<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from____________ to _____________
Commission file number 0-22245
NEXMED, INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 87-0449967
- -------------------------------------- ---------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
350 Corporate Boulevard, Robbinsville, N.J. 08691
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(609) 208-9688
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
N/A N/A
------------------- -------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
- --------------------------------------------------------------------------------
(Title of Class)
<PAGE>
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year: $56,175
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
a specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.): As of March 20 1998, the aggregate market value of
the voting stock held by non-affiliates was $7,419,056. The aggregate market
value was computed based on the average of the bid and asked prices of NexMed,
Inc.'s common stock, par value $0.001 per share, as reported by the National
Quotation Bureau for such date. This calculation does not reflect a
determination that persons are affiliates for any other purpose.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: as of March 20, 1998,
6,195,098 shares of Common Stock, par value $0.001 per share, were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
<PAGE>
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. 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. In addition, the Company intends to
market generic pharmaceutical products, as well as advance its research and
eventual marketing of its proprietary products, including drugs
incorporating the NexACT(TM) technology, through its recently-formed joint
venture in China (see "Joint Venture in China" below). With respect to the
marketing and development of its proprietary products, the Company intends
to direct its topical delivery system development efforts on 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. Currently, the primary topical
treatment product under research and development by the Company is an
alprostadil cream for the treatment of male erectile dysfunction
(impotence). Also under research and development are ibuprofen and
ketoprofen cream formulations for sports medicine and arthritis treatment
and an acyclovir anti-viral cream for the treatment of herpes simplex. The
Company has entered into certain agreements for the licensing and, upon
receipt of regulatory approval, the supply and distribution in selected
international markets of products incorporating the NexACT(TM) technology
and intends to seek similar licensing arrangements during 1998 (see
"Licensing Agreements and Other International Commercialization Efforts"
below);
(ii) the Viratrol(R) device, a proprietary therapeutic medical device
for the treatment of herpes simplex diseases which does not require the use
of any drugs. The Company believes that the electrical current, which is
topically
<PAGE>
delivered by the device to an infected site, blocks lesions from forming or
shortens healing time once lesions develop; and
(iii) through the Chinese joint venture, the Company expects to
continue and expand upon the production and distribution in China and
export to other international markets of generic medical and pharmaceutical
products currently approved and sold in China and, upon regulatory
approval, the Company's proprietary products (see "Joint Venture in China"
below). In addition, the Company expects, through partnerships or other
arrangements with local entities, to intensify its efforts to supply and
distribute generic pharmaceuticals and, upon regulatory approval, its
proprietary products, in selected developing-world regions (see "Licensing
Agreement and Other International Commercialization Efforts" below).
A. Development of Topical Treatment Products
-----------------------------------------
1. Acquisition, Research and Development of Drug Delivery Enhancement Technology
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 the 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 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 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
2
<PAGE>
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.
2. Products Under Development
Assuming adequate funding, leading candidates for topical treatment
products currently under research and development by the Company include:
(i) for the treatment of male erectile dysfunction, an alprostadil
topical 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 approved alprostadil intra-urethral dosage
form. Assuming regulatory approval, the Company has filed trademark
applications in the U.S. and internationally for the alprostadil cream
incorporating the NexACT(TM) enhancers under the name Alprox-TD(TM). The
Alprox-TD(TM) topical cream will be intended for use by men with mild to
moderate erectile dysfunction. 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. Clinical Studies of Alprox-TD(TM) are being conducted in the
United States and China. With respect to the approval of its products in
the United States, the Company generated during the fourth quarter of 1997
the data necessary to file with the FDA an Investigational New Drug ("IND")
application for the Alprox-TD(TM) cream and completed a 60-patient (30 male
and 30 female) Phase I study on the Alprox-TD(TM) cream which was commenced
in the United States in September 1997. On January 15, 1998, the Company
received clearance from the FDA for the initiation of Phase II, pending the
completion of additional toxicology studies, which the Company expects will
take six months to be completed at an approximate cost of $400,000.
Assuming adequate funding, the Company expects to complete these studies
and thereafter initiate Phase II studies in the United States in the second
half of 1998. For a discussion of the studies being conducted in China, see
"Agreement to Conduct Clinical Studies" below;
(ii) for sports medicine and arthritis treatment, ibuprofen and
ketoprofen creams. In-vitro data indicate that the Company's 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.
3
<PAGE>
(iv) for the treatment of female sexual dysfunction, an alprostadil-
based product known as Femprox(TM). On December 24, 1997, the Company,
having generated the necessary data, filed an IND application with the FDA.
In February 1998, the FDA cleared the Company to proceed with an eight-
patient, Phase I clinical study for safety and efficacy. With adequate
funding, the Company intends to complete the Phase I study in the second
quarter of 1998.
3. Advisors, Consultants, Researchers and Employees in Absorption Enhancement
Field
Dr. Servet Buyuktimkin and Dr. Nadir Buyuktimkin, co-developers of, and
authors of numerous publications and presentations relating to, the Company's
NexACT(TM) enhancers, are employed by the Company as Manager of Drug Delivery
Research and Manager of Formulation Research, respectively, and conduct research
at the Company's laboratories 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-developer 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. Rytting for the development of 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.
B. Viratrol(R) Herpes Treatment Device
-----------------------------------
Another of the Company's proposed products, which is still in the
development stage, is the Viratrol(R) 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 and/or shortens healing time once lesions develop. The
commercial prototype 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 used the commercial prototype of the
redesigned Viratrol(R) device in clinical trials which commenced in China in
January 1997. During 1997, the Company completed a Phase II study in China on
the Viratrol(R) device, involving 10 patients with recurrent herpes labialis.
All of the subjects experienced full remission of symptoms after one to three
days of the device-application regimen. Through Innapharma, Inc. (see "Agreement
to Conduct Clinical Studies" below), the Company has initiated a 60-patient,
double-blind study in China, which is expected to conclude in the fourth quarter
of 1998. If the results of the double-blind clinical trials are satisfactory,
the Company may, assuming adequate funding, elect to file an
4
<PAGE>
Investigational Device Exemption ("IDE") with the FDA during the second quarter
of 1998 and initiate Phase I studies in the United States by the end of 1998.
The Company has two issued patents on the current version of the device and one
pending Continuation-in-Part application currently under review by the U.S.
Patent and Trademark Office. In addition, the Company filed its first
application under the Patent Cooperation Treaty on the new device in October
1997 which, if granted will provide patent protection in countries which are
parties to the treaty, including China and most European countries. 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.
C. Agreements to Conduct Clinical Studies
--------------------------------------
In 1996 and 1997, 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 is conducting clinical
studies for the Company in China and the United States on the Viratrol(R) device
and on the Alprox-TD(TM) cream, in conformance with U.S. Good Clinical
Practices. As discussed above, the Company has completed a Phase II study, and
has initiated a 60-patient, double-blind study, on the Viratrol(R) device in
China. The resulting data may also be used by the Company to complete the pre-
clinical requirements for the filing with the FDA of an IDE for the Viratrol(R)
device, which the Company intends to file during the second quarter of 1998.
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. In 1997, the Company completed the
required pharmacology and toxicology studies in China. The Company plans to
initiate a 300-patient Phase III double-blind study in the second quarter of
1998 and submit a New Drug Application in China by the end of 1998. Assuming
adequate funding, both studies are expected to conclude, with final reports,
during the second half of 1998. 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, South American and developing-world
countries. In order to complete the aforementioned Chinese studies in 1998, the
Company estimates that it will require $ 130,000. If the Company is unable to
obtain adequate funding in a timely manner, it is likely that the studies and,
accordingly, product development, will be significantly delayed or curtailed.
D. Joint Venture in China
----------------------
In July 1997, the Company, through its wholly-owned subsidiary, NexMed
(Asia) Limited, entered into an agreement to form a Chinese joint-venture
company, NexMed Pharmaceuticals (Zhongshan) Ltd. (the "JV" or "China Joint
Venture"), with Zhongshan Xiaolan Pharmaceuticals Factory (the "Factory" or the
"JV partner") in Zhonghshan City, Guangdong Province, China. In September 1997,
the JV received all necessary Chinese government approvals. Under the terms of
the agreement, the Company was required to make an initial contribution of
$2,170,000, and is required to make additional
5
<PAGE>
contributions by September 1999 and 2000 of $700,000 and $630,000, respectively,
in exchange for 70% of the registered capital of the JV. As of December 31,
1997, the Company had placed $1,870,000 of the initial payment in escrow,
pending funding of the entire $2,170,000 initial advance.
Effective January 1, 1998, the Company's JV partner agreed to extend the
due date for completing the initial payment due under the JV agreement until
September 25, 1998. The $1,870,000 held in escrow as of December 31, 1997 was
released to the JV and the parties agreed that the effective date for the JV
would be January 1, 1998. The parties further agreed that if the Company was
unable to complete the initial payment by September 25, 1998, the Company and
the JV partner would re-divide the percentage ownership of the JV according to
the ratio of actual investments.
In addition to the initial payment, the JV's assets include the Factory's
sales and customer base, distribution network, licenses to manufacture and
market 156 generic drugs in China, 17 registered trademarks for the Chinese
market, import and export licenses for finished products and raw materials, and
equipment and technology for the production of various pharmaceutical dosage
forms, including tablets, capsules, oral solutions and injections.
Pursuant to the joint-venture agreement, the Company is obligated to
transfer to the JV the production rights to two new products. Towards the
fulfillment of this obligation, the Company intends upon the granting of
regulatory approval, to use the JV to sponsor, manufacture and launch its
proprietary products in China.
In consideration for the formation of the JV, the Factory's parent, Xiaolan
Industrial General Corporation, is providing the JV with a $1,566,265 (RMB 13
million) unsecured, uncollateralized, revolving line of credit for working
capital. The source of the funds provided to the JV is a line of credit
previously extended to the Factory by the China Industrial and Commercial Bank.
The line of credit provided by the Factory to the JV expires in September 2000
and requires payment of interest only during the term. Interest may be paid on a
monthly basis or accrued at the JV's option. The JV currently pays interest to
the Factory at a rate of 0.924% per month, or 11.088% per year. In addition to
the payment of interest, the JV is obligated to pay the principal at the end of
the term. The Factory has also provided the JV with an additional $216,867 (RMB
1.8 million) for working capital, for which the parties have agreed will be
repaid on the same terms as the RMB 13 million loan. The line of credit
currently provided to the Factory by the China Industrial and Commercial Bank is
due soon, and the Bank has stated that it will not continue to extend the loan
to the Factory and agreed that the JV should apply directly for the loan.
Accordingly, the JV is presently applying directly for a $2,409,639 (RMB 20
million) line of credit from the Xiaolan township branch of the China Industrial
and Commercial Bank, for which the Company expects to pay a lower rate of
interest than it is currently charged by the Factory's parent. The JV intends to
use the new line of credit for retiring the existing line of credit and
repayment of the cash advance described above, the development of new
pharmaceutical products, the acquisition of new
6
<PAGE>
production equipment, working capital and to provide funding for the
retrofitting of existing production facilities by the third quarter of 1998, in
order to meet new Chinese Good-Manufacturing-Practices (GMP) standards.
The Factory, which has been manufacturing pharmaceuticals for 40 years,
reported revenues in 1996 and 1997 of approximately $6.4 million and $6.9
million, respectively. The JV intends to change the existing Factory labels and
sell products under the NexMed brand with higher labeling and packaging quality,
and expects an increase in overall sales in 1998 as compared to the Factory's
sales in 1997.
During 1996, the Company, through its wholly-owned subsidiary, NexMed
International Limited, entered into an agreement to form a Chinese joint-venture
company with Guangdong Pharmaceutical and Health Products Import-Export Company
and Zhongshan Shiqi Pharmaceutical Factory (the "Guangdong JV"). In July 1997,
the Company and its Guangdong JV partners terminated their agreement to form the
Guangdong JV. In September 1997, $300,000 which the Company had advanced to its
Guangdong JV partners to form the Guangdong JV was returned.
E. Licensing Agreements and Other International Commercialization Efforts
----------------------------------------------------------------------
1. 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.
To date, Lotus has begun exploratory steps to initiate studies in Taiwan, but
has not commenced research and testing. 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
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. The Lotus License Agreement will terminate ten (10) years from the
date on which any product is approved by the appropriate Taiwanese governmental
authority.
2. Agreement to Market and Distribute Alprox-TD(TM) in Argentina and Uruguay
On October 2, 1997, the Company, through NexMed International, entered into
a Supply and Distribution Agreement with Finadiet S.A.C.I.F.I., ("Finadiet"), a
major
7
<PAGE>
Argentinian manufacturer and distributor of urological pharmaceutical products,
for the distribution of the Alprox-TD(TM) cream in Argentina and Uruguay. Under
the agreement, the Company would manufacture and supply the Alprox-TD(TM) cream
under a new trademark, Bifort(TM), and packaging proposed for selected Latin
American countries. Finadiet is obligated to pay the expenses and obtain
regulatory approval to market the product, in exchange for a five-year exclusive
sales and distribution right for the two countries. Pending regulatory approval,
if Finadiet purchases $23.7 million or more of products during the term of the
agreement, then it has the right to extend the agreement for another five-year
period.
3. Sales and Marketing Joint Venture in Peru
In December 1997, the Company, through NexMed International, concluded an
agreement with two local partners for the establishment of a sales and marketing
office and showroom in Lima, Peru. Under the agreement, the Company will own
70% of the joint venture and has advanced $42,000 to it. The joint venture is
in the process of obtaining registration as an accredited supplier, which will
allow it to engage in sales to government agencies in Peru. The Company
recognizes the potential of the Peruvian office, once established, to be a
conduit for the sale and distribution of generic pharmaceutical products in
Latin America, and for the introduction of Alprox-TD(TM) to selected Latin
American countries.
F. 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 1997, the Company spent $2,078,517, and in 1996, the Company spent
$1,040,396, on research and development. Since January 1, 1994, when the
Company repositioned itself as a medical and pharmaceutical technology company,
the Company has spent $3,951,280 on research and development.
The Company will need significant funding to pursue its research,
development and commercialization plans (see Part II, Item 6, "Plan of
Operation"). The potential products upon which the Company intends to focus its
current development efforts, including the Alprox-TD(TM) cream and the
Viratrol(R) device, are in the research and development stage. 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
8
<PAGE>
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
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(R) device, the Alprox-
TD(TM) cream or any products based on the NexACT(TM) technology, the Femprox(TM)
formulation or 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. Other than the sales and distribution network in China for generic
pharmaceutical products acquired by the JV, 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 began forging marketing and distribution
relationships in Taiwan and Latin America during 1997 (see "Licensing Agreements
and Other International Commercialization Efforts" above), there is no assurance
that the Company will be able to establish additional adequate distribution or
marketing arrangements or that any such current or prospective 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
Other than the equipment and technology acquired, and the facility leased,
by the JV, 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
9
<PAGE>
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.
With this in mind, the China Joint Venture expects, from its own cash flow and
line of credit, which it is in the process of obtaining from the China
Industrial and Commercial Bank, to fund the retrofitting of its manufacturing
facility in order to meet new Chinese GMP standards. 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. Prices of
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
small U.S. fine chemical manufacturer, and intends to establish at least one
additional supplier within the next 12 months.
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
include an oral medication by Pfizer, Inc., which approved by the FDA on March
27, 1998. 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,
10
<PAGE>
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(R) system, which is a device for the intra-uretheral delivery of a
suppository containing alprostadil. Vivus, Inc. has entered partnerships and
agreements for the development and distribution of MUSE(R) 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 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
11
<PAGE>
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 is seeking 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
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 a new
generation of absorption technology, which is in the process of being patented.
The Company also owns two patents on the Viratrol(R) device, has two pending
patent applications with respect to the technology, inventions and improvements
that are significant to the Viratrol(R) 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(R) 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
12
<PAGE>
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 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
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.
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
13
<PAGE>
implement similar government control. The United States Congress has 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 the consumer will be available or will be sufficient to allow
the Company to sell its products on a competitive basis.
EMPLOYEES
As of December 31, 1997, the Company had 17 full-time and five part-time
employees, four of whom were executive management. As of March 20, 1998, the
Company had 15 full-time and six part-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 million 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
14
<PAGE>
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 has been a reporting company under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), since the effectiveness in May 1997 of
the registration statement on Form 10-SB which the Company filed voluntarily in
March 1997 pursuant to Section 12(g) of the Exchange Act.
The Company's principal executive offices are located at 350 Corporate
Boulevard, Robbinsville, New Jersey 08691, and its telephone number is (609)
208-9688. The Company's website is "www.nexmed.com". Through its subsidiaries,
the Company has also established offices in Canada, Hong Kong and mainland
China.
ITEM 2. DESCRIPTION OF PROPERTY.
Through 1997, the Company leased approximately 500 square feet of Office
Space for its headquarters at 6087 Triangle Drive, Commerce, California 90040
pursuant to a month-to-month arrangement. The rent for such space was $1,000 per
month. In February 1998, The Company relocated its headquarters to New Jersey
and, through its wholly-owned subsidiary, NexMed (U.S.A.), Inc., a Delaware
corporation, began leasing approximately 6,010 square feet of office space at
350 Corporate Boulevard, Robbinsville, New Jersey 08691, pursuant to a five-year
lease. In the second year, the Company will begin to lease approximately 5,540
square feet of warehouse space at the Robbinsville, New Jersey location. The
Company's rent for such space is $6,510.83 per month in the first year,
$9,742.50 in the second year and $10,916.25 thereafter. Pursuant to a research
agreement between the Company and the University of Kansas, which expired on
August 31, 1997, the Company 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 has agreed to another 12-month research
agreement with the University of Kansas, pursuant to which the Company pays
$5,000 per month for access to and the use of laboratory space.
The Company's subsidiary, NexMed (Asia) Limited, leases 1,100 square feet
of office space in Hong Kong pursuant to a 2-year arrangement. The rent for such
space is $6,000 per month. Another of the Company's subsidiaries, NexMed
(Americas) Limited, leases 1,000 square feet of office space in Mississauga,
Ontario, Canada for $850 per month pursuant to a month-to-month arrangement.
The China Joint Venture leases 139,074 square feet of land and a 183,581 square-
foot building in Zhongshan City, Guangdong Province, China for $21,084 per
month, paid quarterly, pursuant to a 10-year lease.
ITEM 3. 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
15
<PAGE>
Nevada Corporation. It was 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 claimed breach of
contract, unjust enrichment and anticipatory breach of contract, requested
damages of $388,062.50, plus interest, costs and attorney's fees. In November
1997, the suit was dismissed without prejudice on procedural grounds. There
is a possibility that the plaintiff may file an amended complaint. Should an
amended complaint be filed, the Company, which believes that this lawsuit is
without merit, intends to defend its position vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
16
<PAGE>
PART II
Item 5. Market Price for Common Equity and Related Stockholder 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
1997 March 31 June 30 September 30 December 31
- ---------------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
High $2.875 $3.00 $2.875 $3.125
LOW 1.00 1.50 1.00 1.00
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
</TABLE>
(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 March 20, 1998, there were 191 holders of record of 6,195,098 shares of
Common Stock.
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.
RECENT SALES OF UNREGISTERED SECURITIES.
In August 1995 the Company completed a Regulation S offering to 17
individuals, selling 33 million shares of Common Stock, for gross proceeds of
$330,000.
17
<PAGE>
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 1.6 million 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 million. 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 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.
18
<PAGE>
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).
In February 1997, the Company completed a Regulation S offering of 1
million 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 million 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
exercise of one individual's option to purchase Common Stock at $.25 per share.
In November 1997, in conjunction with the issuance of $1.82 million of
unsecured subordinated notes, due on November 16, 1998 and bearing interest at
six percent, the Company issued to the noteholders 455,000 warrants to purchase
shares of Common Stock, exercisable for 12 months at $4.00 per share, in a
private placement pursuant to Regulation S. In connection with the placement,
the Company issued 455,000 of such warrants as a commission to the placement
agent, China Everbright Investment Agency.
Item 6. Plan of Operation.
During the next 12 months, depending on the amount of funding available,
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, licensees,
importers and brokers. With respect to the United States, the Company intends to
continue the FDA application and approval process for the Alprox-TD(TM) cream
and commence such process for the Viratrol(R) herpes treatment device.
19
<PAGE>
The first step in the Company's plan for the next 12 months with regard to
the research, development and commercialization of the Alprox-TD(TM) cream and
the Viratrol(R) device is the completion of the clinical studies currently in
progress on each of the two proposed products in China. It is expected that the
studies on the Viratrol(R) device and the Alprox-TD(R) cream will be concluded
during the second half of 1998. Both studies are subject to local government
review at various stages, which could affect the delivery time of the final
results. Pending satisfactory results, the Company expects that the clinical
data generated should permit the Company to submit an application for
manufacturing and marketing approval of the Alprox-TD(TM) cream in China and
other developing-world countries, and a notification of sale for the Viratrol(R)
device in Canada. During 1997, the Company completed a Phase II study in China
on the Viratrol(R) device, involving 10 patients with recurrent herpes labialis.
All of the subjects experienced full remission of symptoms after one to three
days of the device-application regimen. Through Innapharma, the Company has
initiated a 60-patient, double-blind study in China, which is expected to
conclude in the fourth quarter of 1998.
With respect to the approval of its products in the United States, the
Company generated during the fourth quarter of 1997 the data necessary to file
with the FDA an IND application for the Alprox-TD(TM) cream and completed a 60-
patient (30 male and 30 female) Phase I study on the Alprox-TD(TM) cream during
the fourth quarter of 1997. On January 15, 1998, the Company received clearance
from the FDA for the initiation of Phase II, pending the completion of
additional toxicology studies. With adequate funding, the Company expects to
initiate Phase II studies in the United States in the second half of 1998.
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 approximately 12
months. 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 filed additional patent applications with respect to
its products in 1997 and hopes in the next 12 months to secure U.S. and
international strategic partners for its leading products under development. In
this regard, and also with respect to its plans for the commercialization of
generic pharmaceuticals, the Company intends to continue or initiate certain
activities through, or with respect to, the China Joint Venture (see Part I,
Item 1, "Description of Business - Business - Joint Venture in China"). First,
the Company, through the JV, plans to continue and expand upon the production
and distribution in China and export to other developing-world markets of
certain generic drugs and Chinese herbal products currently approved and sold in
China. In addition, pursuant to the joint-venture agreement, the Company is
obligated to transfer to the JV
20
<PAGE>
the production rights to two new products. Towards the fulfillment of this
obligation, the Company intends, upon the granting of regulatory approval, to
use the JV to sponsor, manufacture and launch its proprietary products in China.
In implementing these plans, the Company, through the JV, will have the benefit
of an existing sales and customer base and distribution network, licenses to
manufacture and market 156 generic drugs in China, 17 registered trademarks for
the Chinese market, import and export licenses for finished products and raw
materials, and equipment and technology for the production of various
pharmaceutical dosage forms, including tablets, capsules, oral solutions and
injections. Furthermore, the China Joint Venture expects, from its own cash flow
and line of credit, which it is in the process of obtaining from the China
Industrial and Commercial Bank, to fund the retrofitting of its manufacturing
facility in order to meet new Chinese GMP standards.
The Company expanded its international representation through the
establishment of its own sales offices in North and South America, and
partnering with local distribution companies in selective developing markets.
In August 1997, the Company established NexMed (Americas) Limited ("NexMed
Americas"), a wholly-owned subsidiary based in Ontario, Canada, responsible for
the Company's North and South American manufacturing and distribution
activities. In December, 1997, the Company, through NexMed International,
concluded an agreement with two local partners for the establishment of a sales
and marketing office in Lima, Peru. Under the agreement, the Company will own
70% of the joint-venture and has advanced $42,000 to it. The joint venture is
in the process of obtaining registration as an accredited supplier, which will
allow it to engage in sales to government agencies in Peru. The Company
recognizes the potential of the Peruvian office, once established, to be a
conduit for sales of generic pharmaceutical products in Latin America, and for
the introduction of Alprox-TD(TM) to selective Latin American countries.
The Company expects to enter into licensing agreements and receive certain
licensing payments from licensing partners during the upcoming 12 months. In
January 1997, the Company, through NexMed International, signed a license
agreement with Lotus Medical Supply, Inc., a Taiwanese company. In addition, on
October 2, 1997, the Company entered into a Supply and Distribution Agreement
with Finadiet (see Part I, Item 1, "Description of Business"), an Argentinian
manufacturer and distributor of urological pharmaceutical products, for the
distribution of the Alprox-TD(TM) cream in Argentina and Uruguay. Under the
agreement, the Company would manufacture and supply the Alprox-TD(TM) cream
under a new trademark and packaging proposed for Latin America. Based on reports
by Finadiet, the Company expects the product to be approved for distribution in
Argentina by June 1998. Accordingly, the Company is currently seeking additional
funding for its planned production activities in Canada. The Company believes
that the regulatory approval of Alprox-TD(TM) in Argentina will
23
<PAGE>
represent an important milestone for initiating the regulatory processes in
South American countries which are members of Mercosul, the regional common
market. Moreover, it is anticipated that data from planned clinical studies
would be valuable for the regulatory processes in the U.S. and other countries.
In addition, the Company has received inquiries from pharmaceutical
companies worldwide 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 licensing or contract development fees within the next twelve months.
Previously, the Company had explored the possibility of expanding its
domestic laboratory research capability by 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. However, while the Company did expand
operations at its topical formulation development laboratories in Lawrence,
Kansas and is continuing with its existing biosciences operations in Fort Worth,
it has decided to postpone the commitment of resources necessary for expansion
of the Fort Worth laboratories until additional financing, including government
research grants, is available.
The Company has incurred cumulative net operating losses of $7,959,629
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 Alprox-TD(TM), the Company's first new
product based on the NexACT(TM) technology. Accordingly, the Company will
require additional funding to reach certain goals. In order to complete the
pre-Phase II toxicology studies for the Alprox-TD(TM) cream and Phase I studies
on the Femprox(TM) formulation, and file an IDE for the Viratrol(R) device in
the U.S., the Company will need to raise $2 million. As of December 31, 1997,
NexMed Asia had contributed $1.87 million to the China Joint Venture. The
Company intends to invest the remaining $300,000 of its first year obligation
for the China Joint Venture by the third quarter of 1998. In addition, the
Company expects to allocate $1.5 million for international operations, which
will include the initiation of production activities in Canada of the Alprox-
TD(TM) cream for, upon regulatory approval, its introduction in the Argentinian
and Uruguayan markets.
The Company does not expect to acquire any significant or expensive large-
scale equipment or instruments within the coming 12 months, with the exception
that the China Joint Venture plans to spend $650,000 for upgrading its
production facilities and acquiring new equipment. The Company believes that
its planned $3.5 million investment in the China Joint Venture will include
adequate funding for the proposed
24
<PAGE>
renovation work in order to upgrade certain of its operations to revised Chinese
GMP standards by the third quarter of 1997, as well as for the commercialization
of the Alprox-TD(TM) cream product, once regulatory approval is obtained in
China.
Currently, the Company has 15 full-time employees in the U.S. and Hong Kong
and expects during the next 12 months to hire five additional employees, at the
anticipated cost with regard to salary and benefits to be approximately $1.5
million per annum.
In order to meet the aforementioned immediate funding requirements, repay
short-term indebtedness and maintain day-to-day operations, the Company
estimates that it will require $6.5 million over the next 12 months. The
Company's ability to implement the foregoing plan of operation is dependent on
its ability to raise sufficient equity capital, which the Company currently
intends to seek through private placements. The Company is currently engaged in
discussions with prospective investors. If the Company is unable to obtain
adequate funding in a timely manner, it will most likely have to modify,
postpone, curtail or abandon a number of the plans and initiatives discussed
above.
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, distribution and marketing difficulties
that may be beyond the Company's financial or technical abilities to resolve
satisfactorily.
This report 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 such
projections.
25
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
NEXMED, INC.
(a development stage company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS................................................................. 27
INDEPENDENT AUDITORS REPORT....................................................................... 28
FINANCIAL STATEMENTS
Consolidated Balance Sheet - December 31, 1997............................................... 29
Consolidated Statement of Operations for the years ended December 31, 1997 and 1996,
and for the period from inception (January 1, 1994) through December 31, 1997.............. 30
Consolidated Statement of Changes in Stockholders' Equity for the period from inception
(January 1, 1994) through December 31, 1997................................................ 31
Consolidated Statement of Cash Flows for the years ended December 31, 1997 and 1996,
and for the period from inception (January 1, 1994) through December 31, 1997.............. 32
NOTES TO FINANCIAL STATEMENTS..................................................................... 33
</TABLE>
26
<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
subsidiaries (a development stage company) (the "Company") at December 31, 1997,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 1997 and the period from inception
(January 1, 1994) through December 31, 1997, 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 12% of the cumulative
net loss and 9%, 0% and 6% of the cumulative net cash flows from operating,
investing and financing activities, respectively, from inception (January 1,
1994) through December 31, 1997. 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 audits 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
audits and the reports of other auditors provide a reasonable basis for the
opinion expressed above.
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
incurred 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
March 2, 1998
27
<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 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 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
28
<PAGE>
NexMed, Inc.
(A development stage company)
Consolidated Balance Sheet
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
December 31, 1997
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 133,189
Prepaid expenses 69,254
----------
Total current assets 202,443
----------
Equipment 218,294
Furniture 18,001
----------
Total equipment and furniture 236,295
Less accumulated depreciation 35,942
----------
200,353
----------
Debt issuance costs, net of accumulated amortization of $8,588 60,117
Advance to Joint Venture 1,870,000
----------
Total Assets $2,332,913
==========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $2,568,583
Accounts payable 608,313
Accrued expenses 82,276
----------
Total current liabilities 3,259,172
----------
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,
6,180,098 shares issued and outstanding 6,180
Additional paid-in capital 7,300,453
Accumulated deficit (8,181,434)
----------
(874,801)
Less: Deferred compensation (51,458)
----------
Total stockholders' equity (926,259)
----------
Total liabilities and stockholders' equity $2,332,913
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
NexMed, Inc.
(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,
1997 1996 1997
<S> <C> <C> <C>
Revenue $ 56,175 $ -- $ 56,175
----------- ----------- -----------
Operating expenses
Selling, general and administrative 1,824,857 2,076,360 4,047,766
Research and development 2,078,517 1,040,396 3,951,280
----------- ----------- -----------
Total operating expenses 3,903,374 3,116,756 7,999,046
----------- ----------- -----------
Loss from operations (3,847,199) (3,116,756) (7,942,871)
Interest expense, net 10,267 1,637 16,758
----------- ----------- -----------
Net loss $(3,857,466) $(3,118,393) $(7,959,629)
=========== =========== ===========
Basic and diluted loss per share $ (.63) $ (.72)
=========== ===========
Weighted average common shares outstanding
used for basic and diluted loss per share 6,077,475 4,327,548
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
NexMed, Inc.
(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
service 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 897,500 897 1,605,199 -- -- 1,606,096
Issuance of compensatory
options to consultants -- -- 317,200 -- (60,062) 257,138
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 compensatory
warrants to an advisor -- -- 109,500 -- -- 109,500
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
Issuance of common stock
for cash 1,062,500 1,062 2,093,908 -- -- 2,094,970
Issuance of common stock
with note payable 7,500 8 14,992 -- -- 15,000
Issuance of common stock upon
conversion of note payable 13,750 14 27,486 -- -- 27,500
Issuance of common stock upon
exercise of stock options 25,000 25 6,225 -- -- 6,250
Issuance of compensatory
options to consultants -- -- 129,400 -- (81,600) 47,800
Issuance of warrants with
notes payable -- -- 137,410 -- -- 137,410
Issuance of compensatory
warrants to a consultant -- -- 44,000 -- -- 44,000
Amortization of deferred
compensation expense 90,204 90,204
Net loss -- -- -- (3,857,466) -- (3,857,466)
---------- --------- ---------- ----------- --------- -----------
Balance at December 31, 1997 6,180,098 $ 6,180 $7,300,453 $(8,181,434) $(51,458) $ (926,259)
========== ========= ========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
NexMed, Inc.
(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,
1997 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) $(3,857,466) $(3,118,393) $(7,959,629)
Adjustments to reconcile net loss to net cash
from operating activities
Depreciation 31,684 4,258 35,942
Amortization of debt discount and debt
issuance costs 32,176 -- 32,176
Stock issued for patents and other rights -- 150,000 532,775
Noncash compensation expense 181,984 1,837,888 2,209,171
Noncash interest expense 2,519 -- 2,519
Increase in prepaid expense (39,254) (30,000) (69,254)
Decrease in other assets -- 9,800 1,825
Increase in accounts payable 522,905 79,731 608,312
Increase in accrued liabilities 76,279 5,998 82,277
----------- ----------- -----------
Net cash used in operating activities (3,049,173) (1,060,718) (4,523,886)
----------- ----------- -----------
Cash flows from investing activities
Capital expenditures (147,135) (89,160) (236,295)
Advances to joint ventures (1,570,000) (300,000) (1,870,000)
----------- ----------- -----------
Net cash used in investing activities (1,717,135) (389,160) (2,106,295)
----------- ----------- -----------
Cash flows from financing activities
Issuance of common stock, net of offering costs 2,094,970 1,606,096 4,101,888
Proceeds from the exercise of options 6,250 -- 6,250
Issuance of notes payable 2,628,700 140,000 2,793,700
Repayment of notes payable (25,000) (115,000) (140,000)
----------- ----------- -----------
Net cash from financing activities 4,704,920 1,631,096 6,761,838
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (61,388) 181,218 131,657
Cash and cash equivalents
Beginning of period 194,577 13,359 1,532
----------- ----------- -----------
End of period $ 133,189 $ 194,577 $ 133,189
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
NexMed, Inc.
(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 $7,959,629 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. 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 subsidiaries, NexMed (U.S.A.), Inc., NexMed (Holdings),
Inc., NexMed International Limited, a British Virgin Islands Company based in
Hong Kong, NexMed (Asia) Limited, a Hong Kong Company, and NexMed (Americas)
Limited, a Nova Scotia Company. 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, notes payable and accounts
payable and accrued expenses approximates fair value due to the relatively
short maturity of these instruments.
33
<PAGE>
NexMed, Inc.
(A development stage company)
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. 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
Effective December 31, 1997, the Company adopted Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128") which requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings
per share ("Diluted EPS") by all entities that have publicly traded common
stock or potential common stock (options, warrants, convertible securities or
contingent stack arrangements). Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The
computation of diluted EPS does not assume conversion, exercise or contingent
exercise of securities that would have an antidilutive effect on earnings.
All prior periods presented have been restated for the adoption of FAS 128.
The adoption of FAS 128 did not have any impact on the loss per share of
prior periods.
At December 31, 1997, outstanding options to purchase 2,930,000 shares of
common stock with exercise prices ranging from $.25 to $2.00 have been
excluded from the computation of diluted loss per share as they are
antidilutive. Outstanding warrants to purchase 1,085,000 shares of common
stock with exercise prices ranging from $2.00 to $4.00 have also been
excluded from the computation of diluted loss per share as they are
antidilutive. Common shares issuable upon conversion of a note payable have
also been excluded from the computation of diluted loss per share as they are
antidilutive.
Accounting estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
34
<PAGE>
NexMed, Inc.
(A development stage company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Accounting for stock based compensation
During 1996 the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). As provided by
SFAS 123, the Company has elected to continue to account for its stock-based
compensation programs according to the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation expense has been recognized to the extent of
employee or director services rendered based on the intrinsic value of
compensatory options or shares granted under the plans. The Company has
adopted the disclosure provisions required by SFAS 123.
Concentration of credit risk
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.
Supplemental cash flow information
The Company paid interest of $19,873 and $2,734 in 1997 and 1996,
respectively.
In February 1997, a holder of a $25,000 note payable elected to convert the
principal and accrued but unpaid interest, in the amount of $2,500 thereon,
into 13,750 shares of the Company's common stock.
New accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("FAS 130"), which requires the presentation of the components of
comprehensive income in the company's financial statement for reporting
periods beginning subsequent to December 15, 1997. Comprehensive income is
defined as the change in the company's equity during a financial reporting
period from transactions and other circumstances from non-owner sources
(including cumulative translation adjustments, minimum pension liabilities
and unrealized gains/losses on available for sale securities). The adoption
of FAS 130 is not expected to have a material impact on the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"), which requires disclosure of
information about operating segments in annual financial statements for
reporting periods beginning subsequent to December 15, 1997. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. The adoption of FAS 131 is not expected to have a
material impact on the Company's financial statements.
3. Joint Venture Agreements
In July 1997, the Company, through its wholly-owned subsidiary, NexMed
(Asia) Limited, entered into an agreement to form a Chinese joint-venture
company, NexMed Pharmaceuticals (Zhongshan) Ltd. (the "JV") with Zhongshan
Xiaolan Pharmaceuticals Factory. In September 1997, the Joint Venture
35
<PAGE>
NexMed, Inc.
(A development stage company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
received all necessary Chinese government approvals. Under the terms of the
agreement, the Company was required to make an initial contribution of
$2,170,000, and is required to make additional contributions by September
1999 and 2000 of $700,000 and $630,000, respectively, in exchange for 70% of
the registered capital of the JV. As of December 31, 1997, the Company had
placed $1,870,000 of the initial payment in escrow, pending funding of the
entire $2,170,000 initial payment. Effective January 1, 1998, the Company was
given an extension of time to fund the remaining portion of the initial
payment and the $1,870,000 was released from escrow (see Note 10).
During 1996, the Company, through its wholly-owned subsidiary, NexMed
International Limited, entered into an agreement to form a Chinese
joint-venture company with Guangdong Pharmaceutical and Health Products
Import-Export Company and Zhongshan Shiqi Pharmaceutical Factory (the
"Guangdong JV"). In July 1997, the Company and its Guangdong JV partners
terminated their agreement to form the Guangdong JV. In September 1997,
$300,000 which the Company had advanced to its Guangdong JV partners to form
the Guangdong JV was returned.
4. Notes Payable
In January 1997, the Company issued a $100,000 convertible promissory note
bearing interest at 10% per annum. The note is due on 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 valued these shares at $15,000 ($2.00 per share) which was
accounted for as debt discount and amortized over the life of the note (see
Note 10).
In October 1997, the Company issued a $200,000 promissory note. The principal
amount of the note, together with interest in the amount of $30,000, is due
on April 17, 1998.
In November 1997, the Company issued a $458,700 promissory note. The
principal amount of the note, together with interest in the amount of
$24,400, is due on January 14, 1998 (see Note 10).
In November 1997, the Company completed a private placement of unsecured
subordinated notes bearing interest at 6% per annum (the "6% Notes"), in the
cumulative principal amount of $1,820,000. The 6% Notes, together with
accrued but unpaid interest thereon, are due on November 16, 1998. In
conjunction with the issuance of the 6% Notes, the Company granted warrants
to purchase shares of the Company's common stock to the holders of the 6%
Notes and to a placement agent (see Note 7).
In December 1997, the Company issued a $50,000 promissory note bearing
interest at 15% per annum. The note and unpaid interest are due on June 27,
1998.
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,
36
<PAGE>
NexMed, Inc.
(A development stage company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
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 $2.00 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 ($2.00 per
share), resulting in a charge to research and development expense.
During November 1996, the Company sold 322,500 shares of common stock at
$2.00 share and received net proceeds of $620,000.
In February 1997, the holder of a $25,000 note payable elected to convert the
principal and interest due into 13,750 shares of common stock.
In February 1997, the Company completed a private placement of 1,062,500
shares of common stock at $2.00 per share in a private placement, receiving
net proceeds of $2,094,970.
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
37
<PAGE>
NexMed, Inc.
(A development stage company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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. In July 1997, the Board of Directors increased the
number of shares reserved for the Incentive Plan and Recognition Plan to a
total of 4,000,000.
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 $1.00 per
share. The estimated fair value of the Company's common stock was $2.00 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 1997 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 $2.00 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 $2.00 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 $2.00 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.
38
<PAGE>
NexMed, Inc.
(A development stage company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In December 1996, under the Recognition Plan, the Company also issued 60,000
options to a director at an exercise price of $2.00 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 $2.00 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. As of December 31, 1997, the consultant
did not meet the performance goals, and the options were cancelled.
During 1997, the Company granted 475,000 options to employees and directors
under the Incentive Plan at an exercise price of $2.00 per share, which was
the estimated fair value of the common stock on the date of grant. 400,000 of
such options vest in equal installments over five years and 75,000 of such
options vest in equal installments over three years. All of such options
expire in 2007.
During 1997, the Company granted 85,000 options to a director and a
consultant under the Recognition Plan at an exercise price of $2.00 per
share, which was the estimated fair value of the common stock on the date of
grant. 10,000 of such options are immediately exercisable and the remaining
75,000 options vest in equal installments in December 1997, 1998 and 1999 and
expire in 2007. During the year ended December 31, 1997, the Company
recognized $81,600 in deferred compensation expense related to these options
which is being amortized over the vesting period.
During 1997, the Company also granted 50,000 options to a consultant under
the Recognition Plan at an exercise price of $2.00 per share, which was the
estimated fair value of the common stock on the date of grant. The options
are immediately exercisable and expire in 2007. The Company has recorded
$47,800 in expense related to these options during the year ended December
31, 1997.
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:
Dividend yield 0.0%
Risk-free yields 5.89% - 6.71%
Expected volatility 65.0%
Option terms 1-10 years
39
<PAGE>
NexMed, Inc.
(A development stage company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
<S> <C> <C>
Outstanding at December 31, 1994 - -
Granted 900,000 $ .25
---------
Outstanding at December 31, 1995 900,000 $ .25
Granted 1,615,000 $1.98
---------
Outstanding at December 31, 1996 2,515,000 $1.36
Granted 600,000 $2.00
Exercised (25,000) $ .25
Forfeited (100,000) $2.00
Cancelled (60,000) $2.00
---------
Outstanding at December 31, 1997 at $.25 per share 835,000 $ .25
Outstanding at December 31, 1997 at $1.00 per share 40,000 $1.00
Outstanding at December 31, 1997 at $2.00 per share 2,055,000 $2.00
---------
Total outstanding at December 31, 1997 2,930,000 $1.49
=========
Exercisable at December 31, 1997 1,478,000 $1.14
=========
Options available for grant at December 31, 1997 1,985,000
=========
Weighted average remaining contractual life for options at $.25 3.4 years
Weighted average remaining contractual life for options at $1.00 8.9 years
Weighted average remaining contractual life for options at $2.00 9.1 years
</TABLE>
Had compensation cost for option grants to employees pursuant to the
Company's stock option plans been determined based upon the fair value at
the grant date for awards under the plan consistent with the methodology
prescribed under FAS 123, the Company's net loss and net loss per share, for
the years ended December 31, 1997 and 1996, would have been increased by
approximately $455,200 and $91,200, respectively, or $.07 and $.02 per
share, respectively.
7. Warrants
During November 1996, the Board of Directors approved the issuance of
warrants to purchase 150,000 shares of common stock at $1.00 per share to
its outside legal counsel as consideration for legal services performed
relating to the sale of common stock in November 1997 and other matters. The
estimated fair value of the Company's common 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. The issue of these warrants resulted
in additional legal expense of $109,500 in 1996. No warrants have been
exercised as of December 31, 1997.
40
<PAGE>
NexMed, Inc.
(A development stage company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In conjunction with the issuance of the 6% Notes (see Note 4), the note
holders received warrants to purchase 455,000 shares of the Company's common
stock at an exercise price of $4.00. The warrants are immediately exercisable
and have a term of one year. The estimated fair value of the Company's common
stock was $2.00 per share at the time of issuance. The Company has valued the
warrants at $68,705 which has been accounted for as a debt discount and is
being amortized over the life of the 6% Notes. Additionally, the Company
issued 455,000 warrants to purchase shares of the Company's common stock at
an exercise price of $4.00 per share to a placement agent. The warrants are
immediately exercisable and have a term of one year. The estimated fair value
of the Company's common stock was $2.00 per share at the time of issuance.
The Company has valued the warrants at $68,705 which has been classified as
debt issuance costs and is being amortized over the life of the 6% Notes.
In December 1997, the Company issued warrants to purchase 50,000 shares of
common stock at $4.00 per share to a consultant. The estimated fair value of
the Company's common stock was $2.00 per share at the time of issuance. The
warrants have a term of five years and are immediately exercisable. The
Company recognized expense of $44,000 for the year ended December 31, 1997
related to these warrants.
8. Income Taxes
The Company has incurred losses since inception which have generated net
operating loss carryforwards of approximately $8,000,000 for federal and
state income tax purposes. These carryforwards are available to offset future
taxable income and expire beginning in 2011 for federal income tax purposes.
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, 1997 of approximately $3,180,000. In consideration of
the Company's accumulated losses and the uncertainty of its ability to
utilize this deferred tax benefit in the future, the Company has recorded a
valuation allowance of an equal amount on such date to fully offset the
deferred tax benefit amount.
For the years ended December 31, 1997 and 1996, 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.
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.
41
<PAGE>
NexMed, Inc.
(A development stage company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company leases office space under operating lease agreements expiring in
February 2003. Future minimum payments under noncancellable operating leases
with initial or remaining terms of one year or more, consist of the following
at December 31, 1997:
1998 $124,000
1999 188,100
2000 148,100
2001 131,000
2002 131,000
Thereafter 21,800
--------
Total $744,000
========
The Company also leases office space under a short-term lease agreement. Rent
expense was $75,200 and $8,500 in 1997 and 1996, respectively.
Litigation
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
requested damages of $388,062, plus interest, costs and attorney's fees. In
November 1997, the claim was dismissed without prejudice on procedural
grounds. There is a possibility that the plaintiff may file an amended
compliant. The Company believes that this claim is without merit and, should
an amended complaint be filed, intends to defend its position vigorously.
10. Subsequent Events
In January 1998, the Company and the holder of a $100,000 convertible note
payable agreed to extended the term of the note until January 1, 1999,
increase the interest rate to 12% per annum and lower the conversion price to
$1.25 per share. Additionally, the note holder was given the right to request
payment of the note if the Company raises additional equity capital in excess
of $1,000,000 (see Note 4).
In January 1998, the Company and the holder of a $458,700 note payable rolled
over the outstanding principal and unpaid interest, in the amount of $24,400,
into a new note. The new note, in the principal amount of $483,100, bears
interest at 12% per annum and is payable, together with accrued but unpaid
interest, in July 1998. Additionally, the note holder was given the right to
request payment of the note if the Company raises additional equity capital
in excess of $3,000,000 (see Note 4).
In January and February 1998, the Company issued notes payable in the
aggregate principal amount of $216,000. The notes bear interest at rates
ranging from 12% to 15% per annum. The notes are payable, together with
accrued but unpaid interest, on various dates through January 1999.
42
<PAGE>
NexMed, Inc.
(A development stage company)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Effective January 1998, the Company entered into a consulting agreement with
an investor relations firm expiring in December 1998. Under the terms of the
agreement, the investor relations firm is to receive compensation of $6,000
per month and options to purchase 120,000 shares of the Company's common
stock. 60,000 of such options have an exercise price of $2.00 per share and
vest on March 1, 1998. The remaining 60,000 of such options have an exercise
price of $3.00 per share and will vest on March 1, 1999, if the consulting
agreement is renewed.
Effective January 1, 1998, the Company's JV partner, Zhongshan Xiaolan
Pharmaceuticals Factory, agreed to extend the due date for completing the
initial payment due under the JV agreement until September 25, 1998 (see Note
3). The $1,870,000 held in escrow as of December 31, 1997 was released to the
JV and the parties agreed that the effective date for completion of the
initial payment would be January 1, 1998. The parties further agreed that if
the Company was unable to complete the initial payment by September 25, 1998,
the Company and the JV partner would re-divide the percentage ownership of
the JV according to the ratio of actual investments. As of and for the year
ended December 31, 1997, the JV had unaudited proforma assets and revenues of
approximately $5,100,000 and $ 6,900,000, respectively.
43
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Executive Officers and Directors
- --------------------------------
The Executive Officers and Directors of the Company are set forth below.
NAME AGE TITLE
- ---- --- -----
Y. Joseph Mo, Ph.D. 50 Chairman of the Board of Directors,
President and Chief Executive Officer
James L. Yeager, Ph.D. 51 Vice President, Business Development
Vivian H. Liu 36 Vice President, Corporate Affairs and
Secretary
Gilbert S. Banker, Ph.D. 66 Director
Robert W. Gracy, Ph.D. 57 Director
Yu-Chung Wei 35 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 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
44
<PAGE>
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, Corporate Affairs 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. In
addition, from September 1995 to September 1997, Ms. Liu had the title of
Treasurer. 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,
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.
45
<PAGE>
Dr. Gracy and Mr. Wei are Class I Directors and Dr. Banker is a Class II
Director with terms that expire at the 1998 annual meeting of shareholders, to
be held on May 15, 1998, 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/Virazole. Dr. Dimitrijevich
received his Ph.D. in Carbohydrate Chemistry 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
46
<PAGE>
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.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Upon effectiveness on May 13, 1997 of the Company's registration statement
on Form 10-SB, filed pursuant to Section 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), at which time the Company voluntarily
became a reporting company, Reports on Form 3 should have been filed at that
time by the Company's officers and directors and beneficial owners of more than
10 percent of the Company's Common Stock, but were not filed on a timely basis.
The following persons filed Reports on Form 3 but not on a timely basis:
Gilbert S. Banker, Robert W. Gracy, and Yu-Chung Wei, all directors; Vivian H.
Liu, Vice President, Corporate Affairs and Secretary; Y. Joseph Mo, President
and Chief Executive Officer; James L. Yeager, Vice President, Business
Development; and Lian-Yin Chen, a ten percent shareholder. In addition,
pursuant to irrevocable proxies, terminated in December 1997 (see Part III, Item
11, "Security Ownership of Certain Beneficial Owners and Management"), Dr. Mo
had voting power over the shares of Common Stock of the following individuals,
who also filed Form 3 Reports but not on a timely basis: Mei-Li Chang, Chun
Chen, I-Chin Chen, Tien Sin Chen, Charles Hok Sau Cheung, Chiu Hsia Chu, Ma
Tsai-Feng Chu, Yia-Hwa Ding, I-Der Huang, Wen-Gei Lee, Tran-Ming Lin, Tzi-Chen
Lin, Li-Hwa Su, Meng-Tun Su, Chen Wang, Mei-Huei Wang and Dun-Seh Wu. Dr. Mo
and the 17 listed individuals chose to file a single Form 3 as members of a
"group" for purposes of Section 13(d) of the Exchange Act. Dr. Mo no longer has
voting power over the shares of the aforementioned individuals, and such persons
are no longer subject to the requirements of Section 16 of the Exchange Act.
In addition, Lian-Yin Chen sold 875,000 shares of Common Stock to Golden
Water Investment Corporation on August 29, 1997, but Ms. Chen did not file a
Form 4, and Golden Water Investment Corporation did not file a Form 3, until
November 1997. The Form 4 was due on September 10, 1997 and the Form 3 was due
on August 29, 1997.
47
<PAGE>
Finally, Messrs. Wen-Gei Lee and Trang-Min Lin each sold 100,000 shares of
Common Stock on October 5, 1997, but did not file Form 4 Reports, which were due
on November 10, 1997, until November 14, 1997.
Item 10. Executive Compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company during
the fiscal years ended December 31, 1997, 1996 and 1995 to the Chief Executive
Officer and its three other most highly compensated executive officers:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
Fiscal ---------------- --------------------------
Name and Position Year Salary Other Restricted Stock Awards(5)
- ----------------- ------ -------- ------ --------------------------
<S> <C> <C> <C> <C>
Y. Joseph Mo, Ph.D. 1997 $120,000 $ -- --
Chairman of the Board of 1996 120,000 -- $500,000
Directors, President and 1995 -- 20,000 --
Chief Executive Officer(1)
James A. Ditanna (2) 1997 33,333 12,000 --
Vice President 1996 -- -- --
1995 -- -- --
James L. Yeager, Ph.D. 1997 100,000 -- --
Vice President, Business 1996 -- 20,000 75,000
Development(3) 1995 -- -- --
Vivian H. Liu 1997 87,333 -- --
Vice President, Corporate 1996 63,666 -- 50,000
Affairs and Secretary(4) 1995 16,000 -- --
</TABLE>
(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) Mr. Ditanna received $12,000 in consulting fees from May through August
1997, and began receiving a salary of $100,000 per year in September 1997.
Mr. Ditanna resigned from the Company effective February 14, 1998.
(3) In 1996, Dr. Yeager was paid a $20,000 consulting fee. He began receiving
a salary of $100,000 per year in 1997.
(4) 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.
48
<PAGE>
(5) In February 1996, Drs. Mo and Yeager and Ms. Liu received 1 million,
150,000 and 100,000 shares of Common Stock, respectively, valued at $.50
per share, for services provided to the Company.
EMPLOYMENT AGREEMENTS
There are currently no employment agreements between the Company and any of
its executive officers.
DIRECTOR COMPENSATION
Except for the reimbursement of travel expenses and the awarding of
incentive stock options, described in "Stock Option and Incentive Award Plans"
below, there is no arrangement for the compensation of directors.
STOCK OPTION INFORMATION
The following table sets forth information concerning options granted
during fiscal 1997 to the executives named in the Summary Compensation Table
above.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total
Number of Options Market
Securities Granted to Exercise Price of
Underlying Employees Price Underlying
Options in Fiscal ($ Per Security on Expiration
Name Granted Year share) Date of Grant Date
- --------------------- ------------- -------------- -------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Y. Joseph Mo, Ph.D. -- -- -- -- --
James A. Ditanna(1) 100,000 21.05 2.00 2.00(2) 8/1/07
James L. Yeager, Ph.D. -- -- -- -- --
Vivian H. Liu -- -- -- -- --
</TABLE>
(1) In July 1997, Mr. Ditanna received options to purchase 100,000 shares of
Common Stock, exercisable for a ten-year term at $2.00 per share, through
the NexMed, Inc. Stock Option and Long-Term Compensation Plan (see "Stock
Option and Incentive Award Plans" below). The options were to vest in five
equal annual installments commencing July 31, 1998. Mr. Dittanna resigned
from the Company effective February 14, 1998, prior to the vesting of any
of his options.
49
<PAGE>
(2) Estimated fair market value on date of grant (July 31, 1997.)
The following table sets forth information concerning the value of unexercised
options as of December 31, 1997 held by the executives named in the Summary
Compensation Table above. 25,000 options were exercised during 1997 at $0.25
per share.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options at Fiscal Year Money Options at Fiscal Year
End [Exercisable (E)/ End [Exercisable (E)/
Name Unexercisable (U)] Unexercisable (U)] (2)
---- ---------------------- ----------------------------
<S> <C> <C>
Y. Joseph Mo, Ph.D. 610,000 (E) $700,000 (E)
650,000 (U) 175,000 (U)
James A. Ditanna (1) 0 (E) 0 (E)
100,000 (U) 0 (U)
James L. Yeager, Ph.D. 55,000 (E) 8,750 (E)
130,000 (U) 0 (U)
Vivian H. Liu 160,000 (E) 210,000 (E)
120,000 (U) 52,500 (U)
</TABLE>
(1) Mr. Ditanna resigned from the Company effective February 14, 1998, prior to
the vesting of any of his options.
(2) Based on a selling price of $2.00, the estimated fair market value at the
Common Stock, for the three months ended December 31, 1997.
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 were reserved by the Company for issuance of awards under the Stock
Option Plan and 500,000 shares of Common Stock were reserved for awards under
the Recognition Plan. On July 28, 1997, the Company reserved an
50
<PAGE>
additional 1,500,000 shares of Common Stock for awards under the Stock Option
Plan and 500,000 shares of Common Stock for awards under the Recognition Plan,
subject to shareholder approval. 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 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.
In December 1996, 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.
During 1997, the Company granted 475,000 options to employees and directors
under the Incentive Plan at an exercise price of $2.00 per share, which was the
estimated fair value of the common stock on the date of grant. 400,000 of such
options vest in equal installments over five years and 75,000 of such options
vest in equal installments over three years. All such options expire in 2007.
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
51
<PAGE>
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 Plan provides for incentive award grants
that are substantially similar to those made under the Stock Option Plan. It is
contemplated that the Recognition 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.
In December 1996, 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.
In December 1996, the Company also issued 50,000 options under the
Recognition Plan to a consultant at an exercise price of $2.00 per share, which
was the estimated fair value of the common stock at that time. If the consultant
had met certain performance goals the options would have vested in December 1997
and expired in December 2006. If he did not meet the performance goals, the
options would expire on December 31, 1997. As of December 31, 1997, the
consultant did not meet the performance goals, and the options were canceled.
During 1997, the Company granted 85,000 options to a director and a
consultant under the Recognition Plan at an exercise price of $2.00 per share,
which was the estimated fair value of the common stock on the date of grant.
10,000 of such options are immediately exercisable and the remaining 75,000
options vest in equal installments in December 1997, 1998 and 1999 and expire in
2007.
52
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information, as of March 20, 1998, 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.
<TABLE>
<CAPTION>
Name, Position Number of Shares Percent of
and Address(1) Beneficially Owned(2) Shares(%)
- -------------- --------------------- ----------
<S> <C> <C>
Y. Joseph Mo, Ph.D., 1,610,000 (3) 23.66
Chairman of the Board of
Directors, President and
Chief Executive Officer
James L. Yeager, Ph.D., 205,000 (4) 3.28
Vice President, Business
Development
Vivian H. Liu, 265,000 (5) 4.17
Vice President,
Corporate Affairs and Secretary
Gilbert S. Banker, Ph.D., 130,000 (6) 2.07
Director
Robert W. Gracy, Ph.D., 110,000 (7) 1.75
Director
Yu-Chung Wei 25,000 (8) 0.40
Director
All Executive Officers 2,345,000 (9) 32.61
and Directors as a
Group (six persons)
Golden Water Investment 875,000 14.12
Corporation
Number 10,2F, Alley III
Han-Chou South Road
Taipei, Taiwan (10)
</TABLE>
53
<PAGE>
<TABLE>
<S> <C> <C>
C.D.C. Venture Investment 500,000 8.07
(B.V.I.) Ltd.(11)
25F Wing On Centre
111 Connaught Road
Central, Hong Kong
</TABLE>
(1) The address for the Executive Officers and Directors is: 350 Corporate
Boulevard, Robbinsville, New Jersey, 08691.
(2) All shares are solely and directly owned, with sole voting and dispositive
power.
(3) Includes 610,000 shares issuable upon exercise of immediately exercisable
stock options.
(4) Includes 55,000 shares issuable upon exercise of immediately exercisable
stock options.
(5) Includes 160,000 shares issuable upon exercise of immediately exercisable
stock options.
(6) Includes 80,000 shares issuable upon exercise of immediately exercisable
stock options.
(7) Includes 90,000 shares issuable upon exercise of immediately exercisable
stock options.
(8) Represents 25,000 shares issuable upon exercise of immediately exercisable
stock options.
(9) Includes 995,000 shares issuable upon exercise of immediately exercisable
stock options.
(10) Golden Water Investment Corporation is a privately-held investment bank
incorporated in the British Virgin Islands and based in Taiwan.
(11) C.D.C. 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
had the right to vote or execute written consents with respect to all shares
which such shareholders were 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. On December 18, 1997, the Irrevocable Proxies were terminated.
ITEM 12. 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
54
<PAGE>
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 III, Item 10, "Executive Compensation -- Stock Option
Information -- 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.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits (in accordance with Item 601 of Regulation S-B)
--------------------------------------------------------
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 2.1 filed with the Company's
Form 10-SB filed with the Commission on March 14, 1997)
3.2 By-laws of the Company (incorporated by reference to Exhibit 2.2 filed
with the Company's Form 10-SB filed with the Commission on March 14,
1997)
3.3 Amendment to By-laws of the Company (incorporated by reference to
Exhibit 2.3 filed with the Company's Form 10-SB filed with the
Commission on March 14, 1997)
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 3.1 filed with the Company's Form 10-SB filed with the
Commission on March 14, 1997)
9.1 Form of Irrevocable Proxy (incorporated by reference to Exhibit 5.1
filed with the Company's Form 10-SB/A filed with the Commission on May
13, 1997)
10.1 Technology Acquisition Agreement between the Company and Odontex, Inc.
(incorporated by reference to Exhibit 6.1 filed with the Company's
Form 10-SB filed with the Commission on March 14, 1997)
55
<PAGE>
10.2 Research Agreement between the Company and the University of Kansas,
effective June 15, 1996 and modified November 22, 1996 (incorporated
by reference to Exhibit 6.2 filed with the Company's Form 10-SB/A
filed with the Commission on June 5, 1997)
10.3 Research Agreement between the Company and the University of Kansas,
executed November 1996 (incorporated by reference to Exhibit 6.3 filed
with the Company's Form 10-SB/A filed with the Commission on June 5,
1997)
10.4 The NexMed, Inc. Stock Option and Long-Term Incentive Compensation
Plan (incorporated by reference to Exhibit 6.4 filed with the
Company's Form 10-SB/A filed with the Commission on June 5, 1997)
10.5 The NexMed, Inc. Recognition and Retention Stock Incentive Plan
(incorporated by reference to Exhibit 6.5 filed with the Company's
Form 10-SB/A filed with the Commission on June 5, 1997)
10.6 The NexMed, Inc. Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 6.6 filed with the Company's Form 10-SB/A filed
with the Commission on June 5, 1997)
10.7 License Agreement between the Company and Lotus Medical Supply, Inc.
(incorporated by reference to Exhibit 6.7 filed with the Company's
Form 10-SB/A filed with the Commission on July 2, 1997)
10.8 Agreement between the Company and Innapharma, Inc. regarding
alprostadil clinical studies (incorporated by reference to Exhibit 6.8
filed with the Company's Form 10-SB/A filed with the Commission on
July 2, 1997)
10.9 Agreement between the Company and Innapharma, Inc. regarding clinical
studies on the Viratrol(TM) device, including two amendments
(incorporated by reference to Exhibit 6.9 filed with the Company's
Form 10-SB/A filed with the Commission on July 2, 1997)
10.10 English Translation of Joint-Venture Agreement between NexMed (Asia)
Limited and Zhongshan City Xiaolan Pharmaceuticals Factory
(incorporated by reference to the identically numbered exhibit to the
Company's Form 8-K filed with the Commission on February 23, 1998)
*10.11 Supply and Distribution Agreement, dated October 2, 1997,
56
<PAGE>
between NexMed International Limited and Finadiet S.A.C.I.F.I.*
11.1 Statement re: Computation of Per Share Earnings
15.1 Letter on Change in Certifying Accountant (incorporated by reference
to Exhibit 12.2 filed with the Company's Form 10-SB/A filed with the
Commission on May 13, 1997)
21 Subsidiaries of the Company
27 Financial Data Schedule
* Confidential treatment has been requested as to certain portions of this
document.
(b) Reports on Form 8-K
-------------------
No current Reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
57
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
/s/
----------------------------------------
NEXMED, INC.
Date: March 31, 1998 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 Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: March 31, 1998 By: /s/ Y. Joseph Mo
------------------------------ -------------------------------------
Y. Joseph Mo
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 31, 1998 By: /s/ Vivian H. Liu
------------------------------ -------------------------------------
Vivian H. Liu,
Vice President, of Corporate Affairs
and Secretary (Principal Financial
and Accounting Officer)
Date: March 31, 1998 By: /s/ Gilbert S. Banker
------------------------------ -------------------------------------
Gilbert S. Banker
Director
Date: March 31, 1998 By: /s/ Robert W. Gracy
------------------------------ -------------------------------------
Robert W. Gracy
Director
Date: March 31, 1998 By: /s/ Yu-Chung Wei
------------------------------ -------------------------------------
Yu-Chung Wei
Director
58
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Description
Number -----------
- ------
<C> <S>
*10.11 Supply and Distribution Agreement, dated October 2, 1997, between
NexMed International Limited and Finadiet S.A.C.I.F.I.
11.1 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Company
27 Financial Data Schedule
</TABLE>
*Confidential treatment has been requested as to certain portions of this
document.
<PAGE>
EXHIBIT 10.11
[*Confidential treatment has been requested as to certain portions of this
document. Such portions, which have been omitted herein and replaced with
asterisks, have been filed separately with the Securities and Exchange
Commission.]
SUPPLY AND DISTRIBUTION AGREEMENT
This Supply and Distribution Agreement ("Agreement"), entered into as of
this 2nd day of October, 1997 by and between NexMed International Limited, a
British Virgin Islands corporation, with a principal place of business at Room
2208, Windsor House, 311 Gloucester Road, Causeway Bay, Hong Kong ("NexMed") and
Finadiet, S.A.C.I.F.I., a company organized under the laws of Argentina with a
principal place of business at Hipolito Yrigoyen 3771, Buenos Aires, Argentina.
("Finadiet").
WHEREAS, NexMed is a medical and pharmaceutical technology company with a
focus on the development and commercialization of, among other things, topical
treatment products based on a penetration enhancement technology; and
WHEREAS, NexMed has developed and is the proprietary owner of the NexMed
Know-How (as defined below) relating to a product containing alprostadil and
other ingredients which enhance performance and absorption of alprostadil (the
"Product"), and is the owner of the rights to manufacture and sell the Product;
and
WHEREAS, Finadiet desires to use, market, distribute and sell the Product
in Argentina and Uruguay.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, Finadiet and NexMed agree as follows:
I. DEFINITIONS
-----------
1.01 "Affiliate" shall mean, with respect to either party, any individual
---------
or any legally-distinct corporation, firm or other form of business
organization, which directly or indirectly owns, controls, is controlled by, or
is under common control with, a party hereto. An entity shall be regarded as
being in control of another entity if the former entity has the direct or
indirect power to order or cause the direction of the policies of the other
entity, whether through ownership of thirty percent (30%) or more of the
outstanding voting securities of that entity, through other dominant equity
ownership, or by contract, statute, regulation, or otherwise.
1.02 "Agreement Year" shall mean the twelve month period ending on an
--------------
anniversary of the date six months after the date of this Agreement.
<PAGE>
1.03 "Application for Approval" shall mean all submissions related to
------------------------
investigational use of the Product (such as an Investigational New Drug
Application filed with the FDA or the equivalent filing with a Regulatory
Authority in the Territories) and all submissions related to marketing approval
(such as a New Drug Application filed with the FDA or equivalent filing) which
will be provided by NexMed to Finadiet with such information, in the sole
discretion of NexMed, is believed to be necessary in connection with the use,
sale or distribution of the Product.
1.04 "Combination Product" shall have the meaning set forth in Section
-------------------
3.03 hereof.
1.05 "Dollars" means lawful currency of the United States of America.
-------
1.06 "Exclusive" shall mean that NexMed shall have no further right to
---------
sell or distribute the Product in the Territories.
1.07 "FDA" shall mean the United States Food and Drug Administration or
---
any successor Regulatory Authority in the United States.
1.08 "Know-How" shall mean any and all technical data, drawings,
--------
documentation, and other information, including information disclosed in an
issued patent or patent application. Know-How relating to the development and
commercialization of therapeutic products based on proprietary delivery systems
including topical treatment products based on a penetration enhancement
technology which may enable the active drug/ingredient to be better absorbed
through the skin, which is owned by NexMed as of the date hereof or is
independently generated, acquired or licensed, with the right to sublicense, by
NexMed during the term of this Agreement is referred to herein as "NexMed Know-
How."
1.09 "NexMed's Warehouse" shall mean a facility to be chosen by
------------------
NexMed, in its sole discretion, located within ten (10) miles of Toronto,
Canada.
1.10 "Person" shall mean any individual, estate, trust, partnership, joint
------
venture, association, firm, corporation, company, or other legal entity.
1.11 "Product" shall mean the pharmaceutical formulation containing
-------
alprostadil, either now known or hereafter developed which utilizes or
incorporates NexMed Know-How, which is intended and promoted for treatment of
male erectile dysfunction in humans and which is supplied by NexMed pursuant to
this Agreement, and shall include Spanish language instructions as to the use of
the Product, final labeling and packaging as will be sent to retail sales
outlets.
1.12 "Proprietary Information" shall have the meaning set forth in Section
-----------------------
2.02(a) hereof.
1.13 "Regulatory Authority" shall mean the agency, if any, of the national
--------------------
government within the Territories with which the Product must be registered or
by which the Product must be approved prior to use or sale in the Territories.
2
<PAGE>
1.14 "Territories" shall mean Argentina and Uruguay.
-----------
II. CLINICAL TRIALS AND REGULATORY APPROVALS
----------------------------------------
2.01 Funding of Regulatory Approvals.
-------------------------------
(a) Upon determination by NexMed that sufficient data has been
compiled to permit filing of Applications for Approval for the Product in the
Territories, Finadiet shall promptly prepare and file such Application for
Approval with the Regulatory Authority in the Territories, at the sole cost of
Finadiet. Each Application for Approval filed by Finadiet shall be filed in the
name of Finadiet. Finadiet shall supply to NexMed for approval, not less than
30 days prior to filing, copies and an English language translation of every
Application for Approval to be filed and each document submitted in connection
therewith. Finadiet shall also provide evidence of filing within 30 days
thereafter, and Finadiet will keep NexMed informed regarding the status of each
such Application for Approval. NexMed shall wherever practical be given notice
of, and a right to participate in, all meetings and discussions with Regulatory
Authorities. NexMed shall have sole ownership wherever practical of all
submissions regardless of the particular name in which the submissions are made.
In the event this Agreement terminates for whatever reason (other than because
of the breach by NexMed) or expires prior to the marketing of the Product,
Finadiet shall assign or otherwise cooperate in transferring to NexMed
Finadiet's rights under any Applications for Approval filed by it or any
approval granted pursuant thereto and NexMed shall have the right to take over
all of the contracts relating to (and the results of) all then existing animal
studies and all clinical trials.
(b) NexMed shall be given a permanent and irrevocable right of
reference to all regulatory submissions filed with any Regulatory Authority by
Finadiet or under its auspices and Finadiet shall (where required to be
effective) notify said Regulatory Authorities of such right.
(c) NexMed shall have the right to utilize all submissions to any
Regulatory Authority made by Finadiet and the information contained therein for
any purpose whatsoever.
2.02 Availability of Information. Subject always to the obligations set
---------------------------
forth in Article IV herein to maintain such information confidential, so long as
this Agreement remains in effect,
(a) all Know-How and all other information and materials related to
the sale or use of a Product ("Proprietary Information") shall be furnished by
NexMed, as NexMed deems appropriate to Finadiet, and significant technical and
other data and submissions shall be furnished in the English language; and
(b) all Proprietary Information shall be owned by NexMed or assigned
by Finadiet to NexMed including, but not limited to, any Know-How gained in
connection with animal or human studies and clinical trials.
3
<PAGE>
2.03 Diligent Efforts. Upon filing of any Application for Approval with
----------------
any Regulatory Authority to use or sell the Product in the Territories, Finadiet
shall use diligent, good faith, commercially reasonable efforts (including,
where appropriate, conducting, or causing to be conducted, clinical trials) to
obtain regulatory approvals and, once obtained, to commercially exploit the
Product.
III. TRADEMARKS, COPYRIGHTS
----------------------
3.01 Trademarks. "Trademarks" shall mean those trademarks of each party
----------
respectively identified in Schedule 3.01 attached hereto, and also any trade
-------------
dress of the parties' respective products and services and all of a party's
rights in the Trademarks including, without limitation, common law rights, and
registrations and applications for registration of any such Trademarks in any
state, federal or other jurisdiction. Simultaneously with the execution of this
Agreement, Finadiet shall assign all of its interest in the trademark "Bifort"
to NexMed.
3.02 Rights in Intellectual Property. Except as otherwise expressly agreed
-------------------------------
by the parties, any trade secrets, Know-How, designs, Trademarks and copyrights
provided by NexMed that are used in connection with the use or sale of the
Product are and shall be the property of NexMed. Finadiet agrees that no
Product using any trade secrets, Know-How or designs of NexMed or bearing any
tradename, Trademark or copyright of NexMed will be offered or sold to any
person or entity other than Finadiet for use, distribution or sale in the
Territories, unless authorized in advance by NexMed in writing. Upon
termination of this Agreement, Finadiet shall return and/or assign any interest
in all assets, documents or lists belonging to NexMed, including but not limited
to trade secrets, designs, Know-How, copyrights, trademarks or other proprietary
rights, samples, patents, art or similar items provided by NexMed that are
utilized by Finadiet to use or sell the Product. This provision shall remain in
effect and shall survive the termination of this Agreement.
3.03 Assertion of Interest. Finadiet will not at any time during or after
---------------------
the term of this Agreement assert or claim any interest in any assets of NexMed
or do anything that may adversely affect the validity or enforceability of any
Trademark, copyright, patent or other proprietary right owned or licensed to
NexMed, including, without limitation, any act or omission which may infringe or
lead to the infringement of any Trademark, copyright or patent owned or licensed
by NexMed.
3.04 Trademark License.
-----------------
(a) NexMed agrees to grant to Finadiet an Exclusive royalty free
license to use its Trademarks only as set forth herein.
(b) Finadiet shall deliver written notice (an "Advertising Notice")
to NexMed, together with a sample of the intended use for prior approval by
NexMed. Finadiet agrees to use the Trademarks of NexMed only in the form and
manner and with appropriate legends as prescribed from time to time thereby, and
shall not use any other trademark or service mark in
4
<PAGE>
combination with any Trademark of NexMed without prior written approval
therefrom. In any written materials, such as the packaging, advertising
materials, catalogs, brochures, and the like associated with the Product which
use a Trademark of NexMed, the following notice shall appear at least once in
each such documents: "Licensed Trademark of NexMed International Limited", in
addition to the "(R)" or "(TM)" symbol displayed adjacent to the Trademark.
3.05 Limit of Rights. Except as otherwise specifically set forth herein in
---------------
Section 3.04(a), Finadiet shall have no license, right, title or interest in and
to the Trademarks, copyrights, patents or other intellectual property of
NexMed.
3.06 Obligation to Protect. Finadiet agrees to use reasonable efforts to
---------------------
protect the proprietary rights of NexMed and to cooperate without charge in
efforts to protect these proprietary rights. Finadiet shall notify NexMed in
writing of any infringements or third party imitations of any of NexMed's
trademarks of which a party becomes aware.
3.07 Obligation to Assign. If Finadiet shall acquire by act, by deed, or
--------------------
by operation of law any rights in the Trademarks of NexMed, Finadiet shall
notify NexMed and immediately assign such rights to NexMed, together with any
goodwill that may have inured to the benefit of Finadiet. Finadiet shall not
permit any other person to use any of the Trademarks of NexMed without NexMed's
prior written consent.
3.08 Protection of Reputation and Approval Rights.
--------------------------------------------
(a) NexMed's image and reputation are of great value and it is of
utmost importance that such image and reputation be maintained and enhanced.
Finadiet covenants, represents and warrants to NexMed that Finadiet has not
committed and will not during the term of this Agreement commit any act or
become involved in any situation or occurrence which will bring it into public
disrepute, contempt, scandal or ridicule or which injure, diminish or otherwise
reflect unfavorably on the reputation of NexMed. Finadiet shall not use (nor
permit its affiliates to use) the Product or any advertising or promotion
materials relating to the Product in any manner which will bring NexMed into
public disrepute, contempt, scandal or ridicule and Finadiet shall not take (nor
permit its affiliates to take) any action which it knows or has reason to know
would threaten to injure or diminish NexMed's image or reputation. Finadiet
shall at all times act with good taste and judgment in utilizing the Products,
shall portray and depict NexMed in a positive and enhancing manner; and shall
ensure that the Product and all advertising or promotion materials relating to
the Product will not, without the prior consent of NexMed, be utilized by
Finadiet to endorse or promote any other product, matter or thing whatsoever.
(b) NexMed shall have the right of prior approval of the final form
and use of all advertising or promotion materials relating to the Product.
Finadiet shall not utilize, disseminate or distribute any form of advertising or
other promotional materials relating to the Product unless such advertising or
promotional materials are first submitted (at Finadiet's expense) to and
approved in writing by NexMed. Finadiet shall submit to NexMed for NexMed's
written approval, at Finadiet's expense, any other material prepared by or for
Finadiet
5
<PAGE>
which contains a reference to NexMed, the Product or Bifort. Finadiet will
timely furnish such adequate number of samples as NexMed reasonably requests for
approval purposes.
(c) All submissions required under this Section 3.08 must allow NexMed
not less than fifteen (15) days to approve, comment upon, or express its
disapproval thereof. Failure to give written disapproval of any submission
shall be deemed approval thereof. The provision for indemnity under Article
VIII hereof shall not be waived by any approval by NexMed.
(d) Finadiet hereby acknowledges and agrees that each Product and all
advertising and promotional materials shall in each case conform in all respects
to the samples thereof approved in writing by NexMed and that Finadiet shall not
distribute, package or sell any additional Products unless such Product and its
packaging is first approved in writing by NexMed.
(e) Finadiet further acknowledges that the Product is of a special
and extraordinary character and nature, giving it and NexMed a peculiar value,
the loss of which or injury to which cannot be reasonably fully compensated for
in damages. Therefore, in the event of a breach of this Agreement by Finadiet,
NexMed shall be entitled to apply for an injunction or such other equitable
relief as may be appropriate in respect of such breach, in addition to any other
rights or remedies that it may have under this Agreement or otherwise.
IV. CONFIDENTIALITY
---------------
4.01 Information Sharing; Confidentiality.
------------------------------------
(a) During the term of this Agreement, each party shall promptly
furnish (and shall cause its Affiliates and/or sublicensees, if any, promptly to
furnish) to the other any information concerning safety or utility of the
Product, including adverse or unexpected side effects, injury or other events
associated with uses, studies, investigations or tests of the Product, whether
or not such party is required to report such events to regulatory authorities
and whether or not such event is determined to be attributable to the Product.
(b) Finadiet recognizes that the Proprietary Information constitutes
highly valuable, proprietary, confidential information. Finadiet agrees that
during the term of this Agreement and thereafter it will keep confidential, and
will cause its Affiliates, officers, employees, consultants and agents to keep
confidential, all Proprietary Information. Finadiet shall not disclose, or
permit any of its Affiliates, officers, employees, consultants and agents to
disclose, Proprietary Information to any other Person nor use the same for any
purpose except as set forth in this Section 4.01 or as otherwise expressly
permitted in this Agreement or in a separate written agreement with NexMed or as
reasonably required in good faith for the registration and commercialization of
the Product.
(c) Finadiet agrees that any dissemination of Proprietary Information
to any of its Affiliates or to any officer, employee, consultant or agent of it
or any of its Affiliates shall be
6
<PAGE>
made only if necessary to carry out the purposes set forth herein and shall be
limited to the maximum extent possible consistent with such purposes. Finadiet
shall take such action, and each will cause its Affiliates, officers, employees,
consultants and agents to take such action, to preserve the confidentiality of
the Proprietary Information as it would customarily take in order to preserve
the confidentiality of other valuable proprietary information owned by it,
including advising all such Persons of the confidentiality obligations set forth
herein.
(d) The restrictions contained in paragraphs (b) and (c) of this
Section 4.01 shall not apply to any Proprietary Information that:
(i) is, at the time of its disclosure to Finadiet, generally
available to the public or otherwise part of the public domain or, as evidenced
by written records of Finadiet, is otherwise previously known to Finadiet;
(ii) becomes generally available to the public or otherwise part of
the public domain after its disclosure to Finadiet through no act or omission of
Finadiet or any other person owing an obligation of confidentiality to either
party hereto; or
(iii) is required to be disclosed by any court or governmental
agency having proper jurisdiction, provided that NexMed is first given an
adequate opportunity to seek a protective order or similar limits on further
disclosure.
4.02 Publicity. Finadiet shall not make any disclosure regarding the
---------
existence of this Agreement nor the research hereunder except with the prior
consent of NexMed to the text of the proposed disclosure unless the failure to
make such disclosure would (in the opinion of counsel to Finadiet) place
Finadiet in violation of applicable law, in which case prior notice of such
disclosure shall be given to NexMed to the extent reasonably possible.
4.03 Publication. The parties recognize the traditional right of all
-----------
scientists to publish and present promptly the results of their research.
Notwithstanding anything to the contrary contained in this Article IV, the
results obtained in the course of the any clinical trials program may be
submitted for publication by Finadiet, but only following notice to and approval
by NexMed in its sole discretion. Finadiet shall not publish information without
first providing NexMed with at least thirty (30) days prior notice of all
results and information intended to be published. NexMed shall act as
expeditiously as practicable following such notice, and shall notify Finadiet
promptly of its determination. If NexMed does not approve such publication,
such results and information shall continue to be subject to the other
provisions of this Article IV.
V. PURCHASES, PRICES, DELIVERIES AND PAYMENT
---------------------------------------------
5.01 Purchases. Subject to the terms and conditions of this Agreement,
----------
NexMed shall manufacture and Finadiet shall purchase the Products, in packaging
of 250 milligram units (each a "Unit"), each Unit containing the cream or gel
formulation containing alprostadil in a strength
7
<PAGE>
selected by NexMed in a net weight of not less than 250 milligrams, which
Finadiet shall from time to time order in accordance with the provisions set
forth herein. To order Products, Finadiet shall complete and deliver a purchase
order (each, a "Purchase Order"), a form of which shall be attached hereto as
Exhibit A, to NexMed. Subject to the terms and conditions of this Agreement,
- ---------
NexMed shall manufacturer and supply, and Finadiet shall purchase, all of the
Products ordered by Finadiet pursuant to a bona fide Purchase Order delivered by
Finadiet to NexMed. All Products ordered from NexMed, shall be subject to the
terms and conditions of this Agreement.
5.02 Product Prices. Finadiet shall pay to NexMed US$***** for each Unit
--------------
purchased under this Agreement. The price for the Unit is expressed in United
States Dollars, F.O.B. NexMed's Warehouse.
5.03 Risk of Loss. All risk of loss of or damage to the Products will pass
------------
to Finadiet, or to such financing institution or other party or parties as may
have been designated to NexMed by Finadiet, upon delivery by NexMed to
Finadiet's carriers, freight forwarders or agent performing similar functions at
NexMed's Warehouse.
5.04 Partial Delivery. Unless otherwise specified in any Purchase Order,
----------------
at any time prior to the agreed upon delivery date specified in the Purchase
Order, NexMed may make partial deliveries on account of such Purchase Order, to
be separately invoiced and paid for upon delivery. Partial deliveries made
pursuant to this Section 5.04 shall be deemed purchases counted toward the
minimum annual purchase requirements of Section 6.02(d).
5.05 Transportation. NexMed shall deliver the Products in suitable
--------------
packaging materials and containers and shall issue, in cooperation with Finadiet
or as specified in the applicable Purchase Order, appropriate instructions to
the carriers to prevent damage to the Products during transportation.
5.06 Additional Units and Credit for Marketing Expenses. (i) NexMed
--------------------------------------------------
will supply Finadiet with a number of Units for sampling purposes equal to
****** percent (**%) of the number of Units purchased for delivery during the
twelve month period following regulatory approval applied for pursuant to
Article II (the "Approval Date"), ************* (the "Additional Units"). A
mutually agreed upon number of Additional Units, not to exceed ***** Additional
Units shall be advanced by NexMed to Finadiet after the Approval Date and the
proper amount will be reconciled at the end of such twelve month period and
credited or debited accordingly. (ii) NexMed will credit the account of
Finadiet with a credit of US$**** after receipt of payment for *************
Units purchased pursuant to this Agreement, for marketing expenses incurred or
to be incurred in the future by Finadiet (the "Marketing Credit"). The parties
acknowledge and agree that the Marketing Credit shall be made only on the books
of NexMed, to be applied against future orders of the Product by Finadiet and,
except as set forth in this Section 5.06(ii), shall not be a liability or
obligation owing to Finadiet by NexMed.
5.07 Sales Limited to Territories. Finadiet agrees not to sell or
----------------------------
distribute the Products outside the Territories, nor to any third party who
Finadiet has reason to believe will, directly or indirectly, sell or ship the
Products outside the Territories. Finadiet shall furnish NexMed
8
<PAGE>
promptly upon NexMed's request, information as to Finadiet's customers, in such
detail as NexMed may request, and in the event NexMed determines that any of
such customers are selling or distributing any Products outside the Territories,
NexMed may require that Finadiet terminate any further sales to such customer
and Finadiet shall promptly terminate any further sales. Finadiet shall
cooperate with NexMed in all reasonable manner as may be requested by NexMed in
order to prevent sales from occurring outside the Territories.
5.08 Payment. (a) In order to pay for all the Products purchased by
-------
Finadiet hereunder, Finadiet shall open in favor of NexMed an irrevocable letter
of credit, for the amount of United States Dollars for Products purchased
pursuant to the applicable Purchase Order. Such letter of credit must be
approved by NexMed both on its form and substance, must be issued by a United
States of America commercial bank with offices in the Territories, approved by
NexMed, for presentation at ___________ Bank ______________ Branch,
_________________, or at any other bank approved by NexMed, and must remain open
for a period of not less than sixty (60) days from the Shipment Date, or at the
sole option of Finadiet, up to a period of one hundred eighty (180) days from
the Shipment Date. Finadiet shall periodically adjust the amount of the letter
of credit, so that it will always cover the value of outstanding Purchase Orders
to NexMed. Finadiet shall bear all bank's costs, taxes, commissions and any
other expenses related to the maintenance of the letter of credit. In the event
that Finadiet chooses to have the letter of credit remain open for a period
longer than sixty (60) days from the Shipment Date, amounts due under the
relevant Purchase Order shall accrue interest over the balance due from the date
sixty (60) days after the Shipment Date until NexMed effectively receives
payment hereunder from the letter of credit, such interest accruing at an annual
rate equal to the prime rate which is publicly announced by Chase Manhattan
Bank, New York, New York, U.S.A., plus two (2) percent. For purposes of this
Agreement, the Shipment Date shall mean the date of delivery by NexMed to
Finadiet's carriers, freight forwarders or agent performing similar functions at
NexMed's Warehouse.
(b) Notwithstanding Section 5.08(a), payment for the first
*************** United States Dollars (US$********) worth of Units shall be made
in immediately available United States Dollars upon delivery of the Purchase
Order. Thereafter, purchases from NexMed by Finadiet shall be against
irrevocable letters of credit, payable according to the terms set forth herein.
5.09 Currency. (i) Although Finadiet intends to sell the Products
--------
in Pesos or in any other Argentine currency that may be effective in the future
(hereinafter referred to as the "Argentine Currency"), all payments due hereof
shall be made in freely available United States Dollars.
VI. TERM AND TERMINATION
--------------------
6.01 Term. The term of this Agreement shall commence on the date hereof
----
and shall continue until the completion of sixty-six (66) months from the date
hereof, unless terminated in accordance with the subsequent paragraphs of this
Article VI. Thereafter, this Agreement will
9
<PAGE>
automatically renew for one (1) additional five (5) year period if Finadiet
meets its minimum purchase requirement of *********************** Units over the
periods indicated in Section 6.02(d) hereof during the initial five year term of
this Agreement.
6.02 Events of Termination. If any of the following events shall occur
---------------------
and be continuing, such event shall constitute an event of termination ("Event
of Termination"):
(a) If any representation or warranty by a party hereto contained in
this Agreement shall prove to have been incorrect in any material respect when
made or deemed made.
(b) If a party shall fail to pay any amount when due hereunder or
shall otherwise default in any material respect in the performance or observance
of any term, covenant or provision contained in this Agreement or any of the
other documents or instruments delivered pursuant to, or concurrently with, this
Agreement, and any such other default shall remain unremedied for 30 days after
written notice thereof to the defaulting party from any other party with a copy
to the other party. The foregoing notwithstanding, no such other default shall
constitute an Event of Termination until 60 days after such notice, if the
defaulting party shall undertake throughout such 60-day period a reasonably
diligent effort to remedy such failure; provided, however that if by its nature
-------- -------
such failure cannot be cured, such failure shall constitute an Event of
Termination immediately upon occurrence.
(c) If this Agreement shall, at any time hereafter and for any reason,
cease to be in full force and effect, or shall be declared null and void, or the
validity or enforceability of this Agreement shall be successfully contested by
a party hereto or successfully contested by any other Person.
(d) If Finadiet fails to meet the following minimum annual
purchase requirements:
(i) Agreement Years 1, 2 and 3 (three year cumulative
total): ******* Units
(ii) Agreement Year 4: ******* Units
(e) At the sole option of NexMed, if approval of the Product for use
in Argentina is not granted by the Regulatory Authority or such other
governmental agency performing similar functions as the FDA within nine (9)
months from the date of this Agreement.
(f) At the sole option of NexMed, if approval of the Product for use
in Uruguay is not granted by the Regulatory Authority or such other governmental
agency performing similar functions as the FDA within twelve (12) months from
the date of this Agreement.
(g) Because each party acknowledges that the services to be rendered
by the other are personal in nature, inasmuch as the respective capabilities of
the parties hereto are uniquely valuable, and that the determination to enter
into this Agreement was based upon the unique ability of the other party to
fulfill its respective obligations hereunder, if
10
<PAGE>
(i) such party shall make an assignment for the benefit of
creditors, file a petition in bankruptcy, petition or apply to any tribunal for
the appointment of a custodian, receiver or any trustee for it or a substantial
part of its assets, or shall commence any proceeding under any bankruptcy,
reorganization in bankruptcy or the equivalent, dissolution or liquidation law
or statute of any jurisdiction, whether now or hereafter in effect; or
(ii) there shall have been filed any such petition or application
against such party, or any such proceeding shall have been commenced against it,
in which an order for relief is entered or which remains undismissed for a
period of 30 days or more; or
(iii) such party by any act or knowing failure to act shall
indicate its consent to, approval of or acquiescence in, any such petition,
application or proceeding or order for relief or the appointment of a custodian,
receiver or any trustee for it or any substantial part of any of its properties,
or shall suffer any such custodianship, receivership or trusteeship to continue
undischarged for a period of 30 days or more; or
(iv) at the sole option of NexMed, upon the occurrence of any
event following which Mr. Saul Breitman or any of Mr. Breitman's immediate
family members including, but not limited to, any of Mr. Breitman's children,
sons-in-law and grandchildren, no longer continue to serve as principal
executive manager of Finadiet or are no longer actively responsible for the day
to day operations of Finadiet; or
(v) subject to Section 6.02 (g)(iv) and Section 9.08 herein, at
the sole option of NexMed and upon six (6) months prior written notice to
Finadiet, upon the occurrence of any consolidation or merger of Finadiet into or
with any other corporation, person or entity, or the sale of all or
substantially all of the assets of Finadiet to another corporation, person or
entity, or if there shall be a change in ownership of more than thirty percent
(30%) of the outstanding stock or ownership shares of Finadiet, or the ultimate
beneficial ownership thereof.
6.03 Termination.
-----------
(a) Upon the occurrence of any Event of Termination set forth in
Section 6.02, the party not responsible for such Event of Termination shall have
the following rights: (i) if the responsible party is NexMed, Finadiet may, by
written notice to NexMed, relinquish its rights and terminate its future
obligations under this Agreement; (ii) if the responsible party is Finadiet,
NexMed may, by written notice to Finadiet terminate Finadiet's rights under this
Agreement.
(b) No termination or expiration of this Agreement shall affect any
obligation of any party which arose prior to the effective date of such
termination with respect to monies owed or to confidential information. The
right of any party to terminate this Agreement as hereinabove provided shall not
be affected in any way by its waiver of or failure to take action with respect
to any previous default.
11
<PAGE>
6.04 Finadiet Failure to Market. NexMed shall have the unilateral right
--------------------------
to terminate this Agreement, and to obtain transfers to it of all rights of
Finadiet to any contracts for investigational or clinical trial work, results of
any such work, Applications for Approval and regulatory approvals if the
Regulatory Authority in the Territories has granted marketing approval but
either (A) no detailed marketing plan (including estimated market size,
projected sales and projected advertising and promotion budgets) for such
Territories has been prepared and delivered to NexMed within six (6) months, or
(B) Finadiet has not commenced implementation of such marketing plan in the
Territories within twelve (12) months; provided, however, that any such
-------- -------
termination under this clause (a) shall only be effective thirty (30) days after
notice to Finadiet thereof.
6.05 Effects of Termination or Expiration.
------------------------------------
(a) Upon termination of this Agreement by NexMed for breach by
Finadiet,
(i) Finadiet shall immediately cease to have any right to sell,
exploit or in any way deal with or in the Product or to use any NexMed
Know-How or Proprietary Information or to use any trademarks or names
associated with the Product and all payments theretofore accrued shall
become due and payable immediately to NexMed and such termination shall be
without prejudice to any rights which NexMed may otherwise have against
Finadiet.
(ii) Finadiet shall deliver to NexMed, as soon as practicable and
within thirty (30) days after receipt of notice of termination or the
happening of the event which terminates this Agreement where no notice is
required, a report indicating the quantity and description of Product on
hand or on order (the "Stock"), as of the date of expiration or
termination. NexMed shall have the right to conduct a physical inventory
of Finadiet's premises to ascertain or verify such final report. In the
event Finadiet refuses to permit NexMed to conduct such physical inventory,
NexMed shall retain all legal and equitable rights that it may have in the
Stock. NexMed shall have the option to purchase the Products held by
Finadiet in its inventory or a portion thereof, said option to be exercised
by serving written notice upon Finadiet within thirty (30) days of the
receipt of the aforementioned list of Stock. Upon receipt by Finadiet of
notice of the exercising by NexMed of said option, Finadiet shall forthwith
forward to NexMed or to a place designated by NexMed at Finadiet's expense
said Stock or a portion thereof, as the case may be, and upon the receipt
of same NexMed agrees to pay to Finadiet the cost of such materials as are
at the time of delivery of good quality and in currently usable condition
and saleable to the trade. By "cost" is meant the actual landed cost of
the goods to Finadiet. NexMed shall have title to all of said materials
including materials which are not in currently usable condition and
saleable to the trade and for which NexMed is not required to and shall not
make payment. Any payment made by NexMed shall be reduced by amounts that
Finadiet owes NexMed for purchase of Products and every other transaction.
12
<PAGE>
(iii) All rights granted to Finadiet hereunder shall forthwith
revert to NexMed, and all rights granted by Finadiet shall forthwith
terminate. NexMed shall be free to sell itself, or license or sell to
others in connection with the sale and distribution of the Product in the
Territories, and Finadiet shall refrain from further use, sale or
distribution of the Product or any product derived from the Product.
Finadiet acknowledges that its (or its Affiliate's) failure (except as
otherwise provided herein) to cease the use, sale or distribution of the
articles covered by this Agreement or any class or category thereof at the
termination of this Agreement will result in immediate and irremediable
damage to NexMed and to the rights of any subsequent licensee. Finadiet
acknowledges and admits that its sole remedy hereunder is to terminate this
Agreement.
(iv) Finadiet shall forthwith deliver to NexMed (and shall cause
each sublicensee to deliver) all reports, memoranda, drawings, data, flow
sheets and other documents and all copies thereof theretofore furnished by
NexMed to Finadiet or which contain or describe any Proprietary Information
and shall take all actions necessary to assign or cause to be assigned to
NexMed all of Finadiet's rights with respect to all contracts for work,
results, filings, Applications for Approval made by it or on its behalf
with and approvals granted by any Regulatory Authority.
(b) In the event that NexMed does not exercise the option set forth in
Section 6.05(a)(ii) hereinabove or exercises such option only with respect to a
portion of the Stock, Finadiet shall be permitted to sell all Stock not
purchased by NexMed until the Final Sales Deadline, after which the Stock must
be discarded. The "Final Sales Deadline" shall mean the term of one hundred and
twenty (120) days counted as from the date of expiration or termination of this
Agreement.
(c) In the event of a wrongful termination by NexMed or breach by
NexMed of a material obligation to Finadiet under this Agreement, Finadiet shall
have the right to recover damages directly and proximately caused by such
wrongful termination or breach.
(d) The confidentiality provisions of Section 4.01 shall survive any
termination of this Agreement.
VII. INDEMNIFICATION AND INSURANCE
-----------------------------
7.01 Indemnification. (a) For purposes of this Section 7.01(a),
---------------
"Indemnified Parties" refers to NexMed, its officers, directors, employees and
agents.
(i) Finadiet, as indemnitor, on behalf of itself and its officers,
directors, employees, agents and representatives (including its sublicensees and
distributors, and contractors undertaking work in the Clinical Trials Program,
if any,) shall indemnify and hold harmless the Indemnified Parties and each of
them from any and all liability arising out of any suit, action, legal
procedures, claim or demand of whatever kind or character based upon (i) a
13
<PAGE>
claim or occurrence arising from the Clinical Trials Program, if any, or the
sale of the Product; or (ii) any breach of any representation, warranty or
agreement made by Finadiet hereunder.
(ii) Anything to the contrary in this Article VII notwithstanding,
Finadiet shall not be obligated to indemnify an Indemnified Party for acts of
negligence or willful misconduct or for any violation of any warranty,
representation or agreement made by such Indemnified Party, hereunder.
(iii) Finadiet shall instruct its insurance carriers to provide
notice to NexMed of any prior intent to terminate coverage by such carrier.
(b) For purposes of this Section 7.01(b), "Indemnified Parties" refers to
Finadiet, its officers, directors, employees and agents.
(i) NexMed, as indemnitor, on behalf of itself and its officers,
directors, employees, agents and representatives shall indemnify and hold
harmless the Indemnified Parties and each of them from any and all liability
arising out of any suit, action, legal procedures, claim or demand of whatever
kind or character based upon (i) a claim or occurrence arising from the
manufacture of the Product; or (ii) any breach of any representation, warranty
or agreement made by NexMed hereunder.
(ii) Anything to the contrary in this Article VII notwithstanding,
NexMed shall not be obligated to indemnify an Indemnified Party for acts of
negligence or willful misconduct or for any violation of any warranty,
representation or agreement made by such Indemnified Party, hereunder.
7.02 Scope of Indemnification.
------------------------
(a) The agreement to indemnify and hold harmless from liability set
forth herein shall include, without limitation, all damages of every kind,
reasonable attorney fees, all costs and expenses which may be levied against and
out-of-pocket costs incurred by the Indemnified Parties in connection with any
suit, action, legal proceeding, claim or demand.
(b) Compliance by Finadiet with Section 7.03 of this Agreement shall
not relieve Finadiet from liability under this indemnity provision.
(c) Both Finadiet and NexMed acknowledge and hereby agree that the
obligations set forth in this Section 7.02 shall survive the termination or
expiration of this Agreement for a period of eight years.
(d) The Indemnified Parties will cooperate with the indemnitor, at the
expense of the indemnitor, in the defense of any suit.
7.03 Insurance. Within ten (10) business days after the Approval Date,
---------
Finadiet hereby agrees to contract at its expense with one or more of the
following insurance companies in the
14
<PAGE>
Territories: (a) La Buenos Aires Compania Argentina de Seguros S.A., (b) Zurich
Iguazu Compania de Seguros S.A., (c) Federacion Patronal Cooperative de Seguros,
(d) Mapfre Aconcaqua Compania de Seguros S.A. and/or (e) La Meridional Compania
Argentina de Seguros S.A., an indemnity insurance with wide coverage, including
distribution liability and product liability resulting from any action or
default of Finadiet or of any agent, contractor or customer of Finadiet in
connection with the distribution and sale of the Products, for the amount of
Five Hundred Thousand United States Dollars (US$500,000), which shall be equal
to or greater than the extent of such insurance which Finadiet maintains with
respect to any product or compound it sells. Such insurance shall also cover all
those other risks that NexMed considers reasonable to cover for all of
Finadiet's activities, including handling and storage of the Products. Within
forty-five (45) days following the date of this Agreement, Finadiet shall
contract such insurance, including NexMed as an "additional insured" and shall
submit to NexMed all necessary certificates to evidence such circumstance and
the validity of such insurance, as well as all the pertinent information on the
limitations of the policy, the territories included and the coverages for
contractual liability. Finadiet further agrees to obtain an annex to said policy
pursuant to which, in the event that said policy is canceled or is not renewed
or in the event that a change in the terms of the policy takes place, the
insurance company will be obliged to forthwith notify NexMed in writing, at
least thirty (30) days prior to the date of cancellation, lack of renewal or
change of terms or insurance company.
VIII. WARRANTIES, COVENANTS AND LIMITATIONS ON RIGHTS
-----------------------------------------------
8.01 Warranties. Each of the parties hereto hereby represents and
-----------
warrants to the other party that, as of the date hereof: (a) such party has all
the requisite resources, power and authority to execute, deliver and perform
this Agreement; (b) the terms of this Agreement are not inconsistent with any
other contractual and/or legal obligations such party may have, or with such
party's policies or the policies of any entity with which such party is
associated; (c) such party has not engaged and shall not engage in any act
inconsistent with this Agreement, particularly that would allow any third party,
including any government or government agency, to acquire, own or possess any
right or interest inconsistent with the other party's rights under this
Agreement; and (d) this Agreement has been duly authorized and, when executed
and delivered by such party, shall constitute a legal, binding obligation,
enforceable against such party, according to its terms.
8.02 Limitation on Warranties. NexMed has not received any notice that
-------------------------
the Product (a) is not a novel entity or (b) infringes the patent rights of
others.
8.03 Covenant of Finadiet: During the term hereof and for a period
---------------------
of five (5) years thereafter, Finadiet and its Affiliates covenant that it will
not directly or indirectly market, sell or distribute nor offer to market, sell
or distribute, whether as principal, agent, consultant, partner, joint venture
or other, any product competitive with the Product.
8.04 Disclaimer. Finadiet and NexMed each understands that neither party
-----------
can guarantee the reliability of its research findings and conclusions, and
therefore, except as
15
<PAGE>
expressly set forth in this Agreement, NEITHER PARTY HAS MADE OR MAKES ANY
GUARANTEES AND EXTENDS ANY WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED,
EXCEPT AS EXPRESSLY PROVIDED HEREIN. there ARE NO EXPRESS OR IMPLIED WARRANTIES
OF DESIGN, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT ANY
PRODUCT IDENTIFIED WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER
INTELLECTUAL PROPERTY RIGHTS OF ANY INDEPENDENT THIRD PARTY. FURTHER, THERE ARE
NO OTHER EXPRESS OR IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING, USAGE OR
TRADE PRACTICES OR OF ANY OTHER KIND.
8.05 Limitations on Rights. Nothing in this Agreement shall be construed
---------------------
as:
(a) conferring rights to use in advertising, publicity, promotional or
sales literature the name of the other party without the prior written consent
of the other party in each instance; or
(b) granting, by implication, estoppel, or otherwise as a result of
either this Agreement, any activities hereunder or the relationship of the
parties, any license, title, ownership or other rights to the other party's
Confidential Information or under patents or know-how of the other party except
as necessary to accomplish the purposes of this Agreement or except as
explicitly provided herein.
Each party acknowledges that by virtue of this Agreement it acquires only
such rights as set forth under the terms and conditions of this Agreement.
IX. MISCELLANEOUS
-------------
9.01 Notices. All notices required or permitted hereunder shall be
--------
transmitted, or at least immediately affirmed, in writing by facsimile, followed
by confirmation of that facsimile either by registered or certified mail,
postage prepaid, return receipt requested, or by overnight courier, addressed as
follows, or to such other address as may be designated from time to time by
notice given by the respective party:
If to Finadiet: Finadiet, S.A.C.I.F.I.
Attention: Luis Cesar Forte
Hipolito Yrigoyen 3771
Buenos Aires, Argentina
Telephone No.: (541) 981-1878
Facsimile No.: (541) 983-0937
If to NexMed: NexMed International Limited
Attention: Dr. James Yeager
Room 2208,
Windsor House
16
<PAGE>
311 Gloucester Road
Causeway Bay, Hong Kong
Telephone No.: (852)-2881-6718
Facsimile No.: (852)-2895-1698
9.02 Independence of Parties. The status of each party under this
------------------------
Agreement is that of an independent contractor, and neither party has the right
or authority to assume or create any obligation, accept legal process, make
commitments, incur any charges or otherwise bind or act on behalf of the other
or limit the other in any manner whatsoever, except as expressly stated herein.
Neither this Agreement nor any act hereunder shall be construed as constituting
the foundation of a partnership, association, agency, joint venture or any other
entity.
9.03 No Third-Party Beneficiaries. No person or entity not a party to
-----------------------------
this Agreement, including any employee of any party to this Agreement, shall
have or acquire any rights by reason of this Agreement, nor shall any party have
any obligations or liabilities to such person or entity by reason of this
Agreement.
9.04 No Waiver. Failure by either party to enforce, or delay in
----------
exercising, or partial exercise of any covenants or rights or remedies under
this Agreement shall not be deemed or construed as a waiver of such rights nor
shall a waiver by either party in one or more instances be construed as
constituting a continuing waiver or as a waiver in other or subsequent
instances.
9.05 Entire Agreement. This Agreement constitutes the complete and entire
-----------------
understanding between the parties with licenses conveyed hereunder, superseding
and replacing all prior oral or written agreements, communications,
representations, proposals, or negotiations specifically relating to the
activities hereunder and subject matter hereof. No change or addition to or
variation or amendment of this Agreement, nor any cancellation or waiver of any
of the terms or provisions hereof, nor any alteration or modification of any of
the terms and conditions hereof, shall be effective or valid and binding on
either party unless in writing and signed by a duly-authorized representative of
the party against which the provision is applied.
9.06 Headings. Article and Section headings are inserted in this
---------
Agreement for convenience of reference only and no construction, meaning,
interpretation or inference shall be derived from them.
9.07 Governmental Compliance and Effect of Invalidity. This Agreement and
-------------------------------------------------
performance hereunder is subject to the restrictions, limitations, terms and
conditions of all applicable governmental regulations, approvals and clearances.
If any term or provision of this Agreement is held invalid, illegal or
unenforceable in any respect, for any reason, that invalidity, illegality or
unenforceability shall not affect any other term or provision hereof, and this
Agreement shall be interpreted as if such term or provision, to the extent the
same shall have been held to be invalid, illegal or unenforceable, had never
been contained herein, with the other provisions of this Agreement remaining in
force. NexMed and Finadiet shall comply with all supranational, federal, state,
and local laws, ordinances and regulations applicable to the
17
<PAGE>
shipment, handling, storage, testing, use, development, sale and/or disposal of
any compound hereunder.
9.08 Assignability. This Agreement and the rights, obligations,
-------------
privileges, and interests hereof may not be assigned by either party, except
that either party may assign this Agreement and rights and interests, in whole
or in part, (i) to any of its Affiliates or (ii) with the consent of the other
party, which consent shall not be unreasonably withheld, to any purchaser of all
or substantially all of its stock or assets or to any acquirer or successor
corporation resulting from any merger or consolidation with or into such
successor corporation.
9.09 Succession. This Agreement and the rights and obligations granted
-----------
and undertaken hereunder shall be binding upon and inure to the benefit of the
parties hereto, and their permitted assign(s), successor(s), trustee(s) or
receiver(s) in bankruptcy.
9.10 Force Majeure. If either party shall be delayed, interrupted in or
-------------
prevented from the performance of any obligation hereunder by reason of Force
Majeure including fire, flood, other natural disasters, war (declared or
undeclared), public disaster, strike or labor differences, governmental
enactment, rule or regulation, or any other cause beyond such party's control,
such party shall not be liable to the other therefor; and the time for
performance of such obligation shall be extended for a period equal to the
duration of the contingency which occasioned the delay, interruption or
prevention. The party invoking such Force Majeure rights of this paragraph must
notify the other party within a period of 15 days after the first and the last
day of the Force Majeure unless the Force Majeure renders such notification
impossible, in which case notification will be made as soon as possible. If the
delay resulting from the Force Majeure exceeds six months, the party not
invoking the Force Majeure rights may terminate the contract in accordance with
the conditions stipulated in this Agreement.
9.11 Counterparts. This Agreement may be executed simultaneously in two
------------
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
9.12 GOVERNING LAW, CHOICE OF FORUM. THIS AGREEMENT SHALL BE DEEMED TO
------------------------------
HAVE BEEN EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN NEW
YORK. THIS AGREEMENT SHALL BE DEEMED TO BE EFFECTIVE ONLY UPON THE ACCEPTANCE
BY NEXMED OF THIS AGREEMENT, AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
SUBSTANTIVE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ANY
CONFLICTS OF LAW RULES OR PRINCIPALS). ANY LEGAL ACTION OR PROCEEDING WITH
RESPECT HERETO SHALL ONLY BE BROUGHT IN THE COURTS OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY,
GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND
IRREVOCABLY WAIVES ANY DEFENSE OR CLAIM TO SUCH JURISDICTION WHICH
18
<PAGE>
EITHER OR BOTH MAY HAVE BASED, DIRECTLY OR INDIRECTLY, ON THE GROUNDS OF FORUM
NON CONVENIENS. IF ANY ACTION IS COMMENCED IN ANY OTHER JURISDICTION, THE
PARTIES HERETO HEREBY CONSENT TO THE REMOVAL OF SUCH ACTION TO THE SOUTHERN
DISTRICT OF NEW YORK. FINADIET HEREBY IRREVOCABLY DESIGNATES GREENBERG, TRAURIG,
HOFFMAN, LIPOFF & QUINTEL, P.A., AS THE DESIGNEE, APPOINTEE AND AGENT, OF
FINADIET TO RECEIVE, FOR AND ON BEHALF OF FINADIET, SERVICE OR PROCESS IN SUCH
RESPECTIVE JURISDICTIONS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT OR THE RIGHTS AND OBLIGATIONS HEREUNDER OR AND SUCH SERVICE SHALL BE
DEEMED COMPLETED UPON DELIVERY THEREOF TO SUCH AGENT. IT IS UNDERSTOOD THAT A
COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY MAIL TO
FINADIET AT ITS ADDRESS SET FORTH IN SECTION 9.01, BUT THE FAILURE OF FINADIET
TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS.
FINADIET FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF
THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO FINADIET AT
ITS ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING.
NOTHING HEREIN SHALL AFFECT THE RIGHT OF NEXMED TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED
AGAINST FINADIET IN ANY OTHER JURISDICTION.
9.14 Stamp Tax. The Stamp tax on this Agreement, if applicable, shall be
---------
exclusively borne and paid by Finadiet.
IN WITNESS WHEREOF, authorized representatives of the parties have duly
executed this Agreement in duplicate.
NEXMED INTERNATIONAL LIMITED
By: /s/ Y. Joseph Mo
Name: Y. Joseph Mo
Title: President and Chief Executive Officer
FINADIET, S.A.C.I.F.I.
By: /s/ Saul Breitman
-----------------
Name: Mr. Saul Breitman
Title: President
19
<PAGE>
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
NexMed, Inc.
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Weighted
Average
Days Shares
1996 Shares Outstanding Outstanding
--------- ----------- -----------
<S> <C> <C> <C>
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 used
for basic and diluted loss per share 4,327,548
Net loss for the period $ (3,118,393)
------------
Basic and diluted loss per share $ (0.72)
============
1997
Opening balance -- January 1, 1997 5,071,348 365 5,071,348
Shares issued with notes payable 7,500 365 7,500
Shares issued for cash 1,062,500 335 975,172
Shares used upon conversion of notes payable 13,750 239 9,003
Shares issued upon exercise of stock options 5,000 323 4,425
Shares issued upon exercise of stock options 20,000 183 10,027
------------
Weighted average shares outstanding used
for basic and diluted loss per share 6,077,475
Net loss for the period $ (3,857,466)
------------
Basic and diluted loss per share $ (0.63)
============
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF NEXMED, INC.
1. NexMed Holdings, Inc. is a wholly-owned subsidiary of NexMed, Inc. and is
incorporated in Delaware.
2. NexMed (U.S.A.), Inc. is a wholly-owned subsidiary of NexMed, Inc. and is
incorporated in Delaware.
3. NexMed International Limited is a wholly-owned subsidiary of NexMed, Inc.
and is a British Virgin Islands Company.
(a) NexMed (Americas) Limited is a wholly-owned subsidiary of NexMed
International Limited and is incorporated in Nova Scotia.
(b) NexMed (Asia) Limited is a wholly-owned subsidiary of NexMed
International Limited and is incorporated in Hong Kong.
(i) NexMed Pharmaceuticals (Zhongshan) Ltd. is a sino-foreign joint
venture entity which is 70%-owned by NexMed (Asia) Limited.
(c) NexMed Peru S.A. is a joint venture incorporated in Peru and is 70%-
owned by NexMed International Limited.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 133,189
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 202,443
<PP&E> 236,295
<DEPRECIATION> (35,942)
<TOTAL-ASSETS> 2,332,913
<CURRENT-LIABILITIES> 3,259,172
<BONDS> 0
0
0
<COMMON> 6,180
<OTHER-SE> (932,439)
<TOTAL-LIABILITY-AND-EQUITY> 2,332,913
<SALES> 0
<TOTAL-REVENUES> 56,175
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,903,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,267
<INCOME-PRETAX> (3,857,466)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,857,466)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,857,466)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
