SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2003
or
[ ] 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
- --------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
110 Hartwell Avenue, Lexington, Massachusetts 02421-3134
--------------------------------------------------------
(Address of principal executive offices, Zip Code)
781-862-4003
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 7, 2003:
- ---------------------------- --------------------------------
Common Stock, $.01 par value 32,814,624
1
MACROCHEM CORPORATION
INDEX TO FORM 10-Q
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Page Number
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Balance Sheets (Unaudited)
September 30, 2003 and December 31, 2002 3
Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 2003 4
and 2002 (Unaudited)
Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 2003
and 2002 (Unaudited) 5
Notes to Unaudited Condensed Financial
Statements 6-10
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
Item 3 Quantitative and Qualitative Disclosures About Market Risk 16
Item 4 Control and Procedures 16
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 6 Exhibits and Reports on Form 8-K 18-20
SIGNATURES 21
EXHIBIT INDEX 22-23
2
ITEM 1. FINANCIAL STATEMENTS
MACROCHEM CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
(Amounts in thousands except share data)
September 30, December 31,
2003 2002
------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,651 $ 771
Short-term investments 5,162 8,118
Accounts receivable 11 40
Receivable due from related party --- 25
Prepaid expenses and other current assets 358 166
------------- ------------
Total current assets 9,182 9,120
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Property and equipment, net 262 376
------------- ------------
Other assets:
Patents, net 650 607
Deposit 29 29
------------- ------------
Total other assets 679 636
------------- ------------
Total assets $ 10,123 $ 10,132
============= ============
LIABILITIES
Current liabilities:
Accounts payable $ 349 $ 19
Accrued expenses 227 395
------------- ------------
Total current liabilities 576 414
Deferred rent 38 48
------------- ------------
Total liabilities 614 462
------------- ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, authorized and unissued, 6,000,000 shares --- ---
Common stock, $.01 par value, 60,000,000 shares authorized;
32,944,334 and 28,163,054
shares issued at September 30, 2003
and December 31, 2002, respectively 329 282
Additional paid-in capital 75,794 72,949
Accumulated deficit (66,214) (62,888)
Less treasury stock, at cost, 129,710 and 185,264
shares at September 30, 2003 and
December 31, 2002, respectively (400) (673)
-------------- -------------
Total stockholders' equity 9,509 9,670
-------------- -------------
Total liabilities and stockholders' equity $ 10,123 $ 10,132
============= ============
The accompanying notes are an integral part of these unaudited condensed
financial statements.
3
MACROCHEM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2003 and 2002
(Unaudited)
(Amounts in thousands except share and per share data)
For the three months ended September 30, For the nine months ended September 30,
---------------------------------------- ---------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Sale of patent $ --- $ --- $ 1,000 $ ---
Research contracts --- --- 10 43
------------ ----------- ----------- ----------
Total revenues --- --- 1,010 43
------------ ----------- ----------- ----------
Operating expenses:
Research and development 687 1,004 1,879 3,204
Marketing, general and administrative 936 555 2,502 2,841
Consulting fees with related parties --- 11 6 41
------------ ----------- ----------- ----------
Total operating expenses 1,623 1,570 4,387 6,086
------------ ----------- ----------- ----------
Loss from operations (1,623) (1,570) (3,377) (6,043)
------------ ----------- ----------- ----------
Other income (expense):
Interest income 14 42 51 162
------------ ----------- ----------- ----------
Total other income 14 42 51 162
------------ ----------- ----------- ----------
Net loss $ (1,609) $ (1,528) $ (3,326) $ (5,881)
============ =========== =========== ==========
Net loss per share -
basic and diluted $ (0.05) $ (0.05) $ (0.12) $ (0.21)
============ =========== =========== ==========
Weighted average shares 29,300,000 27,933,000 28,513,000 27,921,000
outstanding (basic and diluted)
The accompanying notes are an integral part of these unaudited condensed
financial statements.
4
MACROCHEM CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2003 and 2002
(Unaudited)
(Amounts in thousands)
For the nine months ended September 30,
2003 2002
---- ----
Cash flows from operating activities:
Net loss $ (3,326) $ (5,881)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 143 163
Stock-based compensation 56 230
401(k) contribution in Company common stock 37 74
Deferred rent (10) ---
Changes in assets and liabilities:
Accounts receivable 29 375
Receivable due from related party 25 ---
Prepaid expenses and other current assets (192) (130)
Accounts payable and accrued expenses 162 (951)
--------- ---------
Net cash used by operating activities (3,076) (6,120)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (43) (159)
Sales of short-term investments 3,000 5,904
Expenditures for property and equipment (3) (32)
Additions to patents (69) (39)
--------- ---------
Net cash provided by investing activities 2,885 5,674
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock (net of offering cots) 2,972 ---
Proceeds from exercise of common stock options 99 ---
Proceeds from exercise of warrants --- ---
--------- ---------
Net cash provided by financing activities 3,071 ---
--------- ---------
Net change in cash and cash equivalents 2,880 (446)
Cash and cash equivalents at beginning of period 771 697
--------- ---------
Cash and cash equivalents at end of period $ 3,651 $ 251
========= =========
The accompanying notes are an integral part of these unaudited condensed
financial statements.
5
MACROCHEM CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
---------------------
The financial statements included herein have been prepared by MacroChem
Corporation ("MacroChem" or the "Company") without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed
or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying unaudited financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows of the Company at the dates and for the periods indicated. The
unaudited financial statements included herein should be read in
conjunction with the audited financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.
The results disclosed in the Statement of Operations for the three and
nine months ended September 30, 2003 are not necessarily indicative of
the results to be expected for the full year.
MacroChem is a specialty pharmaceutical company engaged in the
development and commercialization of a portfolio of products through the
application of SEPA(R) (Soft Enhancer of Percutaneous Absorption), its
patented topical drug delivery technology.
(2) STOCK BASED COMPENSATION
------------------------
The Company applies the intrinsic value method of accounting for stock
options and awards granted to employees. The Company accounts for stock
options and awards to non-employees using the fair value method.
Under the intrinsic value method, compensation associated with stock
awards to employees is determined as the difference, if any, between the
current fair value of the underlying common stock on the date
compensation is measured and the price an employee must pay to exercise
the award. The measurement date for employee awards is generally the
date of grant. Under the fair value method, compensation associated with
stock awards to non-employees is determined based on the estimated fair
value of the award itself, measured using either current market data or
an established option pricing model. The measurement date for
non-employee awards is generally the date performance of services is
complete.
6
The Company intends to continue to use the intrinsic value method to
account for stock-based compensation to employees and directors. The
following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair value method to stock-based
employee and director compensation:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss as reported $ (1,609,000) $ (1,528,000) $ (3,326,000) $ (5,881,000)
Additional stock compensation
measured using the fair value
method 308,000 542,000 1,169,000 1,703,000
----------- ----------- ----------- -----------
Pro forma net loss $ (1,917,000) $ (2,070,000) $ (4,495,000) $ (7,584,000)
=========== =========== =========== ===========
Basic and diluted net loss per
share - as reported $ (0.05) $ (0.05) $ (0.12) $ (0.21)
=========== ============ =========== ===========
Basic and diluted net loss per
share - pro forma $ (0.07) $ (0.07) $ (0.16) $ (0.27)
=========== ============ =========== ===========
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:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Risk-free interest rate 3.16% 4.08%-4.53% 2.62%-3.16% 4.08%-4.53%
Expected life of option
grants 6 years 6 years 6 years 6 years
Expected volatility of
underlying stock 99% 154% 99% 154%
Expected dividend payment
rate, as a percentage of the
stock price on the date of grant --- --- --- ---
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.
(3) REVENUE RECOGNITION
-------------------
The Company's business seeks to generate revenues through the
development, commercialization and licensing of drug products based upon
the Company's intellectual property. Revenues derived or expected to be
derived from the sale, assignment, transfer, or licensing of patents or
other intellectual property are recognized over various periods based
upon the terms of the relevant agreement. Research contract revenues
consist of non-refundable research and development funding under
collaborative agreements with various corporate or government
organizations. Research and development funding is generally recognized
as revenue at the time the research and development activities are
performed under the terms of the related agreements, when the corporate
partner is obligated to pay and when no future performance obligations
7
exist. Payments received in advance of services provided result in the
deferral of revenue recognition to future periods.
(4) BASIC AND DILUTED LOSS PER SHARE
--------------------------------
The following table sets forth the computation of basic and diluted loss
per share:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator for basic and diluted
loss per share:
Net loss $ (1,609,000) $ (1,528,000) $ (3,326,000) $ (5,881,000)
============ ============ =========== ===========
Denominator for basic and diluted
loss per share:
Weighted average shares
outstanding 29,300,000 27,933,000 28,513,000 27,921,000
============ ============ =========== ===========
Net loss per share - basic and
diluted $ (0.05) $ (0.05) $ (0.12) $ (0.21)
============ ============ =========== ===========
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 the three and nine months ended September 30, 2003 and
2002 were 5,076,671 and 4,911,753, respectively.
(5) STOCKHOLDERS' EQUITY
--------------------
During the nine months ended September 30, 2003, no options were granted
or exercised under the 2001 Incentive Plan (the "Plan"). During the same
period, 506,202 options were canceled under the Plan.
Under the 1994 Equity Incentive Plan (the "1994 Plan"), 390,600 options
were granted and none were exercised during the nine-month period ended
September 30, 2003. During the same period, 182,950 options were
canceled under the 1994 Plan.
During the nine months ended September 30, 2003, 227,600 options were
exercised and 192,400 options were canceled under the 1984 Non-Qualified
Stock Option Plan.
During the nine months ended September 30, 2003, an option to purchase
500,000 shares of common stock was granted to Robert J. DeLuccia, the
Company's new Chief Executive Officer, of which 150,000 shares vest
immediately, with the remainder vesting over two years, with an exercise
price of $1.06 per share.
In October 2000, warrants to purchase common stock were issued in
connection with a private placement to two institutional investors. The
warrants issued consist of warrants to purchase an aggregate of 363,322
shares of common stock at a purchase price of $5.90 per share for five
years. Through September 30, 2003, none of the $5.90 warrants had been
8
exercised. The placement agent received a warrant to purchase 108,999
shares of common stock at a purchase price of $7.43 for five years. As
of September 30, 2003, 50,000 of the $7.43 warrants had been exercised.
None were exercised in the nine months ended September 30, 2003.
In July 2001, the Company sold 1,566,047 shares of its common stock for
approximately $10,148,000 in gross proceeds ($9,406,000 net of issuance
costs) in a private placement to institutional investors. The investors
in the July 2001 common stock transaction received warrants to purchase
an aggregate of 313,209 shares of common stock at a purchase price of
$8.995 per share. The purchase price per share was reduced to $7.845 in
September 2003 as a result of anti-dilution provisions in the warrants.
These warrants expire five years from the closing date and are callable
by the Company if the closing price of the stock is higher than $17.99
for 15 consecutive trading days at any time before expiration. As of
September 30, 2003, none of these $7.845 warrants had been exercised.
In September 2003, the Company sold 4,553,680 shares of its common stock
for approximately $3,246,000 in gross proceeds ($3,027,000 net of
issuance costs and before legal and accounting fees) in a private
placement to primarily institutional investors. The investors in the
September 2003 common stock transaction received warrants to purchase an
aggregate of 910,736 shares of common stock at a purchase price of
$1.173 per share for a period of three years. As of September 30, 2003,
none of the $1.173 investor warrants had been exercised. The placement
agent received a warrant to purchase 150,000 shares of common stock at a
purchase price of $1.173 for a period of three years. As of September
30, 2003, none of the $1.173 placement agent warrants had been
exercised.
(6) COMPREHENSIVE INCOME
--------------------
The Company reports comprehensive income in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which requires businesses to disclose
comprehensive income and its components in their general-purpose
financial statements. Comprehensive loss is equal to the Company's net
loss for the three and nine months ended September 30, 2003 and 2002.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In November 2002, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"
("EITF 00-21"), which provides guidance on the timing and method of
revenue recognition for sales arrangements that include the delivery of
more than one product or service. EITF 00-21 is effective prospectively
for arrangements entered into in fiscal periods beginning after June 15,
2003. The Company's adoption of the provisions of EITF 00-21 had no
effect on the Company's results of operations.
(8) SUBSEQUENT EVENTS
-----------------
On March 31, 2003, the Company received a notification from Nasdaq
indicating that, as of December 31, 2002, the Company's stockholders'
equity did not comply with the minimum $10,000,000 stockholders' equity
9
requirement for continued inclusion on The Nasdaq National Market. On
May 28, 2003, the Company received a further notification from Nasdaq
indicating that as a result of continued non-compliance with this rule,
the Company's Common Stock would be delisted from The Nasdaq National
Market at the opening of business on June 6, 2003 unless the Company
filed a hearing request with the Nasdaq Listing Qualifications Panel
before the end of business on June 4, 2003.
Following a hearing on July 17, 2003, the Nasdaq Listing Qualifications
Panel notified the Company that the Panel had determined to continue the
listing of our Common Stock on The Nasdaq National Market, provided that
we met certain conditions, including (a) the completion of a $3,000,000
equity financing no later than September 12, 2003, (b) achieving
compliance on or before October 15, 2003 with the minimum $10,000,000
stockholders' equity requirement and (c) filing a Form 10-K for the
fiscal year ending December 31, 2003 evidencing continued compliance
with such $10,000,000 requirement.
On September 10, 2003, we completed an equity financing which resulted
in gross proceeds of approximately $3,250,000. On September 29, 2003, we
received notification from Nasdaq that this equity financing satisfied
the first condition established by the Nasdaq Listing Qualifications
Panel.
On October 14, 2003, the Company filed a Form 8-K with the Securities
and Exchange Commission evidencing $10,107,136 in stockholders' equity
as of August 31, 2003. Subsequently, the Company received notification
from Nasdaq that this 8-K filing satisfied the second condition
established by the Nasdaq Listing Qualifications Panel and further
notifying the Company that the Panel had determined to continue the
listing of our Common Stock on The Nasdaq National Market, provided that
we meet certain additional conditions, including (a) filing a Form 10-Q
for the quarter ending September 30, 2003 evidencing compliance with the
minimum $10,000,000 stockholders' equity requirement and (b) filing a
Form 10-K for the fiscal year ending December 31, 2003 evidencing
continued compliance with such $10,000,000 requirement.
Although the Company did not have a minimum of $10,000,000 in
stockholders' equity at September 30, 2003, the Company is in
discussions with Nasdaq regarding its plan to regain compliance with the
stockholders' equity requirement. There can be no assurance that the
Company will be able to regain or maintain compliance with the
stockholders' equity requirement or any other listing requirement nor
can there be any assurance that the Nasdaq Listing Qualifications Panel
will decide to allow the Company to remain listed on The Nasdaq National
Market. If the Company is unable to regain compliance, the Company will
consider other potential actions, including applying to transfer its
common stock to The Nasdaq SmallCap Market. A delisting of the Company's
common stock from the Nasdaq National Market could reduce the liquidity
of an investment in the Company's common stock and affect the Company's
ability to raise additional funds in the future.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
- -------
MacroChem's primary business is the development of specialty pharmaceutical
products for commercialization by employing SEPA(R) (Soft Enhancement of
Percutaneous Absorption), its patented drug delivery technology. SEPA compounds,
when properly combined with drugs, provide pharmaceutical formulations (creams,
gels, lacquers, solutions, etc.) that enhance the transdermal delivery of drugs
into the skin or into the bloodstream. The Company is currently developing
investigational new drugs for the treatment of erectile dysfunction
(Topiglan(R)), testosterone deficiency (Opterone(TM)) and fungal infections of
the toenails (EcoNail(TM)). Our technologies are currently in discovery or
developmental stages and must undergo a rigorous regulatory approval process,
which includes extensive preclinical and clinical testing, to demonstrate safety
and efficacy before any resulting product can be marketed. To date, neither the
Food and Drug Administration ("FDA") nor any of its international equivalents
has approved any of our technologies for marketing. The Company currently
derives no significant revenue from product sales, royalties or license fees.
The Company is developing specific SEPA formulations for use with proprietary
and non-proprietary drugs manufactured by other pharmaceutical companies, and
seeks to commercialize these products through the formation of partnerships,
strategic alliances and licensing arrangements with those companies. If the
Company is unable to form any strategic alliances, partnerships or licensing
arrangements, its business may be materially adversely affected. In addition, if
strategic relationships are formed, the Company may not be able to control the
resources and attention that its partners devote to the products.
The Company's results of operations can 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 our research, marketing and administrative efforts. 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.
A significant portion of our research and development expenses (including
employee payroll and related benefits, laboratory supplies, travel, dues and
subscriptions, clinical trial costs, temporary help costs, consulting costs and
allocable costs such as occupancy and depreciation) are not tracked by project
as they benefit multiple projects or our drug delivery technologies in general.
Each of our research and development programs are subject to risks and
uncertainties, including the requirement to seek regulatory approval, that are
outside of our control. Moreover, the product candidates identified in these
research and development programs, which are currently in discovery or
developmental stages, must overcome significant technological, manufacturing and
marketing challenges before they can be successfully commercialized. As a result
of these risks and uncertainties, we are unable to predict with any certainty
the period in which material net cash inflows from such projects could be
expected to commence or the completion date of these programs.
11
These risks and uncertainties also prevent us from estimating with any certainty
the specific timing and future costs of our clinical development programs,
although historical trends at similarly situated companies indicate that
expenses tend to increase in later stages of development. Our failure to obtain
requisite governmental approvals timely or at all will delay or preclude us from
licensing or marketing our products or limit the commercial use of our products,
which could adversely affect our business, financial condition and results of
operations.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Note 1 of the consolidated financial statements included within the Company's
Form 10-K for the year ended December 31, 2002, includes a summary of the
significant accounting policies and methods used in the preparation of our
consolidated financial statements. The following is a brief discussion of the
more significant accounting policies and methods used by the Company.
The Company's discussion and analysis of its financial condition and results of
operations are based upon its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements. As more fully described in the notes to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002, the Company's business seeks to generate revenues
through the development, commercialization and licensing of drug products based
upon the Company's intellectual property. Revenues derived or expected to be
derived from the sale, assignment, transfer, or licensing of patents or other
intellectual property are recognized over various periods based upon the terms
of the relevant agreement. Research and development funding is generally
recognized as revenue at the time the research and development activities are
performed under the terms of the related agreements, when the counter-party is
obligated to pay, and when no future performance obligation exists. Research and
development revenue is billed on a cost reimbursement basis, which includes
direct costs incurred in connection with research activities and an allocation
of certain other costs incurred by the Company. Revenues from the sale,
assignment, transfer, or licensing of patents or other intellectual property are
recognized over various periods based upon the terms of the relevant agreement.
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 using the straight-line method.
Accumulated patent costs and deferred patent application costs related to
patents that are considered to have limited future value are charged to
operations.
RESULTS OF OPERATIONS
- ---------------------
There were no revenues for the three-month periods ended September 30, 2003 and
September 30, 2002. Revenues, consisting primarily of proceeds from the sale of
a patent, were $1,010,000 for the nine-month period ended September 30, 2003
compared to $43,000 in the same period of the prior year. The increase over the
prior year's nine-month period is the result of the Company having obtained a
payment in connection with the sale of a patent.
12
Research and development expenses decreased $317,000, or 32%, to $687,000 in the
three-month period ended September 30, 2003 from $1,004,000 in the three-month
period ended September 30, 2002. The decrease is primarily attributable to a
reduction in personnel expenses of approximately $274,000 relating to the
reduction of clinical and research staff levels in November of 2002. For the
nine-month period ended September 30, 2003, research and development expenses
decreased $1,325,000, or 41%, to $1,879,000 from $3,204,000 in the same period
of the prior year. The decrease is primarily attributable to a reduction in
personnel expenses of $950,000 relating to the reduction in clinical and
research staff levels in November 2002 and approximately $128,000 more being
spent on clinical trials in the first nine months of 2002 than in 2003. The
level of research and development expenses is highly dependent on the timing and
extent of new and ongoing research performed in our in-house laboratories as
well as outside contract laboratories. Research and development spending is
expected to increase slightly over the remainder of the year as our ongoing
clinical trial of Topiglan progresses and we initiate new clinical trials.
Marketing, general and administrative expenses increased $381,000, or 69%, to
$936,000 in the three months ended September 30, 2003 from $555,000 in the
three-month period ended September 30, 2002. The increase is primarily
attributable to an increase in consulting fees of $120,000 during the three
months ended September 30, 2003 and the reversal of an employee incentive
compensation accrual of $228,000 in the three months ended September 30, 2002.
For the nine-month period ended September 30, 2003, marketing, general and
administrative expenses decreased $339,000, or 12%, to $2,502,000 from
$2,841,000 in the same period in the prior year. The decrease is primarily
attributable to the reduction in staff implemented in November of 2002,
resulting in a savings of approximately $487,000 partially offset by an increase
in consulting fees of $75,000 primarily relating to investor relations and
business development in the nine month period ended September 30, 2003.
Marketing, general and administrative spending is expected to increase slightly
over the remainder of the year due to increased expenses associated with
business development and investor relations activities.
Other income decreased $28,000, or 67%, to $14,000 in the three-month period
ended September 30, 2003 from $42,000 in the three-month period ended September
30, 2002. Other income decreased $111,000, or 69%, to $51,000 in the nine-month
period ended September 30, 2003 from $162,000 in the nine-month period ended
September 30, 2002. The decrease is due to an average lower invested balance of
cash, cash equivalents and short-term investments resulting from funds used in
Company operations and a decrease in overall return rates.
For the reasons described above, net loss increased $81,000, or 5%, to
$1,609,000 in the three-month period ended September 30, 2003 from $1,528,000 in
the three-month period ended September 30, 2002 and decreased $2,555,000, or
43%, to $3,326,000 in the nine-month period ended September 30, 2003 from
$5,881,000 in the same period of the prior year.
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 patents, products and test materials. During the first nine
months of 2003, the Company received net proceeds from the exercise of stock
options of approximately $99,000 and there were no stock options exercised for
13
the nine months ended September 30, 2002. Also, the Company recognized revenue
of $1,010,000 for the nine months ended September 30, 2003, primarily from the
sale of U.S. Patent No. 6,495,124 B1 covering antifungal nail lacquers
containing a pentadecalactone drug-absorption excipient. This patent represented
a non-strategic asset not related to the Company's core SEPA technology.
Accordingly, we believe the sale of this patent will not materially adversely
affect the Company's future operations, cash flows and financial position.
During the first nine months of 2002, the Company recognized $43,000 of revenues
from a research grant.
At September 30, 2003, working capital was approximately $8,606,000, compared to
$8,706,000 at December 31, 2002. The decrease in the Company's working capital,
which was partially offset by $3,027,000 (net of issuance costs and before legal
and accounting fees) received from an equity financing in September 2003, was
due primarily to the use of funds for operations and resulted in a lower balance
of cash, cash equivalents and short-term investments. 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 additional funds through the private or public sale of its securities,
the Company's working capital may be utilized primarily to fund its operating
activities.
There were $3,000 of capital expenditures and $69,000 of patent development
costs for the nine months ended September 30, 2003. The Company anticipates
additional capital and patent expenditures of approximately $75,000 for the
remainder of the current year.
On July 10, 2003, the Board of Directors approved retention payments for certain
key employees, including certain executive officers, in order to enhance
retention of those employees. Payments of up to $80,000 and $155,000 in the
aggregate will be paid on January 1, 2004 and July 1, 2004, respectively.
On March 31, 2003, the Company received a notification from Nasdaq indicating
that, as of December 31, 2002, the Company's stockholders' equity did not comply
with the minimum $10,000,000 stockholders' equity requirement for continued
inclusion on The Nasdaq National Market. On May 28, 2003, the Company received a
further notification from Nasdaq indicating that as a result of continued
non-compliance with this rule, the Company's Common Stock would be delisted from
The Nasdaq National Market at the opening of business on June 6, 2003 unless the
Company filed a hearing request with the Nasdaq Listing Qualifications Panel
before the end of business on June 4, 2003.
Following a hearing on July 17, 2003, the Nasdaq Listing Qualifications Panel
notified the Company that the Panel had determined to continue the listing of
our Common Stock on The Nasdaq National Market, provided that we met certain
conditions, including (a) the completion of a $3,000,000 equity financing no
later than September 12, 2003, (b) achieving compliance on or before October 15,
2003 with the minimum $10,000,000 stockholders' equity requirement and (c)
filing a 10-K for the fiscal year ending December 31, 2003 evidencing continued
compliance with such $10,000,000 requirement.
On September 10, 2003, we completed an equity financing which resulted in gross
proceeds of approximately $3,250,000. On September 29, 2003, we received
notification from Nasdaq that this equity financing satisfied the first
condition established by the Nasdaq Listing Qualifications Panel.
14
On October 14, 2003, the Company filed a Form 8-K with the Securities and
Exchange Commission evidencing $10,107,136 in stockholders' equity as of August
31, 2003. Subsequently, the Company received notification from Nasdaq that this
8-K filing satisfied the second condition established by the Nasdaq Listing
Qualifications Panel and further notifying the Company that the Panel had
determined to continue the listing of our Common Stock on The Nasdaq National
Market, provided that we meet certain additional conditions, including (a)
filing a 10-Q for the quarter ending September 30, 2003 evidencing compliance
with the minimum $10,000,000 stockholders' equity requirement and (b) filing a
10-K for the fiscal year ending December 31, 2003 evidencing continued
compliance with such $10,000,000 requirement.
Although the Company did not have a minimum of $10,000,000 in stockholders'
equity at September 30, 2003, the Company is in discussions with Nasdaq
regarding its plan to regain compliance with the stockholders' equity
requirement. There can be no assurance that the Company will be able to regain
or maintain compliance with the stockholders' equity requirement or any other
listing requirement nor can there be any assurance that the Nasdaq Listing
Qualifications Panel will decide to allow the Company to remain listed on The
Nasdaq National Market. If the Company is unable to regain compliance, the
Company will consider other potential actions, including applying to transfer
its common stock to The Nasdaq SmallCap Market. A delisting of the Company's
common stock from the Nasdaq National Market could reduce the liquidity of an
investment in the Company's common stock and affect the Company's ability to
raise additional funds in the future.
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 clinical testing, proprietary
manufacturing methods and advanced technologies; the ability of the Company to
enter into 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 may 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.
The Company believes that its existing cash, cash equivalents and short term
investments will be sufficient to meet its operating expenses and capital
expenditure requirements for 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.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In November 2002, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"), which
provides guidance on the timing and method of revenue recognition for sales
arrangements that include the delivery of more than one product or service. EITF
00-21 is effective prospectively for arrangements entered into in fiscal periods
15
beginning after June 15, 2003. The Company's adoption of the provisions of EITF
00-21 had no effect on the Company's results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As of September 30, 2003, the Company is exposed to market risks which relate
primarily to changes in U.S. interest rates. The Company's cash equivalents and
short-term investments are subject to interest rate risk and will decline in
value if interest rates increase. Due to the short duration of these financial
instruments, generally one year 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 not have a material effect on our Statement of
Operations or Cash Flows for the nine months ended September 30, 2003.
ITEM 4. CONTROL AND PROCEDURES
As of the end of the period covered by this report, we carried out a review,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures (as defined in the SEC rules promulgated
under the Securities Exchange Act of 1934, as amended), which are designed to
ensure that information required to be disclosed in our Securities and Exchange
Commission reports is properly and timely recorded, processed, summarized and
reported. Based upon that review, our Chief Executive Officer and Chief
Financial Officer concluded that these controls and procedures are operating in
an effective manner as of September 30, 2003.
There were no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2003 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
16
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 THE FOLLOWING: THE COMPANY'S HISTORY
OF OPERATING LOSSES AND NEED FOR CONTINUED WORKING CAPITAL; TECHNOLOGICAL
UNCERTAINTY RELATING TO TRANSDERMAL DRUG DELIVERY SYSTEMS AND THE EARLY STAGE OF
DEVELOPMENT OF THE COMPANY'S PROPOSED PRODUCTS; UNCERTAINTIES RELATING TO
GOVERNMENT REGULATION AND REGULATORY APPROVALS; UNCERTAINTIES RELATED TO
CLINICAL TRIALS OF THE COMPANY'S PROPOSED PRODUCTS; THE COMPANY'S DEPENDENCE ON
THIRD PARTIES FOR COMMERCIALIZATION; NO ASSURANCE OF LICENSE ARRANGEMENTS; THE
COMPANY'S DEPENDENCE ON THIRD PARTIES FOR THE FDA APPLICATION PROCESS; THE LACK
OF SUCCESS OF THE COMPANY'S PRIOR DEVELOPMENT EFFORTS; THE COMPANY'S NEED FOR
SIGNIFICANT ADDITIONAL PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING; THE
COMPANY'S RELIANCE ON KEY EMPLOYEES, THE LIMITED PERSONNEL OF THE COMPANY AND
ITS DEPENDENCE ON ACCESS TO SCIENTIFIC TALENT; UNCERTAINTIES RELATING TO
COMPETITION, PATENTS AND PROPRIETARY TECHNOLOGY; THE COMPANY'S LACK OF
EXPERIENCED MARKETING PERSONNEL AND DEPENDENCE ON THIRD PARTIES FOR MARKETING
AND DISTRIBUTION; THE COMPANY'S DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING;
UNCERTAINTIES RELATING TO RISKS OF PRODUCT LIABILITY CLAIMS, LACK OF PRODUCT
LIABILITY INSURANCE, AND EXPENSE AND DIFFICULTY OF OBTAINING ADEQUATE INSURANCE
COVERAGE; UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS; AND OTHER
FACTORS. ADDITIONAL INFORMATION ON THESE AND OTHER FACTORS WHICH COULD AFFECT
THE COMPANY'S ACTUAL RESULTS AND EXPERIENCE ARE INCLUDED IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002 AND, IN PARTICULAR, THE
SECTION ENTITLED "RISK FACTORS".
17
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 10, 2003, we issued 4,553,680 shares of our common stock and
warrants to purchase our common stock for approximately $3,246,000 in gross
proceeds ($3,027,000 net of issuance costs and before legal and accounting fees)
to primarily institutional investors. The warrants sold in the offering consist
of warrants to purchase an aggregate of 910,736 shares of common stock at a
purchase price of $1.173 per share for a period of three years. The placement
agent received a warrant to purchase 150,000 shares of common stock at a
purchase price of $1.173 for a period of three years.
The transaction described above was effected in reliance upon the exemption from
the registration requirements of the Securities Act of 1933 provided by Section
4(2) on the basis that such transactions did not involve any public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on July 10, 2002. At the
meeting (i) all five director nominees were elected, (ii) the appointment of
Deloitte & Touche LLP as the Company's independent auditors was ratified and
(iii) amendments to the Company's certificate of incorporation to effect a
reverse split of the Company's Common Stock, pursuant to which any whole number
of outstanding shares between, and including, two and four would be combined
into one share were approved and the Company's Board of Directors was
authorized, in its discretion, to select and file one such amendment.
(i) The following directors were elected for one-year terms by the
votes indicated:
John L. Zabriskie, 25,810,118 for, 542,134 against or withheld;
Peter G. Martin, 25,811,968 for, 540,284 against or withheld;
Michael A. Davis, 25,769,562 for, 582,690 against or withheld;
Robert J. DeLuccia, 25,744,357 for, 607,895 against or withheld;
and Paul S. Echenberg, 25,786,468 for, 565,784 against or withheld.
(ii) The appointment of Deloitte & Touche LLP was ratified by a vote of
26,056,497 for, 217,887 against and 77,867 abstaining.
(iii) Amendments to the Company's certificate of incorporation to effect
a reverse split of the Company's Common Stock were approved and the
Company's Board of Directors was authorized, in its discretion, to
select and file one such amendment by a vote of 23,248,500 for,
2,895,441 against and 208,311 abstaining.
As of September 30, 2003, the Company's Board of Directors had not
selected or filed any of the amendments to effect a reverse split.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following is a list of exhibits to this Quarterly Report on Form 10-Q:
18
3.1 Certificate of Incorporation as amended, incorporated by reference to
Exhibit 3a to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 (File No. 0-13634).
3.2 Amended and Restated By-Laws of the Company, incorporated by reference
to Exhibit 5 to the Company's Current Report on Form 8-K dated August 13,
1999 (File No. 0-13634).
10.1 Form of Employment Agreement between the Company and Robert J.
DeLuccia.
10.2 MacroChem Corporation Option Certificate reflecting grant by the
Company to Robert J. DeLuccia.
10.3 Form of Retention Agreement between the Company and Bernard R.
Patriacca.
10.4 Form of Retention Agreement between the Company and Melvin A. Snyder.
10.5 Form of Retention Agreement between the Company and Thomas C.K. Chan.
10.6 Form of Retention Agreement between the Company and Glenn E. Deegan.
10.7 Securities Purchase Agreement, dated as of September 10, 2003, by and
among MacroChem Corporation and the purchasers listed on Schedule A
thereto, incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated September 12, 2003 (File No. 0-13634).
10.8 Form of Warrant dated as of September 10, 2003, incorporated by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated
September 12, 2003 (File No. 0-13634).
10.9 Registration Rights Agreement, dated as of September 10, 2003, by and
among MacroChem Corporation and the investors listed on the signature page
thereto, incorporated by reference to Exhibit 10.3 to the Company's Current
Report on Form 8-K dated September 12, 2003 (File No. 0-13634).
31.1 Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
19
32.2 Certification of Principal Financial Officer Pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) A report on Form 8-K was filed on September 9, 2003 detailing
communications received from the Nasdaq Listing Qualifications Panel concerning
continued listing of the Company's Common Stock on The Nasdaq National Market.
A report on Form 8-K was filed on September 12, 2003 disclosing the Company's
equity financing obtained on September 10, 2003.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MacroChem Corporation
---------------------
(Registrant)
November 14, 2003 /s/ Robert J. DeLuccia
--------------------------------------
Robert J. DeLuccia
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Bernard R. Patriacca
--------------------------------------
Bernard R. Patriacca
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
21
EXHIBIT INDEX
The following is a list of exhibits to this Quarterly Report on Form 10-Q:
3.1 Certificate of Incorporation as amended, incorporated by reference to
Exhibit 3a to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 (File No. 0-13634).
3.2 Amended and Restated By-Laws of the Company, incorporated by reference
to Exhibit 5 to the Company's Current Report on Form 8-K dated August 13,
1999 (File No. 0-13634).
10.1 Form of Employment Agreement between the Company and Robert J.
DeLuccia.
10.2 MacroChem Corporation Option Certificate reflecting grant by the
Company to Robert J. DeLuccia.
10.3 Form of Retention Agreement between the Company and Bernard R.
Patriacca.
10.4 Form of Retention Agreement between the Company and Melvin A. Snyder.
10.5 Form of Retention Agreement between the Company and Thomas C.K. Chan.
10.6 Form of Retention Agreement between the Company and Glenn E. Deegan.
10.7 Securities Purchase Agreement, dated as of September 10, 2003, by and
among MacroChem Corporation and the purchasers listed on Schedule A
thereto, incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated September 12, 2003 (File No. 0-13634).
10.8 Form of Warrant dated as of September 10, 2003, incorporated by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated
September 12, 2003 (File No. 0-13634).
10.9 Registration Rights Agreement, dated as of September 10, 2003, by and
among MacroChem Corporation and the investors listed on the signature page
thereto, incorporated by reference to Exhibit 10.3 to the Company's Current
Report on Form 8-K dated September 12, 2003 (File No. 0-13634).
31.1 Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
22
32.1 Certification of Principal Executive Officer Pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
23