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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 2003.
Commission file number 0-22245
NEXMED, INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 87-0449967
- -------------------------------- -----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
350 Corporate Boulevard, Robbinsville, NJ 08691
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(Address of Principal Executive Offices)
(609) 208-9688
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(Issuer's Telephone Number, Including Area Code)
Check whether the registrant: (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 registrant an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act):
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: as of November 12,
2003, 39,357,358 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 September 30, 2003 and
December 31, 2002 .......................................................................... 1
Unaudited Condensed Consolidated Statements of Operations for the Three Months and Nine
Months Ended September 30, 2003 and September 30, 2002...................................... 2
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and September 30, 2002................................................... 3
Notes to Condensed Consolidated Unaudited Financial Statements.............................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 19
Item 4. Controls and Procedures..................................................................... 20
Part II. OTHER INFORMATION....................................................................................
Item 1. Legal Proceedings........................................................................... 20
Item 6. Exhibits and Reports on Form 8-K............................................................ 20
Signature..................................................................................................... 22
Exhibit Index................................................................................................. 23
NexMed, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
September 30, December 31,
2003 2002
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 7,200,762 $ 1,035,149
Marketable Securities 1,501,088 539,795
Notes Receivable, current 129,465 198,348
Prepaid expenses and other assets, net 373,701 498,042
------------ ------------
Total current assets 9,205,016 2,271,334
Fixed assets, net 10,863,220 11,507,564
Debt Issuance cost 173,090 312,888
Notes Receivable -- 48,341
------------ ------------
Total assets $ 20,241,326 $ 14,140,127
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 1,161,057 $ 4,874,441
Capital lease obligation - current portion 781,274 609,676
------------ ------------
Total current liabilities 1,942,331 5,484,117
------------ ------------
Long Term liabilities:
Convertible note payable, net of discount of $2,310,680 and $669,693 1,389,320 4,330,307
Capital lease obligation 869,245 1,102,211
------------ ------------
Total Liabilities 4,200,896 10,916,635
============ ============
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued
and outstanding -- --
Common stock, $.001 par value, 80,000,000
shares authorized, 38,617,980 and 28,293,719 issued
and outstanding, respectively 38,618 28,294
Additional paid-in capital 94,621,754 71,381,751
Accumulated deficit (78,594,390) (67,987,969)
Deferred compensation (28,691) (97,562)
Accumulated Other Comprehensive income (loss) 3,139 (101,022)
------------ ------------
Total stockholders' equity 16,040,430 3,223,492
------------ ------------
Total liabilities and stockholders' equity $ 20,241,326 $ 14,140,127
============ ============
See notes to unaudited condensed consolidated financial statements.
1
NexMed, Inc.
Condensed Consolidated Statement of Operations
and Comprehensive Income (Unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue $ 64,552 $ 78,175 $ 67,236 $ 145,019
------------ ------------ ------------ ------------
Operating expenses
Cost of product sales -- -- -- 27,033
General and administrative 1,225,359 1,238,262 3,768,476 4,193,004
Research and development 1,687,459 5,582,531 5,649,391 15,229,345
------------ ------------ ------------ ------------
Total operating expenses 2,912,818 6,820,793 9,417,867 19,449,382
------------ ------------ ------------ ------------
Loss from operations (2,848,266) (6,742,618) (9,350,631) (19,304,363)
Other Income (expense)
Interest income (expense), net (333,579) (122,591) (1,145,814) (99,522)
Other income (expense) (2) (10,188) (109,976) 8,537
------------ ------------ ------------ ------------
Total Other income (expense) (333,581) (132,779) (1,255,790) (90,985)
------------ ------------ ------------ ------------
Net loss ($ 3,181,847) ($ 6,875,397) ($10,606,421) ($19,395,348)
------------ ------------ ------------ ------------
Deemed dividend to preferred shareholders
from beneficial conversion feature -- -- (2,942,656) --
Preferred dividend (53,347) -- (175,188) --
------------ ------------ ------------ ------------
Net loss applicable to common stock ($ 3,235,194) ($ 6,875,397) ($13,724,265) ($19,395,348)
------------ ------------ ------------ ------------
Other comprehensive income
Foreign currency translation adjustments (73) 96 3,518 (254)
Unrealized loss on available-for-sale securities (514) (48,127) (514) (102,304)
------------ ------------ ------------ ------------
Total other comprehensive income (587) (48,031) 3,004 (102,558)
------------ ------------ ------------ ------------
Comprehensive Loss ($ 3,182,434) ($ 6,923,428) ($10,603,417) ($19,497,906)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.09) $ (0.24) $ (0.43) $ (0.73)
------------ ------------ ------------ ------------
Weighted average common shares outstanding
used for basic and diluted loss per share 36,745,058 28,245,979 31,704,757 26,472,909
------------ ------------ ------------ ------------
See notes to unaudited condensed consolidated financial statements.
2
NexMed, Inc.
Condensed Consolidated Statement of Cash Flows (Unaudited)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities
Net loss $(10,606,421) $(19,395,348)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization 930,330 599,412
Non-cash interest, amortization of debt discount and
deferred financing costs 1,148,371 100,285
Non-cash compensation expense 339,147 78,767
Net loss on sale of marketable securities 94,824 --
Loss on disposal of assets 30,150 --
(Increase)/decrease in prepaid expenses and other assets 118,841 377,572
(Decrease)/Increase in account payable
and accrued expenses (3,750,907) (858,557)
------------ ------------
Net cash used in operating activities (11,695,665) (19,097,869)
------------ ------------
Cash flow from investing activities
Proceeds (issuance of) from notes receivable 117,224 (284,609)
Capital expenditures (317,056) (3,629,179)
Purchase of marketable securities (1,501,602) (1,227,769)
Purchase of certificates of deposit -- (384,000)
Sales of marketable securities 545,200 2,377,148
Sales of certificates of deposit -- 3,944,000
------------ ------------
Net cash provided by (used in) investing activities (1,156,234) 795,591
------------ ------------
Cash flow from financing activities
Issuance of common stock, net of offering costs 11,078,738 5,750,371
Issuance of preferred stock, net of offering costs 7,396,623 --
Cash from Capital Lease Sale 413,643
Issuance of mortgage and notes payable 1,550,000 4,696,399
Repayments of notes payable (950,000) --
Repayment of capital lease obligations (475,010) (244,818)
------------ ------------
Net cash from financing activities 19,013,994 10,201,952
------------ ------------
Net increase (decrease) in cash 6,162,095 (8,100,326)
Effect of foreign exchange on cash 3,518 (254)
------------ ------------
Cash, beginning of period $ 1,035,149 $ 12,913,803
------------ ------------
Cash, end of period $ 7,200,762 $ 4,813,223
============ ============
See notes to unaudited condensed consolidated financial statements.
3
NEXMED, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 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 $78,594,390 at September 30, 2003 and
while Alprox-TD(R) clinical development expenses for the year 2003 have been
significantly less than in 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. However, the Company expects operating losses in 2003 to be
lower than those incurred 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. 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.
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:
4
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (3,235,194) $ (6,875,397) $(13,724,265) $(19,395,348)
Add: Stock-based compensation expense included
in reported net loss 72,067 40,169 339,147 78,767
Deduct: Total stock-based compensation expense determined
under fair-value based method for all awards (431,023) (705,273) (1,561,101) (1,863,984)
------------ ------------ ------------ ------------
Proforma net loss applicable to common stock $ (3,594,150) $ (7,540,501) $(14,946,219) $(21,180,565)
============ ============ ============ ============
Basic and diluted loss per common share:
As reported $ (0.09) $ (0.24) $ (0.43) $ (0.73)
Proforma $ (0.10) $ (0.27) $ (0.47) $ (0.80)
3. LOSS PER SHARE
At September 30, 2003 and 2002, respectively, options to acquire 4,850,117 and
4,103,200 shares of common stock with exercise prices ranging from $.55 to
$16.25 per share, convertible securities convertible into 1,887,755 and
1,225,490 shares of common stock and warrants to acquire 7,307,664 and 3,390,399
shares of common stock with exercise prices ranging from $1.00 to $5.04 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. FIN 46 must be applied to the first reporting period
ending after December 15, 2003. We do not believe the adoption of this
Interpretation will 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 did 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.
5
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 did not have an impact upon initial adoption.
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) mandatory 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 (except for the indefinite deferral for certain
mandatorily redeemable interests), FAS 150 goes into effect at the beginning of
the first interim period beginning after June 15, 2003. The Company does not
expect the adoption of FAS 150 to have a material impact on its financial
statements.
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 convertible notes (the "Notes") with a face
value of $5 million to two purchasers. Outstanding principal and accrued
interest on the Notes is payable on November 30, 2005 and is collateralized by
the Company's manufacturing facility in East Windsor, New Jersey. The Notes were
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 Notes, the conversion price may be adjusted lower. Interest
accretes on the Notes 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
6
"Warrants") at an exercise price equal to the initial conversion price of the
Notes 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 to the warrants
$795,701 of the proceeds from the Note, based upon the relative fair value of
the Notes and 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 Notes were amended. In order to induce the
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 Notes 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
Notes, 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 Notes.
As a result of the April and July 2003 placements, the conversion price of the
Notes has been further reduced to $1.96 and the Company recorded an additional
discount of $1,586,206, which is being amortized to interest expense over the
remaining term of the Note.
In April and October 2003, respectively, pursuant to the terms of the Note, the
Company issued 102,179 shares and 25,253 shares of its common stock as payment
of an aggregate of $217,411 in interest on the Notes.
For the nine months ended September 30, 2003, the Company recorded amortization
of $846,483 and $72,692 of the debt discount and closing costs on the Notes
respectively.
On July 14 and September 18, 2003, respectively, an additional $650,000 and
$150,000 of the Notes was converted to common stock at the conversion price of
$1.96. On September 30, 2003, the principal balance remaining on the Notes was
$3,700,000. In October and November 2003 an aggregate of $1,450,000 of the Notes
was converted to common stock at the conversion price of $1.96. In connection
with such conversions, one of the noteholders converted the full amount of its
Note. In addition, on October 15, 2003, pursuant to the terms of the Notes, the
Company issued a conversion notice to the other holder to convert $250,000 of
its Note to common stock at a conversion price equal to the 10 day average
market price prior to November 3, 2003 ($4.57). The holder subsequently issued a
blocking notice pursuant to the terms of the Note which prevents the Company
from issuing further conversion notices to the holder for one year. On November
12, 2003, the principal balance remaining on the Note was $2,000,000.
In January and February 2003, the Company issued two short-term promissory
notes, for an aggregate principal amount of $600,000, to one accredited
investor. These promissory notes bore interest at 12% per annum and were
convertible at the option of the noteholders into the Company's securities at
such time as the Company 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
7
outstanding $600,000 in principal and $14,064 in accrued interest 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
in the principal amount of $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 was in the form of a
42-month capital lease. At December 31, 2001, the Company had financed
$1,113,459 of equipment purchases under this GE credit line. The $5 million
credit line expired in March 2002, and as of September 30, 2003, there was an
outstanding balance due GE of $489,695 under this facility, payable in monthly
installments through various dates in 2004.
In January 2002, GE approved a new credit line, which expired on December 31,
2002 and provided for the financing of up to $3 million of equipment. During
2002, the Company accessed $1,111,427 of the credit line. As of September 30,
2003, there was an outstanding balance due GE of $770,264 under the January 2002
facility, payable in 42 monthly installments from date of take-down.
In July 2003, GE approved a new credit line, which expires in July 2004 and
provides for the financing of up to $1.85 million of equipment. As of September
30, 2003, there was an outstanding balance due GE of $390,560 under the July
2003 facility, payable in 36 monthly installments from the date of take-down.
8 SALE OF PREFERRED STOCK
In April 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 paid annual cumulative dividends of 8%. The preferred shareholders
had voting rights and powers identical to those of common shareholders and could
convert their preferred shares to common stock at any time. Each preferred share
was 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.
8
The Company 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 Certificate of Designation of the preferred
stock, the Company issued 34,946 shares of its common stock as payment of a
dividend of $121,841. In addition a dividend of $53,347 was declared in
connection with the mandatory conversion of the preferred stock discussed below.
As of September 30, 2003, 9,836 shares of common stock were issued in payment of
$15,824 of the dividend. The balance of $37,523 is included in "Accounts payable
and accrued expenses" on the September 30, 2003 Condensed Consolidated Balance
Sheet. As of November 12, 2003 23,922 shares of common stock were issued as
payment of the remaining dividend.
The Certificate of Designation of the preferred stock provided that the
preferred stock would be automatically converted into common stock 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. On August 1, 2003, the foregoing condition was satisfied and the
Company issued a notice to the holders of the preferred stock that all of the
outstanding shares of preferred stock were automatically converted into
5,100,089 shares of common stock. Thus, as of September 30, 2003, no shares of
series B preferred stock remained outstanding.
9. SALE OF COMMON STOCK
On July 2, 2003, the Company closed a private placement of its common stock at
$3.60 per share and issued a total of 2,916,669 shares and 1,020,832 four-year
warrants to purchase shares of the Company's common stock at $5.04 per share, to
twelve accredited investors. One third of the warrants are 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.
10. 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 September 30, 2003. The advance
was evidenced by a promissory note, which bore interest at 5% per annum and was
due on November 15, 2002. The note was not paid in full by November 15, 2002 and
went into 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% was paid on a timely basis. On October 16, 2003, Dr. Yeager
surrendered 24,315 shares of the Company's common stock to the Company as
payment in full of the promissory note. The number of shares surrendered was
determined by dividing the outstanding principal and accrued interest on the
promissory note of $119,386.98 by the closing sale price of the
9
Company's common stock on October 16, 2003. The note receivable is included in
the September 30, 2003 Condensed Consolidated Balance Sheet under "Prepaid
expenses and other assets".
11. RESEARCH & DEVELOPMENT AGREEMENT
In August 2003, the Company 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,
the Company received a signing payment and would receive additional payments
based on the achievement of certain R&D milestones. The Company also retained
the rights to manufacture and commercialize the new product worldwide except in
Japan.
Revenues earned under this research and development contract are recognized in
accordance with the cost-to-cost method outlined in Staff Accounting Bulletin
No. 101 whereby the extent of progress toward completion is measured on the
cost-to-cost basis; however, revenue recognized at any point will not exceed the
cash received. If the current estimates of total contract revenue and contract
cost indicate a loss, a provision for the entire loss on the contract would be
made. All costs related to this agreement are expensed as incurred and
classified within "Research and development " expenses in the Condensed
Consolidated Statement of Operations and Comprehensive Income.
10
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 forecast. 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 1,700 patients
at 85 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 these two pivotal Phase 3 studies, with data
indicating that the three dose levels of Alprox-TD(R) tested
11
were effective over placebo in the combined analysis of the two studies. The
side effects reported were mild to moderate, localized and transient.
We are currently engaged in late stage discussions and contract
negotiations with several pharmaceutical companies regarding possible strategic
marketing partnership(s) for Alprox-TD(R). If partnership arrangements are
successfully completed, the partner(s) will obtain marketing rights for
Alprox-TD(R) for certain markets, in exchange for milestone payments and other
future payments to us. However, in each case consummation of the transaction is
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.
We had initiated a Phase 3 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 addressed their concerns 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). This study is one of the
required studies for the new drug application ("NDA") filing. However, we have
determined with the FDA that completion of the open-label study is not a
prerequisite for our NDA submission. The timeframe for us to initiate and
complete this study largely depends on our ability to obtain financing through a
partnering agreement for Alprox-TD(R) or from other sources. Assuming we
initiate the study in January 2004, we anticipate that we will file the NDA
during the fourth quarter of 2004. 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 Singapore
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 furthest 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
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 received a modest signing
payment and would receive additional
12
payments based on the achievement of certain R&D milestones. We also retained
the rights to manufacture and commercialize the new product worldwide except in
Japan. This is the second R&D agreement we have entered since August 2002. We
anticipate that we will enter into additional R&D agreements during the next
twelve months 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(R) -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 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
13
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 Three Months Ended September 30
of 2003 and of 2002.
Revenues. We recorded $64,552 in revenue during the third quarter of 2003
as compared to $78,175 during the same period in 2002. The 2003 revenues
consisted of $1,474 in royalties on sales received from our Asian licensee and
$63,078 of revenue recognized on our research and development agreements with
Japanese pharmaceutical companies. We received $1,474 in royalty revenue in the
third quarter of 2003 as compared to $3,730 in 2002.
Cost of Products Sold. Our cost of products sold was nil during the third
quarter of 2003 and nil during the same period in 2002. Our Asian licensee had
sufficient inventory of manufacturing supplies in both periods and so, made no
purchases from us.
Research and Development Expenses. Our research and development expenses
for the third quarter of 2003 and 2002 were $1,687,459 and $5,582,531,
respectively. Research and development expenses attributable to Alprox-TD(R) and
Femprox(R) in the third quarter of 2003 were $308,124 and $1,855, respectively
with the balance attributable to NexACT(R) technology based products and general
overhead allocated to research and development, as compared to $4,153,850 and
$91,254, 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. Research and development expenses
include all costs associated with our research and development agreements. The
total research and development spending in 2003 will decrease significantly with
the completion of the two Phase 3 pivotal studies for Alprox-TD(R). We
anticipate increasing our
14
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 $1,225,359 during the third quarter of 2003 as compared to
$1,238,262 during the same period in 2002. General and administrative expenses
in the third quarter of 2003 are consistent with expenses during the same period
in 2002. We have begun to increase expenses in order to return to the general
and administrative support levels that are necessary to operate the Company
under the full Alprox-TD(R) development program. However, our cash conservation
program implemented in November 2002 will result in lower full year general and
administrative spending for 2003 as compared to 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.
Interest Income/Expense. We had interest expense of $333,579 during the
third quarter of 2003, as compared to interest expense of $122,591 during the
same period in 2002. The increase in interest expense is a result of an increase
in amortization of note discounts, borrowings under our GE Capital facility and
the convertible notes issued in June 2002.
Net Loss. The net loss was $3,181,847 for the third quarter of 2003, as
compared to a loss of $6,875,397 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 $3,235,194 or $.09 per share for the third quarter of 2003, as
compared to $6,875,397 or $.24 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.
Comparison of Results of Operations Between the Nine Months Ended September 30
of 2003 and of 2002.
Revenues. We recorded $67,236 in revenue during the first nine months of
2003 as compared to $145,019 during the same period in 2002. The 2003 revenues
consisted of $4,158 in royalties on sales received from our Asian licensee and
$63,078 of revenue recognized on our research and development agreements with
Japanese pharmaceutical companies. With respect to sales of Befar(R) in Asia we
received only royalty revenue during the first nine months 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 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
nine 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
nine months of 2003 and so, made no purchases from us.
Research and Development Expenses. Our research and development expenses
for the first nine months of 2003 and 2002 were $5,649,391 and $15,229,345,
respectively. Research and development expenses attributable to Alprox-TD(R) and
Femprox(R) for the first nine months of 2003 were $2,128,178 and $24,322,
respectively with the balance attributable to NexACT(R) technology based
products and general
15
overhead allocated to research and development, as compared to $10,894,654 and
$579,576, 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. Research and development
expenses include all costs associated with our research and development
agreements. The total research and development spending in 2003 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 $3,768,476 during the first nine months of 2003 as compared to
$4,193,004 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 full year 2003 will decrease as compared to 2002
with the reduction in expenditures and non-essential personnel.
Interest Income/Expense. We had interest expense of $1,145,814 during the
first nine months of 2003, as compared to interest expense of $99,522 during the
same period in 2002. The significant increase in interest expense is a result of
an increase in amortization of note discounts, borrowings under our GE Capital
facility and the convertible notes issued in June 2002.
Net Loss. The net loss was $10,606,421 for first the nine months of 2003,
as compared to a net loss of $19,395,348 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 $13,724,265 or $.43 per share for the first nine months of 2003, as
compared to $19,395,348 or $.73 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 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.
Liquidity and Capital Resources.
We have experienced net losses and negative cash flow from operations
each year since our inception. Through September 30, 2003, we had an accumulated
deficit of $78,594,390. 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 September 30, 2003, we had cash and
cash equivalents and marketable securities of $8.7 million as compared to $1.6
million at December 31, 2002.
16
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 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 the Company's 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. On August 1, 2003, we issued a
notice of mandatory conversion to the holders of the preferred stock, as a
result of which all of the outstanding shares of preferred stock were
automatically converted into 5,100,089 shares of common stock. Thus, as of
September 30 2003, no shares of series B preferred stock remained outstanding.
On July 2, 2003, we closed a private placement of our common stock at
$3.60 per share and received $10.5 million in gross proceeds. Pursuant to the
placement agreement, we issued a total of 2,916,669 shares of common stock and
four-year warrants to purchase 1,020,832 shares of 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.
As of November 12 2003, we had approximately $8.2 million of cash and
marketable securities and our average monthly "burn rate" is approximately
$800,000 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) escalate significantly.
We are currently engaged in late stage discussions and contract
negotiations with several pharmaceutical companies regarding possible strategic
marketing partnership(s) for Alprox-TD(R). If partnership arrangements are
successfully completed, the partner(s) will obtain marketing rights for
Alprox-TD(R) for certain markets, in exchange for milestone payments and other
future payments to us. However, in each case consummation of the transaction is
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.
To date, we have spent approximately $62.7 million on the Alprox-TD(R)
development program, and anticipate that through NDA submission in the fourth
quarter 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
17
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 financing 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 initial credit line expired in March 2002, and as of September 30, 2003,
there was an outstanding balance due GE of $489,695 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. As of September 30, 2003,
there was an outstanding balance due GE of $770,264 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. In 2003
we have accessed $413,643 of this credit line. As of September 30, 2003, there
was an outstanding balance due GE of $390,560 under this facility payable in
monthly installments through various dates in 2006.
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. 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. If the current estimates of total contract revenue and contract
cost indicate a loss, a provision for the entire loss on the contract would be
made. All costs related to this agreement are expensed as incurred
18
and classified within "Research and development " expenses in the Condensed
Consolidated Statement of Operations and Comprehensive Income.
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 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.
19
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company's
management carried out an evaluation with 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 as of the end of the period
covered by this report. 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 in timely alerting them to material information relating to the
Company (including the Company's consolidated subsidiaries) required to be
included in periodic reports filed under the Securities Exchange Act of 1934, as
amended. There were no changes in the Company's internal controls over financial
reporting identified in connection with the evaluation by the Chief Executive
Officer and Acting Chief Financial Officer that occurred during the Company's
third quarter that have materially affected or are reasonably likely to
materially affect the Company's internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
There have been no material changes to the legal proceedings described
in the Company's Form 10-Q filed with the Securities Exchange Commission on
August 12, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
10.1* Employment Agreement dated September 26, 2003 by and between NexMed,
Inc. and James L. Yeager.
10.2* Employment Agreement dated September 26, 2003 by and between NexMed,
Inc. and Kenneth F. Anderson.
10.3* Employment Agreement dated September 26, 2003 by and between NexMed,
Inc. and Vivian H. Liu.
10.4* Amendment dated September 26, 2003 to Employment Agreement by and
between Dr. Y. Joseph Mo and NexMed, Inc. dated February 26, 2002
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.
20
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.
*Exhibit is a management contract or compensatory plan
(b) There were no reports or Forms 8-K filed during the fiscal quarter ended
September 30, 2003.
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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: November 12, 2003 /s/ Vivian H. Liu
---------------------- -----------------
Vivian H. Liu
Vice President, Acting Chief Financial
Officer and Secretary
22
Exhibit Index
10.1* Employment Agreement dated September 26, 2003 by and between NexMed,
Inc. and James L. Yeager.
10.2* Employment Agreement dated September 26, 2003 by and between NexMed,
Inc. and Kenneth F. Anderson.
10.3* Employment Agreement dated September 26, 2003 by and between NexMed,
Inc. and Vivian H. Liu.
10.4* Amendment dated September 26, 2003 to Employment Agreement by and
between Dr. Y. Joseph Mo and NexMed, Inc. dated February 26, 2002
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.
*Exhibit is a management contract or compensatory plan
23