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, 2004
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 1, 2004:
- ---------------------------- --------------------------------
Common Stock, $.01 par value 38,826,683
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
September 30, 2004 and December 31, 2003 (Unaudited) 3
Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 2004
and 2003 (Unaudited) 4
Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 2004
and 2003 (Unaudited) 5
Notes to Unaudited Condensed Financial
Statements 6-11
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
Item 4 Control and Procedures 18-19
PART II OTHER INFORMATION
Item 6 Exhibits 20
SIGNATURES 21
EXHIBIT INDEX 22
2
Item 1. Financial Statements
MACROCHEM CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2004 2003
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,736,194 $ 3,839,772
Short-term investments 1,180,397 3,169,523
Prepaid expenses and other current assets 333,674 316,066
------------- ------------
Total current assets 8,250,265 7,325,361
------------- ------------
Property and equipment, net 186,156 227,659
------------- ------------
Other assets:
Patents, net 510,880 667,435
Deposit --- 29,193
------------- ------------
Total other assets 510,880 696,628
------------- ------------
Total assets $ 8,947,301 $ 8,249,648
============= ============
LIABILITIES
Current liabilities:
Accounts payable $ 385,767 $ 358,097
Accrued expenses 531,301 621,868
------------- ------------
Total current liabilities 917,068 979,965
Deferred rent 13,771 33,363
------------- ------------
Total liabilities 930,839 1,013,328
------------- ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, authorized and unissued, 6,000,000 shares --- ---
Common stock, $.01 par value, 100,000,000 shares authorized;
38,903,983 and 32,944,334
shares issued at September 30, 2004
and December 31, 2003, respectively 389,040 329,443
Additional paid-in capital 82,970,771 75,778,945
Unearned compensation --- (2,451)
Accumulated deficit (75,133,578) (68,549,996)
Less treasury stock, at cost, 77,300 and 116,302
shares at September 30, 2004 and
December 31, 2003, respectively (209,771) (319,621)
------------- ------------
Total stockholders' equity 8,016,462 7,236,320
------------- ------------
Total liabilities and stockholders' equity $ 8,947,301 $ 8,249,648
============= ============
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, 2004 and 2003
(Unaudited)
For the three months ended Sept. 30, For the nine months ended Sept. 30,
------------------------------------ -----------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Sale of patent $ --- $ --- $ --- $ 1,000,000
Research contracts --- --- --- 10,031
---------- ---------- ---------- ----------
Total revenues --- --- --- 1,010,031
---------- ---------- ---------- ----------
Operating expenses:
Research and development 1,003,510 687,142 3,509,769 1,878,329
Marketing, general and administrative 934,438 935,845 3,153,167 2,501,832
Consulting fees with related parties --- --- --- 6,000
---------- ---------- ---------- ----------
Total operating expenses 1,937,948 1,622,987 6,662,936 4,386,161
---------- ---------- ---------- ----------
Loss from operations ( 1,937,948) ( 1,622,987) ( 6,662,936) ( 3,376,130)
---------- ---------- ---------- ----------
Other income:
Interest income 26,464 13,539 79,354 50,054
Total other income
---------- ---------- ---------- ----------
26,464 13,539 79,354 50,054
---------- ---------- ---------- ----------
Net loss $( 1,911,484) $( 1,609,448) $( 6,583,582) $( 3,326,076)
========== ========== ========== ==========
Net loss per share -
basic and diluted $( 0.05) $( 0.05) $( 0.18) $( 0.12)
========== ========== ========== ==========
Weighted average shares 38,788,748 29,299,636 37,273,118 28,512,783
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, 2004 and 2003
(Unaudited)
For the nine months ended September 30,
---------------------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net loss $(6,583,582) $(3,326,076)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 150,390 142,841
Stock-based compensation 190,552 57,147
401(k) contribution made in Company common stock 48,082 37,322
Deferred rent ( 19,592) ( 9,489)
Reduction to capitalized patents 124,853 ---
Changes in assets and liabilities:
Accounts receivable --- 29,508
Receivable due from related party --- 25,057
Prepaid expenses and other current assets ( 17,608) ( 192,486)
Accounts payable and accrued expenses ( 62,897) 160,666
Deposits 29,193 ---
--------- ---------
Net cash used in operating activities (6,140,609) (3,075,510)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments ( 10,873) ( 43,247)
Sales of short-term investments 2,000,000 3,000,000
Expenditures for patents ( 30,707) ( 3,462)
Expenditures for property and equipment ( 46,479) ( 68,741)
--------- ---------
Net cash provided by investing activities 1,911,941 2,884,550
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock (net of offering costs) 6,681,274 2,971,505
Proceeds from exercise of common stock options --- 99,575
Proceeds from exercise of warrants 443,816 ---
--------- ---------
Net cash provided by financing activities 7,125,090 3,071,080
--------- ---------
Net change in cash and cash equivalents 2,896,422 2,880,120
Cash and cash equivalents at beginning of period 3,839,772 771,046
--------- ---------
Cash and cash equivalents at end of period $ 6,736,194 $ 3,651,166
========= =========
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 condensed 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 condensed 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, 2003.
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
September 30, 2004, the Company's accumulated deficit was approximately
$75.1 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 cash, cash equivalents and short-term investments of $7,916,591 at
September 30, 2004, will be sufficient to fund operations under the
Company's current plan into June 2005. To continue to operate, the
Company will require significant additional funding. The Company is
assessing opportunities to raise capital and expects to continue
financing operations through sales of securities, strategic alliances
and other financing vehicles, if any, that might become available to
the Company on terms that it deems acceptable.
The results disclosed in the Statement of Operations for the three and
nine months ended September 30, 2004 are not necessarily indicative of
the results to be expected for the full year.
(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.
6
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.
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 assuming the Company had applied the fair value method to
stock-based employee and director compensation:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss as reported $(1,911,484) $(1,609,448) $(6,583,582) $(3,326,076)
Add: Stock-based employee compensation
expense included in reported net loss --- 18,892 7,325 56,676
Deduct: Total stock-based employee
compensation measured using the
fair value method ( 125,290) ( 308,266) ( 569,635) (1,168,520)
--------- --------- --------- ---------
Pro forma net loss $(2,036,774) $(1,898,822) $(7,145,892) $(4,437,920)
========= ========= ========= =========
Basic and diluted net loss per share -
as reported $( 0.05) $( 0.05) $( 0.18) $( 0.12)
========= ========= ========= =========
Basic and diluted net loss per share -
pro forma $( 0.05) $( 0.06) $( 0.19) $( 0. 16)
========= ========= ========= =========
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 Sept. 30, Nine Months Ended Sept. 30,
----------------------------- ----------------------------
2004 2003 2004 2003
---- ---- ---- ----
Risk-free interest rate 3.05% - 4.14% 2.62% - 3.17% 3.05% - 4.14% 2.62% - 3.17%
Expected life of option
grants 6 years 6 years 6 years 6 years
Expected volatility of
underlying stock 97% 99% 97% 99%
Expected dividend payment
rate, as a percentage of the
stock price on the date of grant --- --- --- ---
7
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 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 Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Numerator for basic and diluted
loss per share:
Net loss $( 1,911,484) $( 1,609,448) $( 6,583,582) $( 3,326,076)
========== ========== ========== ==========
Denominator for basic
and diluted loss per share:
Weighted average shares
outstanding 38,788,748 29,299,636 37,273,118 28,512,783
========== ========== ========== ==========
Net loss per share - basic and
diluted $( 0.05) $( 0.05) $( 0.18) $( 0.12)
========== ========== ========== ==========
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 nine months ended September 30, 2004 and 2003 were
6,553,611 and 5,076,671, respectively.
8
(5) PATENTS
-------
On April 14, 2004, the Company announced that preliminary data from its
Phase 2 pharmacodynamic study of Topiglan(R), a topical cream for
erectile dysfunction, demonstrated that Topiglan did not meet the
study's primary clinical endpoints. The Company has conducted a more
complete review of the data and has no plans for further clinical
studies of Topiglan at this time. Accordingly, the Company recorded a
reduction of $124,853 to the carrying value of certain patent assets
related to Topiglan in June 2004.
(6) STOCKHOLDERS' EQUITY
--------------------
During the nine months ended September 30, 2004, 31,000 options were
granted and no options were exercised or cancelled under the 2001
Incentive Plan (the "Plan").
Under the 1994 Equity Incentive Plan (the "1994 Plan"), 353,000 options
were granted and none were exercised during the nine-month period ended
September 30, 2004. During the same period, 483,000 options were
canceled or expired under the 1994 Plan.
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 363,332
shares of common stock at a purchase price of $5.90 per share for five
years. As a result of subsequent financing transactions, the exercise
price of these warrants has been adjusted to $4.64 in accordance with
the terms of the warrants. Through September 30, 2004, none of these
warrants had been exercised. The placement agent for this transaction
received a warrant to purchase 108,999 shares of common stock at a
purchase price of $7.43 for five years. As a result of subsequent
financing transactions, the exercise price of these warrants has been
adjusted to $5.74 in accordance with the terms of the warrants. As of
September 30, 2004, 50,000 of these warrants had been exercised. None
were exercised in the nine months ended September 30, 2004.
In July 2001, the Company sold 1,566,047 shares of its common stock for
approximately $10,148,000 in gross proceeds ($9,406,291 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. As a result of subsequent financing transactions, the
exercise price of these warrants has been adjusted to $6.94 in
accordance with the terms of 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, 2004,
none of these warrants had been exercised.
9
In September 2003, the Company sold 4,553,680 shares of its common
stock for approximately $3,246,000 in gross proceeds ($2,971,505 net of
issuance costs) 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, 2004, 378,360 of these investor warrants had
been exercised. The placement agent for this transaction 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, 2004, none
of these placement agent warrants had been exercised.
On March 9, 2004, the Company sold 5,402,000 shares of its common stock
for $7,292,700 in gross proceeds ($6,681,274 net of issuance costs) in
a private placement to institutional investors. The investors also
received warrants to purchase an aggregate of 1,080,400 shares of
common stock at a purchase price of $2.09 per share expiring five years
from the closing date. As of September 30, 2004, none of these warrants
had been exercised.
On June 23, 2004, at the Company's Annual Meeting of Stockholders, the
Company's stockholders approved amendments to the Company's 2001
Incentive Plan to increase the number of shares of Common Stock
authorized for issuance under the Incentive Plan by 4,000,000,
resulting in a total amount of 4,185,800 shares available for grant
under the Incentive Plan as of the September 30, 2004. The Company's
stockholders also approved a Certificate of Amendment to the Company's
Certificate of Incorporation, as amended, to increase the number of
authorized shares of capital stock from 60,000,000 shares of Common
Stock and 6,000,000 shares of Preferred Stock to 100,000,000 shares of
Common Stock and 6,000,000 shares of Preferred Stock. On August 6,
2004, the Company filed the Certificate of Amendment to its Certificate
of Incorporation with the Secretary of State of the State of Delaware.
(7) COMPREHENSIVE LOSS
------------------
Comprehensive loss is equal to the Company's net loss for the three and
nine months ended September 30, 2004 and 2003.
(8) SUBSEQUENT EVENT
----------------
On October 18, 2004, the Company received written notice from Nasdaq
stating that for the previous 30 consecutive business days the bid
price of the Company's common stock had closed below the minimum $1.00
per share requirement for continued inclusion in The Nasdaq SmallCap
Market under Marketplace Rule 4310(c)(4). In accordance with
Marketplace Rule 4310(c)(8), the Company was provided 180 calendar
days, or until April 18, 2005, to regain compliance. In order to regain
compliance, the company must demonstrate a closing bid price for its
common stock of $1.00 per share or more for a minimum of 10 consecutive
business days.
10
The written notice further provided that if compliance with the $1.00
minimum bid price requirement cannot be demonstrated by the company by
April 18, 2005, the Nasdaq Staff will grant the Company an additional
180 calendar days to regain compliance if, at that time, the Company
meets The Nasdaq SmallCap Market initial listing requirements as set
forth in Marketplace Rule 4310(c), except for the $1.00 minimum bid
price requirement. The written notice provided that if the Company has
not regained compliance with the $1.00 minimum bid price requirement
during the second 180 day compliance period, but again satisfies The
Nasdaq SmallCap Market initial listing requirements as set forth in
Marketplace Rule 4310(c), except for the $1.00 minimum bid price
requirement, the Company may be afforded an additional compliance
period, up to its next shareholder meeting, provided that the Company
commits: (1) to seek shareholder approval for a reverse stock split at
or before its next shareholder meeting and (2) to promptly thereafter
effect the reverse stock split. Such shareholder meeting must occur no
later than October 18, 2006. If the Company fails to regain compliance
with the $1.00 minimum bid price requirement and is not eligible for an
additional compliance period, the Nasdaq Staff would notify the Company
at that time that its securities would be delisted. The Company would
have the right to appeal such delisting to the Nasdaq Listing
Qualifications Panel.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
- -------
We are a specialty pharmaceutical company that develops and seeks to
commercialize topically delivered pharmaceutical products by employing SEPA
(Soft Enhancement of Percutaneous Absorption), our patented topical drug
delivery technology. SEPA enhances the efficiency and rate of diffusion of drugs
into and through the skin. SEPA, when properly combined with active
pharmaceutical ingredients, can provide for a variety of convenient and
easy-to-apply formulations, including creams, gels, ointments, lacquers and
solutions for the treatment of a variety of systemic and localized conditions.
Currently, we are developing investigational new drugs for the endocrinology,
urology, dermatology and podiatry specialties: Opterone(R), for the treatment of
testosterone deficiency, and EcoNail(TM), for fungal infections of the nails. We
believe that products incorporating SEPA may allow selected drugs to be
administered more effectively and with improved patient compliance compared to
alternative methods of drug administration, such as ingestion and injection.
Since inception, we have been engaged primarily in research and
development. We have not generated any meaningful revenues from operations and
we have sustained significant operating losses. We anticipate that we will
continue to incur significant losses for the foreseeable future. We cannot
guarantee that we will be successful in commercializing our products, or that we
will ever become profitable. As of September 30, 2004, we had an accumulated
deficit of approximately $75.1 million. Our product candidates are in discovery
or developmental stages and must undergo a rigorous regulatory approval process,
which includes costly and extensive pre-clinical and clinical testing, to
demonstrate safety and efficacy before we can market any resulting product. To
date, neither the FDA nor any of its international equivalents has approved any
of our product candidates for marketing.
Our results of operations can vary significantly from year to year and
quarter to quarter, and depend, among other factors, on:
o the progress of clinical trials we conduct;
o the degree of our research, marketing and administrative efforts;
o the development, when appropriate, of our own sales force;
o the signing of licenses and product development agreements;
o the timing of revenues recognized pursuant to license agreements; and
o the achievement of milestones by licensees.
The timing of our revenues may not match the timing of our associated
product development expenses. To date, our research and development expenses
generally have exceeded our revenues in any particular period or fiscal year.
12
We expect to continue to spend significant amounts on developing and
seeking regulatory approval of Opterone and EcoNail. Ultimately, if we receive
regulatory approval for Opterone and EcoNail, we will incur significant expenses
in connection with their commercialization. In addition, we also plan to
identify and develop, either internally or through collaborative arrangements,
additional product candidates and technologies that complement our existing
technologies and that fit within our growth strategy. If we identify potential
product candidates, we will incur additional costs in connection with testing
and seeking regulatory approval of those product candidates.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist of:
o salaries and expenses for our research and development personnel;
o payments to consultants, investigators, contract research
organizations and manufacturers in connection with our
pre-clinical and clinical trials;
o costs associated with conducting our clinical trials;
o costs of developing and obtaining regulatory approvals; and
o allocable costs, including occupancy and depreciation.
Because a significant portion of our research and development expenses
(including employee payroll and related benefits, laboratory supplies, travel,
dues and subscriptions, temporary help costs, consulting costs and allocable
costs such as occupancy and depreciation) benefit multiple projects or our drug
delivery technologies in general, we do not track these expenses by project. For
the three months ended September 30, 2004, we spent $1,003,510 on research and
development, including $1,549, $298,779, and $174,574 in costs associated with
clinical trials for Topiglan, Opterone and EcoNail, respectively, and $528,608
in costs not specifically tracked to a project. For the three months ended
September 30, 2003, we spent $687,142 on research and development, including
$150,388 and $40,718 in costs associated with clinical trials related to
Topiglan and Opterone, respectively, and $496,036 in costs not specifically
tracked to a project. EcoNail was not in clinical trials during the three month
period ended September 30, 2003. For the nine months ended September 30, 2004,
we spent $3,509,769 on research and development, including $387,892, $1,007,142,
and $403,547 in costs associated with clinical trials for Topiglan, Opterone and
EcoNail, respectively, and $1,711,188 in costs not specifically tracked to a
project. For the nine months ended September 30, 2003, we spent $1,878,329 on
research and development, including $257,922 and $40,718 in costs associated
with clinical trials for Topiglan and Opterone, respectively, and $1,579,689 in
costs not specifically tracked to a project. EcoNail was not in clinical trials
during the first nine months of 2003.
Each of our research and development programs is 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 currently are in developmental stages,
must overcome significant technological, manufacturing and marketing challenges
before they can be successfully commercialized. As a result of these risks and
13
uncertainties, we are unable to predict with any certainty the period in which
material net cash inflows from these projects could be expected to commence or
the completion date of these programs. In addition, 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 research and
development expenses tend to increase in later stages of clinical 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.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses consist primarily of salaries and other related costs
for personnel, marketing and promotion, professional fees and facilities costs.
We anticipate that marketing, general and administrative expenses will increase
over the next several years as we begin, when appropriate, to build our own
sales force to market our product candidates following their regulatory
approval.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our discussion and analysis of our financial condition and results of
operations are based on our 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 us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. Note 1 to our financial statements included within our
Form 10-K for the year ended December 31, 2003 includes a summary of the
significant accounting policies and methods we use in the preparation of our
financial statements. The following is a brief discussion of the more
significant accounting policies and methods that affect the judgments and
estimates used in the preparation of our financial statements.
RESEARCH AND DEVELOPMENT. Generally, we recognize research and development
funding as revenue at the time the research and development activities are
performed under the terms of the related agreements, when the counterparty is
obligated to pay, and when no future performance obligation exists. We make
estimates of the status of performance with respect to research and development
contracts. In the past, we have found such estimates to be sufficiently accurate
for revenue recognition purposes. We bill research and development revenue on a
cost reimbursement basis, which includes direct costs we incur in connection
with research activities and an allocation of certain other costs we incur.
PATENT ASSETS. We defer costs and expenses incurred in connection with
pending patent applications. We amortize costs related to successful patent
applications over the estimated useful lives of the patents using the
straight-line method. We charge accumulated patent costs and deferred patent
application costs related to patents that are considered to have limited future
value to operations. Estimates we use to determine the future value of deferred
patent costs include analysis of potential market size, time and cost to
complete clinical trials, anticipated interest in our products and potential
value for licensing or partnering opportunities. We recognize revenues derived
or expected to be derived from the sale, assignment, transfer, or licensing of
patents or other intellectual property over various periods based upon the terms
of the relevant agreement.
14
RESULTS OF OPERATIONS
- ---------------------
We had no revenues for the three or nine-month periods ended September 30,
2004. There were no revenues for the three month period ended September 30,
2003. Revenues for the nine-month period ended September 30, 2003 were
$1,010,031 (all of which we received in the three-month period ended June 30,
2003), consisting primarily of proceeds from the sale of a patent (U.S. Patent
No. 6,459,124), which related to antifungal topical compositions but which did
not use our SEPA platform technology.
For the three-month period ended September 30, 2004, research and
development expenses increased by $316,368, or 46%, to $1,003,510 from $687,142
in the three-month period ended September 30, 2003. The increase is primarily
attributable to an increase in employee compensation of $37,219 associated with
the addition of four new research and development employees in late 2003 as well
as an increase of $253,146 spent on clinical trials in the three-month period
ended September 30, 2004 compared with the same three-month period of 2003. For
the nine-month period ended September 30, 2004, research and development
expenses increased by $1,630,440, or 87%, to $3,509,769 from $1,879,329 in the
nine-month period ended September 30, 2003. The increase is primarily
attributable to an increase in employee compensation of $212,024 associated with
the addition of four new research and development employees in late 2003 as well
as an increase of $1,312,324 spent on clinical trials (which increase was
partially offset by a decrease of approximately $130,000 in pre-clinical study
costs) in the first nine months of 2004 compared with the same nine-month period
of 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 over the next quarter is expected to approximate the same level seen in
each of the first three quarters of 2004 as a result of our ongoing clinical
trials of EcoNail and Opterone, and the initiation of new studies with respect
to these products.
Marketing, general and administrative expenses were essentially unchanged
at $934,438 in the three months ended September 30, 2004 compared to $935,845 in
the three-month period ended September 30, 2003. For the nine-month period ended
September 30, 2004, marketing, general and administrative expenses increased by
$651,335, or 26%, to $3,153,167 from $2,501,832 in the nine-month period ended
September 30, 2003. The increase is primarily attributable to an increase of
$240,671 in employee compensation and an increase of $247,919 in consulting fees
relating to investor relations and business development during the nine months
ended September 30, 2004 (which increase was calculated by excluding $55,000 in
consulting fees paid to Robert J. DeLuccia in his role as interim Chief
Executive Officer during the six months ended June 30, 2003) compared with the
same period of the prior year. The increase is further attributable to a
reduction of $124,853 to the carrying value of certain patent assets related to
Topiglan during the nine month period ended September 30, 2004. Marketing,
general and administrative spending over the next quarter is expected to
approximate the same level as seen in each of the first three quarters of 2004.
Other income increased by $12,925, or 95%, to $26,464 in the three-month
period ended September 30, 2004 from $13,539 in the three-month period ended
September 30, 2003. Other income increased $29,300, or 59%, to $79,354 in the
nine-month period ended September 30, 2004 from $50,054 in same
15
period in the prior year. The increase for both periods is due to higher cash
balances available for investment.
For the reasons described above, net loss increased by $302,036, or 19%, to
$1,911,484 in the three-month period ended September 30, 2004 from $1,609,448 in
the three-month period ended September 30, 2003, and increased by $3,257,506, or
98%, to $6,583,582 in the nine-month period ended September 30, 2004 from
$3,326,076 in the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Since inception, our primary source of funding for our operations has been
the private and public sale of our securities, and, to a lesser extent, the
licensing of our proprietary technology and products, research collaborations,
feasibility studies, government grants and the limited sales of products and
test materials. During the first nine months of 2004, we received net proceeds
of $443,816 from the exercise of warrants, and proceeds of $6,681,274 (net of
issuance costs) as a result of the sale of common stock in a private placement
financing transaction. During the first nine months of 2003, we received net
proceeds from the exercise of stock options of $99,575 and no proceeds from the
exercise of warrants or from the sale of common stock.
At September 30, 2004, working capital was approximately $7.3 million,
compared to $6.3 million at December 31, 2003. The increase in our working
capital reflects the receipt of private placement proceeds and net proceeds from
the exercise of warrants, reduced by the use of funds in operations. On March 9,
2004, the Company sold 5,402,000 shares of its common stock for $7,292,700 in
gross proceeds ($6,681,274 net of issuance costs) in a private placement to
institutional investors. The investors also received warrants to purchase an
aggregate of 1,080,400 shares of common stock at a purchase price of $2.09 per
share expiring five years from the closing date. Until such time as we obtain
agreements with third-party licensees or partners to provide funding for our
anticipated business activities, or otherwise generate revenue from the
commercialization of our products, our working capital will be utilized to fund
our operating activities.
Pursuant to a plan approved by our Board of Directors in 1998, we are
authorized to repurchase 1,000,000 shares of our common stock to be held as
treasury shares for future use. During the nine month period ended September 30,
2004, we did not repurchase any shares of common stock. At September 30, 2004,
77,300 repurchased shares remain available for future use and 679,587 shares
remain available for repurchase under the plan.
Capital expenditures were $46,479 and patent development costs were $30,707
for the first nine months of 2004. We anticipate additional capital and patent
expenditures will be approximately $90,000 for the remainder of the fiscal year
ending December 31, 2004.
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 approximately $80,000 were paid on
January 8, 2004 and payments of approximately $153,000 were paid on July 2,
2004.
16
As of September 30, 2004, we had $7,916,591 in cash, cash equivalents and
short-term investments. We believe that our existing cash, cash equivalents and
short-term investments will be sufficient to meet our current operating plan and
capital expenditure requirements into June 2005. Our cash requirements may vary
materially from those now planned because of changes in the focus and direction
of our research and development programs, competitive and technical advances,
patent developments or other developments. We will require additional financing
to continue operations after our current capital resources are exhausted and to
continue our long-term plans for clinical trials and new product development. We
are assessing opportunities to raise capital and expect to continue financing
our operations through sales of securities, strategic alliances or other
financing vehicles, if any, that might become available to us on terms that we
deem acceptable.
We do not enter into financial instrument transactions for trading or
speculative purposes. We do not intend to establish any special purpose entity
and do not have any material off balance sheet financing transactions. We do not
believe that inflation has or will have any significant effect on the results of
our operations.
The following summarizes our contractual obligations at December 31, 2003,
and the effect that such obligations are expected to have on future cash flows
and liquidity:
Due In
-------------------------------------------------------
Obligations: Total Amount 1 Year or 1-3 Years 3-5 Years 5 Years or
Less More
Lease Commitment (through February 2005) $ 543,700 $ 465,300 $78,400 $ 0 $ 0
Employment Agreements (per year) 1,008,600 1,008,600 0 0 0
--------- --------- ------ ----- -----
Total Contractual Cash Obligations $1,552,300 $1,473,900 $78,400 $ 0 $ 0
========= ========= ====== ===== =====
Excluded from the above contractual obligation summary are clinical trial
contracts which may approximate $1,200,000 in 2004. These contracts range in
duration from six (6) weeks to five (5) months and we may terminate them at our
discretion. Also excluded from the above contractual obligation summary is the
six month extension of our existing lease for office and laboratory space,
through August 31, 2005, in the total amount of $235,228 ($39,205 per month for
six months).
On October 18, 2004, the Company received written notice from Nasdaq
stating that for the previous 30 consecutive business days the bid price of the
Company's common stock had closed below the minimum $1.00 per share requirement
for continued inclusion in The Nasdaq SmallCap Market under Marketplace Rule
4310(c)(4). In accordance with Marketplace Rule 4310(c)(8), the Company was
provided 180 calendar days, or until April 18, 2005, to regain compliance. In
order to regain compliance, the company must demonstrate a closing bid price for
its common stock of $1.00 per share or more for a minimum of 10 consecutive
business days.
The written notice further provided that if compliance with the $1.00
minimum bid price requirement cannot be demonstrated by the company by April 18,
2005, the Nasdaq Staff will grant the Company an additional 180 calendar days to
17
regain compliance if, at that time, the Company meets The Nasdaq SmallCap Market
initial listing requirements as set forth in Marketplace Rule 4310(c), except
for the $1.00 minimum bid price requirement. The written notice provided that if
the Company has not regained compliance with the $1.00 minimum bid price
requirement during the second 180 day compliance period, but again satisfies The
Nasdaq SmallCap Market initial listing requirements as set forth in Marketplace
Rule 4310(c), except for the $1.00 minimum bid price requirement, the Company
may be afforded an additional compliance period, up to its next shareholder
meeting, provided that the Company commits: (1) to seek shareholder approval for
a reverse stock split at or before its next shareholder meeting and (2) to
promptly thereafter effect the reverse stock split. Such shareholder meeting
must occur no later than October 18, 2006. If the Company fails to regain
compliance with the $1.00 minimum bid price requirement and is not eligible for
an additional compliance period, the Nasdaq Staff would notify the Company at
that time that its securities would be delisted. The Company would have the
right to appeal such delisting to the Nasdaq Listing Qualifications Panel. A
delisting of the Company's common stock from the The Nasdaq SmallCap 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
- -------------------------------------------------
As of September 30, 2004, we are exposed to market risks which relate
primarily to changes in U.S. interest rates. Our 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 in interest rates would not
have a material effect upon our 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, 2004.
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, 2004.
There were no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR 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 US ON THE BASIS OF
MANAGEMENT'S THEN-CURRENT EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A
18
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO THE FOLLOWING: OUR HISTORY OF
OPERATING LOSSES AND NEED FOR CONTINUED WORKING CAPITAL; OUR NEED FOR
SIGNIFICANT ADDITIONAL PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING;
TECHNOLOGICAL UNCERTAINTY RELATING TO TRANSDERMAL DRUG DELIVERY SYSTEMS; THE
EARLY STAGE OF DEVELOPMENT OF OUR PROPOSED PRODUCTS; THE LACK OF SUCCESS OF OUR
PRIOR DEVELOPMENT EFFORTS; UNCERTAINTIES RELATED TO CLINICAL TRIALS OF OUR
PROPOSED PRODUCTS; UNCERTAINTIES RELATING TO GOVERNMENT REGULATION AND
REGULATORY APPROVALS; OUR DEPENDENCE ON THIRD PARTIES FOR THE FDA APPLICATION
PROCESS; UNCERTAINTIES REGARDING MARKET ACCEPTANCE OF OUR PRODUCT CANDIDATES; NO
ASSURANCE OF OUR ENTERING INTO LICENSE ARRANGEMENTS; OUR ABILITY TO IDENTIFY AND
OBTAIN RIGHTS TO PRODUCTS OR TECHNOLOGIES IN ORDER TO BUILD OUR PORTFOLIO OF
PRODUCT CANDIDATES; OUR DEPENDENCE ON THIRD PARTIES FOR MARKETING AND
DISTRIBUTION; OUR RELIANCE ON KEY EMPLOYEES; OUR LIMITED PERSONNEL AND OUR
DEPENDENCE ON CONTINUED ACCESS TO SCIENTIFIC TALENT; UNCERTAINTIES RELATING TO
COMPETITION, PATENTS AND PROPRIETARY TECHNOLOGY; OUR 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; THE COMPANY'S RELIANCE ON THIRD PARTY SUPPLIERS;
THE HIGHLY COMPETITIVE NATURE OF THE COMPANY'S INDUSTRY; UNCERTAINTY OF
PHARMACEUTICAL PRICING AND RELATED MATTERS; THE VOLATILITY OF OUR STOCK PRICE;
OUR ABILITY TO COMPLY WITH THE MINIMUM LISTING QUALIFICATIONS OF THE NASDAQ
SMALLCAP MARKET; 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, 2003 AND, IN PARTICULAR, THE SECTION ENTITLED "RISK FACTORS".
19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS.
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 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004 (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).
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.
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.
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 8, 2004 /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 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004 (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).
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.
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.
22