Apricus Biosciences Inc.
Annual Report 2002

Plain-text annual report

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 1934For the fiscal year ended December 31, 2002 ----------------- OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 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 toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2) Yes [ ] No [X] As of June 30, 2002, the aggregate market value of the common stockheld by non-affiliates was approximately $65,828,310. As of March 24, 2003 28,678,933 shares of the common stock, par value$.001, of the registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of our Proxy Statement to be delivered to our stockholders inconnection with the Annual Meeting of Stockholders to be held on June 16, 2003(the "2003 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, 2002 ITEMS IN FORM 10-K Page PART I.Item 1. BUSINESS......................................................................................... 1Item 2. PROPERTIES....................................................................................... 9Item 3. LEGAL PROCEEDINGS................................................................................ 9Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 9PART II.Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................................................................... 9Item 6. SELECTED FINANCIAL DATA.......................................................................... 10Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................................ 10Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................... 17Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 17Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................................................ 38PART III.Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 38Item 11. EXECUTIVE COMPENSATION........................................................................... 38Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.............................................................................. 38Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 38Item 14. CONTROLS AND PROCEDURES ......................................................................... 38PART IV.Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................. 38 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 developtherapeutic products based on proprietary delivery systems forcommercialization. We are currently focusing our efforts on new and patentedtopical pharmaceutical products based on a penetration enhancement drug deliverytechnology known as NexACT(R), which may enable an active drug to be betterabsorbed through the skin.PRODUCTS & TECHNOLOGIES We are currently focusing our efforts on new and patented topicalpharmaceutical products based on a penetration enhancement drug deliverytechnology known as NexACT(R), which may enable an active drug to be betterabsorbed through the skin. The NexACT(R) transdermal drug delivery technology isdesigned to enhance the absorption of an active drug through the skin,overcoming the skin's natural barrier properties and enabling highconcentrations of the active drug to rapidly penetrate the desired site of theskin or extremity. Successful application of the NexACT(R) technology wouldimprove therapeutic outcomes and reduce gastrointestinal or other systemic sideeffects that often accompany oral medications. We intend to continue our efforts developing topical treatments includingcream, gel, patch and tape, based on the application of NexACT(R) technology todrugs: (1) previously approved by the FDA, (2) with proven efficacy and safetyprofiles, (3) with patents expiring or expired and (4) with proven market trackrecords and potential. We are focusing our application of the NexACT(R) technology toAlprox-TD(R) cream for the treatment of male erectile dysfunction ("ED"). We arealso developing Femprox(R) cream for female sexual arousal disorder ("FSAD"). Wehave explored the application of the NexACT(R) technology to other drugcompounds and delivery systems, and are in the early stages of developing newtopical treatments for nail fungus, premature ejaculation, urinary incontinence,wound healing, and the prevention of nausea and vomiting associated withpost-operative surgical procedures and cancer chemotherapy. Alprox-TD(R) is an alprostadil-based cream treatment intended forpatients with mild, moderate or severe ED. Our clinical studies havedemonstrated that NexACT(R) enhancers promote the rapid absorption ofalprostadil and improve clinical responses. In December 2002, we completed ourtwo pivotal Phase 3 studies for Alprox-TD(R), which tested over 1,300 patientsat 82 sites throughout the U.S. The two pivotal studies were randomized,double-blind, placebo-controlled, and designed to confirm the efficacy andsafety of Alprox-TD(R) in patients with various degrees of ED. We are currentlyreviewing and analyzing the data from the two pivotal studies and pendingadequate financing, anticipate announcing the preliminary results during secondquarter of 2003. In March 2002, we initiated a Phase 3 open-label study for Alprox-TD(R).The purpose of the new study was to confirm the safety of Alprox-TD(R) on alonger term basis and included new patients as well as those who completedtesting in one of the two pivotal Phase 3 studies and elected to continue usingAlprox-TD(R) for an additional period. In 1November 2002, we halted the open-label study of Alprox-TD(R) due to the FDAconcerns about results of our 26-week transgenic mice study. In January 2003, wemet with the FDA and successfully addressed their issues regarding the resultsof the transgenic mice study and in February 2003, we were cleared by the FDA tocontinue with the open-label study of Alprox-TD(R). However, it remains to bedetermined by the FDA if any data from the halted study can be used for ourfiling of the New Drug Application ("NDA") for Alprox-TD(R). Assuming that we donot include the data from the halted study and that we have financing toinitiate a new open-label study by July 2003, we anticipate that we will filethe NDA during the first half of 2004. Completion of the open-label study is nota prerequisite for our NDA submission; however, it is possible that we may nothave successful clinical results or receive FDA approval on a timely basis, ifat all. In April 2002, Alprox-TD(R) was launched in Hong Kong under the Befar(R)trademark. The product, which has been selling in China since October 2001, ismanufactured and marketed by a local affiliate of Vergemont InternationalLimited, our Asian licensee. We receive from our Asian licensee royalty paymentsand payments for manufacturing supplies in connection with the distribution ofBefar(R) in China and will receive such payments in other Asian markets onceBefar(R) is approved for marketing in such other markets. Befar(R), along withthe currently approved oral erectile dysfunction product, are currentlyclassified in China as controlled substances, and their distribution is limitedto prescription by certain urologists and dispensing through hospitals. Inaddition, China has a limited number of patients who can afford erectiledysfunction treatments. In December 2002, our Asian licensee entered into alicensing agreement with CJ Corporation, one of the five largest pharmaceuticalcompanies in South Korea. Pursuant to the terms of the agreement, CJ Corporationwill develop, file for regulatory approval, market and distribute Befar(R) inSouth Korea. Our Asian licensee also has an NDA pending with the Health ScienceAuthority for approval to market the product in Singapore. Femprox(R) is an alprostadil-based cream product intended for thetreatment of FSAD. We have completed the testing of 98 patients for a Phase 2clinical study with Femprox(R). This multi-center at home use study israndomized, double-blind, placebo-controlled, and designed to investigate theefficacy and safety of the Femprox(R) cream in pre-menopausal women diagnosedwith FSAD. We intend to continue with the clinical development of Femprox(R)pending the availability of financing and/or a partnering agreement. We are working with various pharmaceutical companies in order to explorethe introduction of NexACT(R) into their existing drugs as a means of developingnew patient-friendly topical products and extending patent lifespans. In August2002, we entered into a research and development agreement with a major Japanesepharmaceutical company. Pursuant to the terms of this agreement, we will developa new tape/patch treatment for urinary dysfunction which incorporates theJapanese partner's proprietary drug compound with the NexACT(R) technology. Wereceived an upfront payment of 10 million Japanese Yen (approximately $90,000)with future periodic payments of up to 40 million Japanese Yen (approximately$360,000) to be made based on the achievement of certain development milestones.We will also retain the right to manufacture and commercialize the new productworldwide except in Japan. We anticipate that we will enter into additional R&Dagreements during 2003 but we cannot assure you that we will be able to concludeany arrangement on a timely basis, if at all, or on terms acceptable to us. Another product, which we have developed, is the Viratrol(R) device, atherapeutic medical device for the treatment of herpes simplex diseases withoutthe use of drugs. The Viratrol(R) device is hand-held, non-invasive, anddesigned to treat herpes simplex lesions. The device topically delivers a minuteelectrical current to an infected site and may block lesions from forming and/orshorten healing time once lesions develop. The development program for theViratrol(R) device is on hold pending our entering into a partnering agreement. 2FACTORS THAT COULD AFFECT OUR FUTURE RESULTSRISKS RELATED TO THE COMPANYWE HAVE AN URGENT NEED FOR ADDITIONAL FINANCING. We are currently continuing with the development of Alprox-TD(R) at asignificantly reduced level and have put on hold the development of Femprox(R)and other pipeline products, pending the availability of financing. Our cashposition as of March 24, 2003 is approximately $400,000. We will need anadditional cash infusion of approximately $3 million prior to being able toresume research and development of our pipeline products including Alprox-TD(R)at a consistent level. We have been actively seeking financing from the sale ofequity or issuance of debt from private and public sources as well as fromcollaborative licensing and/or marketing arrangements with third parties, andsince December 31, 2002, we have raised approximately $2 million net through theexercise of warrants to purchase shares of our common stock and the issuance bythe Company of notes, common stock and warrants to purchase shares of commonstock (see Note 15 to the Consolidated Financial Statements). Our anticipatedcash requirements for Alprox-TD(R) through the NDA filing in the first half of2004 will be approximately $15 million. Completion of the open-label study isnot a prerequisite for our NDA submission. We may not be able to arrange for thefinancing of that amount, and if we are not successful in entering into alicensing agreement for Alprox-TD(R), we may be required to discontinue thedevelopment of Alprox-TD(R).OUR STOCK MAY BE DELISTED FROM NASDAQ, WHICH MAY MAKE IT MORE DIFFICULT FOR YOUTO SELL YOUR SHARES. Currently, our common stock trades on the Nasdaq National Market. Duringthe past year, our stock, at times, traded below $1.00 per share. NASDMarketplace Rule 4450(b) provides for continued listing rules and a company wholists on the Nasdaq National Market must meet all of the requirements under atleast one continued listing standard to maintain its listing. If a companyfailures to meet the continued listing requirements, it faces possible delistingfrom the Nasdaq National Market. On December 31, 2002, we received notification from the NASD that ourcommon stock had closed below the minimum $1.00 per share required for continuedinclusion on the Nasdaq for a period of more than thirty consecutive tradingdays. In its notification, the NASD informed us that we have 90 calendar days,or until March 31, 2003, to comply with NASD Marketplace Rule 4450(a)(5). Inorder to comply with this rule, the bid price of our common stock must close at$1.00 per share or more for a minimum of ten consecutive trading days at anytime before March 31, 2003. As of February 11, 2003, the closing bid price ofour common stock had remained equal to $1.00 per share or greater for more thanten consecutive trading days. On January 29, 2003, we received affirmativenotification from Nasdaq that we had regained compliance with Rule 4450(a)(5),and that the matter was therefore closed. As of December 31, 2002, our Stockholders' Equity was $3.6 million, whichis below the $10 million as required by Rule 4450(a)(1). We anticipate that wewill receive a notification from the NASD regarding this matter and be given aperiod of time to remedy the situation or face possible delisting from NasdaqNational Market. If we were to be delisted from the Nasdaq National Market, our commonstock would be listed on the Nasdaq SmallCap Market, assuming we meet thoselisting requirements. If we fail to meet the Nasdaq SmallCap listingrequirements, our stock would be considered a penny stock under regulations ofthe Securities and Exchange Commission and would therefore be subject to rulesthat impose additional sales practice requirements on broker-dealers who sellour securities. The additional burdens imposed upon broker-dealers by theserequirements could discourage broker-dealers from effecting transactions in ourcommon stock, which could severely limit the market liquidity of the commonstock and your ability to sell our securities in the secondary market.WE CONTINUE TO INCUR 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 generated minimalrevenues from the limited sales of Befar(R) in Asia and our existing researchand development agreement with the Japanese partner, and have not marketed orgenerated revenues in the U.S. from our products under development. We are notprofitable and have incurred an accumulated deficit of $67,987,969 since ourinception. Our current ability to generate revenues and to achieve profitabilityand positive cash flow will depend on the successful commercialization of ourproducts currently under development. Thus far, we have generated only minimalrevenues from the limited sales of Befar(R) in Asia and from the research anddevelopment agreement with our Japanese partner, and have not marketed orgenerated revenues in the U.S. from our products under development. However,even if we eventually generate 3revenues from sales of our products currently under development, we expect toincur significant operating losses over the next several years.OUR INDEPENDENT ACCOUNTANTS HAVE DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOINGCONCERN FOR A REASONABLE PERIOD OF TIME. As a result of our losses to date, working capital deficiency andaccumulated deficit, our independent accountants have concluded that there issubstantial doubt as to our ability to continue as a going concern for areasonable period of time, and have modified their report in the form of anexplanatory paragraph describing the events that have given rise to thisuncertainty. Our continuation is based on our ability to generate or obtainsufficient cash to meet our obligations on a timely basis and ultimately toattain profitable operations. Our independent auditors' going concernqualification may make it more difficult for us to obtain additional funding tomeet our obligations. We anticipate that we will continue to incur significantlosses until successful commercialization of one or more of our products, and wemay never operate profitably in the future.WE WILL NEED SIGNIFICANT FUNDING TO COMPLETE OUR RESEARCH AND DEVELOPMENTEFFORTS. Our research and development expenses for the years ended December 31,2002, 2001, and 2000 were $21,615,787, $12,456,384, and $6,892,283,respectively. Since January 1, 1994, when we repositioned ourselves as a medicaland pharmaceutical technology company, we have spent $50,695,348 on research anddevelopment. We anticipate that our expenses for research and development willnot increase in 2003. Given our current lack of cash reserves, we will not beable to advance the development of our products unless we raise additional cashreserves through financing from the sale of our securities and/or throughpartnering agreements. If we are successful in entering partnering agreementsfor our products under development, we will receive milestone payments, whichwill offset some of our research and development expenses. As indicated above, our anticipated cash requirements for Alprox-TD(R)through the NDA filing in the first half of 2004, will be approximately $15million. Completion of the open label study is not a prerequisite for our NDAfiling. We may not be able to arrange for the financing of that amount, and ifwe are not successful in entering enter into a licensing agreement forAlprox-TD(R), we may be required to discontinue the development of Alprox-TD(R). We will also need significant funding to pursue our product developmentplans. In general, our products under development will require significanttime-consuming and costly research and development, clinical testing, regulatoryapproval and significant additional investment prior to their commercialization.The research and development activities we conduct may not be successful; ourproducts under development may not prove to be safe and effective; our clinicaldevelopment work may not be completed; and the anticipated products may not becommercially viable or successfully marketed. Commercial sales of our productscannot begin until we receive final FDA approval. The earliest time for suchfinal approval of the first product which may be approved, Alprox-TD(R), issometime in early 2005. We intend to focus our current development efforts onthe Alprox-TD(R) cream treatment, which is in the late clinical developmentstage.PRE-CLINICAL AND CLINICAL TRIALS ARE INHERENTLY UNPREDICTABLE. IF WE DO NOTSUCCESSFULLY CONDUCT THESE TRIALS, WE MAY BE UNABLE TO MARKET OUR PRODUCTS. Through pre-clinical studies and clinical trials, we must demonstrate thatour products are safe and effective for their indicated uses. Results frompre-clinical studies and early clinical trials may not allow us to predictresults in later-stage testing. Our future clinical trials may not demonstratethe safety and effectiveness of any of our products or may not result inregulatory approval to market our products. The failure of the FDA to approveour products for commercial sales will have a material adverse effect on ourprospects.PATENTS AND INTELLECTUAL PROPERTY RIGHTS ARE IMPORTANT TO US BUT COULD BECHALLENGED. Proprietary protection for our pharmaceutical products is of materialimportance to our business in the U.S. and most other countries. We have andwill continue to seek proprietary protection for our products to attempt toprevent others from commercializing equivalent products in substantially lesstime and at substantially lower expense. Our 4success may depend on our ability to (1) obtain effective patent protectionwithin the U.S. and internationally for our proprietary technologies andproducts, (2) defend patents we own, (3) preserve our trade secrets, and (4)operate without infringing upon the proprietary rights of others. We have nine U.S. patents either acquired or received out of a series ofpatent applications that we have filed in connection with our NexACT(R)technology and our NexACT-based products under development, such as Alprox-TD(R)Femprox(R), and our non-steroidal anti-inflammatory cream. We have three U.S.patents issued on the Viratrol(R) device and one patent application pending withrespect to the technology, inventions and improvements that are significant tothe Viratrol(R) device. To further strengthen our global patent position on ourproprietary products under development, and to expand the patent protection toother markets, we have filed under the Patent Cooperation Treaty, correspondinginternational applications for our issued U.S. patents and pending U.S. patentapplications. The following table identifies our nine U.S. patents issued for NexACT(R)technology and/or our NexACT-based products under development, and the year ofexpiration for each patent:Patent Name Expiration Date----------- --------------- Topical Compositions Containing Prostaglandin E1 2019Prostaglandin Composition and Methods of Treatment of Male ED 2020Compositions and Methods for Amelioration of Human Female Sexual Dysfunction 2017Topical Compositions for PGE1 Delivery 2017Topical Compositions for Non-Steroidal Anti-Inflammatory Drug Delivery 2017Biodegradable Absorption Enhancers 2012Biodegradable Absorption Enhancers 2010Medicament Dispenser 2019Crystalline Salts of dodecyl 2-(N, N-Dimethylamino) 2019 While we have obtained patents and have several patent applicationspending, the extent of effective patent protection in the U.S. and othercountries is highly uncertain and involves complex legal and factual questions.No consistent policy addresses the breadth of claims allowed in or the degree ofprotection afforded under patents of medical and pharmaceutical companies.Patents we currently own or may obtain might not be sufficiently broad toprotect us against competitors with similar technology. Any of our patents couldbe invalidated or circumvented. There have been patents issued to others such as Vivus, Inc. andMacroChem Corporation on the use of alprostadil for the treatment of male orfemale sexual dysfunction. While we believe that our patents will prevail in anypotential litigation, the holders of these competing patents could determine tocommence a lawsuit against us and even prevail in any such lawsuit. Litigationcould result in substantial cost to and diversion of effort by us, which mayharm our business. In addition, our efforts to protect or defend our proprietaryrights may not be successful or, even if successful, may result in substantialcost to us.WE DEPEND UPON THIRD PARTY MANUFACTURERS FOR OUR CHEMICAL MANUFACTURINGSUPPLIES. In 2002, we completed the construction of a 31,500 square foot industrialfacility, located in East Windsor, New Jersey, which we are in the process ofdeveloping and validating as a manufacturing facility designed to meet the GoodManufacturing Practice (GMP) standards required by the FDA. We anticipate thatour manufacturing facility will have the capacity to meet our anticipated needsfor full-scale commercial production. Initially, we are utilizing the facilityto manufacture Alprox-TD(R) and other NexACT(R)-based products under developmentfor continuing clinical testing purposes. In this regard, we depend on third party chemical manufacturers foralprostadil, the active drugs in Alprox-TD(R) and in other NexACT-based productsunder development, and for the supply of our NexACT(R) enhancers that areessential in the formulation and production of our topical products, on a timelybasis and at satisfactory quality levels. If our validated third party chemicalmanufacturers fail to produce quality products on time and in sufficientqualities, our results would suffer, as we would encounter costs and delays inrevalidating new third party suppliers. 5WE FACE SEVERE 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 enhancesuch 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) Cialis(R), an oralformulation to be marketed in the U.S. through a joint venture between ICOS andEli Lilly & Co; (3) Uprima(R), an oral medication to be marketed in the U.S. byTAP Pharmaceuticals, a joint venture between Takeda Pharmaceuticals Japan andAbbott Laboratories; and (4) Levitra(R), an oral medication to be marketedthrough a collaborative effort of Bayer AG and GlaxoSmithKline, Inc.WE WILL NEED TO PARTNER TO OBTAIN EFFECTIVE SALES, MARKETING AND DISTRIBUTION. We currently have no sales force or marketing organization and will need,but may be unable, to attract and retain qualified or experienced marketing andsales personnel. We will need to secure a marketing partner who is able todevote substantial marketing efforts to achieve market acceptance for ourproprietary products under development. The marketing partner will need to spendsignificant funds to inform potential customers, including third-partydistributors, of the distinctive characteristics and benefits of our products.Our operating results and long term success will depend, among other things, onour ability to establish (1) successful arrangements with domestic andinternational distributors and marketing partners and (2) an effective internalmarketing organization. We have engaged in discussions with several largepharmaceutical companies regarding a strategic partnership for the Alprox-TD(R)cream but we may not be able to conclude an arrangement on a timely basis, if atall, or on terms acceptable to us. In Asia, our subsidiary, NexMed International Limited, and our Asianlicensee, Vergemont International Limited, entered into a license agreement in1999 pursuant to which (1) Vergemont International Limited has an exclusiveright to manufacture and to market in Asian Pacific countries, our Alprox-TD(R),Femprox(R) and three other of our proprietary products under development, and(2) we will receive a royalty on sales and supply, on a cost plus basis, theNexACT(R) enhancers that are essential in the formulation and production of ourproprietary topical products. In 2002, we recorded modest payments from ourAsian licensee for royalty on sales of Befar(R) in China and Hong Kong and formanufacturing supplies purchased from us.WE MAY BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS, CREATING RISK ANDEXPENSE. We are exposed to potential product liability risks inherent in thedevelopment, testing, manufacturing, marketing and sale of human therapeuticproducts. Product liability insurance for the pharmaceutical industry isextremely expensive, difficult to obtain and may not be available on acceptableterms, if at all. We currently have liability insurance to cover claims relatedto our products that may arise from clinical trials, with coverage of $1 millionfor any one claim and coverage of $3 million in total, but we do not maintainproduct liability insurance and we may need to acquire such insurance coverageprior to the commercial introduction of our products. If we obtain suchcoverage, we have no guarantee that the coverage limits of such insurancepolicies will be adequate. A successful claim against us if we are uninsured, orwhich is in excess of our insurance coverage, if any, could have a materialadverse effect upon us and on our financial condition. 6INDUSTRY RISKSWE ARE VULNERABLE TO VOLATILE MARKET CONDITIONS. The market prices for securities of biopharmaceutical and biotechnologycompanies, including ours, have been highly volatile. The market has from timeto time experienced significant price and volume fluctuations that are unrelatedto the operating performance of particular companies. In addition, futureannouncements, such as the results of testing and clinical trials, the status ofour relationships with third-party collaborators, technological innovations ornew therapeutic products, governmental regulation, developments in patent orother proprietary rights, litigation or public concern as to the safety ofproducts developed by us or others and general market conditions, concerning us,our competitors or other biopharmaceutical companies, may have a significanteffect on the market price of our common stock.WE ARE SUBJECT TO NUMEROUS AND COMPLEX GOVERNMENT REGULATIONS. Governmental authorities in the U.S. and other countries heavily regulatethe testing, manufacture, labeling, distribution, advertising and marketing ofour proposed products. None of our proprietary products under development hasbeen approved for marketing in the U.S. Before we market any products wedevelop, 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 1 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 1 study for a period of severalmonths. In Phase 2 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 affects thecondition, and begin to identify the correct dosage level. Up to several hundredsubjects may be studied in the Phase 2 study for approximately 6 to 12 months,depending on the type of product tested. In Phase 3 studies, researchers furtherassess efficacy and safety of the drug. Several hundred to thousands of patientsmay be studied during the Phase 3 studies for a period of from 12 months toseveral years. Upon completion of Phase 3 studies, a NDA is submitted to the FDAor foreign governmental regulatory authority for review and approval. Because we intend to sell and market our products outside the U.S., wewill be subject to foreign regulatory requirements governing the conduct ofclinical trials, product licensing, pricing and reimbursements. Theserequirements vary widely from country to country. Our failure to meet eachforeign country's requirements could delay the introduction of our proposedproducts in the respective foreign country and limit our revenues from sales ofour 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 U.S.,federal and state agencies have proposed similar governmental control and theU.S. Congress has recently considered legislative and regulatory reforms thatmay affect companies engaged in the healthcare industry. Pricing constraints onour products in foreign markets and possibly in the U.S. could adversely affectour business and limit our revenues.WE ARE SUBJECT TO 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. 7SEGMENT AND GEOGRAPHIC AREA INFORMATION You can find information about our business segment and geographic areasof business in Note 14 of the Notes to Consolidated Financial Statements.EMPLOYEES As of March 17, 2003, we had 44 full time employees, 8 of whom have Ph.Dand/or M.D. degrees, 4 of whom are executive management and 30 of whom areengaged in research and development activities. We also rely on a number ofconsultants. None of our employees is represented by a collective bargainingagreement. We believe that our relationship with our employees is good.EXECUTIVE OFFICERS The Executive Officers of the Company are set forth below. Name Age* Title ---- ---- ----- Y. Joseph Mo, Ph.D. 55 Chairman of the Board of Directors, President and Chief Executive OfficerJames L. Yeager, Ph.D. 56 Director, Senior Vice President, Scientific AffairsVivian H. Liu 41 Vice President, Acting Chief Financial Officer and SecretaryKenneth F. Anderson 56 Vice President, Commercial Development* As of February 28, 2003. Y. Joseph Mo, Ph.D., is, and has been since 1995, our Chief ExecutiveOfficer and President and Chairman and member of our board of directors. Priorto joining us in 1995, Dr. Mo was President of Sunbofa Group, Inc., aprivately-held investment consulting company. From 1991 to 1994, he wasPresident of the Chemical Division, and from 1988 to 1994, the Vice President ofManufacturing and Medicinal Chemistry, of Greenwich Pharmaceuticals, Inc. Priorto that, he served in various executive positions with several majorpharmaceutical companies, including Johnson & Johnson, Rorer Pharmaceuticals,and predecessors of Smithkline Beecham. Dr. Mo received his Ph.D. in Industrialand Physical Pharmacy from Purdue University in 1977. James L. Yeager, Ph.D., is, and has been since December 1998, a memberof the Board of Directors and, since January 2002, Senior Vice President forScientific Affairs. From June 1996 through December 2001, Dr. Yeager served asthe Company's Vice President of Research and Development and BusinessDevelopment. Before joining the Company, Dr. Yeager was Vice President ofResearch and Development at Pharmedic Company. From 1979 to 1992, Dr. Yeagerheld various positions with Abbott Laboratories and Schiaparelli-Searle. 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 Affairsand Secretary since September 1995 and our Acting Chief Financial Officer sinceAugust 1999. In 1994, while we were in a transition period, Ms. Liu served asour Chief Executive Officer. From September 1995 to September 1997, Ms. Liu wasour Treasurer. From 1985 to 1994, she was a business and investment adviser tothe government 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 F. Anderson is, and has been, our Vice President of CommercialDevelopment since November 2000. Mr. Anderson has extensive experience in thepharmaceutical industry. From 1997 to September 2000, Mr. Anderson was SeniorVice President, Director of Strategy and Business Development for HarrisonWilson & Associates, a consulting and marketing firm specializing in healthcareproducts and services. From 1980 to 1997, Mr. Anderson was at Bristol-MyersSquibb where he served in various management positions, including Senior Managerfor Marketing and Director for Worldwide Business Development. From 1969 to1979, Mr. Anderson was with Parke-Davis, a division of Warner Lambert. Mr.Anderson received his BA from Boston University. 8ITEM 2. PROPERTIES. We currently have our principal executive offices and laboratories inRobbinsville, NJ. We lease approximately 24,000 square feet of space for $25,000per month, pursuant to a lease, which expires in 2004. We also leaseapproximately 5,000 square feet of laboratory space in Monmouth Junction, NJ for$12,035 per month pursuant to a lease, which expires in 2004. We own our 31,500 square foot manufacturing facility in East Windsor, NewJersey. We purchased the facility for $2.2 million and have investedapproximately $5.3 million for construction and GMP development. NexMed (America) Limited leases 1,000 square feet of office space inMississauga, Ontario, Canada for $800 per month pursuant to a month-to-montharrangement. NexMed International Limited subleases 1,000 square feet of office spacein Hong Kong for $3,000 per month pursuant to a month-to-month arrangement.ITEM 3. LEGAL PROCEEDINGS. There are no material legal proceedings pending against NexMed.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There was no submission of matters to a vote of security holders. PART II.ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our Common Stock is traded on the NASDAQ National Market System (the"NASDAQ") under the symbol "NEXM." The following table sets forth the range of the high and low sales pricesas reported by the NASDAQ for the period from January 1, 2001 to December 31,2002. Price of Common Stock ($) ---------------- High Low Fiscal Year Ended December 31, 2001 ------- ------ First Quarter 10.6250 3.5000 Second Quarter 6.8800 3.7000 Third Quarter 5.4900 1.5500 Fourth Quarter 3.7000 2.1500 Fiscal Year Ended December 31, 2002 First Quarter 5.1500 2.1000 Second Quarter 5.2500 2.3000 Third Quarter 2.7300 1.5400 Fourth Quarter 1.9900 0.3500 9 On March 24, 2003, the last reported sales price for our Common Stock onthe NASDAQ was $1.36 per share, and we had 219 holders of record of our CommonStock.DIVIDENDS 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 financeour business.RECENT SALES OF UNREGISTERED SECURITIES None.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. 2002 2001 2000 1999 1998INCOME STATEMENT DATA--------------------- Revenue Product Sales $27,851 $56,309 0 $1,491,746 $5,709,083 Royalties $120,177 $11,780 0 0 0Net Loss $(27,641,519) $(16,174,861) $(8,720,553) $(2,490,600) $(4,779,002)Basic and Diluted Loss per Share $(1.03) $(0.63) $(0.40) $(0.18) $(0.64)Weighted Average Common Shares Outstanding Used for Basic and Diluted Loss per Share 26,937,200 25,486,465 21,868,267 13,724,052 7,505,588BALANCE SHEET DATA------------------Total Assets $14,140,127 $27,314,713 $39,989,682 $7,633,333 $5,924,628Total Liabilities $10,916,635 $3,206,848 $1,245,507 $723,594 $7,594,067Stockholders' Equity $3,223,492 $24,107,865 $38,744,175 $6,909,739 $(2,390,437)ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.GENERAL Currently, we are focusing our efforts on application of the NexACT(R)technology to developing the Alprox-TD(R) and Femprox(R) creams. We are alsoexploring the application of the NexACT(R) technology to other drug compoundsand working on the development of new topical treatments for nail fungus,premature ejaculation, urinary incontinence, wound healing, and the preventionof nausea and vomiting associated with post-operative surgical procedures andcancer chemotherapy. 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. 10CRITICAL ACCOUNTING ESTIMATES Financial Reporting Release No. 60, which was recently released by theSecurities and Exchange Commission, requires all companies to include adiscussion of critical accounting policies or methods used in the preparation offinancial statements. Note 2 in the Notes to the Condensed ConsolidatedFinancial Statements, includes a summary of the significant accounting policiesand methods used in the preparation of our Consolidated Financial Statements. Our discussion and analysis of our financial condition and results ofoperations is based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of these financial statements requiresour management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. Our accounting policies affect our moresignificant judgments and estimates used in the preparation of its financialstatements. Actual results could differ from these estimates. The following is abrief description of the more significant accounting policies and relatedestimate methods that we follow: Revenue recognition -- Revenues from product sales are recognized upondelivery of products to customers, less allowances for returns and discounts.Royalty revenue is recognized upon the sale of the related products, providedthe royalty amounts are fixed or determinable and the amounts are consideredcollectible. Revenues earned under research contracts are recognized inaccordance with the cost-to-cost method outlined in Staff Accounting BulletinNo. 101 whereby the extent of progress toward completion is measured on thecost-to-cost basis; however, revenue recognized at any point will not exceed thecash received. When the current estimates of total contract revenue and contractcost indicate a loss, a provision for the entire loss on the contract is made. Critical Estimate: In calculating the progress made toward completion ofa research contract, we must compare costs incurred to date to the totalestimated cost of the project. We estimate the cost of any given project basedon our past experience in product development as well as the past experience ofour research staff in their areas of expertise. Underestimating the total costof a research contract may cause us to accelerate the revenue recognized undersuch contract. Conversely, overestimating the cost may cause us to delay revenuerecognized. Long-lived assets -- We review for the impairment of long-lived assetswhenever events or circumstances indicate that the carrying amount of an assetmay not be recoverable. An impairment loss would be recognized when estimatedundiscounted future cash flows expected to result from the use of the asset andits eventual disposition are less than its carrying amount. If such assets areconsidered impaired, the amount of the impairment loss recognized is measured asthe amount by which the carrying value of the asset exceeds the fair value ofthe asset, fair value being determined based upon discounted cash flows orappraised values, depending on the nature of the asset. We have not identifiedany such impairment losses. Critical Estimate: Estimated undiscounted future cash flows are based onsales projections for our products under development for which the long-livedassets are used. In 2002, we performed a review for impairment of ourmanufacturing facility based on projections of sales of our product candidates,for which the facility is anticipated to be ultimately utilized. Overestimatingthe future cash flows resulting from the commercialization of Alprox TD(R) maylead to overstating the carrying value of the manufacturing facility by notidentifying an impairment loss. Income Taxes -- In preparing our financial statements, we make estimatesof our current tax exposure and temporary differences resulting from timingdifferences for reporting items for book and tax purposes. We recognize deferredtaxes by the asset and liability method of accounting for income taxes. Underthe asset and liability method, deferred income taxes are recognized fordifferences between the financial statement and tax bases of assets andliabilities at enacted statutory tax rates in effect for the years in which thedifferences are expected to reverse. The effect on deferred taxes of a change intax rates is recognized in income in the period that includes the enactmentdate. In addition, valuation allowances are established when necessary to reducedeferred tax assets to the amounts expected to be realized. Critical Estimate: In consideration of our accumulated losses and lack ofhistorical ability to generate taxable income to utilize our deferred taxassets, we have estimated that we will not be able to realize any benefit fromour temporary differences and have recorded a full valuation allowance. If webecome profitable in the future at levels 11which cause management to conclude that it is more likely than not that we willrealize all or a portion of the net operating loss carry-forward, we wouldimmediately record the estimated net realized value of the deferred tax asset atthat time and would then provide for income taxes at a rate equal to ourcombined federal and state effective rates, which would be approximately 40%under current tax laws. Subsequent revisions to the estimated net realizablevalue of the deferred tax asset could cause our provision for income taxes tovary significantly from period to period.COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEAR ENDED DECEMBER 31, 2002 AND2001. Revenues. We recorded revenues of $148,028 during the twelve months ofoperations in 2002 as compared to $68,089 during the same period in 2001. Therevenues were comprised of royalty payments and payments for the sale ofmanufacturing supplies in connection with the sale of Befar(R) in Asia, and fromthe first milestone payment received from our Japanese research and developmentpartner. The 2002 sales of Befar(R) in China were lower than previouslyanticipated. Befar(R), along with the currently approved oral erectiledysfunction product, are currently classified in China as controlled substances,and their distribution is limited to prescription by certain urologists anddispensing through hospitals. Since Befar(R) is not yet approved in largerwestern or Japanese markets, the lack of comparable clinical and physicianexperiences as compared to the oral dosage form, may also contribute to a lowerphysician prescription and patient demand for Befar(R). However, for 2003, ourAsian licensee anticipates that new and additional marketing campaigns and theavailability of US clinical data will increase awareness among patients andphysicians. Cost of Products Sold. Our cost of products sold was $27,030 and $45,051for 2002 and 2001 respectively, and is attributable to our cost for themanufacturing supplies sold to our Asian licensee for the production of Befar(R)in China. Our Asian licensee had sufficient inventory of the manufacturingsupplies during 2002 and made fewer purchases from us. Research and Development Expenses. Our research and development expensesfor 2002 and 2001 were $21,615,787 and $12,456,384, respectively. Research anddevelopment expenses attributable to Alprox-TD(R) and Femprox(R) in 2002 wereapproximately $15,835,000 and $642,000, respectively, as compared toapproximately $6,968,000 and $993,000 in 2001. The increase in research anddevelopment expenses is approximately 90% attributable to the pre-clinical andclinical expenses for Alprox-TD(R), with the remaining increase in expensesattributable to additional research and development personnel for the first tenmonths of 2002, , and the increased depreciation for scientific equipment in ourfacilities in New Jersey and Kansas and depreciation for the expansion of ourfacilities in Robbinsville and in Princeton, NJ. In 2003, we expect that totalresearch and development spending will decrease with the completion of the twoPhase 3 pivotal studies for Alprox-TD(R). We anticipate increasing our effortsand resources in the application of the NexACT(R) technology to other drugcompounds and delivery systems for the development of new products. Weanticipate that our expense requirements for research and development will notincrease in 2003. However, given our current level of cash reserves, we will notbe able to fund the development of our products unless we raise additional cashreserves through financing from the sale of our securities or through enteringinto partnering agreements. If we are successful in entering partneringagreements for our products under development, we expect to receive milestonepayments, which we anticipate will offset some of our research and developmentexpenses. Selling, General and Administrative Expenses. Our general andadministrative expenses were $6,065,347 during 2002 as compared to $4,770,021during 2001. The increase is approximately 35% attributable to additionalexpenses for legal and accounting fees related to SEC matters and otheroperational activities, approximately 35% to educational grants and industryconferences and the remaining increase in expenses for the expansion of investorand shareholder relations programs. We expect that total general andadministrative spending in 2003 will decrease with the reduction in expendituresand non-essential personnel, which we implemented in November 2002. Other Income and Expense. Our other expense during 2002 was $81,008 ascompared to $174,785 for 2001. The decrease is a result of a charge for disposalof fixed assets in 2001 of approximately $112,000 related to abandonedequipment. There was no charge for the disposal of fixed assets in 2002. Interest Income and Expense. We recognized $243,020 in net interestexpense during 2002 as compared to $1,203,291 in net interest income during2001. The decrease is the result of a significant reduction in our cashposition, 12lower interest rates in the current period, and an increase ininterest expense due to borrowings under our GE Capital facility and theconvertible notes issued in June 2002. Benefit from Income taxes. In 2002, we were approved by the State of NewJersey to sell a portion of our state tax credits pursuant to the Technology TaxCertificate Transfer Program. We had approximately $1.65 million in NJ taxcredits, and were approved to sell $279,000 in 2002. We received proceeds of$242,645 in 2002 as a result of the sale of the tax credits. Net Loss. The net loss was $(27,641,519) or a loss of $(1.03) per sharefor 2002, compared with $(16,174,861) or a loss of $(0.63) per share for 2001.The increase in net loss is primarily attributable to the acceleration of U.S.development activities including U.S. clinical studies and the increase to ourinfrastructure to support these activities. We also used our resources to fundongoing operations and finance the construction of additional research anddevelopment and manufacturing facilities. We also incurred expenses for thereduction in non-essential personnel in November 2002.COMPARISON OF RESULTS OF OPERATIONS BETWEEN THE YEAR ENDED DECEMBER 31, 2001 AND2000. Revenues. We recorded revenues of $68,089 during the twelve months ofoperations in 2001 as compared to no revenue during the same period in 2000. Therevenues were royalty payments and payments for the sale of manufacturingsupplies in connection with the limited introduction of Befar(R) in China. Cost of Products Sold. Our cost of products sold was $45,051 and zero in2001 and 2000, respectively and is attributable to our cost for themanufacturing supplies sold to our Asian licensee for the production of Befar(R)in China. Research and Development Expenses. Our research and development expensesfor 2001 and 2000 were $12,456,384 and $6,892,283, respectively. Research anddevelopment expenses attributable to Alprox-TD(R) and Femprox(R) in 2001 wereapproximately $6,968,000 and $993,000, respectively, as compared toapproximately $5,145,000 and $749,000 in 2000. The increase in research anddevelopment expenses is attributable to the pre-clinical and clinical expensesfor Alprox-TD(R) and Femprox(R), additional research and development personnel,increased legal fees incurred related to our intellectual property estate, andthe increased depreciation for scientific equipment in our facilities in NewJersey and Kansas and amortization for the expansion of our facility inRobbinsville, NJ. Selling, General and Administrative Expenses. Our general andadministrative expenses were $4,770,021 during 2001 as compared to $3,209,465during 2000. The increase is largely attributable to additional personnel in ourCorporate Affairs, Finance, Human Resource, Information Technology andCommercial Development departments. We also incurred additional expenses forprofessional fees related to tax, human resource development, commercialdevelopment, public relations and SEC matters; amortization for leaseholdimprovements; and expansion of investor and shareholder relations programs. Interest Income and Expense. We recognized $1,203,291 in net interestincome during 2001, compared with a net interest income of $1,255,450 during2000. The decrease is a result of the drop in interest rates and a reduction inour cash position. Net Loss. The net loss was $(16,174,861) or a loss of $(0.63) per sharefor 2001, compared with $(8,720,553) or a loss of $(0.40) per share for 2000.The increase in net loss is primarily attributable to the acceleration of U.S.development activities including U.S. clinical studies and the increase to ourinfrastructure to support these activities. We also used our resources to fundongoing operations and finance the construction of additional research anddevelopment and manufacturing facilities. 13QUARTERLY RESULTS The following table sets forth selected quarterly financial informationfor the years ended December 31, 2001 and 2002. The operating results are notnecessarily indicative of results for any future period. Three Months Ended (in thousands, except per share data)-------------------------------------------------------------------------------------------------------------------------- March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002-------------------------------------------------------------------------------------------------------------------------- Total Revenues $45 $22 $78 $3--------------------------------------------------------------------------------------------------------------------------Gross Profit -- -- -- ----------------------------------------------------------------------------------------------------------------------------Loss from Operations (5,637) (6,925) (6,743) (8,255)--------------------------------------------------------------------------------------------------------------------------Net Loss (5,579) (6,941) (6,875) (8,247)--------------------------------------------------------------------------------------------------------------------------Basic & Diluted Loss $(0.22) $(0.27) $(0.24) $(0.30)Per Share-------------------------------------------------------------------------------------------------------------------------- March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001--------------------------------------------------------------------------------------------------------------------------Total Revenues $-- $-- $-- $68--------------------------------------------------------------------------------------------------------------------------Gross Profit -- -- -- ----------------------------------------------------------------------------------------------------------------------------Loss from Operations (3,647) (3,813) (3,678) (6,064)total is off $1 due torounding--------------------------------------------------------------------------------------------------------------------------Net Loss total is off $1 (3,212) (3,588) (3,457) (5,917)due to rounding--------------------------------------------------------------------------------------------------------------------------Basic & Diluted Loss $(0.13) $(0.14) $(0.14) $(0.23)Per Share--------------------------------------------------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES We have experienced net losses and negative cash flow from operationseach year since our inception. Through December 31, 2002, we had an accumulateddeficit of $67,987,969. Our operations have principally been financed throughprivate placements of equity securities and debt financing. Funds raised in pastperiods should not be considered an indication of our ability to raiseadditional funds in future periods. At December 31, 2002, we had cash and cash equivalents, certificates ofdeposit and investments in marketable securities of approximately $1.57 millionas compared to $18.74 million at December 31, 2001. As a result of the FDAdecision in November 2002, we implemented a cash conservation program, whichincluded a significant reduction in expenses and non-essential personnel andallocated our remaining our cash reserves for our operational requirements atthe reduced level. As a result of our losses to date, working capital deficiency andaccumulated deficit, our independent accountants have concluded that there issubstantial doubt as to our ability to continue as a going concern for areasonable period of time, and have modified their report in the form of anexplanatory paragraph describing the events that have given rise to thisuncertainty. Our continuation is based on our ability to generate or obtainsufficient cash to meet our obligations on a timely basis and ultimately toattain profitable operations. Our independent auditors' going concernqualification may make it more difficult for us to obtain additional funding tomeet our obligations. In January and February 2003, we issued two short-term promissory notes,which totaled $600,000, to one accredited investor. These promissory notes boreinterest at 12% per annum and were convertible at the noteholder's option, intoour securities at such time as we close a private placement of our securities.On March 21, 2003, we closed a private placement of shares of our common stockat $1.50 per share. For each share purchased, the investors received a 3-yearwarrant to purchase three-quarters (3/4) of a share of common stock at anexercise price of $2.00 per share. The noteholder elected to convert theoutstanding $614,064 in principal and interest due into 409,376 shares of ourcommon stock and 307,032 warrants to purchase shares of our common stock.Pursuant to the private placement agreement, we issued a total of 209,987 sharesand 157,490 three-year warrants to purchase shares of our common stock at $2.00per share to three accredited investors and received approximately $314,000 ingross proceeds. On February 4, 2003, we raised $533,489 in interim financing from theexercise of 389,408 warrants to purchase shares of our common stock at anexercise price of $1.37 per share. The warrants exercised were issued in 2002 inconnection with the issuance of convertible notes secured by a mortgage on ourmanufacturing facility in East Windsor, NJ. In exchange for the early exerciseof these warrants, we agreed to reduce the conversion price of the convertiblenotes from $4.08 to $2.75 per share. (Notes 5 and 15 in the Notes to theConsolidated Financial Statements). 14 In March 2003, we issued one short-term promissory note for $500,000 toone accredited investor. This promissory note, which is due on May 4, 2003,bears interest at 15% per annum and provides for two-year warrants to purchase50,000 shares of our common stock, at an exercise price of $2.00 per share. As of March 24, 2003, we had approximately $400,000 of cash and ouraverage monthly burn rate is currently $600,000 per month, so we have sufficientcash for a period of approximately three weeks. We are in discussions withvarious parties for financing, which we anticipate will close in April. However,if we cannot obtain such additional financing of at least $3 million, in theshort term, we will have to scale-back or discontinue our existing operationsand may not be able to continue the development of even our Alprox-TD(R)product. To date, we have spent approximately $60.6 million on the Alprox-TD(R)development program, and anticipate that through NDA submission during half of2004, we will require an additional $15 million. Given our current level of cashreserves, we will not be able to fund the development of Alprox-TD(R) throughthe NDA submission unless we raise additional cash reserves through financing orpartnering agreements. If we are successful in entering into partneringagreements for Alprox-TD(R), we anticipate that we will receive significantmilestone payments, which we will use to pay for the projected developmentexpenses through the NDA submission, including the open label study ofAlprox-TD(R). If we are not able to enter into a licensing agreement forAlprox-TD(R), we believe that we will have to discontinue the development ofthis product. Since we cannot predict the actions of the FDA, the level of otherresearch and development activities we may be engaged in, and our ability toenter into partnering agreements, we cannot accurately predict the expenditurerequired for the period between NDA submission of Alprox-TD(R) and itscommercialization. We have spent approximately $7.5 million in total for the land, buildingand GMP development related to our East Windsor manufacturing facility andestimate that we will spend an additional $500,000 prior to completion of GMPcompliance development for the facility. To date, we have spent $7.5 million onthe Femprox and other NexACT-based development programs, and $1.3 million forthe Viratrol device. We intend to initiate additional research and developmentactivities for these products pending the availability of financing or throughpartnering arrangements. At December 31, 2002, we recorded significantly less non-cashcompensation expense than in 2001 as a result of a reduction in the number ofstock options granted to consultants and non-employee directors and the fullamortization of stock options previously granted to consultants and non-employeedirectors. During 2002, we recorded an amortization of debt discount due to theissuance of the convertible notes in June 2002, and we had an increase in debtissuance cost as a result of the issuance of such notes. We lease office space and research facilities under operating leaseagreements expiring through 2005. We also lease equipment from GE Capital undera capital lease expiring through 2006 (Note 13 of the Consolidated FinancialStatements). Future minimum payments under noncancellable operating and capitalleases with initial or remaining terms of one year or more, consisted of thefollowing at December 31, 2002: OPERATING CAPITAL2003 $488,114 $741,0172004 132,964 741,0172005 27,759 432,6552006 3,150 39,2782007 2,100 -- -------- ---------- Total minimum lease payments $654,087 1,953,967 --------Less: amount representing interest (242,080)Present value of future minimum lease payments 1,711,887Less: current portion (609,676) ----------Capital lease obligations, net of current portion $1,102,211 ---------- 15 On June 11, 2002, the Company issued a convertible note (the "Note")with a face value of $5 million to two purchasers. The Note is payable onNovember 30, 2005 and is collateralized by the Company's manufacturing facilityin East Windsor, New Jersey. The Note was initially convertible into shares ofthe Company's common stock at a conversion price initially equal to $4.08 pershare (1,225,490 shares). The purchasers also received warrants to purchase389,408 shares of common stock (the "Warrants") at an exercise price equal tothe conversion price of the Note and a term of five years from the date ofissuance. On February 4, 2003 the terms of the convertible notes were amended.In order to induce the holders to exercise the Warrants in full, the Companyagreed to reduce the conversion price under the notes and the exercise price ofthe Warrants. The note is now convertible into the company's common stock at aconversion price of $2.75 per share and the warrant exercise price was reducedto $1.37. Pursuant to the amendment, all of the Warrants were exercised onFebruary 4, 2003 and the Company received proceeds of $533,489 from suchexercise. The issuance of shares of the Company's common stock on March 21, 2003resulted in a further reduction of the conversion price of the Note to $2.72. Ifthe Company were to issue additional shares of its common stock at per shareprices lower than the conversion price of the Note, the conversion price may beadjusted lower. Interest accretes on the Note on a semi-annual basis at a rateof 5% per annum, and the Company may pay such amounts in cash or by effectingthe automatic conversion of such amount into the Company's common stock at a 10%discount to the then average market prices. Subject to certain exceptions, theCompany has prepayment rights for portions of the principal amount, payable incash or by conversion into common stock at a 10% discount to average marketprices. In February 2001, the Company entered into a financial arrangement withGE Capital Corporation for a line of credit, which provided for the financing ofup to $5 million of equipment (i) for its new East Windsor, NJ manufacturingfacility and (ii) for its expanded corporate and laboratory facilities inRobbinsville, NJ. Equipment financed through this facility has been in the formof a 42-month capital lease. As of December 31, 2002, the Company had financed$1,113,459 of equipment purchases under the GE credit line. The $5 millioncredit line expired in March 2002, and as of December 31, 2002, there was anoutstanding balance due GE of $724,577 under this facility. This balance ispayable in monthly installments through various dates in 2004. In January 2002, GE approved a new credit line, which provides for thefinancing of up to $3 million of equipment and expires on December 31, 2002.During 2002, the Company accessed $1,111,427 of the credit line. As of December31, 2002, when the January 2002 facility expired, there was an outstandingbalance due GE of $987,310 under this facility. Balances due are payable in 42monthly installments from date of takedown.RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 141, "BusinessCombinations," establishes accounting and reporting for business combinations byrequiring that all business combinations be accounted for under the purchasemethod. Use of the pooling-of-interests method is no longer permitted. SFAS 141requires that the purchase method be used for business combinations initiatedafter June 30, 2001. The adoption of SFAS 141 did not have a material impact onthe Company's financial condition or results of operations. SFAS No. 142, "Goodwill and Other Intangible Assets," requires thatgoodwill no longer be amortized to earnings, but instead be reviewed forimpairment. The Company adopted SFAS 142 effective January 1, 2002. The adoptionof SFAS 142 did not have a material impact on the Company's financial conditionor results of operations. In August 2001, Financial Accounting Standards (FAS) No. 144, "Accountingfor the Impairment or Disposal of Long-Lived Assets," was issued, replacing FASNo. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of," and portions of APB Opinion 30, "Reporting theResults of Operations." FAS 144 provides a single accounting model forlong-lived assets to be disposed of and changes the criteria that would have tobe met to classify an asset as held-for-sale. FAS 144 retains the requirement ofAPB Opinion 30, to report discontinued operations separately from continuingoperations and extends that reporting to a component of an entity that eitherhas been disposed of or is classified as held for sale. FAS 144 is effectiveJanuary 1, 2002 for the Company. The adoption of FAS 144 did not have a materialimpact on the Company's financial condition or results of operations. In July 2002, the FASB issued Statement of Financial Accounting StandardsNo. 146 (SFAS 146) "Accounting for Costs Associated with Exit or DisposalActivities." SFAS 146 requires companies to recognize costs associated with exitor disposal activities when they are incurred rather than at the date of acommitment to an exit or disposal plan as 16was the case in prior guidance by EITF Issue No. 94-3, "Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)." SFAS 146 replaces EITFIssue No. 94-3. SFAS 146 is effective for exit or disposal activities initiatedafter December 31, 2002. The Company will adopt the provisions of SFAS 146 as ofJanuary 1, 2003. In December 2002, the SFASB issued Statement of Financial AccountingStandards No. 148 ("SFAS 148"), Accounting for Stock-BasedCompensation-Transition and Disclosure. SFAS 148 amends SFAS No. 123, Accountingfor Stock-Based Compensation, to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, SFAS 148 amends the disclosure requirementsof SFAS 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock based employeecompensation and the effect of the method used on reported results. Theprovisions of SFAS 148 are effective for financial statements for fiscal yearsand interim periods ending after December 15, 2002. The disclosure provisions ofSFAS 148 have been adopted by the Company (see Note 2 of the Notes toConsolidated Financial Statements). SFAS 148 did not require the Company tochange to the fair value based method of accounting for stock-basedcompensation. In November 2002, the SFASB issued Interpretation No. 45, "Guarantor'sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others" (FIN 45). FIN 45 requires at the time acompany issues a guarantee, the Company must recognize an initial liability forthe fair market value of the obligations it assumes under that guarantee andmust disclose that information in its interim and annual financial statements.The initial recognition and measurement provisions are effective on aprospective basis to guarantees issued or modified after December 31, 2002. Theadoption of this Interpretation is not expected to have a material effect on theCompany's consolidated financial statements. In January 2003, the SFASB issued Interpretation No. 46 "Consolidation ofVariable Interest Entities" (FIN 46). Variable Interest Entities ("VIEs") areentities where control is achieved through means other than voting rights. FIN46 provides guidance on the identification of and financial reporting for VIEs.A VIE is required to be consolidated if the company is subject to the majorityof the risk of loss from the VIE's activities or is entitled to receive amajority of the entity's residual returns, or both. The consolidationrequirements for VIEs created after January 31, 2003 are effective immediatelyand consolidation requirements apply to existing entities in the first fiscalyear or interim period beginning after June 15, 2003. The adoption of thisInterpretation is not expected to have a material effect on the Company'sconsolidated financial statements.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 thatexpose us to material market risk.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS PAGEREPORT OF INDEPENDENT ACCOUNTANTS 18FINANCIAL STATEMENTSConsolidated Balance Sheets -December 31, 2002 and 2001 19Consolidated Statement of Operations andComprehensive loss for the years endedDecember 31, 2002, 2001 and 2000 20Consolidated Statement of Changes inStockholders' Equity for years endedDecember 31, 2002, 2001 and 2000 21Consolidated Statement of Cash Flows forthe years ended December 31, 2002, 2001and 2000 22NOTES TO FINANCIAL STATEMENTS 23 17 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, 2002and 2001, and the results of their operations and their cash flows for each ofthe three years in the period ended December 31, 2002 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.The accompanying financial statements have been prepared assuming the Companywill continue as a going concern. As discussed in Note 1 to the financialstatements, the Company has suffered recurring losses and negative cash flowsfrom operations, has a deficit in working capital and expects to incur futurelosses. These factors raise substantial doubt about the Company's ability tocontinue as a going concern. Management's plans in regard to those matters arealso described in Note 1. The accompanying financial statements do not includeany adjustments that might result from the outcome of this uncertainty.PricewaterhouseCoopers LLPNew York, New YorkFebruary 25, 2003, except as to Note 15 which is as of March 21, 2003 18NEXMED, INC.CONSOLIDATED BALANCE SHEETS-------------------------------------------------------------------------------- DECEMBER 31,ASSETS 2002 2001Current assets Cash and cash equivalents $ 1,035,149 $ 12,913,803 Certificates of deposit -- 3,564,373 Marketable securities 539,795 2,265,529 Notes Receivable, current 198,348 -- Prepaid expenses and other current assets 498,042 879,491 ------------ ------------ TOTAL CURRENT ASSETS 2,271,334 19,623,196Fixed assets, net 11,507,564 7,691,517Note Receivable 48,341 --Debt Issuance cost, net of accumulatedamortization of $57,575 312,888 -- ------------ ------------ TOTAL ASSETS $ 14,140,127 $ 27,314,713 ============ ============LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities Accounts payable and accrued expenses $ 4,874,441 $ 2,194,730 Capital lease obligation 609,676 287,541 ------------ ------------ TOTAL CURRENT LIABILITIES 5,484,117 2,482,271Long term liabilities Convertible note payable 4,330,307 -- Capital lease obligations, net of 1,102,211 724,577 current portion ------------ ------------ TOTAL LIABILITIES 10,916,635 3,206,848 ------------ ------------Commitments and contingincies (Note 13)Stockholders' equity: Preferred stock $.001 par value, 10,000,000 shares authorized, none issued and outstanding -- -- Common stock, $.001 par value, 80,000,000 shares authorized, 28,293,719 and 25,541,934 shares 28,294 25,542 issued and outstanding, respectively Additional paid-in capital 71,381,751 64,538,838 Accumulated other comprehensive income (101,022) (103,361) Accumulated deficit (67,987,969) (40,346,450) ------------ ------------ 3,321,054 24,114,569Less: Deferred compensation (97,562) (6,704) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 3,223,492 24,107,865 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,140,127 $ 27,314,713 ============ ============ The accompanying notes are an integral part of these financial statements. 19NEXMED, INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS-------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000 Revenue Product sales $ 27,851 $ 56,309 $ -- License fees 120,177 11,780 -- ------------ ------------ ------------ Total revenue 148,028 68,089 -- ------------ ------------ ------------Costs and expenses Cost of products sold 27,030 45,051 -- Research and development 21,615,787 12,456,384 6,892,283 Selling, general and administrative 6,065,347 4,770,021 3,209,465 ------------ ------------ ------------ TOTAL COSTS AND EXPENSES 27,708,164 17,271,456 10,101,748 ------------ ------------ ------------Loss from operations (27,560,136) (17,203,367) (10,101,748) ------------ ------------ ------------Other income (expense) Other Income (expense) (81,008) (174,785) 125,745 Interest income 141,266 1,236,845 1,255,450 Interest expense (384,286) (33,554) -- ------------ ------------ ------------ Total other income (expense) (324,028) 1,028,506 1,381,195 ------------ ------------ ------------ Loss before benefit from income taxes (27,884,164) (16,174,861) (8,720,553)Benefit from income taxes 242,645 -- -- ------------ ------------ ------------ NET LOSS (27,641,519) (16,174,861) (8,720,553)Other comprehensive loss Foreign currency translation adjustments (223) 36 207 Unrealized gain (loss) on marketable securities 2,562 6,006 (109,725) ------------ ------------ ------------ COMPREHENSIVE LOSS $(27,639,180) $(16,168,819) $ (8,830,071) ------------ ------------ ------------Basic and diluted loss per share $ (1.03) $ (.63) $ (.40) ------------ ------------ ------------Weighted average common shares outstanding used for basic and diluted loss per share 26,937,200 25,486,465 21,868,267 ------------ ------------ ------------ The accompanying notes are an integral part of these financial statements. 20NEXMED, INC.CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY-------------------------------------------------------------------------------- COMMON COMMON ADDITIONAL STOCK STOCK PAID-IN ACCUMULATED (SHARES) (AMOUNT) CAPITAL DEFICIT ---------- ------------ ------------ ------------ Balance at January 1, 2000 16,127,134 $ 16,127 $ 22,356,112 $(15,451,036)Issuance of common stock and warrants for cash 4,044,756 4,045 28,404,386 --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 gain from available-for-sale securities -- -- -- --Cumulative translation adjustment -- -- -- --Net loss -- -- -- (8,720,553) ---------- ------------ ------------ ------------Balance at December 31, 2000 25,147,384 25,147 63,009,161 (24,171,589)Issuance of common stock upon exercise of stock options 189,550 190 382,010 --Issuance of common stock upon exercise of warrants, net 200,000 200 599,800 --Issuance of common stock for services 5,000 5 27,495 --Issuance of compensatory options and warrants to consultants -- -- 482,770 --Capital contribution -- -- 37,602 --Amortization of deferred compensation expense -- -- -- --Unrealized loss from available-for-sale securities -- -- -- --Cumulative translation adjustment -- -- -- --Net loss -- -- -- (16,174,861) ---------- ------------ ------------ ------------Balance at December 31, 2001 25,541,934 25,542 64,538,838 (40,346,450)Issuance of common stock from private placement, net of commission paid 2,666,670 2,667 5,729,204 --Issuance of common stock upon exercise of stock options 53,000 53 18,447 --Issuance of compensatory options and warrants to consultants -- -- 71,840 --Issuance of common stock to Board of Directors 32,115 32 56,468 --Issuance of common stock to employees as bonus -- -- 104,392 --Issuance of warrants as debt issuance cost -- -- 66,861 --Discount on convertible note payable -- -- 795,701 --Amortization of deferred compensation expense -- -- -- --Unrealized loss from available-for-sale securities -- -- -- --Cumulative translation adjustment -- -- -- --Net loss -- -- -- (27,641,519) ---------- ------------ ------------ ------------Balance at December 31, 2002 28,293,719 $ 28,294 $ 71,381,751 $(67,987,969) ---------- ------------ ------------ ------------ ACCUMULATED OTHER COMPREHENSIVE INCOME ------------------------------- UNREALIZED FOREIGN LOSS ON TOTAL DEFERRED CURRENCY MARKETABLE STOCKHOLDERS' COMPENSATION TRANSLATION SECURITIES EQUITY ------------ ------------ ------------ ------------ Balance at January 1, 2000 $ (11,579) $ 115 $ -- $ 6,909,739Issuance of common stock and warrants for cash -- -- -- 28,408,431Issuance of common stock upon exercise of warrants, net -- -- -- 12,180,028Issuance of common stock for services -- -- -- 8,000Issuance of compensatory options to consultants -- -- -- 65,610Amortization of deferred compensation expense 2,438 -- -- 2,438Unrealized gain from available-for-sale securities -- -- (109,725) (109,725)Cumulative translation adjustment -- 207 -- 207Net loss -- -- -- (8,720,553) ------------ ------------ ------------ ------------Balance at December 31, 2000 (9,141) 322 (109,725) 38,744,175Issuance of common stock upon exercise of stock options -- -- -- 382,200Issuance of common stock upon exercise of warrants, net -- -- -- 600,000Issuance of common stock for services -- -- -- 27,500Issuance of compensatory options and warrants to consultants -- -- -- 482,770Capital contribution -- -- -- 37,602Amortization of deferred compensation expense 2,437 -- -- 2,437Unrealized loss from available-for-sale securities -- -- 6,006 6,006Cumulative translation adjustment -- 36 -- 36Net loss -- -- -- (16,174,861) ------------ ------------ ------------ ------------Balance at December 31, 2001 (6,704) 358 (103,719) 24,107,865Issuance of common stock from private placement, net of commission paid -- -- -- 5,731,871Issuance of common stock upon exercise of stock options -- -- -- 18,500Issuance of compensatory options and warrants to consultants -- -- -- 71,840Issuance of common stock to Board of Directors (15,000) -- -- 41,500Issuance of common stock to employees as bonus (78,294) -- -- 26,098Issuance of warrants as debt issuance cost -- -- -- 66,861Discount on convertible note payable -- -- -- 795,701Amortization of deferred compensation expense 2,436 -- -- 2,436Unrealized loss from available-for-sale securities -- -- 2,562 2,562Cumulative translation adjustment -- (223) -- (223)Net loss -- -- -- (27,641,519) ------------ ------------ ------------ ------------Balance at December 31, 2002 $ (97,562) $ 135 $ (101,157) $ 3,223,492 ------------ ------------ ------------ ------------ The accompanying notes are an integral part of these financial statements. 21NEXMED, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS-------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000 Cash flows from operating activities Net (loss) $(27,641,519) $(16,174,861) $ (8,720,553) Adjustments to reconcile net loss to net cash from operating activities Depreciation and amortization 1,066,436 527,011 257,149 Non-cash compensation expense 491,874 512,707 76,048 Non-cash insurance expense (income) (2,155) 15,044 -- Net loss on sale of marketable securities 142,291 -- 8,812 Loss on disposal of property and equipment -- 112,687 -- Decrease in notes receivable -- -- 2,000,000 Decrease (increase) in prepaid expense and other assets 381,449 (77,019) (632,477) Increase in accounts payable and accrued expenses 2,329,711 949,223 688,843 ------------ ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (23,231,913) (14,135,208) (6,322,178) ------------ ------------ ------------Cash flows from investing activities Capital expenditures (3,587,473) (3,820,458) (3,309,957) Issuance of loan receivable (309,575) -- -- Proceeds from collection of loan receivable 62,886 -- -- Purchases of certificates of deposits and marketable securities (3,610,747) (5,878,345) (23,368,745) Proceeds from sale/redemption of certificates of deposits and marketable securities 8,763,279 8,126,732 15,162,880 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,318,370 (1,572,071) (11,515,822) ------------ ------------ ------------Cash flows from financing activities (Decrease) increase in due to offices -- -- (33,092) Issuance of common stock, net of offering costs 5,750,371 982,200 40,588,459 Return of gain on stock by former executive -- 37,602 -- Issuance of notes payable 4,696,399 -- -- Repayment of notes payable -- -- (133,838) Principal payments on capital lease obligations (411,658) (101,341) -- ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 10,035,112 918,461 40,421,529 ------------ ------------ ------------Effect of foreign exchange on cash (223) 36 207 ------------ ------------ ------------Net (decrease) increase in cash and cash equivalents (11,878,654) (14,788,782) 22,583,736Cash and cash equivalents Beginning of period 12,913,803 27,702,585 5,118,849 ------------ ------------ ------------ End of period $ 1,035,149 $ 12,913,803 $ 27,702,585 ------------ ------------ ------------Cash paid for interest $ 196,955 $ 33,554 $ 10,413Supplemental disclosure of non-cash investing and financing activities: Property and equipment acquired through capital lease obligations $ 1,111,427 $ 1,113,459 $ -- The accompanying notes are an integral part of these financial statements. 22NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--------------------------------------------------------------------------------1. ORGANIZATION AND BASIS OF PRESENTATION 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 $67,987,969 at December 31, 2002, a deficit in working capital, and expects that it will incur additional losses in completing the research, development and commercialization of its technologies. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. Management anticipates that it will require additional financing, which it is actively pursuing, to fund operations, including continued research, development and clinical trials of the Company's product candidates. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining financing on terms acceptable to the Company. If the Company is unable to obtain additional financing, operations will need to be discontinued. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.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. RECLASSIFICATIONS Reclassifications of certain amounts for prior years have been recorded to conform to the current year presentation. TRANSLATION OF FOREIGN CURRENCIES The functional currency of the Company's foreign subsidiaries, located in Hong Kong and Canada, 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 operating results. 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 23NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------------------------------------------------- "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 unrealized losses were $103,359 and $120,956 for 2002 and 2001, respectively. Gross realized gains from the sales of securities classified as available for sale were $143,971, $263,052, and $9,653 for 2002, 2001 and 2000 respectively. Gross realized losses were $1,680, $263,052, 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. 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. FIXED ASSETS 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. Royalty revenue is recognized upon the sale of the related products, provided the royalty amounts are fixed or determinable and the amounts are considered collectible. Revenues earned under research contracts are recognized in accordance with the cost-to-cost method outlined in Staff Accounting Bulletin No. 101 whereby the extent of progress toward completion is measured on the cost-to-cost basis; however, revenue recognized at any point will not exceed the cash received. When the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is made in the period which it becomes probable. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred and include the cost of salaries, building costs, utilities, allocation of indirect costs, and expenses to third parties who conduct 24NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------------------------------------------------- research and development, pursuant to development and consulting agreements, on behalf of the Company. In August 2002, the Company entered into a research and development agreement with a Japanese pharmaceutical company. Pursuant to the terms of this agreement, the Company will develop a new tape/patch treatment for urinary dysfunction which incorporates the Japanese partner's proprietary drug compound with the NexACT(R) technology. The Company recognized revenue of approximately $85,000 in 2002, with future periodic payments to be made based on the achievement of certain development milestones. The Company will also retain the right to manufacture and commercialize the new product worldwide except in Japan. 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 assets 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 per share amounts. At December 31, 2002, 2001 and 2000, outstanding options to purchase 4,750,755, 3,834,575, and 3,582,675 shares of common stock, respectively, with exercise prices ranging from $.50 to $16.25 have been excluded from the computation of diluted loss per share as they are antidilutive. Outstanding warrants to purchase 2,044,908, 2,206,549, and 2,291,549 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 antidilutive. Promissory note convertible into 1,225,490 shares of common stock (Note 5) has also been excluded from the computation of diluted loss per share as it is antidilutive. In 2003, this note was amended to be convertible into 1,818,182 shares of common stock (Note 15). ACCOUNTING FOR STOCK BASED COMPENSATION As provided by SFAS 123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company has elected to continue to account for its stock-based compensation programs according to the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense has been recognized to the extent of employee or director services rendered based on the intrinsic value of compensatory options or shares granted under the plans. The Company has adopted the disclosure provisions required by SFAS 123. Had the company's stock-based compensation been determined by the fair-value based method of SFAS 123, "Accounting for Stock-Based Compensation," the company's net loss and loss per share would have been as follows: FOR THE YEAR ENDED 2002 2001 2000 Net loss, as reported $(27,641,519) $(16,174,861) $ (8,720,553)Add: Stock-based compensation expense included in reported net loss 141,874 512,707 76,048Deduct: Total stock-based compensation expense determined under fair-value based method for all awards (2,591,717) (2,605,307) (1,983,748) ------------ ------------ ------------Proforma net loss $(30,091,362) $(18,267,461) $(10,628,253) ============ ============ ============Basic and diluted loss per share:As reported $ (1.03) $ (0.63) $ (0.40)Proforma $ (1.12) $ (0.72) $ (0.49) 25NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------------------------------------------------- Additional disclosures required under SFAS 123 are presented in Note 8. 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. COMPREHENSIVE LOSS In accordance with Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which requires the presentation of the components of comprehensive loss in the Company's financial statements. Comprehensive loss 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 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. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") were issued. SFAS 141 establishes accounting and reporting for business combinations by requiring that all business combinations be accounted for under the purchase method. Use of the pooling-of-interests method is no longer permitted. Statement 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. The adoption of SFAS 141 did not have a material impact on the Company's financial condition or results of operations. SFAS 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The Company adopted the Statement effective January 1, 2002. The adoption of SFAS 142 did not have a material impact on the Company's financial condition or results of operations. In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued, replacing SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of APB Opinion 30, "Reporting the Results of Operations." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and changes the criteria that would have to be met to classify an asset as held-for-sale. SFAS No. 144 retains the requirement of APB Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 is effective January 1, 2002 for the Company. The adoption of SFAS 144 did not have a material impact on the Company's financial condition or results of operations. In July 2002, the SFAS No. 146 ("SFAS 146") "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan as was the case in prior guidance by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 replaces EITF Issue No. 94-3. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company will adopt the provisions of SFAS 146 as of January 1, 2003. 26NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------------------------------------------------- In December 2002, the SFAS No. 148 ("SFAS 148"), Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for financial statements for fiscal years and interim periods ending after December 15, 2002. The disclosure provisions of SFAS 148 have been adopted by the Company (see Note 1 of the Notes to Consolidated Financial Statements). SFAS 148 did not require the Company to change to the fair value based method of accounting for stock-based compensation. In November 2002, Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45") was issued. FIN 45 requires at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this Interpretation is not expected to have a material effect on the Company's consolidated financial statements. In January 2003, Interpretation No. 46 "Consolidation of Variable Interest Entities" (FIN 46) was issued. Variable Interest Entities ("VIEs") are entities where control is achieved through means other than voting rights. FIN 46 provides guidance on the identification of and financial reporting for VIEs. A VIE is required to be consolidated if the company is subject to the majority of the risk of loss from the VIE's activities or is entitled to receive a majority of the entity's residual returns, or both. The consolidation requirements for VIEs created after January 31, 2003 are effective immediately and consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. The adoption of this Interpretation is not expected to have a material effect on the company's consolidated financial statements. 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. The Company's most significant estimates relate to the valuation of its long-lived assets and estimated cost to complete under its research contracts. Actual results may differ from those estimates. 3. NOTES RECEIVABLE The Company has advanced its Asian licensee funds to finance the purchase of certain equipment. In February 2002, the Company received a note, in the original principal amount of $309,575, to evidence these advances. The note bears interest at 6% per annum and is payable in monthly installments of principal and interest through February 2004. 27NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--------------------------------------------------------------------------------4. FIXED ASSETS Fixed assets at December 31, 2002 and 2001 are comprised of the following: 2002 2001 Land 363,909 -- Building 7,116,929 2,264,964 Machinery and equipment 1,761,926 1,319,568 Capital lease - Equipment 2,224,886 1,113,459 Computer software 565,158 596,900 Furniture and fixtures 343,971 238,888 Leasehold improvements 634,624 3,048,625 ------------ ------------ 13,011,403 8,582,404 Less: accumulated depreciation (1,503,839) (890,887) ------------ ------------ $ 11,507,564 $ 7,691,517 ------------ ------------ Depreciation and amortization expense was $882,855, $527,011, and $257,149 for 2002, 2001 and 2000 respectively, of which $268,716, $74,230 and $0 related to capital leases for the respective years. Accumulated amortization of assets under capital leases was $371,366 and $74,230 at December 31, 2002 and 2001 respectively.5. NOTES PAYABLE On June 11, 2002, the Company issued a convertible note (the "Note") with a face value of $5 million to two purchasers. The Note is payable on November 30, 2005 and is collateralized by the Company's manufacturing facility in East Windsor, New Jersey. The Note is initially convertible into shares of the Company's common stock at a conversion price initially equal to $4.08 per share (1,225,490 shares). If the Company were to issue shares of its common stock at per share prices lower than the conversion price of the Note, the conversion price may be adjusted lower. Interest accretes on the Note on a semi-annual basis at a rate of 5% per annum, and the Company may pay such amounts in cash or by effecting the automatic conversion of such amount into the Company's common stock at a 10% discount to the then average market prices. Subject to certain exceptions, the Company has prepayment rights for portions of the principal amount, payable in cash or by conversion into common stock at a 10% discount to average market prices. The purchasers also received warrants to purchase 389,408 shares of common stock (the "Warrants") at an exercise price equal to the conversion price of the Note and a term of five years from the date of issuance. The Company has valued the warrants using the Black-Scholes pricing model and allocated $795,701 of the proceeds from the Note, based upon the relative fair value of the Note and the Warrants, to the Warrants and has recorded such amount as discount on the Note. The discount is being amortized to interest expense over the term of the Note. Assumptions utilized in the Black-Scholes model to value the Warrants were: exercise price of $4.08 per share; fair value of the Company's common stock on date of issuance of $3.00 per share; volatility of 100%; term of five years and a risk-free interest rate of 3%. In February 2003, the warrants were subsequently exercised and the conversion price reduced (Note 15). 28NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------------------------------------------------- In the event the Company were to issue common stock at per share prices less than $4.08 (now $2.75 - see Note 15) resulting in the conversion price of the Note to be adjusted lower, or if the Company were to repay all or a portion of the interest or Note in common stock, the Company may be required to record charges to operations in future periods and the charge could be material. In addition, the Company paid a placement agent $125,000 in cash and issued to the placement agent warrants to acquire 38,941 shares of the Company's common stock at an exercise price of $4.01 per share and a term of three years from the date of issuance. The Company valued the placement agent's warrants at $66,861 using the Black-Scholes pricing model with the following assumptions: exercise price of $4.01 per share; fair value of the Company's common stock on date of issuance of $3.00 per share; volatility of 100%; term of three years and a risk-free interest rate of 2.7%. The Company has recorded the $125,000 cash payment and the fair value of the warrants issued to the placement agent as a debt issuance cost, which is being amortized to interest expense over the term of the Note. In addition, professional fees totaling $163,602 associated with the closing of the Note were also recorded as debt issuance cost and are being amortized over the term of the Note. For the year ended December 31, 2002, the Company recorded amortization of $126,006 and $57,575 of the debt discount and closing costs respectively.6. LINE OF CREDIT In February 2001, the Company entered into a financial arrangement with GE Capital Corporation for a line of credit, which provided for the financing of up to $5 million of equipment (i) for its new East Windsor, NJ manufacturing facility and (ii) for its expanded corporate and laboratory facilities in Robbinsville, NJ. Equipment financed through this facility has been in the form of a 42 month capital lease. As of December 31, 2002, the Company had financed $1,113,459 of equipment purchases under the GE credit line. The $5 million credit line expired in March 2002, and as of December 31, 2002, there was an outstanding balance due GE of $724,577 under this facility. This balance is payable in monthly installments through various dates in 2004. In January 2002, GE approved a new credit line, which provides for the financing of up to $3 million of equipment and expired on December 31, 2002. During 2002, the Company accessed $1,111,427 of the credit line. As of December 31, 2002, there was an outstanding balance due GE of $987,310 under January 2002 facility. Balances due are payable in 42 monthly installments from date of take-down. As of December 31, 2002, the facility is no longer available to the Company.7. RELATED PARTY TRANSACTIONS In July 2001, the Company advanced $100,000 to Vivian Liu, the Company's Vice President and Secretary. The advance was evidenced by a promissory note, which bore interest at 5% per annum and was due on May 24, 2002. Prior to the due date, the principal amount due was rolled into a new promissory note, which bore interest at 5% per annum and had a new due date of December 31, 2002. As of September 30, 2002, the principal amount of $100,000 was repaid along with all interest due. In April 2002, the Company advanced $150,000 to James L. Yeager, Ph.D., the Company's Senior Vice President for Scientific Affairs and a director. The amount of $115,725 remained outstanding as of December 31, 2002. The advance is evidenced by a promissory note, which bears interest at 5% per annum and was due on November 15, 2002. The note was not paid in full by November 15, 29NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------------------------------------------------- 2002 and is currently in default. According to the terms of the note, upon default the interest rate increased to 15% per annum. Interest due on the promissory note at the default rate of 15% has been paid on a timely basis. The note receivable is included in the Condensed Consolidated Balance Sheet under "Prepaid Expenses and Other Assets".8. STOCK OPTIONS 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 one to five years, with exercise prices ranging between $0.50 to $16.50. The maximum term under these plans is 10 years. 30NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------------------------------------------------- A summary of stock option activity is as follows: WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICEOutstanding at December 31, 1999 2,457,700 1.66Granted 1,962,225 5.43Exercised (686,500) 0.85Cancelled (150,750) 7.23 --------- --------Outstanding at December 31, 2000 3,582,675 3.67 --------- --------Granted 537,400 0.75Exercised (189,550) 2.02Cancelled (95,950) 6.77 --------- --------Outstanding at December 31, 2001 3,834,575 $ 3.72 --------- --------Granted 1,555,573 1.35Exercised (53,000) 0.35Cancelled (586,393) 4.04 --------- --------Outstanding at December 31, 2002 4,750,755 $ 2.92 --------- --------Exercisable at December 31, 2002 3,162,900 $ 3.46 --------- --------Exercisable at December 31, 2001 2,731,291 $ 3.26 --------- --------Exercisable at December 31, 2000 2,244,433 $ 2.59 --------- --------Options available for grant at December 31, 2002 2,430,195 --------- The following table summarizes information about options outstanding atDecember 31, 2002: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- -------------------------------- WEIGHTED AVERAGE RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGEEXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE $ .50 - 1.75 1,088,555 9.05 years $ 0.71 91,500 $ 1.51 2.00 - 3.50 2,029,600 5.83 years 2.38 1,521,200 2.17 4.00 - 5.50 1,442,200 7.13 years 4.05 1,401,600 4.03 7.00 - 8.00 65,000 3.44 years 7.46 55,000 7.36 12.00 - 16.25 125,400 7.82 years 15.59 93,600 15.66 --------- ------ --------- ------ 4,750,755 $ 2.92 3,162,900 $ 3.46 --------- ------ --------- ------ The weighted average grant date fair value of options granted during 2002, 2001 and 2000 was $1.23, $2.26 and $3.62, respectively. 31NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------------------------------------------------- The fair value of each option and warrant (note 11) is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used in the model: 2002 2001 2000Dividend yield 0.00% 0.00% 0.00%Risk-free yields 1.35% - 3.00% 4.39% - 6.71% 4.39% - 6.71%Expected volatility 100% 65% - 80% 65% - 80%Option terms 1 - 10 years 1 - 10 years 1 - 10 years9. COMMON STOCK On June 28, 2002, the Company completed a private placement of its securities to institutional and accredited individual investors. The Company issued a total of 2,666,670 shares of its common stock and warrants to purchase 533,334 shares of common stock, pursuant to a Unit Purchase Agreement. Gross proceeds from the private placement were $6,000,000. The investors paid $11.25 per unit and received five shares of NexMed common stock and a two-year warrant for the right to purchase one share of common stock at $2.81. In connection with the private placement, the Company paid a placement agent $249,938 in cash and issued the placement agent warrants to purchase 222,167 shares of the Company's common stock at an exercise price of $2.81 per share and a term of three years from the date of issuance. 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 June 2000, the Articles of Incorporation were amended to increase the number of shares of common stock authorized for issuance from 40,000,000 to 80,000,000. 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 $2,946,900.10. 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 32NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------------------------------------------------- consisting of one one-hundredths of a share (a "Unit") of Series A 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.11. WARRANTS A summary of warrant activity is as follows: WEIGHTED COMMON SHARES AVERAGE ISSUABLE UPON EXERCISE EXERCISE PRICE Outstanding at January 1, 2000 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 Issued 115,000 12.22 Exercised (200,000) 3.00 ---------- ----- Outstanding at December 31, 2001 2,206,549 11.59 ---------- -----  Issued 1,183,850 3.27 Redeemed (1,345,491) 14.31 ---------- ----- Outstanding at December 31, 2002 2,044,908 5.03 ---------- ----- In connection with the private placement on June 28, 2002 (Note 9), the Company issued warrants to purchase 533,334 shares of common stock , pursuant to a Unit Purchase Agreement. The investors paid $11.25 per unit and received five shares of NexMed common stock and a two-year warrant for the right to purchase one share of common stock at $2.81. The Company also issued the placement agent warrants to purchase 222,167 shares of the Company's common stock at an exercise price of $2.81 per share and a term of three years from the date of issuance. 33NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------------------------------------------------- In August 2001, the Company issued warrants to acquire 15,000 shares of its common stock to a financial consultant. The warrants have an exercise price of $7.00 per share and vested immediately. In accordance with EITF 96-18, the Company has recorded $38,550 of consulting expenses related to these warrants, representing the fair value of these warrants using the Black-Scholes pricing model. In February 2001, the Company issued warrants to acquire 100,000 shares of its common stock to a financial consultant. The warrants have an exercise price of $13.00 per share, of which 34,000 warrants vested immediately and the remaining warrants vested in two equal installments on May 20, 2001 and August 20, 2001. The warrants have a three-year term. In accordance with EITF 96-18, the Company has recorded approximately $297,500 of consulting expense related to these warrants during 2001, representing the fair value of these warrants using the Black-Scholes pricing model. 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 9). The warrants have exercise prices ranging from $13.50 to $16.20 per share. 1,295,491 warrants expired in February 2002 and 292,826 warrants issued as commission to a placement agent expire in August 2003.12. INCOME TAXES The Company has incurred losses since inception, which have generated net operating loss carryforwards of approximately $35.4 million 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 $3.8 million. 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. In 2002, the Company was approved by the State of New Jersey to sell a portion of its state tax credits pursuant to the Technology Tax Certificate Transfer Program. The Company has approximately $1.65 million in NJ tax credits, and was approved to sell $279,000 in 2002. The Company received proceeds of $242,645 in 2002 as a result of the sale of the tax credits. The net operating loss carryforwards and tax credit carryforwards result in a noncurrent deferred tax benefit at December 31, 2002 and 2001 of approximately $17.9 million and $8.7 million, respectively. 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, 2002, 2001 and 2000, 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. 34NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--------------------------------------------------------------------------------13. 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 2006. The Company also leases equipment from GE Capital under capital leases expiring through 2005 (Note 6). Future minimum payments under noncancellable operating and capital leases with initial or remaining terms of one year or more, consist of the following at December 31, 2001: OPERATING CAPITAL2003 $ 488,114 $ 741,0172004 132,964 741,0172005 27,759 432,6552006 3,150 39,2782007 2,100 -- ---------- ---------- Total minimum lease payments $ 654,087 1,953,967 ----------Less: amount representing interest (242,080)Present value of future minimum lease payments 1,711,887Less: current portion (609,676) ----------Capital lease obligations, net of current portion $1,102,211 ---------- The Company also leases office space under short-term lease agreements. Total rent expense was $452,052, $535,023, and $310,326 in 2002, 2001, and 2000 respectively. On February 27, 2002, the Company entered in to an employment agreement with Y. Joseph Mo, Ph.D., that has a constant term of five years, and pursuant to which Dr. Mo will serve as the Company's Chief Executive Officer and President. During his employment with the Company, Dr. Mo will receive an annual base salary of at least $250,000 (to be raised to $350,000 after the Company sustains gross revenues of $10 million for two consecutive fiscal quarters), subject to annual cost of living increases. Under the employment agreement, Dr. Mo is entitled to deferred compensation in an annual amount equal to one sixth of the sum of Dr. Mo's base salary and bonus for the 36 calendar months preceding the date on which the deferred compensation payments commence subject to certain limitations, including annual vesting through January 1, 2007, as set forth in the employment agreement. The deferred compensation will be payable monthly for 180 months commencing on termination of employment. As of December 31, 2002, the Company has accrued approximately $350,000, which is included in accounts payable and accrued expenses, based upon the estimated present value of the vested portion of the obligation. 35NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--------------------------------------------------------------------------------14. SEGMENT AND GEOGRAPHIC INFORMATION In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 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. Geographic information as of December 31, 2001, 2000 and 1999 are as follows: 2002 2001 2000NET REVENUES Other foreign countries $ 148,028 $ 68,089 $ -- ------------ ------------ ------------ $ 148,028 $ 68,089 $ -- ------------ ------------ ------------NET LOSS United States $(27,538,701) $(16,106,246) $ (8,630,255) Other foreign countries (102,818) (68,615) (90,298) ------------ ------------ ------------ $(27,641,519) $(16,174,861) $ (8,720,553) ------------ ------------ ------------TOTAL ASSETS United States $ 14,027,334 $ 27,286,173 $ 39,516,217 Other foreign countries 112,793 28,540 473,465 ------------ ------------ ------------ $ 14,140,127 $ 27,314,713 $ 39,989,682 ------------ ------------ ------------15. SUBSEQUENT EVENTS On February 4, 2003 the terms of the convertible notes (Note 5) were amended. In order to induce the holders to exercise the Warrants in full, the Company agreed to reduce the conversion price under the notes to $2.75 and the warrant exercise price was reduced to $1.37 (originally $4.08) per share. Pursuant to the amendment, all of the warrants were exercised on February 4, 2003 and the Company received proceeds of $533,489 from such exercise. The Company is in the process of evaluating this transaction and may be required to record charges related to the reduction of the conversion price and the warrant exercise price. These charges may be material. On January 31, 2003, the Company entered into a 11 month consulting agreement with a financial consultant (the "Consultant") for investor relations and financial consulting services. The Company agreed to pay the consultant a fee of $395,000 and will issue the Consultant immediately exercisable warrants to purchase 500,000 shares of the Company's common stock with an exercise price of $1.00 on April 10, 2003. The Company has granted the Consultant registration 36NEXMED, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------------------------------------------------- rights for such shares. In accordance with EITF 96-18, the Company will record consulting expenses based on the fair value of these warrants on April 10, 2003, calculated using the Black-Scholes pricing model. The Company also agreed to pay the consultant 10% of any funding as a result of an introduction made by the Consultant, and 8% of the total aggregate consideration paid for any acquisition or sale by the Company of any businesses. On January 17, 2003 and February 1, 2003, the Company issued two one-month notes of $500,000 and $100,000 respectively. The notes bore interest at 12% per annum and were convertible into securities at such time as the Company closes a private placement of its securities. The conversion rate was the purchase price of the securities in the private placement. If the notes were not repaid on the maturity date, the noteholder had the option of extending the maturity of the notes for an additional one month at an interest rate of 15%. The notes were not repaid on the maturity date, and both were extended to March 21, 2003. On March 21, 2003, the Company closed a private placement of its common stock at $1.50 per share. The note-holder elected to convert the outstanding $614,064 in principal and interest due into 409,376 shares of the Company's common stock and 307,032 three-year warrants to purchase the Company's common stock at $2.00 per share. As mentioned in the preceding paragraph, on March 21, 2003, the Company closed a private placement of its common stock at $1.50 per share. Pursuant to the agreement of the private placement, the Company issued a total of 209,987 shares and 157,490 three-year warrants to purchase the Company's common stock at $2.00 per share to three accredited investors and received $314,980 in gross proceeds. As a result of the March 21 issuances of common stock, the conversion price of the convertible notes was reduced to $2.72. In March 2003, the Company issued one short-term promissory note due May 4, 2003 for $500,000 to one accredited investor. This promissory note bears interest at 15% per annum and provides for two-year warrants to purchase 50,000 shares of the Company's common stock, at an exercise price of $2.00 per share. The Company has valued the warrants using the Black-Scholes pricing model and allocated $42,000 of the proceeds from the note, based upon the relative fair value of the note and the warrants, to the warrants and has recorded such amount as discount on the note. 37ITEM 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 2003 Proxy Statement, which is incorporatedherein by this reference and "Executive Officers" of Part I of this Report.ITEM 11. EXECUTIVE COMPENSATION. Information called for by Item 11 is set forth under the heading"Executive Compensation" in the 2003 Proxy Statement, which is incorporatedherein by this reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Information called for by Item 12 is in part set forth under the heading"Security Ownership of Certain Beneficial Owners and Management" in the 2003Proxy Statement, which is incorporated herein by this reference, and in part set forth below.EQUITY COMPENSATION PLAN INFORMATION The following table gives information as of December 31, 2002, aboutNexMed Stock that may be issued upon the exercise of options, warrants andrights under all of our existing equity compensation plans (together, the"Equity Plans"). EQUITY COMPENSATION PLAN INFORMATION ---------------------------------------------------------------------------------------------------- (A) NUMBER OF SECURITIES REMAINING NUMBER OF SECURITIES TO BE (B) AVAILABLE FOR FUTURE ISSUANCE ISSUED UPON EXERCISE OF WEIGHTED AVERAGE EXERCISE PRICE UNDER EQUITY COMPENSATION OUTSTANDING OPTIONS, WARRANTS OF OUTSTANDING OPTIONS, WARRANTS PLANS (EXCLUDING SECURITIES PLAN CATEGORY AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (A))------------------ ----------------------------- -------------------------------- --------------------------- Equity Plansapproved bysecurity holders 4,750,755(1) $2.92 2,370,195(2)Equity Plans notapproved bysecurity holders -- N/A -- ------------ ----- ------------Total 4,750,755(1) $2.92 2,370,195(2) ------------ ----- ------------(1) Consists of options outstanding at December 31, 2002 under The NexMed Inc. Stock Option and Long Term Incentive Plan (the "Incentive Plan") and The NexMed Inc. Recognition and Retention Stock Incentive Plan (the "Recognition Plan").(2) Consists of the aggregate number of shares of Stock that remain available for future issuance, at December 31, 2002, under all of our stockholder approved Equity Plans. This consists of 1,637,795 shares available under the Incentive Plan and 732,400 shares available under the Recognition Plan.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information called for by Item 13 is set forth under the heading "CertainRelationships and Related Transactions" in the 2003 Proxy Statement, which isincorporated herein by this reference.ITEM 14. CONTROLS AND PROCEDURES. Within the 90 days prior to the date of filing of this report, we carriedout an evaluation, under the supervision and participation of our management(including our Chief Executive Officer and Acting Chief Financial Officer, ourprincipal executive officer and principal financial officer, respectively), ofthe effectiveness and design and operation of the Company's controls andprocedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, ourChief Executive Officer and Acting Chief Financial Officer concluded that ourdisclosure controls and procedures are effective in timely alerting them toinformation required to be included in our periodic Securities and ExchangeCommission filings. There were no significant changes in our internal controlsor in other factors that could significantly affect these controls subsequent tothe date of their evaluation. PART IV.ITEM 15. 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, 2002. 38 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULETo the Board of Directors and Stockholders of NexMed, Inc.Our audits of the consolidated financial statements referred to in our reportdated February 25, 2003, except as to Note 15 which is as of March 21, 2003,which included an explanatory paragraph regarding the Company's ability tocontinue as a going concern, appearing in this Annual Report on Form 10-K alsoincluded an audit of the financial statement schedules listed in Item 15(a)(2)of this Form 10-K. In our opinion, these financial statement schedules presentfairly, in all material respects, the information set forth therein when read inconjunction with the related consolidated financial statements./s/ PricewaterhouseCoopers LLP------------------------------PricewaterhouseCoopers LLPNew York, New YorkFebruary 25, 2003 SCHEDULE II NEXMED, INC. SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS 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, 2002 Valuation allowance - deferred tax asset $8,699,708 $9,201,826 -- -- $17,901,534YEAR ENDED DECEMBER 31, 2001 Valuation allowance - deferred tax asset $4,572,023 $4,127,685 -- -- $ 8,699,708YEAR ENDED DECEMBER 31, 2000 Valuation allowance - deferred tax asset $2,491,607 $2,080,416 -- -- $ 4,572,023 --All other schedules have been omitted because the information is not applicableor is presented in the Financial Statements or Notes thereto.3. EXHIBITSEXHIBITS DESCRIPTIONNO.---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 Certificate of Amendment to Articles of Incorporation of the Company, dated June 22, 2000.3.3 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).3.4 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). 394.1 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).4.4 Form of 5% Convertible Note dated June 11, 2002 (incorporated herein by reference to Exhibit 4.2 to the Company's S-3 filed with the Securities and Exchange Commission on July 19, 2002).4.5 Form of Warrant dated June 11, 2002 (incorporated herein by reference to Exhibit 4.3 to the Company's S-3 filed with the Securities and Exchange Commission on July 19, 2002).4.6 Form of Unit Warrant dated June 28, 2002 (incorporated herein by reference to Exhibit 4.5 to the Company's S-3 filed with the Securities and Exchange Commission on July 19, 2002).4.7 Form of Placement Agent Warrant dated June 28, 2002 (incorporated herein by reference to Exhibit 4.6 to the Company's S-3 filed with the Securities and Exchange Commission on July 19, 2002).10.1* Amended and Restated NexMed, Inc. Stock Option and Long-Term Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q filed with the Securities and Exchange Commission on May 15, 2001).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 License Agreement dated March 22, 1999 between NexMed International Limited and Vergemont International Limited (incorporated by reference to Exhibit 10.7 of the Company's Form 10-KSB filed with the Securities and Exchange Commission on March 16, 2000).10.4 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).10.5* Employment Agreement dated February 26, 2002 by and between NexMed, Inc. and Dr. Y. Joseph Mo. (Incorporated by reference to Exhibit 10.7 of the Company's Form 10-K filed with the Securities and Exchange Commission on March 29, 2002.)10.6 Letter Agreement dated February 6, 2001, by and among NexMed, Inc. and General Electric Capital Corporation (Incorporated by reference to Exhibit 10.8 of the Company's Form 10-K filed with the Securities and Exchange Commission on March 29, 2002.)10.7 Letter Agreement dated January 2, 2002, by and among NexMed, Inc. and General Electric Capital Corporation (Incorporated by reference to Exhibit 10.8 of the Company's Form 10-K filed with the Securities and Exchange Commission on March 29, 2002.)10.8 Purchase Agreement between the Company and The Tailwind Fund Ltd. and Solomon Strategic Holdings, Inc. dated June 11, 2002 (incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002). 4010.9 Registration Rights Agreement between the Company and The Tailwind Fund Ltd. and Solomon Strategic Holdings, Inc. dated June 11, 2002 (incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002).10.10 Subsidiary Guaranty by NexMed (U.S.A.), Inc., a wholly owned subsidiary of the Company, in favor of The Tailwind Fund Ltd. and Solomon Strategic Holdings, Inc. dated June 11, 2002 (incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002).10.11 Mortgage, Security Agreement and Assignment of Leases and Rents by NexMed (U.S.A.), Inc., a wholly owned subsidiary of the Company, in favor of The Tailwind Fund Ltd. and Solomon Strategic Holdings, Inc. dated June 11, 2002 (incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002).10.12 Form of Unit Purchase Agreement dated June 28, 2002 (incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002).21 List of Subsidiaries.23 Consent of PricewaterhouseCoopers LLP, independent accountants. 99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.2 Certification of Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*Management compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.(B) REPORTS ON FORM 8-K None. 41 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 31, 2003 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, President and March 31, 2003---------------- Chief Executive OfficerY. JOSEPH MO/s/ Vivian H. Liu Vice President, Acting Chief Financial Officer and March 31, 2003----------------- SecretaryVIVIAN H. LIU/s/ James Yeager Director, Senior Vice-President, Scientific Affairs March 31, 2003----------------JAMES YEAGER/s/ Richard J. Berman Director March 31, 2003---------------------RICHARD J. BERMAN/s/ Robert W.Gracy Director March 31, 2003-------------------ROBERT W. GRACY/s/ Stephen M. Sammut Director March 31, 2003---------------------STEPHEN M. SAMMUT 42 CERTIFICATIONI, Y. Joseph Mo, Chief Executive Officer of NexMed, Inc., certify that:1. I have reviewed this annual report on Form 10-K of NexMed, Inc.;2. Based on my knowledge, this annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport;3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;4. The registrant's other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:a) designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during theperiod in which this annual y report is being prepared;b) evaluated the effectiveness of the registrant's disclosure controls andprocedures as of a date within 90 days prior to the filing date of this annualreport (the "Evaluation Date"); andc) presented in this annual report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;5. The registrant's other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalent functions:a) all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant's ability to record, process,summarize and report financial data and have identified for the registrant'sauditors any material weaknesses in internal controls; andb) any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant's internal controls; and6. The registrant's other certifying officers and I have indicated in thisannual report whether or not there were significant changes in internal controlsor in other factors that could significantly affect internal controls subsequentto the date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.Date: March 31, 2003 /s/ Y. Joseph Mo ----------------------- Y. Joseph Mo Chief Executive Officer CERTIFICATIONI, Vivian H. Liu, Chief Financial Officer of NexMed, Inc., certify that:1. I have reviewed this annual report on Form 10-K of NexMed, Inc.;2. Based on my knowledge, this annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport;3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;4. The registrant's other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:a) designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during theperiod in which this annual y report is being prepared;b) evaluated the effectiveness of the registrant's disclosure controls andprocedures as of a date within 90 days prior to the filing date of this annualreport (the "Evaluation Date"); andc) presented in this annual report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;5. The registrant's other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalent functions:a) all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant's ability to record, process,summarize and report financial data and have identified for the registrant'sauditors any material weaknesses in internal controls; andb) any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrant's internal controls; and6. The registrant's other certifying officers and I have indicated in thisannual report whether or not there were significant changes in internal controlsor in other factors that could significantly affect internal controls subsequentto the date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.Date: March 31, 2003 /s/ Vivian Liu ------------------------------ Vivian H. Liu Acting Chief Financial Officer EXHIBIT INDEXEXHIBITS DESCRIPTIONNO.3.2 Certificate of Amendment to Articles of Incorporation of the Company, dated June 22, 2000.21 List of Subsidiaries.23 Consent of PricewaterhouseCoopers LLP, independent accountants.99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.2 Certification of Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. CERTIFICATE OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF NEXMED, INC.NexMed, Inc., a corporation organized under the laws of the State of Nevada, byits president & secretary does hereby certify: 1. That the Board of Directors of said corporation at a meeting duly convened and held on the 19th day of June 2000, passed resolutions declaring that the following changes and amendments in the Amended and Restated Articles of Incorporation are advisable. Resolved that the Fifth Article of the Company's Amended and Restated Articles of Incorporation shall be amended to read as follows: The total number of all classes of stock which the Corporation shall have authority to issue is ninety million (90,000,000), consisting of eighty million (80,000,000) shares of common stock, par value one-tenth of one cent ($0.001) per share (the "Common Stock") and then ten million (10,000,000) shares of preferred stock, par value one-tenth of once cent ($0.001) per share (the "Preferred Stock"). 2. That the number of shares of the corporation and entitled to vote an amendment to the Amended and Restated Articles of Incorporation was 19,464,048; that the said change and amendment had been approved and authorized by stockholders holding at least a majority of each class of stock outstanding and entitled to vote thereon at the Annual Meeting of Shareholders held on June 19, 2000.IN WITNESS WHEREOF, that said NexMed, Inc. has caused this certificate to besigned by its president and its secretary and its corporate seal to be heretoaffixed this 22nd day of June 2000.NexMed, Inc./s/ Joseph Mo /s/ Vivian Liu--------------------------- --------------Y. Joseph Mo, Ph.D. Vivian LiuPresident Secretary 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 International (Hong Kong) Ltd. is a wholly-owned subsidiary incorporated in Hong Kong, on March 14, 2001. EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the RegistrationStatements on Form S-3 (Nos. 333-91957, 333-46976, and 333-96813) and in theRegistration Statement on Form S-8 (No. 333-93435) of NexMed, Inc. of our reportdated February 25, 2002, except as to Note 15 which is as of March 21, 2003,relating to the financial statements, which appear in this Form 10-K./s/ PricewaterhouseCoopers LLP------------------------------PricewaterhouseCoopers LLPNew York, New YorkMarch 31, 2003 EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of NexMed, Inc. (the"Company") for the fiscal year ended December 31, 2002 as filed with theSecurities and Exchange Commission on the date hereof (the "Report"), I, Y.Joseph Mo, Chief Executive Officer of the Company, certify, pursuant to section906 of the Sarbanes-Oxley Act of 2002, that:(1) the Report fully complies with the requirements of section 13(a) or15(d) of the Securities Exchange Act of 1934; and(2) the information contained in the Report fairly presents, in allmaterial respects, the financial condition and results of operations of theCompany.By: /s/ Y. Joseph Mo-----------------------Name: Y. Joseph MoChief Executive OfficerMarch 31, 2003A signed original of this written statement required by Section 906 has beenprovided to NexMed, Inc. and will be retained by NexMed, Inc. and furnished tothe Securities and Exchange Commission or its staff upon request. EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of NexMed, Inc. (the"Company") for the fiscal year ended December 31, 2002 as filed with theSecurities and Exchange Commission on the date hereof (the "Report"), I, VivianLiu, Acting Chief Financial Officer of the Company, certify, pursuant to section906 of the Sarbanes-Oxley Act of 2002, that:(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.By: /s/ Vivian Liu------------------------------Name: Vivian LiuActing Chief Financial OfficerMarch 31, 2003A signed original of this written statement required by Section 906 has beenprovided to NexMed, Inc. and will be retained by NexMed, Inc. and furnished tothe Securities and Exchange Commission or its staff upon request.

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