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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Hartwell Avenue
Lexington, Massachusetts 02173-3134
(Address of principal executive offices)
(617) 862-4003
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Class A Warrants
(Title of Class)
Class AA Warrants
(Title of Class)
Class X Warrants
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
The aggregate market value of the shares of Common Stock held by
non-affiliates, based upon the closing price for such stock on February 28, 1997
was approximately $110,375,000. As of February 28, 1997, 15,767,875 shares of
common stock, $.01 par value, were outstanding.
Documents Incorporated By Reference
Portions of the registrant's definitive Proxy Statement (the "Proxy
Statement") for its 1997 Annual Meeting of Stockholders presently intended to be
filed with the Securities and Exchange Commission by April 30, 1997 are
incorporated by reference into Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED
TO IN "RISK FACTORS".
MacroChem's primary business is the development and commercialization of
transdermal drug delivery compounds and systems designed to promote the delivery
of drugs from the surface of the skin into the skin or into the bloodstream.
SEPA(R) compounds, the Company's proprietary transdermal penetration enhancers,
when properly combined with particular drugs, create pharmaceutical formulations
(creams, gels, solutions, etc.) that enhance the transdermal delivery of drugs
into the skin or into the bloodstream. SEPA formulations combined with the
Company's polymers and adhesives can also be used with patch formats to achieve
the transdermal delivery of selected drugs. The Company believes that SEPA
compounds enhance the diffusion of drugs into and through the skin by making the
outer layer of the skin (stratum corneum) more permeable to the drug molecule.
Transdermal delivery provides an alternative to other methods of drug
administration (injection, oral dosage forms, inhalation), and may allow
selected drugs to be administered more effectively, at lower doses, with fewer
adverse events and improved patient compliance.
The Company is developing specific SEPA formulations for use with
non-proprietary and proprietary drugs manufactured by pharmaceutical companies,
and plans to commercialize these products through the formation of partnerships,
strategic alliances and license agreements with those companies. In order to
attract strategic partners, the Company is conducting clinical testing of
certain SEPA-enhanced pharmaceuticals. The Company believes that if the clinical
trials are successful the results will aid the Company in attracting partners to
assist in the promotion of the product. Because of the substantial costs
involved in bringing a new pharmaceutical product or a new formulation of an old
drug to the market, the Company may be required to rely on pharmaceutical
companies to conduct all or part of the clinical trials necessary to gain
regulatory approval to manufacture and to market any resulting product.
The Company has also developed a series of new low molecular weight
polymers, termed MacroDerm,TM for cosmetic use and the topical delivery of
pharmaceuticals.
The Company does not maintain general product liability insurance, since
the Company does not market drug products. The Company recently commenced
clinical studies and obtained specific liability insurance relating to such
studies. As of December 31, 1996, no asserted liability claims exist against the
Company. However, in the future, incidents could give rise to claims which could
exceed the Company's insurance coverage and resources.
BUSINESS AGREEMENTS
On January 22, 1997 the Company signed a license and supply agreement with
Cytopharm, Inc., a California corporation. Cytopharm invented and is the owner
of certain patent rights covering a photo-activated compound for the treatment
of certain dermatological diseases. The Company will make available its enhancer
for use by Cytopharm and its licensee in the agreed to photo-activated
formulation. Cytopharm agrees to pay or cause its licensee to pay royalties to
the Company on all license fees, milestone payments, advance royalty payments
and other lump-sum payments with respect to license and sale of such formulation
for a period equal to the longer of the life of the Company's patent or ten
years from the commencement of commercial marketing of the formulation in each
country where the formulation is marketed.
In September 1990, the Company entered into a license agreement with Ascent
Pharmaceuticals, Inc. ("Ascent") in which Ascent received an exclusive license
to develop, test and market the Company's SEPA compounds in combination with
catecholamine bronchodilators for the treatment of respiratory disorders and, in
combination with cromolyn sodium, to treat allergic disorders. Ascent is in the
clinical stage of its development program. However, no assurances can be given
that the work conducted by Ascent will lead to the marketing of SEPA-containing
products for these indications.
RESEARCH AND DEVELOPMENT
The Company conducts its research and development activities through its
own staff and facilities, as well as through collaborative arrangements with
universities, contract research organizations and independent consultants. As of
March 1, 1997, the Company had 19 full-time employees, 11 of whom are devoted to
research and development and regulatory affairs. In addition, two Company
officers devote approximately 75% of their time to research and development.
Research and developmental expenditures aggregated $1,736,600, $1,238,100 and
$864,100 during the years ended December 31, 1996, 1995 and 1994, respectively.
The Company is also dependent upon third parties to conduct clinical studies,
obtain FDA and other regulatory approvals and manufacture and market a finished
product.
The Company anticipates incurring significant development expenditures in
the future as the Company continues its efforts to develop its present compounds
and new drug formulations and as it begins to research other technologies and to
expand its toxicological and clinical studies of certain drugs. The Company
conducts stability studies, tests its unique formulations and designs
manufacturing processes for its SEPA compounds and adhesive and polymer
technologies at its facility and other facilities. The Company has cGMP (current
Good Manufacturing Practices) facilities for the manufacture of dosage forms for
clinical evaluations.
PRODUCTS AND TECHNOLOGIES
BACKGROUND
To be effective, drugs must reach an intended site in the body, at an
effective concentration, and for an appropriate length of time. Traditional
methods of drug administration, such as oral ingestion, intramuscular and
intravenous injections and inhalation, are effective for a wide variety of
drugs. However, depending upon the given drug, each method may have
disadvantages. For example, in oral administration, a drug must pass through the
gastrointestinal system to be absorbed and may be metabolized or broken down,
resulting in a lower amount of effective drug being therapeutically available.
As a result, higher dosages of the drug must be used to produce the desired
effect, which may cause irritation of the gastrointestinal tract and systemic
toxicity.
In addition, the rate at which orally administered drugs are absorbed may
vary depending on several factors, including the drug's chemical properties, the
length of time the drug remains in the gastrointestinal tract and the patient's
meal patterns. Although the pharmaceutical industry has investigated a variety
of alternative approaches for dealing with drug adverse events and loss of
efficacy following oral dosing, through enteric coating of tablets, formulating
with various waxes and cellulosic materials, microencapsulation and compressing
tablets in various layers, the desired effects of these approaches are not
always reproducible from patient to patient or effective in modifying metabolic
effects produced in the liver.
TRANSDERMAL DRUG DELIVERY
Transdermal drug delivery is the process of delivering drugs into the
skin so that they can be effective in the treatment of dermatological conditions
and diseases or through the skin and into the bloodstream for the treatment of
systemic diseases.
The skin is made up of three layers: the outer layer, the stratum corneum,
the middle layer or viable epidermis, and the inner layer, the dermis. The
stratum corneum, which serves as the skin's primary barrier to the external
environment, consists of closely packed dead cells and fatty (lipid) material.
The epidermis is composed of several layers of active cells and the dermis
consists, in part, of tissue containing hair follicles, nerve endings and blood
capillaries. Within the stratum corneum, lipid layers bind the dead cells
together to form a protective barrier. Research conducted by MacroChem shows
that SEPA compounds affect drug delivery by acting, in part, upon the stratum
corneum to disrupt the alignment of the lipid molecules within the lipid layers.
This disruption increases the porosity of the lipid-cell layers, allowing drugs
to diffuse through the stratum corneum through the more porous epidermis to the
dermis, where they enter the blood stream through the capillaries. The rate and
amount of drug absorbed can be controlled by varying the formulation used.
THE COMPANY'S DRUG-DELIVERY SYSTEMS AND OTHER PROPOSED PRODUCTS
SEPA COMPOUNDS
The delivery of a drug through the skin depends on the drug's physical and
chemical characteristics (molecular size and shape, the drug's solubility in
lipids and water, its melting point and whether it is lipophilic or
hydrophilic).
Since some drugs move through the skin too rapidly, the transdermal system
must retard the rate of drug absorption to ensure optimal efficacy with minimum
toxicity. Other drugs move through the skin with difficulty, so the transdermal
system must be formulated to increase the drug's rate of absorption through the
skin. Common methods of transdermal delivery use common chemicals such as
ethanol or fatty compounds to enhance penetration.
Although certain delivery methods using chemicals have proven to be
somewhat effective with specific drugs, such as drugs used for the treatment of
motion sickness or hormone deficiencies, they have caused adverse events, such
as skin irritation and sensitivity at the site of application. Some drugs,
because of their physical characteristics or the amount of drug necessary to
achieve the desired therapeutic effect, have not been successfully delivered
transdermally to date.
The Company has developed SEPA compounds that are designed to enhance the
transport, penetration and controlled delivery of drugs through the skin. SEPA
compounds are generally colorless, clear liquids that are intended to promote
drug delivery by aiding drug molecules to penetrate the skin, diffuse into or
through the skin layers and become absorbed into the bloodstream.
The Company has set up its own facility for the in vitro testing of drug
formulations containing SEPA, and is currently less dependent on outside
laboratories for this type of testing. The Company is conducting in vitro
studies to evaluate the transdermal enhancing effect of SEPA in combination with
a variety of drugs with differing physical and chemical characteristics,
representing a broad spectrum of potential drug products. Although the Company's
research and development efforts with SEPA are at an advanced stage, the Company
must still conduct substantial additional studies to demonstrate the efficacy
and safety of any SEPA-drug formulation. The Company has found that specific
drugs administered transdermally with SEPA demonstrated increased transdermal
absorption. Some of the drug formulations tested by the Company with SEPA
contain compounds generally recognized as unlikely or difficult candidates for
transdermal delivery because of their physical and chemical properties and
molecular size. As these drug formulations are further developed, the Company
plans to conduct additional studies to investigate the efficacy and safety of
some of these formulations.
Although in vivo testing has been conducted on SEPA compounds, more studies
will be needed to demonstrate the safety and efficacy of SEPA in formulations
with specific drugs. The Company is currently conducting clinical trials with a
topical SEPA formulation of alprostadil, for the treatment of erectile
dysfunction.
The Company intends to begin clinical trials of a topical formulation of
SEPA and testosterone in early 1997 and plans additional clinical studies of
SEPA in a topical gel formulation with ibuprofen for the treatment of muscle
pain.
In addition to the ongoing clinical development programs cited above, the
Company, in association with third parties, is currently conducting pre-clinical
studies with SEPA formulations in combination with specific drugs for a variety
of applications.
The Company believes that SEPA compounds can be used with a broad variety
of new and existing drugs to enhance their commercial value. The improved
therapeutic effectiveness and convenience of a transdermal SEPA product may
substantially expand the existing market for a drug. In addition, a formulation
containing a SEPA compound may prove to be a superior alternative to the
existing methods of administering certain drugs.
MACRODERM(TM) DRUG DELIVERY SYSTEM
The Company has developed a series of new low molecular weight polymers,
termed MacroDerm,TM for use in cosmetics and in the superficial dermal delivery
of pharmaceuticals. Potential applications include their use with sunscreens,
moisturizers, and insect repellents.
COMPETITION
The Company competes with numerous firms, many of which are large,
multi-national organizations with worldwide distribution. The Company believes
that its major competitors in the drug-delivery sector of the health care
industry include ALZA Corporation, Cygnus Therapeutic Systems, Elan Corporation,
plc., Ciba-Geigy Limited and Sandoz Limited. These firms have substantially
greater capital resources, research and development and technical staffs,
facilities and experience in obtaining regulatory approvals, as well as in
manufacturing, marketing and distribution of products, than the Company. Recent
trends in this area are toward further market consolidation of large drug
companies into a smaller number of very large entities, further concentrating
financial, technical and market strength and increasing competitive pressure in
the industry. Academic institutions, hospitals, governmental agencies and other
public and private research organizations are also conducting research and
seeking patent protection and may develop competing products or technologies of
their own through joint ventures or other arrangements. In addition, recently
developed technologies or technologies that may be developed in the future may
or could be the basis for competitive products. No assurance can be given that
the Company's competitors will not succeed in developing technologies and
products that are more effective or less costly to use than any that are
currently being developed by the Company.
Alprostadil, a synthetic prostaglandin E1, is the only drug approved for
marketing in the U.S. for erectile dysfunction. It is available in two dosage
forms. Caverject,AE marketed by Pharmacia & Upjohn, is administered by needle
injection directly into the penis. The second product, developed by Vivus, is a
pellet form of the drug administered through a tube inserted into the urethra.
In contrast to the invasive forms now available, MacroChem believes that a
topical gel formulation applied to the penis will be the preferred dosage form
for treatment of this disorder.
The Company expects products approved for sale, if any, to compete
primarily on the basis of product efficacy, safety, patient compliance,
reliability, price and patent position. Generally, the first pharmaceutical
product to reach the market in a therapeutic or preventative area is often at a
significant advantage relative to later entrants to the market. The Company's
competitive position will also depend on its ability to attract and retain
qualified scientific and other personnel, develop effective proprietary
products, implement production and marketing plans, obtain patent protection and
secure adequate capital resources.
EMPLOYEES
As of March 1, 1997, the Company had 19 full time employees, 11 of whom are
devoted to research and development and regulatory affairs. In addition, two
Company officers devote approximately 75% of their time to research and
development.
GOVERNMENT REGULATION
The production and marketing of the Company's drug delivery systems and
pharmaceutical products are subject to regulation for safety, efficacy and
quality by numerous federal, state and local agencies and comparable agencies in
foreign countries. In the United States, the Federal Food, Drug and Cosmetics
Act, the Public Health Service Act, the Controlled Substances Act and other
federal statutes and regulations govern or influence the testing, manufacture,
safety, labeling, storage, record keeping, approval, advertising and promotion
of the Company's proposed products and technologies.
Non-compliance with applicable requirements can result in fines and other
judicially imposed sanctions including recalls and criminal prosecutions based
on products, promotional practices, or manufacturing practices that violate
statutory requirements. In addition, administrative remedies can involve
voluntary recalls or cessation of sale of products, administrative detention,
public notice, voluntary changes in labeling, manufacturing or promotional
practices, as well as refusal of the government to approve NDAs. The FDA also
has the authority to withdraw approval of drugs in accordance with statutory
procedures.
The FDA approval procedure involves completion of certain pre-clinical and
manufacturing/stability studies and the submission of the results of these
studies to the FDA in an IND application in support of performing clinical
trials. IND allowance is then followed by performance of human clinical trials,
and additional pre-clinical and manufacturing quality control studies,
supporting safety, efficacy and manufacturing quality control. The information
developed under the IND is compiled into an NDA or ANDA and submitted to FDA for
approval to market.
Pre-clinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
product. Human clinical trials are typically conducted in three sequential
phases, but the phases may overlap. Phase I trials consist of testing of the
product in a small number of normal volunteers primarily for safety. In Phase
II, in addition to safety, the efficacy of the product is evaluated in a small
patient population. Phase III trials typically involve multicenter testing for
safety and clinical efficacy in an expanded population of patients at
geographically dispersed test sites. A clinical plan, or "protocol," accompanied
by the approval of the institutions participating in the trials, must be
submitted to the FDA prior to commencement of each clinical trial. The FDA may
order the temporary or permanent discontinuation of a clinical trial at any time
if adverse events that endanger patients in the trials are observed. In
addition, the FDA may request Phase IV clinical trials, to be performed after
marketing approval, to resolve any lingering questions.
A 30-day waiting period after the filing of each IND application is
required by the FDA prior to the commencement of clinical testing in human
subjects. If the FDA has not commented on or questioned the IND application
within 30 days, initial clinical studies may begin. However, any FDA comments or
questions must be answered to the satisfaction of the FDA before initial
clinical testing can begin. In some instances, this process could result in
substantial delay and expense.
The results of the pre-clinical and clinical studies on new drugs are
submitted to the FDA in the form of NDAs for approval to commence commercial
sales. Following extensive review, the FDA may grant marketing approval, require
additional testing or information or deny the application. Continued compliance
with all FDA requirements and the conditions in an approved application,
including product specifications, manufacturing process and labeling
requirements, are necessary for all products. Failure to comply, or the
occurrence of unanticipated adverse events during commercial marketing, could
lead to the need for labeling changes, product recall, seizure, injunctions
against distribution or other FDA-initiated action, which could delay further
marketing until the products are brought into compliance.
In certain cases, an ANDA may be filed in lieu of filing an NDA. An ANDA
relies on bioequivalency tests that compare the applicant's drug with an already
approved reference drug, rather than on clinical trials. An ANDA may be
available to the Company for a new formulation of a drug which has already been
approved by the FDA in other topical dosage forms. By concentrating on drug
delivery systems employing existing drugs, the Company expects that the time for
regulatory approval of certain products should be shorter than for entirely new
substances.
The NDA itself is a complicated and detailed document and must include the
results of extensive animal, clinical and other testing, the cost of which is
substantial. Although the FDA is required to review applications within 180 days
of filing, in the process of reviewing applications the FDA frequently requests
that additional information be submitted and starts the 180 day regulatory
review period anew when the requested additional information is submitted. The
effect of such requests and subsequent submissions can significantly extend the
time for the NDA review process. Until an NDA is actually approved, no assurance
can be given that the information requested and submitted will be considered
adequate by the FDA to justify approval.
In addition to the above, packaging and labeling of most of the Company's
proposed products are subject to FDA regulation. The Company must get FDA
approval for all labeling and packaging prior to marketing of a regulated
product.
Whether or not FDA approval has been obtained, approval of a product by a
comparable regulatory authority must be obtained in most foreign countries prior
to the commencement of marketing of the product in that country. The approval
procedure varies from country to country and may involve additional testing, and
the time required may differ from that required for FDA approval. Although some
procedures for unified filings exist for certain European countries, in general
each country has its own procedure and requirements, many of which are time
consuming and expensive. Thus, substantial delays in obtaining required
approvals from foreign regulatory authorities can result after the relevant
applications are filed. After such approvals are obtained, further delays may be
encountered before the products become commercially available.
No assurance can be given that any required FDA or other governmental
approval will be granted or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products, cause the Company to undertake costly procedures and furnish
a competitive advantage to the more substantially capitalized companies with
which the Company plans to compete. In addition, the extent of potentially
adverse government regulations that may arise from future administrative action
or legislation cannot be predicted.
PATENTS AND LICENSE RIGHTS
The Company was granted a new U.S. patent in 1996 based on the combination
of various different classes of enhancer compounds in conjunction with
iontophoresis. In addition, the corresponding European application has also been
found allowable and will cover the combination of iontophoresis with SEPA as
well as other enhancer compounds.
The Company's U.S. patent applications filed in 1995 for the use of SEPA
with minoxidil for once-a-day treatment and covering its MacroDerm(TM)
technology were allowed in 1996 and patents are expected to issue in 1997.
Applications covering modified forms of the MacroDerm polymers were filed during
1996. Also allowed in 1996 were the Company's patent applications for low
molecular weight polyvinyl pyrrolidone molecules and their use in stabilizing
enzymes and other types of proteins (U.S.); and for SEPA in Japan. This
technology no longer fits within the product development and technology focus of
the Company, and it intends to sublicense the technology, if possible. No
assurance can be given, however, that a sublicensee can be identified who will
be willing to license the technology.
The Company was granted a U.S. patent in 1994 relating to certain compounds
useful for the treatment of osteoporosis and hypercalcemia. Corresponding
foreign patents have also issued in several European countries and Canada. A
related U.S. patent issued in 1995 for the use of these compounds in the
treatment of hypercalcemia. The Company holds patents on its SEPA compounds in
the United States, Canada, throughout Europe and in Japan. The Company owns a
U.S. patent on a transdermal medicator.
The Company believes that patent protection of its technologies, processes
and products is important to its future operations. The success of the Company's
proposed products may depend, in part, upon the Company's ability to obtain
patent protection.
The Company intends to enforce its patent position and intellectual
property rights vigorously. The cost of enforcing the Company's patent rights in
lawsuits, if necessary, may be significant and could interfere with the
Company's operations.
Although the Company intends to file additional patent applications as
management believes appropriate with respect to any new products or
technological developments, no assurance can be given that any additional
patents will be issued or, if issued, will be of commercial benefit to the
Company. In addition, to anticipate the breadth or degree of protection that any
such patents may afford is impossible. To the extent that the Company relies on
unpatented proprietary technology, no assurance can be given that others will
not independently develop or obtain substantially equivalent or superior
technology or otherwise gain access to the Company's trade secrets, that any
obligation of confidentiality will be honored or that the Company will be able
to effectively protect its rights to proprietary technology. Further, no
assurance can be given that any products developed by the Company will not
infringe patents held by third parties or that, in such case, licenses from such
third parties would be available on commercially acceptable terms, if at all.
In connection with the prior research and development efforts of the
Company, the Company owns several patents and possesses certain license rights
in connection with other technologies, which it is not currently pursuing.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN
FORWARD-LOOKING STATEMENTS MADE FROM TIME TO TIME BY THE COMPANY ON THE BASIS OF
MANAGEMENT'S THEN-CURRENT EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO
BELOW.
HISTORY OF OPERATING LOSSES; NEED FOR CONTINUED WORKING CAPITAL
The Company has been engaged primarily in research and development since
its inception in 1981 and has derived limited revenues from the commercial sale
of its products and licensing of certain technology. The Company has had no
revenues relating to the sale of any products currently under development. The
Company has incurred net losses every year since its inception and the Company
anticipates that losses may continue for the foreseeable future. At December 31,
1996, the Company's accumulated deficit was approximately $18.1 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 assurance can be given. However, the
Company believes that its financial resources are sufficient to meet planned
operating activities for the next twelve months.
The Company continues to pursue the commercialization of its SEPA
technology through discussion and presentation of its technology to potential
licensees. No assurance can be given that these discussions will lead to any
licenses. No assurance can be given that any license fees will be received by
the Company in the current fiscal year. For the foreseeable future, and until
marketing approvals are obtained, and/or license agreements are entered into, if
ever, the Company anticipates limited licensing revenue and no royalties from
sales of products using SEPA for pharmaceutical purposes.
TECHNOLOGY UNCERTAINTY AND EARLY STAGE DEVELOPMENT
Although several systems have been developed by various pharmaceutical
companies to enhance the transdermal delivery of specific drugs, relatively
limited research has been conducted in the expansion of transdermal delivery
systems to a wider range of pharmaceutical products. Although the Company has
demonstrated in preclinical and clinical studies that its SEPA transdermal
compounds may have applicability with a broad range of drugs, transdermal
delivery systems are currently marketed for only a limited number of products.
In addition, transdermal delivery systems used to date have often demonstrated
adverse side effects for users, such as skin irritation and delivery
difficulties.
The Company's proposed products are in the early development stage, require
significant further research, development, testing and regulatory clearances and
are subject to the risks of failure inherent in the development of products
based on innovative technologies. These risks include the possibilities that any
or all of the proposed products may be found to be ineffective or toxic, or
otherwise may fail to receive necessary regulatory clearances; that the proposed
products, although effective, may be uneconomical to market; or that third
parties may market superior or equivalent products. Due to the extended testing
and regulatory review process required before marketing clearance can be
obtained, the Company does not expect to be able to realize revenues from the
sale of any drugs in the near term.
NEED FOR SIGNIFICANT PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING
Before the Company or any licensees of the Company may market any products
based upon the Company's technology, significant additional development efforts
and substantial preclinical and clinical testing will be necessary. Unless
substantial additional financing is obtained, the Company may not have
sufficient working capital to complete clinical studies on any proposed
products. No assurance can be given that the Company will be able to secure such
financing on favorable terms, if at all.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approval for the commercial sale of any of its
pharmaceutical products under development, the Company must demonstrate that the
product is safe and efficacious for use in each proposed indication. The results
of preclinical studies and early clinical trials may not be predictive of
results that will be obtained in large-scale testing, and there can be no
assurance that clinical trials of the Company's products will demonstrate the
safety and efficacy of its products or will result in marketable products. A
number of companies in the pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. If the Company were unable to demonstrate the safety and efficacy of
certain of its products, the Company may be adversely affected.
DEPENDENCE ON THIRD PARTIES FOR DEVELOPMENT; NO ASSURANCE OF LICENSED AGREEMENTS
The Company intends to rely on licensees and joint venture arrangements to
fund most of the costs relating to product development and clinical trials.
Licensees may be expected to have the legal right to terminate funding a product
at any time for any reason without significant penalty. The resources and
attention devoted by a licensee to a product are not within the Company's
control, and this can result in delays in clinical testing, the preparation and
prosecution of regulatory filings and commercialization efforts. Further, no
assurance can be given that the Company will be able to enter into new
collaborative arrangements or that existing or future collaborative arrangements
will be successful.
PRIOR DEVELOPMENT EFFORTS
Since the Company's inception in 1981, the Company has engaged in research
and development activities with respect to a variety of technologies and
products, including polymers for medical and industrial use, dental adhesives,
osteoporotic drugs and transdermal drug-delivery products. Although the Company
has generated differing levels of revenue over the last several years, none of
the Company's products or technologies has ever generated sustained revenues and
the Company has never had profitable operations. The Company has expended a
substantial amount of its resources in researching and developing technology
relating to these products as well as in connection with the research and
development of its transdermal delivery systems. No assurance can be given that
the Company's development activities with respect to its transdermal delivery
systems will be successful or that these efforts, as well, will not be
eventually abandoned.
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES FOR MARKETING
AND DISTRIBUTION OF PRODUCTS
The Company intends to market and distribute its proposed products through
others pursuant to licensing, joint venture, or similar collaborative
arrangements or distribution agreements. The Company has no sales force or
marketing organization. If the Company directly markets and sells any of such
products, it will, among other things, have to attract and retain qualified or
experienced marketing and sales personnel. No assurance can be given that the
Company will be able to attract and retain qualified or experienced marketing
and sales personnel or that any efforts undertaken by such personnel will be
successful. Any contractual arrangements with others may result in a lack of
control by the Company over any or all of the marketing and sales of such
products.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING
The Company currently does not have facilities capable of manufacturing any
proposed products in commercial quantities. Accordingly, the Company expects
that it will be dependent to a significant extent on licensees, corporate
partners or contract manufacturers for such manufacturing and for compliance
with regulatory requirements for good manufacturing practices. The Company's
dependence on third parties for manufacturing may adversely affect the Company's
ability to develop and deliver products on a timely and competitive basis. If
the Company decides to establish a commercial manufacturing facility, it will
require substantial additional funds, will be required to hire and retain
significant additional personnel and will be required to comply with extensive
government regulations. No assurance can be given that the Company will be able
to obtain additional capital to conduct such activities directly.
RELIANCE ON KEY EMPLOYEES; LIMITED PERSONNEL; ABILITY TO ATTRACT AND
RETAIN QUALIFIED SCIENTISTS
The success of the Company is dependent on the efforts and abilities of
Dr. Carlos M. Samour, its Chairman of the Board of Directors and Scientific
Director, Alvin J. Karloff, its Chief Executive Officer and President and
Dr. Stephen J. Riggi, its Vice President of Operations. Dr. Samour, Mr. Karloff
and Dr. Riggi are employed by the Company under employment agreements that are
of indefinite length and include non-disclosure and non-competition provisions.
The loss of Dr. Samour, Mr. Karloff or Dr. Riggi could have a material adverse
effect on the Company's business.
The Company's business also depends on access to scientific talent,
competition for which is intense and can be expected to increase. There can be
no assurances that the Company will be able to retain its existing personnel or
to attract additional qualified employees.
COMPETITION, GOVERNMENT REGULATION, PATENTS AND LICENSE RIGHTS
See these sections, above, for a description of risk factors relating to
these matters.
PRODUCT LIABILITY; NO GENERAL INSURANCE
The design, development, manufacture and sale of the Company's products
involve an inherent risk of liability claims and associated adverse publicity.
The Company currently has liability insurance to cover claims that may result
from clinical trials, but does not maintain product liability insurance and may
need to acquire such insurance coverage prior to the commercial introduction of
its products. No assurance can be given that the coverage limits of the
Company's insurance policies will be adequate. Such insurance is expensive,
difficult to obtain and may not be available in the future on acceptable terms
or at all. A successful claim brought against the Company if it is uninsured, or
which is in excess of the Company's insurance coverage, if any, could have a
material adverse effect upon the Company and its financial condition.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS
The future revenues and profitability of, and availability of capital for
bio-medical and pharmaceutical companies may be affected by the continuing
efforts of governmental and third-party payors to contain or reduce the costs of
health care through various means. For example, in certain foreign markets
pricing or profitability of prescription pharmaceuticals is subject to
government control and to reform in the health care system. In the United
States, there have been, and the Company expects there will continue to be, a
number of federal and state proposals to implement similar government control.
While the Company cannot predict whether any such legislative or regulatory
proposals will be adopted, the announcement or adoption of such proposals could
have a material adverse effect on the Company's prospects. If the Company or one
of its partners succeeded in bringing one or more of its products, based upon
the Company's technology, to market, there can be no assurance that these
products will be cost effective and that reimbursement to the consumer will be
available or will be sufficient to allow the Company or its partners to sell
such products on a profitable basis.
ITEM 2. PROPERTIES.
The Company leases 9,702 square feet of office and laboratory space in
Lexington, Massachusetts. Details of the lease agreements are set out in Note 7
of the Financial Statements included in Item 8 of this Report and in the forms
of lease and amendment included as exhibits to this Report.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the three
months ended December 31, 1996, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE OF SECURITIES AND RELATED MATTERS
The following chart sets forth the range of high and low bid prices for the
Common Stock, Class A Warrants, Class AA Warrants and Class X Warrants for the
periods indicated as obtained from NASDAQ and the NASD Electronic Bulletin
Board:
COMMON STOCK CLASS A WARRANTS CLASS AA WARRANTS CLASS X WARRANTS
MCHM MCHML MCHMM MCHMN
YEAR ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
DECEMBER 31, 1995
First Quarter $2 15/16 $1 1/8 $ 3/4 $ 1/4 $ 5/8 $ 1/8 $1 1/2 $ 1/2
Second Quarter 4 5/16 2 1/16 1 7/8 1/2 1 3/8 1/4 2 1/4 1/2
Third Quarter 6 1/2 3 3/8 3 3/8 1 1/2 2 3/8 7/8 4 1
Fourth Quarter 4 15/16 3 2 1/2 1 1/8 1 5/8 3/4 3 1 3/4
DECEMBER 31, 1996
First Quarter 7 11/16 3 3/4 4 1/2 2 3 1/2 1 5 3 1/2
Second Quarter 6 3/4 4 7/8 4 1/4 2 5/8 3 1/4 1 3/4 4 1/2 3 1/2
Third Quarter 5 3/4 3 11/16 3 5/8 1 3/4 2 3/4 1 1/4 3 1/2 3 1/4
Fourth Quarter 6 5/8 3 1/2 3 1/2 1 5/8 2 1/4 1 1/8 4 3/4 3 1/2
The above quotations represent prices between dealers and do not include
retail markups, markdowns or commissions and may not necessarily reflect actual
transactions. As of December 31, 1996, there were 391 record holders of the
Company's Common Stock.
The Company has never paid dividends on its Common Stock and its Board of
Directors does not contemplate declaring any dividends in the foreseeable
future. The Company presently intends to retain earnings, if any, to finance
research, development, and expansion of its business.
RECENT SALES OF UNREGISTERED SECURITIES
During 1996, the Company issued the following securities which were not
registered under the Securities Act of 1933:
-On June 17, 1996, the Company issued a warrant to its investment
banker, expiring June 17, 1999, for the purchase of 145,800 shares of
the Company's Common Stock at a price of $6.075 per share in
consideration of services to the Company.
-On September 3, 1996, 925 shares of the Company's Common Stock were
issued to a consultant in consideration of services to the Company.
The transactions described above were effected in reliance upon the
exemption from the registration requirements of the Securities Act of 1933
provided by section 4(2) thereof on the basis that such transactions did not
involve any public offering.
ITEM 6. SELECTED FINANCIAL DATA.
FISCAL TRANSITION
YEAR PERIOD FROM
ENDED APRIL 1 TO
MARCH 31 DECEMBER 31 YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------
1993 1993 1994 1995 1996
---- ---- ---- ---- ----
(Note)
STATEMENTS OF
OPERATIONS DATA:
Total revenue $1,027,730 $ 123,819 $ 44,710 $ 17,493 $ 129,786
Net loss ( 2,539) (1,465,454) (1,969,442) (2,465,837) (3,139,796)
Net loss per share 0.00 (0.13) (0.17) (0.20) (.21)
Weighted average
common shares
outstanding 7,929,629 10,874,172 11,558,105 12,331,560 15,239,080
BALANCE SHEET DATA:
Working capital $6,508,411 $5,321,837 $3,615,608 $4,532,623 $7,127,252
Current assets 6,664,117 5,633,155 3,955,357 4,962,562 7,495,715
Total assets 6,914,246 5,956,850 4,437,600 5,462,625 8,063,750
Current liabilities 155,706 311,318 339,749 429,939 368,463
Capital lease obligations -0- -0- 59,715 91,861
57,038
Total liabilities 165,378 324,188 387,792 486,198 386,871
Stockholders' equity 6,748,868 5,632,662 4,049,808 4,976,427 7,676,879
Note: Effective January 1, 1996, the Company adopted the Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation." As a result, the net loss and net loss per share for the year
ended December 31, 1996 includes approximately $543,000, or $.04 per share, for
non-employee stock option compensation. See Note 6 to the Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations for the Company should be read in conjunction with the accompanying
financial statements and related footnotes.
GENERAL
MacroChem's primary business is the development and commercialization of
transdermal drug delivery compounds and systems designed to promote the delivery
of drugs from the surface of the skin into the skin or bloodstream. The Company
currently derives no significant revenue from product sales, royalties or
license fees. The Company plans to develop specific SEPA(R) formulations for use
with proprietary and non-proprietary drugs manufactured by pharmaceutical
companies, and to commercialize these products through the formation of
partnerships, strategic alliances and license agreements with those companies.
In order to attract strategic partners the Company is conducting limited
clinical testing of certain SEPA-enhanced pharmaceuticals.
The Company's results of operations vary significantly from year to year
and quarter to quarter, and depend, among other factors, on the signing of new
licenses and product development agreements, the timing of revenues recognized
pursuant to license agreements, the achievement of milestones by licensees, the
progress of clinical trials conducted by licensees and the Company, and the
degree of research, marketing and administrative effort. The timing of the
Company's revenues may not match the timing of the Company's associated product
development expenses. To date, research and development expenses have generally
exceeded revenues in any particular period and/or fiscal year.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
The Company has continued to incur losses from operations. For the year
ended December 31, 1996, the net loss was approximately $3,139,800 as compared
to a loss of $2,465,800 for the previous year, a 27% increase. For the 1996 and
1995 years, the Company realized operating revenues of approximately $129,800
and $17,500, respectively, which were from the completion of feasibility
studies.
Marketing, general and administrative expenses for 1996 aggregated
approximately $1,892,600, an increase of $480,100 or 34% , from 1995's total of
$1,412,500. The increase was due primarily to the adoption in 1996 of Statement
of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation." Adopting this rule increased expenses approximately $491,200, of
which appproximately $433,100 is attributable to the grant of a warrant to the
Company's investment banker.
Research and development costs increased by approximately $498,500 from
$1,238,100 in 1995 to $1,736,600 for 1996, a 40% increase. The Company has
continued its emphasis on research and development of expanded uses of the
Company's proprietary products. 1996 costs increased due to the hiring of a
director of research and development and to increased clinical study costs and
internal research and development efforts. The adoption of SFAS 123 increased
expenses approximately $35,300. The Company expects that research and
development costs will continue to increase in 1997, reflecting increased
clinical testing of the Company's products.
Other income increased from a net amount of $203,300 in 1995 to $371,600 in
1996. This increase reflects greater cash on hand. Interest expense was
approximately $12,000 in 1996, a reduction of $30,600 from 1995, reflecting the
lower capital lease debt outstanding.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
For the year ended 1995, the net loss was approximately $2,465,800 as
compared to a loss of $1,969,400 for the previous year, a 25% increase. For the
1995 and 1994 years the Company realized operating revenues of approximately
$17,500 and $44,700, respectively, which were from the completion of feasibility
studies.
Marketing, general and administrative expenses for 1995 aggregated
approximately $1,413,500, an increase of $122,500 or 9%, from 1994's total of
$1,291,000. During 1995, the Company used outside service providers for certain
administrative functions, incurred increased recruiting expenses for the
replacement of several executive level employees, and increased marketing its
technology to potential licensees and strategic alliance partners.
Research and development costs increased by approximately $374,000 from
$864,100 in 1994 to $1,238,100 for 1995, a 43% increase. The Company has
continued its emphasis on research and development of expanded uses of the
Company's proprietary products. The construction of a pilot scale manufacturing
facility, conforming to the FDA's current Good Manufacturing Practices (cGMP),
during 1995, has increased the Company's internal research and development
capabilities. This facility will allow for improvements in the manufacture and
testing of its chemical compounds.
Other income increased from a net amount of $177,000 in 1994 to $203,300 in
1995. This increase reflected greater cash on hand, offset in part by the effect
of the flattening of US Treasury rates in the latter part of 1995. Interest
expense was approximately $42,600 in 1995, reflecting management's decision to
maximize available cash resources by acquiring new equipment through capital
lease arrangements, rather than outright purchase.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the primary source of funding for the Company's operations
has been the private and public sale of its securities, and to a lesser extent,
the licensing of its proprietary technology and products, government grants and
the limited sales of products and test materials. During 1996, the Company
received aggregate net proceeds of approximately $5.3 million from the exercise
of stock options, stock warrants, and unit purchase options, compared to
approximately $3.4 million in 1995. At December 31, 1996 working capital was
approximately $7.1 million compared to $4.5 million at December 31, 1995. The
increase in the Company's working capital, based upon the receipt of these net
proceeds from the issuance of its securities was somewhat offset by the net cash
used by operating activities for the year ended December 31, 1996. Until such
time as the Company obtains agreements with third-party licensees or partners to
provide funding for the Company's anticipated business activities or the Company
is able to obtain funds through the private or public sale of its securities,
the Company's working capital will be utilized to fund its activities.
Capital expenditures and additional patent development costs for the year
ended December 31, 1996 were approximately $185,000. The Company anticipates
capital expenditures of approximately $55,000 during the fiscal year ended
December 31,1997.
The Company's long term capital requirements will depend upon numerous
factors including the progress of the Company's research and development
programs; the resources that the Company devotes to self-funded early stage
clinical testing of SEPA enhanced compounds, proprietary manufacturing methods
and advanced technologies; the ability of the Company to enter into additional
licensing arrangements or other strategic alliances; the ability of the Company
to manufacture products under those arrangements and the demand for its products
or the products of its licensees or strategic partners if and when approved for
sale by regulatory authorities. In any event substantial additional funds will
be required before the Company is able to generate revenues sufficient to
support its operations. There is no assurance that the Company will be able to
obtain such additional funds on favorable terms, if at all. The Company's
inability to raise sufficient funds could require it to delay, scale back or
eliminate certain research and development programs.
The Company believes that its existing cash and cash equivalents,
marketable securities and other investments will be sufficient to meet its
operating expenses and capital expenditure requirements for at least the next
twelve months. The Company's cash requirements may vary materially from those
now planned because of changes in focus and direction of the Company's research
and development programs, competitive and technical advances, patent
developments or other developments. It is not believed that inflation will have
any significant effect on the results of the Company's operations.
RECENT ACCOUNTING PRONOUNCEMENT
In March 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 128, "Earning Per Share", which will be
effective for fiscal 1997. SFAS No. 128 will require the Company to restate
amounts previously reported as earnings per share to comply with the
requirements of SFAS No. 128; while the Company is in the process of evaluating
the impact of SFAS No. 128, it does not expect that adoption will have a
material effect on previously reported earnings per share.
THE FOREGOING STATEMENTS IN THIS REPORT INCLUDE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED OR REFERRED TO IN ITEM 1, BUSINESS - "RISK FACTORS".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required under this Item 8 is set forth on pages 21 through
37 of this report.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MacroChem Corporation:
We have audited the accompanying balance sheets of MacroChem Corporation as
of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of MacroChem Corporation at December 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 6, 1997
MACROCHEM CORPORATION
BALANCE SHEETS
DECEMBER 31,
ASSETS 1996 1995 LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ------ ---- ---- ------------------------------------- ---- ----
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and cash equivalents $7,329,881 $3,591,779 Current portion of capitalized lease
Marketable securities 21,824 1,258,492 obligations $ 38,630 $ 36,616
Accounts receivable 43,977 --- Accounts payable and accrued expenses 281,769 290,345
Prepaid expenses and other Deferred compensation 47,050 97,050
current assets 100,033 112,291 Deferred rent 1,014 5,928
--------- --------- ----------- -----------
TOTAL CURRENT LIABILITIES 368,463 429,939
----------- -----------
TOTAL CURRENT ASSETS 7,495,715 4,962,562 CAPITALIZED LEASE OBLIGATIONS, Net of
--------- --------- current portion 18,408 55,245
PROPERTY AND EQUIPMENT (NET) 345,343 307,390
--------- ---------
DEFERRED RENT, Noncurrent portion --- 1,014
----------- -----------
OTHER ASSETS:
Patents, net 218,232 188,213 TOTAL LONG-TERM LIABILITIES 18,408 56,259
----------- -----------
Deposits 4,460 4,460
--------- ---------
TOTAL LIABILITIES 386,871 486,198
----------- -----------
TOTAL OTHER ASSETS 222,692 192,673
--------- ---------
COMMITMENTS & CONTINGENCIES (Notes 6,7,8)
STOCKHOLDERS' EQUITY:
Preferred stock --- ---
Common stock, $.01 par value; authorized
60,000,000 shares; issued and outstanding,
15,601,274 shares and 13,129,321 shares
at December 31, 1996 and 1995, respectively 156,013 131,293
Additional paid-in capital 25,839,675 19,801,473
Unearned compensation ( 222,674) ---
Accumulated deficit (18,096,135) (14,956,339)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 7,676,879 4,976,427
---------- ----------
TOTAL LIABILITIES AND
TOTAL ASSETS $8.063,750 $5,462,625 STOCKHOLDERS' EQUITY $ 8,063,750 $5,462,625
========= ========= ========== ==========
See notes to financial statements.
MACROCHEM CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
REVENUES
Research contracts $ 129,786 $ 17,493 $ 44,710
----------- --------- ----------
OPERATING EXPENSES
Marketing, general and administrative 1,892,572 1,412,537 1,291,040
Research and development 1,736,561 1,238,070 864,123
Consulting fees with related parties 12,000 36,000 36,000
----------- ---------- ----------
TOTAL OPERATING EXPENSES 3,641,133 2,686,607 2,191,163
----------- ---------- ----------
LOSS FROM OPERATIONS ( 3,511,347) ( 2,669,114) ( 2,146,453)
----------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 383,596 246,018 170,950
Interest expense ( 12,045) ( 42,644) ( 1,199)
Other --- ( 97) 7,260
----------- ---------- ----------
TOTAL OTHER INCOME 371,551 203,277 177,011
----------- ----------- ----------
NET LOSS $( 3,139,796) $( 2,465,837)$( 1,969,442)
========== =========== ==========
NET LOSS PER SHARE $( .21) $( .20)$( .17)
========== =========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,239,080 12 ,331,560 11,558,105
========== =========== ==========
See notes to financial statements.
MACROCHEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
--------------- ----------------
Number Number Additional
of Par of Par Paid-In Unearned Accumulated
Shares Value Shares Value Capital Compensation Deficit Total
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 95,000 $ 950 11,123,543 $ 111,235 $ 16,041,537 $ --- $(10,521,060) $5,632,662
Issuance of common stock for services
rendered and in settlement of
accounts payable --- --- 6,600 66 11,709 --- --- 11,775
Conversion of preferred stock to
common stock (95,000) (950) 190,000 1,900 ( 950) --- --- ---
Exercise of common stock warrants --- --- 246,500 2,465 371,035 --- --- 373,500
Exercise of common stock options --- --- 3,000 30 1,283 --- --- 1,313
Net loss --- --- --- --- --- --- ( 1,969,442) (1,969,442)
------ ----- ---------- -------- ---------- ------- ---------- ---------
BALANCE, DECEMBER 31, 1994 --- --- 11,569,643 115,696 16,424,614 --- (12,490,502) 4,049,808
Issuance of common stock --- --- 1,000,000 10,000 2,740,000 --- --- 2,750,000
Issuance of common stock for services
rendered --- --- 4,145 42 16,270 --- --- 16,312
Exercise of common stock warrants --- --- 51,700 517 90,358 --- --- 90,875
Exercise of common stock options --- --- 203,833 2,038 531,231 --- --- 533,269
Exercise of unit purchase options --- --- 300,000 3,000 522,000 --- --- 525,000
Costs associated with issuance of
common stock and warrants --- --- --- --- ( 523,000) --- --- ( 523,000)
Net loss --- --- --- --- --- --- ( 2,465,837) (2,465,837)
------ ----- ---------- --------- ---------- ------- ---------- ---------
BALANCE, DECEMBER 31, 1995 --- --- 13,129,321 131,293 19,801,473 --- (14,956,339) 4,976,427
Issuance of common stock for services
rendered --- --- 925 9 4,500 --- --- 4,509
Exercise of common stock warrants --- --- 726,667 7,267 2,227,984 --- --- 2,235,251
Exercise of common stock options --- --- 251,861 2,519 442,887 --- --- 445,406
Exercise of unit purchase options --- --- 1,492,500 14,925 2,596,950 --- --- 2,611,875
Stock option compensation --- --- --- --- 765,881 (222,674) --- 543,207
Net loss --- --- --- --- --- --- ( 3,139,796) (3,139,796)
------ ----- ---------- --------- ----------- ------- ---------- ---------
BALANCE, DECEMBER 31, 1996 --- $ --- 15,601,274 $ 156,013 $ 25,839,675 $(222,674) $(18,096,135) $7,676,879
====== ===== ========== ========= ========== ======= ========== =========
See notes to financial statements.
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,139,796) $(2,465,837) $(1,969,442)
--------- --------- ---------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 116,967 79,475 60,738
(Gain) loss on disposal of equipment --- ( 3,925) 3,740
Abandoned patent costs --- 22,592 ---
Issuance of common stock in exchange
for services 4,509 16,312 11,775
Stock-based compensation 543,207 --- ---
Amortization of discounts on
marketable securities ( 70,845) ( 152,316) ( 88,108)
Increase (decrease) in cash from:
Accounts receivable ( 43,977) --- 34,000
Prepaid expenses and other current assets 12,258 ( 21,767) ( 46,508)
Accounts payable and accrued expenses ( 8,576) 136,388 ( 22,933)
Deferred compensation ( 50,000) ( 64,200) 32,750
Deferred rent ( 5,928) ( 5,928) ( 5,928)
Deposits --- ( 150) ---
--------- --------- ---------
Total adjustments 497,615 6,481 ( 20,474)
--------- --------- ---------
Net cash used by operating activities (2,642,181) (2,459,356) (1,989,916)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment --- 4,800 ---
Purchases of marketable securities (5,743,755) (3,516,801) (5,491,267)
Purchase of certificates of deposit ( 734,732) ( 287,000) ---
Proceeds from maturities of
marketable securities 6,771,000 5,977,000 2,300,000
Proceeds from maturities of certificates of deposit 1,015,000 --- ---
Expenditures for property and equipment ( 136,306) ( 54,916) ( 130,666)
Additions to patents ( 48,633) ( 16,558) ( 27,740)
--------- --------- ---------
Net cash provided (used) by
investing activities 1,122,574 2,106,525 (3,349,673)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease ( 34,823) ( 16,992) ( 4,905)
Proceeds from issuance of common stock --- 2,750,000 ---
Proceeds from exercise of common stock options 445,406 533,269 1,313
Proceeds from exercise of common stock warrants 2,235,251 90,875 373,500
Proceeds from exercise of unit purchase options 2,611,875 525,000 ---
Costs associated with the registration and
issuance of common stock and warrants --- ( 523,000) ---
--------- --------- ---------
Net cash provided by financing
activities 5,257,709 3,359,152 369,908
--------- --------- ---------
See notes to financial statements. (Continued)
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $3,738,102 $3,006,321 $(4,969,681)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 3,591,779 585,458 5,555,139
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $7,329,881 $3,591,779 $ 585,458
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest aggregated $9,226, $5,022 and $1,199, respectively,
for the years ended December 31, 1996, 1995 and 1994. The Company did not
pay any income taxes during those periods.
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired in exchange for
capital lease obligation $ --- $ 49,138 $ 64,620
========= ========= ==========
See notes to financial statements. (Concluded)
MACROCHEM CORPORATION
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MACROCHEM
Corporation (the "Company") develops and licenses transdermal drug delivery
compounds and systems intended to promote the delivery of drugs from the
surface of the skin into the skin or the bloodstream.
The Company has been engaged primarily in research and development since
its inception in 1981 and has derived limited revenues from the commercial
sale of its products and licensing of certain technology. The Company has
had no revenues relating to the sale of any products currently under
development. The Company has incurred net losses every year since its
inception and the Company anticipates that losses may continue for the
foreseeable future. At December 31, 1996, the Company's accumulated deficit
was approximately $18.1 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 financial resources are sufficient to meet planned operating activities
for the next twelve months.
REVENUE RECOGNITION - Revenues are earned and recognized based upon
completion of a contract, upon the sale or licensing of product rights,
upon shipment of product, or upon the attainment of benchmarks specified in
the related agreements.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations as incurred. Such costs include proprietary research and
development activities and expenses associated with research and
development contracts. In 1996, the Company changed its definition of
research and development to more properly reflect personnel efforts and
other resources previously included in general and administrative expenses.
This change had the effect of increasing research and development and
decreasing general and administrative costs from amounts previously
reported by approximately $129,000 for the year ended December 31, 1995.
This change in definition also had the effect of reducing research and
development and increasing general and administrative costs by
approximately $67,000 for the year ended December 31, 1994.
CASH EQUIVALENTS - Cash equivalents consist of short-term, highly liquid
investments purchased with remaining maturities of three months or less.
MARKETABLE SECURITIES - The Company intends to hold until maturity its
investments and accordingly, such investments are reported at amortized
cost in the accompanying financial statements. The fair market value of
marketable securities is disclosed in a subsequent note.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization are provided on the straight-line method over
the estimated useful lives of the related assets which range from five to
ten years.
PATENTS - The Company has filed applications for United States and foreign
patents covering aspects of its technology. Costs and expenses incurred in
connection with pending patent applications are deferred. Costs related to
successful patent applications are amortized over the estimated useful
lives of the patents, not exceeding 20 years, using the straight-line
method. Accumulated costs related to patents or deferred patent application
costs that are considered to have limited future value are charged to
expense. Accumulated amortization aggregated approximately $47,000 and
$28,000, respectively, at December 31, 1996 and 1995.
On an on-going basis, the Company evaluates the recoverability of the net
carrying value of various patents by reference to the patent's expected use
in drug and other research activities as measured by outside interest in
the Company's patented technologies and management's determination of
potential future uses of such technologies. As a result of such
evaluations, during 1995 the Company wrote off approximately $22,600 of
costs associated with patents no longer having value.
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes", which requires the use of the
liability method. The objective of this method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities
using tax rates in effect in the year(s) in which the differences are
expected to reverse.
NET LOSS PER COMMON SHARE - Net loss per common share is computed based on
the weighted average number of common shares outstanding during each year.
Common equivalent shares from convertible preferred stock, common stock
options and common stock warrants are excluded from the computations as
their effect is antidilutive.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The primary
estimates underlying the Company's financial statements include the useful
lives of the Company's patents, the valuation allowance established for the
Company's deferred tax assets, and the underlying assumptions to apply the
pricing model to value stock options under SFAS No. 123. Management bases
its estimates on certain assumptions, which it believes are reasonable in
the circumstances, and while actual results could differ from those
estimates, management does not believe that any change in those assumptions
in the near term would have a significant effect on financial position or
the results of operations.
RECENTLY ADOPTED ACCOUNTING STANDARDS - During 1996, the Company adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and
for long-lived assets and certain identifiable intangibles which are to be
disposed of. The effect of implementing SFAS No. 121 on the Company's
financial position and results of operations was not material.
STOCK-BASED COMPENSATION - During 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123 addresses the
financial accounting and reporting standards for stock or other
equity-based compensation arrangements.
The Company has elected to continue to use the intrinsic value based method
to account for employee stock option plans and provide disclosures based on
the fair value method in the notes to the financial statements as permitted
by SFAS No. 123.
Stock or other equity based compensation for non-employees must be
accounted for under the fair value based method as required by SFAS No.
123. Under this method, the equity based instrument is valued at either the
fair value of the consideration received or equity instrument issued on the
date of grant. The resulting compensation cost is recognized and charged to
operations over the service period, which is usually the vesting period. In
1996, the net loss reflects compensation costs of approximately $543,200
associated with the issuance of warrants and stock options to non
employees. In addition, the Company recorded unearned compensation of
approximately $222,700 which will be amortized over the remaining vesting
period of the stock-based compensation arrangements.
RECENT ACCOUNTING PRONOUNCEMENT - In March 1997, the Financial Accounting
Standards Board released SFAS No. 128, " Earnings Per Share", which will be
effective for fiscal 1997. SFAS No. 128 will require the Company to restate
amounts previously reported as earnings per share to comply with the
requirements of SFAS No. 128; while the Company is in the process of
evaluating the impact of SFAS No. 128, it does not expect that adoption
will have a material effect on previously reported earnings per share.
OTHER - Certain items in the financial statements for the periods ended
December 31, 1995 and 1994 have been reclassified to conform with current
presentation.
2. MARKETABLE SECURITIES
As of December 31, 1996, all marketable securities are classified as
investment securities and carried at amortized cost. The maturities of
investment securities held at December 31, 1996 and 1995 are all one year
or less.
The carrying amounts and approximate market value of investment securities
are as follows as of December 31:
Amortized Cost Unrealized Gain Market Value
-------------- ---------------- ------------
1996
U.S. Treasury Securities $ 21,824 --- $ 21,824
========= ====== =========
1995
U.S. Treasury Securities $ 971,492 $2,746 $ 974,238
Certificates of deposit
(bearing interest rates
ranging from 3.5% to 5.4%) 287,000 --- 287,000
--------- ----- ---------
$1,258,492 $2,746 $1,261,238
========= ===== =========
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
1996 1995
---- ----
Laboratory equipment $562,183 $448,577
Office equipment 158,929 142,549
Leasehold improvements 96,882 90,564
------- -------
Total 817,994 681,690
Less: accumulated depreciation
and amortization (472,651) (374,300)
------- -------
Property and equipment, net $345,343 $307,390
======= =======
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of
December 31:
1996 1995
---- ----
Accounts payable $ 58,179 $ 20,863
Payroll taxes 19,313 14,670
Accrued interest expense 40,431 37,612
Insurance payable --- 17,447
Accrued professional fees 130,046 130,339
Accrued clinical trial costs 33,800 69,414
------- -------
$281,769 $290,345
======= =======
5. CAPITALIZED LEASE OBLIGATIONS
Equipment held under capital lease obligations included with owned property
on the balance sheet consists of the following as of December 31:
1996 1995
---- ----
Laboratory equipment $ 113,758 $113,758
Less: accumulated amortization ( 39,468) ( 16,716)
------- ------
$ 74,290 $ 97,042
======= =======
Future minimum lease payments under capital leases are as follows:
1997 $ 43,193
1998 19,653
-------
Total minimum lease payments 62,846
Less: imputed interest (approximately 11%) ( 5,808)
-------
Present value of minimum lease payments 57,038
Less: current portion 38,630
-------
Capital lease obligation, net of current portion $ 18,408
=======
6. STOCKHOLDERS' EQUITY
AUTHORIZED CAPITAL STOCK - Authorized capital stock consists of 60,000,000
shares of $.01 par value common stock of which 15,601,274 shares are issued
and 10,491,581 are reserved for conversion of common stock warrants,
options and unit purchase options at December 31, 1996. Authorized
undesignated preferred stock totals 5,500,000 shares.
STOCK ISSUANCES - On May 30, 1995, the Company sold 1,000,000 shares of
common stock, par value $.01 per share, to a single investor (the
"Investor") in a private placement. The sale price was $2.75 per share.
Pursuant to the Common Stock Purchase Agreement between the Company and the
Investor, the Investor had the right to designate one person to serve on
the Company's Board of Directors. The firm of Janssen-Meyers, L.P. ("J-M")
received a brokers fee of $357,500 from the company for this private
placement. Mr. Janssen and Mr. Meyers are principals of J-M and each own,
or have the rights to acquire, more than 10% of the Company's voting
securities.
In January 1993, the Company completed a private placement offering whereby
142 units (the Units), each consisting of 30,000 shares of common stock,
10,000 Class A common stock warrants and 10,000 Class AA common stock
warrants, were sold, or issued in exchange for certain notes payable, for
$52,500 per Unit.
Additionally, options were issued to affiliates of the placement agent of
the offering which are exercisable for 118 and one-third of these Units at
a price of $52,500 per Unit. These options expire in December 1997. During
1995, options to purchase 10 Units were exercised by an affiliate of the
placement agent, and 49 and three-quarters options to purchase Units were
exercised during 1996. At December 31, 1996, options to purchase 58 and
seven-twelfths of these Units remain outstanding.
WARRANTS - As part of the January 1993 private placement, the Company
issued 1,420,000 Class A and 1,420,000 Class AA common stock warrants. Each
Class A and Class AA warrant is exercisable for one share of common stock
at a price per share, subject to adjustment, of $3.00 and $4.50,
respectively. As of November 9, 1994, under certain circumstances, based
primarily upon the trading price of the Company's common stock, each Class
A and AA common stock warrant is redeemable by the Company at a price of
$.05 per warrant. The Class A and Class AA common stock warrants expire in
December 1997. At December 31, 1996, 1,339,733 and 1,936,400 Class A and
Class AA warrants were outstanding, respectively.
In connection with the issuance of $300,000 of subordinated notes payable
in August 1992 (certain of the notes were issued to affiliates of the
placement agent), of which $155,000 was repaid in January 1993 and $145,000
was converted to Units in the January 1993 offering described above, the
Company issued warrants to purchase 300,000 shares of common stock at an
initial exercise price of $1.75 per share. These warrants expire in
September 1997. At December 31, 1996, exercisable warrants to purchase
185,500 shares of common stock remain outstanding.
In June 1991, the Company sold 350,000 shares of common stock at a price of
$1.25 per share. The price per share also included a warrant to purchase
one share of common stock at a price of $2.50 per share. These warrants
expired March 31, 1995.
Warrants issued in connection with the Company's initial public offering in
1985 expired March 31, 1995.
In July 1995, the Company issued 240,000 four-year warrants to J-M to
permit the holder to acquire 80,000 shares of the Company's common stock at
an exercise price of $3,00, $4.00, and $5.00, respectively. Exercise of
these warrants was permitted only if the Company and J-M entered into a new
consulting agreement on or before April 1, 1996. The warrants expired April
1, 1996.
In June 1996, in connection with services performed for the Company, J-M
received a warrant, exercisable immediately and expiring June 17, 1999, for
the purchase of 145,800 shares of the Company's common stock at a price of
$6.075 per share. The market price per share on the grant date was $5.125.
Effective January 1, 1996, the Company adopted SFAS No. 123 "Accounting for
Stock-Based Compensation" which establishes fair value as the measurement
basis for transactions in which an entity acquires goods or services from
non-employees in exchange for equity instruments As a result, the 1996 net
loss reflects compensation costs of $433,133 associated with the granting
of this warrant. The compensation cost is based upon the fair value method
calculated on the grant date using the Black/Scholes option pricing model.
Key assumptions in applying this pricing model include an expected life of
three years, expected volatility of the underlying stock of approximately
94%, and a risk free interest rate of 5.25%. Pursuant to an informal
understanding, the Company is paying J-M a monthly fee of $5,000 for
consulting services from December 1996 through April 1997.
Class A and Class AA warrants, exclusive of the unexercised Unit Purchase
Options, aggregated 3,461,633 at December 31, 1996.
STOCK OPTION PLANS - The Company has three stock option plans, the 1984
Incentive Stock Option Plan (ISO Plan), the 1984 Non-Qualified Stock Option
Plan (Non-qualified Plan) and the 1994 Equity Incentive Plan (1994 Plan).
Under the terms of the 1984 Plans the Company may no longer award any
options. All options previously granted may be exercised at any time up to
ten years from date of award.
Under the terms of the 1994 Plan, the Company may grant options to purchase
up to a maximum of 2,500,000 shares of common stock to certain employees,
directors and consultants. The options may be awarded as incentive stock
options (employees only) and non-incentive stock options (certain
employees, directors and consultants).
The exercise price of options under the ISO Plan and incentive options from
the 1994 Plan may not be less than fair market value at the date of grant.
The exercise price of the Non-Qualified options and the non-incentive
options from the 1994 Plan is determined by the Board of Directors. All
options become exercisable as specified at the date of grant.
The following table presents activity under all stock option plans:
Weighted Average
Number of Options Exercise Price
----------------- ----------------
Outstanding December 31, 1993 2,013,675 $1.178
Granted 848,100 3.360
Exercised ( 3,000) .438
Expired ( 181,000) 3.543
---------
Outstanding December 31, 1994 2,677,775 $1.558
Granted 325,000 3.197
Exercised ( 203,833) 2.616
Expired ( 13,000) 6.023
Canceled ( 141,401) 3.460
---------
Outstanding December 31, 1995 2,644,541 $1.554
Granted 1,180,845 5.573
Exercised ( 251,861) 1.768
Canceled ( 20,000) 4.250
---------
Outstanding December 31, 1996 3,553,525 $2.850
=========
Exerciseable at December 31: 1996 2,312,501 $1.610
=========
1995 2,161,841 $1.216
=========
1994 1,994,276 $1.016
=========
The weighted average fair values of options granted during 1996 and 1995
were $2.37 and $4.93, respectively.
All options granted during the three year period ended December 31, 1996
were granted at the market price of the stock except for 10,000 in 1995
which were issued at an option price higher than market with a weighted
average exercise price of $6.75 and a market price of $3.75.
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:
1996 1995
---- ----
Risk-free interest rate 5.25% 5.25%
Expected life of option grants 5-10 years 5-10 years
Expected volatility of underlying stock 59.3%-99.2% 48.2%-112.5%
Expected dividend payment rate, as a
percentage of the stock price on
the date of grant --- ---
It should be noted that the option pricing model used was designed to value
readily tradable stock options with relatively short lives. The options
granted to employees are not tradable and have contractual lives of up to
ten years.
The following table sets forth information regarding options outstanding at
December 31, 1996:
Weighted Ave. Weighted Ave.
Range of Number of Number Exercise Price- Weighted Ave. Exercise Price-
Exercise Options Currently Options Remaining Currently
Prices Outstanding Exerciseable Outstanding Life Exerciseable
----------------------------------------------------------------------------------------
$.43 1,373,080 1,373,080 $ .43 4.17 years $ .43
$1.50-$2.00 182,500 107,501 $1.78 6.05 years $1.76
$2.75-$4.00 808,920 711,920 $3.20 7.09 years $3.13
$4.875-$5.875 1,184,025 115,000 $5.56 9.35 years $5.83
$7.75 5,000 5,000 $7.75 3.83 years $7.75
The Company uses the intrinsic value method to measure compensation expense
associated with grants of stock options to employees and, prior to December
15, 1995, to suppliers of goods and services. Had the Company used the fair
value method to measure compensation, the reported net loss and loss per
share would have been as follows:
1996 1995
---- ----
Net loss as reported ($3,139,796) ($2,465,837)
Compensation costs:
Employee ( 2,560,760) ( 108,735)
Non-Employee ( 58,273) ( 100,278)
---------- ----------
Proforma net loss ($5,758,829) ($2,674,850)
========== ==========
Proforma net loss per share ($ 0.38) ($ 0.22)
========== ==========
It should be noted that the proforma amounts presented above are inexact in
that the pricing model was designed to value freely-traded options rather
than employee stock options. Proforma charges for 1996 and 1995 may be
understated in relation to future years since the 1996 and 1995 charges do
not reflect the financial impact of options granted prior to 1995.
OTHER STOCK, STOCK OPTION AND WARRANT ISSUANCES - In May 1993, the Company
issued a warrant to purchase 75,000 shares of common stock at a price of
$1.50 per share. The warrant was issued for services provided in selling
shares of the Company's preferred stock in 1991. These warrants were
exercised during the fiscal year ended December 31, 1994. During 1995, the
Company issued 4,145 common shares and recorded compensation of $16,312 for
services rendered. The Company issued 925 common shares and recorded
compensation of $4,509 for services rendered in 1996.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company has a lease expiring on February 28, 2000
for its operating facility. At December 31, 1996, future minimum lease
payments under this lease agreement are as follows: 1997, $163,416, 1998,
$174,816, 1999, $174,816 and 2000, $29,136. Total rental expense under all
operating leases was approximately $106,000, $104,000 and $107,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
EMPLOYMENT AND CONSULTING AGREEMENTS - The Company has employment and
consulting agreements with various consultants and certain key employees,
with terms ranging from one year to an indefinite period of time. These
agreements provide for annual payments of approximately $654,000. In
addition, certain consulting agreements also provide for additional
payments to certain consultants related to obtaining a financial placement,
sale or licensing of the Company's product or technology to third parties.
During the periods ended December 31, 1996, 1995 and 1994, no such
additional amounts were earned by the related consultants.
ROYALTY AGREEMENTS - The Company has entered into various license
agreements which require the Company to pay royalties based upon a set
percentage of certain product sales and license fee revenue. There were no
such amounts paid in 1996, 1995 and 1994.
CLINICAL TRIAL LIABILITY INSURANCE - A clinical liability policy was
obtained as of November, 1995 and renewed in 1996.
8. AGREEMENT WITH PLACEMENT AGENT
In connection with the January 1993 private placement offering (Note 6),
the placement agent received a fee equal to 13% of the proceeds received by
the Company in the offering. In addition, the Company entered into an
agreement with the placement agent of that offering whereby the Company
granted to the placement agent the right of first refusal with respect to
participating in all future financings by the Company within the five-year
period expiring December 1997. This right of first refusal was terminated
for a fee of $150,000, paid in connection with the issuance of one million
shares of the Company's common stock, in May 1995. The placement agent is
entitled to receive 4% of the proceeds collected (under certain
circumstances) in conjunction with the exercise of the Class A and Class AA
common stock warrants sold in the private placement.
9. INCOME TAXES
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of December
31, 1996, the Company has available net operating loss carryforwards of
approximately $17,200,000 for federal income tax purposes, expiring through
2010 and $8,800,000 for state income tax purposes, expiring through 2000.
In addition, the Company, for federal and state income tax purposes, has
unused investment and research and development tax credits aggregating
$270,000 and $60,000, respectively. The use of approximately $8,300,000 of
the federal net operating losses is restricted to approximately $550,000
per year due to a change in ownership, which occurred in December 1992, in
accordance with definitions as stated in the Internal Revenue Code.
Deferred income taxes consist of the aggregate operating loss and tax
credit carryforward and reflect the net tax effect of differences in the
timing of certain revenue and expense items and the related carrying
amounts of assets and liabilities for financial reporting and tax purposes
are not material and, accordingly, are not displayed in the table below.
The components of the Company's deferred tax assets and liabilities as of
December 31, 1996 and December 31, 1995 are as follows:
1996 1995
---- ----
Deferred Tax Assets:
Net operating loss carryforwards $6,700,000 $5,400,000
Tax credit carryforwards 330,000 306,000
Other 23,000 34,000
--------- ---------
7,053,000 5,740,000
Valuation allowance (7,053,000) (5,740,000)
--------- ---------
Deferred tax asset, net $ --- $ ---
========= =========
For the years ended December 31, 1996, 1995 and 1994, the valuation
allowance was increased by approximately $1,313,000, $660,000, and
$851,000, respectively, due to the uncertainty of future realization of
currently generated net operating loss carryforwards.
10. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of quarterly financial information for 1996 (in
thousands, except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------------------------------------------------
Total revenue $ --- $ 83 $ 3 $ 44 $ 130
Operating expenses 812 1,355 689 785 3,641
Net loss $( 749) $(1,148) $(620) $(623) $(3,140)
===== ===== === === =====
Net loss per share $( .05) $( .07) $(.04) $(.05) $( .21)
===== ===== === === =====
The 1996 quarterly financial information has been restated to reflect
compensation costs associated with non-employee stock based compensation
arrangements. As a result of the adoption of SFAS No. 123, these
compensation costs included in the restated quarterly financial information
are $438,000, $34,000 and $56,000 for the second, third and fourth
quarters, respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information requested by this item is incorporated by reference from
the Company's Proxy Statement.
Item 11. EXECUTIVE COMPENSATION.
The information requested by this item is incorporated by reference from
the Company's Proxy Statement.
Item 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information requested by this item is incorporated by reference from
the Company's Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information requested by this item is incorporated by reference from
the Company's Proxy Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following Financial Statements as of December 31, 1996 and 1995 and
for the three years in the period ended December 31, 1996 are filed herewith:
Page
Independent Auditors' Report 21
Balance Sheets 22
Statements of Operations 23
Statements of Stockholders' Equity 24
Statements of Cash Flows 25-26
Notes to Financial Statements 27-37
(a)(2) The following Financial Statement Schedules are filed herewith:
None.
Schedules not included herein are omitted because they are not applicable or
the required information appears in the Financial Statements or Notes thereto.
(a)(3) The following exhibits are filed herewith:
3a Certificate of Incorporation as amended.
4 Stock Purchase Warrant
10.10.2 1984 Non-Qualified Stock Option Plan as amended November 15, 1996*
10.10.3 1984 Incentive Stock Option Plan as amended November 15, 1996*
10.11.1 Second Amendment to Lease Agreement between Lexington BGK Associates,
Limited Partnership and MacroChem Corporation for space located at 110
Hartwell Avenue, Lexington, MA 02173
10.13 Form of Employment Agreement between the Company and
Dr. Stephen J. Riggi*
11. Statement of Earnings Per Share
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
99.1 1994 Equity Incentive Plan as amended November 15, 1996*
The following exhibits to be filed herewith are incorporated by reference
to the exhibits to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995:
4(b) Amendment to warrant agreement.
10.12 Agreement between the Company and Janssen/Meyers Associates, L.P.
The following exhibit required to be filed herewith is incorporated by
reference to the exhibits to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993:
10.11 Lease agreement between MacroChem Corporation and Phoenix Home Life
Mutual Insurance Company for space located at 110 Hartwell Avenue,
Lexington, MA 02173.
The following exhibits required to be filed herewith are incorporated by
reference to the exhibits to the Company's Registration Statement on Form S-1
(No. 33-62042):
1a Agency Agreement between the Company and D.H. Blair Investment
Banking Corp.
1b Unit Purchase Options
1c M/A Agreement between the Company and D.H. Blair Investment
Banking Corp.
3b Bylaws
3c State of Delaware Certificate of Agreement of Merger
4a Included in exhibits 3a, 3b and 3c
4b Specimen Class X Warrant Certificate
4c Specimen Class A Warrant Certificate
4d Specimen Class AA Warrant Certificate
4e Warrant Agreement among the Company, American Stock Transfer and Trust
Company of New York and D.H. Blair Investment Banking Corp.
10a Form of Employment Agreement between the Company and
Dr. Carlos M. Samour*
10b Form of Employment Agreement between the Company and
Mr. Alvin J. Karloff*
The following exhibits required to be filed herewith are incorporated by
reference to the exhibits to the Company's Annual Report on Form 10-K for the
year ended March 31, 1988:
4.1 Form of Common Stock Certificate
(b) No current reports on Form 8-K were filed in the three-month
period ended December 31, 1996.
--------------------------
*Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MACROCHEM CORPORATION
Dated: March 28, 1997 By: /s/ Alvin J. Karloff
Alvin J. Karloff
President, Chief Executive Officer
and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 28, 1997.
/s/ Alvin J. Karloff Chief Executive Officer,
Alvin J. Karloff President, Principal Financial Officer
and Director
/s/ Dr. Carlos M. Samour Chairman of the Board of Directors
Dr. Carlos M. Samour and Scientific Director
/s/ Dr. Stephen J. Riggi Vice President, Operations and
Dr. Stephen J. Riggi Director
/s/ D. Ray Taylor Director
D. Ray Taylor
/s/ Dr. Willard M. Bright Director
Dr. Willard M. Bright
/s/ Peter G. Martin Director
Peter G. Martin