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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission file number 0-13634
MACROCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2744744
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Hartwell Avenue
Lexington, Massachusetts 02421-3134
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(Address of principal executive offices)
(781) 862-4003
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Series B Preferred Stock Purchase Rights, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No --- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of Common Stock held by
non-affiliates, based upon the closing price for such stock on March 1, 2000 was
approximately $140,000,000. As of March 1, 2000, 22,444,955 shares of Common
Stock, $.01 par value, were outstanding.
PART I
ITEM 1. BUSINESS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED
TO IN "RISK FACTORS".
MacroChem's primary business is the development of pharmaceutical products
for commercialization by applying SEPA(R) (Soft Enhancer of Percutaneous
Absorption), its patented topical drug delivery technology. SEPA compounds, when
properly combined with drugs, provide pharmaceutical formulations (creams, gels,
solutions, etc.) that enhance the transdermal delivery of drugs into the skin or
into the bloodstream. SEPA formulations combined with the Company's polymers and
adhesives can also be used with patch formats to achieve the transdermal
delivery of selected drugs. The Company believes that SEPA compounds enhance the
diffusion of drugs into and through the skin by making the outer layer of the
skin (stratum corneum) more permeable to the drug molecule. Transdermal delivery
provides an alternative to other methods of drug administration (injection, oral
dosage forms, inhalation, etc.), and may allow selected drugs to be administered
more effectively, at lower doses, with fewer adverse events and improved patient
compliance.
The Company is developing specific SEPA formulations for use with
non-proprietary and proprietary drugs manufactured by pharmaceutical companies,
and plans to commercialize these products through the formation of partnerships,
strategic alliances and license agreements with those companies. In order to
attract strategic partners, the Company is conducting clinical testing of
certain SEPA-enhanced pharmaceuticals. The Company believes that if the clinical
trials are successful the results will aid the Company in attracting partners to
assist in the promotion of the product. Because of the substantial costs
involved in bringing a new pharmaceutical product or a new formulation of an old
drug to the market, the Company may be required to rely on pharmaceutical
companies to conduct all or part of the clinical trials necessary to gain
regulatory approval to manufacture and to market any resulting product.
The Company has also developed a series of new low molecular weight
polymers, termed MacroDerm(TM), for cosmetic use and the topical delivery of
pharmaceuticals. The Company has developed, tested and evaluated prototypes of
MacroDerms and is currently seeking strategic partners to manufacture and market
products based upon this technology.
The Company does not maintain general product liability insurance, since
the Company does not market drug products. The Company has ongoing clinical
studies and has obtained specific liability insurance relating to such studies.
As of December 31, 1999, no asserted liability claims existed against the
Company. However, in the future, incidents could give rise to claims which could
exceed the Company's insurance coverage and resources.
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RESEARCH AND DEVELOPMENT
The Company conducts its research and development activities through its
own staff and facilities, as well as through collaborative arrangements with
universities, contract research organizations and independent consultants. As of
March 1, 2000, the Company had 25 full-time employees, 18 of whom are devoted to
research and development and regulatory affairs. Research and developmental
expenditures approximated $5,423,100, $4,318,800 and $2,084,800 during the years
ended December 31, 1999, 1998 and 1997, respectively. The Company is dependent
upon third parties to conduct clinical studies, obtain U.S. Food and Drug
Administration ("FDA") and other regulatory approvals and manufacture and market
a finished product.
The Company conducts stability studies, tests its unique formulations and
designs manufacturing processes for its SEPA compounds and adhesive and polymer
technologies at its facility and other facilities. The Company has cGMP (current
Good Manufacturing Practices) facilities for the manufacture of dosage forms for
clinical evaluations.
PRODUCTS AND TECHNOLOGIES
BACKGROUND
To be effective, drugs must reach an intended site in the body, at an
effective concentration, and for an appropriate length of time. Traditional
methods of drug administration, such as oral ingestion, intramuscular and
intravenous injections and inhalation, are effective for a wide variety of
drugs. However, depending upon the given drug, each method may have
disadvantages. For example, following oral administration, a drug must pass
through the gastrointestinal system to be absorbed and may be metabolized or
broken down in the stomach, intestines or liver, resulting in a lower amount of
unchanged drug at the target site for its action. As a result, higher dosages of
the drug must be administered orally to produce the desired effect, which may
cause irritation of the gastrointestinal tract and systemic toxicity.
In addition, the rate at which an orally administered drug is absorbed may
vary depending on several factors, including the drug's chemical properties, the
length of time the drug remains in the gastrointestinal tract and the patient's
meal patterns. Although the pharmaceutical industry has investigated a variety
of alternative approaches for dealing with drug adverse events and loss of
efficacy following oral dosing, through enteric coating of tablets, formulating
with various waxes and cellulosic materials, microencapsulation and compressing
tablets in various layers, the desired effects of these approaches are not
always reproducible from patient to patient or effective in bypassing
metabolism.
TOPICAL DRUG DELIVERY
Topical drug delivery is the process of delivering drugs into the skin
(dermal delivery) so that they can be effective in the treatment of
dermatological conditions and diseases, or through the skin (transdermal
delivery) and into the bloodstream for the treatment of systemic diseases.
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The skin is made up of three layers: the outer layer, the stratum corneum;
the middle layer or viable epidermis; and the inner layer, the dermis. The
stratum corneum, which serves as the skin's primary barrier to the external
environment, consists of closely packed dead cells and fatty (lipid) material.
The epidermis is composed of several layers of active cells and the dermis
consists, in part, of tissue containing hair follicles, nerve endings and blood
capillaries. Within the stratum corneum, lipid layers bind the dead cells
together to form a protective barrier. Research conducted by MacroChem shows
that SEPA compounds affect drug delivery by acting, in part, upon the stratum
corneum to disrupt the alignment of the lipid molecules within the lipid layers.
This disruption increases the porosity of the lipid-cell layers, allowing drugs
to diffuse through the stratum corneum through the more porous epidermis to the
dermis, where they enter the blood stream through the capillaries. The rate and
amount of drug absorbed can be controlled by varying the formulation used.
THE COMPANY'S DRUG DELIVERY SYSTEMS AND OTHER PROPOSED PRODUCTS
SEPA COMPOUNDS
The delivery of a drug through the skin depends on the drug's physical and
chemical characteristics (molecular size and shape, the drug's solubility in
lipids and water, its melting point and whether it is lipophilic or
hydrophilic).
Since some drugs move through the skin too rapidly, the transdermal system
must retard the rate of drug absorption to ensure optimal efficacy with minimum
toxicity. Since other drugs move through the skin with difficulty, the
transdermal system must be formulated to increase a drug's rate of absorption
through the skin. Common methods of transdermal delivery use common chemicals
such as ethanol or fatty compounds to enhance penetration.
Although certain delivery methods using chemicals have proven to be
somewhat effective with specific drugs, such as drugs used for the treatment of
motion sickness or hormone deficiencies, they have caused adverse events, such
as skin irritation and sensitivity at the site of application. Some drugs,
because of their physical characteristics or the amount of drug necessary to
achieve the desired therapeutic effect, have not been successfully delivered
transdermally to date.
The Company has developed SEPA compounds that are designed to enhance the
transport, penetration and controlled delivery of drugs through the skin. SEPA
compounds are generally colorless, clear liquids that are intended to promote
drug delivery by aiding drug molecules to penetrate the skin, diffuse into or
through the skin layers and become absorbed into the bloodstream.
The Company has its own facility for the in vitro testing of drug
formulations containing SEPA, and therefore is less dependent on outside
laboratories for this type of testing. The Company is conducting in vitro
studies to evaluate the transdermal enhancing effect of SEPA in combination with
a variety of drugs with differing physical and chemical characteristics,
representing a broad spectrum of potential drug products. Although the Company's
research and development efforts with SEPA are at an advanced stage, the Company
must still conduct substantial additional studies to demonstrate the efficacy
and safety of any SEPA-drug formulation. The Company has found that specific
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drugs administered transdermally with SEPA demonstrated increased transdermal
absorption. Some of the drug formulations tested by the Company with SEPA
contain compounds generally recognized as unlikely or difficult candidates for
transdermal delivery because of their physical and chemical properties and
molecular size. As these drug formulations are further developed, the Company
plans to conduct additional studies to investigate the efficacy and safety of
some of these formulations.
The Company has conducted early clinical studies with several drug
formulations containing SEPA where SEPA has been demonstrated to enhance
transdermal penetration of the specific drug within in vitro testing. Clinical
studies have included Phase I trials in which safety and tolerance of a topical
application of the drug formulation were assessed and Phase II trials in which
efficacy of the specific drug was evaluated in an appropriate clinical
condition.
The Company has designed and sponsored clinical trials of Topiglan(TM), the
Company's topical formulation of alprostadil and SEPA for use in the treatment
of erectile dysfunction. Testing has established safety and tolerance in both
normal volunteers and patients with the target disease. In addition, randomized
controlled trials have demonstrated effectiveness of the alprostadil formulation
in patients with erectile dysfunction. The Company has also conducted laboratory
studies with SEPA formulations of nonsteroidal anti-inflammatory drugs for
topical application in pain management.
In addition to the ongoing clinical development programs cited above, the
Company, in association with third parties, is currently conducting pre-clinical
studies with SEPA formulations in combination with specific drugs for a variety
of other applications, including but not limited to fungal infections.
The Company believes that SEPA compounds can be used with a broad variety
of new and existing drugs to enhance their commercial value. The therapeutic
effectiveness and improved convenience of a transdermal SEPA product may
substantially expand the existing market for a drug. In addition, a formulation
containing a SEPA compound may prove to be a superior alternative to the
existing methods of administering certain drugs.
MACRODERM(TM) DRUG DELIVERY SYSTEM
The Company has developed a series of new low molecular weight polymers,
termed MacroDerm, for use in cosmetics and in the superficial dermal delivery of
pharmaceuticals. Potential applications include their use with sunscreens,
moisturizers, and insect repellents. The Company has synthesized, tested and
evaluated prototypes of MacroDerms and is currently seeking strategic partners
to manufacture and market specific MacroDerm products.
COMPETITION
The Company competes with numerous firms, many of which are large,
multi-national organizations with worldwide distribution. The Company believes
that its major competitors in the drug delivery sector of the health care
industry include ALZA Corporation, Cygnus Therapeutic Systems, Elan Corporation,
plc., Novartis and Pfizer. These firms have substantially greater capital
resources, research and development and technical staffs, facilities and
5
experience in obtaining regulatory approvals, as well as in manufacturing,
marketing and distribution of products, than the Company. Recent trends in this
area are toward further market consolidation of large drug companies into a
smaller number of very large entities, further concentrating financial,
technical and market strength and increasing competitive pressure in the
industry. Academic institutions, hospitals, governmental agencies and other
public and private research organizations are also conducting research and
seeking patent protection and may develop competing products or technologies of
their own through joint ventures or other arrangements. In addition, recently
developed technologies or technologies that may be developed in the future may
or could be the basis for competitive products. No assurance can be given that
the Company's competitors will not succeed in developing technologies and
products that are more effective or less costly to use than any that are
currently being developed by the Company.
Alprostadil, a synthetic prostaglandin E1 (PGE1), and Viagra(R), are the
only drugs approved for marketing in the United States for erectile dysfunction.
PGE1 is available in two dosage forms. Caverject(R), marketed by Pharmacia &
Upjohn, is administered by needle injection directly into the penis. The second
product, developed by Vivus, is a pellet form of the drug administered through a
tube inserted into the urethra. In contrast to the invasive forms now available,
MacroChem believes that a topical gel formulation applied to the penis will be
the preferred dosage form for treatment of this disorder. Viagra(R), an oral
product of Pfizer, was approved by the FDA in 1998. Many large drug companies
have announced internal programs to develop orally administered alternatives to
Pfizer's Viagra for treating male erectile dysfunction. In addition, NexMed has
announced commencement of U.S. Phase 2 clinical trials of its topical cream
formulation of Alprostadil for treating the disease.
Johnson & Johnson and Novartis each offer an orally administered
anti-fungal therapy for treating fungal infections of the nail. A number of
smaller firms are also developing topical and oral therapies for these
infections.
The Company expects products approved for sale, if any, to compete
primarily on the basis of product efficacy, safety, patient compliance,
reliability, price and patent position. Generally, the first pharmaceutical
product to reach the market in a therapeutic or preventive area is often at a
significant advantage relative to later entrants to the market. The Company's
competitive position will also depend on its ability to attract and retain
qualified scientific and other personnel, develop effective proprietary
products, implement production and marketing plans, obtain patent protection and
secure adequate capital resources.
EMPLOYEES
As of March 1, 2000, the Company had 25 full time employees, 18 of whom are
devoted to research and development and regulatory affairs.
GOVERNMENT REGULATION
The production and marketing of the Company's drug delivery systems and
pharmaceutical products are subject to regulation for safety, efficacy and
quality by numerous federal, state and local agencies and comparable agencies in
foreign countries. In the United States, the Federal Food, Drug and Cosmetics
6
Act, the Public Health Service Act, the Controlled Substances Act and other
federal statutes and regulations govern or influence the testing, manufacture,
safety, labeling, storage, record keeping, approval, advertising and promotion
of the Company's proposed products and technologies.
Non-compliance with applicable requirements can result in fines and other
judicially imposed sanctions including recalls and criminal prosecutions based
on products, promotional practices, or manufacturing practices that violate
statutory requirements. In addition, administrative remedies can involve
voluntary recalls or cessation of sale of products, administrative detention,
public notice, voluntary changes in labeling, manufacturing or promotional
practices, as well as refusal of the government to approve New Drug Applications
(NDAs). The FDA also has the authority to withdraw approval of drugs in
accordance with statutory procedures.
The FDA approval procedure involves completion of certain pre-clinical and
manufacturing/stability studies and the submission of the results of these
studies to the FDA in an Investigational New Drug (IND) exemption in support of
performing clinical trials. IND allowance is then followed by performance of
human clinical trials, and additional pre-clinical and manufacturing quality
control studies, supporting safety, efficacy and manufacturing quality control.
The safety, chemistry, manufacturing and stability and clinical studies
developed under the IND are compiled into an NDA or Abbreviated New Drug
Application (ANDA) and submitted to the FDA for approval to market.
Preclinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
product. Human clinical trials are typically conducted in three sequential
phases, but the phases may overlap. Phase I trials consist of testing of the
product in a small number of normal volunteers primarily for safety. In Phase
II, in addition to safety, the efficacy of the product is evaluated in a small
patient population. Phase III trials typically involve multicenter testing for
safety and clinical efficacy in an expanded population of patients at
geographically dispersed test sites. A clinical plan, or "protocol," accompanied
by the identification of the institutions participating in the trials, must be
submitted to the FDA prior to commencement of each clinical trial. The FDA may
order the temporary or permanent discontinuation of a clinical trial at any time
if adverse events that endanger patients in the trials are observed. In
addition, the FDA may request Phase IV clinical trials, to be performed after
marketing approval, to resolve any lingering questions.
A 30-day waiting period after the filing of each IND application is
required by the FDA prior to the commencement of clinical testing in human
subjects. If the FDA has not commented on or questioned the IND application
within 30 days, initial clinical studies may begin. However, any FDA comments or
questions must be answered to the satisfaction of the FDA before initial
clinical testing can begin. In some instances, this process could result in
substantial delay and expense.
The results of the preclinical and clinical studies on new drugs are
submitted to the FDA in the form of NDAs for approval to commence commercial
sales. Following extensive review, the FDA may grant marketing approval, require
additional testing or information or deny the application. Continued compliance
with all FDA requirements and the conditions in an approved application,
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including product specifications, manufacturing process and labeling
requirements, are necessary for all products. Failure to comply, or the
occurrence of unanticipated adverse events during commercial marketing, could
lead to the need for labeling changes, product recall, seizure, injunctions
against distribution or other FDA-initiated action, which could delay further
marketing until the products are brought into compliance.
In certain cases, an ANDA may be filed in lieu of filing an NDA. An ANDA
relies on bioequivalency tests that compare the applicant's drug with an already
approved reference drug, rather than on clinical trials. An ANDA may be
available to the Company for a new formulation of a drug which has already been
approved by the FDA in other topical dosage forms. By concentrating on drug
delivery systems employing existing drugs, the Company expects that the time for
regulatory approval of certain products should be shorter than for entirely new
substances.
The NDA itself is a complicated and detailed document and must include the
results of extensive animal, clinical and other testing, the cost of which is
substantial. Although the FDA is required to review applications within 180 days
of filing, in the process of reviewing applications the FDA frequently requests
that additional information be submitted and starts the 180-day regulatory
review period anew when the requested additional information is submitted. The
effect of such requests and subsequent submissions can significantly extend the
time for the NDA review process. Until an NDA is actually approved, no assurance
can be given that the information requested and submitted will be considered
adequate by the FDA to justify approval.
In addition, packaging and labeling of most of the Company's proposed
products are subject to FDA regulation. The Company must get FDA approval for
all labeling and packaging prior to marketing of a regulated product.
Whether or not FDA approval has been obtained, approval of a product by a
comparable regulatory authority must be obtained in most foreign countries prior
to the commencement of marketing of the product in that country. The approval
procedure varies from country to country and may involve additional testing, and
the time required may differ from that required for FDA approval. Although some
procedures for unified filings exist for certain European countries, in general
each country has its own procedure and requirements, many of which are time
consuming and expensive. Thus, substantial delays in obtaining required
approvals from foreign regulatory authorities can result after the relevant
applications are filed. After such approvals are obtained, further delays may be
encountered before the products become commercially available.
No assurance can be given that any required FDA or other governmental
approval will be granted or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products, cause the Company to undertake costly procedures and furnish
a competitive advantage to the more substantially capitalized companies with
which the Company plans to compete. In addition, the extent of potentially
adverse government regulations that may arise from future administrative action
or legislation cannot be predicted.
8
PATENTS AND LICENSE RIGHTS, TRADEMARKS
During 1999, the Company was granted five U.S. patents and one Australian
patent. Two of the U.S. patents and the Australian patent are directed to the
Company's MacroDerm polymers. The other three U.S. patents are directed to the
Company's Topiglan(TM), Benefen(TM)(and other NSAID) and hormone replacement
therapy (HRT) formulations incorporating the Company's basic SEPA(R) technology.
Also during 1999, the Company filed a non-provisional patent application
directed to antifungal nail lacquer products and which incorporate SEPA skin
penetration enhancers. Corresponding foreign applications were filed in Europe,
Canada, Brazil and Japan. Additional patent protection was filed in the U.S. for
other NSAID formulations.
The Company is also actively pursuing domestic and European registration of
its MacroDerm(TM) and Benefen (TM) trademarks.
The Company believes that patent protection of its technologies, processes
and products is important to its future operations. The success of the Company's
proposed products may depend, in part, upon the Company's ability to obtain
patent protection.
Although the Company intends to file additional patent applications as
management believes appropriate with respect to any new products or
technological developments, no assurance can be given that any additional
patents will be issued or, if issued, will be of commercial benefit to the
Company. In addition, to anticipate the breadth or degree of protection that any
such patents may afford is impossible. To the extent that the Company relies on
unpatented proprietary technology, no assurance can be given that others will
not independently develop or obtain substantially equivalent or superior
technology or otherwise gain access to the Company's trade secrets, that any
obligation of confidentiality will be honored or that the Company will be able
to effectively protect its rights to proprietary technology. Further, no
assurance can be given that any products developed by the Company will not
infringe patents held by third parties or that, in such case, licenses from such
third parties would be available on commercially acceptable terms, if at all.
In connection with the prior research and development efforts of the
Company, the Company owns several patents and possesses certain license rights
in connection with other technologies, which it is not currently pursuing. The
Company intends to enforce its patent position and intellectual property rights
vigorously. The cost of enforcing the Company's patent rights in lawsuits, if
necessary, may be significant and could interfere with the Company's operations.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN
FORWARD-LOOKING STATEMENTS MADE FROM TIME TO TIME BY THE COMPANY ON THE BASIS OF
MANAGEMENT'S THEN-CURRENT EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO
BELOW.
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HISTORY OF OPERATING LOSSES; NEED FOR CONTINUED WORKING CAPITAL
The Company has been engaged primarily in research and development since
its inception in 1981 and has derived limited revenues from feasibility studies,
the commercial sale of its products and licensing of certain technology. The
Company has had no revenues relating to the sale of any products currently under
development. The Company has incurred net losses every year since its inception
and the Company anticipates that losses may continue for the foreseeable future.
See Item 8, "Financial Statements and Supplementary Data." At December 31, 1999,
the Company's accumulated deficit was approximately $33.3 million. The Company's
ability to continue operations after its current capital resources are exhausted
depends on its ability to obtain additional financing and achieve profitable
operations, as to which no assurance can be given. However, the Company believes
that its financial resources are sufficient to meet planned operating activities
for at least the next 12 months.
The Company continues to pursue the commercialization of its SEPA
technology through discussion and presentation of its technology to potential
licensees. No assurance can be given that these discussions will lead to any
licenses or that any license fees will be received by the Company in the current
fiscal year. For the foreseeable future, and until marketing approvals are
obtained, and/or license agreements are entered into, if ever, the Company
anticipates limited licensing revenue and no royalties from sales of products
using SEPA for pharmaceutical purposes.
TECHNOLOGY UNCERTAINTY AND EARLY STAGE DEVELOPMENT
Although several systems have been developed by various pharmaceutical
companies to enhance the transdermal delivery of specific drugs, relatively
limited research has been conducted in the expansion of transdermal delivery
systems to a wider range of pharmaceutical products. Although the Company has
demonstrated in preclinical and clinical studies that its SEPA transdermal
compounds may have applicability with a broad range of drugs, transdermal
delivery systems are currently marketed for only a limited number of products.
In addition, transdermal delivery systems used to date have often demonstrated
adverse side effects for users, such as skin irritation and delivery
difficulties.
The Company's proposed products are in the early development stage, require
significant further research, development, testing and regulatory clearances and
are subject to the risks of failure inherent in the development of products
based on innovative technologies. These risks include the possibilities that any
or all of the proposed products may be found to be ineffective or toxic, or
otherwise may fail to receive necessary regulatory clearances; that the proposed
products, although effective, may be uneconomical to market; or that third
parties may market superior or equivalent products. Due to the extended testing
and regulatory review process required before marketing clearance can be
obtained, the Company does not expect to be able to realize royalty revenues
from the sale of any drugs in the near term.
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NEED FOR SIGNIFICANT PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING
Before the Company or any of its licensees may market any products based
upon the Company's technology, significant additional development efforts and
substantial preclinical and clinical testing will be necessary. Unless
substantial additional financing is obtained, the Company may not have
sufficient working capital to complete clinical studies on any proposed
products. No assurance can be given that the Company will be able to secure such
financing on favorable terms, if at all.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approval for the commercial sale of any of its
pharmaceutical products under development, the Company must demonstrate that the
product is safe and efficacious for use in each proposed indication. The results
of preclinical studies and early clinical trials may not be predictive of
results that will be obtained in large-scale testing, and there can be no
assurance that clinical trials of the Company's products will demonstrate the
safety and efficacy of its products or will result in marketable products. A
number of companies in the pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. If the Company were unable to demonstrate the safety and efficacy of
certain of its products, the Company might be adversely affected.
DEPENDENCE ON THIRD PARTIES FOR DEVELOPMENT; NO ASSURANCE OF LICENSE
ARRANGEMENTS
The Company intends to rely on licensees and joint venture arrangements to
fund most of the costs relating to product development and clinical trials.
Licensees may be expected to have the legal right to terminate funding a product
at any time for any reason without significant penalty. The resources and
attention devoted by a licensee to a product are not within the Company's
control, and this can result in delays in clinical testing, the preparation and
prosecution of regulatory filings and commercialization efforts. Further, no
assurance can be given that the Company will be able to enter into new
collaborative arrangements or that existing or future collaborative arrangements
will be successful.
PRIOR DEVELOPMENT EFFORTS HAVE NOT GENERATED SUSTAINED REVENUES OR ANY PROFITS
Since its inception in 1981, the Company has engaged in research and
development activities with respect to a variety of technologies and products,
including polymers for medical and industrial use, dental adhesives,
osteoporotic drugs and transdermal drug-delivery products. Although the Company
has generated differing levels of revenue over the last several years, none of
the Company's products or technologies has ever generated sustained revenues and
the Company has never had profitable operations. The Company has expended a
substantial amount of its resources in researching and developing technology
relating to these products as well as in connection with the research and
development of its transdermal delivery systems. No assurance can be given that
the Company's development activities with respect to its transdermal delivery
systems will be successful or that these efforts will not be eventually
abandoned.
11
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES FOR MARKETING AND
DISTRIBUTION OF PRODUCTS
The Company intends to market and distribute its proposed products through
others pursuant to licensing, joint venture, or similar collaborative
arrangements or distribution agreements. The Company has no sales force or
marketing organization. If the Company directly markets and sells any of such
products, it will, among other things, have to attract and retain qualified or
experienced marketing and sales personnel. No assurance can be given that the
Company will be able to attract and retain qualified or experienced marketing
and sales personnel or that any efforts undertaken by such personnel will be
successful. Any contractual arrangements with others may result in a lack of
control by the Company over any or all of the marketing and sales of such
products.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING
The Company currently does not have facilities capable of manufacturing any
proposed products in commercial quantities. Accordingly, the Company expects
that it will be dependent to a significant extent on licensees, corporate
partners or contract manufacturers for such manufacturing and for compliance
with regulatory requirements for good manufacturing practices. The Company's
dependence on third parties for manufacturing may adversely affect the Company's
ability to develop and deliver products on a timely and competitive basis. If
the Company decides to establish a commercial manufacturing facility, it will
require substantial additional funds, will be required to hire and retain
significant additional personnel and will be required to comply with extensive
government regulations. No assurance can be given that the Company will be able
to obtain additional capital to conduct such activities directly.
RELIANCE ON KEY EMPLOYEES; LIMITED PERSONNEL; ABILITY TO ATTRACT AND RETAIN
QUALIFIED SCIENTISTS
The success of the Company is dependent on the efforts and abilities of Dr.
Carlos M. Samour, its Chairman of the Board of Directors and Scientific
Director, Alvin J. Karloff, its Chief Executive Officer and President, Dr. Paul
J. Schechter, its Vice President, Drug Development and Regulatory Affairs and
Kenneth L Rice, its Vice President and Chief Financial Officer . Dr. Samour, Mr.
Karloff, Dr. Schechter and Mr. Rice are employed by the Company under employment
agreements that are of indefinite length and include non-disclosure and
non-competition provisions. The loss of Dr. Samour or Mr. Karloff could have a
material adverse effect on the Company's business.
The Company's business also depends on access to scientific talent,
competition for which is intense and can be expected to increase. There can be
no assurances that the Company will be able to retain its existing personnel or
to attract additional qualified employees.
COMPETITION; GOVERNMENT REGULATION; PATENTS AND LICENSE RIGHTS
See these sections, above, for a description of risk factors relating to
these matters.
12
RISKS OF PRODUCT LIABILITY CLAIMS; LACK OF PRODUCT LIABILITY INSURANCE; EXPENSE
AND DIFFICULTY OF OBTAINING ADEQUATE INSURANCE COVERAGE
The design, development, manufacture and sale of the Company's products
involve an inherent risk of liability claims and associated adverse publicity.
The Company currently has liability insurance to cover claims that may result
from clinical trials, but does not maintain product liability insurance and may
need to acquire such insurance coverage prior to the commercial introduction of
its products. No assurance can be given that the coverage limits of the
Company's insurance policies will be adequate. Such insurance is expensive, is
difficult to obtain and may not be available in the future on acceptable terms
or at all. A successful claim brought against the Company if it is uninsured, or
which is in excess of the Company's insurance coverage, if any, could have a
material adverse effect upon the Company and its financial condition.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS
The future revenues and profitability of, and availability of capital for
biomedical and pharmaceutical companies may be affected by the continuing
efforts of governmental and third-party payers to contain or reduce the costs of
health care through various means. For example, in certain foreign markets
pricing or profitability of prescription pharmaceuticals is subject to
government control and to reform in the health care system. In the United
States, there have been, and the Company expects there will continue to be, a
number of federal and state proposals to impose similar government control.
While the Company cannot predict whether any such legislative or regulatory
proposals will be adopted, the announcement or adoption of such proposals could
have a material adverse effect on the Company's prospects. If the Company or one
of its partners succeeds in bringing to market one or more of its products,
based upon the Company's technology, there can be no assurance that these
products will be cost effective and that reimbursement to the consumer will be
available or will be sufficient to allow the Company or its partners to sell
such products on a profitable basis.
ITEM 2. PROPERTIES.
Effective December 15, 1999, the Company leased an additional 7,316 square
feet of office and laboratory space bringing the total space occupied by the
Company to 17,277 square feet. This space is located on one floor of a three
story building in Lexington, Massachusetts. See Note 5 to the financial
statements included in Item 8 of this Report. The lease agreement is an exhibit
to this Report.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the three
months ended December 31, 1999, through the solicitation of proxies or
otherwise.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE OF SECURITIES AND RELATED MATTERS
The Company's Common Stock is traded on NASDAQ under the symbol "MCHM." The
following chart sets forth the range of high and low closing prices for the
Common Stock for the periods indicated as obtained from NASDAQ:
COMMON STOCK
MCHM
YEAR ENDED HIGH LOW
DECEMBER 31, 1998
First Quarter 13 3/8 7 1/2
Second Quarter 12 7/8 7
Third Quarter 8 7/16 3 1/8
Fourth Quarter 9 3/8 5 1/16
DECEMBER 31, 1999
First Quarter 10 3/4 7 5/8
Second Quarter 10 5/8 5 15/16
Third Quarter 8 5
Fourth Quarter 6 9/16 4 1/16
The above quotations represent prices between dealers and do not include
retail markups, markdowns or commissions and may not necessarily reflect actual
transactions. As of December 31, 1999, there were 487 record holders of the
Company's Common Stock.
The Company has never paid dividends on its Common Stock and its Board of
Directors does not contemplate declaring any dividends in the foreseeable
future. The Company presently intends to retain earnings, if any, to finance
research, development, and expansion of its business.
RECENT SALES OF UNREGISTERED SECURITIES
During 1999, the Company did not issue any securities that were not
registered under the Securities Act of 1933.
14
ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ----- ----- ----
STATEMENTS OF
OPERATIONS DATA:
Revenues $ 17,493 $ 129,786 $ 120,350 $ 274,749 $ 464,332
Research and development
expenses 1,238,070 1,736,561 2,084,826 4,318,758 5,423,138
Net loss (2,465,837) (3,139,796) (3,569,113) (4,842,871) (6,787,069)
Basic and diluted net
loss per share (0.20) (0.21) (0.21) (0.22) (0.30)
Shares used to compute
basic and diluted net
loss per share 12,331,560 15,239,080 16,638,401 22,204,105 22,311,890
BALANCE SHEET DATA:
Working capital $ 4,532,623 $ 7,127,252 $24,756,904 $19,891,936 $14,776,372
Current assets 4,962,562 7,495,715 25,069,804 20,756,671 15,437,685
Total assets 5,462,625 8,063,750 25,623,836 21,509,724 16,313,732
Current liabilities 429,939 368,463 312,900 864,735 661,313
Capitalized lease obligations 91,861 57,038 18,408 --- ---
Total liabilities 486,198 386,871 312,900 1,364,735 1,161,313
Stockholders' equity 4,976,427 7,676,879 25,310,936 20,144,989 15,152,419
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations for the Company should be read in conjunction with the accompanying
financial statements and related footnotes.
GENERAL
MacroChem's primary business is the development of pharmaceutical products
for commercialization by applying SEPA(R) (Soft Enhancer of Percutaneous
Absorption), its patented drug delivery technology. SEPA compounds, when
properly combined with drugs, provide pharmaceutical formulations (creams, gels,
solutions, etc.) that enhance the transdermal delivery of drugs into the skin or
into the bloodstream. The Company currently derives no significant revenue from
product sales, royalties or license fees. The Company plans to develop specific
SEPA formulations for use with proprietary and non-proprietary drugs
manufactured by pharmaceutical companies, and to commercialize these products
through the formation of partnerships, strategic alliances and license
agreements with those companies. In order to attract strategic partners the
Company is conducting clinical testing of certain SEPA-enhanced pharmaceuticals.
15
The Company's results of operations vary significantly from year to year
and quarter to quarter, and depend, among other factors, on the signing of new
licenses and product development agreements, the timing of revenues recognized
pursuant to license agreements, the achievement of milestones by licensees, the
progress of clinical trials conducted by licensees and the Company, and the
degree of research, marketing and administrative effort. The timing of the
Company's revenues may not match the timing of the Company's associated product
development expenses. To date, research and development expenses have generally
exceeded revenues in any particular period and/or fiscal year.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
For 1999 and 1998, the Company recognized revenues of approximately
$464,300 and $274,700, respectively, which were primarily from feasibility
studies.
Research and development costs increased by approximately $1,104,300 from
approximately $4,318,800 in 1998 to approximately $5,423,100 in 1999, a 26%
increase. This increase reflects the Company's continued acceleration of
clinical testing of its products and increased internal research and development
efforts. The Company expects that research and development costs will continue
to increase substantially in 2000, reflecting increased clinical testing
efforts.
Marketing, general and administrative expenses for 1999 aggregated
approximately $2,610,800, an increase of approximately $685,800, or 36%, from
1998's total of approximately $1,925,000. This increase primarily reflects
increases of $331,100 in stock-based compensation, $32,500 in consulting fees
and $295,600 in officers' salaries. The Company expects that marketing, general
and administrative expenses will remain essentially the same for 2000 with the
exception of routine salary increases.
Other income decreased by approximately $343,700, or 29%, from $1,174,200
in 1998 to $830,500 in 1999. This decrease is attributable primarily to the
lower amount of cash available to be invested.
For the year ended December 31, 1999, the Company's net loss was
approximately $6,787,100 as compared to a loss of approximately $4,482,900 for
the previous year, a 51% increase.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
For 1998 and 1997, the Company recognized revenues of approximately
$274,700 and $120,400, respectively, which were primarily from feasibility
studies.
Research and development costs increased by approximately $2,234,000 from
$2,084,800 in 1997 to $4,318,800 in 1998, a 107% increase. This increase
reflects the Company's continued acceleration of clinical testing of its
products and increased internal research and development efforts.
Marketing, general and administrative expenses for 1998 aggregated
approximately $1,925,000, a reduction of approximately $67,200, or 3%, from
1997's total of approximately $1,992,200, reflecting lower stock-based
compensation and consulting expenses partially offset by increased regulatory
fees and recruiting expenses.
16
Other income increased from a net amount of approximately $417,500 in 1997
to approximately $1,174,200 in 1998. This increase reflects investment income
resulting from the investment of proceeds received from the exercise of Class A
and Class AA warrants during the latter part of 1997.
For the year ended December 31, 1998, the Company's net loss was
approximately $4,842,900 as compared to a loss of approximately $3,569,100 for
the previous year, a 36% increase.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the primary source of funding for the Company's operations
has been the private and public sale of its securities, and to a lesser extent,
the licensing of its proprietary technology and products, government grants and
the limited sales of products and test materials. During 1999, the Company
received aggregate net proceeds of approximately $1,367,000 from the exercise of
stock options and stock warrants, compared to approximately $211,000 in 1998. At
December 31, 1999 working capital was approximately $14.7 million, compared to
$19.9 million at December 31, 1998. The reduction in the Company's working
capital was due primarily to the cash used by operating activities, the
Company's investment in equipment and the repurchase of the Company's common
stock. Until such time as the Company obtains agreements with third-party
licensees or partners to provide funding for the Company's anticipated business
activities or the Company is able to obtain funds through the private or public
sale of its securities, the Company's working capital will be utilized to fund
its operating activities.
Pursuant to a plan approved by the Company's Board of Directors, the
Company is authorized to repurchase 1,000,000 shares of its common stock to be
held as treasury shares for future use. During 1999 the Company repurchased
32,500 shares at an aggregate cost of approximately $147,600. At December 31,
1999, 160,165 repurchased shares remain available for future use and 812,650
shares remain available for repurchase under the plan.
Capital expenditures and additional patent development costs for the year
ended December 31, 1999 were approximately $343,200. The Company anticipates
capital expenditures of approximately $450,000 during the fiscal year ending
December 31, 2000.
The Company's long term capital requirements will depend upon numerous
factors including the progress of the Company's research and development
programs; the resources that the Company devotes to self-funded early stage
clinical testing of SEPA-enhanced compounds, proprietary manufacturing methods
and advanced technologies; the ability of the Company to enter into additional
licensing arrangements or other strategic alliances; the ability of the Company
to manufacture products under those arrangements and the demand for its products
or the products of its licensees or strategic partners if and when approved for
sale by regulatory authorities. In any event, substantial additional funds will
be required before the Company is able to generate revenues sufficient to
support its operations. There is no assurance that the Company will be able to
obtain such additional funds on favorable terms, if at all. The Company's
inability to raise sufficient funds could require it to delay, scale back or
eliminate certain research and development programs.
17
The Company believes that its existing cash and cash equivalents will be
sufficient to meet its operating expenses and capital expenditure requirements
for at least the next twelve months. The Company's cash requirements may vary
materially from those now planned because of changes in focus and direction of
the Company's research and development programs, competitive and technical
advances, patent developments or other developments. It is not believed that
inflation will have any significant effect on the results of the Company's
operations.
FUTURE ADOPTION OF ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The provisions of SFAS No. 133 will be effective for the
Company beginning January 1, 2001. The Company has not yet determined whether
the effect of adopting SFAS No. 133 will be material to the Company's financial
position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CASH AND CASH EQUIVALENTS
As of December 31, 1999, the Company is exposed to market risks which
relate primarily to changes in U.S. interest rates. The Company's cash
equivalents are subject to interest rate risk and will decline in value if
interest rates increase. Due to the short duration of these financial
instruments, three months or less, changes to interest rates would not have a
material effect upon the Company's financial position. A hypothetical 10% change
in interest rates would result in an increase or decrease of approximately
$83,000 on interest income within the Company's statement of operations.
THE FOREGOING STATEMENTS IN THIS REPORT INCLUDE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED OR REFERRED TO IN ITEM 1, BUSINESS - "RISK FACTORS".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required under this Item 8 is set forth on pages 19 through
33 of this report.
18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MacroChem Corporation:
We have audited the accompanying balance sheets of MacroChem Corporation as of
December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity,and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of MacroChem Corporation at December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 3, 2000
19
MACROCHEM CORPORATION
BALANCE SHEETS
DECEMBER 31,
ASSETS 1999 1998 LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------ ---- ---- ------------------------------------- ---- ----
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and cash equivalents $15,183,289 $20,504,097 Accounts payable and accrued expenses $ 565,080 $ 771,172
Accounts receivable 66,954 48,393 Deferred compensation and related accrued
Receivable due from related interest 96,233 93,563
party 20,960 --- ---------- ----------
Prepaid expenses and other
current assets 166,482 204,181
---------- ----------
TOTAL CURRENT ASSETS 15,437,685 20,756,671 TOTAL CURRENT LIABILITIES 661,313 864,735
---------- ---------- ---------- ----------
PROPERTY AND EQUIPMENT (NET) 375,464 397,483 DEFERRED REVENUE 500,000 500,000
---------- ---------- ---------- ----------
OTHER ASSETS: TOTAL LIABILITIES 1,161,313 1,364,735
Patents, net 471,390 351,110
Deposits 29,193 4,460 COMMITMENTS AND CONTINGENCIES (Note 5)
---------- ----------
TOTAL OTHER ASSETS 500,583 355,570 STOCKHOLDERS' EQUITY:
---------- ---------- Preferred stock --- ---
Common stock, $.01 par value; authorized
60,000,000 shares; issued 22,597,564
shares,outstanding 22,437,399 shares at
December 31, 1999 and issued 22,281,245
shares,and outstanding, 22,140,328
shares atDecember 31, 1998 225,976 222,812
Additional paid-in capital 49,387,454 47,295,449
Unearned compensation ( 382,473) ( 170,676)
Accumulated deficit (33,295,188) (26,508,119)
---------- ----------
Total 15,935,769 20,839,466
Less cost of treasury stock (160,165
shares at December 31, 1999 and
140,917 shares atDecember 31, 1998) ( 783,350) ( 694,477)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 15,152,419 20,144,989
---------- ----------
TOTAL LIABILITIES AND
TOTAL ASSETS $16,313,732 $21,509,724 STOCKHOLDERS' EQUITY $ 16,313,732 $ 21,509,724
========== ========== ========== ==========
See notes to financial statements.
20
MACROCHEM CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
---- ---- ----
REVENUES
Research contracts $ 464,332 $ 274,749 $ 120,350
---------- ---------- ----------
OPERATING EXPENSES
Research and development 5,423,138 4,318,758 2,084,826
Marketing, general and administrative 2,610,768 1,925,021 1,992,157
Consulting fees with related parties 48,000 48,000 30,000
---------- ---------- ----------
TOTAL OPERATING EXPENSES 8,081,906 6,291,779 4,106,983
---------- ---------- ----------
LOSS FROM OPERATIONS ( 7,617,574) ( 6,017,030) ( 3,986,633)
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 833,450 1,178,825 424,742
Interest expense ( 2,945) ( 4,666) ( 7,222)
---------- ---------- ----------
TOTAL OTHER INCOME 830,505 1,174,159 417,520
---------- ---------- ----------
NET LOSS $( 6,787,069) $( 4,842,871) $( 3,569,113)
========== ========== ==========
BASIC AND DILUTED NET LOSS
PER SHARE $( .30) $( .22) $( .21)
========== ========== ==========
SHARES USED TO COMPUTE BASIC
AND DILUTED NET LOSS PER
SHARE 22,311,890 22,204,105 16,638,401
========== ========== ==========
See notes to financial statements.
21
MACROCHEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Shares
------------------------ Additional Cost of Total
Common Paid-In Unearned Accumulated Treasury Stockholders'
Issued Treasury Stock Capital Compensation Deficit Subtotal Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE,
JANUARY 1, 1997 15,601,274 $156,013 $25,839,675 $(222,674) $(18,096,135) $ 7,676,879 $ --- $ 7,676,879
Exercise of common
stock warrants 4,491,590 44,916 16,938,240 --- --- 16,983,156 16,983,156
Exercise of common
stock options 291,501 2,915 692,087 --- --- 695,002 695,002
Exercise of unit
purchase options 1,757,500 17,575 3,058,050 --- --- 3,075,625 3,075,625
Stock based
compensation 41,000 410 395,625 53,352 --- 449,387 449,387
Net loss --- --- --- --- --- ( 3,569,113) ( 3,569,113) --- ( 3,569,113)
---------- ------- ------- ---------- ------- ---------- ---------- ------- ----------
BALANCE,
DECEMBER 31, 1997 22,182,865 221,829 46,923,677 (169,322) (21,665,248) 25,310,936 --- 25,310,936
Exercise of common
stock warrants 6,342 63 38,465 38,528 38,528
Exercise of common
stock options 91,683 917 171,139 172,056 172,056
Purchase of treasury
stock (154,850) (757,599) ( 757,599)
Stock based
compensation 355 6,158 3 139,352 ( 1,354) 138,001 27,896 165,897
Stock issued to
401(k) trust 7,775 22,816 22,816 35,226 58,042
Net loss --- --- --- --- --- ( 4,842,871) ( 4,842,871) --- ( 4,842,871)
---------- ------- ------- ---------- ------- ---------- ---------- ------- ----------
BALANCE,
DECEMBER 31, 1998 22,281,245 (140,917) 222,812 47,295,449 (170,676) (26,508,119) 20,839,466 (694,477) 20,144,989
Exercise of common
stock warrants 137,319 1,374 832,840 834,214 834,214
Exercise of common
stock options 179,000 1,790 531,366 533,156 533,156
Purchase of treasury
stock ( 32,500) (147,570) ( 147,570)
Stock based
compensation 708,837 (211,797) 497,040 497,040
Stock issued to
401(k) trust 13,252 18,962 18,962 58,697 77,659
Net loss ( 6,787,069) ( 6,787,069) ( 6,787,069)
---------- ------- ------- ---------- ------- ---------- ---------- -------
BALANCE,
DECEMBER 31, 1999 22,597,564 (160,165) $225,976 $49,387,454 $(382,473) $(33,295,188) $ 15,935,769 $(783,350) $ 15,152,419
========== ======= ======= ========== ======= ========== ========== ======= ==========
See notes to financial statements.
22
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,787,069) $(4,842,871) $( 3,569,113)
--------- --------- ----------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 244,986 181,175 123,888
Abandoned patent costs --- 5,604 ---
Loss on disposal of equipment --- --- 1,800
Stock-based compensation 497,040 165,897 448,977
401(k) contributions in company common stock 77,659 58,042 ---
Increase (decrease) in cash from:
Accounts receivable ( 18,561) ( 48,393) 43,977
Receivable due from related party ( 20,960) --- ---
Prepaid expenses and other current assets 37,699 ( 86,498) ( 17,650)
Accounts payable and accrued expenses ( 206,092) 566,820 ( 36,986)
Deferred compensation and related accrued
interest 2,670 3,423 2,659
Deferred rent --- --- ( 1,014)
Deferred revenue --- 500,000 ---
--------- --------- ----------
Total adjustments 614,441 1,346,070 565,651
--------- --------- ----------
Net cash used by operating activities (6,172,628) (3,496,801) ( 3,003,462)
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment --- --- 100
Proceeds from maturities of
marketable securities --- --- 21,824
Deposits ( 24,733) --- ---
Expenditures for property and equipment ( 179,067) ( 277,445) ( 48,991)
Additions to patents ( 164,180) ( 108,355) ( 62,794)
--------- --------- ----------
Net cash used by investing activities ( 367,980) ( 385,800) ( 89,861)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of company stock ( 147,570) ( 757,599) ---
Principal payments on capital lease --- ( 18,408) ( 38,630)
Proceeds from issuance of common stock --- --- 410
Proceeds from exercise of common stock options 533,156 172,056 695,002
Proceeds from exercise of common stock warrants 834,214 38,528 16,983,156
Proceeds from exercise of unit purchase options --- --- 3,075,625
--------- --------- ----------
Net cash provided (used) by financing activities 1,219,800 ( 565,423) 20,715,563
--------- --------- ----------
(Continued)
23
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS $( 5,320,808) $( 4,448,024) $17,622,240
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 20,504,097 24,952,121 7,329,881
---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 15,183,289 $ 20,504,097 $24,952,121
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest aggregated $0, $1,243, and $4,563, respectively, for the
years ended December 31, 1999, 1998 and 1997.
The Company did not pay any income taxes during those periods.
See notes to financial statements. (Concluded)
24
MACROCHEM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MacroChem Corporation (the "Company") develops and licenses transdermal drug
delivery compounds and systems intended to promote the delivery of drugs from
the surface of the skin into the skin or the bloodstream.
The Company has been engaged primarily in research and development since its
inception in 1981 and has derived limited revenues from the commercial sale of
its products, licensing of certain technology and feasibility studies. The
Company has had no revenues relating to the sale of any products currently
under development. The Company has incurred net losses every year since its
inception and the Company anticipates that losses may continue for the
foreseeable future. At December 31, 1999, the Company's accumulated deficit was
approximately $33.3 million. The Company's ability to continue operations after
its current capital resources are exhausted depends on its ability to obtain
additional financing and achieve profitable operations, as to which no
assurances can be given. However, the Company believes that its financial
resources are sufficient to meet planned operating activities at least through
December 31, 2000.
The Company organizes itself as one segment reporting to the chief operating
decision maker. Products and services consist primarily of research and
development activities in the pharmaceutical industry.
REVENUE RECOGNITION - Revenues are earned and recognized based upon the sale or
licensing of product rights, completion of contractually identified development
milestones, upon shipment of product, upon completion of a contract or upon the
attainment of specific milestones or benchmarks specified in license or
development agreements. Deferred revenue at December 31, 1999 and 1998 relates
to a nonrefundable collaborative advance against future milestones, if and when
achieved.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations as incurred. Such costs include proprietary research and development
activities and expenses associated with research and development contracts.
CASH AND CASH EQUIVALENTS - Cash equivalents consist of short-term, highly
liquid investments with a maturity of three months or less when purchased.
CONCENTRATION OF RISK - Cash and cash equivalents at December 31, 1999 and 1998
are primarily comprised of government agency securities. Accounts receivable at
December 31, 1999 and 1998 are due from one customer. 100% of revenue for the
years ended December 31, 1999 and 1998 was derived from research contracts with
one customer. 100% of revenue for the year ended December 31, 1997 was derived
from two customers.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the related assets which range from five to ten
years.
25
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PATENTS - The Company has filed applications for United States and foreign
patents covering aspects of its technology. Costs and expenses incurred in
connection with pending patent applications are deferred. Costs related to
successful patent applications are amortized over the estimated useful lives of
the patents, not exceeding 20 years, using the straight-line method.
Accumulated costs related to patents or deferred patent application costs that
are considered to have limited future value are charged to expense. Accumulated
amortization aggregated approximately $123,500 and $79,600, respectively, at
December 31, 1999 and 1998. On an on-going basis, the Company evaluates the
recoverability of the net carrying value of various patents by reference to the
patent's expected use in drug and other research activities as measured by
outside interest in the Company's patented technologies and management's
determination of potential future uses of such technologies.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", which requires the use of the liability method. The objective of
this method is to establish deferred tax assets and liabilities for the
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities using tax rates in effect in the
year(s) in which the differences are expected to reverse.
NET INCOME (LOSS) PER SHARE - Basic earnings per share is computed using the
weighted average number of common shares outstanding during each year. Diluted
earnings per common share reflect the effect of the Company's outstanding
options and convertible securities, except where such items would be
anti-dilutive. Due to the net losses, reported in 1999, 1998 and 1997, basic
and diluted per share amounts are the same. For the years ended December 31,
1999, 1998 and 1997 potential common shares are not included in the per share
calculations for diluted EPS, because the effect of their inclusion would be
anti-dilutive. Anti-dilutive potential shares not included in per share
calculations for 1999, 1998 and 1997 were approximately 3,596,000, 3,347,000
and 8,711,000 shares, respectively.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The primary estimates underlying the Company's
financial statements include the useful lives of the Company's patents,
property and equipment, the valuation allowance established for the Company's
deferred tax assets, and the underlying assumptions to apply the pricing model
to value stock options under SFAS No. 123. Management bases its estimates on
certain assumptions, which it believes are reasonable in the circumstances, and
while actual results could differ from those estimates, management does not
believe that any change in those assumptions in the near term would have a
significant effect on the financial position or the results of operations.
STOCK-BASED COMPENSATION - SFAS No. 123 ("Accounting for Stock-Based
Compensation") addresses the financial accounting and reporting standards for
stock or other equity-based compensation arrangements.
26
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The Company has elected to continue to use the intrinsic value based method to
account for employee stock option awards under the provisions of Accounting
Principles Board No. 25 and provides disclosures based on the fair value method
in the notes to the financial statements as permitted by SFAS No. 123.
Stock or other equity based compensation for non-employees must be accounted
for under the fair value based method as required by SFAS No. 123 and Emerging
Issues Task Force No.96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." Under this method, the equity based instrument is valued at either
the fair value of the consideration received or from the equity instrument
issued on the date of grant. The resulting compensation cost is recognized and
charged to operations over the service period, which is usually the vesting
period.
FUTURE ADOPTION OF ACCOUNTING PRONOUNCEMENTS - In 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
provisions of SFAS No. 133 will be effective for the Company beginning January
1, 2001. The Company has not yet determined whether the effect of adopting SFAS
No. 133 will be material to the Company's financial position or results of
operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
1999 1998
---- ----
Laboratory equipment $ 806,647 $ 770,915
Office equipment 324,328 208,399
Leasehold improvements 174,305 149,249
--------- ---------
Total 1,305,280 1,128,563
Less: accumulated depreciation
and amortization ( 929,816) ( 731,080)
--------- ---------
Property and equipment, net $ 375,464 $ 397,483
========= =========
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of December
31:
1999 1998
---- ----
Accounts payable $71,318 $116,246
Accrued professional fees 150,096 150,461
Accrued clinical trial costs 257,125 498,716
Accrued miscellaneous 86,541 5,749
------- -------
$565,080 $771,172
======= =======
27
4. STOCKHOLDERS' EQUITY
AUTHORIZED CAPITAL STOCK - Authorized capital stock consists of 60,000,000
shares of $.01 par value common stock of which 22,597,564 shares are issued
(22,437,399 are outstanding) and 4,867,796 are reserved for issuance upon
exercise of common stock options at December 31, 1999. Authorized and unissued
preferred stock totals 6,000,000 shares. On August 31, 1998, the Company's
Board of Directors authorized the repurchase of up to 1,000,000 shares of
common stock at market price. The Company repurchased 32,500 common shares in
1999 and 154,850 common shares in 1998. At December 31, 1999, 160,165
repurchased shares remain available for future use and 812,650 shares are
available to be repurchased.
STOCK ISSUANCES - The Company had issued 142 units (the "Units") and options
for an additional 118.333 Units in connection with a private placement in 1993.
A Unit consists of an option for 30,000 shares of the Company's common stock at
an exercise price of $1.75 per common share, 10,000 Class A warrants and 10,000
Class AA warrants. Each Class A and AA warrant was convertible to one share of
the Company's common stock at a per share exercise price of $3.00 and $4.50
respectively. Outstanding at January 1, 1997 were 58.58 options on Units all of
which were exercised and converted into 1,757,500 shares of common stock for
aggregate proceeds of $3,075,625.
WARRANTS - Outstanding at January 1, 1997 were 1,925,566 Class A, 2,522,233
Class AA and 185,500 Class X warrants. Each warrant was exercisable for one
share of common stock at a price per share, subject to adjustment, of $3.00,
$4.50, and $1.75, respectively. The Class A and Class AA warrants were issued
subject to the 1993 private placement. The Class X warrants were issued in
connection with a private placement occurring in 1992.
During 1997, 1,877,666 Class A, 2,463, 924 Class AA, and 150,000 Class X
warrants were exercised resulting in the issuance of 4,491,590 shares of common
stock for aggregate proceeds of $16,983,156. All remaining Class A, Class AA
and Class X warrants expired unexercised during 1997.
In 1996, in connection with services performed for the Company, the firm of
Janssen-Meyers, L.P. ("J-M") received a warrant, exercisable immediately and
expiring June 17, 1999, for the purchase of 145,800 shares of the Company's
common stock at a price of $6.075 per share. During 1999 and 1998, 137,319 and
6,342 warrants were exercised for aggregate proceeds of $834,214 and $38,528,
respectively. During 1999, 2,139 warrants expired. Pursuant to an informal
understanding, the Company paid J-M a monthly fee of $5,000 for consulting
services from December 1996 through April 1997.
STOCK OPTION PLANS - The Company has three stock option plans, the 1984
Incentive Stock Option Plan (ISO Plan), the 1984 Non-Qualified Stock Option
Plan (Non-Qualified Plan) and the 1994 Equity Incentive Plan (1994 Plan). Under
the terms of the 1984 ISO and Non-Qualified Plans, the Company may no longer
award any options. All options previously granted may be exercised at any time
up to ten years from date of award.
Under the terms of the 1994 Plan, the Company may grant options to purchase up
to a maximum of 4,000,000 shares of common stock to certain employees,
directors and consultants. The options may be awarded as incentive stock
options (employees only) and non-incentive stock options (certain employees,
directors and consultants).
28
The 1994 Plan and the ISO Plan state that the exercise price of options shall
not be less than fair market value at the date of grant. The exercise price of
the Non-Qualified options and the non-incentive options from the 1994 Plan is
determined by the Board of Directors. All options become exercisable as
specified at the date of grant.
The following table presents activity under all stock option plans:
WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
Outstanding January 1, 1997 3,553,525 $ 2.85
Granted 247,500 7.03
Exercised ( 291,501) 2.38
Expired ( 10,000) 4.25
Canceled ( 87,820) 5.68
---------
Outstanding December 31, 1997 3,411,704 3.13
Granted 574,200 10.14
Exercised ( 91,683) 1.88
Canceled ( 46,500) 7.17
---------
Outstanding December 31, 1998 3,847,721 4.16
Granted 573,750 6.73
Exercised ( 179,000) 2.98
Canceled ( 243,180) 7.15
---------
Outstanding December 31, 1999 3,999,291 4.40
=========
Exercisable at December 31: 1999 3,230,070 3.48
=========
1998 3,065,518 2.89
=========
1997 2,867,204 2.58
=========
The weighted average fair values of options granted during 1999, 1998 and 1997
were $5.53, $8.38 and $5.83, respectively.
All options granted during the three year period ended December 31, 1999 were
granted at the market price of the stock.
The fair value of options on their grant date was measured using the
Black/Scholes option pricing model. Key assumptions used to apply this pricing
model are as follows:
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.01%-6.46% 4.08%-5.88% 5.35%-7.14%
Expected life of option grants 10 years 10 years 10 years
Expected volatility of underlying
stock 62.5%-95.6% 71%-112.4% 65.3%-87.7%
Expected dividend payment rate, as a
percentage of the stock price on
the date of grant --- --- ---
It should be noted that the option pricing model used was designed to value
readily tradable stock options with relatively short lives. The options granted
to employees are not tradable and have contractual lives of up to ten years.
29
The following table sets forth information regarding options outstanding at
December 31, 1999:
Weighted Ave. Weighted Ave.
Range of Number of Number Exercise Price- Weighted Ave. Exercise Price-
Exercise Options Currently Options Remaining Currently
Prices Outstanding Exercisable Outstanding Life Exercisable
------------------------------------------------------------------------------------------------
$0.43 1,254,080 1,254,080 $ 0.43 1.17 $ 0.43
$1.50-$2.00 30,666 30,666 $ 1.69 1.03 $ 1.69
$2.75-$4.00 543,920 543,920 $ 3.56 4.24 $ 3.08
$4.875-$5.9375 1,370,175 1,069,675 $ 5.21 4.93 $ 5.59
$6.064-$8.25 432,450 206,729 $ 8.09 9.14 $ 7.16
$9.00-$12.688 368,000 125,000 $12.00 8.36 $12.01
--------- ---------
TOTAL 3,999,291 3,230,070
========= =========
The Company uses the intrinsic value method to measure compensation expense
associated with grants of stock options to employees and, prior to December 15,
1995, to suppliers of goods and services. Had the Company used the fair value
method to measure compensation, the reported net loss and basic and diluted net
loss per share would have been as follows:
1999 1998 1997
---- ---- ----
Net loss as reported $(6,787,070) $(4,842,871) $(3,569,113)
Compensation costs:
Employee (2,270,636) (2,183,916) (2,495,545)
Non-Employee --- ( 26,488) ( 31,785)
--------- --------- ---------
Proforma net loss $(9,057,706) $(7,053,275) $(6,096,443)
========= ========= =========
Proforma basic and diluted
net loss per share $( 0.41) $( 0.32) $( 0.37)
========= ========= =========
It should be noted that the proforma amounts presented above are inexact in
that the pricing model was designed to value freely-traded options rather than
employee stock options. Proforma charges may be understated in relation to
future years since these proforma charges do not reflect the financial impact
of options granted prior to 1995.
UNEARNED COMPENSATION - The following table sets forth the changes to the
Company's reported unearned compensation for the years ended December 31, 1999,
1998 and 1997:
1999 1998 1997
---- ---- ----
Balance, January 1 170,676 $ 169,322 $ 222,674
Common stock granted to non-employees
below fair market value --- --- 286,071
Options, warrants and common stock
granted to non-employees at fair
market value 807,888 117,248 378,422
Amortization of unearned compensation (497,040) (115,894) (448,977)
Unearned compensation forfeited ( 99,051) --- (268,868)
------- ------- -------
Balance, December 31 $ 382,473 $ 170,676 $ 169,322
======= ======= =======
30
STOCK AND STOCK OPTION ISSUANCES -During 1997, the Company issued 41,000 common
shares to non-employees below fair market value and recorded unearned
compensation of $286,071 related to these shares. Also in 1997, the Company
recorded an additional $378,422 of unearned compensation related to options,
warrants and common stock issued or granted to non-employees at fair market
value.
During 1998, the Company issued 355 shares to non-employees at market value and
recorded earned compensation related to the shares of $4,504. Also in 1998, the
Company recorded unearned compensation related to the issuance of 20,000
options to non-employees of $112,744.
During 1998, the Company issued 6,158 common shares and recorded $50,000 as
compensation for services rendered to the Company.
During 1999, the Company issued 129,000 options to non-employees at fair market
value and recorded unearned compensation of $807,888 related to these shares.
SHAREHOLDER RIGHTS PLAN - The Company has adopted a shareholder rights plan.
The Company declared a dividend consisting of one Right for each share of
common stock outstanding on September 10, 1999. Stock issued after that date
will be issued with an attached Right.
Each Right will entitle the holder, upon the occurrence of certain events, to
purchase 1/100th of a share of Series B Preferred Stock of the Company at an
initial exercise price of $50.00, subject to adjustments for stock dividends,
splits and similar events. The Rights will be exercisable only if a person or
group acquires 20% or more of the Company's outstanding common stock, or
announces an intention to commence a tender or exchange offer, the consummation
of which would result in ownership by such person or group of 20% or more of
the Company's outstanding common stock.
The Board of Directors may, at its option after the occurrence of one of the
events described above, exchange all of the then outstanding and exercisable
Rights for shares of common stock at an exchange ratio of one share of common
stock per Right.
The Board of Directors may redeem the Rights at the redemption price of $0.01
per Right at any time prior to the expiration of the rights plan on August 13,
2009. Distribution of the Rights is not a taxable event to shareholders.
The Board of Directors has authorized 600,000 shares of Series B Preferred
Stock.
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company renegotiated its lease which was to have
expired on February 28, 2000 for its operating facility. The new lease,
effective December 15, 1999, expires February 28, 2005. At December 31, 1999,
future minimum lease payments under this lease agreement are as follows:
2000 $403,800
2001 $425,800
2002 $438,600
2003 $451,800
2004 $465,300
2005 $ 78,400
31
Total rental expense under all operating leases was approximately $211,300,
$187,400 and $162,500 for the years ended December 31, 1999, 1998, and 1997,
respectively.
The Company sublets 1,778 square feet of total rented space to Eastern Research
Group, Inc. The sublease, effective January 1, 2000, is coterminous with the
Company's lease. Future minimum sublease payments are as follows:
2000 $42,785
2001 $43,816
2002 $45,135
2003 $46,489
2004 $47,879
2005 $ 8,069
EMPLOYMENT AND CONSULTING AGREEMENTS - The Company has employment and
consulting agreements with various consultants and certain key employees, with
terms ranging from one year to an indefinite period of time. These agreements
provide for annual payments of approximately $816,000. In addition, certain
consulting agreements also provide for additional payments to certain
consultants related to obtaining a financial placement or the sale or licensing
of the Company's product or technology to third parties. During the years ended
December 31, 1999, 1998 and 1997, no such additional amounts were earned by the
related consultants.
ROYALTY AGREEMENTS - The Company has entered into various license agreements
which require the Company to pay royalties based upon a set percentage of
certain product sales and license fee revenue. There were no such amounts paid
in 1999, 1998 and 1997.
6. Income Taxes
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of December 31,
1999, the Company has available net operating loss carryforwards of
approximately $31.6 million for federal income tax purposes, expiring through
2019 and $19.0 million for state income tax purposes, expiring through 2004. In
addition, the Company has unused investment and research and development tax
credits for federal and state income tax purposes aggregating $776,400 and
$484,700, respectively. The use of the federal net operating loss may also be
restricted due to changes in ownership in accordance with definitions as stated
in the Internal Revenue Code.
The net tax effect of differences in the timing of certain revenue and expense
items and the related carrying amounts of assets and liabilities for financial
reporting and tax purposes are not material and, accordingly, are not displayed
in the table below. The components of the Company's deferred tax assets as of
December 31, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred Tax Assets:
Net operating loss carryforwards 12,557,000 10,300,000
Tax credit carryforwards 1,261,000 511,800
---------- ----------
13,818,000 10,811,800
Valuation allowance (13,818,000) (10,811,800)
---------- ----------
Deferred tax asset, net $ --- $ ---
========== ==========
32
For the years ended December 31, 1999, 1998 and 1997, the valuation allowance
was increased by approximately $3,006,200, $2,418,800, and $1,340,000,
respectively, due to the uncertainty of future realization of currently
generated net operating loss and tax credit carryforwards.
7. EMPLOYEE BENEFIT PLAN
In 1998, the Company established a qualified 401(k) Retirement Plan (the
"Plan") under which employees are allowed to contribute certain percentages of
their pay, up to the maximum allowed under Section 401(k) of the Internal
Revenue Code. Company contributions to the Plan are at the discretion of the
Board of Directors. The Company contributed 13,252 shares of common stock in
1999 and 7,775 shares of commons stock in 1998, valued at $77,659 and $58,042,
respectively.
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the year each Director was first elected and
the age, positions, and offices presently held by each Director with the
Company:
Year First
Name Age Became a Director Position with Company
- --------------------------------------------------------------------------------
Carlos M. Samour .....79 1981 Chairman of the Board of Directors
and Scientific Director
Alvin J. Karloff......68 1990 Chief Executive Officer, President
and Director
Willard M. Bright ....86 1993 Director
Peter G. Martin.......51 1995 Director
Michael A. Davis......59 1997 Director and Consultant
The following is a brief summary of the background of each Director of the
Company:
CARLOS M. SAMOUR, PH.D., the Company's Chairman of the Board of Directors
and its Scientific Director, founded the Company in 1981. From 1958 until the
formation of the Company, Dr. Samour was director of the corporate research
laboratory at The Kendall Company, a general medical supply company, and its
Lexington Laboratory after Kendall was acquired by Colgate-Palmolive Corporation
in 1972. Dr. Samour is the inventor of many of the technologies under
development by the Company and is responsible for managing research and product
development activities. He received an M.S. from the Massachusetts Institute of
Technology and a Ph.D. in organic chemistry from Boston University.
ALVIN J. KARLOFF has served as the Company's Chief Executive Officer and
President and as a Director since January 1990. In 1986, Mr. Karloff founded
Medical and Scientific Enterprises, Inc., a privately held medical diagnostic
equipment company, where he served as Chairman, Chief Executive Officer and
President prior to joining the Company. Mr. Karloff was Director of Marketing
for Medical Products with New England Nuclear ("NEN"), a Dupont company, from
1984 to 1985, and from 1969 to 1984, he served as Marketing Manager, Sales
Manager, and in several other sales and marketing positions for NEN. Mr. Karloff
received a B.S. from the University of Massachusetts.
34
WILLARD M. BRIGHT, PH.D., has served as a Director of the Company since
December 1992. Since 1982, Dr. Bright has served as a Director (from 1982 to
July 1996 as Chairman of the Board of Directors) of Zoll Medical Corporation, a
publicly held medical supply company. Prior to 1982, Dr. Bright served as
President and Chief Executive Officer of The Kendall Company; as President of
the Professional Products Division of Warner Lambert; as President of Boehringer
Manheim Corporation USA, a manufacturer of medical products and biochemicals;
and as President and Director of Curtiss-Wright Corp., a manufacturer of
aerospace and industrial products. Dr. Bright received a B.S. and M.S. from the
University of Toledo and a Ph.D. in physical chemistry from Harvard University.
PETER G. MARTIN has served as a Director of the Company since 1995. Since
1990 Mr. Martin has been an independent investment banker and venture
capitalist. Prior to 1990 he was a commercial banker. Mr. Martin was initially
elected to the Board of Directors as the designee of David Russell, who
privately purchased 1 million shares of the Company's Common Stock in 1995. Mr.
Russell is no longer entitled to designate a Director of the Company. Mr. Martin
received a B.A. and J.D. from Fordham University and an M.B.A. from Columbia
University.
MICHAEL A. DAVIS, M.D., SC.D., has served as a Director of the Company
since 1997 and has provided medical and pharmaceutical consulting services to
the Company since 1991. Since 1980 Dr. Davis has been Professor of Radiology and
Nuclear Medicine and Director, Division of Radiologic Research, University of
Massachusetts Medical School. From 1982 to 1997 Dr. Davis was Adjunct Professor
of Surgery at Tufts University School of Veterinary Medicine. Since 1986 he has
been Affiliate Professor of Biomedical Engineering at Worcester Polytechnic
Institute. He is also a director of EZ EM, Inc., a public company engaged in
supplying oral radiographic contrast media, as well as medical devices. In
addition, from February to November 1999 he was President and Chief Executive
Officer of Amerimmune Pharmaceuticals, Inc., formerly known as Versailles
Capital Corporation, a public company, and its wholly owned subsidiary,
Amerimmune Inc., which is engaged in developing drugs relating to the immune
system. Since February 1999 Dr. Davis has been a director of both Amerimmune
Pharmaceuticals, Inc. and Amerimmune Inc.. Dr. Davis received a B.S. and M.S.
from Worcester Polytechnic Institute, an S.M. and Sc.D. from the Harvard School
of Public Health, an M.B.A. from Northeastern University and an M.D. from the
University of Massachusetts Medical School.
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and their positions with
the Company are as follows:
Name Age Position with Company
- --------------------------------------------------------------------------------
Carlos M. Samour.......79 Chairman of the Board of Directors and Scientific
Director
Alvin J. Karloff.......68 Chief Executive Officer, President and Director
Paul J. Schechter......60 Vice President, Drug Development & Regulatory
Affairs
Kenneth L. Rice, Jr... 46 Vice President, Chief Financial Officer, Treasurer
and Secretary
35
The following is a brief summary of the backgrounds of Dr. Schechter and
Mr. Rice. The backgrounds of the Company's other executive officers, Dr. Samour
and Mr. Karloff, are summarized above.
PAUL J. SCHECHTER, M.D., PH.D., the Company's Vice President, Drug
Development and Regulatory Affairs since May 1998, was from 1973 to 1990 with
Merrell Dow Research Institute, where he attained the position of Vice President
for Clinical Research. He went on to become Vice President of Fujisawa
Pharmaceutical Company from 1990 to 1993. Most recently he served as Senior Vice
President, Drug Development with Hybridon, Inc. from 1993 to 1997. Dr. Schechter
holds an M.D. and Ph.D. in Pharmacology from the University of Chicago and a
B.S. from Columbia University, College of Pharmacy.
KENNETH L. RICE, JR., Vice President and Chief Financial Officer of the
Company since August 1999 and Treasurer and Corporate Secretary since February
2000, has held executive financial and operating positions at a number of life
sciences and computer services firms. Most recently Mr. Rice was Vice President,
Finance and Administration, Chief Financial Officer & Secretary at Pentose
Pharmaceuticals, Inc. from 1998 to 1999. Mr. Rice held similar positions at
Unisyn Technologies, Inc. (1993 to 1998, Senior Vice President, CFO and General
Counsel). Mr. Rice spent his early career at Millipore Corporation, where he
attained the position of Corporate Tax Director. Mr. Rice holds an LL.M. in
Taxation from Boston University Law School, a J.D. from Suffolk Law School and
an M.B.A. and B.S.B.A. from Babson College.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who beneficially own more than 10 percent of
the Company's Common Stock to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Based solely on its review of the
copies of such reports received by it, and written representations from certain
reporting persons that no Forms 5 were required for those persons, the Company
believes that during 1999 all filing requirements applicable to its officers,
directors, and such 10 percent beneficial owners were complied with, except that
Peter Martin filed one late report covering an acquisition made in 1999.
36
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth the compensation earned by or paid or
awarded to Dr. Samour, Mr. Karloff and Dr. Riggi during each of the three fiscal
years ended December 31, 1999 and to Dr. Schechter during each of the two fiscal
years ended December 31, 1999:
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards
- ------------------------------------------------------------------------------------------------
Securities
Other Annual Underlying All Other
Name and Principal Salary Bonus Compensation Options Compensation
Position Year $ $(1) $(2) # $(3)
- ------------------------------------------------------------------------------------------------
Carlos M. Samour 1999 250,000 45,000 10,606 ----- 5,000
Chairman, Scientific 1998 237,538 42,757 10,889 ----- 5,000
Director 1997 198,749 35,775 10,894 ----- -----
Alvin J. Karloff 1999 250,000 45,000 10,955 ----- 5,000
President, Chief 1998 237,563 42,761 13,453 ----- 5,000
Executive Officer 1997 198,749 35,775 13,046 ----- -----
Stephen J. Riggi 1999(4) 106,788 ----- ----- ----- 71,337
Former Vice 1998 175,000 ----- 1,175 ----- 5,000
President, Operations 1997 159,167 ----- 490 ----- -----
Paul J. Schechter 1999 182,500 ----- ----- 50,000 5,000
Vice President, 1998(5) 116,667 ----- 392 180,000 5,000
Drug Development
& Regulatory Affairs
- ------------------------------------------------------------------------------------------------
(1) Since March 1992, Dr. Samour and Mr. Karloff have each received, in lieu of
retirement benefits, annual payments equal to eighteen percent of their
salaries.
(2) Includes amounts paid for taxable group term life insurance. Also includes
for Dr. Samour and Mr. Karloff a monthly automobile allowance of $799, plus
a health insurance benefit equal to the annual premium each individual pays
under separate health insurance policies maintained by their former
employers, which health insurance benefit is paid in lieu of any other
health, medical or retirement benefits.
(3) For Dr. Samour, Mr. Karloff and Dr. Schechter, represents the dollar value
of Company contributions to the Company's 401(k) Retirement Plan, which was
established in 1998. For Dr. Riggi, represents $68,212 paid to Dr. Riggi
for consulting services to the Company from August 11, 1999 through
December 31, 1999 pursuant to an agreement with the Company and $3,125 of
Company contributions to the Company's 401(k) Retirement Plan. Company
contributions to the 401(k) Retirement Plan are made in its common stock.
(4) Dr. Riggi resigned as Director and officer on August 10, 1999.
(5) Dr. Schechter's employment commenced on May 1, 1998.
37
STOCK OPTIONS
The following table provides information concerning the grant of stock
options during 1999 to Dr. Schechter (no stock options were granted during 1999
to Dr. Samour, Mr. Karloff or Dr. Riggi):
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
----------------------------------
Potential
Realizable
Value
at Assumed
Annual Rates
Number of % of Total of Stock Price
Securities Options Exercise Appreciation for
Underlying Granted to or Base Option Term
Options Employees in Price Expiration 5% 10%
Name Granted (#) Fiscal Year ($/Sh) Date ($) ($)
- ------------------------------------------------------------------------------------------
Paul J. Schechter 50,000(1) 9% 7.81 January 2009 216,000 622,000
- ------------------------------------------------------------------------------------------
(1) The option granted to Dr. Schechter was granted in January 1999 under the
Company's 1994 Equity Incentive Plan at an exercise price of $7.81 per
share. The option expires ten years from the date of grant and vests with
respect to 25,000 shares in January in each of 2000 and 2001.
The following table provides information concerning unexercised options
held by Dr. Samour, Mr. Karloff, Dr. Riggi and Dr. Schechter as of December 31,
1999 (no options were exercised by these persons during the fiscal year ended
December 31, 1999):
AGGREGATED FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
Fiscal Year-End # Fiscal Year-End $ (1)
- --------------------------------------------------------------------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- --------------------------------------------------------------------------------
Carlos M. Samour (2) 695,080/ NA $ 685,050/ NA
Alvin J. Karloff 1,080,000/ NA $2,535,000/ NA
Stephen J. Riggi 180,000/ NA $ 0/ NA
Paul J. Schechter 60,000/170,000 $ 0/ 0
- --------------------------------------------------------------------------------
(1) The value of Dr. Samour's, Mr. Karloff's, Dr. Riggi's and Dr. Schechter's
in-the-money unexercised options at the end of the fiscal year ended
December 31, 1999 was determined by multiplying the number of options held
by the difference between the market price of the Common Stock underlying
the options on December 31, 1999 ($4.1875 per share) and the exercise price
of the options granted.
(2) Does not include options to purchase 300,000 shares of Common Stock granted
to Pierrette Samour, Dr. Samour's wife, of which he is deemed to have
beneficial ownership. If such 300,000 options were included, Dr. Samour
would be deemed to have had a total of 995,080 exercisable options as of
December 31, 1999, the value of which would have been $1,435,050.
38
DIRECTORS' COMPENSATION
Each non-employee Director of the Company receives compensation of $6,000
annually, $1,000 per meeting attended, $500 for each committee meeting attended,
$300 per telephone meeting and reimbursement of travel expenses in connection
with attending meetings of the Board of Directors. Dr. Bright receives
additional Director compensation of $1,000 per month. Dr. Samour and Mr. Karloff
do not receive any additional compensation for their services as Directors.
During 1999 no stock options were granted to any non-employee Director.
The Company currently compensates Dr. Davis at the rate of $3,000 per month
for medical and pharmaceutical consulting services.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has entered into employment agreements of indefinite length
effective as of November 1, 1992 with each of Dr. Samour and Mr. Karloff. Each
agreement currently provides for annual compensation of $250,000. Each agreement
also provides for a monthly automobile allowance of $500 net of taxes and a
payment, in lieu of retirement benefits, equal to 18% of the individual's base
salary. Further, each agreement provides for the payment of 12 months' salary in
the event the individual is terminated without cause. In addition, each
agreement was amended in 1999 to preclude the individual from competing with the
Company during his employment and for a period of two years thereafter, and from
disclosing confidential information.
The Company has entered into an employment agreement of indefinite length
effective as of June 8, 1999 with Dr. Schechter. The agreement currently
provides for annual compensation of $190,000 and for the payment of six months'
salary in the event he is terminated without cause. In addition, the agreement
precludes Dr. Schechter from competing with the Company during his employment
and for a period of two years thereafter, and from disclosing confidential
information.
The Company and Dr. Riggi entered into a two-year agreement effective as of
August 10, 1999 in connection with his resignation as an officer and Director of
the Company. Under the agreement, the Company has engaged Dr. Riggi as a
consultant. Payment to Dr. Riggi for the first six months was at the annualized
rate of $175,000, and for the remaining 18 months will be at the annualized rate
of $87,500. During the term of the agreement, Dr. Riggi will receive all
benefits provided to him by the Company as of August 10, 1999, other than
participation in the Company's 401(k) plan, vacation accrual and other paid time
off. The agreement also extends Dr. Riggi's right to exercise all outstanding
stock options awarded to him under the Company's 1994 Equity Incentive Plan, as
amended, for 24 months after August 10, 1999. Pursuant to the agreement and the
Employment Agreement between Dr. Riggi and the Company, dated March 25, 1996 and
the Proprietary Information and Inventions Agreement dated March 25, 1996, Dr.
Riggi is precluded from competing with the Company for a period of two years
commencing on August 10, 1999 and from disclosing confidential information.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Dr. Davis (Chairman), Dr.
Bright and Mr. Martin.
39
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 1, 2000, certain information
concerning ownership of the Company's common stock by (i) each person known by
the Company to be the beneficial owner of more than five percent (5%) of the
Company's common stock, (ii) each of the Company's Directors, (iii) each of the
executive officers named in the Summary Compensation Table under "Executive
Officers' Compensation' above and (iv) all Directors and executive officers as a
group. Except as otherwise indicated, the stockholders listed in the table have
sole voting and investment powers with respect to the shares indicated.
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED PERCENTAGE OF CLASS
- --------------------------------------------------------------------------------
Carlos M. and Pierrette E. Samour(2)(3)... 1,459,400 6.5%
Alvin J. Karloff(2)(3).................... 1,080,000 4.8%
Willard M. Bright(2) ..................... 86,800 *
Peter G. Martin(2) ....................... 59,270 *
Michael A. Davis(2)....................... 35,000 *
Paul J. Schechter(2)(3)................... 145,000 *
Stephen J. Riggi(2)(3).................... 180,000 *
Peter Janssen............................. 1,357,017 6.0%
1780 Route 106
Muttontown, NY 11791
All Directors and Officers as a Group
(7 persons)(2)(3)...................... 3,045,470 13.6%
- --------------------------------------------------------------------------------
* Less than one percent (1%).
(1) The address of Dr. Samour, Mrs. Samour, Mr. Karloff, Dr. Bright, Mr.
Martin, Dr. Davis, Dr. Schechter and Dr. Riggi is c/o the Company, 110
Hartwell Avenue, Lexington, Massachusetts 02421.
(2) Includes the following numbers of shares issuable upon the exercise of
stock options exercisable within 60 days: Dr. and Mrs. Samour-995,080; Mr.
Karloff-1,080,000; Dr. Bright-60,000; Mr. Martin-40,000; Dr. Davis-35,000;
Dr. Schechter-145,000; Dr. Riggi-180,000.
(3) Does not include the following numbers of vested shares in the Company's
401(k) Plan contributed by the Company to match portions of cash
contributions by the following Plan participants: Dr. and Mrs.
Samour-2,053; Mr. Karloff-1,524; Dr. Schechter-1,524; Dr. Riggi-1,121.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) The following Financial Statements as of December 31, 1999 and 1998 and
for the three years in the period ended December 31, 1999 are filed herewith:
Page
Independent Auditors' Report 19
Balance Sheets 20
Statements of Operations 21
Statements of Stockholders' Equity 22
Statements of Cash Flows 23-24
Notes to Financial Statements 25-33
(a)(2) The following Financial Statement Schedules are filed herewith:
None.
Schedules not included herein are omitted because they are not applicable
or the required information appears in the Financial Statements or Notes
thereto.
(a)(3) The following exhibits are filed herewith or are incorporated by
reference as may be indicated:
3a Certificate of Incorporation as amended, incorporated by reference to
exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
3b Amended and Restated By-Laws of the Company, incorporated by reference to
exhibits to the Company's Current Report on Form 8-K dated August 13, 1999.
4a Stock Purchase Warrant, incorporated by reference to exhibits to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
4b Rights Agreement dated as of August 13, 1999 between the Company and American
Stock Transfer & Trust Company, as Rights Agent, including Form of Certificate
of Designation with respect to the Series B Preferred Stock, par value $.01 per
share (attached as Exhibit A to the Rights Agreement), Form of Rights
Certificate (attached as Exhibit B to the Rights Agreement), and Summary of
Rights (attached as Exhibit C to the Rights Agreement), incorporated by
reference to exhibits to the Company's Current Report on Form 8-K dated August
13, 1999.
4c Common Stock Certificate, filed herewith.
10.10.1 1994 Equity Incentive Plan as amended November 14, 1997,
incorporated by reference to exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.*
41
10.10.2 1984 Non-Qualified Stock Option Plan as amended November 15,
1996, incorporated by reference to exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996.*
10.10.2 1984 Incentive Stock Option Plan as amended November 15, 1996,
incorporated by reference to exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.*
10a Form of Employment Agreement between the Company and Dr. Carlos M. Samour,
incorporated by reference to exhibits to the Company's Registration Statement
on Form S-1 (No. 33-62042).*
10a.1 Amendment to Employment Agreement between the Company and Dr. Carlos M.
Samour, incorporated by reference to exhibits to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999.*
10b Form of Employment Agreement between the Company and Mr. Alvin J. Karloff,
incorporated by reference to exhibits to the Company's Registration Statement on
Form S-1 (No. 33-62042).*
10b.1 Amendment to Employment Agreement between the Company and Mr. Alvin J.
Karloff, incorporated by reference to exhibits to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999.*
10c Form of Employment Agreement between the Company and Dr. Stephen J. Riggi,
incorporated by reference to exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.*
10c.1 Letter Agreement dated August 10, 1999 between the Company and Dr.
Stephen J. Riggi, incorporated by reference to exhibits to the Company's
Quarterly Report of Form 10-Q for the quarter ended September 30, 1999.*
10d Form of Employment Agreement between the Company and Dr. Paul J. Schechter,
incorporated by reference to exhibits to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.*
10e Form of Employment Agreement between the Company and Mr. Kenneth L. Rice,
filed herewith.*
10.11 Lease between GLB Lexington Limited Partnership and the Company dated as
of July 21, 1999, for space located at 110 Hartwell Avenue, Lexington, MA 02421,
filed herewith.
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
42
(b) No current reports on Form 8-K were filed in the three-month period ended
December 31, 1999.
- --------------------------
*Management contract or compensatory plan or arrangement
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MACROCHEM CORPORATION
Dated: March 30, 2000 By: /s/ Alvin J. Karloff
---------------------
Alvin J. Karloff
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 30, 2000. .
/s/ Alvin J. Karloff Chief Executive Officer, President,
- --------------------- and Director
Alvin J. Karloff
/s/ Kenneth L. Rice Vice President and Chief Financial Officer
- ---------------------
Kenneth L. Rice
/s/ Carlos M. Samour Chairman of the Board of Directors
- ---------------------- and Scientific Director
Carlos M. Samour, Ph.D.
/s/ Willard M. Bright Director
- ----------------------
Willard M. Bright, Ph.D.
/s/ Peter G. Martin Director
- ----------------------
Peter G. Martin
/s/ Michael A. Davis Director
- ----------------------
Michael A. Davis, M.D.
44