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


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 March 31, 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 May 8, 2007, 81,067,352 shares of Common Stock, par value $0.001 per share, were outstanding.
 
 
Table of Contents
 
       
Page
         
Part I. FINANCIAL INFORMATION
    
         
Item 1.
  
Financial Statements
    
         
   
Unaudited Consolidated Balance Sheets at March 31, 2007 and December 31, 2006
  
1
         
   
Unaudited Consolidated Statements of Operations for the Three Months Ended March
    
   
31, 2007 and March 31, 2006
  
 2
         
   
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March
    
   
31, 2007 and March 31, 2006
  
3
         
   
Notes to Unaudited Consolidated Financial Statements
  
  4
         
Item 2.
  
Management's Discussion and Analysis of Financial Condition and Results of
    
   
Operations
  
 14
         
Item 3.
  
Qualitative and Quantitative Disclosures about Market Risk
  
 22
         
Item 4.
  
Controls and Procedures
  
  22
         
Part II. OTHER INFORMATION
    
         
Item 1.
  
Legal Proceedings
  
 23
         
Item 1A.
  
Risk Factors
  
 23
         
Item 2.
  
Unregistered Sales of Equity Securities and Use of Proceeds
  
 23
         
Item 6.
  
Exhibits
  
 24
         
Signatures
      
 25
         
Exhibit Index
      
 26



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS 
 
NexMed, Inc.
Consolidated Balance Sheets (Unaudited)

   
March 31,
  
December 31,
  
   
2007
  
2006
  
   
(Unaudited)
      
           
Assets
          
Current assets:
          
Cash and cash equivalents
  
$
8,163,420
  
$
11,069,133
  
Short term investments
    
2,500,000
   
1,000,000
 
Other receivable
    
-
   
183,700
 
Debt issuance cost, net of accumulated amortization
             
of $45,357 and $36,752
    
19,198
   
27,803
 
Prepaid expenses and other assets
    
195,925
   
164,898
 
Total current assets 
    
10,878,543
   
12,445,534
 
               
Fixed assets, net
    
7,316,303
   
7,488,100
 
               
Total assets 
  
$
18,194,846
  
$
19,933,634
  
               
Liabilities and stockholders' equity
              
Current liabilities:
              
Accounts payable and accrued expenses
  
$
693,613
  
$
587,750
  
Payroll related liabilities
    
122,725
   
156,567
 
Deferred revenue
    
1,411,598
   
1,693,917
 
Deferred compensation - current portion
    
60,930
   
60,212
 
Convertible notes payable - current portion
    
3,000,000
   
3,000,000
 
Note payable, net of debt discount of $95,538 and $127,385
    
1,904,462
   
1,872,615
 
Total current liabilities 
    
7,193,328
   
7,371,061
 
               
Long Term liabilities:
              
Deferred compensation
    
1,016,682
   
1,058,098
 
Total Liabilities 
    
8,210,010
   
8,429,159
 
               
Commitments and contingencies (Note 9)
              
Stockholders' equity:
              
Preferred stock, $.001 par value, 10,000,000
              
shares authorized, none issued and outstanding
    
-
   
-
 
Common stock, $.001 par value, 120,000,000
             
shares authorized, 80,965,829 and 80,285,905 issued
              
and outstanding, respectively
    
80,968
   
80,287
 
Additional paid-in capital
    
137,683,647
   
137,164,658
 
Accumulated other comprehensive loss
    
(9,596
)
  
(9,596
)
Accumulated deficit
    
(127,770,183
)
  
(125,730,874
)
Total stockholders' equity 
    
9,984,836
   
11,504,475
 
               
Total liabilities and stockholders' equity 
  
$
18,194,846
  
$
19,933,634
  
 
See notes to consolidated financial statements.
 
1
 
NexMed, Inc.
Consolidated Statements of Operations (Unaudited)

   
FOR THE THREE MONTHS ENDED
 
   
MARCH 31,
 
   
2007
  
2006
  
           
Royalties and research and development fees
  
$
286,959
  
$
453,947
  
               
Operating expenses
              
General and administrative 
    
1,232,895
   
1,832,171
 
Research and development 
    
1,077,883
   
1,507,975
 
 Total operating expenses
    
2,310,778
   
3,340,146
 
               
Loss from operations
    
(2,023,819
)
  
(2,886,199
)
               
Other expense
              
Interest expense, net 
    
(15,490
)
  
(20,094
)
 Total other expense
    
(15,490
)
  
(20,094
)
               
Net loss 
    
(2,039,309
)
  
(2,906,293
)
               
Deemed dividend to preferred shareholders
              
from beneficial conversion feature
    
-
   
(41,704
)
Preferred dividend
    
-
   
(12,945
)
               
Net loss applicable to common stock 
    
(2,039,309
)
  
(2,960,942
)
               
Other comprehensive income
             
Foreign currency translation adjustments 
    
-
   
3
 
               
Comprehensive Loss 
    
($2,039,309
)
  
($2,906,290
)
               
               
Basic and diluted loss per share
  
$
(0.03
)
$
(0.05
)
               
Weighted average common shares outstanding
              
used for basic and diluted loss per share 
    
80,803,109
   
62,812,481
 
 
See notes to consolidated financial statements.
 
2
 
NexMed, Inc.
Consolidated Statements of Cash Flows (Unaudited)

   
FOR THE THREE MONTHS ENDED
 
   
MARCH 31,
 
   
2007
  
2006
  
Cash flows from operating activities
              
Net loss
  
$
(2,039,309
)
$
(2,906,293
)
Adjustments to reconcile net loss to net cash used in operating
              
activities
              
Depreciation and amortization 
    
171,798
   
234,082
 
Non-cash interest, amortization of debt discount and  
              
deferred financing costs 
    
68,229
   
2,836
 
Non-cash compensation expense 
    
358,313
   
414,662
 
Loss on disposal of fixed assets 
    
-
   
186,381
 
Decrease in other receivable 
    
183,700
   
378,667
 
Increase in prepaid expenses and other assets 
    
(31,027
)
  
(5,615
)
Decrease in deferred revenue 
    
(282,319
)
  
(247,971
)
Decrease in payroll related liabilities 
    
(33,842
)
  
(852,590
)
Decrease in deferred compensation 
    
(40,698
)
  
-
 
Increase/(decrease) in accounts payable 
              
and accrued expenses 
    
105,863
   
57,582
 
 Net cash used in operating activities
    
(1,539,292
)
  
(2,738,259
)
               
Cash flow from investing activities
              
Capital expenditures
    
-
   
(54,068
)
Proceeds from sale of fixed assets
    
-
   
89,574
 
Purchase of short term investments
    
(3,000,000
)
  
(6,000,000
)
Proceeds from sale of short term investments
    
1,500,000
   
3,500,000
 
 Net cash used in investing activities
    
(1,500,000
)
  
(2,464,494
)
               
Cash flow from financing activities
              
Issuance of common stock, net of offering costs
    
(2,110
)
  
7,747,808
 
Proceeds from exercise of stock options and warrants
    
135,689
   
81,340
 
Repayment of capital lease obligations
    
-
   
(104,395
)
 Net cash provided by financing activities
    
133,579
   
7,724,753
 
               
Net increase (decrease) in cash and cash equivalents
    
(2,905,713
)
  
2,522,000
 
               
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
  
$
8,163,420
  
$
5,475,784
  
 
              
See notes to consolidated financial statements.
 
3

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 three months ended March 31, 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 has an accumulated deficit of $127,770,183 at March 31, 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.
 
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 between $0.55 to $16.25. The maximum term under these plans is 10 years.
 
4
 
The following table summarizes information about options outstanding at March 31, 2007 (unaudited):

   
 
  
Options Outstanding
  
Options Exercisable
  
   
Range of
Exercise Prices
  
Number Outstanding
  
Weighted Average Remaining Contractual Life
  
Weighted Average Exercise Price
  
Aggregate Intrinsic Value
  
Number Exercisable
  
Weighted Average Exercise Price
  
Aggregate Intrinsic Value
  
   
$
.55 - 1.85
    
2,824,390
   
8.33 years
  
$
0.85
  
$
885,853
    
1,940,067
 
$
0.84
  
$
607,910
  
     
2.00 - 3.99
    
143,750
   
3.87 years
    
2.83
   
-
   
143,750
   
2.83
   
-
 
 
    
4.00 - 5.50
    
375,301
   
5.26 years
    
4.65
   
-
   
355,301
   
4.63
   
-
 
 
    
7.00 - 8.00
    
15,000
   
3.14 years
    
8.00
   
-
   
15,000
   
8.00
   
-
 
 
    
12.00 - 16.25
    
14,400
   
3.47 years
    
13.15
   
-
   
14,400
   
13.15
   
-
 
                                                   
           
3,372,841
       
$
1.44
  
$
885,853
    
2,468,518
 
$
1.61
  
$
607,910
  
 
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 months ended March 31, 2007 and March 31, 2006 includes expense for all equity awards granted during the three months ended March 31, 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.
 
5
 
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 months ended March 31, 2007 and March 31, 2006 is $298,313 and $378,662 more, 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 months ended March 31, 2007 and March 31, 2006 is $0.004 and $0.01 more, 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):

   
Three Months
  
Three Months
  
   
Ended
  
Ended
  
   
March 31, 2007
  
March 31, 2006
  
           
General and administrative
  
$
273,347
  
$
374,519
  
Research and development
    
24,966
   
4,143
 
               
Stock-based compensation expense
   
298,313
   
378,662
 
 
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 in deferred expenses in stockholders' equity 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 three months ended March 31, 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 months ended March 31, 2007 and 2006:
 
6

Dividend yield
    
0.00
%
Risk-free interest rate
    
4.15% - 4.47
%
Expected volatility
    
80% - 105
%
Expected term
    
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 March 31, 2007, and related transactions for the three months then ended (unaudited):
 
7

   
 
 
Weighted
 
Weighted
Average
 
Total
 
 
 
 
 
Average
 
Remaining
 
Aggregate
 
 
 
Number of
 
Exercise
 
Contractual
 
Intrinsic
 
 
 
Shares
 
Price
 
Life
 
Value
  
                   
Outstanding at December 31, 2006
    
3,613,421
                   
Granted
    
12,100
 
$
0.85
              
Exercised
    
(28,480
)
$
0.55
              
Cancelled
    
(224,200
)
$
2.91
              
                           
Outstanding at March 31, 2007
    
3,372,841
 
$
1.44
    
7.76 years
  
$
885,853
  
                           
Vested or expected to vest at
                          
March 31, 2007
    
3,156,642
 
$
1.44
    
7.76 years
  
$
885,853
  
                           
Exercisable at March 31, 2007
    
2,468,518
 
$
1.61
    
7.43 years
  
$
607,910
  
 
The weighted-average grant-date fair value of options granted during the three months ended March 31, 2007 and March 31, 2006 was $0.85 and $0.78, respectively. The intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $8,529 and $99,400, respectively. Cash received from option exercises for the three months ended March 31, 2007 and March 31, 2006, was $15,664 and $81,340, 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. Ms. Liu and Mr. Westgate received awards of 150,000 and 75,000 shares, respectively. Ms. Liu's 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. 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.

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.
 
8
 
As of March 31, 2007, there was $493,593 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 1.47 years.
 
3. LOSS PER SHARE

At March 31, 2007 and 2006, respectively, options to acquire 3,372,841 and 3,077,595 shares of common stock with exercise prices ranging from $0.55 to $16.25 per share, convertible securities convertible into 600,000 and 1,200,000 shares of common stock at a conversion price of $5.00, and warrants to acquire 20,022,527 and 14,769,426 shares of common stock with exercise prices ranging from $0.55 to $3.00 were excluded from the calculation of diluted loss per share, as their effect would be anti-dilutive. Earnings per share for the three months ended March 31, 2007 and 2006 was calculated as follows (net loss applicable to common stock / weighted average common shares outstanding):

   
FOR THE THREE MONTHS
 
   
ENDED MARCH 31,
 
   
2007
  
2006
  
           
Net loss applicable to common stock
    
($2,039,309
)
  
($2,960,942
)
Weighted average common shares outstanding
              
used for basic and diluted loss per share
    
80,803,109
   
62,812,481
 
               
Basic and diluted loss per common share
  
$
(0.03
)
$
(0.05
)
 
4. CONVERTIBLE NOTES PAYABLE

On December 12, 2003, the Company issued convertible notes (the “Notes”) in an aggregate principal amount of $6 million. The Notes are payable in two installments of $3 million on November 30, 2006 and May 31, 2007 and are collateralized by the Company’s facility in East Windsor, New Jersey which has a carrying value of approximately $6.9 million. 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 accretes on the Notes on a semi-annual basis at a rate of 5% per annum, and the Company may pay such amounts in cash or by effecting the automatic conversion of such amount into the Company’s common stock at a 5% premium to the then average market prices.
 
9
 
On November 30, 2006, the Company paid in cash the $3 million installment due plus accrued interest of $25,417. The remaining $3 million balance plus accrued interest on the Note is payable on May 31, 2007.
 
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.
 
5. NOTE PAYABLE
 
On November 30, 2006, the Company issued a Note in principal amount of $2 million. The Note is 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, New Jersey. Interest accretes on the Note on a quarterly basis at a rate of 7.5% per annum provided, however, if the Company has not entered into a contract of sale of the East Windsor property on or prior to May 31, 2007, and the Note has not been repaid by such date, the interest rate will increase to 8.5%.
 
The Company also issued 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 is allocated to additional paid in capital and treated as a discount to the Note that is being amortized over the 13-month period ending December 31, 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
 
6. DEFERRED COMPENSATION
 
On February 27, 2002, the Company entered into an employment agreement with Y. Joseph Mo, Ph.D., that has 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 is 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 commence subject to certain limitations, including annual vesting through January 1, 2007, as set forth in the employment agreement. The deferred compensation will be payable monthly for 180 months commencing on termination of employment. Dr. Mo’s employment was terminated as of December 15, 2005. The monthly deferred compensation payment through May 15, 2021 will be $9,158. The first payment of $64,106 was made on June 30, 2006 representing the first seven months of payments due under the agreement. As of March 31, 2007 the Company has accrued $1,077,612, which is included in deferred compensation, based upon the estimated present value of the obligation.
 
7. 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. As a result of the conversions described below, no shares of the Series C Stock remained outstanding as of March 31, 2007.
 
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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 three months ended March 31, 2007 and 2006, the Company recorded a deemed dividend to the shareholders of the Series C Stock of $0 and $11,175, respectively, based on the amortization of the beneficial conversion feature.
 
For the three months ended March 31, 2007 and 2006 pursuant to the terms of the Series C Stock, the Company recorded dividends in the amount of $0 and $12,945, respectively, as a dividend to preferred shareholders in the Consolidated Statements of Operations.
 
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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 March 31, 2007, no shares of the Series C Stock remained outstanding.
 
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 three months ended March 31, 2007 and 2006, the Company amortized $0 and $30,529, respectively of the issuance costs as a deemed dividend to the preferred shareholders in the Consolidated Statements of Operations.
 
8. INCOME TAXES  
 
In consideration of the Company’s accumulated losses and lack of historical ability to generate taxable income, the Company has estimated that it will not be able to realize any benefit from its temporary differences between book income and taxable income and has recorded a valuation allowance of an equal amount to fully offset the deferred tax benefit amount.
 
9.  COMMITMENTS AND CONTINGENCIES
 
The Company is a party to clinical research agreements in connection with a one-year open-label study for Alprox-TD® 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 March 31, 2007, this amounts to approximately $1.1 million. The Company anticipates that the clinical research in connection with the agreements will be completed in 2007.
 
10. 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.
 
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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 month period ended March 31, 2007, the Company recognized licensing revenue of $282,319 related to the Novartis agreement.
 
11. RESTRUCTURING
 
On December 15, 2005, the Company announced the departure of Dr. Y. Joseph Mo as President and Chief Executive Officer of the Company. On January 12, 2006, the Company announced the appointment of Richard J. Berman, who has served on the Board of Directors since 2002, as Chief Executive Officer of the Company. The Board of Directors mandated Mr. Berman to improve the Company’s financial condition and focus its development efforts.

The Company has incurred and expensed $0 and $178,459 in the first quarter of 2007 and 2006, respectively, in connection with a reduction in staff initiated during the first quarter of 2006 related to this restructuring. $171,993 of these costs are included in research and development expenses in the Consolidated Statement of Operations for the three months ended March 31, 2006.

The Company paid out $116,834 in the first quarter of 2006 that was accrued in 2005 related to staff reductions in 2005.
 
There were no payments made during the first quarter of 2007 related to restructuring.
 
In addition, the Company paid out $902,239 in the first quarter of 2006 that was accrued and expensed in 2005 related to the departure of Dr. Mo and Kenneth Anderson in December 2005.
 
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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 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.

We have applied the NexACT® technology to a variety of compatible drug compounds and delivery systems, and are in various stages of developing new topical treatments for sexual dysfunction and nail fungus.

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. In addition, we are eligible to receive royalties based upon the level of sales achieved. On January 31, 2007, we announced that Novartis, had commenced dosing of patients in 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 will participate in the two studies, which will take place in the U.S., Europe, Canada and Iceland. The Phase 3 program is expected to be competed in mid-2008.
 
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In March 2007, Novartis commenced a comparator study in ten European countries. Over 900 patients with mild to moderate onychomycosis will participate 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 most advanced of our products under development is Alprox-TD® which is an alprostadil-based cream treatment intended for patients with erectile dysfunction. In December 2002, we completed our two pivotal Phase 3 studies for Alprox-TD® that tested over 1,700 patients at 85 sites throughout the U.S. We announced in 2006 that we have developed a room temperature stable Alprox-TD®. We believe the opportunity to distribute a non-refrigerated alprostadil product will be attractive for potential licensing partners. However, even if we attract a potential partner, 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.

We are pursuing a new regulatory strategy for Alprox-TD® which includes the filing of the New Drug Application (“NDA”) in the United States, New Drug Submission in Canada, and Marketing Authorization Application (“MAA”) in Europe during first half of 2007. With input from independent regulatory consultants and legal counsel, we believe the safety data of Alprox-TD® based on our clinical database of over 3,000 patients is sufficient for filing the NDA and, therefore, we do not need to conduct a12-month open-label study indicated by ICH (International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use) guidance. We believe our strategy is aggressive but has a reasonable likelihood of success, and we anticipate that the cost to prepare all of the relevant dossiers and assemble the regulatory approval applications in the U.S., Canada and Europe will be approximately $1.9 million. However, we cannot be certain that our applications with the appropriate regulatory authorities will be accepted for filing, and it is also possible that even if our applications have been accepted, we may not be successful in convincing the regulatory authorities to accept our position.

On February 21, 2007, the Canadian regulatory authority, Health Canada, informed us that the safety data on Alprox-TD® that we have compiled to date is sufficient for the New Drug Submission application (“NDS”) to be filed and accepted for review in Canada. As such, the lack of a completed 12-month open label safety study will not preclude Health Canada from accepting and reviewing our NDS in Canada.
 
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Further, on April 20, 2007, the United Kingdom regulatory authority, Medicines and Healthcare products Regulatory Agency (“MHRA”), also informed us that the safety data on Alprox-TD® that we have compiled to date is sufficient for the MAA to be filed and accepted for review in the United Kingdom. As such, the lack of a completed 12-month open label safety study will not preclude MHRA from accepting and reviewing our MAA in the United Kingdom.

Alprox-TD® has been selling in China and in Hong Kong since October 2001 and April 2002, respectively, under the Befar trademark. The product is manufactured and marketed by a local affiliate of Vergemont International Limited, our Asian licensee. We are entitled to receive from our Asian licensee very modest royalty payments in connection with the distribution of Befar® in China and other Asian markets if and when Befar® is approved for marketing in such other markets. The sale of Befar® has been limited for several reasons including that China has a limited number of patients who can afford erectile dysfunction treatments.

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 analyzed our product pipeline for opportunities to license or divest some of our products under development, with the goal of focusing our attention on product opportunities that would replicate the model of our licensed anti-fungal nail treatment. We have decided to concentrate our development efforts on our non-patch topical products.

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.
 
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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, including the Alprox-TD® cream utilizing the NexACT® technology, has 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.
 
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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 March 31, 2007, we had an accumulated deficit of $127,770,183. 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.
 
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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 March 31, 2007 we had cash and cash equivalents and short term investments of approximately $10.7 million as compared to $12.1 million at December 31, 2006. Our net decrease in cash in the first quarter of 2007 is the result of our average fixed monthly overhead costs of approximately $450,000 per month. We project that our cash reserves of $10.1 million as of the date of this report are sufficient to sustain our operations through approximately the end of 2007 if we are unable to renegotiate our $5 million of notes due in 2007 to be able to postpone repayment or repay amounts in equity rather than cash. However, we believe that we will be able to either renegotiate the notes, sell our facility in East Windsor, NJ or rely on expected milestone payments from our Novartis licensing agreement to fund the repayment of the notes. If we are able to achieve any one of the aforementioned objectives then we project that our cash reserves of $10.1 million as of the date of this report are sufficient to sustain our operations for approximately 19 months at the current burn rate of approximately $450,000 per month for fixed monthly overhead costs and an anticipated $1.5 million in expenditures during 2007 required to prepare all of the relevant dossiers and assemble the regulatory approval applications for Alprox-TD® in the U.S., Canada and Europe in the first half of 2007. There is no assurance that we will be able to renegotiate our notes on terms acceptable to us, if at all. Further, there is no assurance that milestone payments from our Novartis licensing agreement will be earned or that we will be able to sell our facility in East Windsor, NJ.

At March 31, 2007 we had an 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 quarter of 2007 and will not be billing Novartis in any future periods. 
 
For the three months ended March 31, 2007 we incurred no loss on disposal of fixed assets as compared to $186,381 in 2006. The decrease in 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.
 
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To date, we have spent approximately $69.1 million on the Alprox-TD® development program, and anticipate that the remaining cost to prepare all of the relevant dossiers and assemble the regulatory approval applications in the U.S., Canada and Europe in 2007 will be approximately $1.5 million. We estimate that an additional $5-7 million will need to be spent on scale-up manufacturing costs prior to commerialization.  We intend to rely on future commercialization partners for Alprox-TD® to assume those expenses along with any additional expenditure that may be required for the period between regulatory submission of Alprox-TD® and its commercialization. Since we cannot predict the actions of the regulatory agencies, the level of other research and development activities we may be engaged in, and our ability to enter into additional partnering agreements, we cannot accurately predict the expenditure required for the period between regulatory submission of Alprox-TDâ and its commercialization.

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. Other than the following, 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.
 
Stock-Based Compensation Expense
 
Effective January 1, 2006, we account for stock-based compensation costs in accordance with SFAS 123R, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to our employees and directors. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as an expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires considerable judgment. Furthermore, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If our actual experience differs significantly from the assumptions used to compute our stock-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little stock-based compensation cost.

Accounting for Uncertainty in Income Taxes
 
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 our consolidated financial statements.

Comparison of Results of Operations Between the Three Months Ended March 31 of 2007 and of 2006.
 
Royalties and research and development fee revenue. We recorded $286,959 in revenue during the first quarter of 2007, as compared to $453,947 in revenue during the first quarter of 2006. The revenue consisted of $1,200 and $2,203 in 2007 and 2006, respectively, in royalties on sales of Befar® received from our Asian licensee and $285,759 and $451,744, 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 10 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.
 
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   General and Administrative Expenses. Our general and administrative expenses decreased to $1,232,895 during the first quarter of 2007 as compared to $1,832,171 during the same period in 2006. The decrease is primarily due to a decrease in overhead including rent and utilities of approximately $118,000 as a result of the completion of our consolidation of facilities in April 2006. Additionally in the first quarter 2006 we recognized a loss on the disposal of equipment of approximately $190,000 as a result of the consolidation of our operations. We also had a decrease in general and administrative salaries of approximately $45,000 as a result of our restructuring program initially implemented in December 2005 and completed in March 2006. There was also a decrease in legal expenses of $48,000 due to our incurring additional legal expenses in 2006 related to our restructuring program and also our adopting a new stock option plan in 2006 whereas we had no such expenses in 2007. We had a decrease in legal fees related to patents of approximately $99,000 as a result of our decision to reduce the number of national patent filings we would pursue on early stage pipeline products. There was also a decrease in compensation expense of approximately $137,000 due to 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 quarter of 2006.

Research and Development Expenses. Our research and development expenses for the first quarter of 2007 and 2006 were $1,077,883 and $1,507,975, respectively. Research and development expenses in the first quarter of 2007 included approximately $5,600 attributable to NM100060, $335,000 attributable to Alprox-TD® and the balance attributable to other NexACT® technology based products and indirect overhead related to research and development, as compared to approximately $194,000 for NM100060 and $141,000 for Alprox-TD® during the same period in 2006. Research and development expenses related to NM100060 have decreased significantly in 2007, 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. While our total direct project expenses to third parties has remained consistent, our research and development salaries have decreased approximately $378,000 in the first quarter of 2007 as a result of our restructuring program initially implemented in December 2005 and completed in March 2006. Additionally, rent and utility expenses directly related to research and development decreased approximately $50,000 in 2007 as a result of the completion of our consolidation of facilities in April 2006.
 
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Interest Expense, Net. We had interest expense net of interest income of $15,490 during the first quarter of 2007, as compared to $20,094 during the same period in 2006. The decrease is due to a decrease in interest expense related to our capital leases with GE Capital. Our capital leases were paid in full in 2006 and we no longer incurred interest expense in 2007 related to these capital leases.

Net Loss. The net loss was $2,039,309 and $2,906,293 in the first quarter of 2007 and 2006, respectively. The decrease is primarily 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 $2,039,309 or $0.03 per share for first quarter of 2007 as compared to $2,960,942 or $0.05 per share for 2006. The decrease is primarily attributable to our restructuring program initially implemented in December 2005 whereby we significantly reduced our research and development project expenditures and staff and reduced our overhead by consolidating our facilities in 2006. The decrease also resulted from the deemed dividend to preferred shareholders in 2006 as discussed in Note 7 to the Consolidated Financial Statements.
 
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.
 
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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 February 28, 2007, the Company issued 28,809 shares of common stock to the holder of the $2 million Notes in payment of accrued interest for the two month period ended January 31, 2007 of $25,000. The common stock was issued pursuant to an exemption provided by Section 4(2) of the Securities Act of 1933.
 
On April 1, 2007, the Company issued 59,576 shares of common stock to the holders of the Convertible Notes in payment of accrued interest for the six month period ended March 31, 2007 of $75,833. The common stock was issued pursuant to an exemption provided by Section 4(2) of the Securities Act of 1933.
 
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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.

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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: May 10, 2007    /s/ Mark Westgate
 
Mark Westgate
Vice President and Chief Financial Officer
 

 
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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.

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