SEELOS THERAPEUTICS, INC. - Quarter Report: 2007 September (Form 10-Q)

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2007.

Commission file number 0-22245

NEXMED, INC.

(Exact Name of Issuer as Specified in Its Charter)

Nevada		87-0449967
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

89 Twin Rivers Drive, East Windsor, NJ 08520

(Address of Principal Executive Offices)

(609) 371-8123

(Issuer’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the preceding 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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: as of November 9, 2007, 82,906,867 shares of Common Stock, par value $0.001 per share, were outstanding.

Table of Contents

		Page

Part I. FINANCIAL INFORMATION		1

Item 1.	Financial Statements	1

	Consolidated Balance Sheets at September 30, 2007 (unaudited) and December 31, 2006	1

	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and September 30, 2006	2

	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and September 30, 2006	3

	Notes to Unaudited Consolidated Financial Statements	4

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26

Item 4.	Controls and Procedures	26

Part II. OTHER INFORMATION		26

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 6.	Exhibits	28

Signatures		29

Exhibit Index		30

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NexMed, Inc.

Consolidated Balance Sheets

	September 30,			December 31,
	2007			2006
	(Unaudited)

Assets
Current assets:
Cash and cash equivalents	$	1,957,313		$	11,069,133
Short term investments		1,000,000			1,000,000
Other receivable		-			183,700
Debt issuance cost, net of accumulated amortization of $58,786 and $36,752		5,769			27,803
Prepaid expenses and other assets		1,146,774			164,898
Total current assets		4,109,856			12,445,534

Fixed assets, net		7,079,464			7,488,100
Total assets	$	11,189,320		$	19,933,634

Liabilities, convertible preferred stock and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses	$	654,562		$	587,750
Deferred revenue		846,959			1,693,917
Payroll related liabilities		100,886			156,567
Deferred compensation - current portion		60,212			60,212
Convertible notes payable - current portion		-			3,000,000
Note payable, net of debt discount of $31,846 and $127,385		1,968,154			1,872,615
Total current liabilities		3,630,773			7,371,061

Long Term liabilities:
Deferred compensation		1,017,400			1,058,098
Total Liabilities		4,648,173			8,429,159

Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $.001 par value, 120,000,000 shares authorized, 82,806,867 and 80,285,905 and outstanding, respectively		82,809			80,287
Additional paid-in capital		138,291,516			137,164,658
Accumulated other comprehensive loss		(9,596	)		(9,596	)
Accumulated deficit		(131,823,582	)		(125,730,874	)
Total stockholders' equity		6,541,147			11,504,475

Total liabilities and stockholder's equity	$	11,189,320		$	19,933,634

See notes to unaudited consolidated financial statements.

NexMed, Inc.

Consolidated Statements of Operations

and Comprehensive Income (Unaudited)

	FOR THE THREE MONTHS						FOR THE NINE MONTHS ENDED
	ENDED SEPTEMBER 30,						SEPTEMBER 30,
	2007			2006			2007			2006

Revenues, principally license fee revenue	$	296,390		$	446,268		$	866,766		$	1,433,870

Operating expenses
General and administrative		1,037,421			1,079,807			3,414,246			3,988,395
Research and development		1,266,792			1,332,351			3,459,390			3,925,827
Total operating expenses		2,304,213			2,412,158			6,873,636			7,914,222

Loss from operations		(2,007,823	)		(1,965,890	)		(6,006,870	)		(6,480,352	)

Other Income (expense)
Interest expense, net		(54,555	)		(21,945	)		(85,838	)		(64,082	)
Other income		-			-			-			627,455
Total Other income (expense)		(54,555	)		(21,945	)		(85,838	)		563,373

Net loss	$	(2,062,378	)	$	(1,987,835	)	$	(6,092,708	)	$	(5,916,979	)

Deemed dividend to preferred shareholders from beneficial conversion feature		0			-			0			(49,897	)
Preferred dividend		0			-			0			(15,264	)

Net loss applicable to common stock	$	(2,062,378	)	$	(1,987,835	)	$	(6,092,708	)	$	(5,982,140	)

Basic and diluted loss per common share	$	(0.02	)	$	(0.03	)	$	(0.07	)	$	(0.09	)

Weighted average common shares outstanding used for basic and diluted loss per share		82,700,287			66,643,197			81,710,215			65,299,502

See notes to unaudited consolidated financial statements.

NexMed, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	FOR THE NINE MONTHS ENDED
	SEPTEMBER 30,
	2007			2006
Cash flows from operating activities
Net loss	$	(6,092,708	)	$	(5,916,979	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		488,238			655,470
Non-cash interest, amortization of debt discount and deferred financing costs		308,321			160,175
Non-cash compensation expense		736,049			920,632
Loss on disposal of fixed assets		7,911			454,105
Decrease (increase) in other receivable		183,700			398,740
(Increase) decrease in prepaid expenses and other assets		(981,876	)		42,441
Decrease in accounts payable and accrued expenses		66,812			29,879
Decrease in payroll related liabilities		(55,681	)		(1,053,668	)
Decrease in deferred compensation		(40,698	)		(45,805	)
Decrease in deferred revenue		(846,958	)		(843,913	)
Net cash used in operating activities		(6,226,891	)		(5,198,923	)

Cash flows from investing activities
Proceeds from sale of fixed assets		-			178,769
Capital expenditures		(87,512	)		(70,078	)
Purchase of marketable securities and short term investments		(3,000,000	)		(6,000,000	)
Proceeds from sale of marketable securities and short term investments		3,000,000			4,500,000
Net cash used in investing activities		(87,512	)		(1,391,309	)

Cash flows from financing activities
Issuance of common stock, net of offering costs of $2,110 in 2007 and $571,193 in 2006		(2,110	)		7,747,808
Proceeds from exercise of stock options and warrants		204,692			97,316
Repayment of capital lease obligations		-			(213,744	)
Repayment of convertible notes payable		(3,000,000	)		-
Net cash (used in) provided by financing activities		(2,797,418	)		7,631,380

Net (decrease) increase in cash and cash equivalents		(9,111,820	)		1,041,148

Effect of foreign exchange on cash and cash equivalents		-			3

Cash and cash equivalents, beginning of period	$	11,069,133		$	2,953,781

Cash and cash equivalents, end of period	$	1,957,313		$	3,994,932

See notes to unaudited consolidated financial statements.

NexMed, Inc.

Notes to Unaudited

Consolidated Financial Statements

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007. These financial statements should be read in conjunction with the financial statements and notes thereto contained in NexMed, Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2006.

The Company had an accumulated deficit of $131,823,582 at September 30, 2007 and the Company expects to incur additional losses during the remainder of 2007. As a result of our losses to date and accumulated deficit, there is doubt as to our ability to continue as a going concern, and, accordingly, our independent registered public accounting firm has modified its report on our December 31, 2006 consolidated financial statements included in our Annual Report on Form 10-K in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. Management plans to obtain additional financing through additional partnering agreements for its products under development using the NexACT^® technology. If the Company is successful in entering into such additional partnering agreements, it anticipates that it may receive milestone payments, which would offset some of its research and development expenses. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining financing on terms acceptable to it. If additional financing cannot be obtained on reasonable terms, future operations will need to be scaled back or discontinued. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48 "Accounting for Uncertainty in Income Taxes" ("FIN48"). FIN 48 sets forth a recognition threshold and measurement attribute for financial statement recognition of positions taken or expected to be taken in income tax returns. The required adoption of FIN 48 as of January 1, 2007 had no material impact on the Company's consolidated financial statements. The tax years 2003-2006 remain open to examination by the major taxing jurisdictions to which we are subject.

2. ACCOUNTING FOR STOCK BASED COMPENSATION

During December 1996, the Company adopted the NexMed, Inc. Stock Option and Long-Term Incentive Compensation Plan (“the Incentive Plan”) and the NexMed, Inc. Recognition and Retention Stock Incentive Plan (“the Recognition Plan”). A total of 2,000,000 shares were set aside for these two plans. In May 2000, the Stockholders approved an increase in the number of shares reserved for the Incentive Plan and Recognition Plan to a total of 7,500,000. During June 2006, the Company adopted the NexMed, Inc. 2006 Stock Incentive Plan. A total of 3,000,000 shares were set aside for the plan. Options granted under the Company’s plans generally vest over a period of one to five years, with exercise prices of currently outstanding options ranging from $0.55 to $16.25. The maximum term under these plans is 10 years.

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), which establishes the financial accounting and reporting standards for stock-based compensation plans. SFAS 123R requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including employee stock options and restricted stock. Under the provisions of SFAS 123R, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense on a straight-line basis over the requisite service period of the entire award (generally the vesting period of the award). The Company adopted the provisions of SFAS 123R as of January 1, 2006 using the modified prospective transition method. Under this transition method, stock-based compensation expense for the three and nine months ended September 30, 2007 and September 30, 2006 includes expense for all equity awards granted during the three and nine months ended September 30, 2007 and prior, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123,”) as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Also in accordance with the modified prospective transition method, prior interim and annual periods have not been restated and do not reflect the recognition of stock-based compensation cost under SFAS 123R. Since the adoption of SFAS 123R, there have been no changes to the Company’s stock compensation plans or modifications to outstanding stock-based awards which would increase the value of any awards outstanding. Compensation expense for all stock-based compensation awards granted subsequent to January 1, 2006 was based on the grant-date fair value determined in accordance with the provisions of SFAS 123R.

As a result of adopting SFAS 123R, the Company’s net loss and its non cash compensation expense as shown in the Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and September 30, 2006 is more by $167,641, $676,049 and $193,065, $812,632, respectively, than if the Company had continued to account for stock-based compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and its related interpretations. Basic and diluted net loss per share for the three and nine months ended September 30, 2007 and September 30, 2006 is more by $0.002, $0.008 and $0.003, $0.01, respectively, than if the Company had not adopted SFAS 123R.

The following table indicates where the total stock-based compensation expense resulting from stock options and awards appears in the Statement of Operations (unaudited):

	FOR THE THREE MONTHS				FOR THE NINE MONTHS ENDED
	ENDED SEPTEMBER 30,				SEPTEMBER 30,
	2007		2006		2007		2006

General and administrative	$	163,409	$	203,385	$	640,764	$	880,422
Research and development		4,232		25,680		35,285		40,210

Stock-based compensation expense	$	167,641	$	229,065	$	676,049	$	920,632

The stock-based compensation expense has not been tax-effected due to the recording of a full valuation allowance against U.S. net deferred tax assets.

The Company accounts for stock and stock options granted to non-employees on a fair value basis in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." Any stock or stock options issued to non-employees are recorded in the consolidated financial statements using the fair value method and then amortized to expense over the applicable service periods. As a result, the non-cash charge to operations for non-employee options with vesting or other performance criteria is valued each reporting period based upon changes in the fair value of the Company's common stock.

During the nine months ended September 30, 2007, the Company issued 60,000 shares of its common stock in payment for services rendered by a consultant. Accordingly, the Company recorded $60,000 to general and administrative expenses in the Statement of Operations based on the fair value of its common stock on the date of issuance.

The fair value of each stock option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions used for the three and nine months ended September 30, 2007 and 2006:

Dividend yield	0.00	%
Risk-free yields	4.15% - 4.47	%
Expected volatility	80% - 105	%
Expected option life	6 years

Expected Volatility. The Company uses analysis of historical volatility to compute the expected volatility of its stock options.

Expected Term. The expected term is based on several factors including historical observations of employee exercise patterns during the Company’s history and expectations of employee exercise behavior in the future giving consideration to the contractual terms of the stock-based awards.

Risk-Free Interest Rate. The interest rate used in valuing awards is based on the yield at the time of grant of a U.S. Treasury security with an equivalent remaining term.

Dividend Yield. The Company has never paid cash dividends, and does not currently intend to pay cash dividends, and thus has assumed a 0% dividend yield.

Pre-Vesting Forfeitures. Estimates of pre-vesting option forfeitures are based on Company experience. The Company will adjust its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods. The cumulative effect resulting from initially applying the provisions of SFAS 123R to nonvested equity awards was not significant. The Company’s current forfeiture rate is 6.41%.

Stock Options and Restricted Stock

Presented below is a summary of the status of Company stock options as of September 30, 2007, and related transactions for the nine months then ended (unaudited):

				Weighted		Weighted		Total
				Average		Average Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value

Outstanding at December 31, 2006		3,663,421
Granted		27,100		$	1.28
Exercised		(58,480	)	$	0.96
Forfeited		(317,200	)	$	2.82

Outstanding at September 30, 2007		3,314,841		$	1.41		7.42 years	$	2,279,888

Vested or expected to vest at September 30, 2007		3,102,360		$	1.41		7.42 years	$	2,133,747

Exercisable at September 30, 2007		2,801,741		$	1.50		7.24 years	$	1,889,346

		Options Outstanding								Options Exercisable
				Weighted Average				Aggregate						Aggregate
Range of		Number		Remaining		Weighted Average		Intrinsic		Number		Weighted Average		Intrinsic
Exercise Prices		Outstanding		Contractual Life		Exercise Price		Value*		Exercisable		Exercise Price		Value*
$	.55 - 1.85		2,779,390		7.83 years	$	0.83	$	2,279,888		2,266,290	$	0.82	$	1,889,346
	2.00 - 3.99		139,250		3.34 years		2.83		-		139,250		2.83		-
	4.00 - 5.50		374,301		4.76 years		4.65		-		374,301		4.76		-
	7.00 - 8.00		15,000		2.63 years		8.00		-		15,000		8.00		-
	12.00 - 16.25		6,900		3.02 years		14.40		-		6,900		14.40		-

			3,314,841			$	1.41	$	2,279,888		2,801,741	$	1.50	$	1,889,346

*Intrinsic values are determined by comparing the aggregate exercise prices of options to the closing price of our Common Stock on September 30, 2007

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2007 and September 30, 2006 was $1.28 and $0.77, respectively. The intrinsic value (the difference between the aggregate exercise price and the closing price of our common stock on the date of exercise) on the exercise date of options exercised during the nine months ended September 30, 2007 and 2006 was $23,529 and $108,328, respectively. Cash received from option exercises for the nine months ended September 30, 2007 and September 30, 2006, was $56,164 and $97,316, respectively.

On January 24, 2007, the Company issued awards of restricted shares of the Company’s common stock to Richard Berman, Chief Executive Officer, Vivian Liu, Chief Operating Officer, and Mark Westgate, Chief Financial Officer. Mr. Berman’s award of 60,000 shares vests in four equal installments on March 31, June 30, September 30, and December 31, 2007, assuming continuous and uninterrupted service as Chief Executive Officer of the Company. Mr. Berman’s 30,000 unvested shares at June 30, 2007 were cancelled upon his resignation as CEO and the appointment of Ms. Liu to the position of CEO. Ms. Liu and Mr. Westgate received awards of 150,000 and 75,000 restricted shares, respectively. Ms. Liu and Mr. Westgate’s awards vest in three equal installments on December 31, 2007, 2008 and 2009, assuming continuous and uninterrupted service with the Company.

Also on January 24, 2007, the Company issued awards of shares of the Company’s common stock to Board members Leonard Oppenheim, Martin Wade and Arthur Emil for their services during their 2006 – 2007 terms. Mr. Oppenheim received an award of 25,000 shares for his service as Chairman of the Board of Directors. Mr. Wade received an award of 10,000 shares for his service as Chairman of the Audit Committee and Compensation Committee of the Board of Directors. Mr. Emil received an award of 5,000 shares for his service as Chairman of the Corporate Governance/Nominating Committee of the Board of Directors.

Additionally, on April 1, June 28, and September 28, 2007 the Company issued awards of shares of the Company’s common stock to each independent director as compensation for their services during the quarters ended March 31, June 30, 2007 and September 30, 2007. Each independent director received 10,227 shares of common stock for a total of 51,135 shares issued on April 1, June 28, and September 28, 2007.

The Company appointed Dr. David S. Tierney to the Board of Directors on January 24, 2007. In connection with his appointment to the Board, the Company issued an award of restricted shares of the Company’s common stock as compensation for his services as a member of the Board of Directors. The restricted stock award of 30,000 shares vests in three equal installments on February 1, 2007 and on the dates of the Annual Meeting of Stockholders in 2007 and 2008 assuming continuous and uninterrupted service with the Company.

On September 12, 2007, the Company issued awards of shares of the Company’s common stock to Board members Leonard Oppenheim, Martin Wade, Arthur Emil and David Tierney for their services during their 2007 – 2008 terms. Mr. Oppenheim received an award of 5,000 shares for his service as Chairman of the Finance Committee of the Board of Directors. Mr. Wade received an award of 10,000 shares for his service as Chairman of the Audit Committee and Compensation Committee of the Board of Directors. Mr. Emil received an award of 5,000 shares for his service as Chairman of the Corporate Governance/Nominating Committee of the Board of Directors. Dr. Tierney received an award of 20,000 shares for his service as Chairman of the Company’s Scientific Advisory Board.

As of September 30, 2007, there was $306,478 of total unrecognized compensation cost related to non-vested stock and stock options. That cost is expected to be recognized over a weighted-average period of 1.48 years.

3. WARRANTS

A summary of warrant activity for the nine month period ended September 30, 2007 is as follows:

				Weighted		Weighted
	Common Shares			Average		Average
	Issuable upon			Exercise		Contractual
	Exercise			Price		Life

Outstanding at December 31, 2006		20,125,027		$	1.33		2.49 yrs
Issued		-			-
Exercised		(2,790,495	)	$	1.83
Cancelled		(5,344,578	)	$	1.40
Outstanding at September 30, 2007		11,989,954		$	1.43		2.59 yrs
Exercisable at September 30, 2007		11,989,954		$	1.43		2.59 yrs

Cash received from warrant exercises for the nine months ended September 30, 2007 and September 30, 2006, was $148,528 and $0, respectively. Additionally, warrants to purchase 2,663,400 shares of common stock were exercised during the nine months ended September 30, 2007 under the cashless exercise provisions of the applicable warrant agreement. As such, 1,512,368 net shares were issued to the warrant holder upon the cashless exercise.

4. LOSS PER SHARE

At September 30, 2007 and 2006, respectively, options to acquire 3,314,841 and 3,183,745 shares of common stock with exercise prices ranging from $.55 to $16.25 per share, warrants to acquire 13,010,786 and 14,304,894 shares of common stock with exercise prices ranging from $0.55 to $3.00 and convertible securities convertible into zero and 1,200,000 shares of common stock in 2007 and 2006, respectively, at a conversion price of $5.00 were excluded from the calculation of diluted loss per share, as their effect would be anti-dilutive. Loss per share for the three and nine months ended September 30, 2007 and 2006 was calculated as follows (net loss applicable to common stock / weighted average common shares outstanding):

	FOR THE THREE MONTHS						FOR THE NINE MONTHS ENDED
	ENDED SEPTEMBER 30,						SEPTEMBER 30,
	2007			2006			2007			2006

Net loss applicable to common stock	$	(2,062,378	)	$	(1,987,835	)	$	(6,092,708	)	$	(5,982,140	)

Weighted average common shares outstanding used for basic and diluted loss per share		82,700,287			66,643,197			81,710,215			65,299,502

Basic and diluted loss per common share	$	(0.02	)	$	(0.03	)	$	(0.07	)	$	(0.09	)

5. CONVERTIBLE NOTES PAYABLE

On December 12, 2003, the Company issued convertible notes (the “Notes”) in an aggregate principal amount of $6 million. The Notes were payable in two installments of $3 million on November 30, 2006 and May 31, 2007 and were collateralized by the Company’s facility in East Windsor, New Jersey. The Notes were initially convertible into shares of the Company’s common stock at a conversion price equal to $6.50 per share (923,077 shares). Pursuant to the terms of the Notes, the conversion price was adjusted on June 14, 2004 to the greater of (i) the volume weighted average price of the Company’s stock over the six-month period ending on such date and (ii) $5.00. Since the volume weighted average price of the Company’s stock during this period was below $5.00, the conversion price was adjusted to $5.00 (1,200,000 shares). Interest accreted on the Notes on a semi-annual basis at a rate of 5% per annum, and the Company could pay such amounts in cash or by effecting the automatic conversion of such amount into the Company’s common stock at a 5% premium to the then average market prices.

On November 30, 2006, the Company paid in cash the $3 million installment due plus accrued interest of $25,417.

In April 2007, the Company issued 59,576 shares of its common stock as payment of an aggregate of $75,833 in interest on the Notes.

On May 31, 2007, the Company paid in cash the remaining $3 million balance due plus accrued interest of $25,417. As of June 30, 2007, there was no remaining balance due to the holders of the Notes.

6. NOTE PAYABLE

On November 30, 2006, the Company issued a Note in a principal amount of $2 million. The Note was payable on the earlier of December 31, 2007 or the closing by the Company on the sale of the Company’s facility in East Windsor. Interest accreted on the Note on a quarterly basis at a rate of 7.5% per annum provided, however, if the Company had not entered into a contract of sale of the East Windsor property on or prior to May 31, 2007, and the Note had not been repaid by such date, the interest rate would increase to 8.5%. As such, on May 31, 2007, the interest rate increased to 8.5%.

The Company also issued to the Note holder a 4-year detachable warrant to purchase 500,000 shares of common stock at an exercise price of $0.5535. The Company valued the warrants using the Black-Scholes pricing model. The Company allocated a relative fair value of $138,000 to the warrants. The relative fair value of the warrants was allocated to additional paid in capital and treated as a discount to the Note that was being amortized over the 13-month period ending December 31, 2007. The balance of the Note discount was expensed as interest upon the Note being repaid on October 29, 2007.

On February 28, 2007, the Company issued 28,809 shares of its common stock as payment of an aggregate of $25,000 in interest on the Note.

On May 1, 2007, the Company issued 30,711 shares of its common stock as payment of an aggregate of $37,500 in interest on the Note.

On August 1, 2007 the Company issued 26,518 shares of its common stock as payment of an aggregate of $40,833 in interest on the Note.

On October 29, 2007, the Company paid in cash the $2 million balance on the Note plus accrued interest of $42,028.

7. DEFERRED COMPENSATION

On February 27, 2002, the Company entered into an employment agreement with Y. Joseph Mo, Ph.D., that had a constant term of five years, and pursuant to which Dr. Mo would serve as the Company's Chief Executive Officer and President. Under the employment agreement, Dr. Mo was entitled to deferred compensation in an annual amount equal to one sixth of the sum of his base salary and bonus for the 36 calendar months preceding the date on which the deferred compensation payments commenced subject to certain limitations, including annual vesting through January 1, 2007, as set forth in the employment agreement. The deferred compensation is payable monthly for 180 months commencing on termination of employment. Dr. Mo’s employment was terminated as of December 15, 2005. At such date, the Company accrued deferred compensation of $1,178,197 based upon the estimated present value of the obligation. The monthly deferred compensation payment through May 15, 2021 will be $9,158. As of September 30, 2007 the Company has accrued $1,077,612 in deferred compensation.

8. SERIES C 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK

On May 17, 2005, the Company sold an aggregate of 445 shares of its Series C 6% cumulative convertible preferred stock (the “Series C Stock”) and raised gross proceeds of $4,450,000 ($10,000 liquidation preference per share). Each preferred share of the Series C Stock was initially convertible at the holder’s option into approximately 7,353 shares of common stock (total of 3,272,059 shares). Each investor also received for each share of Series C Stock purchased, 4-year detachable warrants to purchase 2,672 shares of common stock (total of 1,188,931 warrants) at an exercise price of $1.43 per share. The Series C Stock could be converted at any time, at the holder’s option, into shares of the Company’s common stock at an initial conversion value of $1.36. The Company also had the right to force conversion of the Series C Stock, under certain circumstances, at the initial conversion value. Under the terms of the certificate of designation of the Series C Stock, the Company agreed to redeem at the liquidation preference per share or convert the Series C Stock on a quarterly basis, subject, in each case, to reduction by previously converted shares of Series C Stock, as follows: $2 million plus accrued dividends on September 30, 2005, $1 million plus accrued dividends each on December 31, 2005 and September 30, 2006 and $450,000 plus accrued dividends on September 30, 2006.

On June 30, 2006, pursuant to the terms of the Series C Stock, the Company converted the remaining 15.5 preferred shares and accrued dividends through June 30, 2006 of $159,612 at a price of $0.65 per share. Upon conversion, the Company issued a total of 244,113 shares of common stock. As of June 30, 2007, no shares of the Series C Stock remained outstanding.

The Company valued the warrants using the Black-Scholes pricing model. The Company allocated a relative fair value of $799,844 to the warrants. The relative fair value of the warrants was allocated to additional paid in capital and treated as a discount to the Series C Stock that would not be amortized until such time as the redemption for cash became probable. Therefore, the Company recorded a deemed dividend to the shareholders of the Series C Stock in proportion to the amount redeemed at any time redemption for cash became probable. Assumptions utilized in the Black-Scholes model to value the warrants were: exercise price of $1.43 per share; fair value of the Company’s common stock on the date of issuance of $1.33 per share; volatility of 80%; term of 4 years and a risk-free interest rate of 3.97%.

The allocated value of the Series C Stock contained a beneficial conversion feature calculated based upon the difference between the effective conversion price of the proceeds allocated to the Series C Stock, and the fair market value of the common stock on the date of issuance. As a result, the Company recorded a deemed dividend to the shareholders of the Series C Stock of $636,241 on the issuance date, representing the value of the beneficial conversion feature of the Series C Stock. As the Company had no retained earnings on the date of the deemed dividend, the dividend was recorded as a reduction to additional paid in capital.

The Company also recorded a discount to the Series C Stock of $209,686 based on a contingent beneficial conversion feature which would arise because the Company must adjust the conversion price to be equal to a 4.5% discount to the then common stock price on each respective settlement date. The Company has amortized this discount, which is treated as a deemed dividend, over the life of the Series C Stock using the effective interest method. For the nine months ended September 30, 2006, the Company recorded a deemed dividend to the shareholders of the Series C Stock of $12,796 based on the amortization of the beneficial conversion feature.

For the nine months ended September 30, 2006 pursuant to the terms of the Series C Stock, the Company recorded dividends in the amount of $15,624 as a dividend to preferred shareholders in the Consolidated Statements of Operations.

The Company incurred issuance costs associated with the preferred placement of $230,031. The relative fair value of the issuance costs attributable to the Series C Stock of $188,685 was accreted as a deemed dividend to the holders of the Series C Stock at such time conversion became probable. The relative fair value of the issuance costs attributable to the warrants of $41,346 has been recorded as an offset to additional paid in capital. For the nine months ended September 30, 2006, the Company amortized $37,101 of the issuance costs as a deemed dividend to the preferred shareholders in the Consolidated Statements of Operations.

9. INCOME TAXES

In consideration of the Company’s accumulated losses and lack of historical ability to generate taxable income, the Company has determined that it will not be able to realize any benefit from its temporary differences between book income and taxable income in the foreseeable future, and has recorded a valuation allowance of an equal amount to fully offset the deferred tax benefit amount.

10. COMMITMENTS AND CONTINGENCIES

The Company is a party to clinical research agreements in connection with a one-year open-label study for its topical alprostadil-based cream treatment for erectile dysfunction (“ED Product”) with commitments by the Company that initially totaled approximately $12.8 million. These agreements were amended in October 2005 such that the total commitment was reduced to approximately $4.2 million. These agreements provide that if the Company cancels them prior to 50% completion, the Company will owe the higher of 10% of the outstanding contract amount prior to the amendment or 10% of the outstanding amount of the amended contract at the time of cancellation. At September 30, 2007, this amounts to approximately $1.1 million. The Company anticipates that the clinical research in connection with the agreements may be completed in 2008.

11. LICENSING AGREEMENTS

On September 15, 2005, the Company signed an exclusive global licensing agreement with Novartis International Pharmaceutical Ltd., (“Novartis”) for its anti-fungal product, NM100060. Under the agreement, Novartis acquired the exclusive worldwide rights to NM100060 and would assume all further development, regulatory, manufacturing and commercialization responsibilities as well as costs. Novartis agreed to pay the Company up to $51 million in upfront and milestone payments on the achievement of specific development and regulatory milestones, including an initial cash payment of $4 million at signing. In addition, the Company is eligible to receive royalties based upon the level of sales achieved and is entitled to receive reimbursements of third party preclinical study costs up to $3.25 million. The Company is recognizing the initial up front and preclinical reimbursement revenue from this agreement based on the cost-to-cost method over the 32-month period estimated to complete the remaining preclinical studies for NM100060.

On February 16, 2007, the Novartis agreement was amended. Pursuant to the amendment, the Company is no longer obligated to complete the remaining preclinical studies for NM100060. Novartis has taken over all responsibilities related to the remaining preclinical studies. As such, the balance of deferred revenue of $1,693,917 at December 31, 2006 is being recognized as revenue on a straight line basis over the 18 month period ended June 30, 2008 which is the estimated performance period for Novartis to complete the remaining preclinical studies. Accordingly, for the three and nine month period ended September 30, 2007, the Company recognized licensing revenue of $282,319 and $846,957, respectively, related to the Novartis agreement.

12. SUBSEQUENT EVENTS

On October 26, 2007 the Company issued a Note in a principal amount of $3 million. The Note is payable on June 30, 2009 and can be prepaid by the Company at any time without penalty. Interest accretes on the Note on a quarterly basis at a rate of 8.0% per annum.

The Company also issued to the Note holder a 5-year detachable warrant to purchase 450,000 shares of common stock at an exercise price of $1.52. Of the total warrants issued, 350,000 warrants vest immediately and the remaining 100,000 warrants will vest if the Note remains outstanding on October 26, 2008.

The Note is collateralized by the Company’s facility in East Windsor, New Jersey. The Company terminated an earlier agreement of sale for the Company’s East Windsor facility due to a breach by the buyer.

On November 1, 2007, the Company signed an exclusive licensing agreement with Warner Chilcott Company, Inc., (“Warner”) for its topical alprostadil-based cream treatment for erectile dysfunction (“ED Product”). Under the agreement, Warner acquired the exclusive rights in the United States to the ED Product and will assume all further development, manufacturing, and commercialization responsibilities as well as costs. Warner agreed to pay the Company an up front payment of $500,000 and up to $12.5 million in milestone payments on the achievement of specific regulatory milestones. In addition, the Company is eligible to receive royalties based upon the level of sales achieved.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Disclosures Regarding Forward-Looking Statements.

The following should be read in conjunction with the unaudited consolidated financial statements and the related notes that appear elsewhere in this document. This report includes forward-looking statements made based on current management expectations pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual outcomes may differ materially from what is expressed or forecast. There are many factors that affect our business, consolidated financial position, results of operations and cash flows, including but not limited to, our ability to enter into partnering agreements or raise financing on acceptable terms, successful completion of clinical development programs, regulatory review and approval, product development and acceptance, manufacturing, competition, and/or other factors, many of which are outside our control.

General.

We are a Nevada corporation and have been in existence since 1987. Since 1994, we have positioned ourselves as a pharmaceutical and medical technology company with a focus on developing and commercializing therapeutic products based on proprietary delivery systems. We are currently focusing our efforts on new and patented topical pharmaceutical products based on a penetration enhancement drug delivery technology known as NexACT^®, which may enable an active drug to be better absorbed through the skin.

The NexACT^® transdermal drug delivery technology is designed to enhance the absorption of an active drug through the skin, overcoming the skin's natural barrier properties and enabling high concentrations of the active drug to rapidly penetrate the desired site of the skin or extremity. Successful application of the NexACT^® technology would improve therapeutic outcomes and reduce systemic side effects that often accompany oral and injectable medications. We have applied the NexACT^® technology to a variety of compatible drug compounds and delivery systems, and on our own or through development partnerships are in various stages of developing new topical treatments for sexual dysfunction, nail fungus and other dermatological conditions. We intend to continue our efforts developing topical treatments based on the application of NexACT^® technology to drugs: (1) previously approved by the FDA, (2) with proven efficacy and safety profiles, (3) with patents expiring or expired and (4) with proven market track records and potential.

On June 18, 2007, Vivian H. Liu was appointed as our Chief Executive Officer. Ms. Liu succeeded Richard J. Berman, who was elected by the Board to serve as its non-executive Chairman. Mr. Berman was our Chief Executive Officer from January 2006 through June 2007 and has served as a Director of NexMed since 2002. At the Annual Meeting of Stockholders on June 18, 2007, Ms. Liu was also elected to serve on the Board of Directors for a three-year term. In addition, we have formed a Scientific Advisory Board headed by Dr. David Tierney who also serves as a Director on the Board of Directors. The focus of the Scientific Advisory Board is to assist us in evaluating our current pipeline consisting of early stage NexACT^® based products under development, and also assist us in identifying and evaluating new product development opportunities going forward.

On September 15, 2005, we announced an exclusive global licensing agreement with Novartis International Pharmaceutical Ltd. (“Novartis”), for NM100060, our proprietary nail lacquer treatment for onychomycosis (nail fungal infection). Under the agreement, Novartis acquired the exclusive worldwide rights to NM100060 and has assumed all further development, regulatory, manufacturing and commercialization responsibilities as well as costs. Novartis agreed to pay us up to $51 million in upfront and milestone payments on the achievement of specific development and regulatory milestones, including an initial cash payment of $4 million at signing. We expect to receive an additional $3 million in early 2008 which was triggered by the recent completion of patient recruitment in the ongoing Phase 3 trials. In addition, we are eligible to receive royalties based upon the level of sales achieved.

On July 9, 2007, we announced that Novartis had completed patient enrollment for the Phase 3 clinical trials for NM100060. The Phase 3 program for NM100060 consists of two pivotal, randomized, double-blind, placebo-controlled studies. The parallel group studies are designed to assess the efficacy, safety and tolerability of NM100060 in patients with mild to moderate toenail onychomycosis. Approximately 1,000 patients are enrolled in the two studies, which are taking place in the U.S., Europe, Canada and Iceland. The Phase 3 program is expected to be completed in mid-2008.

In March 2007, Novartis commenced a comparator study in ten European countries. Over 900 patients with mild to moderate onychomycosis are participating in this open-label study, which is designed to assess the safety and tolerability of NM100060 (terbinafine 10% topical formulation) versus amorolfine 5% nail lacquer, a topical treatment for onychomycosis that is approved in Europe. The comparator study is expected to be completed during the second half of 2008 and the data will be included in the European regulatory application.

The most advanced of our products under development is our topical alprostadil-based cream treatment intended for patients with erectile dysfunction (“the ED Product”), which was previously known as Alprox-TD^®. The FDA informed us that we could no longer use the name because of possible name confusion with another product currently marketed. On September 21, 2007, we filed our New Drug Application (“NDA”) with the FDA. The FDA takes up to 60 days before confirming whether the NDA has been accepted for review.

In December 2002, we completed our two pivotal Phase 3 studies on the ED Product that tested over 1,700 patients with erectile dysfunction at 85 sites throughout the U.S. We announced in 2006 that we developed a room temperature stable prototype for the ED Product which significantly extends the shelf life of the product and thus makes it more attractive for potential licensing partners. We estimate that $5 million will have to be invested in the scale-up (developing the prototype to production level) of the room temperature prototype. In addition, we estimate an additional $2 million will need to be spent on our East Windsor manufacturing facility in order for the facility to pass inspection by the regulatory authorities and manufacture commercialization batches of the refrigerated ED Product. On November 1, 2007, we licensed the US rights of our ED Product to Warner Chilcott Company, Inc. (“Warner”). As part of the financial package to be paid for the right to commercialize the product, Warner will undertake the manufacturing investment and any other investment for further product development that may be required for product approval.

We continue to be in discussions with potential partners for Europe and other international markets. Assuming a potential partner agrees to make the necessary investment, the consummation of a commercialization arrangement is subject to complex negotiations of contractual relationships, and we may not be able to consummate such relationship on a timely basis, or on terms acceptable to us.

Our regulatory strategy for our ED Product includes the filing of the NDA in the United States and New Drug Submission (“NDS”) in Canada in 2007, and Marketing Authorization Application (“MAA”) in Europe during 2008. We have taken the position that the safety data of the product, which is based on our clinical database of over 3,000 patients, should be sufficient for filing the NDA/NDS/MAA and, therefore, we do not need to conduct a 12-month open-label study as indicated by ICH (International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use) guidance.

On February 21, 2007, the Canadian regulatory authority, Health Canada, informed us that the lack of a completed 12-month open label safety study would not preclude them from accepting and reviewing our NDS in Canada. On October 19, 2007, we filed the NDS for our ED Product and await confirmation of acceptance for review which typically takes up to 60 days. Once accepted, the review and approval process takes about 12 months. Even though we are encouraged by the initial positive feedback from Health Canada, the risk remains that we may not be successful in convincing them to approve our product for marketing.

On April 20, 2007, the United Kingdom regulatory authority, Medicines and Healthcare Products Regulatory Agency (the “MHRA”) also informed us that the safety data that we have compiled to date was sufficient for the MAA to be filed and accepted for review in the United Kingdom. Even though we are encouraged by the initial positive feedback from the MHRA, the risk remains that we may not be successful in convincing the MHRA and other European regulatory authorities to approve our product for marketing. Our plan is to file the MAA in Europe under the mutual recognition system so we will submit applications in France, Germany, Italy, Spain, and the United Kingdom which will also be identified as the reference state for our MAA.

In terms of the NDA filing in the US, there has been no discussion with the FDA concerning our regulatory position that the 3,000 patient clinical data base should be accepted in lieu of the ICH guidance for the 12 month open-label study. As such, we will learn whether the FDA agrees with our position when they review our NDA. We currently estimate the cost to complete a 12 month open-label study to be approximately $8 million. Warner will undertake the investment necessary to complete the 12 month open-label study should it be required by the FDA. There is always the risk that our NDA will not be accepted for review, or that even if it was accepted for review, we will not be successful in convincing the FDA to approve the product for marketing.

We are also developing Femprox^®, which is an alprostadil-based cream product intended for the treatment of female sexual arousal disorder. We have completed one U.S. Phase 2 study for Femprox^®, and also a 400-patient study for Femprox^® in China, where the cost for conducting clinical studies is significantly lower than in the U.S. We have been in contact with several potential co-development partners. We do not intend to conduct additional studies for this product until we have secured a co-development partner.

We have also continued early stage development work for our product pipeline with the goal of focusing our attention on product opportunities that would replicate the model of our licensed anti-fungal nail treatment.

Patents.

We have thirteen U.S. patents either acquired or received out of a series of patent applications that we have filed in connection with our NexACT^® technology and our NexACT-based products under development. To further strengthen our global patent position on our proprietary products under development, and to expand the patent protection to other markets, we have filed under the Patent Cooperation Treaty corresponding international applications for our issued U.S. patents and pending U.S. patent applications.

The following table identifies our thirteen U.S. patents issued for NexACT^® technology and/or our NexACT^®-based products under development, and the year of expiration for each patent. In addition, we have over 200 international patents and U.S. and international patent applications pending.

Patent Name	Expiration Date

Biodegradable Absorption Enhancers		2008
Biodegradable Absorption Enhancers		2009
Compositions and Methods for Amelioration of Human Female Sexual Dysfunction		2017
Topical Compositions for PGE1 Delivery		2017
Topical Compositions for Non-Steroidal Anti-Inflammatory Drug Delivery		2017
Prostaglandin Compositions & Methods of Treatment for Male Erectile Dysfunction		2017
Medicament Dispenser		2019
Crystalline Salts of dodecyl 2-(N, N-Dimethylamino) *		2019
Topical Compositions Containing Prostaglandin E₁		2019
CIP: Topical Compositions Containing Prostaglandin E₁		2019
Prostaglandin Composition and Methods of Treatment of Male Erectile Dysfunction		2020
CIP: Prostaglandin Composition and Methods of Treatment of Male Erectile Dysfunction		2020
Topical Stabilized Prostaglandin E Compound Dosage Forms		2023

^* Composition of matter patent on our NexACT^® technology which is included in all of our current products under development

While we have obtained patents and have several patent applications pending, the extent of effective patent protection in the U.S. and other countries is highly uncertain and involves complex legal and factual questions. No consistent policy addresses the breadth of claims allowed in or the degree of protection afforded under patents of medical and pharmaceutical companies. Patents we currently own or may obtain might not be sufficiently broad to protect us against competitors with similar technology. Any of our patents could be invalidated or circumvented.

While we believe that our patents would prevail in any potential litigation, the holders of competing patents could determine to commence a lawsuit against us and even prevail in any such lawsuit. Litigation could result in substantial cost to and diversion of effort by us, which may harm our business. In addition, our efforts to protect or defend our proprietary rights may not be successful or, even if successful, may result in substantial cost to us.

Research and Development.

Governmental authorities in the U.S. and other countries heavily regulate the testing, manufacture, labeling, advertising, marketing and distribution of our proposed products. None of our proprietary products under development have been approved for marketing in the U.S. Before we market any products we develop, we must obtain FDA and comparable foreign agency approval through an extensive clinical study and approval process.

The studies involved in the approval process are conducted in three phases. In Phase 1 studies, researchers assess safety or the most common acute adverse effects of a drug and examine the size of doses that patients can take safely without a high incidence of side effects. Generally, 20 to 100 healthy volunteers or patients are studied in the Phase 1 study for a period of several months. In Phase 2 studies, researchers determine the drug's efficacy and short-term safety by administering the drug to subjects who have the condition the drug is intended to treat. At the conclusion of the study, an assessment of the correct dosage level and whether the drug favorably affects the condition is made. Up to several hundred subjects may be studied in the Phase 2 study for approximately 6 to 12 months, depending on the type of product tested. In Phase 3 studies, researchers further assess efficacy and safety of the drug. Several hundred to thousands of patients may be studied during the Phase 3 studies for a period lasting from 12 months to several years. Upon completion of Phase 3 studies, a New Drug Application is submitted to the FDA or foreign governmental regulatory authority for review and approval.

Our failure to obtain requisite governmental approvals in a timely manner, or at all, will delay or preclude us from licensing or marketing our products or limit the commercial use of our products, which could adversely affect our business, financial condition and results of operations.

Because we intend to sell and market our products outside the U.S., we will be subject to foreign regulatory requirements governing the conduct of clinical trials, product licensing, pricing and reimbursements. These requirements vary widely from country to country. Our failure to meet a foreign country's requirements could delay the introduction of our proposed products in such foreign country and limit our revenues from sales of our proposed products in foreign markets.

Successful commercialization of our products may depend on the availability of reimbursement to consumers from third-party healthcare payers, such as government and private insurance plans. Even if we succeed in bringing one or more products to market, reimbursement to consumers may not be available or sufficient to allow us to realize an appropriate return on our investment in product development or to sell our products on a competitive basis. In addition, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to governmental controls. In the U.S., federal and state agencies have proposed similar governmental control and the U.S. Congress has recently considered legislative and regulatory reforms that may affect companies engaged in the healthcare industry. Pricing constraints on our products in foreign markets and possibly in the U.S. could adversely affect our business and limit our revenue.

Liquidity, Capital Resources and Financial Condition.

We have experienced net losses and negative cash flows from operations each year since our inception. Through September 30, 2007, we had an accumulated deficit of $131,823,582. Our operations have principally been financed through private placements of equity securities and debt financing. Funds raised in past periods should not be considered an indication of our ability to raise additional funds in any future periods.

As a result of our losses to date and accumulated deficit, there is doubt as to our ability to continue as a going concern, and, accordingly, our independent registered public accounting firm has modified its report on our December 31, 2006 consolidated financial statements included in our Annual Report on Form 10-K in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. These factors may make it more difficult for us to obtain additional funding to meet our obligations. Our ability to continue as a going concern is based on our ability to generate or obtain sufficient cash to meet our obligations on a timely basis and ultimately become profitable.

At September 30, 2007 we had cash and cash equivalents and short term investments of approximately $2.9 million as compared to $12.1 million at December 31, 2006. Our net decrease in cash in the first nine months of 2007 is the result of our average fixed monthly overhead costs of approximately $450,000 per month, direct costs of approximately $1.9 million related to the preparation of the regulatory filings for our ED Product including the filing fee of $896,000, and the repayment on May 31, 2007 of the $3 million convertible notes as discussed in Note 5 of the unaudited consolidated financial statements. Pursuant to the FDA regulations, we have been notified that the filing fee of $896,000 will be refunded to us as this is our first NDA filing and we are a small business as defined by the FDA regulations. As such, the filing fee is recorded in prepaid and other current assets in the unaudited consolidated balance sheet. We expect the filing fee to be returned to us before the end of November 2007.

On October 26, 2007 we issued a note in a principal amount of $3 million (the “2007 Note”). The 2007 Note is due June 30, 2009 and accretes interest at a rate of 8% per annum as discussed in Note 12 of the unaudited consolidated financial statements. We used approximately $2.1 million of the 2007 Note proceeds to pay in full the principal amount of the $2 million note that was due on December 31, 2007, plus accrued interest as discussed in Note 6 of the unaudited consolidated financial statements. The approximately $900,000 remaining was added to our current cash reserves along with the $500,000 up front payment received from Warner as discussed in Note 12 of the unaudited consolidated financial statements, which gives us sufficient cash reserves to fund our operations through the end of the first quarter of 2008, based on our projected average fixed monthly overhead costs of approximately $525,000 in 2008 and the remaining anticipated expenditure of approximately $500,000 related to the regulatory filings in Europe for our ED Product. Additionally, we will receive a $3 million milestone payment from Novartis in early 2008 pursuant to the terms of the licensing agreement whereby the payment is due seven months after the completion of patient enrollment for the Phase 3 clinical trials for NM100060, which occurred in July 2007. Our cash reserves of $3.4 million as of the date of this report together with the expected refund of the $896,000 NDA filing fee and the $3 million milestone payment in 2008 from Novartis should provide us with sufficient cash reserves to fund our operations through the end of 2008.

At September 30, 2007 we had other receivable of $0 as compared to $183,700 at December 31, 2006. The other receivable consists of amounts billed to Novartis in connection with the exclusive global licensing agreement for our NM100060 nail lacquer. Pursuant to the terms of the agreement, Novartis has agreed to reimburse us for related patent expenses as well as the remaining costs for completion of preclinical studies that we had begun prior to the signing of the agreement. On February 16, 2007, the Novartis agreement was amended. Pursuant to the amendment, the Company is no longer obligated to complete the remaining preclinical studies for NM100060. Novartis has taken over all responsibilities related to the remaining preclinical studies. As such, we did not bill Novartis for any preclinical reimbursement costs in the first half of 2007 and will not be billing Novartis for such costs in any future periods.

At September 30, 2007 we had prepaid expenses and other current assets of $1,146,774 as compared to $164,898 at December 31, 2006. The increase is due to the payment of the $896,000 filing fee in connection with our filing of the NDA for our ED Product. As confirmed by the FDA, we expect the filing fee to be refunded to us before the end of November 2007 as this is our first NDA filing and we are a small business as defined by the FDA regulations. As such, the filing fee is recorded in prepaid and other current assets in the unaudited consolidated balance sheet.

At September 30, 2007 we had convertible notes of $0 as compared to $3,000,000 at December 31, 2006. The notes were due and paid in cash on May 31, 2007. Therefore, at September 30, 2007, there is no remaining balance due to the holders of the convertible notes.

For the nine months ended September 30, 2007 we incurred loss on disposal of fixed assets (included in general and administrative expenses in our unaudited consolidated statement of operations) of $7,911 as compared to $222,798 in 2006. The loss on disposal of fixed assets resulted from the consolidation of our operations in 2006 into our East Windsor facility which was originally designed for manufacturing with offices and laboratories. In consolidating our facilities and reducing staff in 2006 we determined that we had excess laboratory equipment. We wrote off obsolete equipment and sold many pieces of equipment.

To date, we have spent approximately $71 million on our ED Product development program. Pursuant to our license agreement signed on November 1, 2007, Warner will undertake the manufacturing investment and any other investment for further product development that may be required for product approval in the United States. We anticipate that the remaining cost to prepare all of the relevant dossiers and assemble the regulatory approval applications in Canada and Europe will be approximately $785,000 which we have budgeted in our 2007 and 2008 expenditures.

Critical Accounting Estimates.

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. Actual results could differ from these estimates. There have been no material changes to our Critical Accounting Policies described in our Form 10-K filed with the Securities and Exchange Commission on March 26, 2007.

Comparison of Results of Operations Between the Three Months Ended September 30 of 2007 and of 2006.

Revenue, principally license fee revenue. We recorded $296,390 in revenue during the third quarter of 2007, as compared to $446,268 in revenue during the third quarter of 2006. The revenue consisted of $940 and $1,669 in 2007 and 2006, respectively, in royalties on sales of Befar^® received from our Asian licensee and $295,450 and $444,599, respectively, of revenue on our Novartis licensing agreement. The decrease in revenue in 2007 is primarily attributable to the method used to recognize revenue from the $4 million up-front payment received in 2005 from Novartis under the licensing agreement for NM100060. As discussed in Note 11 to the Consolidated Financial Statements, the Novartis agreement was amended in February 2007 such that beginning with the first quarter of 2007 we are recognizing the initial up-front payment and preclinical reimbursement revenue from this agreement based on a straight-line basis over the 18 month period ended June 30, 2008 rather than the cost-to-cost method over the 32-month period estimated to complete the remaining preclinical studies for NM100060. Accordingly, the Company recognized significantly more revenue in the first quarter of 2006 as the preclinical studies were initiated because the high costs to initiate the preclinical studies in 2005 and early 2006 resulted in a larger portion of revenue recognized under the cost-to-cost method in 2006.

General and Administrative Expenses. Our general and administrative expenses decreased to $1,037,421 during the third quarter of 2007 as compared to $1,079,807 during the same period in 2006. The modest decrease is primarily due to a recognized loss on disposal of equipment of approximately $225,000 in 2006 as a result of the consolidation of our operations last year. This decrease in our loss on disposal of assets was partially offset by an increase in 2007 of $112,000 in expenses related to the national filings of patent applications for our ED Product as well as fees in connection with a patent lawsuit whereby we are the plaintiff suing for patent infringement on our herpes treatment medical device. Additionally in the third quarter of 2007 we had an increase in accounting fees of approximately $84,000 related to additional work performed by our independent registered accounting firm and our internal control consultants in connection with our compliance with the Sarbanes-Oxley Act of 2002.

Research and Development Expenses. Our research and development expenses for the third quarter of 2007 and 2006 were $1,266,792 and $1,332,351, respectively. Research and development expenses in the third quarter of 2007 included approximately $521,000 attributable to our ED Product and the balance attributable to other NexACT^® technology based products and indirect overhead related to research and development, as compared to approximately $295,000 for NM100060 and $372,000 for our ED Productduring the same period in 2006. We no longer have research and development expenses related to NM100060, as we are no longer obligated to complete the remaining preclinical studies for NM100060. Novartis has taken over all responsibilities related to the remaining preclinical studies whereas in 2006, we incurred the preclinical study costs and were reimbursed by Novartis.

Interest Expense, Net. We had interest expense net of interest income of $54,555 during the second quarter of 2007, as compared to $21,945 during the same period in 2006. The increase is primarily due to a decrease in interest income to offset the interest expense. Interest income decreased in 2007 as a result of lower average cash balances during the third quarter 2007 as compared to 2006 as we funded our operations in 2007 and repaid the $3 million note due in May 2007 without any significant cash inflows during 2007.

Net Loss. The net loss was $2,062,378 or $0.02 per share and $1,987,835 or $0.03 per share in the third quarter of 2007 and 2006, respectively. The increase is primarily attributable to the decrease in revenues primarily attributable to the method used to recognize revenue from the $4 million up-front payment received in 2005 from Novartis under the licensing agreement for NM100060. As discussed in Note 11 to the Consolidated Financial Statements, the Novartis agreement was amended in February 2007 such that beginning with the first quarter of 2007 we are recognizing the initial up-front payment and preclinical reimbursement revenue from this agreement based on a straight-line basis over the 18 month period ended June 30, 2008 rather than the cost-to-cost method over the 32-month period estimated to complete the remaining preclinical studies for NM100060. Accordingly, the Company recognized significantly more revenue in 2006 as the preclinical studies were initiated because the high costs to initiate the preclinical studies in 2005 and early 2006 resulted in a larger portion of revenue recognized under the cost-to-cost method in 2006.

Comparison of Results of Operations Between the Nine Months Ended September 30 of 2007 and of 2006.

Revenue, principally license fee revenues. We recorded $866,766 in revenue during the first nine months of 2007, as compared to $1,433,870 in revenue during the same period in 2006. The revenue consisted of $3,237 and $5,856 in 2007 and 2006, respectively, in royalties on sales of Befar^® received from our Asian licensee and $863,529 and $1,428,014, respectively, of revenue on our Novartis licensing agreement. Additionally, in the second quarter of 2006, we recognized $100,000 in research and development fee revenue received from a Japanese pharmaceutical company for whom we were developing a pain management patch product. In the second quarter of 2006, we decided to terminate the development agreement and transfer all know-how developed to date to the partner in exchange for such fee of $100,000. The decrease in revenue in 2007 is primarily attributable to the method used to recognize revenue from the $4 million up-front payment received in 2005 from Novartis under the licensing agreement for NM100060. As discussed in Note 11 to the Consolidated Financial Statements, the Novartis agreement was amended in February 2007 such that beginning with the first quarter of 2007 we are recognizing the initial up-front payment and preclinical reimbursement revenue from this agreement based on a straight-line basis over the 18 month period ended June 30, 2008 rather than the cost-to-cost method over the 32-month period estimated to complete the remaining preclinical studies for NM100060. Accordingly, the Company recognized significantly more revenue in the first half of 2006 as the preclinical studies were initiated because the high costs to initiate the preclinical studies in 2005 and early 2006 resulted in a larger portion of revenue recognized under the cost-to-cost method in 2006.

General and Administrative Expenses. Our general and administrative expenses decreased to $3,414,246 during the first nine months of 2007 as compared to $3,988,395 during the same period in 2006. The decrease is due in part to a decrease in general and administrative salaries of approximately $109,000 as a result of our restructuring program initially implemented in December 2005 and completed in March 2006. Additionally in the first nine months of 2006 we recognized a loss on the disposal of equipment of approximately $454,000 as a result of the consolidation of our operations. There was also a decrease in accounting and auditing expenses of $96,000 due to the cost savings realized during the 2006 audit of our financial statements which occurred and is expensed in 2007. We realized additional cost saving by changing our independent registered accounting firm for the 2006 audit. There was also a decrease in compensation expense of approximately $240,000 due to an increased number of stock options issued to Richard Berman and Leonard Oppenheim who were appointed as Chief Executive Officer and Lead Director, respectively, in the first half of 2006. These decreases in 2007 were partially offset by approximately $175,000 in consulting fees for business development and market research activities related to identifying potential commercial partners for our topical treatment for erectile dysfunction and $107,000 in increased expenses related to the national filings of patent applications for our ED Product as well as fees in connection with a patent lawsuit in which we are the plaintiff suing for patent infringement of our herpes treatment medical device.

Research and Development Expenses. Our research and development expenses for the first nine months of 2007 and 2006 were $3,459,390 and $3,925,827, respectively. Research and development expenses in the first nine months of 2007 included approximately $17,500 attributable to NM100060, $1.4 million attributable to our ED Product and the balance attributable to other NexACT^® technology based products and indirect overhead related to research and development, as compared to approximately $752,000 for NM100060 and $576,000 for our ED Productduring the same period in 2006. We no longer have research and development expenses related to NM100060, as we are no longer obligated to complete the remaining preclinical studies for NM100060. Novartis has taken over all responsibilities related to the remaining preclinical studies whereas in 2006, we incurred the preclinical study costs and were reimbursed by Novartis. Additionally, rent and utility expenses directly related to research and development decreased approximately $353,000 in 2007 as a result of the completion of our consolidation of facilities in April 2006.

Interest Expense, Net. We had interest expense net of interest income of $85,838 during the first nine months of 2007, as compared to $64,082 during the same period in 2006. The increase is primarily due to a decrease in interest income to offset the interest expense. Interest income decreased in 2007 as a result of lower average cash balances during the first nine months of 2007 as compared to 2006 as we funded our operations in 2007 and repaid the $3 million note due in May 2007 without any significant cash inflows during 2007.

Net Loss. The net loss was $6,092,708 and $5,916,979 in the first nine months of 2007 and 2006, respectively. The increase is attributable to a one-time payment that was accrued by the Company in 2006 when Schering elected to terminate the supply and distribution agreement for our topical erectile dysfunction treatment without cause. Pursuant to the agreement, Schering paid us a termination fee of 500,000 Euros or $627,455. We also had a decrease in revenues in 2007 as a result of the method used to recognize revenue from the $4 million up-front payment received in 2005 from Novartis under the licensing agreement for NM100060. As discussed in Note 11 to the Consolidated Financial Statements, the Novartis agreement was amended in February 2007 such that beginning with the first quarter of 2007 we are recognizing the initial up-front payment and preclinical reimbursement revenue from this agreement based on a straight-line basis over the 18 month period ended June 30, 2008 rather than the cost-to-cost method over the 32-month period estimated to complete the remaining preclinical studies for NM100060. Accordingly, the Company recognized significantly more revenue in 2006 as the preclinical studies were initiated because the high costs to initiate the preclinical studies in 2005 and early 2006 resulted in a larger portion of revenue recognized under the cost-to-cost method in 2006. While increased revenue in 2006 resulted in lower net loss in 2006, the decrease in revenue in 2007 was substantially offset by the decrease in expenses in 2007 attributable to our restructuring program initially implemented in December 2005 and completed in April 2006 whereby we significantly reduced our research and development project expenditures and staff and reduced our overhead by consolidating our facilities in 2006.

Net Loss applicable to Common Stock. The net loss applicable to common stock was $6,092,708 or $0.07 per share for the first nine months of 2007 as compared to $5,982,140 or $0.09 per share for 2006. The increase is primarily attributable to a one-time payment that was accrued by the Company in 2006 when Schering elected to terminate the supply and distribution agreement for our topical treatment for erectile dysfunction without cause and the method used to recognize revenue from the $4 million up-front payment received in 2005 from Novartis under the licensing agreement for NM100060 as discussed in the previous section above. While increased revenue in 2006 resulted in lower net loss in 2006, the decrease in revenue in 2007 was substantially offset by the decrease in expenses in 2007 attributable to our restructuring program initially implemented in December 2005 and completed in April 2006 whereby we significantly reduced our research and development project expenditures and staff and reduced our overhead by consolidating our facilities in 2006.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our exposures to market risk since December 31, 2006.

ITEM 4. CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company's management carried out an evaluation with participation of the Company's Chief Executive Officer and Chief Financial Officer, its principal executive officer and principal financial officer, respectively, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of the end of the period covered by this Form 10-Q that the Company's disclosure controls and procedures are effective. There were no changes in the Company's internal controls over financial reporting that occurred during the quarter covered by this report that have materially affected or are reasonably likely to materially affect the Company's internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no material changes to the legal proceedings described in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 26, 2007.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors described in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 26, 2007.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 1, 2007, the Company issued 26,518 shares of common stock to the holder of the $2 million Notes in payment of accrued interest for the three month period ended July 31, 2007 of $40,833. The common stock was issued pursuant to an exemption provided by Section 4(2) of the Securities Act of 1933.

ITEM 6. EXHIBITS

31.1		Chief Executive Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Chief Financial Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Chief Executive Officer’s Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – furnished only.
32.2		Chief Financial Officer’s Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – furnished only.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NEXMED, INC.

Date: November 14, 2007	/s/ Mark Westgate
	Mark Westgate
	Vice President and Chief Financial
	Officer

EXHIBIT INDEX

31.1		Chief Executive Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Chief Financial Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Chief Executive Officer’s Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – furnished only.
32.2		Chief Financial Officer’s Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – furnished only.