SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K(Mark One)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-22245 NEXMED, INC ----------- (Exact Name of Registrant 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 ----------------------------------------------- (Address of Principal Executive Offices) (609) 208-9688 -------------- (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Exchange on Which Registered------------------- ------------------------------------COMMON STOCK, PAR VALUE $.001 THE NASDAQ NATIONAL MARKET Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. [X] As of March 1, 2001, 25,162,654 shares of Common Stock of the registrantwere outstanding and the aggregate market value of Common Stock held bynon-affiliates was approximately $156,516,664.50. DOCUMENTS INCORPORATED BY REFERENCE Portions of our Proxy Statement to be delivered to our shareholders inconnection with the Annual Meeting of Shareholders to be held on May 7, 2001(the "2001 Proxy Statement") are incorporated by reference into Part III of thisReport. NEXMED, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION YEAR ENDED DECEMBER 31, 2000 ITEMS IN FORM 10-K Page ---- PART I.Item 1. BUSINESS......................................................................................... 1Item 2. PROPERTIES....................................................................................... 7Item 3. LEGAL PROCEEDINGS................................................................................ 7Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 7PART II. Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ........................... 7Item 6. SELECTED FINANCIAL DATA.......................................................................... 8Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 8Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................... 12Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 12Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............. 30PART III.Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................. 30Item 11. EXECUTIVE COMPENSATION.......................................................................... 30Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 30Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................. 30 PART IV.Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................. 30 PART I.ITEM 1. BUSINESS. Some of the statements contained in this Report discuss futureexpectations, contain projections of results of operations or financialcondition or state other "forward-looking" information. Those statements includestatements regarding the intent, belief or current expectations of the Companyand its management team. Prospective investors are cautioned that any suchforward-looking statements are not guarantees of future performance and involverisks and uncertainties, and that actual results may differ materially fromthose projected in the forward-looking statements. These risks and uncertaintiesinclude but are not limited to, those risks and uncertainties set forth underthe heading "Factors That Could Affect Our Future Results" of Part I of thisReport. In light of the significant risks and uncertainties inherent in theforward-looking statements included in this Report, the inclusion of suchstatements should not be regarded as a representation by us or any other personthat our objectives and plans will be achieved.GENERAL NexMed, Inc., (the "Company," which may be referred to as "we," "us," or"our") is a pharmaceutical and medical technology company. We develop andcommercialize therapeutic products based on proprietary delivery systems. We arecurrently focusing our efforts on new and patented pharmaceutical products basedon a penetration enhancement topical delivery technology known as NexACT(R),which may enable an active drug to be better absorbed through the skin. Our home page on the internet is at www.nexmed.com. You can learn moreabout us by visiting that site. Information contained on our internet site doesnot constitute part of this Report or the Company's prior filings with theSecurities and Exchange Commission.PRODUCTS & TECHNOLOGIES We are currently focusing our efforts on new and patented pharmaceuticalproducts based on a penetration enhancement topical delivery technology known asNexACT(R), which may enable an active drug to be better absorbed through theskin. The NexACT(R) transdermal drug delivery technology is designed to enhanceabsorption of an active drug through the skin, overcoming the skin's naturalbarrier properties and enabling high concentrations of the active drug torapidly penetrate the desired site of the skin or extremity. Successfulapplication of the NexACT(R) technology would improve therapeutic outcomes andreduce gastrointestinal or other systemic side effects that often accompany oralmedications. We intend to continue our efforts developing topical treatments based onthe application of NexACT(R) technology to drugs: (1) previously approved by theFDA, (2) with proven efficacy and safety profiles, (3) with patents expiring orexpired and (4) with proven market track records and potential. In furtheranceof these efforts, we will continue to use laboratory space at the HiguchiBiosciences Center of the University of Kansas pursuant to a research agreementwith the University. We have retained advisors, consultants and employees at theHiguchi Biosciences Center to assist with our development efforts. Currently, we are focusing our application of the NexACT(R) technologyto Alprox-TD(R), an alprostadil cream for the treatment of male erectiledysfunction ("ED") and Femprox(TM), also an alprostadil-based cream, for thetreatment of female sexual arousal disorder ("FSAD"). We are also exploring theapplication of the NexACT(R) technology to other drug compounds and working onthe development of new products such as a topical treatment for nail fungus, atopical non-steroidal anti-inflammatory drug ("NSAID") treatment for pain andinflammation, and a topical anti-emetic cream for the prevention of nausea and vomiting associated with post-operative surgical procedures and cancerchemotherapy. Alprox-TD(R) is an alprostadil-based topical treatment cream intended totreat mild to moderate ED. Our clinical studies have demonstrated that NexACT(R)enhancers may promote the absorption of alprostadil and improve clinicalresponses. In September 2000, we completed a Phase II trial on Alprox-TD(R) andsubmitted the results to the FDA for review. The U.S. Phase II study which wasconducted at 12 clinical sites in the U.S., was randomized, parallel,double-blind, placebo-controlled, and designed to investigate the dose-responserelationships of the efficacy and safety of 3 different doses of Alprox-TD(R)versus a placebo in 161 men with mild to moderate ED. The study resultsindicated that three different dose levels of Alprox-TD(R) were 1shown to be effective over placebo in sexual function endpoint analyses. PendingFDA concurrence, we intend to initiate Phase III dosing of patients in the U.S.,which we anticipate will begin in first half of 2001. In Asia, our subsidiary NexMed International Limited and VergemontInternational Limited entered into a license agreement in 1999 pursuant to which(1) Vergemont International Limited has an exclusive right to manufacture and tomarket in China and Asian Pacific countries, our Alprox-TD(R), Femprox(TM) andthree other of our proprietary products under development, and (2) we willreceive a royalty on sales and supply, on a cost plus basis, the NexACT(R)enhancers that are essential in the formulation and production of ourproprietary topical products. Under the terms of our subsidiary's agreement withVergemont International Limited, Dr. Joseph Mo, our President and ChiefExecutive Officer, has actively assisted in the anticipated launch of ourproprietary ED treatment in China which will be marketed under the Befar(R)trademark. On February 2, 2001, we announced that the China State DrugAdministration gave approval to NexMed Pharmaceuticals (Zhongshan) Ltd., asubsidiary of Vergemont International Limited, to manufacture, sell anddistribute Befar(R) in China. The launch of Befar(R), is scheduled to take placeduring first half of 2001. Femprox(TM) is an alprostadil-based cream product intended for thetreatment of FSAD. We completed in 1998, an eight-patient Phase I clinical studyfor safety and efficacy. Results from our clinical study demonstrated a positiveeffect on increasing blood flow to the clitoris and labia in the subjectstested. We also completed two additional Phase I safety studies in 2000, whichincluded a total of 64 healthy normal subjects and examined the safety ofdifferent doses of the Femprox(TM) product. No systemic side effects wereevidenced and local side effects were minimal. Subject to FDA concurrence, weintend to initiate the proposed U.S. Phase II program for Femprox(TM) duringfirst half of 2001. Another product we are continuing to develop is the Viratrol(R) device,a therapeutic medical device for the treatment of herpes simplex diseaseswithout the use of drugs. The Viratrol(R) device is a hand-held non-invasivetherapeutic device designed to treat herpes simplex diseases. The devicetopically delivers a minute electrical current to an infected site and may blocklesions from forming and/or shorten healing time once lesions develop. We haveallocated sufficient funds for our U.S. clinical development program on theViratrol(R) device which we intend to initiate during 2001.FACTORS THAT COULD AFFECT OUR FUTURE RESULTSPATENTS AND INTELLECTUAL PROPERTY RIGHTS Proprietary protection for our pharmaceutical products is of materialimportance to our business in the United States and most other countries. Wehave and will continue to seek proprietary protection for our products toattempt to prevent others from commercializing equivalent products insubstantially less time and at substantially lower expense. Our success maydepend on our ability to (1) obtain effective patent protection within theUnited States and internationally for our proprietary technologies and products,(2) defend patents we own, (3) preserve our trade secrets, and (4) operatewithout infringing upon the proprietary rights of others. We have five U.S. patents either acquired or received out of a series of patent applications that we have filed in connection with our continuingdevelopment of a new generation of skin absorption technology based on theNexACT(R) technology and our NexACT-based products under development, such asAlprox-TD(R) and Femprox(TM). We have three U.S. patents issued on the Viratrol(R) device and onepatent application pending with respect to the technology, inventions andimprovements that are significant to the Viratrol(R) device, and intend to fileadditional patent applications to continue expanding the coverage on the device. To further strengthen our global patent position on Alprox-TD(R),Femprox(TM) and the Viratrol(R) device, and to expand the patent protection toother markets, we have filed under the Patent Cooperation Treaty, correspondinginternational applications for our issued and pending U.S. patents. While we have obtained patents and have several patent applicationspending, the extent of effective patent protection in the United States andother countries is highly uncertain and involves complex legal and factualquestions. No consistent policy addresses the breadth of claims allowed in orthe degree of protection afforded under patents of medical and pharmaceuticalcompanies. Patents we currently own or may obtain might not be sufficientlybroad to protect us against competitors with similar technology. Any of ourpatents could be invalidated or circumvented. 2 There have been patents issued to others such as Vivus, Inc. andMacroChem Corporation on the use of prostaglandin for the treatment of male orfemale sexual dysfunction. While we believe that our patents will prevail in anypotential litigation, we can provide no assurance that the holders of thesecompeting patents will not commence a lawsuit against us or that we will prevailin any such lawsuit.OPERATING LOSSES Our current business operations began in 1994 and we have a limitedoperating history. We may encounter delays, uncertainties and complicationstypically encountered by development stage businesses. We have not marketed orgenerated revenues from our products under development. We are not profitableand have incurred an accumulated deficit of $24,171,589 since our inception. Webelieve that our current cash reserves are adequate to support our continuingoperations for at least the next twelve months. However, we will requireadditional financing before achieving positive cash flow and may seek financingfrom equity or debt and from private and public sources as well as fromcollaborative licensing and/or marketing arrangements with third parties.However, we have not made arrangements for, and there is no assurance that suchadditional external funding will be available to us on acceptable terms, if atall. If we cannot obtain such additional financing, we may need to modify ourbusiness objectives or reduce or cease certain or all of our product developmentprograms and other operations. The Company's current ability to generaterevenues and to achieve profitability and positive cash flow will depend on thesuccessful commercialization of our products currently under development.However, even if we eventually generate revenues from sales of our productscurrently under development, we expect to incur significant operating lossesover the next several years. Our ability to become profitable will depend, amongother things, on our (1) development of our proposed products, (2) obtaining ofregulatory approvals of our proposed products on a timely basis and (3) successin manufacturing, distributing and marketing our proposed products.MANUFACTURING In October 2000, we completed the purchase of a 31,500 square footmanufacturing facility, located in East Windsor, New Jersey. The facility, whichhas been designed to meet our anticipated needs for full-scale commercialproduction and will be utilized initially to manufacture Alprox-TD(R) andFemprox(TM) for continuing clinical testing purposes, is currently beingcompleted to meet Good Manufacturing Practice (GMP) standards as required by theFDA. We depend on third party chemical manufacturers for alprostadil, theactive drug in Alprox-TD(R) and Femprox(TM) and for the supply of our NexACT(R)enhancers that are essential in the formulation and production of our topicalproducts, in a timely basis and at satisfactory quality levels. If our third party chemical manufacturers fail to produce quality products on time and insufficient qualities, our results would suffer.COMPETITION We are engaged in a highly competitive industry. We expect increasedcompetition from numerous existing companies, including large internationalenterprises, and others entering the industry. Most of these companies havegreater research and development, manufacturing, marketing, financial,technological, personnel and managerial resources. Acquisitions of competingcompanies by large pharmaceutical or healthcare companies could further enhancesuch competitors' financial, marketing and other resources. Competitors maycomplete clinical trials, obtain regulatory approvals and commence commercialsales of their products before we could enjoy a significant competitiveadvantage. Products developed by our competitors may be more effective than ourproducts. Certain treatments for ED, such as needle injection therapy, vacuumconstriction devices, penile implants, transurethral absorption and oralmedications, currently exist, have been approved for sale in certain markets andare being improved. Currently known products for the treatment of ED developedor under development by our competitors include the following: (1) Caverject(R),Pharmacia & Upjohn Company's needle injection therapy; (2) Viagra(R), Pfizer,Inc.'s oral product to treat ED; and (3) Muse(R), VivUs, Inc.'s device forintra-urethral delivery of a suppository containing alprostadil. In addition,the following products are currently under development: (1) Topiglan(R), atopical treatment containing alprostadil based on a proprietary drug deliverysystem under development by MacroChem Corporation; (2) Vasomax(R), an oralmedication to be marketed through a collaborative effort of Zonagen, Inc. andSchering Plough Pharmaceuticals; (3) Cialis, an oral formulation underdevelopment by the joint venture between ICOS and Eli Lilly & Co; (4) Uprima(R),an oral medication to be marketed by TAP Pharmaceuticals, a joint venturebetween Takeda PharmaceuticalS Japan and Abbott Laboratories; (5) Max-K(R), anoral medication by Bristol-Meyers Squibb; and (6) Vardenafil, an oral medicationby Bayer AG. 3RESEARCH AND DEVELOPMENT Our research and development expenses for the years ended December 31,2000, 1999, and 1998 were $6,892,283, $2,374,024, and $2,302,148 respectively.Since January 1, 1994, when we repositioned ourselves as a medical andpharmaceutical technology company, we have spent $16,623,177 on research anddevelopment. We anticipate that our expenses for research and development willcontinue to increase as we enter into advanced clinical development. We currently employ Dr. Servet Buyuktimkin as Director of Drug DeliveryResearch and Dr. Nadir Buyuktimkin as Director of Formulation Research toconduct research at our laboratories at the Higuchi Biosciences Center of theUniversity of Kansas. Dr. Servet Buyuktimkin and Dr. Nadir Buyuktimkin areco-developers and authors of several publications and presentations relating toour NexACT(R) enhancers. Dr. J. Howard Rytting, a co-developer of the NexACT(R)enhancers and professor in the Department of Pharmaceutical Chemistry of theSchool of Pharmacy of the University of Kansas, is a member of our ScientificAdvisory Board. Pursuant to a research agreement with the University of Kansas,we are funding Dr. Rytting's research efforts to develop new methodologiesinvolving penetration enhancement research. Although the University would ownany patents resulting from such efforts, we have the right to an exclusivelicense to any technology resulting from such efforts. We will need significant funding to pursue our research, development andcommercialization plans. We intend to focus our current development efforts onthe Alprox-TD(R) and Femprox(TM) creams and the Viratrol(R) device. Theseproducts are currently in the research and development stage. We believe thatour current cash reserves are sufficient to support our Phase III program on theAlprox-TD(R) cream. We have not begun to market or generate revenues from thecommercialization of our products under development. Our products underdevelopment will require significant time-consuming and costly research anddevelopment, clinical testing, regulatory approval and significant additionalinvestment prior to their commercialization. There can be no assurance that (1)the research and development activities we conduct will be successful, (2)products under development will prove to be safe and effective, (3) any of the clinical development work will be completed, or (4) the anticipated productswill be commercially viable or successfully marketed. Commercial sales of ourproducts cannot begin until we receive final FDA approval. The earliest likelytime for such final approval of the first product which may be approved(Alprox-TD (R)) is sometime in early 2003. We cannot assure you that (1) we willobtain regulatory approval or develop any additional products, (2) ifsuccessful, we will attract sufficient capital to complete any development andcommercialization undertaken or (3) any such development and commercializationwill be successful.GOVERNMENT REGULATIONS Governmental authorities in the United States and other countriesheavily regulate the testing, manufacture, labeling, distribution, advertisingand marketing of our proposed products. The Alprox-TD(R) and Femprox(TM) creamsutilizing the NexACT(R) technology as well as the Viratrol(R) device have notbeen approved for marketing in the United States. Before we market any productswe develop, we must obtain FDA and comparable foreign agency approval through anextensive clinical study and approval process. The studies involved in the approval process are conducted in threephases. In Phase I studies, researchers assess safety or the most common acuteadverse effects of a drug and examine the size of doses that patients can takesafely without a high incidence of side effects. Generally, 20 to 100 healthyvolunteers or patients are studied in the Phase I study for a period of severalmonths. In Phase II studies, researchers determine the drug's efficacy withshort-term safety by administering the drug to subjects who have the conditionthe drug is intended to treat, assess whether the drug favorably effects thecondition, and begin to identify the correct dosage level. Up to several hundredsubjects may be studied in the Phase II study for approximately 6 to 12 months,depending on the type of product tested. In Phase III studies, researchersfurther assess efficacy and safety of the drug. Several hundreds to thousands ofpatients may be studied during the Phase III studies for a period of from 12months to several years. Upon completion of Phase III studies, a New DrugApplication is submitted to the FDA or foreign governmental regulatory authorityfor review and approval. Our failure to obtain requisite governmental approvals timely or at allwill delay or preclude us from licensing or marketing our products or limit thecommercial 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 UnitedStates, we will be subject to foreign regulatory requirements governing theconduct of clinical trials, product licensing, pricing and reimbursements. Theserequirements vary widely from country to country. Our failure to meet eachforeign country's requirements could delay our introduction of our 4proposed products in the respective foreign country and limit our revenues fromsales of our proposed products in foreign markets. Successful commercialization of our products may depend on theavailability of reimbursement to the consumer from third-party healthcarepayers, such as government and private insurance plans. Even if we succeed inbringing one or more products to market, reimbursement to consumers may not beavailable or sufficient to allow us to realize an appropriate return on ourinvestment in product development or to sell our products on a competitivebasis. In addition, in certain foreign markets, pricing or profitability ofprescription pharmaceuticals is subject to governmental controls. In the UnitedStates, federal and state agencies have proposed similar governmental controland the United States Congress has recently considered legislative andregulatory reforms that may affect companies engaged in the healthcare industry.Pricing constraints on our products in foreign markets and possibly the UnitedStates, could adversely effect our business and limited our revenues.SALES, MARKETING AND DISTRIBUTION We have engaged in discussions with several large pharmaceuticalcompanies regarding a strategic partnership for the Alprox-TD(R) cream but wecannot assure you that we will be able to conclude an arrangement on a timelybasis, if at all, or on terms acceptable to us. With our current cash reserves, we have elected to proceed with our Phase III program on the Alprox-TD(R) cream,assuming we receive FDA concurrence, while concurrently pursuing thesediscussions. We will need to devote substantial marketing efforts to achieve marketacceptance for products based on the NexACT(R) technology, the Viratrol(R)device and any of our other proposed products. We will need to spend significantfunds to inform potential customers, including third-party distributors, of thedistinctive characteristics and benefits of our products. Our operating resultsand long term success will depend on our ability to establish (1) successfularrangements with domestic and international distributors and marketing partnersand (2) an effective internal marketing organization. We currently have no salesforce or marketing organization and will need, but may be unable, to attract andretain qualified or experienced marketing and sales personnel. In Asia, our subsidiary NexMed International Limited and VergemontInternational Limited entered into a license agreement in 1999 pursuant to which(1) Vergemont International Limited has an exclusive right to manufacture and tomarket in China and Asian Pacific countries, our Alprox-TD(R), Femprox(TM) andthree other of our proprietary products under development, and (2) we willreceive a royalty on sales and supply, on a cost plus basis, the NexACT(R)enhancers that are essential in the formulation and production of ourproprietary topical products. Under the term of our subsidiary's agreement withVergemont International Limited, Dr. Joseph Mo, our President and ChiefExecutive Officer, has actively assisted in the anticipated launch of ourproprietary ED treatment in China which will be marketed under the Befar(R)trademark. On February 2, 2001, we announced that the China State DrugAdministration gave approval to NexMed Pharmaceuticals (Zhongshan) Ltd., asubsidiary of Vergemont International Limited, to manufacture, sell anddistribute Befar in China. The launch of Befar is scheduled to take place duringthe first half of 2001.ENVIRONMENTAL LAW COMPLIANCE Most of our manufacturing and certain research operations are or will beaffected by federal, state and local environmental laws. We have made, andintend to continue to make, necessary expenditures for compliance withapplicable laws. While we cannot predict with certainty the future operatingcosts for environmental compliance, we do not believe they will have a materialeffect on our capital expenditures, earnings or competitive position.SEGMENT AND GEOGRAPHIC AREA INFORMATION You can find information about our business segment and geographic areasof business in "Note 14. Segment and Geographic Information" of our Notes toConsolidated Financial Statements at page 28 below.EMPLOYEES As of March 1, 2001, we had 51 full time employees, ten of whom havePh.D and/or M.D. degrees and four of whom are executive management and 35 ofwhom are engaged in research and development activities. We also rely on anumber of part time employees and consultants. None of our employees isrepresented by a collective bargaining agreement. We believe that ourrelationship with our employees is good. 5EXECUTIVE OFFICERS The Executive Officers of the Company are set forth below. Name Age Title ---- --- -----Y. Joseph Mo, Ph.D. 53 Chairman of the Board of Directors, President and Chief Executive OfficerJames L. Yeager, Ph.D. 54 Director, Vice President, R&D and Business DevelopmentVivian H. Liu 39 Vice President, Corporate Affairs, Chief Financial Officer and SecretaryKenneth Anderson 54 Vice President, Commercial DevelopmentY. Joseph Mo, Ph.D., is, and has been since 1995, our Chief Executive Officerand President and Chairman and member of our board of directors. His currentterm as member of our board of directors expires in 2002. Prior to joining us in1995, Dr. Mo was President of Sunbofa Group, Inc., an investment consultingcompany. From 1991 to 1994, he was President of the Chemical Division, and from1988 to 1994, the Vice President of Manufacturing and Medicinal Chemistry, ofGreenwich Pharmaceuticals, Inc. Prior to that, he served in various executivepositions with several major pharmaceutical companies, including Johnson &Johnson, Rorer Pharmaceuticals, and predecessors of Smithkline Beecham. Dr. Moreceived his Ph.D. in Industrial and Physical Pharmacy from Purdue University in1977.James L. Yeager, Ph.D., is, and has been since December 1998, a member of ourboard of directors and, since June 1996, Vice President of Research andDevelopment and Business Development. His current term as member of our board ofdirectors expires in 2002. Before joining us, Dr. Yeager was Vice President ofResearch and Development of Pharmedic Company. During that time he specializedin building and managing new product development programs. From 1989 to 1992,Dr. Yeager held international managerial positions with Abbott Laboratories. Dr.Yeager received his Ph.D. in Industrial and Physical Pharmacy from PurdueUniversity in 1978.Vivian H. Liu is, and has been, our Vice President of Corporate Affairs andSecretary since September 1995 and our Chief Financial Officer since August1999. In 1994, while we were in a transition period, Ms. Liu served as our ChiefExecutive Officer. From September 1995 to September 1997, Ms. Liu was ourTreasurer. From 1985 to 1994, she was a business and investment adviser to thegovernment of Quebec and numerous Canadian companies with respect to productdistribution, technology transfer and investment issues. Ms. Liu received herMPA in International Finance from the University of Southern California and herBA from the University of California, Berkeley.Kenneth Anderson is and has been, our Vice President of Commercial Developmentsince November 2000. Mr. Anderson has extensive experience in the pharmaceuticalindustry. He held several positions with Bristol-Myers Squibb over aseventeen-year period where he served in various management positions, includingSenior Manager for Marketing and Director for Worldwide Business Developmentfrom 1980 to 1997. From 1997 to September 2000, Mr. Anderson was Senior VicePresident, Director of Strategy and Business Development for Harrison Wilson &Associates, a consulting and marketing firm specializing in healthcare productsand services. From 1969 to 1979, Mr. Anderson was with Parke-Davis, a divisionof Warner Lambert. Mr. Anderson received his BA from Boston University. 6ITEM 2. PROPERTIES. We currently have our principal executive offices and one analyticallaboratory in Robbinsville, NJ. We lease approximately 23,000 square feet ofspace for $23,745.30 per month, pursuant to a five-year lease which expires inFebruary 2003. In October 2000, we completed the $2.2 million purchase of our 31,500square foot manufacturing facility in East Windsor, New Jersey. We are in theprocess of completing the facility for compliance with Good ManufacturingPractices as mandated by the FDA. Pursuant to our research agreement with the University of Kansas, whichis renewable annually, we pay $5,325 per month for access to and use oflaboratory space at the University's Higuchi Biosciences Center. NexMed (America) Limited, leases 1,000 square feet of office space inMississauga, Ontario, Canada for $850 per month pursuant to a month-to-montharrangement. ITEM 3. LEGAL PROCEEDINGS. There are no material legal proceedings pending against NexMed.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II.ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our Common Stock is traded on the NASDAQ National Market System (the"NASDAQ") under the symbol "NEXM." The following table sets forth the range of the high and low salesprices as reported by the NASDAQ for the period from January 1, 1999 to December31, 2000.Fiscal Year Ended December 31, 2000 Price of Common Stock----------------------------------- --------------------- High Low ---------- ---------First Quarter .................................. $23.5000 $3.4375Second Quarter ................................. $16.4370 $6.0000Third Quarter .................................. $20.0000 $8.5000Fourth Quarter ................................. $20.6250 $3.7500Fiscal Year Ended December 31 1999----------------------------------First Quarter .................................. $2.7500 $1.7813Second Quarter ................................. $2.2150 $0.8750Third Quarter .................................. $3.5000 $0.9375Fourth Quarter ................................. $4.7500 $2.8750 On March 1, 2001, the last reported sales price for our Common Stock onthe NASDAQ was $6.75 per share. We had 208 holders of record of our Common Stock as of March 1, 2001. 7DIVIDENDS We have never paid cash dividends and do not have any plans to pay cashdividends in the foreseeable future. Our board of directors anticipates that anyearnings that might be available to pay dividends will be retained to financeour business.ITEM 6. SELECTED FINANCIAL DATA. The following selected financial information is qualified by referenceto, and should be read in conjunction with, the Company's consolidated financialstatements and the notes thereto, and "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" contained elsewhere herein. Fiscal Year Ended December 31, ------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 INCOME STATEMENT DATARevenue Product Sales 0 $1,491,746 $5,709,083 0 0 Licensing 0 0 0 $56,175 0Net Loss $(8,720,553) $(2,490,600) $(4,779,002) $(3,857,466) $(3,118,393)Basic and Diluted Loss per Share $(0.40) $(0.18) $(0.64) $(0.63) $(0.72)Weighted Average Common Shares Outstanding Used for Basic and Diluted Loss per Share 21,868,267 13,724,052 7,505,588 6,077,475 4,327,548BALANCE SHEET DATATotal Assets $39,989,682 $7,633,333 $5,924,628 $2,332,913 $609,479Total Liabilities $1,245,507 $723,594 $7,594,067 $3,259,172 $141,406Stockholders' Equity $38,744,175 $6,909,739 $(2,390,437) $(926,259) $468,073 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.GENERAL We are currently focusing our efforts on: (i) new and patented pharmaceutical products based on a penetrationenhancement topical delivery technology known as NexACT(R), which may enable theactive drug to be better absorbed through the skin. Currently, we are focusingon Alprox-TD(R), an alprostadil cream for the treatment of male erectiledysfunction ("ED") and Femprox(TM), also an alprostadil-based cream, for thetreatment of female sexual arousal disorder ("FSAD"). We have engaged indiscussions with several large pharmaceutical companies regarding a strategicpartnership for the Alprox-TD(R) cream but we cannot assure you that we will beable to conclude an arrangement on a timely basis, if at all, or on termsacceptable to us. With our current cash reserves, we have elected to proceedwith our Phase III program on the Alprox-TD(R) cream, assuming we receive FDAconcurrence, while concurrently pursuing these discussions; and (ii) the Viratrol(R) device, a therapeutic medical device for thetreatment of herpes simplex I without the use of drugs. We believe that theminute electrical current, which is topically delivered by the device to aninfected site, may block lesions from forming or may significantly shortenhealing time once lesions develop. We are in the process of completing thecommercial product design of the Viratrol(R) herpes treatment device for theU.S. market. We intend to (1) pursue our research, development, and marketingactivities and capabilities, both domestically and internationally, with regardto our proprietary pharmaceutical products and (2) execute a business strategywith the goal of achieving a level of development sufficient to enable us toattract potential strategic partners with resources sufficient to furtherdevelop and market our proprietary products. 8COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEAR ENDED DECEMBER 31, 2000 AND1999. Revenues. We recorded no revenues during the twelve months of operationsin 2000 as compared to $1,491,746 during the same period in 1999. The 1999revenues were from NexMed Pharmaceuticals (Zhongshan) Limited, a joint venturein China which we sold in May 1999. Cost of Products Sold. Our cost of products was $1,415,002 in 1999 whichis attributable to the manufacturing operations of the China joint venture. Withthe sale of the China joint venture, we ceased to record the corresponding costof sales in May 1999. Selling, General and Administrative Expenses. The general andadministrative expenses were $3,209,465 during 2000 as compared to $1,761,796 in1999. The increase is largely attributable to increase in administrativeexpenses resulting from new personnel and programs to support our ongoing U.S.development activities. During 2000, we added additional personnel in theCorporate Affairs, Finance and Human Resource departments, and also created theInformation Technology and Commercial Development departments. We also incurredadditional expenses associated with our Nasdaq listings and legal fees for theimplementation of a shareholders rights plan. We expect that total general andadministrative spending in 2001 will continue to increase with our anticipatedgrowth. Research and Development Expenses. Our research and development expensesfor 2000 and 1999, were $6,892,283 and $2,374,024, respectively. The increase isattributable to the scaling-up of our U.S. research and development programs,including the toxicology studies and clinical trials on Alprox-TD(R) andFemprox(TM), increase in our research and development staff, from eightfull-time employees in 1999 to thirty-five full employees in 2000, and legalfees associated with the filings of new patent applications and maintenance ofissued patents. We expect that total research and development spending in 2001will continue to increase with the initiation and progression of advanced andcostly U.S. clinical activities on the Alprox-TD(R) and Femprox(TM) creams andour application of the NexACT(R) technology to other drug compounds and ourdevelopment of new products such as a topical treatment for nail fungus, a topical NSAID treatment for pain and inflammation, and a topical anti-emeticcream for the prevention of nausea and vomiting associated with post-operativesurgical procedures and cancer chemotherapy. Interest Income and Expense. We recognized $1,255,450 in net interestincome during 2000, compared with a net expense of $315,740 during 1999. This isthe result of the investment of proceeds from private placements and exercise ofwarrants and the elimination of interest payments associated with promissorynotes and credit lines. Gain on Sale of NexMed (Asia) Limited. We realized no gain in 2000 ascompared to a gain of $1,810,296 in 1999 for the divestiture of our Asianproperties in May 1999. Net Loss. The net loss was $(8,720,553) or a loss of $(0.40) per sharefor 2000, compared with ($2,490,600) or ($0.18) per share for 1999. The increasein net loss is primarily attributable to the acceleration of U.S. developmentactivities including the ongoing clinical studies and the increase ininfrastructure to support the activities. The 1999 net loss was also offset bythe gain on the sale of NexMed (Asia) Limited.COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEAR ENDED DECEMBER 31, 1999 AND1998. Revenues. We recorded revenues of $1,491,746 during the twelve months ofoperations in 1999 as compared to $5,709,083 during the same period in 1998. Therevenues were from NexMed Pharmaceuticals (Zhongshan) Limited, a joint venturein China which we sold in May 1999. Cost of Products Sold. Our cost of products sold was $1,415,002 and$5,186,308 in 1999 and 1998, respectively and is attributable to themanufacturing operations of the China joint venture. With the sale of the Chinajoint venture, we ceased to record the corresponding cost of sales in May 1999. Selling, General and Administrative Expenses. Our general andadministrative expenses were $1,761,796 during 1999 as compared to $2,635,114 in1998. The decrease is a result of the sale of our Asian operations including ourholding in the China joint venture. 9 Research and Development Expenses. Our research and development expensesfor 1999 and 1998, were $2,374,024 and $2,302,148, respectively. The increase isprimarily attributable to the initiation of clinical programs during the fourthquarter of 1999. Interest Income and Expense. We recognized $315,740 in net interestexpense during 1999, compared with a net expense of $600,337 during 1998. Thedecrease is due to our ceasing to record the interest expense for the lines ofcredit of the China joint venture. Gain on Sale of NexMed (Asia) Limited. We realized a gain of $1,810,296in 1999, compared to $0 in 1998, as a result of the divestiture of our Asianproperties. Net Loss. The net loss was $(2,490,600) or a loss of $(0.18) per sharefor 1999, compared with ($4,779,002) or ($0.64) per share for 1998. The decreasein net loss is primarily attributable to the gain on the sale of NexMed (Asia)Limited and reduction in expenses associated with the divestiture of our Asianoperations.QUARTERLY RESULTS The following table sets forth selected quarterly financial informationfor the years ended December 31, 2000 and 1999. The operating results are notnecessarily indicative of results for any future period. THREE MONTHS ENDED ------------------- -------------------------- ---------------------------- -------------------- March 31, June 30, September 30, December 31, 2000 2000 2000 2000 --------- -------- ------------- ------------ (in thousands, except per share data) Total Revenues $ - $ - $ - $ - Gross profit - - - -Loss from operations (1,407) (2,617) (2,341) (3,737)Net Loss (1,238) (2,469) (1,843) (3,171)Basic and diluted lossPer share $ (0.07) $ (0.13) $ (0.08) $ (0.14) =========== ========== ========== ========= THREE MONTHS ENDED ------------------- -------------------------- ---------------------------- -------------------- March 31, June 30, September 30, December 31, 1999 1999 1999 1999 --------- -------- ------------- ------------ (in thousands, except per share data) Total Revenues $ 1,098 $ 394 $ - $ -Gross profit 57 20 - -Loss from operations (739) (819) (575) (1,926)Net Loss (769) (897) (601) (223)Basic and diluted lossPer share $ (0.09) $ (0.11) $ (0.07) $ (0.01) ========== ========== ========== ========== ------------------------------------------------------------------------------------------------ 10LIQUIDITY AND CAPITAL RESOURCES We have experienced net losses and negative cash flow from operationseach year since our inception. Through December 31, 2000, we had an accumulateddeficit of $24,171,589. Our operations have principally been financed throughprivate placements of equity securities and debt financing. Since September1999, we have completed four private placements of our common stock and warrantsto purchase our common stock, raising gross proceeds of approximately $38.49million. During the same period, we raised an additional $12.6 million as aresult of exercises of warrants and options to purchase our common stock. Thetiming and size of the exercise of the warrants and options are determined bythe decisions of the respective warrant and option holders, and are notcontrolled by us. Therefore, funds raised in past periods should not beconsidered an indication of additional funds to be raised in any future periods. We have attempted to reduce cash flow requirements by renting scientificequipment and research and development facilities and using consultants, whereappropriate. We expect to incur additional future expenses, resulting insignificant losses, as we continue and expand our research and developmentactivities and undertake additional pre-clinical and clinical trials for ourproprietary topical treatments under development. We also expect to incursubstantial expenses relating to the filing, maintenance, defense andenforcement of patent and other intellectual property claims. At December 31, 2000, we had cash and cash equivalents, certificates ofdeposit and investments in marketable securities of approximately $35.79 millioncompared to $5.12 million at December 31, 1999. We have allocated our cashreserves for our operational requirements, and for the U.S. clinical studies onthe Alprox-TD(R) and Femprox(TM) creams, the development program on theViratrol(R) device, and the completion of our new manufacturing facility forcompliance with Good Manufacturing Practices (GMP) as required by the FDA. InFebruary 2001, we entered into a financial arrangement with GE CapitalCorporation for a $5 million line of credit for the purchase of equipment (i)for our new East Windsor, NJ manufacturing facility and (ii) for our expandedcorporate and laboratory facilities in Robbinsville, NJ. We believe that ourcurrent cash reserves are adequate to support our continuing operations for atleast the next twelve months. However, we may require additional financing forthe next phase of our development programs and may seek financing from equity ordebt and from private and public sources as well as from collaborative licensingand/or marketing arrangements with third parties. There is no assurance thatsuch funds will be available to us on acceptable terms, if at all.RECENT ACCOUNTING PRONOUNCEMENTS On December 3, 1999, the staff of the SEC published Staff AccountingBulletin 101, "Revenue Recognition," ("SAB 101") to provide guidance on therecognition, presentation and disclosure of revenue in financial statements. TheCompany's policy of revenue recognition is consistent with this bulletin. In June 2000, the FASB issued SFAS 138, "Accounting for Certain HedgingActivities", which amended Statement No. 133, "Accounting for DerivativeInstruments and Hedging Activities", Statement 138 must be adopted concurrentlywith the adoption of Statement 133. The Company will be required to adopt thesestatements for the year ending December 31, 2001. Statements 133 and 138establishes methods of accounting for derivative financial instruments andhedging activities related to those instruments as well as other hedgingactivities. Because we currently hold no derivative financial instruments and donot currently engage in hedging activities, adoption of these Statements is notexpected to have a material impact on our financial condition or results ofoperations. In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),"Accounting for Certain Transactions Involving Stock Compensation," aninterpretation of Accounting Principles Board Opinion No. 25 ("Opinion 25"). FIN44 clarifies (a) the definition of "employee" for purposes of applying Opinion25, (b) the criteria for determining whether a plan qualifies as anon-compensatory plan, (c) the accounting consequence of various modificationsto the terms of previously fixed stock options or awards, and (d) the accountingfor an exchange of stock compensation awards in a business combination. FIN 44was effective July 1, 2000, but certain conclusions in FIN 44 cover specificevents that occurred after either December 15, 1998 or January 12, 2000. Theapplication of FIN 44 did not have a material impact on our financial position,results of operations or cash flows. 11DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995, including statementsregarding our plans, objectives, expectations and intentions. Although webelieve the statements and projections are based upon reasonable assumptions,actual results may differ from those that we have projected.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We do not hold derivative financial investments, derivative commodityinvestments engage in foreign currency hedging or other transactions that exposeus to material market risk.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS PAGEREPORT OF INDEPENDENT ACCOUNTANTS 13FINANCIAL STATEMENTS Consolidated Balance Sheets - December 31, 2000 and 1999 14 Consolidated Statement of Operations and Comprehensive loss for the years ended December 31, 2000, 1999 and 1998 15 Consolidated Statement of Changes in Stockholders' Equity for years ended December 31, 1998, 1999 and 2000 16 Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998 17NOTES TO FINANCIAL STATEMENTS 18 12 Report of Independent AccountantsTo the Board of Directors and Stockholders of NexMed, Inc.In our opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations and comprehensive loss, of changes instockholders' equity and of cash flows present fairly, in all material respects,the financial position of NexMed, Inc. and its subsidiaries at December 31, 2000and 1999, and the results of their operations and their cash flows for each ofthe three years in the period ended December 31, 2000 in conformity withaccounting principles generally accepted in the United States of America. Thesefinancial statements are the responsibility of the Company's management; ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.PricewaterhouseCoopers LLPNew York, New YorkFebruary 15, 2001 13NEXMED, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 1999 ASSETS Current assets Cash and cash equivalents $ 27,702,585 $ 5,118,849 Certificates of deposit 2,976,000 -- Marketable securities 5,111,328 -- Notes receivable -- 2,000,000 Prepaid expenses and other current assets 802,472 169,995 -------------- -------------- TOTAL CURRENT ASSETS 36,592,385 7,288,844 Fixed assets, net 3,397,297 344,489 -------------- -------------- TOTAL ASSETS $ 39,989,682 $ 7,633,333 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 1,245,507 $ 556,664 Notes payable -- 133,838 Due to officer -- 33,092 -------------- -------------- TOTAL CURRENT LIABILITIES 1,245,507 723,594 -------------- -------------- Commitments and contingencies (Note 13) Stockholders' equity: Preferred stock $.001 par value, 10,000,000 shares authorized, none issued and outstanding -- -- Common stock, $.001 par value, 40,000,000 shares authorized, 25,147,384 and 16,127,134 shares issued and outstanding, respectively 25,147 16,127 Additional paid-in capital 63,009,161 22,356,112 Accumulated other comprehensive (loss) income (109,403) 115 Accumulated deficit (24,171,589) (15,451,036) -------------- -------------- 38,753,316 6,921,318Less: Deferred compensation (9,141) (11,579) -------------- -------------- TOTAL STOCKHOLDERS' EQUITY 38,744,175 6,909,739 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,989,682 $ 7,633,333 ============== ============== The accompanying notes are an integral part of these consolidated financialstatements. 14NEXMED, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998 Revenue Product sales $ -- $ 1,491,746 $ 5,709,083 -------------- -------------- -------------- Costs and expenses Cost of products sold -- 1,415,002 5,186,308 Selling, general and administrative 3,209,465 1,761,796 2,635,114 Research and development 6,892,283 2,374,024 2,302,148 -------------- -------------- -------------- TOTAL COSTS AND EXPENSES 10,101,748 5,550,822 10,123,570 -------------- -------------- -------------- Loss from operations (10,101,748) (4,059,076) (4,414,487) -------------- -------------- -------------- Other income (expense) Gain on sale of NexMed Asia -- 1,810,296 -- Other Income 125,745 -- -- Interest income 1,255,450 92,385 15,878 Interest expenses -- (408,125) (616,215) -------------- -------------- -------------- Total other income (expense) 1,381,195 1,494,556 (600,337) -------------- -------------- -------------- Loss before minority interest (8,720,553) (2,564,520) (5,014,824) Minority interest -- 73,920 235,822 -------------- -------------- -------------- NET LOSS $ (8,720,553) $(2,490,600) $(4,779,002) ============== ============== ============== Other comprehensive loss Foreign currency translation adjustments $ 207 $ (16,318) $ (44,284) Unrealized loss on marketable securities (109,725) -- -- -------------- -------------- -------------- COMPREHENSIVE LOSS $ (8,830,071) $(2,506,918) $(4,823,286) ============== ============== ============== Basic and diluted loss per share $ (.40) $ (.18) $ (.64) ============== ============== ============== Weighted average common shares outstanding used for basic and diluted loss per share 21,868,267 13,724,052 7,505,588 ============== ============== ============== The accompanying notes are an integral part of these consolidated financial statements. 15NEXMED, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ACCUMULATED OTHER COMPREHENSIVE INCOME ------------------------ UNREALIZED COMMON STOCK ADDITIONAL FOREIGN LOSS ON -------------------- PAID-IN CURRENCY MARKETABLE (SHARES) (AMOUNT) CAPITAL TRANSLATION SECURITIES Balance at January 1, 1998 6,180,098 $6,180 $ 7,300,453 $ -- $-- Issuance of common stock for cash 1,790,167 1,790 2,602,585 -- -- Issuance of common stock upon conversion of note payable 120,400 120 150,380 -- -- Embedded discount on convertible notes payable -- -- 70,100 -- -- Issuance of common stock upon exercise of stock options 285,000 285 70,965 -- -- Issuance of common stock for services 51,038 51 63,747 -- -- Issuance of compensatory options to consultants -- -- 36,960 -- -- Shares cancelled in settlement (see Note 8) (25,000) (25) 25 -- -- Sale of stock by subsidiary -- -- 475,000 -- -- Issuance of note receivable-related party Amortization of deferred compensation expense -- -- -- -- -- Cumulative translation adjustment -- -- -- (44,284) -- Net loss -- -- -- -- -- ----------- --------- ------------- ---------- ------------ Balance at December 31, 1998 8,401,783 8,402 10,770,214 (44,284) -- Issuance of common stock upon conversion of note payable 1,725,434 1,725 2,644,976 -- -- Embedded discount on convertible notes payable -- -- 64,348 -- -- Issuance of common stock and warrants for cash 5,671,652 5,672 7,820,640 -- -- Issuance of common stock upon exercise of warrants, net 83,332 83 173,352 -- -- Issuance of common stock for services 11,600 12 50,739 -- -- Issuance of common stock for purchase of minority 233,333 233 349,767 -- -- Adjustment due to acquisition of minority interest -- -- (475,000) -- -- Sale and issuance of warrants in connection with -- -- 445,200 -- -- Compensation expense related to vesting -- -- 499,688 -- -- Unearned Compensation -- -- 12,188 -- -- Amortization of deferred compensation expense -- -- -- -- -- Cumulative translation adjustment -- -- -- 44,399 -- Net loss -- -- -- -- -- ----------- --------- ------------- ---------- --------Balance at December 31, 1999 16,127,134 16,127 22,356,112 115 -- Issuance of common stock and warrants for cash 3,358,256 3,358 27,822,823 -- -- Issuance of common stock upon exercise of stock options 686,500 687 581,563 -- -- Issuance of common stock upon exercise of warrants, net 4,973,494 4,973 12,175,055 -- -- Issuance of common stock for services 2,000 2 7,998 -- -- Issuance of compensatory options to consultants -- -- 65,610 -- -- Amortization of deferred compensation expense -- -- -- -- -- Unrealized loss from available-for-sale securities -- -- -- -- (109,725) Cumulative translation adjustment -- -- -- 207 -- Net loss -- -- -- -- -- ----------- -------- ------------- ---------- ---------Balance at December 31, 2000 25,147,384 $25,147 $63,009,161 $ 322 $(109,725) =========== ======== ============= ========== ========= NOTE TOTAL ACCUMULATED DEFERRED RECEIVABLE STOCKHOLDERS' DEFICIT COMPENSATION RELATED PARTY EQUITY Balance at January 1, 1998 $ (8,181,434) $(51,458) -- (926,259) Issuance of common stock for cash -- -- -- 2,604,375 Issuance of common stock upon conversion of note payable -- -- -- 150,500 Embedded discount on convertible notes payable -- -- -- 70,100 Issuance of common stock upon exercise of stock options -- -- -- 71,250 Issuance of common stock for services -- -- -- 63,793 Issuance of compensatory options to consultants -- (25,800) -- 11,160 Shares cancelled in settlement (see Note 8) -- -- -- -- Sale of stock by subsidiary -- -- -- 475,000 Issuance of note receivable-related party (150,000) (150,000) Amortization of deferred compensation expense -- 62,925 -- 62,925 Cumulative translation adjustment -- -- -- (44,284) Net loss (4,779,002) -- -- (4,779,002) --------------- ----------- ----------- ------------- Balance at December 31, 1998 (12,960,436) (14,333) (150,000) (2,390,437) Issuance of common stock upon conversion of note payable -- -- -- 2,646,701 Embedded discount on convertible notes payable -- -- -- 64,348 Issuance of common stock and warrants for cash -- -- -- 7,826,312 Issuance of common stock upon exercise of warrants, net -- -- -- 173,435 Issuance of common stock for services -- -- -- 50,751 Issuance of common stock for purchase of minority -- -- 150,000 500,000 Adjustment due to acquisition of minority interest -- -- -- (475,000) Sale and issuance of warrants in connection with -- -- -- 445,200 Compensation expense related to vesting -- -- -- 499,688 Unearned Compensation -- (12,188) -- -- Amortization of deferred compensation expense -- 14,942 -- 14,942 Cumulative translation adjustment -- -- 44,399 Net loss (2,490,600) -- -- (2,490,600) --------------- ----------- ----------- ------------ Balance at December 31, 1999 (15,451,036) (11,579) -- 6,909,739 Issuance of common stock and warrants for cash -- -- -- 27,826,181 Issuance of common stock upon exercise of stock options -- -- -- 582,250 Issuance of common stock upon exercise of warrants, net -- -- -- 12,180,028 Issuance of common stock for services -- -- -- 8,000 Issuance of compensatory options to consultants -- -- -- 65,610 Amortization of deferred compensation expense -- 2,438 -- 2,438 Unrealized loss from available-for-sale securities -- -- -- (109,725) Cumulative translation adjustment -- -- 207 Net loss -- -- -- -- --------------- ----------- ----------- ------------ Balance at December 31, 2000 $(15,451,036) $ (9,141) $ -- $47,464,728 =============== =========== =========== ============ 16NEXMED, INC. CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998 Cash flows from operating activities Net (loss) $ (8,720,553) $(2,490,600) $(4,779,002) Adjustments to reconcile net loss to net cash from operating activities Depreciation and amortization 257,149 56,378 341,217 Minority interest -- (73,920) (235,822) Noncash compensation expense 76,048 565,381 137,883 Noncash interest expense -- 277,329 70,100 Net loss on sale of marketable securities 8,812 -- -- Gain on sale of NexMed Asia -- (1,810,296) -- Changes in assets and liabilities affecting operating cash flows Increase in accounts receivable -- -- (1,289,483) Decrease in notes receivable 2,000,000 -- -- Decrease (increase) in inventories -- 8,898 (699,651) Increase in prepaid expense (632,477) (114,315) (124,007) (Decrease) increase in accounts payable and accrued expenses 688,843 (875,345) 1,405,189 -------------- -------------- -------------- NET CASH USED IN OPERATING ACTIVITIES (6,322,178) (4,456,490) (5,173,576) -------------- -------------- -------------- Cash flows from investing activities Capital expenditures (3,309,957) (247,745) (498,758) Proceeds from sale of subsidiary, net -- 343,441 -- Increase in notes receivable-related party -- -- (150,000) Purchases of certificates of deposits and marketable securities (23,368,745) -- -- Proceeds from sale/redemption of certificates of deposits and marketable securities 15,162,880 -- -- Advances to joint ventures -- -- 1,870,000 -------------- -------------- -------------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (11,515,822) 95,696 1,221,242 -------------- -------------- -------------- Cash flows from financing activities Net borrowings under line of credit -- -- 2,174,412 Net decrease in due to joint venture partner -- -- (522,075) (Decrease) increase in due to officers (33,092) (567,408) 600,500 Issuance of common stock, net of offering costs 40,588,459 8,444,947 2,675,625 Sale of stock by subsidiary -- -- 500,000 Issuance of notes payable -- 1,132,500 527,735 Repayment of notes payable (133,838) (1,228,050) (500,000) -------------- -------------- -------------- NET CASH FROM FINANCING ACTIVITIES 40,421,529 7,781,989 5,456,197 -------------- -------------- -------------- Effect of foreign exchange on cash 207 16,318 44,284 -------------- -------------- -------------- Net (decrease) increase in cash and cash equivalents 22,583,736 3,437,513 1,548,147 Cash and cash equivalents Beginning of period 5,118,849 1,681,336 133,189 -------------- -------------- -------------- End of Period $ 27,702,585 $ 5,118,849 $ 1,681,336 ============== ============== ============== The accompanying notes are an integral part of these consolidated financial statements. 17NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 19981. ORGANIZATION AND BASIS OF PRESENTATION ORGANIZATION The Company was incorporated in Nevada in 1987. In January 1994, the Company began research and development of a device for the treatment of herpes simplex. The Company, since 1995, has conducted research and development both domestically and abroad on proprietary pharmaceutical products, with the goal of growing through acquisition and development of pharmaceutical products and technology. The accompanying financial statements have been prepared on a basis which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has an accumulated deficit of $24,171,589 at December 31, 2000 and expects that it will incur additional losses in completing the research, development and commercialization of its technologies. Management anticipates that it will require additional financing, which it is actively pursuing, to fund operations and continued research and development. Management believes that the Company has the ability to obtain such additional financing and that its cash and cash equivalents, and marketable securities balances at December 31, 2000 will be sufficient to fund existing operations through at least December 31, 2001.2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES Significant accounting principles followed by the Company in preparing its financial statements are as follows: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its majority and wholly owned subsidiaries. All significant intercompany transactions have been eliminated. TRANSLATION OF FOREIGN CURRENCIES The functional currency of the Company's foreign subsidiaries is the local currency. Assets and liabilities of the Company's foreign subsidiaries are translated to United States dollars based on exchange rates at the end of the reporting period. Income and expense items are translated at average exchange rates prevailing during the reporting period. Translation adjustments are accumulated in a separate component of stockholder's equity. Transaction gains or losses are included in the determination of income. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, cash equivalents represent all highly liquid investments with an original maturity date of three months or less. MARKETABLE SECURITIES Marketable securities consist of high quality corporate and government securities, which have original maturities of more than three months at the date of purchase and less than one year from the date of the balance sheet, and equity investments in publicly-traded companies. The Company classifies all debt securities and equity securities with readily determinable market value as "available for sale" in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These investments are carried at fair market value with unrealized gains and losses reported as a separate component of stockholders' equity. Gross realized gains and gross realized losses from the sales of securities classified as available-for-sale for the year ended December 31, 2000 were $9,653 and $18,465, respectively. For the purpose of determining realized gains and losses, the cost of securities sold was based on specific identification. The Company reviews investments on a quarterly basis for reductions in market value that are other than temporary. When such reductions occur, the cost of the investment is adjusted to its fair value through a charge to net income. 18NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 1998 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents, notes payable and accounts payable and accrued expenses approximates fair value due to the relatively short maturity of these instruments. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Depreciation of equipment and furniture and fixtures is provided on a straight-line basis over the estimated useful lives of the assets, generally three to ten years. Depreciation of buildings is provided on a straight-line basis over its estimated useful life of 31 years. Amortization of leasehold improvements is provided on a straight-line basis over the shorter of their estimated useful life or the lease term. The costs of additions and betterments are capitalized, and repairs and maintenance costs are charged to operations in the periods incurred. LONG-LIVED ASSETS The Company reviews 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 is 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. No such impairment losses have been identified by the Company. REVENUE RECOGNITION Revenues from product sales are recognized upon delivery of products to customers, less allowances for estimated returns and discounts. Revenues from license fees are recognized when earned in accordance with the underlying agreement. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred and include the cost of third parties who conduct research and development, pursuant to development and consulting agreements, on behalf of the Company. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized. LOSS PER COMMON SHARE Basic earnings per share ("Basic EPS") is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share ("Diluted EPS") gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an antidilutive effect on earnings. At December 31, 2000, 1999 and 1998, outstanding options to purchase 3,582,675, 2,457,700 and 2,676,700 shares of common stock, respectively, with exercise prices ranging from $.25 to $16.25 have been excluded from the computation of diluted loss per share as they are antidilutive. Outstanding warrants to purchase 2,291,549, 5,705,726 and 200,000 shares of common stock, respectively, with exercise prices ranging from $1.00 to $16.20 have also been excluded from the computation of diluted loss per share as they are 19NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 1998 antidilutive. Additionally, 500,000 common shares that were issuable upon conversion of notes payable have been excluded from the computation of Diluted EPS at December 31, 1998, as they are antidilutive. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. ACCOUNTING FOR STOCK BASED COMPENSATION As provided by 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. CONCENTRATION OF CREDIT RISK From time to time, the Company maintains cash in bank accounts that exceed the FDIC insured limits. The Company has not experienced any losses on its cash accounts. SUPPLEMENTAL CASH FLOW INFORMATION The Company paid interest of $10,413, $66,576 and $10,000 in 2000, 1999 and 1998, respectively. There was no cash paid for income taxes in each of 2000, 1999 and 1998. COMPREHENSIVE LOSS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), which requires the presentation of the components of comprehensive income in the Company's financial statements. Comprehensive income is defined as the change in the Company's equity during a financial reporting period from transactions and other circumstances from non-owner sources (including cumulative translation adjustments, minimum pension liabilities and unrealized gains/losses on available for sale securities). Accumulated other comprehensive (loss) income included in the Company's balance sheet is comprised of translation adjustments from the Company's foreign subsidiaries and unrealized gains and losses on investment in marketable securities.3. JOINT VENTURE AGREEMENTS In July 1997, the Company, through its wholly-owned subsidiary, NexMed (Asia) Limited, entered into an agreement to form a Chinese joint-venture company, NexMed Pharmaceuticals (Zhongshan) Ltd. (the "JV"), with Zhongshan Xiaolan Pharmaceuticals Factory (the "JV Partner"). In September 1997, the JV received all necessary Chinese government approvals to commence operations. Effective January 1, 1998, the Company completed its first year funding requirement of $2,170,000 and, as a result, the financial position and results of operations of the JV were included in the consolidated financial statements of the Company as of January 1, 1998. On March 29, 1999, the Company entered into a stock purchase agreement (the "Purchase Agreement") with Vergemont International Limited ("Vergemont"), for the sale of all the issued and outstanding capital stock of NexMed (Asia) Limited, which became effective on May 17, 1999, for $4,000,000, consisting of $2,000,000 in cash and two promissory notes, each in the amount of $1,000,000, due on November 12, 1999 and June 30, 2000, respectively. In addition, the Company granted Vergemont warrants to acquire 2,000,000 shares of the 20NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 1998 Company's common stock, exercisable at $3.00 per share. In conjunction with this transaction, the Company agreed to pay a consulting firm a 6% commission on the $4,000,000 in proceeds, as such proceeds are received, and issued the consulting firm warrants to acquire 200,000 shares of the Company's common stock at $3.00 per share. At the date of sale, the Company's basis in the assets and liabilities of NexMed (Asia) Limited was $1,504,204. The Company has estimated the fair value of the warrants issued to Vergemont and the consulting firm to be approximately $372,000 and $73,000, respectively, resulting in a net gain on the transaction of $1,810,296. Such gain was initially deferred due to uncertainty regarding the ultimate realization of the two promissory notes issued. In February 2000 Vergemont repaid the $2,000,000 in promissory notes. As a result, the Company has recorded the gain on the sale of NexMed (Asia) Limited during 1999.4. NEW BRUNSWICK MEDICAL In June 1999, the Company acquired the remaining 5% minority interest in its subsidiary, New Brunswick Medical, Inc. ("NBM") in exchange for total consideration of approximately $500,000, consisting of 233,333 shares of the Company's common stock, with an estimated fair value of $350,000, and the forgiveness of a $150,000 note receivable from the former minority stockholder.5. FIXED ASSETS Fixed assets at December 31, 2000 and 1999 are comprised of the following: 2000 1999 Building $ 2,264,964 $ - Machinery and equipment 1,073,723 267,601 Furniture and fixtures 144,215 98,863 Leasehold improvements 304,693 113,843 ----------- --------- Less: accumulated depreciation (390,298) (135,818) ----------- --------- $ 3,397,297 $ 344,489 =========== =========6. NOTES PAYABLE From April to September 1999, the Company issued an aggregate of $1,082,500 of convertible promissory notes. The notes bore interest at rates ranging from 12% to 15% per annum. The notes were convertible at the option of the holder at prices ranging from $1.00 to $1.50 per share. The Company has recorded additional interest expense in the amount of $64,348, based upon the difference between the fair value of the common stock on the date of issuance and the conversion price per share. During 1999, the note holders converted such notes into 973,334 shares of the Company's common stock. In February 1999, the Company issued a $50,000 note payable. The note bore interest at 15% per annum and was initially due May 1999. The Company repaid the note in November 1999. 21NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 1998 In December 1998, the Company issued a promissory note, in the aggregate principal amount of $324,678. The note bore interest at 12% per annum and was payable, together with accrued but unpaid interest, in June 1999. In June 1999, the Company repaid the note. In October 1998, the Company issued a promissory note in the aggregate principal amount of $120,000. The note bore interest at 15% per annum and was payable together with accrued interest in January 1999. In January 1999, the holder of the note agreed to roll-over the outstanding principal and unpaid interest into a new note, in the aggregate principal amount of $124,500. The new note bears interest at 15% per annum and is payable, together with accrued but unpaid interest, in July 1999. In July 1999, the holder of the note agreed to roll-over the outstanding principal and unpaid interest into a new note, due on January 25, 2000 in the aggregate principal amount of $138,838. The Company repaid the note in January 2000. In July and August 1998, the Company issued promissory notes in the aggregate principal amount of $131,750. The notes bore interest at rates ranging from 12% to 15% per annum and were initially payable together with accrued interest on various dates through February 1999. The holders of the notes agreed to roll-over the outstanding principal and unpaid interest into new notes, in the aggregate principal amount of $138,718. The new notes bore interest at rates ranging from 12% to 15% per annum and were payable, together with accrued but unpaid interest, on various dates through January 2000. The Company repaid the notes in June 1999. In January 1998, the Company issued a $100,000 promissory note. The note bore interest at 15% per annum and was due in January 1999. In January 1999, the holder of the note agreed to roll-over the outstanding principal and unpaid interest into a new note, in the aggregate principal amount of $115,000. The new note bore interest at 12% per annum and was payable, together with accrued but unpaid interest, in June 1999. In May 1999, the Company repaid the note. In November 1997, the Company completed a private placement of unsecured subordinated notes bearing interest at 6% per annum (the "6% Notes"), in the cumulative principal amount of $1,820,000. The 6% Notes, together with accrued but unpaid interest, were initially due on November 16, 1998. In November 1998, holders of an aggregate principal amount of $1,000,000 of the 6% Notes agreed to extend the maturity date of their notes until November 16, 1999. In addition, the interest rate on their notes was increased to 10% per annum and the holders were given the right to convert their notes into common stock at $2.00 per share, which was the estimated fair value of the Company's common stock. During 1999, the holders of such notes converted their principal and interest into 580,000 shares of the Company's common stock. The Company was in default of the remaining 6% Notes, in the aggregate principal amount of $820,000. During 1999, the holders of an aggregate principal amount of $300,000 of 6% Notes in default agreed to convert their principal and unpaid interest into 172,100 shares of common stock, based upon the estimated fair value of the Company's common stock on the date of conversion. Also during 1999, the Company repaid the remaining $520,000 of 6% Notes.7. RELATED PARTY TRANSACTIONS Amounts due to an officer of the Company at December 31, 1999 represents advances from an officer and director of the Company under an informal agreement. The advances bore interest at 12% per annum and were repaid in January 2000. During 1999 and 1998, the JV paid approximately $120,000 and $253,000 in rent and management fees, respectively, to the JV Partner. 22NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 19988. COMMON STOCK In August 2000, the Company completed unit offerings of 3,138,256 shares of its common stock and warrants to acquire 1,282,891 shares of its common stock to 25 accredited individuals and financial institutions. The warrants have an exercise price of $13.50 to $16.20 per share and a term of eighteen months. The price of the units ranged from $16.54 to $18.00, depending on the date of closing and/or amount of warrant coverage. The Company raised $26,848,139 in gross proceeds and $24,879,281 in net proceeds, after deducting commissions and offering expenses, in connection with these offerings. In addition, the Company issued warrants to acquire an aggregate of 305,426 shares of its common stock, with exercise prices ranging from $13.65 to $16.20 per share, to the placement agents in the offering. In April 2000, the Company completed a private placement of 220,000 shares of its common stock at $14.25 per share, raising gross proceeds of $3,135,000 and net proceeds, after deducting commissions and offering expenses, of $2,946,900. In September 1999, the Company completed a private placement of its securities at $3.00 per unit (the "Unit"), raising gross proceeds of $8,507,478 and net proceeds, after deducting commissions and offering expenses, of $7,826,312. Each Unit consisted of two shares of common stock and a warrant to purchase an additional share of common stock at $2.25 per share (the "Warrant"). Each warrant is redeemable by the Company if the closing price per share of common stock should reach $4.00 per share for 15 consecutive trading days. In addition, the Company issued warrants to acquire 553,232 shares of its common stock at $2.25 per share to the placement agent in the offering. In December 1999, Warrants to acquire 83,332 shares of common stock were exercised, providing gross proceeds of $187,497 and net proceeds, after deducting commissions and offering expenses, of $173,435. In December 1999, the Company issued 11,600 shares of its common stock to employees and vendors for services rendered. The Company has recorded $50,750 as compensation expense based upon the fair value of the shares on the date of issuance. During 1998, the Company issued 1,790,167 shares of its common stock in a number of private placement transactions, raising proceeds of $2,604,375. In April 1998, the Company issued 51,038 shares of common stock to consultants in exchange for services. The Company has recorded approximately $63,798 of expense based upon the estimated fair value of the Company's common stock at the time of issuance. During 1998, options to acquire 285,000 shares of common stock at $.25 per share were exercised. The Company received net proceeds of $71,250. During 1998, a stockholder returned 25,000 shares of the Company's common stock in settlement of an outstanding dispute. The returned shares were cancelled by the Company.9. STOCKHOLDER RIGHTS PLAN On April 3, 2000, the Company declared a dividend distribution of one preferred share purchase right (the "Right") for each outstanding share of the Company's common stock to shareholders of record at the close of business on April 21, 2000. One Right will also be distributed for each share of Common Stock issued after April 21, 2000, until the Distribution Date, described in the next paragraph. Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-hundredths of a share (a "Unit") of Series A 23NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 1998 Junior Participating Preferred Stock, $.001 par value per share (the "Preferred Stock"), at a Purchase Price of $100.00 per Unit, subject to adjustment. 1,000,000 shares of the Company's preferred stock has been set-aside for the Rights Plan. Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights Certificates will be distributed. The Rights will separate from the Common Stock and a Distribution Date will occur upon the earlier of (i) ten (10) business days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date"), or (ii) ten (10) business days following the public announcement of a tender offer or exchange offer that would, if consummated, result in a person or group beneficially owning 15% or more of such outstanding shares of Common Stock, subject to certain limitations. Under the terms of the Rights Agreement, Dr. Y. Joseph Mo, who beneficially owned approximately 12.12% of the outstanding shares of the Company's Common Stock as of April 2000, will be permitted to continue to own such shares and to increase such ownership to up to 25% of the outstanding shares of Common Stock, without becoming an Acquiring Person and triggering a Distribution Date.10. STOCK OPTIONS In November 1995, the Company granted options to certain officers and directors to purchase up to 560,000 shares of its common stock at an exercise price of $0.25 per share, which was the estimated fair value of the common stock at that time. The vesting of these options was contingent upon reaching certain market capitalization levels, as defined in the option agreements. 135,000 options vest if market capitalization reaches $2,000,000 by December 31, 1997 and an additional 135,000, 140,000 and 150,000 options vest if market capitalization reaches $3,000,000, $5,000,000 and $10,000,000, respectively. These options expire on December 1, 2002. During 1996, the market capitalization, as defined, of the Company exceeded $5,000,000, resulting in the vesting of 410,000 of these options and the recording of $665,000 of expense. In December 1999, the market capitalization, as defined, exceeded $10,000,000, resulting in the vesting of 130,000 of these options and the recording of $499,688 in expense. As of December 31, 2000, 50,000 of such options remain outstanding. During October 1996 the Company adopted a Non-Qualified Stock Option Plan ("Stock Option Plan") and reserved 100,000 shares of common stock for issuance pursuant to the Plan. During December 1996, the Company also adopted The NexMed, Inc. Stock Option and Long-Term Incentive Compensation Plan ("the Incentive Plan") and The NexMed, Inc. Recognition and Retention Stock Incentive Plan ("the Recognition Plan"). A total of 2,000,000 shares were set aside for these two plans. In May 2000, the Stockholders' approved an increase in the number of shares reserved for the Incentive Plan and Recognition Plan to a total of 7,500,000. Options granted under the Company's plans generally vest over a period of three to five years. During 1998, the Company granted 80,000 fully-vested options to acquire shares of the Company's common stock to consultants under the Recognition Plan. The exercise prices of the options range from $2.00 to $2.50 per share, based upon the estimated fair value of the Company's common stock on the date of grant. The Company has recorded a total of $36,960 of expense related to these options during the year ended December 31, 1998. 24NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 1998A summary of stock option activity is as follows: WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PIRCE Outstanding at January 1, 1998 2,930,000 $1.49 Granted 396,700 2.51 Exercised (285,000) 0.25 Forfeited (80,000) 0.25 Cancelled (285,000) 2.00 ------------ ---------- Outstanding at December 31, 1998 2,676,700 1.73 Granted 90,000 2.00 Cancelled (309,000) 2.34 ------------ ---------- Outstanding at December 31, 1999 2,457,700 1.66 Granted 1,962,225 5.43 Exercised (686,500) 0.85 Cancelled (150,750) 7.23 ------------ ---------- Outstanding at December 31, 2000 3,582,675 $3.67 ============ ========== Exercisable at December 31, 2000 2,244,433 $2.59 ============ ========== Exercisable at December 31, 1999 2,366,700 $1.64 ============ ========== Exercisable at December 31, 1998 1,792,700 $1.66 ============ ========== Options available for grant at December 31, 2000 3,780,825 ============ The following table summarizes information about options outstanding at December31, 2000: OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------------------------------------- WEIGHTED AVERAGE RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE $ 0.25 - 1.00 90,000 4.9 years $ 0.58 90,000 $ 0.58 2.00 - 2.50 1,677,200 6.5 years 2.05 1,610,000 2.05 4.00 - 5.00 1,538,125 9.1 years 4.02 499,433 4.01 6.50 - 8.00 97,500 9.5 years 7.77 30,000 7.25 12.00 -16.50 179,850 9.8 years 15.20 15,000 16.25 ------------- ---------------- ------------- ---------------- 3,582,675 $ 3.67 2,244,433 $ 2.59 ============= ================ ============= ================ 25NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 1998 Had compensation cost for option grants to employees pursuant to the Company's stock option plans been determined based upon the fair value at the grant date for awards under the plan consistent with the methodology prescribed under FAS 123, the Company's net loss and net loss per share, for the years ended December 31, 2000, 1999 and 1998, would have been increased by approximately $1,907,700, $464,000 and $803,200, respectively, or $.10, $.03 and $.11 per share, respectively. The weighted average grant date fair value of options granted during 2000, 1999 and 1998 was $3.62, $1.11 and $.96, respectively. The fair value of each option and warrant (see Note 10) is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used in the model: Dividend yield 0.0% Risk-free yields 4.39% - 6.71% Expected volatility 65.0% - 80.0% Option terms 1-10 years11. WARRANTS A summary of warrant activity is as follows: WEIGHTED COMMON SHARES AVERAGE ISSUABLE UPON EXERCISE EXERCISE PRICE Outstanding at January 1, 1998 1,110,000 $ 3.59 Cancelled (910,000) 4.00 --------------- ---------- Outstanding at December 31, 1998 200,000 1.75 Issued 5,589,058 2.55 Exercise (83,332) 2.25 --------------- ---------- Outstanding at December 31, 1999 5,705,726 2.52 Issued 1,588,317 14.59 Exercised (4,973,494) 2.54 Redeemed (29,000) 2.25 --------------- ---------- Outstanding at December 31, 2000 2,291,549 $10.85 --------------- ---------- In August 2000, the Company issued warrants to acquire an aggregate of 1,588,317 shares of its common stock to the investors and placement agents in a private placement of its securities (see Note 8). The warrants have exercise prices ranging from $13.50 to $16.20 per share and expire in February 2002. In May 1999, the Company issued warrants to acquire an aggregate of 2,200,000 shares of common stock at $3.00 per share in connection with the sale of NexMed (Asia) Limited (Note 3). Warrants to acquire 2,000,000 shares were exercised during 2000 and the remaining 200,000 are outstanding at December 31, 2000. In September 1999, the Company issued warrants to acquire an aggregate of 2,835,826 shares of common stock at $2.25 per share in connection with a private placement (Note 8). As of December-31, 1999, warrants to acquire 83,332 shares of common stock were exercised. In January 2000, the Company received $6,127,862 26NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 1998 million in gross proceeds from the exercise of the Warrants and issued 2,723,494 shares of is common stock. Each warrant was redeemable by the Company at $.001 per warrant if not exercised by close of business on January 14, 2000. The Company redeemed a total of 29,000 Warrant shares. In addition, the Company issued warrants to acquire 553,232 shares of its common stock at $2.25 per share to the placement agent in the offering. As of December 31, 2000, the placement agent has exercised 200,000 of such warrants and the remaining 353,232 remain outstanding. In conjunction with the issuance of the 6% Notes (see Note 6), the note holders and the placement agent received warrants to purchase an aggregate of 910,000 shares of the Company's common stock at an exercise price of $4.00. The warrants are immediately exercisable and have a term of one year. The estimated fair value of the Company's common stock was $2.00 per share at the time of issuance. The Company has valued the warrants at $137,410 which has been accounted for as a debt discount and is being amortized over the life of the 6% Notes.12. INCOME TAXES The Company has incurred losses since inception which have generated net operating loss carryforwards of approximately $10,000,000 for federal and state income tax purposes. These carryforwards are available to offset future taxable income and expire beginning in 2011 for federal income tax purposes. In addition, the Company has general business and research and development tax credit carryforwards of approximately $550,000. Internal Revenue Code Section 382 places a limitation on the utilization of Federal net operating loss carryforwards when an ownership change, as defined by tax law, occurs. Generally, an ownership change, as defined, occurs when a greater than 50 percent change in ownership takes place during any three-year period. The actual utilization of net operating loss carryforwards generated prior to such changes in ownership will be limited, in any one year, to a percentage of fair market value of the Company at the time of the ownership change. Such a change may have already resulted from the additional equity financing obtained by the Company since its formation. The net operating loss carryforwards and tax credit carryforwards result in a noncurrent deferred tax benefit at December 31, 2000 of approximately $4,500,000. In consideration of the Company's accumulated losses and the uncertainty of its ability to utilize this deferred tax benefit in the future, the Company has recorded a valuation allowance of an equal amount on such date to fully offset the deferred tax benefit amount. For the years ended December 31, 2000, 1999 and 1998, the Company's effective tax rate differs from the federal statutory rate principally due to net operating losses and other temporary differences for which no benefit was recorded, state taxes and other permanent differences. 27NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 199813. COMMITMENTS AND CONTINGENCIES The Company is a party to several short-term consulting and research agreements which, generally, can be cancelled at will by either party. The Company leases office space and research facilities under operating lease agreements expiring through 2005. Future minimum payments under noncancellable operating leases with initial or remaining terms of one year or more, consist of the following at December 31, 2000: 2001 $345,533 2002 325,908 2003 109,569 2004 27,129 2005 22,104 -------- TOTAL $808,139 ======== The Company also leases office space under a short-term lease agreements. Total rent expense was $325,666, $310,326 and $344,200 in 2000, 1999 and 1998, respectively.14. SEGMENT AND GEOGRAPHIC INFORMATION In 1998, the Company adopted FAS 131, "Disclosures about Segments of an Enterprise and Related Information". FAS 131 establishes standards for reporting information regarding operating segments and related disclosures about products and services, geographic areas and major customers. The Company is active in one business segment: designing, developing, manufacturing and marketing pharmaceutical products. The Company maintains development and marketing operations in the United States, Hong Kong and Canada. Through May 1999, the Company also maintained a manufacturing facility in China through the JV (Note 3). 28NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2000, 1999 and 1998 Geographic information as of December 31, 2000, 1999 and 1998 are as follows: 2000 1999 1998 NET REVENUES United States .......... $ -- $ -- $ -- China .................. -- 1,491,774 5,709,083 Other foreign countries -- -- -- -------------- -------------- -------------- $ -- $ 1,491,774 $ 5,709,083 ============== ============== ============== NET LOSS United States .......... $(8,630,255) $(4,041,824) $(3,743,963) China .................. -- (172,509) (544,939) Other foreign countries (90,298) 1,736,437 (490,100) -------------- -------------- -------------- $(8,720,553) $(2,477,896) $(4,779,002) ============== ============== ============== TOTAL ASSETS United States .......... $39,516,217 $ 5,497,834 $ 277,119 China .................. -- -- 5,539,329 Other foreign countries 473,465 2,084,798 108,180 -------------- -------------- -------------- $39,989,682 $ 7,582,632 $ 5,924,628 ============== ============== ============== 15. SUBSEQUENT EVENTS In February 2001, the Company entered into a $5,000,000 line of credit facility for the purchase of equipment with GE Capital Corporation. 29ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.PART III.ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information called for by Item 10 is set forth under the heading"Election of Directors" in the Company's Proxy Statement for the annual meetingof stockholders to be held in May 2001 (the "2001 Proxy Statement"), which isincorporated herein by this reference and "Executive Officers" of Part I of thisReport.ITEM 11. EXECUTIVE COMPENSATION. Information called for by Item 11 is set forth under the heading"Executive Compensation" in the 2001 Proxy Statement, which is incorporatedherein by this reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information called for by Item 12 is set forth under the heading"Security Ownership of Certain Beneficial Owners and Management" in the 2001Proxy Statement, which is incorporated herein by this reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information called for by Item 13 is set forth under the heading"Certain Relationships and Related Transactions" in the 2001 Proxy Statement,which is incorporated herein by this reference.PART IV.ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements: The information required by this item is included in Item 8 of Part II of this Form 10-K. 2. Financial Statement Schedules Report of Independent Accountants on Financial Statement Schedule for the three years in the period ended December 31, 2000. Schedule II - Valuation and Qualifying Accounts. 30 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of NexMed, Inc.In connection with our audits of the consolidated financial statements ofNexMed, Inc. as of December 31, 1999, and 2000 and for each of the three yearsin the period ended December 31,2000, which financial statements are included inthe Form 10-K, we have also audited the financial statement schedule listed inPart II herein.In our opinion, this financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly, in allmaterial respects, the information required to be included therein./s/ PricewaterhouseCoopers LLPPricewaterhouseCoopers LLPNew York, New YorkFebruary 15, 2001 S-1 SCHEDULE II NEXMED, INC. SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance at Charged to Charged to Beginning Costs and Other Balance at Description of Year Expenses Accounts Deductions End of Year ----------- ------- -------- -------- ---------- ----------- YEAR ENDED DECEMBER 31, 2000 Valuation allowance - deferred tax asset $2,495,647 $2,080,416 $4,576,063YEAR ENDED DECEMBER 31, 1999 Allowance for doubtful accounts 157,040 ($157,040) 0 Valuation allowance - deferred tax asset 2,413,290 82,357 2,495,647YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts 0 157,040 157,040 Valuation allowance - deferred tax asset 1,413,076 1,000,214 2,413,290 S-2 All other schedules have been omitted because the information is not applicable or is presented in the Financial Statements or Notes thereto. 3. Exhibits EXHIBITS NO. DESCRIPTION ---- ----------- 3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 2.1 filed with the Company's Form 10-SB filed with the Securities and Exchange Commission on March 14, 1997). 3.2 By-laws of the Company (incorporated by reference to Exhibit 2.2 filed with the Company's Form 10-SB filed with the Securities and Exchange Commission on March 14, 1997). 3.3 Amendment to By-laws of the Company (incorporated by reference to Exhibit 2.3 filed with the Company's Form 10-SB filed with the Securities and Exchange Commission on March 14, 1997). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 3.1 filed with the Company's Form 10-SB filed with the Securities and Exchange Commission on March 14, 1997). 4.2 Rights Agreement and form of Rights Certificate (incorporated herein by reference to Exhibit 4 to our Current Report on Form 8-K filed with the Commission on April 10, 2000). 4.3 Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 4 to our Current Report on Form 8-K filed with the Commission on April 10, 2000). 9 Form of Irrevocable Proxy (incorporated by reference to Exhibit 5.1 filed with the Company's Form 10-SB/A filed with the Securities and Exchange Commission on May 13, 1997). 10.1 The NexMed, Inc. Stock Option and Long-Term Incentive Compensation Plan (incorporated by reference to Exhibit 6.4 filed with the Company's Form 10-SB/A filed with the Securities and Exchange Commission on June 5, 1997).* 10.2 The NexMed, Inc. Recognition and Retention Stock Incentive Plan incorporated by reference to Exhibit 6.5 filed with the Company's Form 10-SB/A filed with the Securities and Exchange Commission on June 5, 1997).* 10.3 Form of Agreement dated November 15, 1995 between NexMed, Inc. and each of Y. Joseph Mo, Ph.D., Vivian H. Liu and Gilbert S. Banker, Ph.D, which are collectively commonly referred to by NexMed, Inc. as the Non-Qualified Performance Incentive Program (filed as Exhibit 4.2 to our Registration Statement on Form 8-A filed with the Securities and Exchange 31 Commission on December 22, 1999, including any amendment or report filed for the purpose of updating such information, and incorporated herein by reference). * 10.4 License Agreement dated March 22, 1999 between NexMed International Limited and Vergemont International Limited (We have requested confidential treatment for a portion of this exhibit, which portion has been omitted and filed separately with the Securities and Exchange Commission). 10.5 The NexMed, Inc. Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 6.6 filed with the Company's Form 10-SB/A filed with the Securities and Exchange Commission on June 5, 1997).* 10.6 Form of Unit Purchase Agreement between the Company and each investor who purchased units relating the Company's private placement dated August and July 2000 (incorporated by reference to Exhibit 4.2 filed with the Company's Form S-3 filed with the Securities and Exchange Commission on September 29, 2000). 21 Subsidiaries. 23 Consent of PricewaterhouseCoopers LLP, independent accountants.* Management compensatory plan or arrangement required to be filed as an exhibitpursuant to Item 14(c) of Form 10-K. b. Reports on Form 8-K The Company filed one report on Form 8-K during the fourth quarter ended December 31, 2000. Information regarding the item reported on is as follows: November 6, 2000 - the Company announced the clinical results for a completed U.S. Phase II study for Alprox-TD(R). 32 SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.NEXMED, INC.Dated: March 3, 2001 By: /s/ Y. Joseph Mo ----------------------------- Y. Joseph Mo Chairman of the Board of Directors, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Y. JOSEPH MO---------------------------- Chairman of the Board of Directors March 3, 2001Y. JOSEPH MO President and C.E.O. /s/ VIVIAN H. LIU ---------------------------- Vice President, Chief Financial March 3, 2001VIVIAN H. LIU Officer and Secretary/s/ JAMES YEAGER ---------------------------- Director, Vice-President, R&D and March 3, 2001JAMES YEAGER Business Development/s/ GILBERT S. BANKER--------------------------- GILBERT S. BANKER Director March 3, 2001/s/ ROBERT W. GRACY--------------------------- Director March 3, 2001ROBERT W. GRACY/s/ YU-CHUNG WEI---------------------------YU-CHUNG WEI Director March 3, 2001 33 Exhibit Index Exhibit No. Description ----------- ----------- 21 Subsidiaries. 23 Consent of PricewaterhouseCoopers LLP, independent accountants. 34 EXHIBIT 21 SUBSIDIARIES OF NEXMED, INC.1. NexMed Holdings, Inc., incorporated in Delaware on February 28, 1997.2. NexMed (U.S.A.), Inc., incorporated in Delaware on June 18, 1997. (a) New Brunswick Medical Inc. is a wholly-owned subsidiary of NexMed (U.S.A.), Inc., incorporated in Delaware on August 12, 1998.3. NexMed International Limited, is incorporated in the British Virgin Islands, incorporated on August 2, 1996. (a) NexMed (Americas) Limited is a wholly-owned subsidiary of NexMed International Limited, incorporated in Nova Scotia, on August 15, 1997. (b) NexMed Peru S.A. is a joint venture incorporated in Peru on August 29, 1997, and is 70% owned by NexMed International Limited. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 We hereby consent to the incorporation by reference in the RegistrationStatements on Form S-3 (Nos. 333-91957, and 333-46976) and in the RegistrationStatement on Form S-8 (No. 333-93435) of NexMed, Inc. of our report datedFebruary 15, 2001 relating to the financial statements and financial statementschedule, which appear in this Form 10-K./s/ PricewaterhouseCoopers LLPPricewaterhouseCoopers LLPNew York, New YorkMarch 6, 2001