Dermatology/Cosmeceutical Specialty Pharmaceutical Opportunity · company or a company offering a product in every segment. DermWorx’s management, directors, and consultants have

†BOLD WORDS ARE REFERENCED IN THE GLOSSARY ON PAGES 41-43.

Dermatology/Cosmeceutical Specialty Pharmaceutical Opportunity

Snapshot May 18, 2007 DermWorx, Inc. (“DermWorx” or “the Company”) is a closely held specialty pharmaceutical company utilizing unique and novel drug delivery systems to develop more effective versions of currently available dermatology products and cosmeceuticals†. The Company has in-licensed a unique and novel Novasome® Microvesicle Drug Delivery System, which significantly increases a compound’s aqueous solubility (moisture), penetrability, and stability. DermWorx has also internally developed a unique delivery system, termed Small Molecule Solubilization System™ (SMSS™), which enables molecules of selected actives to rapidly penetrate the skin, thereby increasing the onset of action and therapeutic effect. DermWorx’s pipeline focuses on creating products for use in some of the fastest growing and largest sectors of the dermatology market, including non-invasive and invasive surgical procedures, acne, onychomycosis, psoriasis, seborrheic dermatitis, anti-aging cosmeceuticals, and tinea versicolor. The pipeline reflects the armamentarium used in today’s dermatology practices. DermWorx expects to have its first three products—LidoWorx™ (a topical anesthetic), CerumWorx™ (an antioxidant serum containing Vitamin C), and AcneWorx™ (an adult acne/dry skin formulation)—market-ready shortly after becoming fully operational. DermWorx is headquartered in Hollywood, Florida.

Key Points

DermWorx’s drug development program has identified nine product candidates in the fastest growing and largest sectors of the dermatology market. Five of these candidates are monograph drugs, where the active substances and their indications have already been reviewed by U.S. Food and Drug Administration (FDA) Advisory Review Panels and were found to be safe and effective in their prescribed treatments (e.g., lidocaine as a topical analgesic; salicylic acid in acne, psoriasis, and seborrheic dermatitis; and clotrimazole as an antifungal agent). In addition, DermWorx is developing two prescription products and two cosmeceuticals.

The dermatology/cosmeceutical sector has seen significant increases in recent years due in large part to the aging “baby boomer” generation. Currently, 78 million baby boomers account for 75% of all prescription drug sales and spend $1.7 trillion on goods and services per year (Source: Barron’s February 26, 2007).

The absence of brands with billion dollar annual sales opportunities has minimized the participation of most “Big Pharma” Fortune 500 companies in the dermatology market. Most segments of this market are able to support product sales for new entries ranging from $10 million to $100 million. Thus, the dermatology market has smaller to midsize companies that compete against each other and offer a variety of products, though is devoid of any one dominating company or a company offering a product in every segment.

DermWorx’s management, directors, and consultants have extensive experience in the areas of dermatology and drug delivery, previously holding senior positions at Key Pharmaceuticals, Inc. (now Schering-Plough Corp. [SGP-NYSE]), Alza Corporation (a member of the Johnson & Johnson [JNJ-NYSE] family of companies), Elan Corporation plc (ELN-NYSE), KOS Pharmaceuticals, Inc. (now part of Abbott Laboratories Inc. [ABT-NYSE]), Columbia Laboratories Inc. (CBRX-NASDAQ), IVAX Laboratories (now part of Teva Pharmaceutical Industries Ltd. [TEVA-NASDAQ]), Baker Cummins, Procter & Gamble Company (PG-NYSE), and Alcon, Inc. (ACL-NYSE)—affording the Company a particularly unique advantage in developing and selling dermatological drug delivery products.

DermWorx has had exploratory discussions with leading professionals in the dermatology community to have these professionals serve as advocates for several of its products.

The Company has certain rights to drug delivery technology secured via in-licensing, which includes over 45 issued patents and several patent applications in the field of enhanced drug delivery to the skin.

As of May 2007, the Company’s cash position was $160,000.

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DermWorx, Inc.

P.O. Box 220500 Hollywood, FL 33022

Phone: (954) 926-7974 Fax: (954) 926-1052 www.dermworx.com

CRYSTAL RESEARCH ASSOCIATES, LLC EXECUTIVE INFORMATIONAL OVERVIEW® PAGE 2

Table of Contents Snapshot .......................................................................................................................................... 1

Key Points .....................................................................................................................................................1

Executive Overview.......................................................................................................................................3

Growth Strategy ............................................................................................................................................6

Intellectual Property ......................................................................................................................................7

Corporate Leadership ...................................................................................................................................8

Core Story ...................................................................................................................................................11

Market Potential .....................................................................................................................................11

DermWorx’s Drug Delivery Technologies ..............................................................................................12

Product Opportunities ............................................................................................................................13

Recent and Potential Milestones ................................................................................................................22

Competition .................................................................................................................................................23

Key Points to Consider................................................................................................................................25

Historical Financial Results .........................................................................................................................27

Risks............................................................................................................................................................30

Glossary ......................................................................................................................................................41


Executive Overview DermWorx, Inc. (“DermWorx” or “the Company”) is a closely held specialty pharmaceutical company utilizing unique and novel drug delivery systems to develop more effective versions of currently available dermatology products and cosmeceuticals. Each of DermWorx’s target markets is described in brief below and accompanied by short descriptions of the Company’s development efforts in that area. Table 1 lists each of the Company’s potential products and the corresponding indication. Detailed descriptions can be found on pages 13-21 of this Executive Informational Overview® (EIO®).

Product Opportunities Topical Anesthetic for Non-Invasive and Invasive Surgical Procedures There are nearly 10 million procedures annually in the growing dermatology market for non-invasive and invasive surgical procedures, which includes cyst and mole removal, skin cancers, biopsies, and procedures involving dermal fillers and Botox®. Prior to these procedures, topical anesthetic agents are used to numb the area of the skin where the surgery is being performed. These anesthetics can take 45 minutes to an hour to be effective. DermWorx has developed a fast acting topical anesthetic, called LidoWorx™, which contains lidocaine 4%, and employs the Company’s proprietary drug delivery system, the Small Molecule Solubilization System™ (SMSS™). This formulation increases solubility and thus penetration of the active ingredient while decreasing the amount of time it takes for the anesthetic to act. Efficacy studies have been performed to evaluate the onset and duration of the anesthetic’s effect on eliminating pain after an injection. DermWorx’s product exhibited maximum anesthetic effect in 15 minutes or less (up to a quarter of the time of current agents). Since the active ingredient in this product is a monograph drug, it does not require regulatory approval. The packaging and labeling have been finalized and the product is ready for market. DermWorx has filed a provisional patent for this topical analgesic formulation. Acne Acne remains the leading indication treated by dermatologists, with annual sales for treatments totaling $2 billion. Adult acne by itself is estimated to impact 17 million people, with recent studies pointing to a high prevalence in adult women.

Product Indication

LidoWorx™ (4% Lidocaine) Topical anestheticAcneWorx™ (2% Salicylic Acid) Adult acne and dry skinCerumWorx™ (10% Vitamin C) Anti-agingNanomycin-A (topical antibiotic) Acne and rosaceaPamorx C (Vitamin C valerate ester) Anti-aging hand creamOnychoWorx (antifungal) Nail fungal infectionsNanopsorx Body (3% Salicylic Acid) Psoriasis body lotionNanopsorx Scalp (3% Salicylic Acid) Psoriasis scalp shampooTineaWorx (3% Salicylic Acid and 1% Clotrimazole) Tinea versicolor

Source: DermWorx, Inc.

Table 1DermWorx, Inc.

PIPELINE OVERVIEW


DermWorx is developing two treatments for acne: one for adult acne, called AcneWorx™, and the other as a prescription topical antibiotic for wide usage in acne and rosacea. AcneWorx™ is expected to provide a greater therapeutic effect than currently used regimens, as the active ingredient is incorporated into the Company’s drug delivery process, which can materially increase the compound’s aqueous solubility (moisture), penetrability, and stability. As observed in patient trials, DermWorx’s formulation avoids the use of inorganic solvents, thereby reducing side effects and eliminating irritation and excessive drying of the skin. This is important since the mature skin of adults tends to be drier. As with LidoWorx™, the active ingredient of the Company’s adult acne product is a monograph drug. As such, it does not require regulatory approval and is ready for marketing. The packaging and labeling have also been finalized, and the product is ready for market. DermWorx’s second acne product is a prescription topical antibiotic for widespread use in both acne and rosacea. The product is currently approved in an oral dosage form; however, there is no approved topical version. DermWorx expects to file a New Drug Application (NDA) for a topical version in the last quarter of 2008. Since the drug is already approved, time to approval is not expected to take as long as it would for a New Chemical Entity (NCE). Onychomycosis Onychomycosis is a fungal infection that affects the nail and nail bed and may be due to a dermatophyte, yeast, or non-dermatophyte mold. Onychomycosis, particularly fingernail infections, significantly impacts affected individuals since patients may be precluded from acting in social and occupational circumstances where they are reluctant to show their hands or feet. Existing treatments for this condition, which encompass roughly a $500 million worldwide annual market, tend to be largely ineffective or cause serious side effects. DermWorx is working toward repurposing an antifungal agent and incorporating it into its proprietary, topical SMSS™. The Company seeks to differentiate its formulation from current therapies by proving that the selected drug crosses through the keratin of the nail to the nail bed and site of the infection. DermWorx intends to file a New Drug Application (NDA) by mid-2009 to obtain approval and prescription status of this NCE and its route of administration. A provisional patent for this antifungal formulation has also been filed. Other Dermatologic Indications DermWorx has identified additional product formulation opportunities in the following therapeutic areas: psoriasis, seborrheic dermatitis, and tinea versicolor. The Company plans to develop two Vitamin C anti-aging cosmeceutical formulations to replenish the skin’s elasticity and produce collagen. Both would be entrants into the $6.4 billion cosmeceutical market. The two Vitamin C formulations are as follows: (1) an in-licensed Vitamin C 10% serum (called CerumWorx™) with a patented vehicle formulation providing stabilization, which maintains the product’s potency when exposed to light; and (2) a second product containing a new, patented ester of Vitamin C. As cosmeceuticals, these products do not require regulatory approval for marketing. Product development, packaging, and labeling have been finalized. The product’s packaging resembles a cosmetic product. Drug Delivery Technology DermWorx has in-licensed a proprietary Novasome® Microvesicle Drug Delivery System and has internally developed a unique small molecule patented drug delivery system, SMSS™, which allows molecules of selected actives to rapidly penetrate the skin, thereby increasing the onset of action and therapeutic effect. In addition, the Company continues to design New Molecular Entities (NMEs) that can be coupled with the SMSS™. Each of these technologies is described in brief on page 5 and more thoroughly on pages 12-13 of this EIO®.


Novasome® Microvesicle Drug Delivery System. DermWorx is incorporating its in-licensed rights to the patented Novasome® technology into select formulations for adult acne, psoriasis, and tinea versicolor products. The Novasome® technology is a novel, proprietary process that significantly increases a compound’s aqueous solubility (moisture), penetrability, and stability. This technology employs a proprietary organized lipid structure, lipid vesicle encapsulation technologies, cellulose structures, and micellar nanoparticles, thus providing for a nanoparticle in an aqueous transport system.

The Small Molecule Solubilization System™ (SMSS™). The SMSS™ employs the fundamentals of

transport science and technology to create products that increase the efficacy of topical drug delivery to and through the skin and nail bed. This system is being employed in the development of DermWorx’s topical anesthetic, acne, anti-aging, and nail fungal injection products. The delivery system is achieved through the use of compounds called “cis-unsaturated fatty alcohols and acids.” These molecules “fluidize” the membranes of skin and nail cells in order for drugs to penetrate them more easily and rapidly.

New Molecular Entities (NMEs). DermWorx is additionally deriving NMEs from parent compounds,

with the aim of dissolving drugs much more efficiently within cell membranes. Coupled with DermWorx’s SMSS™ leads, the Company expects this to produce a greater delivery of compounds into skin combined with enhanced efficacy. DermWorx is using this strategy with its anti-aging Vitamin C analog.

Size of the Dermatology Market There are over 9,000 dermatologists in private practice in the U.S. who treat 40 million patients annually. Approximately 2,500 of these dermatologists account for more than half of the specifications and recommendations for which dermatological brands and products are sold. The highest concentrations of dermatologists are located in California (1,600), New York (975), Florida (900), Texas (675), Pennsylvania (475), Illinois (349), Ohio (327), and Michigan (175). Targeting a relatively smaller and more concentrated universe of physicians can translate into reasonable promotional budgets, effective and manageable sales forces, and an easier-to-control marketing process. This affords DermWorx the opportunity to reach and impact the dermatologist. DermWorx believes that it can initially target this market with between 15 to 20 sales representatives. Headquarters and Employees DermWorx was founded in March 2005 and is located in Hollywood, Florida. The Company currently employs seven people.


Growth Strategy DermWorx seeks to become a fully integrated, specialty dermatological pharmaceutical company by developing more effective, proprietary versions of off-patent or monograph dermatology drugs and cosmeceuticals. The Company expects to accomplish this through the use of unique, patented drug delivery systems. Employing a novel drug delivery business model, DermWorx expects to incur substantially lower research and development (R&D) expenditures and shorter approval timelines than are normally seen in the pharmaceutical and biotechnology industry. Using this strategy, the Company aims to finalize product development, packaging, and labeling in an expeditious manner. DermWorx has licensed a proprietary drug delivery system, the Novasome® Microvesicle Drug Delivery System, and has also internally developed a unique small molecule patented drug delivery system, the SMSS™. The Company intends to continue to file for patent protection for its core technology inventions, as well as ancillary technologies that support its core technologies, either alone or in collaboration with specific partners. DermWorx expects to initially focus its R&D on quick-to-market opportunities (monograph-approved drugs) using its proprietary drug delivery strategy. DermWorx plans to use past relationships to recruit and build a customer-oriented sales organization. The Company intends to focus on key customers and product distribution, supported by innovative and proven advertising and marketing programs. Furthermore, the Company seeks to pursue an active in-licensing campaign of unique drug delivery technologies or dermatology drugs. This is to be accomplished through the Company’s experienced senior management team, each of whom brings strengths in drug delivery, pharmaceutical marketing, sales, R&D, legal and regulatory affairs, and dermatology, as described in Corporate Leadership (pages 8-10).


Intellectual Property Drug Delivery Technology DermWorx has licensed the rights to the patented Novasome® Microvesicle Drug Delivery System technology, and has internally developed products and technology that have provisional patent applications filed and pending—all of which form the proprietary base for the Company’s R&D efforts in dermatology. The Company’s ownership, or certain product rights secured via in-licensing, includes over 45 issued patents and five patent applications in the field of enhanced drug delivery to the skin. License for the Novasome® Microvesicle Drug Delivery System In October 2006, DermWorx signed an agreement with IGI, Inc. ([IG-AMEX] a nanomaterial supplier that produces and markets cosmetics and skin care products) to license, develop, and manufacture a series of specialty dermatology products utilizing IGI’s Novasome® Microvesicle Drug Delivery System. IGI leverages its Novasome® nanoparticles to help manufacture multiple dermatology, consumer, skin care, and hair care products. Based on this agreement, the Company received an exclusive license to the products developed using the technology, and IGI receives product development revenue, manufacturing revenue, and a 7% royalty on product sales. IGI also received an equity stake in DermWorx. In accordance with the obligations under the agreement, DermWorx paid IGI $250,000 on November 30, 2006, and was obligated to pay an additional $750,000 by February 15, 2007, which was to be credited against development of other products. Due to a delay in funding, DermWorx has not yet been able to make the $750,000 payment. DermWorx is currently renegotiating the agreement with future payments, to be scheduled once funding is obtained. Work is proceeding on the first product under this agreement. Patents and Trademarks DermWorx expects to continue in-licensing and developing patentable drug delivery technologies as well as new compounds and cosmeceuticals as part of its development and IP strategies. The Company has recently filed provisional patents for two of its drug delivery development candidates. (1) A provisional patent was filed with the U.S. Patent and Trademark Office (USPTO) on January 16,

2007, as Application Number 60/885,068 for a fast acting topical anesthetic and method of applying a topical anesthetic. Preliminary studies with this entity demonstrate an almost immediate onset of action reaching full clinical effect a short time thereafter.

(2) A provisional patent was filed with the USPTO on February 8, 2007, as Application Number

60/888,825 for an anti-infective agent to be used in the treatment of nail fungal infections utilizing DermWorx’s SMSS™, which is designed to allow this agent to cross through the highly keratinized nail and treat the underlying infection.

Trademarks have been filed for the names DermWorx™, LidoWorx™, AcneWorx™, and CerumWorx™. Additionally, the Company has filed for trademarks on the phrases “Small Molecule Solubilization System™,” “SMSS™,” “Optimizing Dermatological Efficacy with Small Molecule Technology™,” and “Optimizing Efficacy™.” These phrases and trademarks are intended to be used to identify DermWorx’s R&D and marketing programs. The Company furthermore intends to continue to file trademarks and patents, both for indications and composition, as it develops other products.


Corporate Leadership Senior Leadership DermWorx’s management, directors, and consultants have extensive experience in the areas of dermatology and drug delivery, coming from Key Pharmaceuticals, Inc. (which was sold to Schering-Plough Corp. in June 1986), Alza Corporation (a member of the Johnson & Johnson family of companies), Elan Corporation plc, KOS Pharmaceuticals, Inc. (now part of Abbott Laboratories Inc. as of December 2006), Columbia Laboratories Inc., IVAX Laboratories (now part of Teva Pharmaceutical Industries Ltd.), Baker Cummins, Procter & Gamble Company, and Alcon, Inc.—giving this management team an advantage of significant industry experience in developing and selling dermatological drug delivery products. Table 2 provides a summary of these individuals, followed by their biographies.

John J. Moroney, Chairman Mr. John Moroney is a co-founder, president, and chief executive officer (CEO) of Juvent, Inc., a closely held company specializing in products for the treatment of osteoporosis. Mr. Moroney has also served since 1983 as the president of Landmark Financial Corporation, a provider of corporate finance services to emerging growth companies in the healthcare sector that specializes in mergers and acquisitions and product licensing. Between 1985 and 1991, Landmark was involved in an exclusive arrangement with Ladenburg, Thalmann & Co. (LTS-AMEX), one of the oldest investment banks in New York, to capitalize on emerging opportunities in the healthcare market. Mr. Moroney served as a managing director of Ladenburg Thalmann. His previous experiences also include 10 years served in various executive roles, including as chairman of Flemington Pharmaceutical Corporation, a development-stage drug delivery company (now NovaDel Pharmaceuticals [NVD-AMEX]). Steven Girgenti, Vice Chairman and Co-Founder Mr. Steven Girgenti is the worldwide chairman and CEO of Ogilvy Healthworld, a leading global provider of strategic marketing and communication services to most of the world’s healthcare companies. Mr. Girgenti founded Healthworld in 1986 and made eight acquisitions to expand and diversify its business. Under Mr. Girgenti’s leadership, Healthworld went public in 1997 and was later acquired by WPP (WPPGY-NASDAQ) in 2003 for $225 million. It is now owned by WPP, one of the largest communications firms in the world. Mr. Girgenti was recognized as “Entrepreneur of the Year” by NASDAQ in 1999 and “Medical Advertising Man of the Year” by Med Ad News in 2000. He has served as a director of Burren Pharmaceuticals and Pharmacon International, and is currently a director of ArrowVision. Mr. Girgenti is also the vice chairman of the Board of Governors for the Mt. Sinai Hospital Prostate Disease and Research Center in New York City, New York.

John J. Moroney ChairmanSteven Girgenti Vice Chairman and Co-FounderNorman M. Meier President, Chief Executive Officer, Director, and Co-FounderDavid M. Cohen, Ph.D. Executive Vice President, Operations and Co-FounderDavid L. Weinberg Vice President and Chief Financial OfficerEugene R. Cooper, Ph.D. Executive Vice President, Research and DevelopmentRobb E. Wilentz, M.D. Vice President, Medical Affairs



SENIOR LEADERSHIP


Norman M. Meier, President, Chief Executive Officer, Director, and Co-Founder Mr. Norman Meier served as the CEO of Pharmamatrix, Inc., a medical marketing and advertising company, from 2000 until 2006. From December 1986 to November 1999, Mr. Meier served as the president, CEO, and director of Columbia Laboratories, Inc., a publicly traded women’s healthcare company, which he co-founded. In addition, Mr. Meier founded American Urologicals, Inc. and served as its president, CEO, and director until it was acquired by Key Pharmaceuticals. From 1971 to 1976, Mr. Meier served as the vice president of sales and marketing of Key Pharmaceuticals. Mr. Meier continued as a consultant to Key Pharmaceuticals until 1986 when the company was sold to Schering-Plough. Mr. Meier currently serves as a director of Universal Insurance Holdings, Inc. (UVE-AMEX), a property and casualty insurer. David M. Cohen, Ph.D., Executive Vice President, Operations and Co-Founder Dr. David Cohen has over 40 years of experience in the pharmaceutical industry. From 2002 to 2005, Dr. Cohen served as president of PharmaConsult International, a regulatory and strategic consulting company. From 1986 to 2001, Dr. Cohen served as president, chief operating officer (COO), and co-founder of Guidelines Integrated Services, a formulation development, regulatory, clinical consulting, and contract analytical laboratory. From 1977 to 1986, Dr. Cohen served as corporate vice president of quality assurance and regulatory affairs at Key Pharmaceuticals. At Key Pharmaceuticals, he was responsible for the regulatory approval of three leading products (TheoDur, NitroDur, and K-Dur). In addition, Dr. Cohen oversaw manufacturing, both internal and external, for all of Key Pharmaceuticals’ products, including the Baker Cummins’ dermatology unit. From 1962 to 1977, he worked in various roles at Pfizer Inc. (PFE-NYSE), including as manager of the analytical development laboratories. David L. Weinberg, Vice President and Chief Financial Officer Mr. David Weinberg served from January 1987 to June 1991 and from September 1997 to December 2006 as vice president, chief financial officer (CFO), and treasurer of Columbia Laboratories. From October 1991 to September 1997, Mr. Weinberg served as vice president and CFO of Rewards Network, Inc. (IRN-AMEX), a company providing marketing and loyalty programs to the restaurant industry. From June 1981 to August 1986, he held various positions, ultimately holding the titles of vice president, finance, secretary, and treasurer of Key Pharmaceuticals. Eugene R. Cooper, Ph.D., Executive Vice President, Research and Development Dr. Eugene Cooper has been actively involved in the development of nanotechnology in the pharmaceutical industry. From 1998 to 2003, he served as the executive vice president, R&D and chief technical officer (CTO) of Elan Drug Delivery, Inc. At Elan, Dr. Cooper built one of the leading drug delivery technologies for delivery of poorly soluble molecules and launched the first products (Rapamune® and Emend®) containing NanoCrystals. From 1994 to 1998, Dr. Cooper served as the vice president, R&D, for NanoSystems. He was responsible for all research, applications, and development of nanoparticle technology to the pharmaceutical industry. Dr. Cooper built an R&D organization and a NanoCrystal technology that was later sold to Elan for $160 million. From 1989 to 1994, he worked at Sterling Winthrop, Inc., as an executive director with worldwide responsibility for all of pharmaceutical sciences. Dr. Cooper helped build a technology-based pharmaceutical sciences department that enhanced discovery effectiveness, development speed, and created value, resulting in more than 35 patents in drug delivery (nanoparticle technology) and novel packaging systems. In 1991, Dr. Cooper established the Nanoparticle Technology Program, which led to several major development projects and the initiation of a new business venture, NanoSystems. Robb E. Wilentz, M.D., Vice President, Medical Affairs Dr. Robb Wilentz is a board-certified anatomic pathologist and a board-certified dermatopathologist. He is also the director of the pathology laboratory at Skin and Cancer Associates, a laboratory that processes approximately 70,000 biopsies and excisions annually and performs a range of services, including routine and special staining, immunohistochemical studies, and second-opinion consultation. Dr. Wilentz received a medical degree from the Johns Hopkins University School of Medicine and completed his internship and residency in anatomic pathology at the Johns Hopkins Hospital in Baltimore, Maryland. He also completed fellowships in surgical and gastrointestinal/pancreatic pathology at the Johns Hopkins


Hospital and served as chief resident in the Department of Pathology. Dr. Wilentz served as an assistant professor of pathology at the Johns Hopkins University School of Medicine and pursued a fellowship in dermatopathology at the University of Miami, School of Medicine. He has published over 60 peer-reviewed manuscripts and book chapters, appearing in preeminent journals and textbooks, including Cancer, The American Journal of Pathology, and Robbins’ Pathologic Basis of Disease. Dr. Wilentz is a member of many medical societies, including the Alpha Omega Alpha Honor Medical Society, the U.S. and Canadian Academy of Pathology, the College of American Pathologists, the Gastrointestinal Pathology Society, the American Academy of Dermatology, and the American Society of Dermatopathology. Independent Directors DermWorx’s Board of Directors oversees the conduct of and supervises the Company’s management. Table 3 provides a summary of the Company’s independent Board members, followed by detailed biographies.

Robert E. Baldini, Director Mr. Robert Baldini served as the vice chairman of KOS Pharmaceuticals, Inc. until the company was acquired by Abbott Laboratories, Inc. in December 2006. Mr. Baldini has more than 50 years of pharmaceutical industry experience, including positions in senior management at Key Pharmaceuticals (a division of Schering-Plough Pharmaceuticals), Ciba-Geigy Pharmaceuticals and Charles Pfizer and Co. In addition, Mr. Baldini has had significant operational experience, helping launch 27 major pharmaceutical products over the course of his career. Presently, Mr. Baldini consults for Oikos Ventures and Arisaph Pharmaceuticals. Mr. Baldini is the recipient of Seton Hall University’s Marketing Medal, as well as the recipient of the Order of the Cross and Crescent Honor Society and Most Distinguished Alumnus award. He has authored and published articles for Pharmaceutical Executive and Medical Marketing & Media, and he is a board member of Arisaph Pharmaceuticals, Espirit Pharmaceuticals, and Seton Hall University. Jack A. Smith, Director Mr. Jack Smith is the retired chairman of The Sports Authority, Inc., a national sporting goods chain, which he founded in 1987 and took public in 1994. Mr. Smith has held various executive management positions with major national retailers, including Herman’s Sporting Goods (as COO), Sears, Roebuck & Co., and Montgomery Ward & Co. Furthermore, Mr. Smith is a current director of Darden Restaurants, Inc. (DRI-NYSE), and a former director of Compex Technologies (formerly Rehabilicare). Joel Wilentz, M.D., Director Dr. Joel Wilentz is a practicing dermatologist. He co-founded Dermatology Associates of South Florida in 1970, which is the largest private dermatologic group in Florida. He was trained in dermatology at New York University Skin and Cancer Unit and served as chief resident of Dermatology at Mt. Sinai Hospital in New York. He is a fellow of the American Academy of Dermatology, a member of the dermatological Surgeon’s Society, and a life member of the Association of Military Surgeons. In addition, Dr. Wilentz has been president of Broward County Dermatology Society, clinical assistant professor of Dermatology at the University of Miami, School of Medicine, on the Board of Overseers of Nova Southeastern College of Pharmacy, and member of the Board of Directors of the Broward County Medical Society and president of its Political Action Committee.

Robert E. Baldini DirectorJack A. Smith DirectorJoel Wilentz, M.D. Director


INDEPENDENT DIRECTORS



Core Story DermWorx, Inc. is a closely held specialty pharmaceutical company utilizing unique and novel drug delivery systems to develop more effective versions of currently available dermatology products and cosmeceuticals. DermWorx’s product candidates are focused within some of the fastest growing and largest sectors of the dermatology market to treat a wide range of conditions, including a topical anesthetic for invasive and non-invasive surgical procedures; a prescription treatment for acne and rosacea; an ethical over-the-counter (OTC) product for adult acne/dry skin; a prescription product for nail fungal infections (onychomycosis); as well as ethical OTC products for psoriasis, seborrheic dermatitis, and tinea versicolor. MARKET POTENTIAL In dermatology, the absence of brands with billion dollar annual sales opportunities has minimized the interest of most “Big Pharma” Fortune 500 companies to enter or materially participate in this market. There are 10 principal market segments forming the basis of dermatological therapeutics, cited in Table 4. Most of the segments are able to support product sales for new entries ranging from $10 million to $100 million. As a result, the dermatology market has many smaller and midsize companies competing against each other and offering a full variety of products, though the market is devoid of any one company dominating every segment or offering a product in every segment.

In recent years, there have not been many new actives or compounds for the management of dermatologic diseases developed or approved by the U.S. Food and Drug Administration (FDA); rather, the majority of new entries coming to market have been innovative formulations of older actives. It is this fact that DermWorx believes provides the Company with an opportunity to create new product offerings that employ well-accepted actives, drug delivery, and vehicle formulations. In doing so, the Company could develop new, effective, clinically superior brands and gain market traction. There are approximately 9,000 dermatologists in private practice in the U.S., with the highest concentrations located in California (1,600), Texas (675), New York (975), Florida (900), Illinois (349), Ohio (327), Pennsylvania (475), and Michigan (175). Of the 9,000 dermatologists, only approximately 2,500 account for 50% of the product volume generated. Dermatologists typically see anywhere between 30 and 100 patients a day, with nearly 40 million patient visits in 2005. Furthermore, most dermatologic conditions require treatment for extended periods of time, resulting in a steady demand for products. The cosmeceutical segment, in particular, is currently experiencing significant growth, largely due to the aging baby boomer generation. From 2003 to 2004, sales of skin care cosmeceuticals in the U.S. grew over 7% to $6.4 billion, according to consumer industry tracker, Packaged Facts. There has also been an increased emphasis on skin rejuvenation and skin care treatment, shown in the remarkable increase in non-surgical cosmetic procedures and topical anti-aging skin care products. In 2005, there were nearly five million non-surgical cosmetic procedures performed by dermatologists and almost as many by plastic surgeons. According to the Orlando Dermatology & Aesthetic Conference Group, since 1997, total cosmetic procedures have increased by 444%, surgical procedures by 119%, and non-invasive surgical procedures by 726%.

- acne and scarring - nail problems- aging skin - itching- cold sores - psoriasis or rashes- hair loss - warts- hives - skin cancer

Source: Stiefel Laboratories, Inc.

MOST COMMON CONDITIONS TREATED BY DERMATOLOGISTSTable 4


DERMWORX’S DRUG DELIVERY TECHNOLOGIES DermWorx has in-licensed a proprietary Novasome® Microvesicle Drug Delivery System for use with many of its product candidates. The Company has also internally developed a proprietary, unique small molecule drug delivery system, the Small Molecule Solubilization System™ (SMSS™), and continues to design new molecular entities (NMEs) that can be coupled with the SMSS™. Novasome® Microvesicle Drug Delivery System DermWorx is incorporating its in-licensed rights to IGI, Inc.’s Novasome® Microvesicle Drug Delivery System technology into select formulations. IGI uses its Novasome® nanoparticles to help manufacture multiple dermatology, consumer, skin care, and hair care products. The technology consists of a novel, proprietary process that significantly increases a compound’s aqueous solubility (moisture), penetrability, and stability. It can be equated to hollow spheres measuring between 200 and 400 nanometers (nm) in size, which are used to improve the ability of active cosmetic and personal care ingredients to deliver full potency to structures located deeper beneath the skin’s surface.

The Novasome® technology employs a proprietary organized lipid structure, lipid vesicle encapsulation technology, cellulose structures, and micellar nanoparticles, thus providing for a nanoparticle in an aqueous transport system, as illustrated in Figure 1. Since the system is aqueous, irritating organic solvents such as ether, acetone, and alcohol (which are currently used in other products to solubilize drugs with poor aqueous solubility) can be eliminated without sacrificing efficacy relating to concentration. For example, established data shows that the concentration of salicylic acid in water, which is approximately 0.2%, is increased to as high as 10% (or a 50-fold increase in solubility) using this technology. The use of this aqueous-based system is intended to increase penetration, resulting in a more rapid onset of action and a reduced time to

cure with little or no additional side effects. This technology is being employed in the Company’s adult acne, psoriasis, and tinea versicolor products. Small Molecule Solubilization System™ (SMSS™) Small molecule technologies have been previously used as sources for new drug candidates in the pharmaceutical industry. In many ways, small molecules are more attractive than large molecules, as small molecules generally lend themselves to easier formulation, have the potential for a broader array of dosage forms, and have greater potential for skin penetration. DermWorx expects to use this approach in selecting and developing molecules from a given class of active drug agents. The SMSS™ employs the fundamentals of transport science and technology to create products that more effectively deliver topical drugs to and through the nail bed and skin, where there is a natural resistance to drug diffusion. This resistance declines exponentially with decreasing molecular weight. The nail bed is especially sensitive to the increasing molecular weights of topical antifungal agents.

Composed of 5 to 7 lipid bilayers (A) and the inner cargo hold (B)


DermWorx, Inc.Figure 1

A NON-PHOSPHID OUTER MEMBRANE OF THE NOVASOME® MICROVESICLE


DermWorx has identified topical antifungal drugs within the allowed molecular size domain. The small size of these molecules, in combination with the SMSS™, enables improved penetration into the nail bed. To do so, the SMSS™ uses compounds called “cis-unsaturated fatty alcohols and acids.” These molecules “fluidize” the membranes of skin and nail cells in order for drugs to penetrate them more easily and rapidly. The delivery of drugs in the SMSS™ is maximized once the volatile compounds of a given formulation have evaporated. DermWorx expects that lidocaine, clotrimazole (and its other antifungal agents), topical antibiotics, and the valerate ester form of Vitamin C will likely utilize its proprietary SMSS™. New Molecular Entities (NMEs) Additionally, DermWorx is designing NMEs derived from parent compounds, with the aim of dissolving drugs much more efficiently within cell membranes. Coupled with DermWorx’s SMSS™ leads, the Company expects this to improve the delivery of compounds into the skin and enhance efficacy. DermWorx is using this strategy with its Vitamin C analog (Cosmeceuticals [pages 20-21]). PRODUCT OPPORTUNITIES DermWorx’s drug development program identifies nine product candidates that have a need for more effective versions. Some are monograph drugs, where the active substances and their indications have already been reviewed by FDA Advisory Review Panels and were found to be safe and effective in their prescribed treatments (e.g., salicylic acid in acne, lidocaine as a topical analgesic, and clotrimazole as an antifungal agent). As a result, these candidates have a shorter pipeline. The remaining products using active ingredients, such as other antifungal agents and topical antibiotics, will require pre-approval by the FDA prior to marketing. Also included in the pipeline are two Vitamin C formulations. Both products are to be marketed as cosmeceuticals, thus they do not require regulatory approval. One of the Vitamin C products is an in-licensed 10% Vitamin C serum, which has a patented vehicle formulation providing stabilization to the Vitamin C, thereby allowing the formulation to maintain its potency when exposed to light and other environmental conditions. The Company’s pipeline of development candidates is listed in Table 5 and explained in greater detail in the accompanying sections. The first three candidates are those that can be market-ready prior to the Company being fully operational: LidoWorx™, AcneWorx™, and CerumWorx™.

LidoWorx™ (4% Lidocaine) Topical anesthetic Completed Sept. 2007 SMSS™AcneWorx™ (2% Salicylic Acid) Adult acne and dry skin Completed Aug. 2007 Novasome™CerumWorx™ (10% Vitamin C) Anti-aging Completed Aug. 2007 —Nanomycin-A (topical antibiotic) Acne and rosacea Aug. 2007 Nov. 2010 SMSS™Pamorx C (Vitamin C valerate ester) Anti-aging hand cream Aug. 2007 Oct. 2008 SMSS™OnychoWorx (antifungal) Nail fungal infections Aug. 2007 Aug. 2011 SMSS™Nanopsorx Body (3% Salicylic Acid) Psoriasis body lotion Aug. 2007 Feb. 2008 Novasome™Nanopsorx Scalp (3% Salicylic Acid) Psoriasis scalp shampoo Aug. 2007 Feb. 2008 Novasome™TineaWorx (3% Salicylic Acid and 1% Clotrimazole)

Tinea versicolor July 2007 Aug. 2008 Novasome™



PIPELINE

Estimated Project Launch Date

Product Indication Estimated Project Development Start Date

Type of Vehicle Formulation System


Topical Analgesics Topical analgesics (anesthetics) are used in a variety of needle procedures, from removing cysts and moles to Botox® and dermal filler procedures. A host of lidocaine formulations for use as a topical anesthetic have been tested, albeit with limited success, partially due to the high water content that is needed to penetrate the skin and the high concentration of lidocaine that is required to provide reliable numbing. These higher concentrations are available only through prescription and require pre-approval by the FDA. Skin Procedures The number of skin surgery procedures performed in 2005 to improve the health, function, and cosmetic appearance of the skin increased to almost 4.9 million (Source: American Society for Dermatology Surgery [ASDS]). This represented a 20% increase versus 2003 and a 32% increase since 2001. Minimally invasive cosmetic procedures have increased 32% versus 2003 and 58% since 2001. Nearly all dermasurgeons (95%) report treating skin cancer, where surgical techniques are employed to combat this disease. Dermasurgeons additionally conduct cosmetic skin surgery, where two-thirds to three-quarters of respondents report performing Botox® injections (71%), vein treatment (70%), laser- and light-based treatment (65%), dermal filler injections (64%), and skin resurfacing (63%). Table 6 provides a depiction of the annual number of dermasurgery procedures that are performed.

Procedure Trends Injectables continue to gain popularity, with more than 5.5 million people seeking them to eliminate and fill wrinkles in 2004, which is the highest number of any surgical or nonsurgical treatment performed in the U.S. Treatment can take place in just one doctor visit with nearly instantaneous results and little to no downtime from daily activities. Current Treatment The most widely used topical anesthetic today is a eutectic mixture of local anesthetic creams (called EMLA [Eutectic Mixture of Lidocaine and Prilocaine]), composed of lidocaine (25 mg/mL) and prilocaine (25 mg/mL). EMLA is a combination of two or more ingredients which, when combined, melt at a lower temperature than any of the ingredients alone. While it is an effective topical anesthetic, EMLA must be applied as a thick layer to the skin, and its analgesic action does not take effect for 60 to 90 minutes. Moreover, EMLA is not effective on its own since an occlusive dressing must be placed over the EMLA application to allow for effective anesthesia. Furthermore, because of the long delay in the onset of effect and the requirement for occlusive dressing for effective anesthesia, EMLA’s value as a topical anesthetic is limited.

Procedure 2005 2003 2001 2005/2003 2005/2001

Skin cancer treatment 1,718,885 1,611,014 1,536,814 7% 12%Laser and light therapy 914,427 686,361 599,650 33% 52%Botulinum toxin injections 574,080 458,253 311,727 25% 84%Resurfacing 531,846 422,611 478,957 26% 11%Dermal filler injections 437,643 281,571 206,292 55% 112%Nonablative skin rejuventation 299,714 233,964 146,632 28% 104%Vein treatment 299,697 331,979 348,041 -10% -14%Miscellaneous 105,497 56,518 58,440 TOTAL 4,881,789 4,082,271 3,686,553 20% 32%

Source: American Society for Dermatologic Surgery (ASDS).

Change over time

Table 6ANNUAL NUMBER OF DERMASURGERY PROCEDURES PERFORMED


In a recent development, the FDA voiced concern about the serious public health risks related to pharmacy-compounded topical anesthetic creams. The basis for this concern was that exposure to high concentrations of local anesthetics, such as those in pharmacy-compounded topical anesthetic creams, can cause grave reactions, such as seizures and irregular heartbeats. In fact, two deaths have been connected to pharmacy-compounded topical anesthetic creams. Based on the aforementioned, there is a need for a safe, effective, topical anesthetic with a shorter onset of anesthetic effects. A variety of new topical formulations of lidocaine have been tested, though have met with only limited success, due in part to the requirement that these formulations have a high water base and active ingredient content in order to produce the desired anesthetic effects. DermWorx’s Topical Analgesic Development Efforts DermWorx has used its proprietary SMSS™ technology (described on pages 12-13) to develop a lidocaine formulation, called LidoWorx™, with the intent on increasing the solubility of the active ingredient and decreasing the amount of time for the product to take effect, potentially creating a more effective anesthetic for dermatological cosmetic procedures. Preliminary efficacy studies have been performed to evaluate the onset and duration of anesthetic effect for pain on injection as well as to finalize the compound’s formulation. The study was to evaluate two of the fast acting topical formulations, both 4% lidocaine, but one with a greater amount of the thickening agent (hydroxypropylcellulose) than the other. The appropriate amount of hydroxypropylcellulose ensures that the formulation remains at the site of application (adheres to the skin) but does not interfere with lidocaine absorption, so that the maximum amount of drug penetrates the selected area. Experiment and Results DermWorx has evaluated two lidocaine formulations, containing 2% and 3% hydroxypropylcellulose, respectively. The products were applied to subjects’ perioral skin using a cotton swab and then rubbed into the area using a gloved hand. Subjects received a series of subcutaneous injections of a cosmetic filler 15 to 20 minutes after the application of the lidocaine formulation. Subjects had previously received subcutaneous injections of the identical cosmetic filler after pretreatment for an hour with EMLA. Subjects were then asked to compare the pain at the injection site among pretreatments with lidocaine/2% hydroxypropylcellulose, with lidocaine/3% hydroxypropylcellulose, and retrospectively, with EMLA. Six subjects participated in the study. DermWorx’s formulation, which contained 3% hydroxypropycellulose, was rated better than that containing 2% hydroxypropylcellulose, as it pertained to onset of action, overall numbness, and post-treatment injection-site pain. Both of the Company’s proprietary formulations (applied for up to 20 minutes) were shown to be superior to EMLA (which was applied for one hour) when they were compared. Based on the retrospective evaluations of the participants, one subject reported the complete absence of pain at the injection site after application of the 3% formulation compared to prior experiences with EMLA. Besides the six patients in this study, two other subjects were pretreated for 15 minutes with the 3% formulation and reported no pain during injection with xylocaine in preparation for diagnostic biopsies for skin lesions. Formulations that contained 3% hydroxypropylcellulose demonstrated a faster onset of action and reached maximum effect more quickly than the 2% formulation. Retrospective comparison to prior experience indicates that the effect achieved with the 3% formulation was equal to or superior to today’s widely used topical anesthetic, EMLA (which requires 60 to 90 minutes to take effect). Regulatory Strategy DermWorx expects to market LidoWorx™ as a monograph drug in accordance with current FDA regulations that relate to acceptable concentrations and labeling claims. Accordingly, no regulatory approval is likely to be necessary. The product is expected to be available for marketing since formulation development has been completed. DermWorx has recently filed a provisional patent for this formulation (Intellectual Property [page 7]).


Acne and Adult Acne Acne impacts more than 50 million people in the U.S. and accounts for more than $2 billion in products and services to treat and diagnose the condition (Source: the Society for Investigative Dermatology). Specifically, adult acne is estimated to impact 17 million people, with recent studies suggesting a high prevalence particularly among women, in which 50% of women are affected versus 25% of men. Adult acne is primarily caused by genetic and hormonal changes. Other factors that can cause the condition include certain medications, excessive sweating, stress, pregnancy, and menopause. It can also be caused by especially oily cosmetic products. There are various theories as to why adults get acne, with research pointing to inherent bacteria multiplying excessively within the hair follicle, an oil-releasing blockage that develops from the sebaceous gland, or an enlarged sebaceous oil gland yielding an overproduction of oil. Bacteria and oil blockages can lead to adult acne problems such as pimples, inflammation, cysts, and scarring, primarily on the face, though it can also appear on the arms, legs, buttocks, and torso. Current Treatment Acne treatment is dependent upon the type, extent, and severity of the condition. Treatments work by reducing sebum production, reducing bacteria, normalizing the keratinization process, and reducing inflammation. It can take eight weeks for a pimple to run its course from its beginning to disappearance, though darkened spots and scarring may last even longer. Acne treatments usually work by helping to prevent new acne lesions from appearing, though have no effect on existing lesions. Therefore, results may not be apparent for two to three months after initiation of treatment. Traditional acne treatments employ active ingredients, such as salicylic acid. Due to salicylic acid’s low solubility, however, organic solvents such as alcohol must be added to solubilize the salicylic acid, which ensures the effectiveness of the treatment. Yet, these organic solvents irritate surrounding healthy skin and act as drying agents on the skin. Antibiotics can also be used to treat acne vulgaris and rosacea. The Company has identified an alternative antibiotic that could offer superior tissue distribution and cellular concentration and has shown to be an effective oral anti-acne medication. While this could prove to be superior to current antibiotics that treat acne, such as erythromycin, there is still no topical solution of this antibiotic available as an acne treatment. Soaps and Cleansers Anti-acne soaps, which are non-oily, remove excess sebum from the skin and function to prevent follicle blockage. Anti-acne face cleansers with abrasives remove dead skin cells, though are not intended for skin that is inflamed. Topical Medications Topical medications, which are applied to the affected area of skin, include over-the-counter (OTC) products containing salicylic acid or benzyl peroxide. Additionally, Vitamin A derivatives and antibiotic lotions (available by prescription) may also be used topically. Salicylic acid is a mild acid that works as a keratolytic agent, encouraging the sloughing of dead skin cells. It has been shown to be a safe and effective treatment for mild acne, oily skin, textural changes, and post-inflammatory hyperpigmentation in most patients. These solutions encourage the peeling of the top layer of skin and the opening of plugged follicles, which helps to re-establish the normal replacement cycle of skin cells. In milder cases, salicylic acid helps to unclog pores, which tends to prevent lesions though does not have an effect on the production of sebum or the presence of P. acnes bacteria. Additionally, this treatment must be used continuously, after the acne has healed. The most commonly reported side effect is skin dryness, which is most often mild in nature.


Systemic Medications Systemic medications, which are taken orally, require a doctor’s prescription and include the following: (1) oral antibiotics, such as erythromycin, tetracycline, or minocycline; (2) oral hormonal treatments, such as estrogen pills or a low-dose estrogen/anti-testosterone combination drug; and (3) oral Vitamin A derivatives. Other Remedies Additionally, adhering to the following guidelines may prevent or reduce acne: protect the skin from pollution with toners and moisturizers;

limit exposure to high humidity levels;

do not touch or scrub face or blemishes on the skin;

do not wear apparel that is tight on the face or skin, including tight collars;

employ a proper skincare regimen;

avoid excess sun and cold exposure;

select cosmetics with little or no oil; and

eat a well-balanced diet.

DermWorx’s Anti-Acne Development Efforts The therapeutic effectiveness of salicylic acid depends upon the presence of moisture. As such, it is commonly incorporated into vehicles that occlude the area and promote hydration, causing maceration (softening) of the skin. DermWorx plans to incorporate the Novasome® Microvesicle Drug Delivery System (described on page 12) in its acne formulation to increase the aqueous solubility, penetrability, and stability of the salicylic acid. The aqueous nature of the Company’s solution negates the need for irritating organic solvents, such as ether, acetone, and alcohol (which are currently used in many other products that contain salicylic acid), without sacrificing efficacy relating to concentration. Data is established that demonstrates the increased concentration of salicylic acid in water with the use of this technology. Employing DermWorx’s proprietary drug delivery system, the Company expects to develop a topical antibiotic without the need for an organic solvent in its topical formulation. This strategy is intended to not only increase the efficacy in the treatment of acne vulgaris and rosacea but to also reduce unwanted side effects due to the absence of alcohol. Regulatory Strategy DermWorx believes that products meeting the concentrations of salicylic acid permitted in the final rule/final monograph can be developed and marketed under the limitations of the monograph. Therefore, formal FDA approval is not required so long as the marketed product poses no additional safety issues and is within the described final rule/final monograph conditions of concentration, indications, warnings, and precautions. With respect to the antibiotic, because there are no currently approved topical drug products of this entry, this product is likely to require pre-approval by the FDA prior to marketing. DermWorx expects to file a New Drug Application (NDA) as either a 505(b)(2) or a 505(j) to obtain approval of this route of administration to treat acne vulgaris and rosacea. The Company would then undertake discussions with the FDA to determine the appropriate file type. Based on the application type, DermWorx could conduct a pre-Investigational New Drug (pre-IND) meeting with the FDA to establish the


requirements to confirm the safety and efficacy of this dosage form prior to initiating large-scale clinical studies. These preclinical studies could involve measurements of systemic levels along with dose response studies. Following, DermWorx could meet with the FDA at the end of the Phase II clinical trials. Subsequently, the Company intends to undertake Phase III clinical studies, with a design agreeable to the FDA, to establish the efficacy and length of treatment required to obtain a significant reduction in inflammatory lesions. Upon completion, the Company would meet with the FDA (pre-NDA meeting) to agree on the various data analysis methods to establish the clinical efficacy of the formulation. This could take a minimum of four to five years. Nail Fungal Infection (Onychomycosis) Thickened, discolored toenails and fingernails are fairly common, with about 50% of these types of nails due to a fungal infection of the nail bed, matrix, or nail plate. Nearly 7% to 10% of the U.S. population is affected by fungal infections of the nail (including 48% of those over age 70). These infections are called onychomycosis or tinea unguium, which is a fungal infection that affects the nail and nail bed. Men are more often affected by the condition than women, and usually after age 40. There are four different types of fungal nail infections, categorized by the part of the nail involved. The most common infection occurs at the end of the nail, when the fungus invades the hyponychium. When this occurs, the nail plate splits from the nail bed. The end of the nail then turns yellow or white and keratin debris develops under the nail, which causes additional separation. The fungus that grows in the substance of the nail causes it to become fragile. There are many factors that contribute to the risk of being infected with nail fungus, cited in Table 7.

Current Treatments Current treatments for this condition, which are quite costly and only successful in roughly 12% of patients, encompass a $500 million-plus worldwide market. These treatments tend to be largely ineffective or result in serious side effects. There are three effective oral antifungal medications—two that are FDA approved for fungal nail injections and one that is not FDA approved. All three have significant side effects and interact with other medications. Furthermore, anyone who takes these treatments must have periodic laboratory testing performed to monitor liver and blood cell functions. The only non-oral FDA-approved onychomycosis treatment is a nail lacquer, called ciclopirox (Penlac® by Dermik Laboratories, a division of sanofi-aventis U.S. LLC [SNY-NYSE]), for fungal nail injections, which is an option for people who are not able to take oral antifungal medications.

Table 7FACTORS THAT CONTRIBUTE TO THE RISK OF BEING INFECTED WITH NAIL FUNGUS

- have a history of athlete's foot - have had nail fungus before - have an injury to the nail bed, such as a stubbed toe or cut finger - frequently are around swimming pools, spas, and locker rooms - wear acrylic nails - have feet that perspire excessively - wear tight shoes or socks - have family members who have had the condition - have certain medical conditions such as diabetes, circulatory problems, immune disorders (such as AIDS), or an immune system that is otherwise compromised - get manicures or pedicures in salons/spas that do not keep nail clippers, emory boards, and other tools clean

Source: Dermik Laboratories, a business of sanofi-aventis U.S. LLC.


DermWorx’s Antifungal Development Efforts DermWorx plans to repurpose an antifungal agent for the treatment of onychomycosis. The molecular size, its high aqueous solubility, and its ability to penetrate the nail bed make this product candidate a potentially solid entry into the antifungal market. This compound has been reviewed by the Environmental Protection Agency (EPA), with a great amount of information relating to its toxicology already in existence. DermWorx has recently filed a provisional patent for this compound for use in nail infections. Regulatory Strategy DermWorx expects to file an NDA to obtain approval of this new chemical entity (NCE) and route of administration in 2009. The Company will need to hold discussions with the FDA to determine the appropriate steps to develop and obtain approval for this candidate, which are likely to include a pre-IND meeting with the FDA to establish the necessary requirements to confirm the safety and efficacy prior to the initiation of clinical studies. These preclinical studies could involve measurements of systemic levels along with dose response studies. Following completion of such preliminary work, DermWorx would then meet with the FDA (end of Phase II meeting) and undertake Phase III clinical studies, with a design agreeable to the FDA, to establish the efficacy and length of treatment required to obtain clinical efficacy. Once all clinical studies are completed, DermWorx would then meet with the FDA (pre-NDA meeting) to agree on the various data analysis methods to clearly establish the clinical efficacy of the formulation. Psoriasis and Seborrheic Dermatitis Psoriasis is a skin condition that affects between 5.8 million and 7.5 million U.S. citizens (Source: the National Institutes of Health [NIH]). It is most commonly diagnosed between the ages of 15 and 25, with both men and women of any race affected. The exact cause of psoriasis is not yet known; however, it is believed that whether a person develops the condition or not may depend on a “trigger,” which may include emotional stress, skin injury, systemic injections, and certain medications. Additionally, it may also be that a person is genetically predisposed to psoriasis, with multiple genes confirming this fact over the past several years. The market for psoriatic medicines and treatments is estimated to exceed $3 billion worldwide, with the majority of milder forms treated with topical therapies, while more severe forms of the disease (which represent 30% of the psoriatic population) are treated with new biologics. Seborrheic dermatitis is a chronic inflammatory disease of the skin that is characterized by moderate erythema; dry, moist, or greasy scaling; and yellow-crusted patches on various areas, including the face, scalp, chest, armpits, or groin. In infants, seborrheic dermatitis of the scalp is often identified as “cradle cap.” Treatment There is currently no cure for psoriasis, and the tendency to develop the condition is inherited. However, it can be cleared and, in certain rare cases, never return at all. Many different therapies can reduce, or nearly stop symptoms. No single treatment works for everyone, but one is likely to work in most cases. In the majority of patients, psoriasis is a lifelong condition with alternating periods of flaring and clearing. Types of treatments fall into three categories: (1) topical (applied to the skin), for mild to moderate psoriasis; (2) phototherapy (light, usually ultraviolet (UV), applied to the skin), for moderate to severe psoriasis; and (3) systemic (taken orally or by injection or infusion), for moderate, severe, or disabling psoriasis. DermWorx’s Psoriasis and Seborrheic Dermatitis Development Efforts DermWorx expects to formulate products employing a microencapsulated form of salicylic acid for a new psoriasis and seborrheic dermatitis treatment. Salicylic acid is most effective when applied to areas of thick scaling, such as the scalp, palms, and soles. It is designed to decrease cohesion of corneocytes in an abnormal horny layer of psoriasis. Salicylic acid is also believed to lower the pH in the area, which promotes hydration of epidermal cells with their swelling, softening, and shedding, therefore acting as a keratolytic agent. Moreover, salicylic acid is often used to enhance effectiveness of topical corticosteroids, tar, or anthralin by improving their cutaneous absorption.


Regulatory Strategy In December 1991, the FDA published a final rule/final monograph supporting the safety and effectiveness of salicylic acid for dandruff, seborrhea, and psoriasis. In this final rule/final monograph, the FDA established the concentration that could be marketed (1.8% to 3%), with no limitations placed on the type of vehicle utilized. This final monograph listed salicylic acid alone as safe and effective in the treatment of dandruff, seborrheic dermatitis, and psoriasis, and safe and effective in combination with sulfur as a dandruff treatment. Thus, DermWorx does not expect any regulatory approval to be required. Tinea Versicolor Tinea versicolor is a common fungal skin infection characterized by white or light brown patches on the skin, specifically the chest and back. This infection occurs more frequently in regions of high temperatures and humidity and is most common in people ages 15 to 24. In 2005, there were nearly 500,000 patients treated for this condition. Tinea versicolor is caused by the dimorphic, lipophilic organism, Malassezia furfur (“M furfur”), which is a member of normal human cutaneous flora. The organism is found in 18% of infants and 90% to 100% of adults on normal skin and on skin regions demonstrating cutaneous disease. In patients with clinical disease, the organism is found in both the yeast (spore) stage and the filamentous (hyphal) form. The conversion of the saprophytic yeast to the parasitic, mycelial morphologic form can arise from any of the following: a genetic predisposition; warm, humid environments; immunosuppression; malnutrition; and Cushing’s disease. DermWorx’s Tinea Versicolor Development Efforts DermWorx intends to develop a topical product that combines an antifungal agent (clotrimazole), which is effective against the fungus that causes tinea versicolor, with a skin penetrating and peeling agent (salicylic acid), which enhances deep antifungal penetration. This combination could prove effective in treating the infection in both the superficial and deep layers of the skin. Regulatory Strategy In March 2002, the FDA amended the monograph for antifungal products to include clotrimazole in topical products at a concentration of 1% for the treatment of athlete’s foot, jock itch, and ringworm. While clotrimazole is normally prescribed to treat tinea versicolor, this particular indication has not been formally approved. Since clotrimazole and salicylic acid have been individually reviewed by the OTC advisory panel and classified as Category 1, safe and effective, DermWorx seeks to develop a combination product containing clotrimazole and salicylic acid to treat tinea versicolor. DermWorx believes that this combination could be marketed as a topical 1% clotrimazole containing salicylic acid while making no efficacy claims for the salicylic acid other than that it is a keratolytic agent. Alternatively, the Company could file a petition to reopen the administrative record for the OTC monograph to include the combination of clotrimazole and salicylic acid and submit clinical studies in support of this requested change. Cosmeceuticals Cosmeceuticals are products that are formulated to improve the skin’s health and appearance. From 2003 to 2004, sales of skin care cosmeceuticals in the U.S. grew over 7% to $6.4 billion, largely driven by the aging baby boomers. In fact, since 1997, there has been a 444% increase in the total number of cosmetic procedures. Additionally, cosmetic surgery in 2005 constituted a $13 billion to $15 billion per year industry. Vitamin C (L-ascorbic acid) Exposure to UV light, as well as smoke and environmental pollutants, has been shown to decrease the naturally occurring Vitamin C (L-ascorbic acid) levels in the skin and to accelerate the signs of aging. To compensate for this effect, topical application of Vitamin C has been shown to restore these photoprotectant levels. In particular, topical Vitamin C has been shown to protect the skin from UV damage caused by prolonged sun exposure by reducing free radical formation and sunburn cells.


Other studies also suggest that Vitamin C may play a part in the collagen biosynthetic pathway by activating collagen metabolism and dermal synthesis of elastic fibers. While Vitamin C is one of the relatively few topical agents whose effectiveness against wrinkles and fine lines is substantiated through reliable scientific evidence, the practical use of Vitamin C for skin care presents certain complications due to its lack of stability. For example, when exposed to air, Vitamin C solution undergoes oxidation and becomes not only ineffective but also potentially harmful. Stabilized Vitamin C products, which oxidize less rapidly, are available on the market; however, they may still be excessively oxidized by the time consumers use them. Ascorbic acid is one of the most important supplements to the human body. It was discovered in the early 18th century that a deficiency of ascorbic acid contributed to scurvy in sailors. Humans are one of the only mammals that are unable to synthesize ascorbic acid. While oral supplementation may help with some of the ascorbic acid that the body needs, it is not nearly enough to replenish the skin’s requirements. In addition to its antioxidant properties, ascorbic acid has been found to stimulate the synthesis of collagen in the skin. It is the cofactor for two enzymes essential to collagen synthesis: lysil and prolyl hydroxylases. These enzymes act as a catalyst for hydroxylation, a critical phase in the production of collagen since it regulates the formation of the triple helix, the excretion of procollagen, and the cross-linking of the tropocollagen. This all eventually leads to the creation of the collagen fibers found in the skin. DermWorx’s Cosmeceutical Development Efforts DermWorx expects to offer two cosmeceutical products that contain Vitamin C. The first product is to utilize L-ascorbic acid, the pure form of Vitamin C, which increases the solubility and decreases the oxidation on exposure to air of Vitamin C. DermWorx licensed the rights to a patented serum (“10% Pure C Serum”), which is covered by two patents (6,087,393 and 6,211,231). This 10% Pure C Serum has proven to be chemically and physically stable. The product remains clear and maintains its level of 10% L-ascorbic acid for a minimum of two years. A 12-week clinical study performed with this patented 10% Pure C Serum product exhibited positive results. In this study, subjects topically applied the 10% Pure C Serum around the eye area to evaluate its potential for reducing the appearance of fine lines. Table 8 summarizes the results. The second Vitamin C product is to be a valeric acid ester in a cream or lotion form and uses two development criteria: (1) increase solubility by using certain approved excipients; and (2) increase penetration of the Vitamin C/Vitamin C derivatives while protecting the active component from air oxidation using small molecule technology. DermWorx has made initial contact with a custom synthesis laboratory to develop a synthetic pathway to produce Vitamin C valeric acid ester. This laboratory has successfully synthesized and purified this ester on a laboratory scale. Based on these efforts, DermWorx believes that the proposed synthetic process could successfully produce this derivative in commercially available amounts with a patentable process. This small molecule derivative, which appears as an oil at room temperature, exhibits greater solubility in the Company’s proprietary topical formulation, resulting in increased absorption into the skin. Regulatory Strategy No regulatory approval is required for this product class, and there are no limitations regarding concentration for Vitamin C or its derivatives. The Vitamin C products would be marketed as clinically baked cosmeceuticals.


RESULTS OF A 12-WEEK CLINICAL STUDY PERFORMED WITH 10% PURE VITAMIN C SERUM PRODUCT

- 94% reported an improvement in fine lines- 88% reported an improvement in skin firmness- 88% reported a reduction in crow's feet- 80% reported an improvement in skin texture- 58% reported an improvement in skin tone- 87% reported an improvement in skin's overall appearance- 61% reported a reduction in dark circles- 58% reported a reduction in under-eye puffiness- 42% reported a reduction in age spots



Recent and Potential Milestones Recent Milestones The Company has recently accomplished the following milestones: In-licensed the proprietary Novasome® Microvesicle Drug Delivery System from IGI, Inc.

Developed a proprietary SMSS™ delivery system

Filed provisional patents for

o a unique, repurposed antifungal agent utilizing a proprietary small molecule penetration

technology that allows the antifungal agent to cross through the highly keratinized nail to treat the underlying fungal infection; and

o a unique proprietary formulation of a topical anesthetic utilizing small molecule penetration

technology, which allows the topical anesthetic to exhibit a faster onset of action in reaching full clinical effect.

Potential Milestones DermWorx has targeted the following milestones for the next 12 to 18 months. The Company believes that each of these milestones has the potential to translate into shareholder value: Manufacturing, scale-up, and product launches of LidoWorx™, CerumWorx™, and AcneWorx™; and

Hiring and training a sales force.


Competition DermWorx competes against companies such as Allergan, Inc. (AGN-NYSE), Medicis Pharmaceuticals Corp. (MRX-NYSE), Bradley Pharmaceuticals, Inc. (BDY-NYSE), Dermik Laboratories (a business of sanofi-aventis U.S. LLC), Stiefel Laboratories, Inc., CORIA Laboratories Ltd, and DUSA Pharmaceuticals Inc.® (DUSA-NASDAQ), among others. None of these companies is dominant in any one therapeutic segment of the dermatology marketplace, and none offers a product in every therapeutic area. Brief descriptions of competition by company are followed by competition by product, based on the dermatologic categories that DermWorx expects to target. Competition by Company Allergan, Inc. Headquartered in Irvine, California, Allergan, Inc. is a global specialty pharmaceutical and medical device company that discovers, develops, and commercializes innovative products for the ophthalmology, neurosciences, medical dermatology, medical aesthetics, and other specialty markets. The Company employs more than 6,500 people worldwide, and operates research and development (R&D) facilities and manufacturing plants, and has global marketing and sales capabilities, with a presence in more than 100 countries. The Company’s dermatology efforts are focused on the high growth markets of acne and psoriasis in the U.S. and Canada, while modestly building its presence outside North America. Medicis Pharmaceuticals Corp. Scottsdale, Arizona-based Medicis Pharmaceuticals Corp. is a significant participant in the independent specialty pharmaceutical arena in the U.S. The company is primarily focused on treating dermatological and podiatric conditions and aesthetics medicine. Medicis has leading branded prescription products in a number of therapeutic categories, including acne, fungal infections, psoriasis, rosacea, seborrheic dermatitis, and skin and skin-structure infections. Additionally, the company markets the leading dermal filler in the U.S., Restylane®. Well-known brands include Omnicef®, a patented oral cephalosporin for skin and skin-structure infections; Restylane®, an injectable gel for the treatment of facial wrinkles and folds, such as nasolabial folds; Solodyn®, which is used in the treatment of inflammatory lesions of non-nodular acne vulgaris; Triaz®, a gel and cleanser used for the treatments for acne; Vanos®, which is a topical corticosteroid for the relief of the inflammatory and pruritic manifestations of corticosteroid-responsive dermatoses; and Ziana™, a topical gel treatment for acne vulgaris. The company also offers dermal restorative products, such as Restylane®, Perlane®, Restylane Fine Lines™, and SubQ™, which are injectable, transparent, and stabilized hyaluronic acid gels for skin type volume augmentation needs. Bradley Pharmaceuticals, Inc. Bradley Pharmaceuticals, Inc. of Fairfield, New Jersey, is a specialty pharmaceutical company that provides therapies to niche physician specialties in the U.S. and 38 international markets. The company’s Doak Dermatologics subsidiary delivers dermatology and podiatry therapies, while the Kenwood Therapeutics division provides gastroenterology and internal medicine brands. Doak Dermatologics specializes in the manufacturing and marketing of brand-name prescription and OTC skincare brands for use as recommended by dermatologists throughout the world. Doak is involved in an R&D phase of growth. Well-known Doak brands include Solaraze® Gel, Adoxa®, Keralac™, Rosula®, Zoderm®, and Lidamantle®. Dermik Laboratories, a business of sanofi-aventis U.S. LLC Dermik Laboratories of Berwyn, Pennsylvania, conducts the North American business of sanofi-aventis Dermatology, the global dermatology unit of sanofi-aventis. With nearly 60 years of experience in the development, marketing, and distribution of prescription pharmaceutical products, the company has created a new division, Dermik Aesthetics, which is intended to focus on marketing innovative and reliable treatments to improve appearance and well-being. Dermik possesses the first and only brush-on


prescription treatment approved by the FDA to treat mild to moderate nail fungus, called Penlac®. For acne, Dermik has BenzaClin®, indicated for the topical treatment of mild to moderate acne vulgaris. Stiefel Laboratories, Inc. Stiefel Laboratories, Inc., headquartered in Coral Gables, Florida, is a skin care pharmaceutical company, entirely focused in dermatology, and has been for over 150 years. Stiefel Laboratories’ skin care products are prescribed or recommended by doctors and pharmacists in more than 100 countries around the world, improving the quality of life for millions of people each year. The Company’s products include the following: Brevoxyl®, Claripel™, Duac®, Evoclin™, LactiCare®, Luxíq®, OLUX®, PanOxyl®, Rosac®, Sarna®, Soriatane®, Verdeso™, and Zeasorb®. CORIA Laboratories Ltd. CORIA Laboratories, Ltd., based in Fort Worth, Texas, is gaining visibility and recognition in the field of dermatology, with a product line as well as a pipeline that includes treatments for a range of conditions such as atopic dermatitis, acne, and psoriasis. The company’s main products include Salex™, Cloderm®, Ovace®, Akne-mycin®, and TheraSeal®. DUSA Pharmaceuticals Inc.® DUSA Pharmaceuticals, Inc.®, based in Wilmington, Massachusetts, is an integrated dermatology pharmaceutical company focused primarily on the development and marketing of its Levulan® Photodynamic Therapy (PDT) technology platform, as well as complementary dermatology products. Levulan® PDT is currently approved for the treatment of pre-cancerous actinic keratoses, and is being studied for the treatment of acne. DUSA’s other dermatology products include ClindaReach™, Nicomide®, and the AVAR® line. ClindaReach™ is indicated to treat acne vulgaris and is only available by prescription. DUSA is also researching additional indications for internal uses of Levulan® PDT. Competition by Product The Company may also specifically compete with the products presented in the list below. In the use of anesthetics, EMLA from AstraZeneca plc (AZN-NYSE) and Topicaine® from

Topicaine.net. To treat acne and adult acne, Accutane® from Hoffman-La Roche, various products from generic

manufacturers and other commercially available products from companies that utilize various formulations of salicylic acid and benzoyl peroxide (e.g., certain products offered by Neutrogena Corporation).

To treat onychomycosis, PenLac® from Dermik and Lamisil® from Novartis AG (NVS-NYSE).

To treat psoriasis, Soriatane® from Hoffman-La Roche and Connetics Corp. (now Stiefel Laboratories,

Inc., described above), biologic agents such as Amevive® from Biogen Idec Inc. (BIIB-NASDAQ), Raptiva® from Genentech, Inc. (DNA-NYSE), Methotrexate from Barr Laboratories, Inc., and other generic products.

To treat seborrheic dermatitis, Nizoral® from Janssen, L.P., ketoconazole creams from generic

manufacturers, Desowen® from Galderma S.A., and Loprox® from Medicis. To treat tinea versicolor, Nizoral® from Janssen and Mentax® from Mylan Laboratories Inc. (MYL-

NYSE). In the use of Vitamin C in cosmeceutical products, anti-aging products developed by Dr. Pericone,

among others.


Key Points to Consider DermWorx, Inc. is a closely held specialty pharmaceutical company utilizing unique and novel drug

delivery systems to develop more effective versions of currently available dermatology products and cosmeceuticals.

DermWorx’s drug development program began by identifying nine product candidates in some of the

fastest growing and largest sectors of the dermatology market. Some are monograph drugs, where the active substances and their indications have already been reviewed by U.S. Food and Drug Administration (FDA) Advisory Review Panels and found to be safe and effective in their prescribed treatments (e.g., salicylic acid in acne, lidocaine as a topical analgesic, and clotrimazole as an antifungal agent).

o DermWorx has developed a rapid acting topical anesthetic containing lidocaine 4% utilizing the

Company’s proprietary Small Molecule Solubilization System™ (SMSS™). This topical formulation increases solubility and, hence, penetration of the active ingredient while decreasing the amount of time required for the active to be effective.

- Preliminary efficacy studies were performed to evaluate the onset and duration of anesthetic

effect for pain upon injection. DermWorx’s product exhibited maximum anesthetic effect in 15 minutes or less. Current topical anesthetic agents can take from 60 to 90 minutes to an hour to be effective.

- Development of this product is completed. Since the active ingredient is a monograph drug,

this product does not require regulatory approval and is ready for marketing. Product development, packaging, and labeling are finalized.

o Still the leading indication treated by dermatologists, acne treatments account for roughly $2

billion in sales annually. Adult acne alone is estimated to impact 17 million people, with recent studies pointing to a high prevalence of acne in adult women. DermWorx is developing two products for the treatment of acne. The first product, designed for adult acne, is intended to provide a greater therapeutic effect due to the active ingredient being incorporated into a novel, patented micro-encapsulation process that increases its aqueous solubility, penetrability, and stability. DermWorx’s second acne entry will likely be a prescription topical antibiotic for widespread use in acne and rosacea. The active ingredient is currently approved as an oral dosage form; however, there is no approved topical version of this drug.

- Development of the adult acne product, packaging, and labeling are finalized. Since the

active ingredient is a monograph drug, this product does not require regulatory approval and is ready for marketing.

- The Company could file a New Drug Application (NDA) for a topical version of its second

acne product in the fourth quarter of 2008 to obtain approval for this route of administration. Since the drug is already approved, the time to approval is not expected to take as long as it would for a new chemical entity (NCE).

o DermWorx is also working toward repurposing an antifungal agent and incorporating it into its

proprietary topical SMSS™ to treat onychomycosis, a market that currently exceeds $500 million. The Company believes that it can differentiate its formulation from current therapies by proving the selected drug penetrates or crosses though the keratin of the nail to the nail bed and site of the infection. DermWorx intends to file an NDA by mid-year 2009 to obtain approval of this NCE and its route of administration, and subsequently gain prescription status.


o The Company expects to have two Vitamin C formulations to replenish the skin’s elasticity and produce collagen. Both formulations are entrants into the anti-aging sector of the $6.4 billion cosmeceutical market. The two Vitamin C products include an in-licensed Vitamin C 10% serum that has a patented vehicle formulation to provide stabilization, which maintains the product’s potency when exposed to light, and a second product containing a new, patented ester (a select type of organic molecule) of Vitamin C. - The Vitamin C 10% serum is a cosmeceutical and, therefore, does not require regulatory

approval for marketing. Product development, packaging, and labeling are finalized.

o Additional product formulation opportunities exist in psoriasis, seborrheic dermatitis, and tinea versicolor.

The dermatology/cosmeceutical space has seen significant increases in recent years due in large

part to the aging “baby boomer” generation. Currently, 78 million baby boomers account for 75% of all prescription and drug sales and spend $1.7 trillion on goods and services a year (Source: Barron’s February 26, 2007).

In dermatology, the absence of brands with billion dollar annual sales opportunities has minimized the

interest for most “Big Pharma” Fortune 500 companies to enter or materially participate in this market. Most segments of the dermatology market are able to support product sales for new entries ranging from $10 million to $100 million. Thus, the dermatology market has more small and midsize companies, which compete against each other and offer a variety of products. This market is devoid of any one dominating company or a company offering a product in every segment.

DermWorx’s management, directors, and consultants have extensive experience in the areas of

dermatology and drug delivery at Key Pharmaceuticals, Inc. (now Schering-Plough), Alza Corporation (a member of the Johnson & Johnson family of companies), Elan Corporation plc, KOS Pharmaceuticals, Inc. (now part of Abbott Laboratories Inc.), Columbia Laboratories Inc., IVAX Laboratories (now part of Teva Pharmaceutical Industries Ltd.), Baker Cummins, Procter & Gamble, and Alcon, Inc.—affording the Company a particularly unique advantage in developing and selling dermatological drug delivery products.

As of May 2007, the Company’s cash position was $160,000.


Historical Financial Results Tables 9, 10, and 11 provide a summary of DermWorx’s key historical financial statements—its Statements of Operations, Balance Sheet, and Statements of Cash Flow.

Inception Inception(June 6, 2005) (June 6, 2005)

Year ended to toDecember 31, 2006 December 31, 2005 December 31, 2006

Research and development expenses 223,840$ $ — 223,840$ General and administrative expenses 174,691 133,924 308,615 Financing and interest expenses 141,083 $ — 141,083 Total expenses 539,614 133,924 673,538

Net loss (539,614)$ (133,924)$ (673,538)$

Basic and diluted net loss per share (0.15)$ (0.07)$

Weighted average Common Shares outstanding 3,518,146 1,808,285


Table 9DermWorx, Inc. (A development stage company)

STATEMENTS OF OPERATIONS


Current assets:Cash 239,405$ Prepaid offering costs 30,000

Total current assets 269,405 Product rights 85,763

TOTAL ASSETS 355,168$

Current liabilities: Notes payable - stockholders 550,000$ Accounts payable 76,106 Accounts payable - stockholders 9,447 Accrued expenses 80,728 Total current liabilities 716,281 Commitments and ContingenciesStockholders' equity (deficit):

Common Stock, $.0001 par value, 19,000,000 shares authorized,8,426,976 shares issued and outstanding at December 31, 2006 843

Additional paid-in capital 311,582 Deficit accumulated during development stage (673,538)

Total stockholders' equity (deficit) (361,113)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 355,168$


ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)


BALANCE SHEET December 31, 2006


Period from Period fromInception Inception

(June 6, 2005) (June 6, 2005)Year ended To To

Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006Cash flows from operating activities:

Net loss (539,614)$ (133,924)$ (673,538)$

Adjustments to reconcile net loss to net cash used in operating activities: Issuance of Warrants to purchase Common Stock 65,083 — 65,083 Expenses paid and services provided by stockholders 117,088 79,491 196,579

Changes in assets and liabilities: Prepaid expenses (30,000) — (30,000) Accounts payable 31,120 54,433 85,553 Accrued expenses 80,728 — 80,728 Net cash used in operating activities (275,595) — (275,595)

Cash flows from investing activities: Purchase of product rights (50,000) — (50,000) Net cash used in investing activities (50,000) — (50,000)

Cash flows from financing activities: Cash contributed by stockholders 15,000 — 15,000 Proceeds from Notes Payable 550,000 — 550,000 Net cash provided by financing activities 565,000 — 565,000

Change in cash 239,405 — 239,405 Beginning cash — — —Ending cash 239,405$ $ — 239,405$

Supplemental Disclosure of Non-cash investing activity:Issuance of Common Stock for product rights 35,763$ $ — 35,763$

Interest paid during the period $ — $ — $ —

Income taxes paid during the period $ — $ — $ —



STATEMENTS OF CASH FLOW


Risks Some information in this Executive Informational Overview® (EIO®) relates to future events or future business and financial performance. Such statements can be only predictions and the actual events or results may differ from those discussed. The content of this EIO® with respect to DermWorx, Inc. has been compiled primarily from information available to the public and released by the Company through various publications. DermWorx is solely responsible for the accuracy of that information. Information about other companies has been prepared from publicly available documents and has not been independently verified by DermWorx. For more information about DermWorx, please refer to the Company’s website at www.dermworx.com. One should carefully consider the risks and the information about DermWorx’s business described below. One should not interpret the order in which these considerations are presented as an indication of their relative importance. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known or those it currently considers immaterial may also have an adverse effect on its business. If any of the matters discussed in the accompanying risk factors were to occur, DermWorx’s business, financial condition, results of operations, cash flows, or prospects could be materially adversely affected. RISKS RELATED TO DERMWORX’S BUSINESS DermWorx is a start-up company with a limited operating history. DermWorx is a start-up company with a limited operating history. Consequently, investors will have a limited basis upon which to evaluate the Company’s ability to successfully achieve its planned business objectives. RISKS RELATED TO DERMWORX’S FINANCIALS AND NEED FOR ADDITIONAL FINANCING The Company has incurred losses since inception and anticipates that it will continue to incur losses for the foreseeable future. Since DermWorx’s inception, it has incurred significant operating losses. The Company has completed the development of three of its product candidates but has yet to commercialize any of these products. Consequently, DermWorx has not yet generated any revenues from the sale of its product candidates. The Company expects to continue to incur significant operating expenses and capital expenditures, and anticipates that its expenses may increase significantly in the foreseeable future as it performs the following: conducts research and development (R&D) on existing and new product candidates;

seeks regulatory approvals, as needed, for select product candidates;

conducts clinical trials;

commercializes its product candidates;

hires additional clinical, scientific, sales and marketing, and management personnel;

adds operational, financial, and management information systems; and

identifies and in-licenses additional compounds or product candidates.

The Company needs to generate significant revenue to achieve profitability. Even if DermWorx succeeds in developing and commercializing one or more of its product candidates, the Company may never generate sufficient sales revenue to achieve and then maintain profitability. DermWorx expects to incur operating losses for the foreseeable future.


DermWorx may need additional funding and may be unable to raise capital when needed, which would force the Company to delay, reduce, or eliminate its product development programs or commercialization efforts. DermWorx believes that the net proceeds from its cash resources and interest on these funds, will be sufficient to meet its projected operating requirements through the end of 2008. The Company currently has no additional commitments or arrangements for any further financing to fund the R&D and commercial launch of its product candidates. DermWorx may require additional funding in order to continue its R&D programs, including preclinical studies and clinical trials of its product candidates; pursue regulatory approvals for select product candidates; pursue the commercial launch of product candidates; and for other general corporate purposes. The Company’s future capital requirements will depend on many factors, including the following: the success of DermWorx’s development and commercialization of its product candidates;

potential acquisition or in-licensing of other products or technologies;

the scope and results of the Company’s clinical trials;

the timing of, and the costs involved in, obtaining regulatory approvals as necessary;

the costs of manufacturing activities;

the costs of commercialization activities, including product marketing, sales, and distribution;

the costs involved in preparing, filing, prosecuting, maintaining, and enforcing patent claims and other

intellectual property (IP)-related costs, including any possible litigation costs; and DermWorx’s ability to establish and maintain collaborative and other strategic arrangements.

Adequate financing may not be available on terms acceptable to the Company, if at all. DermWorx may continue to seek additional capital through public or private equity offerings, debt financings, or collaborative arrangements and licensing agreements. If the Company raises additional funds by issuing equity securities, its stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting DermWorx’s ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. Any debt financing that the Company raises or additional equity it may sell may contain terms that are not favorable to DermWorx or its Common Stockholders. If the Company raises additional funds through collaboration and licensing arrangements with third parties, it will be necessary to relinquish some rights to the Company’s technologies or its product candidates, or grant licenses on terms that may not be favorable to DermWorx. A lack of funding could adversely affect the Company’s ability to pursue its business objectives. If adequate funds are not available in the future, DermWorx may be required to curtail significantly or eliminate one or more of its product development programs. RISKS RELATED TO DEVELOPMENT OF PRODUCT CANDIDATES If DermWorx is incorrect in its assessment of the stages of clinical development or monograph classification of its initial product candidates, the Company may need to perform preclinical studies or clinical trials that it did not anticipate, which would result in additional product development costs for DermWorx and delays in filing for regulatory approval for its product candidates. With respect to a number of the Company’s product candidates, DermWorx expects to rely on the fact that these products will be treated as monograph drugs, and as a result, no regulatory approval will be required prior to marketing. If these product candidates were to require regulatory approval, the Company’s ability to generate revenues would be significantly delayed thereby affecting its profitability. If DermWorx does not receive regulatory approval to sell its product candidates or cannot successfully commercialize its product candidates, it would not be able to generate any initial revenues or grow


revenues in future periods, which would result in significant harm to the Company’s financial position and adversely impact its stock price. Furthermore, if DermWorx’s current assessments prove to be inaccurate, it will likely have to perform additional preclinical studies or clinical trials, which will require the Company to expend additional resources and may delay filing for regulatory approval for that product. The Company may not receive regulatory approval for those product candidates that require regulatory approval, or approvals may be delayed, either of which could materially harm its business. DermWorx believes that while many of its product candidates will not require any regulatory approval, certain products candidates will require such approval before commercialization. Government authorities in the U.S. and foreign countries extensively regulate the development, testing, manufacture, distribution, marketing, and sale of such product candidates. The process of obtaining regulatory approvals is costly, often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity, and novelty of the product candidates involved. Securing U.S. Food and Drug Administration (FDA) approval requires the submission of extensive preclinical and clinical data, information about product manufacturing processes, and inspection of facilities and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Varying interpretations of the data obtained from preclinical and clinical testing could delay, limit, or prevent regulatory approval of a product candidate. The FDA has substantial discretion in the approval process, which may take many years to complete and may involve ongoing requirements for post-marketing studies. Any FDA or other regulatory approval of the Company’s product candidates, once obtained, may be withdrawn, including for failure to comply with regulatory requirements or if clinical or manufacturing problems follow initial marketing. If DermWorx’s product candidates are marketed abroad, they will also be subject to extensive regulation by foreign governments. If the Company fails to obtain or maintain, or encounters delays in obtaining or maintaining regulatory approvals, it could adversely affect DermWorx’s ability to achieve profitability. DermWorx will not be able to commercialize select product candidates if its preclinical studies do not produce successful results or if its clinical trials do not demonstrate safety and efficacy in humans. Although the Company expects that many of its products will not require regulatory approval, certain product candidates will. Before obtaining regulatory approval for the sale of these product candidates, DermWorx must conduct, as necessary, at its own expense, extensive preclinical studies, and clinical trials to demonstrate the safety and efficacy in humans of those product candidates. Preclinical studies and clinical trials are costly, time-consuming, and have uncertain outcomes. In addition, the regulatory approval procedures vary among countries and additional testing may be required in some jurisdictions. The Company’s success will depend in part on the success of its clinical trials that have not yet begun. It may take several years to complete the clinical trials of a product, and a failure of one or more of DermWorx’s clinical trials can occur at any stage of testing. The Company believes that the development of each of its product candidates involves significant risks at each stage of testing. If clinical trial difficulties and failures arise, certain product candidates may never be approved for sale or become commercially viable. DermWorx does not believe that any of its product candidates have alternative uses if its current development activities are unsuccessful. There are a number of difficulties and risks associated with clinical trials. These difficulties and risks may result in the failure to receive regulatory approval to sell the Company’s product candidates or the inability to commercialize any of its product candidates. The following possibilities exist: DermWorx may discover that a product candidate does not exhibit the expected therapeutic results in

humans, may cause harmful side effects, or has other unexpected characteristics that may delay or preclude regulatory approval or limit commercial use if approved;


the results from early clinical trials may not be statistically significant or predictive of results that will be obtained from expanded, advanced clinical trials;

institutional review boards (IRBs) or regulators, including the FDA, may hold, suspend, or terminate

the Company’s clinical research or the clinical trials of its product candidates for various reasons, including noncompliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks;

subjects may drop out of DermWorx’s clinical trials;

the Company’s preclinical studies or clinical trials may produce negative, inconsistent, or inconclusive

results, and DermWorx may decide, or regulators may require the Company to conduct additional preclinical studies or clinical trials; and

the cost of DermWorx’s clinical trials may be greater than it currently anticipates.

If the Company fails to comply with regulatory requirements, regulatory agencies may take action against it, which could significantly harm DermWorx’s business. Any products for which the Company obtains marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising, and promotional activities for these products, will be subject to continual requirements and review by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed, or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. In addition, regulatory authorities subject a marketed product, its manufacturer, and the manufacturing facilities to continual review and periodic inspections. DermWorx will be subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports, registration requirements, current Good Manufacturing Practice (cGMP) regulations, requirements regarding the distribution of samples to physicians, and recordkeeping requirements. The cGMP regulations include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. If the Company engages contract manufacturers, it will rely on their compliance with cGMP regulations and other regulatory requirements relating to the manufacture of products, if any. DermWorx also will be subject to state laws and registration requirements covering the distribution of its products. Regulatory agencies may change existing requirements or adopt new requirements or policies. The Company may be slow to adapt or may not be able to adapt to these changes or new requirements. Later discovery of previously unknown problems with DermWorx’s products, manufacturing processes, or failure to comply with regulatory requirements, may result in any of the following: restrictions on the Company’s products or manufacturing processes;

warning letters;

withdrawal of the products from the market;

voluntary or mandatory recall;

fines;

suspension or withdrawal of regulatory approvals;

suspension or termination of any of DermWorx’s ongoing clinical trials;


refusal to permit the import or export of the Company’s products; refusal to approve pending applications or supplements to approved applications that DermWorx

submits; product seizure; and

injunctions or the imposition of civil or criminal penalties.

The Company has not yet sought regulatory approval for any of its products where required. DermWorx has experienced management personnel who have worked extensively with regulatory agencies, but the Company has not as yet filed any applications necessary to gain regulatory approvals. Moreover, some of the products that are likely to result from DermWorx’s product development, licensing, and acquisition programs may be based on new technologies that have not been extensively tested in humans. The regulatory requirements governing these types of products may be less well defined or more rigorous than for conventional products. As a result, the Company may experience a longer regulatory process in connection with obtaining regulatory approvals of any products that it develops, licenses, or acquires. If DermWorx fails to obtain regulatory approval in foreign jurisdictions, it may not be able to market certain products abroad, and the growth of its revenues, if any, would be limited. The Company intends to have some of its products marketed outside the U.S. In order to market certain products in the European Union and many other foreign jurisdictions, DermWorx must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and jurisdictions and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. The Company may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. DermWorx may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize certain products in any market. The Company may acquire additional products or product candidates in the future and any difficulties from integrating such acquisitions could damage its ability to attain profitability. DermWorx may acquire additional products or product candidates that complement or augment its existing product development pipeline. Integrating any newly acquired product or product candidate could be costly and time-consuming. The Company may not be able to integrate any acquired product or product candidate successfully. Moreover, DermWorx may need to raise additional funds through public or private debt or equity financing to complete these acquisitions, which may result in dilution for stockholders and the incurrence of indebtedness. RISKS RELATED TO THE COMPANY’S DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING, R&D, AND MARKETING AND DISTRIBUTION ACTIVITIES Because DermWorx has no manufacturing capabilities, it expects to rely on third-party contract manufacturers. The performance of these third-party contract manufacturers may be substandard or not in compliance with regulatory requirements, which could increase the risk that the Company will not have adequate supplies of its product candidates and harm its ability to commercialize its product candidates. DermWorx does not have any manufacturing experience or facilities. The Company will rely on third-party contract manufacturers to produce its products. If DermWorx is unable to engage contract manufacturers, it will neither be able to sell any products that it is ready to commercialize nor be able to conduct its clinical trials on those few product candidates that require approval. The risks associated with DermWorx’s reliance on contract manufacturers include the following (on page 35):


Contract manufacturers may encounter difficulties in achieving volume production, quality control, and quality assurance, as well as may also experience shortages in qualified personnel. Consequently, the Company’s contract manufacturers might not be able to meet its development schedules or adequately manufacture its products when required.

Contract manufacturers are subject to ongoing, periodic, unannounced inspection by the FDA and

corresponding state and foreign agencies or their designees to ensure strict compliance with cGMPs and other governmental regulations and corresponding foreign standards. Other than through contract, DermWorx does not have control over compliance by its contract manufacturers with these regulations and standards. The Company’s contract manufacturers may not be able to comply with cGMPs and other FDA requirements or similar regulatory requirements outside the U.S. Failure of its contract manufacturers or DermWorx to comply with applicable regulations could result in sanctions being imposed on the Company, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of its product candidates, delays, suspension or withdrawal of approvals, seizures or recalls of product candidates, operating restrictions, and criminal prosecutions—any of which could significantly and adversely affect the Company’s business.

DermWorx’s contract manufacturers may breach their manufacturing agreements because of factors

beyond their control or may terminate or fail to renew a manufacturing agreement based on their own business priorities at a time that is costly or inconvenient for the Company.

The Company may compete with other drug developers for access to manufacturing facilities for its current and future product candidates. If DermWorx is not able to obtain adequate supplies of its product candidates, it will be more difficult for the Company to develop its product candidates and compete effectively. Dependence upon third parties for the manufacture of DermWorx’s product candidates may reduce its profit margins or the sale of its products and may limit its ability to develop and deliver products on a timely and competitive basis. If third parties on whom DermWorx relies do not perform as contractually required or expected, the Company may not be able to commercialize its product candidates or obtain regulatory approval for those select product candidates requiring regulatory approval. The Company may depend on independent clinical investigators and contract research organizations (CROs) to conduct its clinical trials for those select product candidates that require such trials. CROs may also assist DermWorx in the collection and analysis of trial data. The investigators and CROs are not the Company’s employees, and DermWorx cannot control, other than by contract, the amount of resources, including time, which they devote to its product candidates. However, the Company is responsible for ensuring that each of its clinical trials is conducted in accordance with the general investigational plan and protocols for the trial that have been approved by regulatory agencies. Furthermore, the FDA requires DermWorx to comply with standards, commonly referred to as good clinical practice, for conducting, recording, and reporting clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity, and confidentiality of trial participants are protected. In connection with the Company’s potential reliance on independent clinical investigators and CROs, its clinical trials may be extended, delayed, suspended, or terminated, including as a result of the following: the failure of these investigators and research organizations to comply with good clinical practice or to

meet their contractual duties; the failure of DermWorx’s independent investigators to devote sufficient resources to the

development of its product candidates or to perform their responsibilities at a sufficiently high level; the Company’s need to replace these third parties for any reason, including for performance reasons

or if these third parties go out of business; or the existence of problems in the quality or accuracy of the data third parties obtain due to the failure

to adhere to clinical protocols or regulatory requirements or for other reasons.


Extensions, delays, suspensions, or terminations of DermWorx’s clinical trials as a result of the performance of its independent clinical investigators and CROs will delay, and make more costly, regulatory approval for any product candidates that the Company may develop. RISKS RELATED TO INTELLECTUAL PROPERTY (IP) DermWorx licenses a patented drug delivery system from a sub-licensee of the patent owner of the drug delivery system. The Company may be adversely affected if the sub-licensee were to lose its licensing rights or if the Company was to lose its licensing rights to the drug delivery system. Part of DermWorx’s competitive advantage is derived from the use of a unique drug delivery system (Novasome®). If the Company was to lose its licensing rights to this drug delivery system, it would have to reformulate with a different drug delivery system. DermWorx’s SMSS™ may prove as potent or effective as the current Novasome® drug delivery system. The Company does not believe that its business would be adversely affected if it was to lose its right to use this specific drug delivery system. However, DermWorx may in-license other delivery systems. If the Company was to lose its licensing rights to any of these drug delivery systems, it would be forced to rely upon a different drug delivery system, which may not be as potent or effective as its current drug delivery system. Consequently, DermWorx’s business could be adversely affected. If the Company fails to comply with its obligations in current and/or future agreements under which it licenses rights to products or technology from third parties, DermWorx could lose license rights that are important to its business. DermWorx’s initial success will depend in part on its ability to in-license technology from third parties. For example, the Company has currently licensed a patented Vitamin C serum from IGI, Inc. and expects to in-license other technology from IGI, Inc. and other third parties. If DermWorx were to lose its rights to such licenses, its ability to sell certain products would be limited, thereby reducing its revenues and overall profitability. There are limitations on the Company’s licensed patent rights and prospective patent applications that it expects to file relating to its product candidates that may affect its ability to exclude third parties from competing against DermWorx. The licensed patent rights that the Company has obtained, and prospective patent applications that it expects to file relating to its product candidates, are limited in ways that may affect DermWorx’s ability to exclude third parties from competing against it. In particular: The Company expects to file patent applications for matter patents covering the active

pharmaceutical ingredients for some of its product candidates. Composition of matter patents on active pharmaceutical ingredients are the strongest form of IP protection for pharmaceutical products, as they apply without regard to any method of use or other type of limitation. The active ingredients of most of DermWorx’s product candidates are off-patent. As a result, competitors may offer products with the same active ingredients as the Company’s products so long as the competitors do not infringe any method of use or formulation patents that DermWorx may hold.

For some of the Company’s product candidates, the principal licensed patent protection, and future

patent applications that covers, or that DermWorx expects will cover, its product candidate is a method of use patent. This type of patent only protects the product when used or sold for the specified method. However, this type of patent does not limit a competitor from making and marketing a product that is identical to the Company’s product for an indication that is outside of the patented method. Moreover, physicians may prescribe such a competitive identical product for off-label indications that are covered by the applicable patents. Although such off-label prescriptions may infringe or contribute to the infringement of method of use patents, the practice is common and such infringement is difficult to prevent or prosecute.

These limitations on DermWorx’s patent rights may result in competitors taking product sales away from the Company, which would reduce its revenues and harm its business.


If DermWorx is unable to obtain and maintain patent protection for its IP, its competitors could develop and market products similar or identical to the Company’s, which may reduce demand for its product candidates. DermWorx’s success will depend in part on its ability to obtain and maintain additional in-licensed patents; obtain and maintain patent protection for its proprietary technologies and product candidates; and to prevent third parties from infringing its proprietary rights. The patent situation surrounding dermatological and cosmeceutical products is generally highly uncertain and often involves complex legal and scientific questions. The Company may not be able to obtain patents relating to its technology or products. Even if issued, patents may be challenged, narrowed, invalidated, or circumvented, limiting DermWorx’s ability to stop competitors from marketing similar products or limiting the length of term of patent protection it may have for its products. Changes in either patent laws or in interpretations of patent laws in the U.S. and other countries may diminish the value of DermWorx’s IP or narrow the scope of its patent protection. Because of the substantial length of time and expense associated with bringing new products to market, the dermatological and cosmeceutical industries place considerable importance on patent protection for new technologies, products, and processes. Accordingly, the Company expects to seek patent protection for its new proprietary technologies and some of its product candidates. The risk exists, however, that new patents may be unobtainable and that the breadth of the claims in a patent, if obtained, may not provide adequate protection for DermWorx’s proprietary technologies or product candidates. Moreover, competitors may infringe upon the Company’s IP rights or successfully avoid them through design innovation. To prevent infringement or unauthorized use, DermWorx may need to file infringement lawsuits, which are costly and time-consuming. If there is an infringement proceeding, a court may decide that one of the Company’s prospective patents is not valid or is unenforceable, may narrow its prospective patent claims, or may refuse to stop the other party from using the technology at issue on the ground that DermWorx’s prospective patents do not cover its technology. Interference proceedings brought in the United States Patent and Trademark Office (USPTO) may be necessary to determine whether the Company’s prospective patent applications or those of its collaborators are entitled to priority of invention relative to third parties. Litigation, interference, or opposition proceedings may result in adverse rulings and may result in substantial costs, as well as could be a distraction to DermWorx’s management. The Company may not be able to prevent misappropriation of its respective proprietary rights, particularly in countries where the laws may not protect its rights as fully as in the U.S. If the Company is unable to protect the confidentiality of its proprietary information and know-how, the value of its technology may be adversely affected. In addition to patent protection, DermWorx relies upon trade secrets relating to unpatented know-how and technological innovations to develop and maintain its competitive position, which the Company seeks to protect, in part, by confidentiality agreements with its suppliers and consultants. DermWorx has obtained confidentiality agreements with all consultants and suppliers to-date. If the Company’s suppliers or consultants breach these agreements, it may not have adequate remedies for any of these breaches. In addition, DermWorx’s trade secrets may otherwise become known to or be independently developed by its competitors. If the development of DermWorx’s product candidates infringes the IP of its competitors or other third parties, the Company may be required to pay license fees or cease its development activities and pay damages, which could significantly harm its business. DermWorx’s product candidates may infringe the patents or violate the proprietary rights of third parties. In these cases, the Company may be required to obtain licenses to patents or proprietary rights of others in order to continue to develop and commercialize its product candidates. DermWorx may not, however, be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if the Company was able to obtain rights to a third party’s IP, these rights may be non-exclusive, thereby giving DermWorx’s competitors potential access to the same IP.


Third parties may assert patent or other IP infringement claims against the Company, or its collaborators, and DermWorx may be sued for patent infringement based on these claims with respect to technologies used in potential product candidates. Any claims that might be brought against the Company relating to infringement of patents may cause it to incur significant expenses and, if successfully asserted against DermWorx, may cause it to pay substantial damages. Even if the Company was to prevail, any litigation could be costly and time-consuming, as well as divert the attention of DermWorx’s management and key personnel from its business operations. In addition, any patent claims brought against the Company’s collaborators could affect their ability to carry out their obligations to DermWorx. Furthermore, as a result of a patent infringement suit brought against the Company or its collaborators, the development, manufacture, or potential sale of product candidates claimed to infringe a third party’s IP may have to stop or be delayed. Ultimately, DermWorx may be unable to commercialize some of its product candidates or may have to cease some of its business operations as a result of patent infringement claims, which could severely harm its business. RISKS RELATED TO COMMERCIALIZATION The Company’s product candidates may never achieve market acceptance in a financially profitable manner. If this were to happen, DermWorx’s ability to continue its operations would be severely limited and the Company might be forced to cease operations, which may cause its investors to lose all or a significant portion of the value of their investment. The commercial success of DermWorx’s product candidates will depend upon the acceptance of these products by consumers, the medical community, and, in part, on the reimbursement of some of its products by third-party payors. Safety, efficacy, convenience, and cost-effectiveness, particularly as compared to competitive products, are the primary factors that affect market acceptance. Even if a potential product displays a favorable efficacy and safety profile, market acceptance of the product will not be known until after it is launched. The Company’s efforts to educate consumers, the medical community, and third-party payors on the benefits of its product candidates may require significant resources and may never be successful. Ultimately, if DermWorx is unable to obtain broad market acceptance for its product candidates, its ability to continue operations may be severely limited and might result in its investors losing all or a significant portion of the value of their investment. The Company may not be able to successfully differentiate its products and its proprietary drug delivery system from the products of its competitors. The success of DermWorx’s product candidates depends, in part, on its ability to successfully differentiate its products from currently existing products. The Company must effectively market and convey the benefits of its proprietary drug delivery system as compared to competitors. To the extent DermWorx is unable to do so, its profitability and ability to achieve market acceptance may be adversely affected. If DermWorx is unable to establish a sales and marketing infrastructure, it will not be able to commercialize its product candidates. The Company currently has no sales or distribution capabilities and has only limited marketing capabilities. In order to commercialize any of its product candidates, DermWorx must either acquire or internally develop sales, marketing, and distribution capabilities, or make arrangements with third parties to perform these services for the Company. DermWorx plans to build its own sales force to market its products directly to dermatologists and other target physicians. The development of a sales and distribution infrastructure for the Company’s operations will require substantial resources, which may negatively impact its product development efforts. RISKS RELATED TO EMPLOYEES AND GROWTH DermWorx currently does not have any employment agreements in place with its senior management team. If the Company is not able to retain its current senior management team or attract and retain qualified scientific, technical, and business personnel, its business will suffer.


DermWorx is dependent upon the members of its senior management team and Board of Directors for its business success. In particular, the Company is highly dependent upon Norman M. Meier, president, CEO, and co-founder; John J. Moroney, chairman; Steven Girgenti, vice chairman and co-founder; David M. Cohen, executive vice president of operations and co-founder; David L. Weinberg, vice president and chief financial officer; Eugene R. Cooper, executive vice president of R&D; and Robb E. Wilentz, vice president of medical affairs. DermWorx does not have any employment agreements in place with any of these individuals. The loss of any one of these individuals would result in a significant loss in the knowledge and experience that the Company, as an organization, possesses and could cause significant delays, or outright failure, in the development, approval, and commercialization of its product candidates. The Company will need to hire additional employees as it grows. Any inability to manage future growth could harm DermWorx’s ability to commercialize its product candidates, increase its costs, and adversely impact its ability to compete effectively. The Company’s expected growth will require it to hire a significant number of qualified scientific, commercial, and administrative personnel. There is intense competition for human resources, including management in the technical fields in which DermWorx operates, and it may not be able to attract and retain qualified personnel necessary for the successful development and commercialization of its product candidates. The inability to attract new employees when needed and retain existing employees as the Company grows could severely harm its business. Expected future growth will impose significant added responsibilities on members of DermWorx’s management, including the need to identify, recruit, retain, and integrate additional employees. The Company’s future financial performance and its ability to commercialize its product candidates and compete effectively will depend, in part, on its ability to manage any future growth effectively. RISK RELATED TO DERMWORX’S INDUSTRY The Company faces potential product liability exposure, and, if successful claims are brought against it, DermWorx may incur substantial liability for a product and may have to limit its commercialization. The use of the Company’s product candidates exposes it to the risk of product liability claims. Product liability claims might be brought against DermWorx by consumers, healthcare providers, pharmaceutical companies, or others selling its products. If the Company cannot successfully defend itself against these claims, it may incur substantial losses or expenses, be required to limit the commercialization of its product candidates, and face adverse publicity. DermWorx intends to obtain product liability insurance coverage to include the sale of commercial products, but it may be unable to obtain commercially reasonable product liability insurance for such products. Insurance coverage is becoming increasingly costly, and, in the future, the Company may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect it against losses due to liability. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against the Company could cause its business to suffer and, if judgments exceed its insurance coverage, could decrease its cash. If DermWorx’s competitors develop and market products faster than it does or if the products of its competitors are considered more desirable than the Company’s, revenues for its product candidates will not develop or grow. The dermatological and cosmeceutical industries are highly competitive and include a number of established large and mid-sized companies, as well as smaller emerging companies, whose activities are directly focused on DermWorx’s target markets and areas of expertise. The Company faces and will continue to face competition in the discovery, in-licensing, development, and commercialization of its product candidates, which could severely impact its ability to generate revenue or achieve significant market acceptance of its product candidates. Furthermore, new developments, including the development of other drug technologies, occur in the pharmaceutical industry at a rapid pace. These developments may render the Company’s product candidates or technologies obsolete or non-competitive.


Compared to DermWorx, many of its competitors and potential competitors have substantially greater: capital resources;

R&D resources, including personnel and technology;

regulatory experience;

preclinical study and clinical trial experience; and

manufacturing, distribution, and sales and marketing resources.

As a result of these factors, the Company’s competitors may obtain regulatory approval of their products more rapidly than DermWorx. The Company’s competitors may obtain patent protection or other IP rights that limit its ability to develop or commercialize its product candidates or technologies. DermWorx’s competitors may also develop products that are more effective, useful, and less costly than the Company’s and may also be more successful than DermWorx in manufacturing and marketing their products. If approved, each of the Company’s product candidates will compete for a share of the existing market with numerous products that have become standard treatments recommended or prescribed by physicians. For example, DermWorx believes that the following selected products listed on page 24 will be among the leading competitors in each category for its product candidates. If third-party payors do not reimburse customers for certain product candidates, such as the onchychomycosis product for nail fungal infections and the topical antibiotic product for acne, such products might not be used or purchased, and the Company’s revenues and profits will not develop or grow as expected. DermWorx’s revenues and profits depend in part upon the availability of reimbursement for the use of its product candidates that are approved for marketing from third-party healthcare and government payors, both in the U.S. and in foreign markets. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product meets the following criteria: is safe, effective, and medically necessary;

appropriate for the specific patient;

cost-effective; and

neither experimental nor investigational.

Since reimbursement approval for a product is required from each third-party and government payor individually, seeking this approval is a time-consuming and costly process. Third-party payors may require cost-benefit analysis data from the Company in order to demonstrate the cost-effectiveness of any product DermWorx might bring to market. The Company may not be able to provide data sufficient to gain acceptance with respect to reimbursement. There also exists substantial uncertainty concerning third-party reimbursement for the use of any drug product incorporating new technology. In addition, as a result of actions by these third-party payors, the healthcare industry is experiencing a trend toward containing or reducing costs through various means, including lowering reimbursement rates, limiting therapeutic class coverage, and negotiating reduced payment schedules with service providers for drug products.


Glossary 505(b)(2) or 505(j)—The Food, Drug, and Cosmetic Act describes three types of drug applications in Section 505. The first type of application contains the full reports on safety and effectiveness studies, as described under Section 505(b)(1). The second type as described under Section 505(b)(2) permits the U.S. Food and Drug Administration (FDA) to approve applications other than those that are duplicate products and permits the FDA to rely on literature data or on the Agency’s own finding of safety and/or effectiveness for an approved drug product. The third type, as described under Section 505(j), is for a product that is identical in drug substance, dosage form, strength, route of administration, labeling, quality, performance characteristics, and intended use. Acne Vulgaris—An eruption, predominantly of the face, upper back, and chest, composed of comedones, cysts, papules, and pustules on an inflammatory base. The condition occurs in a majority of people during puberty and adolescence. Actives—An active ingredient that is intended to furnish pharmacological activity or other direct effect in the diagnosis, cure, mitigation, treatment, or prevention of disease. Anthralin—A refined derivative of anthracene, originally from a tree bark. The strongest anthralins are used in hospitals or psoriasis day treatment centers. Armamentarium—The complete equipment of a physician or medical institution, including books, supplies, and instruments. Cis-Unsaturated—Polyunsaturated and monounsaturated organic compounds. Collagen—A protein chemical substance that is the main support of skin, tendon, bone, cartilage, and connective tissue. Corneocytes—The dead keratin-filled squamous cell of the stratum corneum. Corticosteroids—A group of synthetic hormones including prednisone, prednisolone, methylprednisolone, and dexamethasone used in the treatment of some leukemias. Also to suppress graft rejection and Graft-versus-Host disease following a bone marrow transplant. Side effects include an increased risk of infection. Cosmeceuticals—A cosmetic that has or is purported to have medicinal properties. Cushing’s Disease—A disease characterized by abnormal accumulations of facial and trunk fat, fatigue, hypertension, and osteoporosis, caused by hyperfunction of the adrenal cortex or administration of adrenal cortical hormones. Cutaneous—Pertaining to the skin, dermal, or dermic. Dermasurgeons—Dermatologic surgeons who are board-certified dermatologists and members of the American Society for Dermatologic Surgery (ASDS), a professional medical organization founded in 1970. Dermatopathologist—A pathologist with additional training and certification in making diagnoses from skin biopsies. Dermatophyte—Any parasite fungus on the skin and causing a skin disease, such as ringworm. Dermatoses—Any disease of the skin. Dimorphic—Of two different forms. Erythema—Redness of the skin due to capillary dilation.


Erythromycin—An antibiotic obtained from a strain of the actinomycete Streptomyces erythreus, effective against many gram-positive bacteria and some gram-negative bacteria. Ester—Any of a class of organic compounds corresponding to inorganic salts and formed from an organic acid and an alcohol, usually with the elimination of water. Eutectic—Of greatest fusibility; said of an alloy or mixture whose melting point is lower than that of any other alloy or mixture of the same ingredients. Filamentous (Hyphal)—In the form of very long rods, many times longer than wide. Final Rule/Final Monograph—The published requirements for the marketing of OTC drugs in which safety and efficacy have been established. Free Radical—A chemically active atom or molecular fragment containing a chemical charge due to an excess or deficient number of electrons. Radicals seek to receive or release electrons in order to achieve a more stable configuration, a process that can damage the large molecules within cells. Horny Layer—The outer, horny layer of the nail. Hydroxypropylcellulose—A partially substituted, water-soluble cellulose ether, used as a pharmaceutic aid and as a topical ophthalmic protectant and lubricant. Hyperpigmentation—Darkening of the skin, commonly produced by ultraviolet radiation, which provokes melanocytes in the skin. Hyponychium—The portion of the epidermis under the free edge of the nail. Keratin—The primary protein of skin, hair, and nails. Keratinization—Organic process by which keratin is deposited in cells and the cells become horny (as in nails and hair). Keratolytic Agent—A peeling agent. Lipophilic—Having an affinity for, tending to combine with, or capable of dissolving in lipids. Maceration—The softening of a tissue by soaking, especially in acids, until the connective tissue fibers are so dissolved that the tissue components can be teased apart. Malassezia Furfur (“M Furfur”)—Formerly known as Pityrosporum ovale, M Furfur is one species of a group of related fungi (yeasts) naturally found on the skin surfaces of many animals and humans, and primarily known as the most common cause of dandruff. Matrix—The body substance in which tissue cells are embedded. Micellar Nanoparticles—A nanoparticle that has the properties of an assemblage of micelles, of a gel. Monograph Drug—After the FDA reviews available data regarding the safety and efficacy of an OTC ingredient (monograph drug) and public comments have been reviewed, a final monograph is prepared. The final monograph sets final standards that specify ingredients, dosage, indications for use, and certain labeling requirements for the monographed drug. Nail Plate—The hard keratin coating that protects the fingertip and underlying tissue. Nanometers (nm)—One billionth of a meter. Nasolabial Folds—The lines which run from the sides of the nose to the corners of the mouth. New Chemical Entity (NCE)—A drug that contains no active moiety that has been approved by the FDA in any other application submitted under section 505(b) of the Food, Drug, and Cosmetic Act.


New Drug Application (NDA)—The vehicle through which drug sponsors formally propose that the FDA approve a new pharmaceutical for sale and marketing in the U.S. The data gathered during the animal studies and human clinical trials of an IND become part of the NDA. New Molecular Entity (NME)—A drug that contains no active moiety that has been approved by FDA in any other application submitted under section 505(b) of the Federal Food, Drug, and Cosmetic Act. Non-Dermatophyte—One of three types of fungi. Onychomycosis—A fungal infection of the fingernails or toenails that results in thickening, roughness, and splitting of the nails. It is usually caused by Trichophyton rubrum or T. mentagrophytes. Ophthalmology—Branch of science dealing with the anatomy, functions, and diseases of the eye. P. Acnes Bacteria—Propionibacterium acnes; a type of bacteria that is normally present in the skin. Perioral—Of, relating to, occurring in, or being the tissues around the mouth. Pharmacy Compounded—Medications that are compounded at the pharmacy and not usually available from other sources. Pre-Cancerous Actinic Keratoses—Actinic keratoses are a common, potentially serious skin condition that may be characterized by rough, red, scaly patches, crusts, or sores, measuring anywhere from one-quarter to one-inch in diameter. They are usually found on the face, lips, scalp, neck, forearms, and back of the hands and, if left untreated, may become cancerous. Procollagen—The soluble precursor of collagen possibly formed by fibroblasts in the process of collagen synthesis. Pruritic—Pertaining to or characterized by severe itching. Psoriasis—A common chronic, inflammatory skin disease characterized by scaly patches. Rosacea—A chronic form of acne affecting the nose, forehead, and cheeks; characterized by red pustular lesions. Sebaceous Gland—Any of the cutaneous glands that secrete oily matter for lubricating hair and skin. Seborrheic Dermatitis—A chronic skin disease associated with seborrhea and greasy scales on the scalp or eyelids or other parts of the skin. Sebum—The fatty secretion of the sebaceous glands. Tar—Any of various dark-colored viscid products obtained by the destructive distillation of certain organic substances, such as coal or wood. Tinea Unguium—Fungal infection of the nails (especially toenails). Tinea Versicolor—An eruption of tan or brown, branny patches (broken layers of small husklike scales) on the skin of the trunk, caused by the fungus Pityrosporum furfur and often appearing white in contrast with hyperpigmented skin after exposure to intense sunlight. Also called pityriasis versicolor. Tropocollagen—The molecular component of a collagen fiber, consisting of three polypeptide chains coiled around each other. Valeric Acid—The monobasic aliphatic acid distilled from valerian. Some of its salts are used in medicine and it is found in human colon. Vesicle—A closed membrane shell, derived from membranes either by a physiological process (budding) or mechanically by sonication.

Executive Informational Overview Page 44

Jeffrey J. Kraws and Karen B. Goldfarb

Phone: (609) 306-2274 Fax: (609) 395-9339

Email: [email protected] Web: www.crystalra.com

Legal Notes and Disclosures: This report has been prepared by DermWorx, Inc. (“DermWorx” or “the Company”) with the assistance of Crystal Research Associates, LLC (“CRA”) based upon information provided by the Company. CRA has not independently verified such information. In addition, CRA has been compensated by the Company in cash of forty thousand U.S. dollars and one hundred fifty thousand four-year Options/Warrants to purchase DermWorx, Inc. stock for its services in creating this report, for Quarterly Updates, and for printing costs. Some of the information in this report relates to future events or future business and financial performance. Such statements constitute forward-looking information within the meaning of the Private Securities Litigation Act of 1995. Such statements can be only predictions and the actual events or results may differ from those discussed due to, among other things, the risks described in DermWorx’s reports, press releases, and other forms filed from time to time. The content of this report with respect to the Company has been compiled primarily from information available to the public released by DermWorx. DermWorx is solely responsible for the accuracy of that information. Information as to other companies has been prepared from publicly available information and has not been independently verified by DermWorx or CRA. Certain summaries of scientific activities and outcomes have been condensed to aid the reader in gaining a general understanding. For more complete information about DermWorx, the reader is directed to the Company’s website at www.dermworx.com. This report is published solely for information purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any state. Past performance does not guarantee future performance. Free additional information about DermWorx, as well as free copies of this report, can be obtained in either a paper or electronic format by calling (954) 926-7974.

Documents

Dermatology/Cosmeceutical Specialty Pharmaceutical Opportunity · company or a company offering a product in every segment. DermWorx’s management, directors, and consultants have