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SEC FILE NO.: 0-22245
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-SB/A
AMENDMENT NO.1
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B)
OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
NEXMED, INC.
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(Name of Small Business Issuer in Its Charter)
Nevada 87-0449967
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6087 Triangle Drive, Commerce, CA 90040
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(Address of Principal Executive Offices) (Zip Code)
(213) 890-0881
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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N/A N/A
Securities to be registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
NexMed, Inc. ("NexMed"), which has been in existence since 1987 and is in
the development stage (see "Company History and General Information" in this
Item 1), has, since 1994, positioned itself as a medical and pharmaceutical
technology company with a focus on developing and commercializing therapeutic
products based on proprietary delivery systems. NexMed (together with its
subsidiaries, the "Company") currently intends to focus its efforts on: (i)
topical treatment products based on a penetration enhancement technology known
as NexACT-TM-, which may enable the active drug to be better absorbed through
the skin; (ii) the Viratrol-TM- device, a therapeutic medical device for the
treatment of herpes simplex diseases which does not require the use of any
drugs; and (iii) through a joint-venture with Asian partners, research and
development, production and distribution in China and other international
markets of medical and pharmaceutical products, including generic
pharmaceuticals currently approved and sold in China and products incorporating
new and advanced technologies. The Company intends to conduct research and
development both domestically and abroad on proprietary pharmaceutical products,
with the goal of eventually achieving a level of development sufficient to
enable the Company to attract potential strategic partners with the resources
necessary to further develop, commercialize and market the products. The
Company also intends to undertake the commercialization of new products in
particular international markets through strategic partners, licensees,
importers and brokers.
DEVELOPMENT OF DRUG DELIVERY ENHANCEMENT TECHNOLOGY
ACQUISITION OF TECHNOLOGY; RESEARCH AND DEVELOPMENT
In October 1996, the Company acquired rights and interests, including
patents, patent applications, trade secrets and know-how, relating to absorption
enhancers for topical pharmaceutical formulations from Odontex, Inc.
("Odontex"), a Kansas-based company, in exchange for 75,000 shares of the
Company's Common Stock, $.001 par value per share ("Common Stock"). The Company
has filed a trademark application for this newly-acquired transdermal drug
delivery technology under the name NexACT-TM-. The NexACT-TM- technology is
designed to enhance absorption through the skin, overcoming the skin's natural
barrier properties and enabling the rapid penetration of high concentrations of
the active drug directly to the site of the skin or extremity at which the
active drug's effect is desired, thereby resulting in improved therapeutic
outcomes and reduced gastrointestinal or other systemic side effects that often
accompany oral medications. The Company believes, based on preliminary in-vitro
data generated to date, that this technology, when applied to drugs such as
alprostadil, acyclovir, ibuprofen and ketoprofen, may have application in the
development of products or treatments for
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diseases and disorders such as male erectile dysfunction (impotence), herpes
labialis (cold sores), genital herpes, arthritis and pain management.
The Company acquired two U.S. patents, a pending U.S. patent application
and a pending international patent application from Odontex, which application
is currently pending in Canada, China, the European Patent Office, New Zealand
and the Russian Federation. In addition, the Company is developing the next
generation of absorption enhancement technology, which is in the process of
being patented.
During the next twelve months, the Company intends to continue its focus on
developing topical treatments based on the NexACT-TM- technology at the Higuchi
Biosciences Center of the University of Kansas, where the Company is using
laboratory space pursuant to a research agreement with the university. The
drugs to which the Company currently intends to direct the topical delivery
system development efforts of its advisors, consultants and employees at the
Higuchi Biosciences Center (see "Advisors, Consultants, Researchers and
Employees in Absorption Enhancement Field" below) are drugs previously approved
by the Food and Drug Administration ("FDA") with proven efficacy and safety
profiles, with patents expiring or expired and with proven market records and
potential. Leading candidates for topical treatment products currently under
research and development by the Company include:
(i) for treatment of male erectile dysfunction (impotence), an
alprostadil cream, which the Company believes may have a higher patient
compliance for usage as compared to the currently-marketed alprostadil
injectable dosage form and the recently-approved alprostadil intra-urethral
dosage form. The NexACT-TM- alprostadil topical cream is expected to be
effective in men with mild to moderate erectile dysfunction, whether the
cause is psychological or physiological. The NexACT-TM- enhancers have
been demonstrated to promote the absorption of alprostadil in in-vitro and
animal models and to improve the clinical responses in pilot clinical
studies. The Company has recently filed of a trademark application for
the alprostadil cream incorporating the NexACT-TM- enhancers under the name
Alprox-TD-TM-;
(ii) for sports medicine and arthritis treatment, ibuprofen and
ketoprofen creams. In-vitro data indicate that the Company's new cream
formulations have higher drug penetration, suggesting the potential to
provide improved clinical benefits; and
(iii) for the treatment of herpes simplex, an acyclovir anti-viral
cream, which exhibits an improved in-vitro penetration profile as compared
to a top-selling European acyclovir ointment, indicating the potential for
better delivery of the anti-viral drug to the active site.
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ADVISORS, CONSULTANTS, RESEARCHERS AND EMPLOYEES IN ABSORPTION
ENHANCEMENT FIELD
The Company has retained the Chief Executive Officer of Odontex, Dr. John
J. Hefferren, as a consultant. In exchange for Dr. Hefferren's research
consultation and collaboration services as an independent contractor three days
per month at the Higuchi Biosciences Center of the University of Kansas, the
Company has agreed to pay Dr. Hefferren $5,000 quarterly. In addition, the
Company has granted Dr. Hefferren options to purchase 40,000 shares of Common
Stock at an exercise price of $1.00 per share. As of January 31, 1997, 30,000
of such options have vested and the balance will vest effective as of April 30,
1997. The consulting agreement is for a one-year term, with the Company's
option to renew the agreement annually for up to two years.
Dr. Servet Buyuktimkin and Dr. Nadir Buyuktimkin, co-inventors of the
Company's patented NexACT-TM- enhancers, are employed by the Company as
Managers of the Company's Drug Delivery Laboratories, which is conducting
research at the Higuchi Biosciences Center of the University of Kansas using
space made available pursuant to a research agreement with the university.
Dr. J. Howard Rytting, a co-inventor of the NexACT-TM- enhancers and
professor in the Department of Pharmaceutical Chemistry of the School of
Pharmacy of the University of Kansas, is a member of the Company's Scientific
Advisory Board. In addition, pursuant to a research agreement between the
Company and the University of Kansas, the Company is funding a research
effort by Dr. J. Howard Rytting for the development of new enhancers and new
methodologies involving penetration enhancement research. The Company has
the right to become the exclusive licensee of such new technology, for which
the University of Kansas would hold the patents.
TAIWANESE LICENSE AGREEMENT
In January 1997, the Company, through its wholly-owned subsidiary, NexMed
International Limited ("NexMed International"), a British Virgin Islands company
based in Hong Kong, entered into a license agreement with Lotus Medical Supply,
Inc. ("Lotus"), a Taiwanese company (the "Lotus License Agreement"), whereby
Lotus secured certain exclusive rights in Taiwan to make use of and sell
products which incorporate the Company's penetration enhancement technology or
other know-how regarding absorption of alprostadil. Lotus has the obligation to
seek regulatory approval in Taiwan and to conduct all research and testing
required to be performed for the purpose of obtaining such regulatory approval.
Although the Company is sponsoring similar research and testing work currently
being done or to be carried out in China, and anticipates conducting additional
similar research in the U.S. or elsewhere, the Company believes that the work to
be performed pursuant to the Lotus License Agreement may provide the Company
with valuable clinical data which may supplement and accelerate its other
efforts. NexMed International and Lotus share equally the cost of pre-clinical
work and Lotus pays the costs of clinical studies and regulatory approvals.
NexMed International retains ownership of all trademarks and proprietary
information. In February 1997, Lotus paid a non-refundable licensing fee in
connection with the signing of the Lotus License Agreement and additional
minimum payments and royalties will be due if certain
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milestones with regard to the regulatory approval process are reached, of which
there can be no assurance. The Company does not expect to derive significant
revenue from the Lotus License Agreement in relation to its anticipated
operations. Milestones which must be reached by Lotus include the receipt of
approval to proceed with clinical studies in Taiwan and completion of essential
clinical studies with protocols pre-approved by the appropriate Taiwanese
regulatory authority which will partially satisfy requirements to receive
marketing approval in Taiwan. The Lotus License Agreement will terminate ten
(10) years from the date on which any product is approved by the appropriate
Taiwanese governmental authority.
VIRATROL-TM- HERPES TREATMENT DEVICE
Another of the Company's proposed products, which is still in the
development stage, is the Viratrol-TM- device, a hand-held non-invasive
therapeutic device designed to deliver a minute electrical current for the
treatment of herpes simplex diseases. The Company believes that the electrical
current, which is topically delivered by the device to an infected site, blocks
lesions from forming or shortens healing time once lesions develop. The product
currently being developed by the Company is based on a new generation of
technology and patents resulting from development work undertaken by the Company
subsequent to its acquisition in 1994 of earlier technology for a device
designed for similar use. The Company has completed the first commercial
prototype of the redesigned Viratrol-TM- device, which the Company used in pilot
efficacy clinical trials which commenced in China in January 1997 and were
recently completed. The Company has decided to delay the 60-subject
double-blind efficacy clinical trials in order to incorporate the final
commercial prototype of the device. The final commercial model of the
Viratrol-TM- device administers the same treatment in the same manner as the
prototype used in the pilot clinical trials but has a different microchip and
shell design and employs a disposable probe and dosing insert rather than being
fully disposable. If the results of the double-blind clinical trials are
satisfactory, the Company intends shortly thereafter to commence the regulatory
approval process and clinical studies in the United States. The Company has two
issued patents on the current version of the device and one pending patent
application currently under review by the U.S. Patent and Trademark Office, and
recently filed its first application under the Patent Cooperation Treaty on the
new device. The Company plans to file additional patents as a strategy to
continue expanding the protective coverage of the device. Patent approval does
not assure regulatory approval.
AGREEMENT TO CONDUCT CLINICAL STUDIES
In October 1996, the Company entered into agreements with Innapharma, Inc.,
a contract research organization based in New Jersey with branch offices in
Tokyo and Beijing, pursuant to which Innapharma has initiated clinical studies
for the Company in China on the Viratrol-TM- device and on the Alprox-TD-TM-
cream.
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Innapharma will verify that such studies conform with U.S. Good Clinical
Practices. The first phase pilot study of the 60-patient double-blind study on
the Viratrol-TM- device, involving 10 of the patients, commenced in January 1997
and was recently completed. As discussed above, the Company has decided to
delay the double-blind clinical trials on the Viratrol-TM- device in order to
complete and incorporate the final commercial prototype of the device. With
respect to the Alprox-TD-TM- cream, as the product is not currently approved for
sale in the United States or other industrialized countries, the Chinese
Department of Health informed the Company that certain pre-clinical studies
would have to be repeated in China. The required pre-clinical studies are
underway and the Company anticipates that the first phase of the 600-patient
double-blind clinical study on the Alprox-TD-TM- cream will commence by the
second half of 1997. Both studies are expected to conclude, with final reports,
during the second half of 1997. If the results of the clinical trials are
satisfactory, the Company plans to use the resulting data in connection with
obtaining regulatory approval for further trials and for the sale of the
Alprox-TD-TM- cream in China and other Asian and South American and other
developing-world countries. These data may also be used by the Company to
complete the pre-clinical requirements for the filing with the FDA of an
Investigational New Drug ("IND") application for the Alprox-TD-TM- cream and an
Investigational Device Exemption ("IDE") for the Viratrol-TM- device, both of
which the Company intends to file by the end of 1997.
JOINT VENTURE IN CHINA
The Company is currently in negotiations with Zhongshan (ShiQi)
Pharmaceutical Manufacturing Factory (the "Factory") regarding the formation of
a Chinese joint venture company to be known as NexMed (Zhongshan)
Pharmaceuticals, Ltd. (the "JV"). The purpose of the JV would be to carry out
research and development, production and distribution of medical and
pharmaceutical products, both for the internal markets of China and
internationally. The parties with one other company had entered into a joint
venture agreement in August 1996 which was subject to Chinese governmental
approval. That agreement has been abrogated in favor of a more encompassing
relationship which is the subject of the current negotiations.
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As presently contemplated, the new JV agreement would have a term of 30
years and would provide the Company with a majority controlling interest in the
JV. The Factory would contribute a manufacturing complex consisting of real
estate, which has a total gross area of approximately 160,000 square feet and
factory buildings on the real estate, which have a total gross floor area of
approximately 240,000 square feet. Additional assets to be provided by the
Factory would include regulatory approvals for manufacturing and marketing of
approximately 360 drug products produced by the Factory; its existing sales
revenue; its sales and distribution network in China; trademarks; goodwill;
intellectual property; all production equipment (mostly foreign made), currently
being used by the Factory to manufacture liquid and sterile powder for
injections, capsules, tablets, eye drops, granules and unit-dose oral liquid
dosage forms, as well as for fluid-bed granulation-drying, wet granulation,
mixing and blister packaging production. Three hundred thousand dollars
previously advanced by the Company under the August 1996 joint venture agreement
and which is being held by the Factory will either be credited to the JV,
returned to the Company or used as a line of credit for the funding of purchase
orders for the Factory's pharmaceutical products.
The proposed new and expanded JV agreement would require a significantly
greater capital contribution by NexMed International, via its wholly-owned
subsidiary, NexMed (China) Ltd., approximating $8 million, to be paid over
two years. In the first year following receipt of a commercial license, the
Factory would contribute $7.4 million in total assets and $1.4 million in
liabilities, for a total of $6 million in net assets. NexMed International
would be obligated to pay $4.8 million to the Factory to acquire 80% of such
net assets contributed to the JV, $2 million of which must be paid within the
first three months following receipt of the commercial license, in addition
to the contribution of production technology for two controlled-release
pharmaceutical formulations. In the second year, the Factory would
contribute $800,000 and NexMed International would contribute $3.2 million,
both of which would be paid simultaneously. NexMed International would own
80% of the JV's net assets of $6 million after the receipt of the commercial
license and the paid-in capital of the first $2 million and 80% of the JV's
total assets of $10 million following the second year.
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It is anticipated during the third quarter of 1997, an agreement regarding
the terms of the new JV agreement will be entered into which, in turn, would be
subject to various governmental approvals. Any JV, whatever the exact terms of
the agreement on which it is based may ultimately be, would require that the
Company raise additional capital to fulfill its commitments. While the Company
believes that it will be able to obtain outside sources of financing for this
purpose, there is no assurance that such sources of financing will be available
or, if available, will be on terms acceptable to the Company.
POTENTIAL CORPORATE ALLIANCES
The Company is currently in preliminary discussions regarding potential
corporate alliances relating to the supply, distribution, marketing, research
and development of pharmaceutical products. Although no assurances can be
given, the Company is hopeful that such negotiations will result in the
consummation of one or more definitive agreements.
RESEARCH AND DEVELOPMENT
In 1996, the Company spent $1,040,396, and in 1995, the Company spent
$169,073, on research and development. Since January 1, 1994, when the Company
repositioned itself as a medical and pharmaceutical technology company, the
Company has spent $1,872,763 on research and development. These amounts for
1996, 1995 and from January 1, 1994 to December 31, 1996 include $696,838,
$8,275 and $1,079,613, respectively, of non-cash compensation and stock and
option issuances.
The Company will need significant funding to pursue its research,
development and commercialization plans (see Part I, Item 2, "Plan of
Operation"). The potential products upon which the Company intends to focus its
initial development efforts, including the Viratrol-TM- device and the
NexACT-TM- topical treatment technology, are in the research and development
stage. Although the Company has begun to receive payments from licensing fees
(see "Development of Drug Delivery Enhancement Technology - Taiwanese License
Agreement" above), the Company has not begun to market or generate revenues from
the commercialization of any of these products under development. The Company's
products under development will require significant time-consuming and costly
research, development, preclinical studies, clinical testing, regulatory
approval and significant additional investment prior to their commercialization.
There can be no assurance that the research and development activities funded by
the Company will be successful, that products under development will prove to be
safe and effective, that any of the preclinical or clinical development work
will be completed, or that the anticipated products will be commercially viable
or successfully marketed. In addition, there can be no assurance that the
Company will be successful in obtaining regulatory approval or developing any
additional products, that if successful, it will be able to attract sufficient
capital to
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complete any development and commercialization undertaken or that any such
development and commercialization will be successful.
MARKETING AND DISTRIBUTION
If regulatory approval is obtained for the Viratrol-TM- device, any
products based on the NexACT-TM- technology and any other products, of which
there is no assurance, achieving market acceptance will still require
substantial marketing efforts and the expenditure of significant funds to inform
potential customers, including third-party distributors, of the distinctive
characteristics and benefits of these products. The Company currently has no
sales force or marketing organization. Therefore, the Company's operating
results will depend largely on its ability to establish successful arrangements
with domestic and international distributors and marketing partners. The
Company intends to utilize this method of product distribution at least for the
next two or three years, although the Company anticipates having an immediate
sales and distribution presence in China if the JV, as contemplated, is
implemented (see "Business - Joint Venture in China" above). There is no
assurance that the Company will be able to establish appropriate distribution or
marketing arrangements or that any such distributors and marketing partners will
be successful in marketing the Company's products. The Company's long-term
success may also depend, to a significant extent, on its ability to establish an
effective internal marketing organization for which the Company will, among
other things, have to attract and retain experienced marketing and sales
personnel. No assurance can be given that the Company will be able to attract
and retain qualified or experienced marketing and sales personnel or that any
efforts undertaken by such personnel will be successful.
DEPENDENCE ON THIRD PARTY SUPPLIERS AND MANUFACTURERS
The Company presently does not have any manufacturing capacity of its own
but instead intends to rely on outside manufacturers. To be successful, the
Company must be able to manufacture its products in commercial quantities at
acceptable costs and, whether the Company manufactures its own products or
contracts with third parties to do so, such manufacturing must comply with U.S.
Good Manufacturing Practices ("GMP") or similar requirements of the countries in
which the products will be marketed. Regulatory authorities such as the FDA
generally will periodically inspect manufacturing facilities in order to assure
compliance with applicable GMP or equivalent requirements. Foreign
manufacturing facilities also are inspected if drugs manufactured at such
facilities are imported for sale into the jurisdiction. The inability or
failure of a contract supplier or manufacturer to comply with GMP or similar
foreign regulations or other regulatory requirements could have a material
adverse effect on the Company's business in the relevant jurisdiction and
therefore, depending on the size of the market, on the Company's financial
condition and results of operations.
The Company currently has one supplier of alprostadil, a chemical
manufacturing subsidiary of a major European pharmaceutical company, and intends
to complete a supply agreement with an additional qualified supplier within the
next six months. Prices of
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alprostadil have been falling and the Company does not anticipate any problems
in obtaining alprostadil or other supplies in commercial quantities for the
manufacture of its proposed products.
The Company currently has one supplier of its key NexACT-TM- enhancers, a
medium-sized U.S. fine chemical manufacturer, and intends to establish at least
one additional supplier or an internal source within the next 12 months.
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COMPETITION
Competition in the pharmaceutical and medical products industries is
intense and characterized by extensive research efforts and rapid technological
progress. The Company competes with numerous firms, many of which are large,
multi-national organizations with worldwide distribution. Even if the proposed
products are approved for marketing, the Company will face major competitors in
the transdermal drug-delivery sector of the industry and in the field of herpes
treatment. With regard to erectile dysfunction, certain treatments exist, such
as needle injection therapy, vacuum constriction devices, penile implants,
transurethral absorption and oral medications, and the manufacturers of these
products are expected to continue to improve these therapies. In July 1995, the
FDA approved the use of alprostadil in The Upjohn Company's needle injection
therapy product for erectile dysfunction. Previously, Upjohn had obtained
approval in a number of European countries. Additional competitive therapies
under development include an oral medication by Pfizer, Inc. Other large
pharmaceutical companies may also become actively engaged in the development of
therapies for the treatment of erectile dysfunction. Such companies would have
substantially greater research and development capabilities as well as
substantially greater marketing, financial and human resources than the Company.
In addition, these companies have significantly greater experience than the
Company in undertaking preclinical testing, human clinical trials and other
regulatory approval procedures.
There are also small companies, academic institutions, governmental
agencies and other research organizations that are conducting research and
developing products in the area of erectile dysfunction. For instance, Zonagen,
Inc. and Pentech Pharmaceutical, Inc. have oral medications under development
and Harvard Scientific Corp. is developing a system which uses a bottle and
catheter to deliver a liquid containing micro-encapsulated alprostadil into the
urethra. These entities may also market commercial products either on their own
or through collaborative efforts. Furthermore, in October 1996, Vivus, Inc.
received FDA approval for their MUSE-Registered Trademark- system, which is a
device for the intra-uretheral delivery of a suppository containing alprostadil.
Vivus, Inc. has sought to enter partnerships and has signed agreements for the
distribution of MUSE-Registered Trademark- in various countries, including
China. The Company's competitors may develop technologies and products that are
available for sale prior to the Company's proposed products, or that are more
effective than those being developed by the Company. Such developments would
render the Company's products less competitive or possibly obsolete. If the
Company is permitted to commence commercial sales of products, it will also be
competing with respect to marketing capabilities and manufacturing efficiency,
areas in which it has limited experience.
GOVERNMENT REGULATION
The testing, manufacture, distribution, advertising and marketing of drug
products are subject to extensive regulation by governmental authorities in most
countries, including the United States. Prior to marketing in a particular
jurisdiction, any
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pharmaceutical products developed or licensed by the Company will in most cases
have to undergo an extensive regulatory approval process required by the
governmental agencies in the intended market, such as the FDA in the United
States and comparable agencies in other countries. This process, which may
include pre-clinical studies and clinical trials of pharmaceutical products to
establish safety and effectiveness and confirmation by the regulatory authority
of the maintenance of the equivalent of U.S. GMP during testing and
manufacturing, can take many years, requires the expenditure of substantial
resources and gives larger companies with greater financial resources a
competitive advantage over the Company. Although approval in one major market
may assist in obtaining approval elsewhere, the regulatory review process in
each country can be lengthy and unpredictable, and the Company may encounter
delays or rejections of one or more of its applications when submitted. If
questions arise during the regulatory review process in a given country,
approval may take a significantly longer period of time.
After completion of clinical trials of a new product, which can take
several months or years to complete, most countries require the approval of the
relevant regulatory authority. If questions arise during the regulatory review
process, approval may take a significantly longer period of time. The testing
and approval processes require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all. Even
if regulatory clearances are obtained, a marketed product is subject to
continual review, and later discovery of previously unknown problems or failure
to comply with the applicable regulatory requirements may result in restrictions
on the marketing of a product or withdrawal of the product from the market as
well as possible civil or criminal sanctions. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. None of the Company's products under
development has been approved for marketing in the United States or elsewhere.
No assurance can be given that the Company will be able to obtain regulatory
approval in any country for any such products under development or that, if the
products under development are approved by the FDA or foreign regulatory
authorities, the Company will ever achieve significant revenues or profitable
operations. Failure to obtain requisite governmental approvals or failure to
obtain approvals of the scope requested will delay or preclude the Company or
its licensees or marketing partners from marketing their products, or limit the
commercial use of the products in one or more markets, and thereby could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
In order to justify the substantial investment of time and expense required
to develop and commercialize its products, the Company will seek proprietary
protection for its pharmaceutical products so as to prevent others from
commercializing equivalent products in substantially less time and at
substantially lower expense. The pharmaceutical industry places considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. The Company's success will depend in part on the ability
of the Company to obtain effective patent protection for the Company's
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proprietary technologies and products, defend such patents, preserve its trade
secrets and operate without infringing upon the proprietary rights of others,
both in the United States and in other countries. The patent position of firms
relying upon medical and pharmaceutical technologies is highly uncertain and
involves complex legal and factual questions. To date, there has emerged no
consistent policy regarding the breadth of claims allowed in such patents or the
degree of protection afforded under the patents.
The Company acquired two patents and two pending patent applications upon
the completion of the transaction with Odontex. One of the patents expires in
2007 and the other in 2009. In addition, the Company has developed the next
generation of absorption technology, which is in the process of being patented.
The Company also owns two patents on the Viratrol-TM- device, has two pending
patent applications with respect to the technology, inventions and improvements
that are significant to the Viratrol-TM- device and intends to file several
additional patent applications as a strategy to continue expanding the coverage
on the device. One of the patents expires in 2009 and the other in 2015.
The patent application and issuance process can be expected to take several
months, if not years, and could entail considerable expense to the Company.
There can be no assurance that patents, whether as to the Viratrol-TM- device,
the NexACT-TM- absorption enhancement technology or otherwise, will issue as a
result of any applications or that the existing patent and any patents resulting
from such applications will be sufficiently broad to afford protection against
competitors with similar technology. In addition, there can be no assurance
that such patents will not infringe upon the claims of third-party patents or be
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. Moreover, the Company does not have
international patents covering all of the claims of its U.S. patents. The
commercial success of the Company also will depend upon its avoidance of
infringement of patents issued to competitors. A United States patent
application is maintained under conditions of confidentiality while the
application is pending, so the Company cannot determine the inventions being
claimed in pending patent applications filed by third parties. Litigation may
be necessary to defend or enforce the Company's patent and license rights or to
determine the scope and validity of the proprietary rights of others. Defense
and enforcement of patent claims can be expensive and time-consuming, even in
those instances in which the outcome is favorable to the Company, and can result
in the diversion of substantial resources from the Company's other activities.
An adverse outcome could subject the Company to significant liabilities to third
parties, require the Company to obtain licenses from third parties, or require
the Company to alter its products or processes, or cease altogether any related
research and development activities or product sales, any of which may have a
material adverse effect on the Company's business, financial condition and
results of operations.
To the extent that consultants, key employees or other third parties apply
technological information independently developed by them or by others to any of
the proposed projects of the Company, disputes may arise as to the proprietary
rights to such information which may not be resolved in favor of the Company.
In addition, the
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Company may also rely from time to time on trade secrets and proprietary
know-how that it may seek to protect in part by its confidentiality agreements
with its employees, consultants, advisors or others. There can be no assurance
that these agreements will not be breached, that the Company would obtain
adequate remedies for any breach, or that the Company's trade secrets or
proprietary know-how will not otherwise become known or be independently
developed by competitors in such a manner that the Company has no legal
recourse.
FOREIGN OPERATIONS; APPROVAL OF JV BY CHINESE REGULATORY AUTHORITIES
The Company initially plans to market its products outside of the United
States. The Company's results from operations may be affected by currency
exchange rate fluctuations and other factors affecting international business,
including legal or political changes in foreign countries. The formation of the
JV is subject to the approval of Chinese regulatory authorities, which approval
has not yet been obtained (see "Business - Joint Venture in China" above).
While the Company believes, based upon discussions with NexMed International's
partners in the JV, that approval will be obtained, such approval cannot be
assured.
PRODUCT PRICING AND REIMBURSEMENT; HEALTH CARE REFORM AND RELATED MEASURES
The levels of revenues and profitability of medical and pharmaceutical
technology products and companies may be affected by efforts of governmental and
third-party payers to contain or reduce the costs of health care through various
means. For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been, and the Company expects that there will continue to be,
a number of federal and state proposals to implement similar government control.
The United States Congress has recently considered a number of legislative and
regulatory reforms that may affect companies engaged in the health care industry
in the United States. Pricing constraints on the Company's products, if
approved, could have a material adverse effect on the Company. In addition, the
Company's ability to commercialize potential medical and/or pharmaceutical
technology products may be adversely affected to the extent that such proposals
have a material adverse effect on other companies that are prospective
collaborators with respect to any of the Company's product candidates.
In the United States and elsewhere, successful commercialization of the
Company's products will depend in part on the availability of reimbursement to
the consumer from third-party health care payers, such as government and private
insurance plans. There can be no assurance that such reimbursement will be
available or will permit price levels sufficient to realize an appropriate
return on the Company's investment and product development. Third party
healthcare payers are becoming increasingly cost-conscious in determining which
pharmaceutical products they will and will not reimburse. If the Company
succeeds in bringing one or more products to the market, there can be no
assurance that these products will be considered cost-effective and that
reimbursement to
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the consumer will be available or will be sufficient to allow the Company to
sell its products on a competitive basis.
EMPLOYEES
As of March 1, 1997, the Company had ten full-time employees, three of whom
were executive management. The Company believes its employee relationships are
satisfactory.
COMPANY HISTORY AND GENERAL INFORMATION
The Company was organized under the laws of the state of Nevada in
October 1987 under the name Target Capital, Inc. The Company raised initial
funds in 1988 through an offering pursuant to Regulation A of the Securities
Act, selling 1,000,000 shares of its Common Stock. Subsequently, the Company
issued Common Stock to purchase twenty unpatented mining claims, which claims
ultimately reverted to the government when not exploited by the Company. Its
early business plans did not prove to be productive, and the Company became
inactive until early 1994, when the Company acquired a patent for, and an
unrefined research prototype of, a medical device for the treatment of herpes
simplex diseases, in exchange for the issuance of 217,500 shares of Common
Stock to Peter H. Lathrop and 17,500 shares of Common Stock to Steven K.
Johnston, followed by the issuance of 41,375 shares of Common Stock in 1995 to
eight individuals to acquire outstanding royalty rights (giving effect to
the 20-for-1 reverse stock split on October 2, 1995). The Common Stock was
valued at $.20 per share, with an aggregate value of $55,275. In 1994, the
Company changed its name to BioElectric, Inc. In September 1995, the Company
changed its name to NexMed, Inc., reflecting its broader-based business
objectives. The Company's Common Stock has been quoted on the
Over-the-Counter Bulletin Board since October 1995 under the symbol "NEXM."
The Company intends to become a reporting company under the Securities
Exchange Act of 1934, as amended, with the filing of this Form 10-SB.
The Company's principal executive offices are in Commerce, California. The
Company, through NexMed International, has also established an office in Hong
Kong and is currently working with several marketing and distribution companies
on the commercialization, outside of the U.S. in developing world markets, of a
number of off-patent pharmaceutical products manufactured by one of its
prospective JV partners (see "Business - Joint Venture in China" above).
ITEM 2. PLAN OF OPERATION.
In 1997, the Company intends to expand its research, development and
marketing activity and capability, both domestically and internationally, with
regard to its proprietary pharmaceutical products, and intends to execute a
business strategy with the goal of achieving a level of development and
commercialization sufficient to enable the Company to attract potential
strategic partners with resources sufficient to further develop and market its
products. The Company also intends to undertake the commercialization of new
and off-patent products in particular international markets through strategic
partners,
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licensees, importers and brokers. With respect to the United States, the
Company intends to commence the FDA application and approval process for the
Alprox-TD-TM- cream and the Viratrol-TM- herpes treatment device.
The first step in the Company's plan for 1997 with regard to the research,
development and commercialization of the Alprox-TD-TM- cream and the
Viratrol-TM- device is the completion of the clinical studies currently in
progress on each of the two proposed products in China. It is expected that
these studies will be concluded in the second half of 1997. The data from such
studies will permit the Company to submit an application for manufacturing and
marketing approval of the Alprox-TD-TM- cream in China and other Asian and
South American and other developing-world countries.
With respect to the approval of its products in the United States, the
Company plans, by the third quarter of 1997, to generate all pre-clinical data
necessary to file with the FDA an IND (Investigational New Drug) application for
the Alprox-TD-TM- cream and, by the end of 1997, an IDE (Investigational Device
Exemption) for the Viratrol-TM- device. In addition, the Company expects to
start Phase I and II clinical studies on the Alprox-TD-TM- cream in the United
States, pending FDA approval. Phase I studies assess the most common acute
adverse effects of a drug and examine the size of doses that patients can take
safely without a high incidence of side effects. Generally, 20 to 100 healthy
volunteers or patients are studied for a period of several months. The focus of
Phase I is safety. If no major problems, such as toxicity, are discovered in
Phase I, the next step is a Phase II study in which the drug's efficacy is
determined by means of its administration to subjects who have the condition the
drug is intended to treat. Researchers then assess whether the drug has a
favorable effect on the condition and also begin to identify the correct dosage
level (dose ranging). Phase II involves the study of up to several hundred
subjects for several months to two years. The focus of Phase II is
effectiveness with short-term safety.
As part of the Company's strategy for developing, protecting and marketing
its technology, the Company intends during 1997 to file additional patent
applications with respect to its products and hopes to secure at least one U.S.
and two international strategic partners for the Viratrol-TM- device and/or
products incorporating NexACT-TM- technology. Furthermore, the Company, through
NexMed International, anticipates finalizing the revised JV agreement and
establishing the proposed JV, subject to approval from Chinese regulatory
authorities (see Part I, Item 1, "Business - Joint Venture in China"). The JV,
if formed, is expected to have the rights to market certain generic drugs and
Chinese herbal products approved for sale in China and other countries, in which
case the Company, through NexMed International, plans to establish an
international generic drug and health-product trading business.
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Concurrently with the foregoing marketing efforts, the Company plans to
expand its laboratory research capability by commencing the funding and
operation of new biosciences laboratories in Fort Worth, Texas, in collaboration
with the University of North Texas Health Science Center, at which Robert W.
Gracy, Ph.D., one of the Company's Directors and a member of the Company's
Scientific Advisory Committee, and S. Dan Dimitrijevich, Ph.D., also a
Scientific Advisory Committee member, are faculty members.
As a result of the closings of two private placements in February 1997, in
which the Company has received net proceeds of $2,094,970, management believes
that the Company has sufficient cash to sustain its current day-to-day
operations for the next 12 months, including operations at the headquarters
office in Los Angeles, the topical formulation development laboratories in
Lawrence, Kansas, NexMed International's Hong Kong office and proposed new
biosciences laboratories in Fort Worth, Texas. The Company believes that it has
adequate funding to complete any additional pre-clinical studies required for
the filing of an IND application with the FDA for the Alprox-TD-TM- cream in
order to initiate clinical studies for the proposed product in the U.S.
NexMed International expects to enter into additional licensing agreements
and receive certain licensing payments from its international licensing partners
during the upcoming 12 months. It has concluded the licensing agreement with
Lotus in Taiwan and received a licensing fee payment in February 1997. Most of
the development expenses incurred in Taiwan will be paid for by Lotus, and the
Company expects that it will need to spend only a small amount for research and
development in Taiwan on alprostadil. In addition, since November 1996, the
Company has received inquiries from pharmaceutical companies worldwide regarding
the licensing of its products, which the Company believes may lead to the
conclusion of additional licensing agreements in the coming 12 months and the
receipt of additional licensing fees.
The Company has also received inquiries from major pharmaceutical companies
regarding the work of the topical formulation development laboratories in
Lawrence, Kansas, including requests regarding the utilization of the Company's
patented NexACT-TM- penetration enhancement technology and the co-development of
proprietary new drugs that have absorption or penetration difficulties. The
Company believes that such inquiries could lead to the receipt of contract
development fees from certain of these potential client companies within the
next 12 months.
The Company expects to spend no more than $200,000 for the Biosciences
laboratories in Fort Worth, Texas within the next 12 months. The Company
intends to establish the laboratories as part of a special small-company
incubator program sponsored by the city of Fort Worth. For the first 24 months
of operation, companies participating in this program would expect to receive
minimum payments toward overhead expenses for their operations. The Company
also plans to apply for grants from local and state governments.
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Although management believes that the Company has adequate resources for
day-to-day operations for the next 12 months, the Company has incurred
cumulative net operating losses of $4,102,163 since its inception as a medical
and pharmaceutical technology company in 1994 and expects to incur substantial
additional losses in completing the research, development and commercialization
of its technologies (see "Notes to Consolidated Financial Statements" in Part
F/S). Accordingly, the Company will require additional funding to reach certain
goals. Assuming the acceptance of the proposed IND application by the FDA later
in 1997, the Company would need to raise an additional $4 million in order to
initiate the proposed Phase I and II studies on the Alprox-TD-TM- cream in the
U.S. In addition, if the outcome of the clinical studies conducted in China on
the Viratrol-TM- device is satisfactory, the Company would expect, upon filing
of the IDE, to begin clinical studies in the United States this year at a
projected budget of $500,000. Furthermore, of the $8 million anticipated to be
contributed by the Company in connection with the new JV Agreement (see Part I,
Item 1, "Business - Joint Venture in China"), it is anticipated that $4.8
million, including $2 million for the first payment, would have to be paid over
the first 12 months following receipt of necessary governmental approvals, with
the balance payable in the 24 months thereafter. Finally, as previously
discussed, the Company intends to work with marketing and distribution companies
in Asia, the Middle East, South America and other regions to market new and
off-patent pharmaceutical products at a proposed budget of $500,000. In order
to meet the aforementioned additional funding requirements for the next 12
months, the Company will need to raise $10 million, which it will seek to do
through a private placement in the third quarter of 1997.
The Company does not expect to acquire any significant or expensive
large-scale equipment or instruments within the coming 12 months. The Company
believes that the renovation work proposed for the JV plant in China in order to
upgrade its operations to GMP standards will be covered by a proposed $2 million
loan from local Chinese banks.
Over the next 12 months, the Company expects to increase the current number
of employees in its U.S. operations from 10 to approximately 20. It is expected
that most of the new employees will be middle-management and laboratory
scientists and that the additional cost which the Company expects to incur over
the next 12 months with regard to salary and benefits will be approximately
$200,000. The Company believes that the increase in the number of employees
should not significantly affect cash needs.
The Company's operations are subject to numerous risks associated with the
establishment and development of products based upon innovative or novel
technologies. As a result, the Company must be evaluated in light of the
problems, delays, uncertainties and complications encountered in connection with
newly founded businesses. Some of these unanticipated problems may include
development, regulatory, manufacturing,
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distribution and marketing difficulties that may be beyond the Company's
financial or technical abilities to resolve satisfactorily.
This registration statement contains forward-looking information, including
statements regarding the Company's plans, objectives, expectations and
intentions. All forward-looking statements are subject to risks and
uncertainties that could cause the Company's actual results and experience to
differ materially from those such projections. Factors that might cause such a
difference include, but are not limited to, those discussed herein.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company presently leases approximately 500 square feet of office space
at its headquarters at 6087 Triangle Drive, Commerce, California 90040,
pursuant to a month-to-month arrangement. The Company's rent for such space is
$1,000 per month. Pursuant to a research agreement between the Company and the
University of Kansas, which expires on August 31, 1997, the Company has paid
$31,100 for access to and use of laboratory space at the University's Higuchi
Biosciences Center during the 15-month term of the research agreement.
The Company's subsidiary, NexMed(ASIA) Ltd., leases 1,100 square feet of
office space in Hong Kong pursuant to a month-to-month arrangement. The rent
for such space is $6,000 per month.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information, as of May 12, 1997, with
respect to the beneficial ownership of Common Stock by (a) each person known by
the Company to be the beneficial owner of more than 5% of the Company's
outstanding Common Stock, (b) the directors and executive officers of the
Company, individually, and (c) directors and executive officers of the Company
as a group.
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NAME, POSITION NUMBER OF SHARES PERCENT OF
AND ADDRESS(1) BENEFICIALLY OWNED(2) SHARES(%)
- --------------- --------------------- ----------
Y. Joseph Mo, Ph.D., 3,092,500(3) 47.11
Chairman of the Board of
Directors, President and
Chief Executive Officer
James L. Yeager, Ph.D., 165,000(4) 2.67
Vice President, Business
Development
Vivian H. Liu, 235,000(5) 3.74
Vice President,
Treasurer and Secretary
Gilbert S. Banker, Ph.D., 110,000(6) 1.77
Director
Robert W. Gracy, Ph.D., 110,000(7) 1.76
Director
Yu-Chung Wei ---- --
Director
All Executive Officers 3,712,500(8) 54.12
and Directors as a
Group (six persons)
Lian-Yin Chen 875,000 14.22
F19-2, #314
Jen-Ai Road, Section 4
Taipei, Taiwan
China Venture Investment 500,000 8.12
(B.V.I.) Ltd.(9)
25F Wing On Centre
111 Connaught Road
Central, Hong Kong
(1) The address for the Executive Officers and Directors is: NexMed, Inc.,
6087 Triangle Drive, Commerce, California 90040.
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(2) All shares are solely and directly owned, with sole voting and dispositive
power.
(3) Includes 410,000 shares issuable upon exercise of immediately exercisable
stock options. Also includes 1,682,500 shares over which Dr. Mo has voting
power. See "Irrevocable Proxies" below.
(4) Includes 15,000 shares issuable upon exercise of immediately exercisable
stock options.
(5) Includes 130,000 shares issuable upon exercise of immediately exercisable
stock options.
(6) Includes 60,000 shares issuable upon exercise of immediately exercisable
stock options.
(7) Includes 90,000 shares issuable upon exercise of immediately exercisable
stock options.
(8) Includes 705,000 shares issuable upon exercise of immediately exercisable
stock options. Also includes 1,682,500 shares over which Dr. Mo has voting
power. See "Irrevocable Proxies" below.
(9) China Venture Investment (B.V.I.) Ltd. is a wholly-owned subsidiary of the
China Development Corporation, a publicly-traded investment banking firm
based in Taipei, Taiwan.
IRREVOCABLE PROXIES
In December 1996, certain shareholders of an aggregate of 1,682,500 shares
of Common Stock entered into irrevocable proxies, pursuant to which Dr. Mo was
appointed as an attorney and proxy. Pursuant to the Irrevocable Proxies, Dr. Mo
has the right to vote or execute written consents with respect to all shares
which such shareholders are entitled to vote and to represent and otherwise to
act for such shareholders in the same manner and with the same effect as if such
shareholders were personally present or personally executing a written consent
of shareholders.
In addition, the shareholders who are parties to the Irrevocable Proxies
have agreed not to sell, assign, transfer or pledge any or all of the shares
except (i) to their affiliates or via private placement transaction if, as a
condition precedent to any such Transfer, the transferee reaffirms in writing
the terms of the Irrevocable Proxy or (ii) to an unaffiliated third party in a
"brokered transaction," as defined in the Securities Act of 1933, as amended
(the "Securities Act"), at which time the Proxy, by its terms, terminates.
The shareholders who are parties to the Irrevocable Proxies are identified
in the table below.
NAME SHARES
Mei-Li Chang 100,000
Chun Chen 100,000
I-Chin Chen 100,000
Tien Sin Chen 100,000
Charles Hok Sau Cheung 7,500
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Chiu Hsia Chu 100,000
Ma Tsai-Feng Chu 100,000
Yia-Hwa Ding 100,000
I-Der Huang 125,000
Wen-Gei Lee 100,000
Tran-Ming Lin 100,000
Tzi-Chen Lin 100,000
Li-Hwa Su 50,000
Meng-Tun Su 100,000
Chen Wang 100,000
Di-Jie Wang 100,000
Mei-Huei Wang 100,000
Dun-Seh Wu 100,000
TOTAL 1,682,500
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
EXECUTIVE OFFICERS AND DIRECTORS
The Executive Officers and Directors of the Company are set forth below.
NAME AGE TITLE
Joseph Mo, Ph.D. 49 Chairman of the Board of
Directors, President and
Chief Executive Officer
James L. Yeager, Ph.D. 50 Vice President, Business
Development
Vivian H. Liu 35 Vice President, Treasurer and
Secretary
Gilbert S. Banker, Ph.D. 65 Director
Robert W. Gracy, Ph.D. 56 Director
Yu-Chung Wei 34 Director
The Company has three classes of Directors. At each annual meeting of
shareholders, the successors to the class of Directors whose terms expire at
that meeting shall be elected for a three-year term.
Y. JOSEPH MO, PH.D. Dr. Mo has been Chairman of Board of Directors,
President and Chief Executive Officer of the Company since joining the Company
in 1995. Prior to joining the Company, Dr. Mo was president of Sunbofa Group,
Inc., an investment
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consulting company. From 1991 to 1994, he was President of the Chemical
Division, and from 1988 to 1994 the Vice President of Manufacturing and
Medicinal Chemistry, of Greenwich Pharmaceuticals, Inc. Prior thereto, he
served in various executive positions with several major pharmaceutical
companies, including Johnson & Johnson, Rorer Pharmaceuticals, and predecessors
of SmithKline Beecham. Dr. Mo received his Ph.D. in Industrial and Physical
Pharmacy from Purdue University in 1977.
JAMES L. YEAGER, PH.D. Dr. Yeager has been Vice President, Business
Development since June 1996. Prior to joining the Company, Dr. Yeager was the
Vice President of Research and Development for Pharmedic Company, during which
time he specialized in the building and managing of new product development
programs. From 1989 to 1992, Dr. Yeager held international managerial positions
with Abbott Laboratories. Dr. Yeager received his Ph.D. in Industrial and
Physical Pharmacy from Purdue University in 1978. Dr. Yeager is also a member
of the Company's Scientific Advisory Committee. Dr. Yeager commenced full-time
employment with the Company on January 1, 1997.
VIVIAN H. LIU. Ms. Liu has been Vice President, Treasurer and Secretary of
the Company since September, 1995. In 1994, while the Company was in a
transitional period, Ms. Liu served as its Chief Executive Officer. From 1985
to 1994, she was a business and investment adviser to the government of Quebec
and numerous Canadian companies with respect to product distribution, technology
transfer and investment issues. Ms. Liu received her Masters Degree in
International Finance from the University of Southern California, and a Bachelor
of Arts degree in International Trade from the University of California,
Berkeley.
GILBERT S. BANKER, PH.D. Dr. Banker has been a Director of the Company
since September 1995. Since 1992, Dr. Banker has been Dean and a distinguished
professor of the College of Pharmacy at the University of Iowa. From 1985 to
1992, he was Dean and Professor of the College of Pharmacy at the University of
Minnesota. Prior to that time, he was the Department Head of Industrial and
Physical Pharmacy at Purdue University for 18 years. Dr. Banker has authored
numerous publications, lectures internationally and consults to several major
pharmaceutical companies. Dr. Banker received his Ph.D. in Industrial Pharmacy
from Purdue University in 1957. Dr. Banker is also a member of the Company's
Scientific Advisory Committee.
ROBERT W. GRACY, PH.D. Dr. Gracy has been a Director of the Company since
January 1997. Dr. Gracy is the Dean for Research and Biotechnology and
Associate Dean for Basic Science at the University of North Texas Health Science
Center in Fort Worth, Texas. Since 1985, Dr. Gracy has received over $5 million
in research grants and contracts. His current projects focus on three aspects
of the biochemical changes associated with aging: changes at the cellular level,
wound and tissue repair, and vision impairment. Dr. Gracy is a consultant to
number of the major pharmaceutical companies. Dr. Gracy lectures
internationally and has published over 140 papers regarding his research. Dr.
Gracy received his Ph.D. in Biochemistry from the University of California,
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Riverside in 1968 and completed a postdoctoral in Molecular Biology at the
Albert Einstein College of Medicine in New York in 1970. Dr. Gracy is also a
member of the Company's Scientific Advisory Committee.
YU-CHUNG WEI. Mr. Wei has been a Director of the Company since March 1997.
Mr. Wei is Chairman of the Board of Directors and Chief Executive Officer of
Alfa Romeo (Taiwan) Motor Company. From 1993 to 1994, he served as Special
Advisor to Tai-Lung Holding Co., Ltd., a Taiwan-based investment conglomerate.
From 1989 to 1993, Mr. Wei held various managerial positions at Kidder, Peabody
Incorporated and Merrill Lynch & Co., Inc., in New York City. Mr. Wei received
his MBA in Finance and Management Information Systems from Pace University in
New York.
Dr. Gracy and Mr. Wei are Class I Directors with terms that expire at the
1997 annual meeting of shareholders, Dr. Banker is a Class II Director with a
term that expires at the 1998 annual meeting of shareholders and Dr. Mo is a
Class III Director with a term that expires at the 1999 annual meeting of
shareholders.
SCIENTIFIC ADVISORY COMMITTEE
The members of the Company's Scientific Advisory Committee are Gilbert S.
Banker, Ph.D., J.R. Chen, Ph.D., S. Dan Dimitrijevich, Ph.D., Robert W. Gracy,
Ph.D., Neal S. Penneys, M.D., Ph.D., J. Howard Rytting, Ph.D. and James L.
Yeager, Ph.D. The Scientific Advisory Committee provides advice and assistance
to the Company with regard to issues that arise within the committee members'
expertise. Although Scientific Advisory Committee members are not compensated
for their services in such capacity, certain members have received stock options
for services rendered to the Company on an individual basis. Summaries of the
backgrounds of Scientific Advisory Committee members who are not Executive
Officers or Directors of the Company are set forth below.
J.R. CHEN, PH.D. Dr. Chen is the President and Chief Executive Officer of
Sage Pharmaceuticals, Inc., a manufacturer and distributor of pharmaceutical and
health care products, including generic and proprietary formulations and skin-
and wound-care products, which he founded in 1991. Dr. Chen has 20 years of
experience in the field of drug development. Dr. Chen received his Ph.D. in
Physical Pharmacy from the University of Iowa.
S. DAN DIMITRIJEVICH, PH.D. Dr. Dimitrijevich is an Associate Research
Professor at the Department of Biochemistry and Molecular Biology and Department
of Surgery, and a Faculty member of the Cardiovascular Research Institute at the
University of North Texas Health Science Center at Fort Worth. Since 1969, Dr.
Dimitrijevich has carried out original research in synthetic organic chemistry
of carbohydrates, nucleosides and nucleotides and was involved in the New Drug
Application for the antiviral drug Ribovirin-Registered
Trademark-/Virazole-Registered Trademark-. Dr. Dimitrijevich received his Ph.D.
in Carbohydrate Chemistry
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from the University of Bath, England in 1969, and from 1969 to 1974, completed
research fellowships at the Department of Chemistry, University of Alberta,
Canada, the Institute of Molecular Biology at Syntex Research in Palo Alto,
California, and the Glycoprotein Research Unit at the University of Durham,
England.
NEAL S. PENNEYS, M.D., PH.D. Dr. Penneys is the director of Dermatology
and Professor of Medicine, Pathology and Pediatrics at the St. Louis University
School of Medicine, and is also a staff physician at the St. Louis University
Hospital and St. Mary's Hospital in Missouri. He has served on numerous
governmental advisory committees, including the FDA Dermatological Drugs
Advisory Committee from 1985 to 1989, the FDA Advisory Panel on Orphan Drugs
from 1992 to 1994 and the Panel on OTC Agents in 1994. Dr. Penneys has also
been a senior FDA consultant since 1989. He has published over 200 books and
papers regarding his work and has earned international recognition for his
expertise. Dr. Penneys received his M.D. from the University of Pennsylvania in
1967 and his Ph.D. in Biochemistry from the University of Miami in 1973.
J. HOWARD RYTTING, PH.D. Dr. Rytting is a Professor of Pharmaceutical
Chemistry at the University of Kansas, and the Editor-in-Chief of the
INTERNATIONAL JOURNAL OF PHARMACEUTICS. Dr. Rytting has published over 100
articles and over 100 abstracts regarding his research in the areas of solution
thermodynamics and its applications to drug designs and delivery, and the
stability of oral, rectal, transdermal and intestinal drug delivery. He was
designated a Fellow of the American Association of Pharmaceutical Scientists in
1990. Dr. Rytting received his Ph.D. in Physical Chemistry from Brigham Young
University in 1969.
ITEM 6. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company during
the fiscal years ended December 31, 1996, 1995 and 1994 to the Chief Executive
Officer and its two other most highly compensated executive officers:
SUMMARY COMPENSATION TABLE
FISCAL
ANNUAL COMPENSATION
LONG-TERM
COMPENSATIONNAME AND POSITION YEAR SALARY OTHER RESTRICTED STOCK
AWARDS(4)
Joseph Mo, Ph.D. 1996 $120,000 $ -- $500,000
Chairman of the Board of 1995 -- 20,000 --
Directors, President and Chief 1994 -- -- --
Executive Officer(1)
James L. Yeager, Ph.D. 1996 -- 20,000 75,000
Vice President, Business 1995 -- -- --
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Development(2) 1994 -- -- --
Vivian H. Liu 1996 63,666 -- 50,000
Vice President, Treasurer and 1995 16,000 -- --
Secretary(3) 1994 -- -- 7,000
(1) In 1995, Dr. Mo was paid a $20,000 consulting fee. He began receiving a
salary of $120,000 per year in 1996.
(2) In 1996, Dr. Yeager was paid a $20,000 consulting fee. He began receiving
a salary of $100,000 per year in 1997.
(3) Ms. Liu began receiving a salary of $48,000 per year on September 1, 1995.
On May 1, 1996, her salary was increased to $80,000 per year. On February
3, 1997, Ms. Liu began receiving a salary of $88,000 per year.
(4) In February 1996, Drs. Mo and Yeager and Ms. Liu received 1,000,000,
150,000 and 100,000 shares of Common Stock, respectively, valued at $.50
per share, for services provided to the Company. In addition, in 1994, Ms.
Liu received 5,000 shares of Common Stock, valued at $1.40 per share, for
services provided to the Company.
EMPLOYMENT AGREEMENTS
There are currently no employment agreements between the Company and any of
its executive officers.
DIRECTOR COMPENSATION
Except for the reimbursement of travel expenses and the awarding of
incentive stock options, described in "Stock Option and Incentive Award Plans"
below, there is no arrangement for the compensation of directors.
STOCK OPTION INFORMATION
The following table sets forth information concerning options granted
during fiscal 1996 to the executives named in the Summary Compensation Table
above.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
% OF TOTAL MARKET
NUMBER OF OPTIONS PRICE OF
SECURITIES GRANTED TO EXERCISE UNDERLYING
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UNDERLYING EMPLOYEES PRICE SECURITY ON
OPTIONS IN FISCAL ($ PER DATE OF EXPIRATION
NAME GRANTED(1) YEAR SHARE) GRANT(2) DATE
Y. Joseph Mo, Ph.D. 760,000 61.04 2.00 2.00 12/04/06
James L. Yeager, Ph.D. 180,000 14.46 2.00 2.00 12/04/06
Vivian H. Liu 130,000 10.44 2.00 2.00 12/04/06
(1) Includes 750,000, 170,000 and 120,000 shares of Common Stock underlying
options granted to Dr. Mo, Dr. Yeager and Ms. Liu, respectively, which
options will vest over a three-year period commencing in 1997.
(2) Based on a selling price of $2.00, the price of the Common Stock sold by
the Company in recent private placements.
The following table sets forth information concerning the value of
unexercised options as of December 31, 1996 held by the executives named in the
Summary Compensation Table above. No options were exercised during 1996.
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<PAGE>
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FISCAL YEAR END MONEY OPTIONS AT FISCAL YEAR
[EXERCISABLE (E)/ END [EXERCISABLE(E)/
NAME UNEXERCISABLE (U)] UNEXERCISABLE (U)] (1)
Y. Joseph Mo, Ph.D. 410,000 (E) $700,000 (E)
850,000 (U) 175,000 (U)
James L. Yeager, Ph.D. 15,000 (E) 8,750 (E)
170,000 (U) 0 (U)
Vivian H. Liu 130,000 (E) 210,000 (E)
150,000 (U) 52,500 (U)
(1) Based on the amount by which $2.00, the price of the Common Stock sold by
the Company in recent private placements, exceeds the exercise price of the
options.
STOCK OPTION AND INCENTIVE AWARD PLANS
On December 4, 1996, the Company adopted the NexMed, Inc. Stock Option and
Long-Term Incentive Compensation Plan (the "Stock Option Plan"), for the purpose
of attracting, retaining and maximizing the performance of executive officers
and key employees, and the NexMed, Inc. Recognition and Retention Stock
Incentive Plan (the "Recognition Plan"), for the purpose of attracting and
retaining individuals with renown, ability and intelligence to serve the Company
as directors and consultants and to provide a direct link between the
compensation of such individuals with shareholder value. 1,500,000 shares of
Common Stock have been reserved by the Company for issuance of awards under the
Stock Option Plan and 500,000 shares of Common Stock have been reserved for
awards under the Recognition Plan. Both the Stock Option Plan and the
Recognition Plan have a term of ten years.
STOCK OPTION PLAN. The Stock Option Plan provides for the grant of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, non-statutory stock options, stock
appreciation rights and restricted stock awards. It is contemplated that the
Stock Option Plan will eventually be administered by a Compensation Committee of
the Board of Directors (the "Compensation Committee"), which Committee has not
yet been created. The exercise price for non-statutory stock options may be
equal to or less than 100 percent of the fair market value of shares of Common
Stock on the date of grant. The exercise price for incentive stock options may
not be less than 100 percent of the fair market value of shares of Common Stock
on the date of grant (110 percent of fair market value in the case of incentive
stock options
29
<PAGE>
granted to employees who hold more than ten percent of the voting power of the
Company's issued and outstanding shares of Common Stock).
Options granted under the Stock Option Plan may not have a term of more
than a ten-year period (five years in the case of incentive stock options
granted to employees who hold more than ten percent of the voting power of the
Company's Common Stock) and generally vest over a three-year period. Options
generally terminate three months after the optionee's termination of employment
by the Company for any reason other than death, disability or retirement, and
are not transferable by the optionee other than by will or the laws of descent
and distribution.
The Company's Board of Directors granted options to purchase 1,185,000
shares of Common Stock at an exercise price of $2.00 per share to six employees,
including grants of 750,000 options to Dr. Mo, 170,000 options to Dr. Yeager and
120,000 options to Ms. Liu. Such options have a term not in excess of ten years
and vest over a three-year period. In addition, the Board of Directors granted
options to purchase 50,000 shares of Common Stock at an exercise price of $2.00
per share to five employees for services rendered to the Company, including the
grants of 10,000 options to each of Dr. Yeager and Ms. Liu. Such options have
a term not in excess of ten years.
In February 1997, the Board of Directors granted additional options to
purchase a total of 75,000 shares of Common Stock at an exercise price of $2.00
per share to three new middle-management employees. Such options have a term
not in excess of ten years and vest over a three-year period.
The plan also provides for grants of stock appreciation rights ("SARs")
which entitle a participant to receive a cash payment, equal to the difference
between the fair market value of a share of Common Stock on the exercise date
and the exercise price of SAR. The exercise price of any SAR granted under the
Stock Option Plan will be determined by the Board of Directors in its discretion
at the time of the grant. SARs granted under the Stock Option Plan may not be
exercisable for more than a ten year period. SARs generally terminate one month
after the grantee's termination of employment by the Company for any reason
other than death, disability or retirement. Although the Board of Directors has
authority to grant SARs, it does not have any present plans to grant SARs.
Restricted stock awards which consist of grants of shares of Common Stock
subject to a restricted period during which the restricted common shares may not
be sold, assigned, transferred, made subject to a gift, or otherwise disposed
of, mortgaged, pledged, or otherwise encumbered may also be made under the Plan.
At this time, the Board of Directors has not granted, and does not have any
plans to grant, restricted shares of Common Stock.
RECOGNITION PLAN. The Recognition and Retention Plan provides for
incentive award grants that are substantially similar to those made under the
Stock Option Plan. It
30
<PAGE>
is contemplated that the Recognition and Retention Plan will also eventually be
administered by a Compensation Committee. An eligible director or consultant
selected for participation in this Plan may be granted a non-statutory stock
option, a stock appreciation right or a restricted stock award. Incentive stock
options will not be granted under this Plan. Recognition Plan awards generally
vest over a three-year period and will be subject to attainment of performance
goals, with all such terms to be specified in the written grant agreement
between the Company and the award holder.
The Board of Directors made initial grants under the Recognition Plan of
options to purchase 60,000 shares at an exercise price of $2.00 per share to Dr.
Banker. Such options have a term not in excess of ten years and vest over a
three-year period. In addition, the Board of Directors granted options to
purchase 230,000 shares at an exercise price of $2.00 per share to certain
directors and consultants for services rendered to the Company, including the
grant of 10,000 options to Dr. Mo. Such options have a term not in excess of
ten years. The Board of Directors also granted one sales representative an
option to purchase up to 50,000 shares of Common Stock at an exercise price of
$2.00 per share and for a term not in excess of ten years. The representative's
option shall only vest if he introduces and completes sales transactions for the
Company or a subsidiary, where the aggregate gross proceeds from resulting
executed contracts, agreements or firm commitments are equal to or greater than
$1,000,000 and all such proceeds are received within the 1997 calendar year.
In February 1997, the Board of Directors granted additional options to
purchase 85,000 shares at an exercise price of $2.00 per share, 75,000 of such
options to Mr. Wei and 10,000 of such options to Dr. Dimitrijevich. Mr. Wei's
options have a term not in excess of ten years and vest over a three-year period
and Dr. Dimitrijevich's options were granted for services rendered to the
Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to a unanimous written consent of the Board of Directors on
February 16, 1996, a number of persons, including certain of the Company's
officers, directors, Scientific Advisory Committee members, attorneys and
consultants received a total of 1,600,000 shares of Common Stock valued at $.50
per share, issued in reliance upon Section 4(2) of the Securities Act. In
addition, certain of the Company's Executive Officers and Directors hold options
to purchase an aggregate of 735,000 shares of Common Stock at an exercise price
of $.25 per share. With regard to the Company's issuance of additional stock
options to senior management, see Part I, Item 6, "Executive Compensation -
Stock Option and Incentive Award Plans."
In November 1996, the Company issued warrants to purchase 150,000 shares of
Common Stock to Pryor, Cashman, Sherman & Flynn, its outside legal counsel.
Such warrants have a ten-year term, are exercisable for a price of $1.00 per
share and vest over three years.
31
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES.
The Company is authorized to issue 40,000,000 shares of Common Stock, $.001
par value per share, and 10,000,000 shares of Preferred Stock, par value $.001
per share.
Each share of Common Stock entitles the holder thereof to one vote on all
matters submitted to shareholders. Holders of Common Stock are entitled to
receive such dividends as are declared by the Board of Directors from time to
time. Payment of dividends will depend upon the earnings, capital requirements
and operating and financial condition of the Company, among other factors.
There is no present intention by the Company to pay dividends. In the event of
a liquidation, dissolution or winding up of the Company, holders of Common Stock
will be entitled to share ratably in the assets remaining after payment in full
to creditors and holders of any Preferred Stock (if subsequently issued by the
Company) having liquidation preference over the Common Stock. There are no
preemptive, conversion, redemption or cumulative voting rights applicable to the
Common Stock. As of May 12, 1997, 6,160,098 shares of the Company's Common
Stock were issued and outstanding.
The Board of Directors is empowered by the Company's Articles of
Incorporation, as amended, to designate and issue from time to time one or more
classes or series of Preferred Stock without any action of the shareholders.
The Board of Directors may authorize issuance's in one or more classes or
series, and may fix and determine the relative rights, preferences, and
limitations of each class or series so authorized. Such action could adversely
affect the voting power of Common Stock or could have the effect of discouraging
or making difficult any attempt by a person or group to obtain control of the
Company.
32
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
The Company's Common Stock has been quoted on the Over-the-Counter Bulletin
Board since October 1995 under the symbol "NEXM." The following table sets
forth, based on information received from the National Quotation Bureau, the
high and low bid prices for the Common Stock for the quarters indicated. The
quotations represent bid between dealers and do not include retail mark-up,
mark-down or commissions, and do not represent actual transactions.
THREE MONTHS ENDED
-------------------------------------------------
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------- -------- ------- ------------ -----------
HIGH $ 3.00 $ -- $ -- $ --
LOW 1.50 -- -- --
1996
- -------
HIGH .875 2.00 2.75 1.00
LOW .50 .75 1.00 .875
1995(1)
- -------
HIGH .20 .20 .20 .625
LOW .20 .20 .10 .10
(1) On October 2, 1995, a reverse stock split of 20 to one became effective
for all of the issued and outstanding shares of Common Stock. All 1995
quotations have been restated based on the reverse stock split.
As of May 12, 1997, there were 206 holders of record of 6,160,098 shares of
Common Stock.
SHARES ELIGIBLE FOR SALE
Sales in the market of substantial amounts of currently outstanding Common
Stock could have an adverse effect on the price of the Common Stock. A total of
3,061,348 shares of the 6,160,098 shares of Common Stock currently issued and
outstanding are, or within the next 12 months will be, eligible for resale,
subject, in certain cases, to the applicable volume and other limitations set
forth in Rule 144 of the Securities Act. Of the remaining 3,093,750 shares of
Common Stock, 322,500 shares will be eligible for resale in November 1997 and
62,500 shares will be eligible for resale in February 1998, subject to Rule 144
limitations. In addition, 1,000,000 shares issued by the Company in reliance
upon Regulation S of the Securities Act, as currently in effect, may also be
eligible for
33
<PAGE>
resale in February 1998 in the United States, pursuant to subscription
agreements between the Company and the subscribers for such shares which specify
one-year restricted periods, if at that time it is determined that an exemption
for resales into the United States is available (see Part II, Item 4, "Recent
Sales of Unregistered Securities").
34
<PAGE>
DIVIDENDS
The Company anticipates that for the foreseeable future, earnings will be
retained for the development of its business. Accordingly, the Company does not
anticipate paying dividends on the Common Stock in the foreseeable future. The
payment of future dividends will be at the sole discretion of the Company's
Board of Directors and will depend on, among other things, future earnings,
capital requirements, the general financial condition of the Company and general
business conditions.
ITEM 2. LEGAL PROCEEDINGS.
In January 1997, a complaint was filed against the Company in the District
Court, Third Judicial District, Salt Lake County, State of Utah, by Genie Total
Products, Inc., a Nevada Corporation. It is alleged in the complaint that the
plaintiff entered into a three-year agreement on December 1, 1993 to provide
consulting and marketing services to the Company for a stated monthly amount,
but that no payments were made. The President of Genie Total Products, Inc. is
Clealon B. Mann, a resident of Salt Lake City, Utah. The suit, which claims
breach of contract, unjust enrichment and anticipatory breach of contract,
requests damages of $388,062.50, including interest, plus costs and attorney's
fees. The Company believes that this lawsuit is without merit and intends to
defend its position vigorously. On March 3, 1997, the Company filed a motion
for dismissal, which is currently pending before the Court.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
At a meeting on February 1, 1997, the Company's Board of Directors
confirmed the appointment of Price Waterhouse LLP as the Company's outside
auditors and dismissed Boros & Farrington, its former auditors. The decision to
engage Price Waterhouse LLP did not result from disagreements with Boros &
Farrington. The Company intends to retain Boros & Farrington for other
services. There were no disagreements with Boros & Farrington regarding
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. Boros & Farrington's reports for the years ended December
31, 1994 and 1995 did not contain an adverse opinion or a disclaimer of an
opinion or qualifications as to uncertainty, audit scope or accounting
principles. Prior to retaining Price Waterhouse LLP, the Company had not
consulted Price Waterhouse LLP regarding the application of accounting
principles, the type of audit opinion that might be rendered on the Company's
financial statements, or any event that was either a reportable event or the
subject of a disagreement.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
35
<PAGE>
In August 1995 the Company completed a Regulation S offering to 17
individuals, selling 33,000,000 shares of Common Stock, for gross proceeds of
$330,000. After offering expenses and a commission paid to the placement agent,
American Pacific Investments, Ltd., Hong Kong, the Company received net proceeds
of approximately $267,000.
In August 1995, the Company issued 827,500 shares of Common Stock with a
total offering price of $8,275 to eight individuals to acquire the
outstanding royalty rights to a device for the treatment of herpes simplex,
in reliance upon Section 4(2) of the Securities Act.
On October 2, 1995, a reverse stock split of 20 to one became effective for
all of the issued and outstanding shares of Common Stock.
On February 16, 1996, the Company issued a total of 1,600,000 shares of
Common Stock, valued at $.50 per share and with a total offering price of
$800,000, to 19 individuals, including certain of the Company's Officers,
Directors, Scientific Advisory Committee members, attorneys and consultants, in
reliance upon Section 4(2) of the Securities Act.
In April 1996, the Company issued 12,500 shares of Common Stock, valued at
$.50 per share and with a total offering price of $6,250, to three noteholders
as part of a unit offering including promissory notes, in reliance upon Section
4(2) of the Securities Act.
In May 1996, the Company completed a Regulation S offering of 500,000
shares of Common Stock to China Venture Investment (H.K.) Ltd. for gross
proceeds of $1,000,000. In connection with the offering, 75,000 shares of
Common Stock with a total value of $150,000 were issued as a commission to the
placement agent, American Pacific Investments, Ltd., Hong Kong.
In October 1996, the Company acquired technology relating to absorption
enhancers for topical pharmaceutical formulations from Odontex, Inc. in exchange
for 75,000 shares of Common Stock with a total value of $150,000, or $2.00 per
share, issued in reliance upon Section 4(2) of the Securities Act.
In November 1996, the Company issued a total of 322,500 shares of Common
Stock at a total offering price of $645,000, or $2.00 per share, to five
individual investors pursuant to an exemption from registration under the
Securities Act provided by Rule 506 of Regulation D promulgated thereunder.
In November 1996, the Company issued warrants to purchase 150,000 shares of
Common Stock at $1.00 per share to Pryor, Cashman, Sherman & Flynn, its outside
legal counsel, as consideration for legal services performed relating to the
sale of Common Stock in November 1996 and other matters. The estimated fair
value of the Common
36
<PAGE>
Stock was $2.00 per share at that time. The warrants have a term of ten years
and vest in equal installments over a three year period.
In January 1997, the Company issued a $100,000 promissory note bearing
interest at 10% per annum to one noteholder. The note must be repaid by
December 31, 1997 and the noteholders may convert the unpaid note into common
stock at a conversion price of $2.50 per share. In conjunction with the
issuance of the note, the Company granted the purchaser of such note 7,500
shares of Common Stock. The Company has valued these shares at $15,000 ($2.00
per share) which is being accounted for as debt discount and amortized over the
life of the note.
In February 1997, the Company completed a Regulation S offering of
1,000,000 shares of Common Stock to four individuals and an offering of 62,500
shares of Common Stock to five individuals pursuant to an exemption for
registration under the Securities Act provided by Rule 506 of Regulation D
promulgated thereunder. The price of the Common Stock in both offerings was
$2.00 per share and the total offering prices were $2,000,000 and $125,000,
respectively.
In February 1997, the Company issued 13,750 shares of Common Stock with a
total value of $27,500, or $2.00 per share, to one individual as part of a
unit offering including promissory notes, in reliance upon Section 4(2) of the
Securities Act.
In March 1997, the Company issued 5,000 shares of Common Stock pursuant
to the exercise of one individual's option to purchase Common Stock at $.25
per share.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Article XI of the Company's Amended and Restated Articles of
Incorporation, the Company shall indemnify any and all persons who may serve at
any time as directors or officers or who at the request of the Board of
Directors of the Company may serve or at any time have served as directors or
officers of another corporation in which the Company at such time owned or may
own shares of stock or which it was or may be a creditor, and their respective
heirs, administrators, successors, ad assignees, against any and all expenses,
including amounts paid upon judgments counsel fees and amounts paid in
settlement (before or after suit is commenced), actually and necessarily
incurred by such persons in connection with the defense or settlement of any
claim, action, suit or proceeding in which may be asserted against them or any
of them, by reason of being or having been directors or officers or a director
or officer of the Company, or such other corporation, except in relation to
matters as to which any such director or officer or former director or officer
or person shall be adjudged in any action, suit or proceeding to be liable for
his own negligence or misconduct in the performance of his duty.
Pursuant to Section 8.1 of the Company's By-laws, no officer or director
shall be personally liable for any obligations arising out of any acts or
conduct of said officer or director performed for or on behalf of the Company.
The Company shall indemnify and hold harmless each person and his heirs and
administrators who shall serve at any time
37
<PAGE>
hereafter as a director or officer of the Company from and against any and all
claims, judgments and liabilities to which such persons shall become subject by
any reason of his having been a director of officer of the Company, or by reason
of any action alleged to have been taken or omitted to have been taken by him as
such director or officer, and shall reimburse each such person for all legal and
other expenses reasonably incurred by him in connection with any such claim or
liability; including power to defend such person from all suits as provided for
under the provisions of the Nevada Business Corporation Act; provided, however,
that no such person shall be indemnified against, or be reimbursed for, any
expense incurred in connection with any claim or liability arising out of his
own negligence or willful misconduct. The Company, its directors, officers,
employees and agents shall be fully protected in taking any action or making any
payment or in refusing so to do in reliance upon the advice of counsel.
Section 78.751 of the Nevada General Corporation Law permits a corporation
to indemnify a present or former director, officer, employee or agent of the
corporation, or of another entity which such person is or was serving in such
capacity at the request of the corporation, against expenses, including legal
expenses, arising by reason of service in such capacity if such person acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interest of the corporation had no reasonable cause to believe his
conduct was unlawful. In the case of actions brought by or in the right of
corporation, indemnification may be made if the person acted in good faith and
in a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation; provided, however, that no indemnification may be
made for any claim, issue or matter as to which such person has been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation, unless and only to the extent that the court in
which the action or suit was brought or other court of competent jurisdiction
determines upon application that in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnity for such expenses as
the court deems proper.
38
<PAGE>
PART F/S
FINANCIAL STATEMENTS
NexMed, Inc.
(A development stage company)
Consolidated Financial Statements
December 31, 1996 and 1995
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
NexMed, Inc.
In our opinion, based upon our audit and the reports of other auditors,
the accompanying consolidated balance sheet and the related consolidated
statements of operations, of changes in stockholders' equity and of cash
flows present fairly, in all material aspects, the financial position of
NexMed, Inc. and its subsidiary (a development stage company) at December 31,
1996, and the results of their operations and their cash flows for the year
then ended and the period from inception (January 1, 1994) through December
31, 1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audit. We did not audit the financial statements of NexMed, Inc. for
the period from inception (January 1, 1994) through December 31, 1995, which
statements reflect 24% of the cumulative net loss and 28%, 0% and 21% of the
cumulative net cash flows from operating, investing and financing activities,
respectively, from inception (January 1, 1994) through December 31, 1996.
These statements were audited by other auditors whose reports thereon have
been furnished to us, and our opinion, insofar as it relates to the amounts
for the period from inception (January 1, 1994) through December 31, 1995 is
based solely on the reports of the other auditors. We conducted our audit of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit and the reports of other auditors provide a reasonable basis for
the opinion expressed above.
F-2
<PAGE>
To the Board of Directors and Stockholders of
NexMed, Inc.
Page 2
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company is a development stage
company and has suffered operating losses since inception. These and other
factors, as discussed in Note 1, raise substantial doubt about its ability to
continue as a going concern. As such, the Company is dependent on capital
infusions from existing and new investors to fund operations. Management's
plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
New York, New York
February 25, 1997
F-3
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
NexMed, Inc.
In our opinion, the accompanying consolidated statements of operations,
of cash flows and of changes in stockholders' equity for the year ended
December 31, 1995 and the consolidated statements of operations, of cash
flows and of changes in stockholders' equity for the period from inception
(January 1, 1994) through December 31, 1995 (not presented separately herein)
present fairly, in all material respects, the results of operations and cash
flows of NexMed, Inc. for the year ended December 31, 1995 and the period
from inception (January 1, 1994) through December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above. We
have not audited the consolidated financial statements of NexMed, Inc. for
any period subsequent to December 31, 1995.
BOROS & FARRINGTON, APC
San Diego, California
May 10, 1996
F-4
<PAGE>
NexMed, Inc. 4
(A development stage company)
Consolidated Balance Sheet
December 31, 1996
- ------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents...................................... $ 194,577
Prepaid expenses............................................... 30,000
Total current assets......................................... 224,577
----------
Equipment........................................................ 83,705
Furniture........................................................ 5,455
----------
Total equipment and furniture.................................. 89,160
Less accumulated depreciation.................................... (4,258)
----------
84,902
----------
Advance to Joint Venture......................................... 300,000
----------
Total Assets................................................... $ 609,479
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.................................................. $ 50,000
Accounts payable............................................... 85,408
Accrued expenses............................................... 5,998
---------
Total current liabilities.................................... 141,406
---------
Commitments and contingencies (Notes 1, 3, 9 and 10)
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, none issued and outstanding...................... --
Common stock, $.001 par value, 40,000,000 shares authorized,
5,071,348 shares issued and outstanding...................... 5,071
Additional paid-in capital..................................... 4,847,032
Accumulated deficit............................................ (4,323,968)
---------
528,135
Less: Deferred compensation...................................... (60,062)
---------
Total stockholders' equity..................................... 468,073
---------
Total liabilities and stockholders' equity..................... $ 609,479
---------
---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NexMed, Inc. 5
(A development stage company)
Consolidated Statement of Operations
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JANUARY 1, 1994
(INCEPTION OF
FOR THE YEAR ENDED DEVELOPMENT STAGE
DECEMBER 31, TO DECEMBER 31,
1996 1995 1996
------------------------ -----------
<S> <C> <C> <C>
Revenue $ -- $ -- $ --
----------- ----------- -----------
Operating expenses
Selling, general and administrative.................................... 2,076,360 92,211 2,222,909
Research and development............................................... 1,040,396 169,073 1,872,763
----------- ----------- -----------
Total operating expenses............................................. 3,116,756 261,284 4,095,672
----------- ----------- -----------
Loss from operations..................................................... (3,116,756) (261,284) (4,095,672)
Interest expense, net.................................................... 1,637 3,104 6,491
----------- ----------- -----------
Net loss............................................................. $(3,118,393) $ (264,388) $(4,102,163)
----------- ----------- -----------
----------- ----------- -----------
Loss per common share.................................................... $ (0.72) $ (0.19)
----------- -----------
----------- -----------
Weighted average common shares outstanding............................... 4,327,548 1,400,244
----------- -----------
----------- -----------
</TABLE>
F-6
<PAGE>
NexMed, Inc. 6
(A development stage company)
Consolidated Statement of Changes in Stockholders' Equity
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL TOTAL
STOCK STOCK PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS'
(SHARES) (AMOUNT) CAPITAL DEFICIT COMPENSATION EQUITY
- ----------------------------- ----------- ----------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception of
development stage
(January 1, 1994)........ 296,465 $ 296 $ 224,865 $ (221,805) $ -- $ 3,356
Issuance of common stock
for patents and other
devices.................. 267,500 268 374,232 -- -- 374,500
Issuance of common stock
for services............. 135,214 135 189,164 -- -- 189,299
Issuance of common stock
for cash................. 95,794 96 134,014 -- -- 134,110
Net loss -- -- -- (719,382) -- (719,382)
----------- ----------- ------------ ------------- ------------ ------------
Balance at December 31,
1994..................... 794,973 795 922,275 (941,187) -- (18,117)
Issuance of common stock
for cash................. 1,650,000 1,650 265,062 -- -- 266,712
Issuance of common stock
for royalty rights....... 41,375 41 8,234 -- -- 8,275
Net loss (264,388) -- (264,388)
----------- ----------- ------------ ------------- ------------ ------------
Balance at December 31,
1995..................... 2,486,348 2,486 1,195,571 (1,205,575) -- (7,518)
Issuance of common stock
for services............. 1,600,000 1,600 798,400 -- -- 800,000
Issuance of common stock
with notes payable....... 12,500 13 6,237 -- -- 6,250
Issuance of common stock
for cash................. 575,000 575 985,521 -- -- 986,096
Issuance of compensatory
options to a consultant -- -- 51,200 -- (5,632) 45,568
Vesting of performance
based options............ -- -- 665,000 -- -- 665,000
Issuance of common stock
for patents and other
technology............... 75,000 75 149,925 -- -- 150,000
Issuance of common stock
for cash................. 322,500 322 619,678 -- -- 620,000
Issuance of compensatory
warrants to an advisor -- -- 109,500 -- -- 109,500
Issuance of compensatory
options to consultants -- -- 209,000 -- -- 209,000
Issuance of compensatory
options to a consultant -- -- 57,000 -- (54,430) 2,570
Net loss................... (3,118,393) -- (3,118,393)
----------- ----------- ------------ ------------- ------------ ------------
Balance at December 31,
1996..................... 5,071,348 $ 5,071 $ 4,847,032 $(4,323,968) $ (60,062) $ 468,073
----------- ----------- ------------ ------------- ------------ ------------
----------- ----------- ------------ ------------- ------------ ------------
</TABLE>
F-7
<PAGE>
NexMed, Inc. 7
(A development stage company)
Consolidated Statement of Cash Flows
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JANUARY 1, 1994
(INCEPTION OF
FOR THE YEAR ENDED DEVELOPMENT STAGE
DECEMBER 31, TO DECEMBER 31,
1996 1995 1996
------------------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss)............................................................. $(3,118,393) $ (264,388) $(4,102,163)
Adjustments to reconcile net loss to net cash from operating
activities
Depreciation......................................................... 4,258 -- 4,258
Stock issued for patents and other rights............................ 150,000 8,275 532,775
Non-cash compensation expense........................................ 1,837,888 -- 2,027,187
Increase in prepaid expenses......................................... (30,000) -- (30,000)
Decrease in other assets............................................. 9,800 -- 1,825
Increase (decrease) in accounts payable.............................. 79,731 (22,339) 85,407
Increase in accrued liabilities...................................... 5,998 -- 5,998
----------- ---------- ------------
Net cash used in operating activities.............................. (1,060,718) (278,452) (1,474,713)
----------- ---------- ------------
Cash flows from investing activities:
Capital expenditures................................................... (89,160) -- (89,160)
Advance to joint venture............................................... (300,000) -- (300,000)
----------- ---------- ------------
Net cash used in investing activities.............................. (389,160) -- (389,160)
----------- ---------- ------------
Cash flows from financing activities:
Issuance of common stock, net of offering costs........................ 1,606,096 266,712 2,006,918
Issuance of notes payable.............................................. 140,000 25,000 165,000
Repayment of notes payable............................................. (115,000) -- (115,000)
----------- ---------- ------------
Net cash from financing activities................................. 1,631,096 291,712 2,056,918
----------- ---------- ------------
Net increase in cash and cash equivalents................................ 181,218 13,260 193,045
Cash and cash equivalents:
Beginning of period.................................................... 13,359 99 1,532
----------- ---------- ------------
End of period.......................................................... $ 194,577 $ 13,359 $ 194,577
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
NexMed, Inc. 8
(A development stage company)
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
The Company, formerly known as BioElectric, Inc. and previously as Target
Capital, Inc., 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. Prior to January 1994, the Company
was engaged in other businesses which were not successful.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. Since its inception as
a medical and pharmaceutical technology company in 1994, the Company has
incurred cumulative net operating losses of $4,102,163 and expects to incur
substantial additional losses in completing the research, development and
commercialization of its technologies. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations as they come
due. Management is actively pursuing various options which include securing
additional equity and/or debt financing and believes that sufficient funding
will be available to meet its planned business objectives (see Note 10). The
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
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 wholly-owned subsidiary, NexMed International Limited, a British
Virgin Islands Company based in Hong Kong. All significant intercompany
transactions have been eliminated.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, and accounts payable and
accrued expenses approximates fair value due to the relatively short maturity
of these instruments.
F-9
<PAGE>
NexMed, Inc. and Subsidiary 9
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
EQUIPMENT
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets (five years).
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and include the
cost of third parties who conduct research and development, pursuant to
development and consulting agreements, on behalf of the Company.
INCOME TAXES
Income taxes are accounted for under the asset and liability method
prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred income taxes are recorded for
temporary differences between financial statement carrying amounts and the
tax basis of assets and liabilities. Deferred tax assets and liabilities
reflect the tax rates expected to be in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided if it
is more likely than not that some or all of the deferred tax asset will not
be realized.
LOSS PER COMMON SHARE
Loss per common shares is calculated by dividing net loss by the weighted
average common shares outstanding during the year. Common stock equivalents
have not been included in the calculation of weighted average shares
outstanding as their effect is antidilutive.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans. Had compensation cost for
option grants to employees pursuant to the Company's stock option plans been
determined based upon the fair value at the grant date for awards under the
plan consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and net loss per share, for the years ended December 31,
1996 and 1995, would have been increased by approximately $91,200 and $5,600,
respectively, or $.02 and less than $.01 per share, respectively.
CONCENTRATION OF CREDIT RISK
The Company has cash in bank accounts that exceed the FDIC insured
limits. The Company has not experienced any losses on its cash accounts. No
allowance has been provided for potential credit losses because management
believes that any such losses would be minimal.
F-10
<PAGE>
NexMed, Inc. and Subsidiary 10
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest of $2,734 and $3,926 in 1996 and 1995,
respectively.
3. JOINT VENTURE AGREEMENT
The Company, through its wholly-owned subsidiary, has an agreement to
form a Chinese joint-venture company, NexMed (Zhongshan) Pharmaceuticals,
Ltd. (the "Joint Venture"), with Guangdong Pharmaceutical and Health Products
Import-Export Company and Zhongshan Shiqi Pharmaceutical Factory. The Joint
Venture plans to carry out research and development, production, and
distribution in China and other international markets. The term of the Joint
Venture is 20 years. The formation of the Joint Venture is subject to the
approval of Chinese regulatory authorities, which approval has not been
obtained. Under the proposed agreement, the Company will contribute $1.75
million to the Joint Venture, representing 70 percent of its registered
capital. The Company has advanced $300,000 to its Joint Venture partner to
form the Joint Venture. In the event that the Joint Venture is not launched,
these funds will be returned to the Company. In January 1997, the Company and
its JV partners began discussing an expansion of the scope of the JV (see
Note 10).
4. NOTES PAYABLE
At December 31, 1996, the Company has notes payable of $50,000 which bear
interest at 10% per annum and are due through February 21, 1997. The note
holders may convert the unpaid principal into common stock at a conversion
price of $2 per share. In conjunction with the issuance of these notes, and
other notes totaling $75,000 which have been repaid, the Company granted the
purchasers of such notes 12,500 shares of common stock. The common stock was
valued at $6,250 ($.50 per share) which is being accounted for as debt
discount and amortized over the lives of the notes.
5. COMMON STOCK
On September 1, 1995, the Company's Board of Directors authorized a
20-for-1 reverse stock split of the Company's common stock which was
effective on October 2, 1995. All shares of common stock, common stock
options and warrants and per share amounts included in these financial
statements have been restated to give retroactive effect to the reverse stock
split for all periods presented.
On September 15, 1996, the Company's Board of Directors amended the
Certificate of Incorporation of the Corporation to authorize 10,000,000
shares of preferred stock and decrease the number of authorized shares of
common stock from 50,000,000 to 40,000,000.
During August 1995, the Company sold 1,650,000 shares of common stock at
an offering priced at $0.20 per share. The Company recorded net proceeds of
$266,712 from the sale.
In August 1995, the Company issued 41,375 shares to acquire the
outstanding royalty rights to its device for the treatment of herpes simplex,
which the Company will attempt to develop into a viable product. These shares
were valued at $8,275 ($.20 per share), resulting in a charge to research and
development expense.
F-11
<PAGE>
NexMed, Inc. and Subsidiary 11
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
During February 1996, the Company issued 1,600,000 shares of common stock
to employees and consultants, primarily in consideration of past services,
valued at $.50 per share, resulting in a charge to operations of $800,000.
During April 1996, the Company issued 12,500 shares of common stock in
conjunction with notes issued in December 1995, January 1996 and February
1996. These shares were valued at $.50 each resulting in a charge to interest
expense of $6,250 (see Note 4).
During May 1996, the Company received net proceeds of $986,096 in
connection with the private placement of 500,000 shares of its common stock
at $2 per share. In connection with this offering, the Company issued 75,000
shares to the placement agent as compensation for the private placement.
During October 1996, the Company issued 75,000 shares of common stock to
acquire the rights to certain technology which the Company will attempt to
develop into a viable product. The shares were valued at $150,000 ($2 per
share), resulting in a charge to research and development expense.
During November 1996, the Company sold 322,500 shares of common stock at
$2 share and received net proceeds of $620,000.
6. STOCK OPTIONS
In November 1995, the Company granted options to certain employees and
key individuals to purchase 340,000 shares of its common stock at an exercise
price of $0.25 per share, which was the estimated fair value of the common
stock at that time. These options are fully vested and expire on December 1,
1998.
In November 1995, the Company also granted options to certain officers
and directors to purchase up to 560,000 shares of its common stock at an
exercise price of $0.25 per share, which was the estimated fair value of the
common stock at that time. The vesting of these options is contingent upon
reaching certain market capitalization levels, as defined in the option
agreements. 135,000 options vest if market capitalization reaches $2,000,000
by December 31, 1997 and an additional 135,000, 140,000 and 150,000 options
vest if market capitalization reaches $3,000,000, $5,000,000 and $10,000,000,
respectively, by December 31, 1998. These options expire on December 1, 2002.
During 1996, the market capitalization, as defined, of the Company exceeded
$5,000,000, resulting in the vesting of 410,000 of these options and the
recording of $665,000 of expense.
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.
F-12
<PAGE>
NexMed, Inc. and Subsidiary 12
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
In connection with the acquisition of technology in October 1996
described in Note 5, the Company entered into a consulting agreement with the
developer of the technology. Under the terms of the agreement, the Company
issued options to purchase 40,000 shares of common stock at an exercise price
of $1 per share. The estimated fair value of the Company's common stock was
$2 per share at that time. Under the option agreement, 20,000 shares vest
immediately, 10,000 shares vest as of January 31, 1997, and 10,000 shares
vest as of April 30, 1997. The Company recorded $45,568 of research and
development expense in 1996 related to this option agreement. Deferred
compensation related to these options is recorded as a reduction of
stockholders' equity and will be amortized over the remaining option vesting
period.
In December 1996, under the Incentive Plan, the Company issued 1,185,000
options to key employees at an exercise price of $2 per share, which was the
estimated fair value of the common stock at that time. Provided the employee
remains in service to the Company, the options vest at December 31, 1997,
1998 and 1999 and expire in December 2006.
In December 1996, under the Stock Option Plan, the Company also issued
50,000 options to key employees with an exercise price of $2 per share, which
was the estimated fair value of the common stock at that time. These options
expire in December 2006.
In December 1996, under the Recognition Plan, the Company also issued
230,000 options to directors and consultants at an exercise price of $2 per
share, which was the estimated fair value of the common stock at that time.
Compensation expense of $209,000 was recorded for this grant.
In December 1996, under the Recognition Plan, the Company also issued
60,000 options to a director at an exercise price of $2 per share that vest
in December 1997, 1998 and 1999 provided the director remains in service to
the Company. Compensation expense of $2,570 was recorded for these grants.
Deferred compensation relating to these options is recorded as a reduction in
stockholders' equity and will be amortized over the remaining option vesting
period.
In December 1996, under the Recognition Plan, the Company also issued
50,000 options to a consultant at an exercise price of $2 per share, which
was the estimated fair value of the common stock at that time. If the
consultant meets certain performance goals the options would vest in December
1997 and expire in December 2006. If he does not meet the performance goals,
the options expire on December 31, 1997.
F-13
<PAGE>
NexMed, Inc. and Subsidiary 13
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
The fair value of each option and warrant (see Note 7) is estimated on
the date of grant using the Black-Scholes option-pricing model. The following
assumptions were used in the model:
<TABLE>
<S> <C>
Dividend yield........................................ 0.0%
Risk-free yields...................................... 5.89%-6.71%
Expected volatility................................... 0.0%
Option terms.......................................... 3-10 years
</TABLE>
A summary of stock option activity is as follows:
F-14
<PAGE>
NexMed, Inc. and Subsidiary 14
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
---------- -------------
<S> <C> <C>
Outstanding at December 31, 1994.................... -- --
Granted........................................... 900,000 $ .25
---------- -------------
Outstanding at December 31, 1995.................... 900,000 $ .25
Granted........................................... 1,615,000 $ 1.00-$2.00
---------- -------------
Outstanding at December 31, 1996.................... 2,515,000 $ .25-$2.00
---------- -------------
Exercisable at December 31, 1996.................... 1,110,000 $ .25-$2.00
---------- -------------
</TABLE>
No options have been exercised or canceled as of December 31, 1996.
7. WARRANTS
During November 1996, the Board of Directors approved the issuance of
warrants to purchase 150,000 shares of common stock at $1 per share to its
outside legal counsel as consideration for legal services performed relating
to the sale of common stock in November 1996 and other matters. The estimated
fair value of the Company's common stock was $2 per share at that time. The
warrants have a term of ten years and vest in equal installments over a three
year period. The issue of these warrants resulted in additional legal expense
of $109,500. No warrants have been exercised as of December 31, 1996.
8. INCOME TAXES
The Company has incurred losses since inception which have generated net
operating loss carryforwards of approximately $4,180,000 for federal and
state income tax purposes. These carryforwards are available to offset future
taxable income and expire in 2011 for federal income tax purposes. 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. The actual
utilization of net operating loss carryforwards generated prior to such
changes in ownership will be limited, in any one year, to a percentage of
fair market value of the Company at the time of the ownership change. Such a
change may have already resulted from the additional equity financing
obtained by the Company since its formation.
The net operating loss carryforwards result in a noncurrent deferred tax
benefit at December 31, 1996 of $1,546,237. 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, 1996 and 1995, 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.
F-15
<PAGE>
NexMed, Inc. and Subsidiary 15
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
9. 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 under a short-term lease agreement. Rent
expense was $8,500 and $600 in 1996 and 1995, respectively.
10. SUBSEQUENT EVENTS
In January 1997, the Company issued a $100,000 promissory note bearing
interest at 10% per annum. The note must be repaid by December 31, 1997 and
the note holders may convert the unpaid note into common stock at a
conversion price of $2.50 per share. In conjunction with the issuance of the
note, the Company granted the purchaser of such note 7,500 shares of common
stock. The Company has valued these shares at $15,000 ($2.00 per share) which
is being accounted for as debt discount and amortized over the life of the
note.
In January 1997, discussion began between the Company and its Joint
Venture partners regarding the expansion of the scope of the proposed Joint
Venture. The revised agreement, which is subject to the successful completion
of the discussions and the receipt of necessary governmental approvals, is
expected to require the Company to contribute approximately $15 million over
a 24 month period.
In January 1997, the Company entered into a license agreement with Lotus
Medical Supply, Inc. ("Lotus"). Lotus received certain exclusive rights to
manufacture and sell products in Taiwan using the Company's penetration
enhancement technology in return for certain license fees, including a
non-refundable fee of $50,000 paid in February 1997. The agreement provides
that the Company and Lotus share equally the cost of certain pre-clinical
testing.
In January 1997, a complaint was filed against the Company by a
corporation claiming breach of contract, unjust enrichment and anticipatory
breach of contract relating to a marketing and consulting agreement. The
corporation is requesting damages of $388,062, plus interest, costs and
attorney's fees. The Company believes that this lawsuit is without merit and
intends to defend its position vigorously.
In February 1997, the Company issued 1,062,500 shares at $2.00 each in a
private placement. The Company received net proceeds of $1,995,000 from the
issuance.
In February 1997, the holder of a $25,000 note payable (see Note 4)
elected to convert the principal and interest due into 13,750 shares of
common stock.
F-16
<PAGE>
NexMed, Inc. and Subsidiary 16
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
In February 1997, under the Recognition Plan and Incentive Plan, the
Company issued 85,000 and 75,000 options, respectively, to a director, a
consultant and employees at an exercise price of $2 per share, which was the
estimated fair value of the common stock at that time. Provided they remain
in service to the Company, the options vest at December 31, 1997, 1998 and
1999 and expire in 2007.
F-17
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS.*
* 2.1 Amended and Restated Articles of Incorporation of the Company
** 2.2 By-laws of the Company
** 2.3 Amendment to By-laws of the Company
** 3.1 Specimen Common Stock Certificate
5.1 Form of Irrevocable Proxy
** 6.1 Technology Acquisition Agreement between the Company and Odontex,
Inc.
12.1 Statement re: Computation of Per Share Earnings
12.2 Letter on Change in Certifying Accountant
12.3 Subsidiaries of the Company
27 Financial Data Schedule
* Pursuant to Item 1(b) of Part III to Form 10-SB, exhibits are listed
according to the numbers assigned in Part III of Form 1-A or Item 2 of
Part III to Form 10-SB.
** Filed as an exhibit to the Registrant's Form 10-SB filed with the
Securities and Exchange Commission on March 14, 1997.
II-1
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
/s/
-----------------------------------------
NEXMED, INC.
Date: May 12, 1997 By: /s/ Y. Joseph Mo
----------------------------------
Y. Joseph Mo
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Date: May 12, 1997 By: /s/ Y. Joseph Mo
----------------------------------
Y. Joseph Mo
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 1997 By: /s/ Vivian H. Liu
----------------------------------
Vivian H. Liu,
Vice President, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
Date: May 12, 1997 By: /s/ Gilbert S. Banker
----------------------------------
Gilbert S. Banker
Director
Date: May 12, 1997 By: /s/ Robert W. Gracy
----------------------------------
Robert W. Gracy
Director
Date: May 12, 1997 By: /s/ Yu-Chung Wei
----------------------------------
Yu-Chung Wei
Director
<PAGE>
EXHIBIT INDEX
ITEM 1. INDEX TO EXHIBITS.*
* 2.1 Amended and Restated Articles of Incorporation of the Company
** 2.2 By-laws of the Company
** 2.3 Amendment to By-laws of the Company
** 3.1 Specimen Common Stock Certificate
5.1 Form of Irrevocable Proxy
** 6.1 Technology Acquisition Agreement between the Company and Odontex,
Inc.
12.1 Statement re: Computation of Per Share Earnings
12.2 Letter on Change in Certifying Accountant
12.3 Subsidiaries of the Company
27 Financial Data Schedule
* Pursuant to Item 1(b) of Part III to Form 10-SB, exhibits are listed
according to the numbers assigned in Part III of Form 1-A or Item 2 of
Part III to Form 10-SB.
** Filed as an exhibit to the Registrant's Form 10-SB filed with the
Securities and Exchange Commission on March 14, 1997.
<PAGE>
Exhibit 5.1
- -----------
IRREVOCABLE PROXY
The undersigned hereby revokes any previous proxies and appoints Y.
Joseph Mo, Ph.D., as attorney and proxy of the undersigned to attend any and
all meetings of shareholders of NexMed, Inc., a Nevada corporation (the
"Corporation"), to vote (or execute written consents with respect to) all
shares of Common Stock, $.001 par value, of the Company which the undersigned
is entitled to vote (the "Shares"), and to represent and otherwise to act for
the undersigned in the same manner and with the same effect as if the
undersigned were personally present or personally executing a written consent
of shareholders.
The undersigned hereby agrees not to sell, assign, transfer or pledge
(each a "Transfer") any or all of the Shares except (i) to an affiliate of
the undersigned or via private placement transaction if as a condition
precedent to any such Transfer, the transferee reaffirms in writing the terms
of this proxy or (ii) to an unaffiliated third party in a "brokered
transaction", as defined in the Securities Act of 1933, as amended. A third
party shall be deemed "affiliated" for purposes of this proxy if such third
party is controlled by, controls or is under common control with the
undersigned or a member of the immediate family of the undersigned, is
retained by the undersigned or a member of the immediate family of the
undersigned as a consultant generally operating at the direction of such
person, is employed, directly or indirectly, by such person, or has made
substantial business investments of any nature in any entity with the
undersigned or a member of the immediate family of the undersigned.
This proxy shall be deemed to be a proxy coupled with an interest and is
irrevocable.
The undersigned authorizes such attorney and proxy to substitute any
other person to act hereunder, to revoke any substitution and to file this
proxy and any substitution or revocation with the Secretary of the Company.
Dated: December , 1996
- -------------------------------------
NAME OF SHAREHOLDER
- -------------------------------------
SIGNATURE OF SHAREHOLDER
<PAGE>
Exhibit 12.1
- ------------
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
NexMed, Inc.
Computation of Per Share Earnings
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
DAYS SHARES
1995 SHARES OUTSTANDING OUTSTANDING
- ------------------------------------------------------------------------ ------------- --------------- -----------
<S> <C> <C> <C>
Opening balance--January 1, 1995........................................ 794,973 365 794,973
Shares issued for royalty rights........................................ 41,375 137 15,585
Shares issued for cash.................................................. 1,650,000 130 589,686
-----------
Weighted average shares outstanding..................................... 1,400,244
Net loss for the period................................................. $ (264,388)
----------
Net loss per common share............................................... $ (0.19)
----------
----------
1996
- ------------------------------------------------------------------------
Opening balance--January 1, 1996........................................ 2,486,348 365 2,486,348
Shares issued with notes payable........................................ 12,500 330 11,296
Shares issued for services.............................................. 1,600,000 319 1,397,333
Shares issued for cash.................................................. 575,000 242 381,896
Shares issued for patents and other technology.......................... 75,000 69 14,125
Shares issued for cash.................................................. 322,500 41 36,550
----------
Weighted average shares outstanding..................................... 4,327,548
Net loss for the period................................................. $(3,118,393)
----------
Net loss per common share............................................... $ (0.72)
----------
----------
</TABLE>
<PAGE>
Exhibit 12.2
- ------------
Boros & Farrington
Certified Public Accountants
A Professional Corporation
- ------------------------------------------------------------------------------
1170 Bernardo Plaza Court, Suite 210
San Diego, CA 92128-2424
(619) 487-8518 Fax (619) 487-6794
April 28, 1997
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Dear Sirs:
We have read NexMed, Inc.--Form 10-SB12G (File No. 0-22245) Item 3.
Changes in and Disagreements With Accountants. We concur with the reasons set
forth for the change in accountants and verify that we have had no
disagreements with NexMed, Inc. regarding accounting principles or practices,
financial statements disclosure, or auditing scope or procedure. Our report
for the years ended December 31, 1994 and 1995 did not contain an adverse
opinion or disclaimer or opinion or qualification as to uncertainty, audit
scope, or accounting principle.
SINCERELY,
/s/ John Farrington
- ---------------------------------
John Farrington
Boros & Farrington, APC
<PAGE>
Exhibit 12.3
- ------------
Subsidiaries of NexMed, Inc.
1. NexMed Holding, Inc. is a wholly-owned subsidiary of NexMed, Inc. and is
incorporated in Delaware.
2. NexMed International Limited is a wholly-owned subsidiary of NexMed, Inc.
and is a British Virgin Islands Company.
3. NexMed (ASIA) Ltd. is a wholly-owned subsidiary of NexMed International
Limited and is incorporated in Hong Kong.
4. NexMed (China) Ltd. is a wholly-owned subsidiary of NexMed International
Limited and is incorporated in the British Virgin Islands.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 194,577
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 224,577
<PP&E> 89,160
<DEPRECIATION> (4,258)
<TOTAL-ASSETS> 609,479
<CURRENT-LIABILITIES> 141,406
<BONDS> 0
0
0
<COMMON> 5,071
<OTHER-SE> 463,002
<TOTAL-LIABILITY-AND-EQUITY> 609,479
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,095,672
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,491
<INCOME-PRETAX> (4,102,163)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,102,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,102,163)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> 0
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