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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
350 Corporate Boulevard, Robbinsville, NJ 08691
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(Address of Principal Executive Offices)
(609) 208-9688
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
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 August 8, 2003,
33,785,323 shares of Common Stock, par value $0.001 per share, were outstanding.
Table of Contents
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet at June 30, 2003 and
December 31, 2002 ....................................................................... 3
Unaudited Condensed Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 2003 and June 30, 2002......................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and June 30, 2002...........................................................5
Notes to Condensed Consolidated Unaudited Financial Statements............................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....13
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................22
Item 4. Controls and Procedures..................................................................22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................22
Item 2. Changes in Securities and Use of Proceeds................................................22
Item 4. Submission to a Vote of Security Holders.................................................23
Item 6. Exhibits and Reports on Form 8-K.........................................................23
Signature..................................................................................................25
Exhibit Index..............................................................................................26
2
NexMed, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
June 30, December 31,
2002 2003
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 1,545,692 $ 1,035,149
Marketable Securities -- 539,795
Notes Receivable, current 169,126 198,348
Prepaid expenses and other assets, net 563,369 498,042
------------ ------------
Total current assets 2,278,187 2,271,334
Fixed assets, net 11,090,118 11,507,564
Debt Issuance cost 259,965 312,888
Notes Receivable -- 48,341
------------ ------------
Total assets $ 13,628,270 $ 14,140,127
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,050,193 $ 4,874,441
Capital lease obligation - current portion 638,554 609,676
------------ ------------
Total current liabilities 2,688,747 5,484,117
------------ ------------
Long Term liabilities:
Convertible note payable, net of discount of
$2,116,848 and $669,693 2,383,152 4,330,307
Capital lease obligation 775,546 1,102,211
------------ ------------
Total Liabilities 5,847,445 10,916,635
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000
shares authorized, 775 and none issued
and outstanding, respectively 1 --
Common stock, $.001 par value, 80,000,000
shares authorized, 30,030,537 and 28,293,719 issued
and outstanding, respectively 30,030 28,294
Additional paid-in capital 83,187,661 71,381,751
Accumulated deficit (75,412,543) (67,987,969)
Deferred compensation (28,050) (97,562)
Unrealized loss on marketable securities -- (101,157)
Cumulative translation adjustments 3,726 135
------------ ------------
Total stockholders' equity 7,780,825 3,223,492
------------ ------------
Total liabilities and stockholders' equity $ 13,628,270 $ 14,140,127
============ ============
3
See notes to unaudited condensed consolidated financial statements.
NexMed, Inc.
Condensed Consolidated Statement of Operations
and Comprehensive Income (Unaudited)
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS
JUNE 30, ENDED JUNE 30,
---------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
Revenue
Product sales and royalties $ 2,684 $ 66,844 $ 971 $ 21,563
------------ ------------ ------------ ------------
Total revenues 2,684 66,844 971 21,563
------------ ------------ ------------ ------------
Operating expenses
Cost of product sales -- 27,033 -- 7,965
General and administrative 2,543,117 2,954,742 1,308,071 1,540,013
Research and development 3,961,932 9,646,814 2,106,598 5,398,227
------------ ------------ ------------ ------------
Total operating expenses 6,505,049 12,628,589 3,414,669 6,946,205
------------ ------------ ------------ ------------
Loss from operations (6,502,365) (12,561,745) (3,413,698) (6,924,642)
Other Income (expense)
Interest income (expense), net (812,235) 23,069 (559,110) (17,464)
Other income (expense) (109,974) 18,725 (439) 1,003
------------ ------------ ------------ ------------
Total Other income (expense) (922,209) 41,794 (559,549) (16,461)
------------ ------------ ------------ ------------
Net loss ($7,424,574) ($12,519,951) ($3,973,247) ($6,941,103)
------------ ------------ ------------ ------------
Deemed dividend to preferred shareholders
from beneficial conversion feature (2,942,656) -- (2,942,656) --
Preferred dividend (121,841) -- (121,841) --
------------ ------------ ------------ ------------
Net loss applicable to common stock ($10,489,071) ($12,519,951) ($7,037,744) ($6,941,103)
------------ ------------ ------------ ------------
Other comprehensive income
Foreign currency translation adjustments 3,591 (350) 82 (54)
Unrealized loss on available-for-sale securities -- (54,177) -- (35,626)
------------ ------------ ------------ ------------
Total other comprehensive income 3,591 (54,527) 82 (35,680)
------------ ------------ ------------ ------------
Comprehensive Loss ($ 7,420,983) ($12,574,478) ($ 3,973,165) ($ 6,976,783)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.36) $ (0.49) $ (0.24) $ (0.27)
------------ ------------ ------------ ------------
Weighted average common shares outstanding
used for basic and diluted loss per share 29,142,836 25,586,617 29,674,173 25,630,815
------------ ------------ ------------ ------------
See notes to unaudited condensed consolidated financial statements
4
NexMed, Inc.
Condensed Consolidated Statement of Cash Flows (Unaudited)
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities
Net loss $ (7,424,574) $(12,519,951)
Adjustments to reconcile net loss to net cash from operating
activities
Depreciation and amortization 608,906 362,825
Non-cash interest, amortization of debt discount and
deferred financing costs 831,542 12,336
Non-cash insurance expense 3,501 --
Non-cash compensation expense 267,080 38,598
Net loss on sale of marketable securities 94,824 --
Loss on disposal of assets 30,150 --
(Increase)/decrease in prepaid expenses and other assets (65,327) 157,205
(Decrease)/Increase in account payable
and accrued expenses (2,946,089) (165,399)
------------ ------------
Net cash used in operating activities (8,599,987) (12,114,386)
------------ ------------
Cash flow from investing activities
Proceeds (issuance of) from notes receivable 77,563 (284,609)
Capital expenditures (221,229) (2,770,414)
Purchase of marketable securities -- (1,210,446)
Purchase of certificates of deposit -- (384,000)
Sales of marketable securities 545,200 2,338,725
Sales of certificates of deposit -- 3,272,000
------------ ------------
Net cash provided by (used in) investing activities 401,534 961,256
------------ ------------
Cash flow from financing activities
Issuance of common stock, net of offering
costs 956,569 5,113,777
Issuance of preferred stock, net of offering
costs 7,446,623 --
Issuance of mortgage and notes payable 1,550,000 4,696,399
Repayments of notes payable (950,000) --
Repayment of capital lease obligations (297,787) (140,256)
------------ ------------
Net cash from financing activities 8,705,405 9,669,920
------------ ------------
Net increase (decrease) in cash 506,952 (1,483,210)
Effect of foreign exchange on cash 3,591 (350)
------------ ------------
Cash, beginning of period $ 1,035,149 $ 12,913,803
------------ ------------
Cash, end of period $ 1,545,692 $ 11,430,243
============ ============
See notes to unaudited condensed consolidated financial statements
5
NEXMED, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 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 $75,412,543 at June 30, 2003 and while
it expects that Alprox-TD(R) clinical development expenses for the year 2003
will be significantly less than 2002 due to the completion of the two Phase 3
pivotal studies for Alprox-TD(R) in 2002, the Company still expects to incur
additional losses in 2003. 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 to be 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.
2. 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 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.
6
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 SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
Net loss applicable to common stock $(10,489,071) $12,519,951) ($7,037,744) $(6,941,103)
Add: Stock-based compensation expense included
in reported net loss 267,080 38,598 142,483 13,489
Deduct: Total stock-based compensation expense determined
under fair-value based method for all awards (1,130,078) (1,158,711) (581,414) (585,084)
------------ ------------ ------------ ------------
Proforma net loss applicable to common stock $(11,352,069) $(13,640,064) $ (7,476,675) $ (7,512,698)
============ ============ ============ ============
Basic and diluted loss per common share:
As reported $ (0.36) $ (0.49) $ (0.24) $ (0.27)
------------ ------------ ------------ ------------
Proforma $ (0.39) $ (0.53) $ (0.25) $ (0.29)
============ ============ ============ ============
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
3. LOSS PER SHARE
At June 30, 2003 and 2002, respectively, options to acquire 5,083,905 and
4,081,300 shares of common stock with exercise prices ranging from $.55 to
$16.25 per share, convertible securities convertible into 7,236,629 and
1,225,490 shares of common stock and warrants to acquire 6,568,858 and 3,390,399
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.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") 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
7
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.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This standard amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement is effective prospectively for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. SFAS No. 149 will not have an impact upon initial adoption and is not
expected to have a material effect on the Company's results of operations,
financial position and cash flows.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables," related to the
timing of revenue recognition for arrangements in which goods or services or
both are delivered separately in a bundled sales arrangement. The EITF requires
that when the deliverables included in this type of arrangement meet certain
criteria they should be accounted for separately as separate units of
accounting. This may result in a difference in the timing of revenue recognition
but will not result in a change in the total amount of revenue recognized in a
bundled sales arrangement. The allocation of revenue to the separate
deliverables is based on the relative fair value of each item. If the fair value
is not available for the delivered items then the residual method must be used.
This method requires that the amount allocated to the undelivered items in the
arrangement is their full fair value. This would result in the discount, if any,
being allocated to the delivered items. This consensus is effective
prospectively for arrangements entered into in fiscal periods beginning after
June 15, 2003. EITF 00-21 will not have an impact upon initial adoption and is
not expected to have a material impact on the Company's ongoing results of
operations, financial position or cash flows.
In May 2003, the FASB issued Statement No. 150 ("FAS 150"), Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. FAS 150 specifies that instruments within its scope embody obligations
of the issuer and that, therefore, the issuer must classify them as liabilities.
FAS 150 requires issuers to classify as liabilities the following three types of
freestanding financial instruments: (1) mandatorily redeemable financial
instruments; (2) obligations to repurchase the issuer's equity shares by
transferring assets and (3) certain obligations to issue a variable number of
shares. FAS 150 defines a "freestanding financial instrument" as a financial
instrument that (1) is entered into separately and apart from any of the
entity's other financial instruments or equity transactions or (2) is entered
into in conjunction with some other transaction and can be legally detached and
exercised on a separate basis. For all financial instruments entered into or
modified after May 31, 2003, FAS 150 is effective immediately. For all other
instruments of public companies, FAS 150 goes into effect at the beginning of
the first interim period beginning after June 15, 2003. For contracts that were
created or modified before May 31, 2003 and still exist at the beginning of the
first interim period beginning after June 15, 2003, entities should record the
transition to FAS 150 by reporting the cumulative effect of a change in an
accounting principle. FAS 150 prohibits entities from restating financial
statements for earlier years presented. The Company does not expect the adoption
of FAS 150 to have a material impact on its financial statements.
8
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. NOTES 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. 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. 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 and July 2003 placements, the conversion price of the
Note has been further reduced to $1.96 and the Company recorded an additional
discount of approximately $1,585,000, which is being amortized to interest
expense over the remaining term of the Note.
In April 2003, pursuant to the terms of the Note, the Company issued 102,179
shares of its common stock as payment of $124,658 in interest on the Note.
9
For the six months ended June 30, 2003, the Company recorded amortization of
$567,355 and $52,923 of the debt discount and closing costs respectively.
On June 17, 2003, $500,000 of the convertible note was converted to common stock
at the conversion price of $2.41. On June 30, 2003, the principal balance
remaining on the note was $4,500,000. Furthermore, on July 14, 2003 an
additional $650,000 of the convertible note was converted to common stock at the
conversion price of $1.96. On August 8, 2003, the principal balance remaining on
the Note was $3,850,000.
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 and the noteholder
elected to convert the outstanding $600,000 in principal and $14,064 in interest
due into 409,376 shares of our common stock and 307,032 warrants to purchase
shares of our common stock.
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 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. 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 and the remaining balance due of $250,000 was repaid on June 17,
2003.
In April 2003 and June 2003, the Company issued two short-term promissory notes
due June 9, 2003 for $250,000 and $200,000 to an accredited investor. The
promissory notes bore interest at 15% per annum. The principal of both notes was
repaid on June 17, 2003.
7. CAPITAL LEASE OBLIGATIONS
In February 2001, the Company entered into a financial arrangement with GE
Capital Corporation for a line of credit, which provided for the financing of up
to $5 million of equipment (i) for its new East Windsor, NJ manufacturing
facility and (ii) for its expanded corporate and laboratory facilities in
Robbinsville, NJ. Equipment financed through this facility has been in the form
of a 42 month capital lease. As of December 31, 2001, the Company had financed
$1,113,459 of equipment purchases under the GE credit line. The $5 million
credit line expired in March 2002, and as of June 30, 2003, there was an
outstanding balance due GE of $569,910 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 June 30, 2003, there was an outstanding balance due GE
of $844,190 under the January 2002 facility, which is payable in 42 monthly
installments from date of take-down. This credit facility expired on December
31, 2002.
10
In July 2003, GE approved a new credit line, which provides for the financing of
up to $1.85 million of equipment. The credit line is payable in 36 monthly
installments from the date of take down. The credit facility expires in July
2004. No amounts have been drawn under this new credit line.
8 SALE OF PREFERRED STOCK
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
Series B convertible preferred stock at a per share price of $10,000. The Series
B Preferred pays annual cumulative dividends of 8%. The preferred shareholders
have the same voting rights and powers as common shareholders and can convert
their preferred shares to common stock at any time. Each preferred share is
initially convertible into approximately 6,375 shares of its common stock (or an
aggregate of 5,100,089 shares of common stock) and included a warrant to
purchase approximately 5,499 shares of the Company's common stock at a price of
$1.43 per share. The Company has valued the warrants using the Black-Scholes
pricing model and allocated $3,037,518 of the proceeds from the preferred
offering, based upon the relative fair value of the Preferred shares and the
Warrants, to the Warrants. Assumptions utilized in the Black-Scholes model to
value the Warrants were: exercise price of $1.43 per share; fair value of the
Company's common stock on date of issuance of $1.55 per share; volatility of
100%; term of four years and a risk-free interest rate of 2.79%.
The allocated value of the convertible preferred stock contained a beneficial
conversion feature calculated based upon the difference between the effective
conversion price of the proceeds allocated to the convertible preferred stock,
and the fair market value of the common stock on the date of issuance. The
Company recorded a deemed dividend to the preferred shareholders of $2,942,656
representing the value of the beneficial conversion feature of the preferred
stock.
On July,1 ,2003, pursuant to the terms of the preferred stock, the Company
issued 34,946 shares of its common stock as payment of a dividend of $121,841
which was included in outstanding payables at June 30, 2003.
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 were not determined
to be satisfactory by June 16, 2003. On June 12, 2003, the Company announced
satisfactory clinical results and the $4 million in escrow was released to the
Company. In June 2003, 25 shares of preferred stock were converted into common
stock at the option of the shareholders. As of June 30, 2003, 775 shares of the
preferred stock remained outstanding.
In July 2003, 20 shares of the preferred stock were converted to common stock at
the option of the shareholders. The Certificate of Designation of the preferred
stock provided that the preferred stock would be automatically converted if the
twenty trading day average closing bid price of the Company's common stock
exceeded 250% of the conversion price of the preferred stock for twenty
consecutive trading days. As a result, on August 1, the remaining 755 shares of
preferred stock and accrued dividends thereon were converted into 4,846,968
shares of common stock.
11
9. RELATED PARTY TRANSACTIONS
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 June 30, 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".
10. SUBSEQUENT EVENTS
On July 2, 2003, the Company closed a private placement of its common stock at
$3.60 per share. Pursuant to the agreement, the Company issued a total of
2,916,669 shares and 1,020,832 four-year warrants to purchase the Company's
common stock at $5.04 per share to twelve accredited investors. One third of the
warrants will be callable by the company if the market price of the Company's
common stock closes above $10.00 for seven consecutive trading days. The Company
received $10.5 million in gross proceeds.
In August 2003, we entered into an R&D agreement with a Japanese pharmaceutical
company to develop NM 20138, a new once-a-day patch treatment for bronchial
asthma. NM 20138 incorporates an off-patent anti-asthmatic drug compound and the
NexACT(R) technology. Pursuant to the terms of the agreement, we have received a
modest signing payment and will receive additional payments based on the
achievement of certain R&D milestones. We have also retained the rights to
manufacture and commercialize the new product worldwide except in Japan.
12
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
have explored the application of the NexACT(R) technology to other drug
compounds and delivery systems, and are in various stages of developing new
topical treatments for female sexual arousal disorder ("FSAD"), 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. On June 12, 2003
we announced positive results from our two pivotal Phase 3 studies, with data
indicating that the three dose levels of Alprox-TD(R) tested
13
were effective over placebo in each study and in the combined analysis of the
two studies. The side effects reported were mostly mild to moderate, localized
and transient.
We are currently engaged in discussions with several pharmaceutical
companies regarding a strategic marketing partnership for the Alprox-TD(R)
cream. We have accepted a term sheet offer from one of the potential partners
and have entered into contract negotiations. We anticipate that we will receive
significant milestone payments if we successfully enter into this agreement.
However, all such offers are subject to the negotiation of complex contractual
relationships, and we may not be able to negotiate such agreements on a timely
basis, if at all, or on terms acceptable to us.
The timeframe for us to complete our open-label study for Alprox-TD(R)
depends on when and if we finalize a partnering agreement for Alprox-TD(R). We
had initiated the open-label study for Alprox-TD in March 2002, in order to
confirm the safety of Alprox-TD(R) on a longer-term basis. However, 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). 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 fourth quarter of 2003, we anticipate that we will
file the NDA during the second 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 provided that the results of the open-label study are filed
within four months after 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.
We have explored the application of the NexACT(R) technology to other
drug compounds and delivery systems. The most advanced of these products is
Femprox(R), which is an alprostadil-based cream product intended for the
treatment of FSAD. We have completed one Phase 2 study for Femprox(R) and intend
to continue with its U.S. clinical development pending the availability of a
partnering agreement.
We are also 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
14
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 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. In August 2003, we
entered into an R&D agreement with a Japanese pharmaceutical company to develop
NM 20138, a new once-a-day patch treatment for bronchial asthma. NM 20138
incorporates an off-patent anti-asthmatic drug compound and the NexACT(R)
technology. Pursuant to the terms of the agreement, we have received a modest
signing payment and will receive additional payments based on the achievement of
certain R&D milestones. We have also retained the rights 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 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 E(1) 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.
15
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 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 Six Months Ended June 30 of 2003
and of 2002.
Revenues. We recorded $2,684 in revenue during the first six months of
2003 as compared to $66,844 during the same period in 2002. The 2003 revenues
consists of royalties on sales received from our Asian licensee. We received
only royalty revenue in the first half of 2003 as compared to 2002 when we
received royalty revenue and revenue from sales of manufacturing supplies to our
Asian licensee. The sales and royalty revenue decreased in 2003 because of the
local economic conditions and our Asian licensee being in the process of
changing distributors.
Cost of Products Sold. Our cost of products sold was nil during the first
six months of 2003 and $27,033 during the same period in 2002. Our Asian
licensee had sufficient inventory of the manufacturing supplies during the first
half of 2003 and so, made no purchases from us.
16
Research and Development Expenses. Our research and development expenses
for the first six months of 2003 and 2002 were $3,961,932 and $9,646,814,
respectively. Research and development expenses attributable to Alprox-TD(R) and
Femprox(R) in the first six months of 2003 were $1,820,054 and $22,467,
respectively with the balance attributable to NexACT(R) technology based
products and general overhead allocated to research and development, as compared
to $6,745,151 and $488,322, 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 December 2002 and the reduction in expenditures and
non-essential personnel implemented in November 2002. In 2003, we expect that
total research and development spending will significantly 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 $2,543,117 during the first six months of 2003 as compared to
$2,954,742 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.
Interest Income/Expense. We had interest expense of $812,235 during the
first six months of 2003, as compared to interest income of $23,069 during the
same period in 2002. The significant increase in interest expense is a result of
a reduction in our cash position, lower interest rates in the current period,
and an increase in interest expense, including amortization of note discounts,
due to borrowings under our GE Capital facility and the convertible notes issued
in June 2002.
Net Loss. The net loss was $7,424,574 for the first six months of 2003,
as compared to a loss of $12,519,951 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.
Net Loss applicable to Common Stock. The net loss applicable to common
stock was $10,489,071 or $.36 per share for the first six months of 2003, as
compared to $12,519,951 or $.49 per share for the same period in 2002. The
decrease in net loss applicable to common stock 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. The decrease resulting from
the decrease in operating expenses was partially offset by the deemed dividend
related to the beneficial conversion feature of the preferred stock as discussed
in Note 8 of the condensed consolidated financial statements..
Comparison of Results of Operations Between the Three Months Ended June 30 of
2003 and of 2002.
Revenues. We recorded $971 in revenue during the second quarter of 2003
as compared to $21,563 during the same period in 2002. The 2003 revenues consist
of royalties on sales received from our Asian licensee. We received only royalty
revenue in the first half of 2003 as compared to 2002 when we received royalty
revenue and revenue from sales of manufacturing supplies to our Asian licensee.
The sales
17
and royalty revenue decreased in 2003 because of the local economic conditions
and our Asian licensee being in the process of changing distributors.
Cost of Products Sold. Our cost of products sold was nil during the
second quarter of 2003 and $7,965 during the same period in 2002. Our Asian
licensee had sufficient inventory of the manufacturing supplies during the first
half of 2003 and so, made no purchases from us.
Research and Development Expenses. Our research and development expenses
for the second quarter of 2003 and 2002 were $2,106,598 and $5,398,227,
respectively. Research and development expenses attributable to Alprox-TD(R) and
Femprox(R) in the second quarter of 2003 were $1,078,003 and $4,235,
respectively with the balance attributable to NexACT(R) technology based
products and general overhead allocated to research and development, as compared
to $3,892,417 and $314,228, 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 implemented in November 2002. In 2003, we expect that total research
and development spending will decrease significantly 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 $1,308,071 during the second quarter of 2003 as compared to
$1,540,013 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/Expense. We had interest expense of $559,110 during the
second quarter of 2003, as compared to interest expense of $17,464 during the
same period in 2002. The increase in interest expense is a result of a reduction
in our cash position, lower interest rates in the current period, and an
increase in interest expense, including amortization of note discounts, due to
borrowings under our GE Capital facility and the convertible notes issued in
June 2002.
Net Loss. The net loss was $3,973,247 for the second quarter of 2003, as
compared to a loss of $6,941,103 for the same period in 2002. The significant
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.
Net Loss applicable to Common Stock. The net loss applicable to common
stock was $7,037,744 or $.24 per share for the second quarter of 2003, as
compared to $6,941,103 or $.27 per share for the same period in 2002. The
increase in net loss applicable to common stock is primarily attributable to the
deemed dividend related to the beneficial conversion feature of the preferred
stock as discussed in Note 8 of the condensed consolidated financial statements
which almost fully offset the decrease in operating expenses as a result of 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.
18
Liquidity and Capital Resources.
We have experienced net losses and negative cash flow from operations
each year since our inception. Through June 30, 2003, we had an accumulated
deficit of $75,412,543. Our operations have principally been financed through
private placements of equity securities and debt financing. Funds raised in past
periods should not be considered an indication of our ability to raise
additional funds in any future periods. At June 30, 2003, we had cash and cash
equivalents of $1,545,692 as compared to $1,035,149 at December 31, 2002.
As a result of our losses to date, working capital deficiency and
accumulated deficit, there is 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.
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 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) were not determined to be satisfactory by June
16, 2003. On June 12, 2003, we announced satisfactory results for Alprox-TD(R),
and the $4 million held in escrow was released to us. On August 1, the remaining
755 shares of preferred stock and accrued dividends thereon were converted into
4,846,968 shares of common stock pursuant to the terms of the Certificate of
designation of the preferred stock.
On July 2, 2003, we closed a private placement of our common stock at
$3.60 per share. Pursuant to the agreement, we issued a total of 2,916,669
shares and 1,020,832 four-year warrants to purchase our common stock at $5.04
per share to twelve accredited investors. One third of the warrants will be
callable by us if the market price of our common stock closes above $10.00 for
seven consecutive trading days. We received $10.5 million in gross proceeds.
As of August 8 2003, we had approximately $11,000,000 of cash and our
average monthly "burn rate" is approximately $750,000 per month. We anticipate
that our monthly expenses will increase with the preparation for the NDA filing
for Alprox-TD(R). However, we hope to enter into a partnering agreement for
Alprox-TD(R) before expenses, including the cost for the open label study for
Alprox-TD(R), will escalate significantly.
We are currently engaged in discussions with several pharmaceutical
companies regarding a strategic marketing partnership for the Alprox-TD(R)
cream. We have accepted a term sheet offer from one of the potential partners
and have entered into contract negotiations. We anticipate that we will receive
significant milestone payments if we successfully enter into this agreement.
However, all such offers are subject to the negotiation of complex contractual
relationships, and we may not be able to negotiate such agreements on a timely
basis, if at all, or on terms acceptable to us.
19
To date, we have spent approximately $62.4 million on the Alprox-TD(R)
development program, and anticipate that through NDA submission during the
second half of 2004, we will require an additional $15 million, approximately.
Assuming we are successful in negotiating an agreement as discussed above, we
anticipate that the significant milestone payments which we will receive upon
signing the agreement will pay for our general overhead expenses and most, if
not all, of the remaining projected expenses for Alprox-TD(R). If we are not
able to enter into a licensing agreement for Alprox-TD(R) on a timely basis, the
timeframe for our NDA filing will be delayed. 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 $9.3 million in total for the land, building,
equipment and GMP (Good Manufacturing Practices as defined by the FDA)
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 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 June 30, 2003, there was an
outstanding balance due GE of $569,910 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 June 30, 2003, there was an outstanding balance due GE
of $844,190 under the January 2002 facility, which is payable in monthly
installments through various dates in 2005. In July 2003, GE approved a new line
of credit for $1.85 million, which is payable in 36 monthly installments from
date of take-down. We have not yet drawn on this new line, but intend to utilize
this line of credit for new equipment for our manufacturing and laboratory
facilities.
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.
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.
20
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 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
21
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
The Company's management carried out an evaluation with the participation of
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 Company's disclosure controls and procedures. Based upon
that evaluation, the Chief Executive Officer and Acting Chief Financial Officer
concluded as of the end of the period covered by this Form 10-Q that the
Company's disclosure controls and procedures are effective.
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
five 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 five 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 has engaged counsel to
defend its position.
ITEM 2. Changes in Securities and Use of Proceeds.
In June 2003, the Company issued a short-term promissory note for $200,000 to an
accredited investor. The promissory note, which was due on July 2, 2003 bore
interest at 15% per annum and was repaid on June 17, 2003. The note was issued
pursuant to an exemption provided by Section 4(2) of the Securities Act of 1933.
The Company received $200,000 in gross proceeds which was used to fund general
corporate overhead expenses.
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On July 2, 2003, the Company closed a private placement of its common stock at
$3.60 per share. Pursuant to the agreement, the Company issued a total of
2,916,669 shares and four-year warrants to purchase 1,020,832 shares of its
common stock at $5.04 per share to twelve accredited investors. One third of the
warrants will be callable by the Company if the market price of its common stock
closes above $10.00 for seven consecutive trading days. The common stock and
warrants were issued pursuant to an exemption provided by Section 4(2) of the
Securities Act of 1933. The Company received $10.5 million in gross proceeds,
which have been and are being used to fund general corporate overhead expenses
and ongoing U.S. clinical studies.
ITEM 4. Submission to a Vote of Security Holders
These are the results of voting by stockholders present or represented by proxy
at our annual meeting on June 16, 2003:
Item 1. Election of Directors. The stockholders elected Martin R. Wade, III, and
Richard J. Berman and Arthur D. Emil to serve as Class I (Wade) and Class II
(Berman and Emil) directors, until the year, 2004 and 2006, respectively or
until their successors are elected:
Name of Director Votes For Votes Withheld
- ---------------- --------- --------------
Richard J. Berman 24,470,360 267,205
Arthur D. Emil 24,469,710 267,855
Martin R. Wade, III 24,474,160 263,405
Item 2. Ratification of Selection of Independent Accountants. The stockholders
ratified the Board's selection of PricewaterhouseCoopers LLP as our independent
accountants for fiscal year 2003. There were 24,464,354 votes for ratification;
38,456 votes against; 234,755 votes abstaining; and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Letter Agreement dated July 12, 2003, between NexMed, Inc. and
General Electric Capital Corporation
31.1 Chief Executive Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
23
32.2 Chief Financial Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) We filed a form 8-K on June 2, 2003 in connection with an opinion by
the Company's Nevada counsel regarding the validity of the Company's
common stock being registered pursuant to a registration statement.
We filed a Form 8-K on June 12, 2003, in connection with the
announcement of positive top-line results from our two pivotal Phase 3
studies of Alprox-TD(R) cream treatment for erectile dysfunction and
the release to the Company of funds held in escrow in connection with
our April 2003 offering of preferred stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEXMED, INC.
Date: August 12, 2003 /s/ Vivian H. Liu
---------------------- -----------------
Vivian H. Liu
Vice President, Acting Chief Financial
Officer and Secretary
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Exhibit Index
10.1 Letter Agreement dated July 12 2003, between NexMed, Inc. and
General Electric Capital Corporation
31.1 Chief Executive Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
26