
co-employer who provides the Company's benefits), claiming their termination was
due to age discrimination and seeking unspecified damages. This complaint is
covered by a labor insurance policy the Company maintains through Administaff
and the insurance company has appointed counsel.
The second was filed with the Superior court of New Jersey on April 1, 2003 by
one of the above four employees against the Company for an unspecified bonus
amount that he believes he should have received for completing the construction
of the Company's East Windsor facility. The Company is in the process of
engaging counsel.
17
ITEM 2. Changes in Securities and Use of Proceeds.
In January and February 2003, the Company issued two short-term promissory
notes, which totaled $600,000, to an accredited investor. These promissory notes
bore interest at 12% per annum and were convertible at the noteholder's option,
into the Company's securities at such time as it closed a private placement of
our securities. On March 21, 2003, the Company closed a private placement of its
shares of common stock at $1.50 per share. For each share purchased, the
investors received a 3-year warrant to purchase three-quarters (3/4 ) of a share
of common stock at an exercise price of $2.00 per share. The noteholder elected
to convert the outstanding $614,064 in principal and interest due into 409,376
shares of our common stock and 307,032 warrants to purchase shares of our common
stock. Pursuant to the private placement agreement, the Company issued a total
of 210,000 shares and 157,500 three-year warrants to purchase shares of its
common stock at $2.00 per share to three accredited investors and received
approximately $315,000 in gross proceeds. The notes, warrants, and shares of
common stock were issued pursuant to an exemption provided by Section 4(2) of
the Securities Act of 1933. We received approximately $900,000 in gross
proceeds, which have been and are being used to fund general corporate overhead
expenses and ongoing U.S. clinical studies.
On February 4, 2003, the Company raised $533,489 in interim financing from the
exercise of 389,408 warrants to purchase shares of its common stock at an
exercise price of $1.37 per share. The warrants exercised were issued in 2002 in
connection with the issuance of convertible notes secured by a mortgage on our
manufacturing facility in East Windsor, NJ. In exchange for the early exercise
of these warrants, the Company agreed to reduce the conversion price of the
convertible notes from $4.08 to $2.75 per share. The warrants were issued
pursuant to an exemption provided by Section 4(2) of the Securities Act of 1933.
We received $533,489 million in gross proceeds, which have been and are being
used to fund general corporate overhead expenses and ongoing U.S. clinical
studies.
In March 2003, the Company issued a short-term promissory note for $500,000 to
an accredited investor. This promissory note, which was due on May 4, 2003, bore
interest at 15% per annum and provides for two-year warrants to purchase 50,000
shares of the Company's common stock, at an exercise price of $2.00 per share.
The Note and warrants were issued pursuant to an exemption provided by Section
4(2) of the Securities Act of 1933. We received $500,000 in gross proceeds,
which have been and are being used to fund general corporate overhead expenses
and ongoing U.S. clinical studies.
In April 2003, the Company issued a second short-term promissory note due June
9, 2003 for $250,000 to the same accredited investor indicated in the previous
paragraph. The promissory note bears interest at 15% per annum. The note was
issued pursuant to an exemption provided by Section 4(2) of the Securities Act
of 1933. We received $250,000 in gross proceeds, which have been and are being
used to fund general corporate overhead expenses and ongoing U.S. clinical
studies
On April 21, 2003, the Company sold 800 shares of newly issued convertible
preferred stock, with each preferred share convertible into approximately 6,375
shares of its common stock. Each preferred share in the offering had a purchase
price of $10,000 and includes a warrant to purchase approximately 5,499 shares
of the Company's common stock at a price of $1.4322 per share. The Company
received $8 million in gross proceeds. At closing, $4 million of the proceeds
were placed in escrow to fund any potential redemption by the purchasers to
which they may be entitled if the results from the Company two pivotal Phase 3
studies for Alprox-TD are not determined to be satisfactory by June 16, 2003. If
such results are not satisfactory, the purchasers will have the option until
June 27, 2003, to redeem up to one-half of their preferred stock (with the
concurrent cancellation of up to one-half of their warrants) utilizing the funds
held
18
in escrow. The preferred stock and warrants were issued pursuant to an exemption
provided by Section 4(2) of the Securities Act of 1933. The proceeds have been
and are being used to fund general corporate overhead expenses and ongoing U.S.
clinical studies.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Amended and Restated By-laws of the Company
4.1 Certificate of Designation of the Company's Series B 8% Cumulative
Convertible Preferred Stock
4.2 Form of Warrant dated April 21, 2003
10.1 Preferred Stock and Warrant Purchase Agreement, dated as of April 21,
2003, between the Company and the Purchasers identified on Schedule 1
to the Purchase Agreement
10.2 Investor Rights Agreement, dated as of April 21, 2003, between the
Company and the Purchasers identified on Schedule 1 to the Investor
Rights Agreement
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 February 6, 2003 in connection with the warrant
exercise by the note holders of the Convertible Notes.
19
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: May 14, 2003 /s/ Vivian H. Liu
-----------------------------------
Vivian H. Liu
Vice President, Acting Chief Financial
Officer and Secretary
20
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: May 14, 2003
/s/ Y. Joseph Mo
------------------------------
Y. Joseph Mo
Chief Executive Officer
21
CERTIFICATION
-------------
I, Vivian H. Liu, Acting 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: May 14, 2003
/s/ Vivian H. Liu
------------------------------
Vivian H. Liu
Acting Chief Financial Officer
22
EXHIBIT INDEX
-------------
3.1 Amended and Restated By-laws of the Company
4.1 Certificate of Designation of the Company's Series B 8% Cumulative
Convertible Preferred Stock
4.2 Form of Warrant dated April 21, 2003
10.1 Preferred Stock and Warrant Purchase Agreement, dated as of April 21,
2003, between the Company and the Purchasers identified on Schedule 1
to the Purchase Agreement
10.2 Investor Rights Agreement, dated as of April 21, 2003, between the
Company and the Purchasers identified on Schedule 1 to the Investor
Rights Agreement
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
23