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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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission file number 0-13634
MACROCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2744744
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Hartwell Avenue
Lexington, Massachusetts 02421-3134
-----------------------------------
(Address of principal executive offices)
(781) 862-4003
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of Common Stock held by
non-affiliates, based upon the closing price for such stock on February 26, 1999
was approximately $223,000,000. As of February 26, 1999, 22,165,328 shares of
Common Stock, $.01 par value, were outstanding.
PART I
ITEM 1. BUSINESS.
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed or referred
to in "Risk Factors".
MacroChem's primary business is the development of pharmaceutical products
for commercialization by applying SEPA(R) (Soft Enhancer of Percutaneous
Absorption), its patented topical drug delivery technology. SEPA compounds, when
properly combined with drugs, provide pharmaceutical formulations (creams, gels,
solutions, etc.) that enhance the transdermal delivery of drugs into the skin or
into the bloodstream. SEPA formulations combined with the Company's polymers and
adhesives can also be used with patch formats to achieve the transdermal
delivery of selected drugs. The Company believes that SEPA compounds enhance the
diffusion of drugs into and through the skin by making the outer layer of the
skin (stratum corneum) more permeable to the drug molecule. Transdermal delivery
provides an alternative to other methods of drug administration (injection, oral
dosage forms, inhalation, etc.), and may allow selected drugs to be administered
more effectively, at lower doses, with fewer adverse events and improved patient
compliance.
The Company is developing specific SEPA formulations for use with
non-proprietary and proprietary drugs manufactured by pharmaceutical companies,
and plans to commercialize these products through the formation of partnerships,
strategic alliances and license agreements with those companies. In order to
attract strategic partners, the Company is conducting clinical testing of
certain SEPA-enhanced pharmaceuticals. The Company believes that if the clinical
trials are successful the results will aid the Company in attracting partners to
assist in the promotion of the product. Because of the substantial costs
involved in bringing a new pharmaceutical product or a new formulation of an old
drug to the market, the Company may be required to rely on pharmaceutical
companies to conduct all or part of the clinical trials necessary to gain
regulatory approval to manufacture and to market any resulting product.
The Company has also developed a series of new low molecular weight
polymers, termed MacroDerm(TM), for cosmetic use and the topical delivery of
pharmaceuticals. The Company has developed, tested and evaluated prototypes of
MacroDerms and is currently seeking strategic partners to manufacture and market
products based upon this technology.
The Company does not maintain general product liability insurance, since
the Company does not market drug products. The Company has ongoing clinical
studies and has obtained specific liability insurance relating to such studies.
As of December 31, 1998, no asserted liability claims existed against the
Company. However, in the future, incidents could give rise to claims which could
exceed the Company's insurance coverage and resources.
BUSINESS AGREEMENTS
On July 1, 1998 the Company signed a global licensing agreement with
American Home Products to develop and market a drug formulation incorporating
MacroChem's proprietary SEPA(R) penetration enhancement system. The agreement
provides for licensing fees, milestone payments, purchase of MacroChem Common
Stock and royalties. Most of the payments under the agreement are contingent on
achieving milestones related to the development, marketing and sale of the
product.
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,
other lump-sum payments and running royalty 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 addition,
Cytopharm must pay a minimum royalty of $100,000 per year beginning January 22,
2002, subject to the receipt of an approved NDA for the formulation. The Company
has not received any royalties under this agreement to date.
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, 1999, the Company had 29 full-time employees, 19 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 approximated $4,318,800, $2,084,800 and
$1,736,600 during the years ended December 31, 1998, 1997 and 1996,
respectively. The Company is dependent upon third parties to conduct clinical
studies, obtain U.S. Food and Drug Administration ("FDA") and other regulatory
approvals and manufacture and market a finished product.
The Company anticipates incurring significant development expenditures in
the future as it continues its efforts 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, following oral administration, a drug must pass
through the gastrointestinal system to be absorbed and may be metabolized or
broken down in the stomach, intestines or liver, resulting in a lower amount of
unchanged drug at the target site for its action. As a result, higher dosages of
the drug must be administered orally to produce the desired effect, which may
cause irritation of the gastrointestinal tract and systemic toxicity.
In addition, the rate at which an orally administered drug is absorbed may
vary depending on several factors, including the drug's chemical properties, the
length of time the drug remains in the gastrointestinal tract and the patient's
meal patterns. Although the pharmaceutical industry has investigated a variety
of alternative approaches for dealing with drug adverse events and loss of
efficacy following oral dosing, through enteric coating of tablets, formulating
with various waxes and cellulosic materials, microencapsulation and compressing
tablets in various layers, the desired effects of these approaches are not
always reproducible from patient to patient or effective in bypassing
metabolism.
TOPICAL DRUG DELIVERY
Topical drug delivery is the process of delivering drugs into the skin
(dermal delivery) so that they can be effective in the treatment of
dermatological conditions and diseases, or through the skin (transdermal
delivery) and into the bloodstream for the treatment of systemic diseases.
The skin is made up of three layers: the outer layer, the stratum corneum;
the middle layer or viable epidermis; and the inner layer, the dermis. The
stratum corneum, which serves as the skin's primary barrier to the external
environment, consists of closely packed dead cells and fatty (lipid) material.
The epidermis is composed of several layers of active cells and the dermis
consists, in part, of tissue containing hair follicles, nerve endings and blood
capillaries. Within the stratum corneum, lipid layers bind the dead cells
together to form a protective barrier. Research conducted by MacroChem shows
that SEPA compounds affect drug delivery by acting, in part, upon the stratum
corneum to disrupt the alignment of the lipid molecules within the lipid layers.
This disruption increases the porosity of the lipid-cell layers, allowing drugs
to diffuse through the stratum corneum through the more porous epidermis to the
dermis, where they enter the blood stream through the capillaries. The rate and
amount of drug absorbed can be controlled by varying the formulation used.
THE COMPANY'S DRUG DELIVERY SYSTEMS AND OTHER PROPOSED PRODUCTS
SEPA COMPOUNDS
The delivery of a drug through the skin depends on the drug's physical and
chemical characteristics (molecular size and shape, the drug's solubility in
lipids and water, its melting point and whether it is lipophilic or
hydrophilic).
Since some drugs move through the skin too rapidly, the transdermal system
must retard the rate of drug absorption to ensure optimal efficacy with minimum
toxicity. Since other drugs move through the skin with difficulty, the
transdermal system must be formulated to increase a drug's rate of absorption
through the skin. Common methods of transdermal delivery use common chemicals
such as ethanol or fatty compounds to enhance penetration.
Although certain delivery methods using chemicals have proven to be
somewhat effective with specific drugs, such as drugs used for the treatment of
motion sickness or hormone deficiencies, they have caused adverse events, such
as skin irritation and sensitivity at the site of application. Some drugs,
because of their physical characteristics or the amount of drug necessary to
achieve the desired therapeutic effect, have not been successfully delivered
transdermally to date.
The Company has developed SEPA compounds that are designed to enhance the
transport, penetration and controlled delivery of drugs through the skin. SEPA
compounds are generally colorless, clear liquids that are intended to promote
drug delivery by aiding drug molecules to penetrate the skin, diffuse into or
through the skin layers and become absorbed into the bloodstream.
The Company has its own facility for the in vitro testing of drug
formulations containing SEPA, and therefore is less dependent on outside
laboratories for this type of testing. The Company is conducting in vitro
studies to evaluate the transdermal enhancing effect of SEPA in combination with
a variety of drugs with differing physical and chemical characteristics,
representing a broad spectrum of potential drug products. Although the Company's
research and development efforts with SEPA are at an advanced stage, the Company
must still conduct substantial additional studies to demonstrate the efficacy
and safety of any SEPA-drug formulation. The Company has found that specific
drugs administered transdermally with SEPA demonstrated increased transdermal
absorption. Some of the drug formulations tested by the Company with SEPA
contain compounds generally recognized as unlikely or difficult candidates for
transdermal delivery because of their physical and chemical properties and
molecular size. As these drug formulations are further developed, the Company
plans to conduct additional studies to investigate the efficacy and safety of
some of these formulations.
The Company has conducted early clinical studies with several drug
formulations containing SEPA where SEPA has been demonstrated to enhance
transdermal penetration of the specific drug within in vitro testing. Clinical
studies have included Phase I trials in which safety and tolerance of a topical
application of the drug formulation were assessed and Phase II trials in which
efficacy of the specific drug was evaluated in an appropriate clinical
condition.
The Company has designed and sponsored clinical trials of Topiglan(TM), the
Company's topical formulation of alprostadil and SEPA for use in the treatment
of erectile dysfunction. Testing has established safety and tolerance in both
normal volunteers and patients with the target disease. In addition, randomized
controlled trials have demonstrated effectiveness of the alprostadil formulation
in patients with erectile dysfunction. The Company is also conducting laboratory
and clinical studies with SEPA formulations of nonsteroidal anti-inflammatory
drugs for topical application in pain management.
In addition to the ongoing clinical development programs cited above, the
Company, in association with third parties, is currently conducting pre-clinical
studies with SEPA formulations in combination with specific drugs for a variety
of other applications.
The Company believes that SEPA compounds can be used with a broad variety
of new and existing drugs to enhance their commercial value. The therapeutic
effectiveness and improved convenience of a transdermal SEPA product may
substantially expand the existing market for a drug. In addition, a formulation
containing a SEPA compound may prove to be a superior alternative to the
existing methods of administering certain drugs.
MACRODERM(TM) DRUG DELIVERY SYSTEM
The Company has developed a series of new low molecular weight polymers,
termed MacroDerm, for use in cosmetics and in the superficial dermal delivery of
pharmaceuticals. Potential applications include their use with sunscreens,
moisturizers, and insect repellents. The Company has synthesized, tested and
evaluated prototypes of MacroDerms and is currently seeking strategic partners
to manufacture and market specific MacroDerm products.
COMPETITION
The Company competes with numerous firms, many of which are large,
multi-national organizations with worldwide distribution. The Company believes
that its major competitors in the drug delivery sector of the health care
industry include ALZA Corporation, Cygnus Therapeutic Systems, Elan Corporation,
plc., Novartis and Pfizer. These firms have substantially greater capital
resources, research and development and technical staffs, facilities and
experience in obtaining regulatory approvals, as well as in manufacturing,
marketing and distribution of products, than the Company. Recent trends in this
area are toward further market consolidation of large drug companies into a
smaller number of very large entities, further concentrating financial,
technical and market strength and increasing competitive pressure in the
industry. Academic institutions, hospitals, governmental agencies and other
public and private research organizations are also conducting research and
seeking patent protection and may develop competing products or technologies of
their own through joint ventures or other arrangements. In addition, recently
developed technologies or technologies that may be developed in the future may
or could be the basis for competitive products. No assurance can be given that
the Company's competitors will not succeed in developing technologies and
products that are more effective or less costly to use than any that are
currently being developed by the Company.
Alprostadil, a synthetic prostaglandin E1 (PGE1), and Viagra(R), are the
only drugs approved for marketing in the United States for erectile dysfunction.
PGE1 is available in two dosage forms. Caverject(R), marketed by Pharmacia &
Upjohn, is administered by needle injection directly into the penis. The second
product, developed by Vivus, is a pellet form of the drug administered through a
tube inserted into the urethra. In contrast to the invasive forms now available,
MacroChem believes that a topical gel formulation applied to the penis will be
the preferred dosage form for treatment of this disorder. Viagra(R), an oral
product of Pfizer, was approved by the FDA in 1998.
The Company expects products approved for sale, if any, to compete
primarily on the basis of product efficacy, safety, patient compliance,
reliability, price and patent position. Generally, the first pharmaceutical
product to reach the market in a therapeutic or preventive area is often at a
significant advantage relative to later entrants to the market. The Company's
competitive position will also depend on its ability to attract and retain
qualified scientific and other personnel, develop effective proprietary
products, implement production and marketing plans, obtain patent protection and
secure adequate capital resources.
EMPLOYEES
As of March 1, 1999, the Company had 29 full time employees, 19 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 New Drug Applications (NDAs). The FDA also has the authority to withdraw
approval of drugs in accordance with statutory procedures.
The FDA approval procedure involves completion of certain pre-clinical and
manufacturing/stability studies and the submission of the results of these
studies to the FDA in an Investigational New Drug (IND) exemption in support of
performing clinical trials. IND allowance is then followed by performance of
human clinical trials, and additional pre-clinical and manufacturing quality
control studies, supporting safety, efficacy and manufacturing quality
control. The safety, chemistry, manufacturing and stability and clinical studies
developed under the IND are compiled into an NDA or Abbreviated New Drug
Application (ANDA) and submitted to FDA for approval to market.
Preclinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
product. Human clinical trials are typically conducted in three sequential
phases, but the phases may overlap. Phase I trials consist of testing of the
product in a small number of normal volunteers primarily for safety. In Phase
II, in addition to safety, the efficacy of the product is evaluated in a small
patient population. Phase III trials typically involve multicenter testing for
safety and clinical efficacy in an expanded population of patients at
geographically dispersed test sites. A clinical plan, or "protocol," accompanied
by the identification of the institutions participating in the trials, must be
submitted to the FDA prior to commencement of each clinical trial. The FDA may
order the temporary or permanent discontinuation of a clinical trial at any time
if adverse events that endanger patients in the trials are observed. In
addition, the FDA may request Phase IV clinical trials, to be performed after
marketing approval, to resolve any lingering questions.
A 30-day waiting period after the filing of each IND application is
required by the FDA prior to the commencement of clinical testing in human
subjects. If the FDA has not commented on or questioned the IND application
within 30 days, initial clinical studies may begin. However, any FDA comments or
questions must be answered to the satisfaction of the FDA before initial
clinical testing can begin. In some instances, this process could result in
substantial delay and expense.
The results of the preclinical and clinical studies on new drugs are
submitted to the FDA in the form of NDAs for approval to commence commercial
sales. Following extensive review, the FDA may grant marketing approval, require
additional testing or information or deny the application. Continued compliance
with all FDA requirements and the conditions in an approved application,
including product specifications, manufacturing process and labeling
requirements, are necessary for all products. Failure to comply, or the
occurrence of unanticipated adverse events during commercial marketing, could
lead to the need for labeling changes, product recall, seizure, injunctions
against distribution or other FDA-initiated action, which could delay further
marketing until the products are brought into compliance.
In certain cases, an ANDA may be filed in lieu of filing an NDA. An ANDA
relies on bioequivalency tests that compare the applicant's drug with an already
approved reference drug, rather than on clinical trials. An ANDA may be
available to the Company for a new formulation of a drug which has already been
approved by the FDA in other topical dosage forms. By concentrating on drug
delivery systems employing existing drugs, the Company expects that the time for
regulatory approval of certain products should be shorter than for entirely new
substances.
The NDA itself is a complicated and detailed document and must include the
results of extensive animal, clinical and other testing, the cost of which is
substantial. Although the FDA is required to review applications within 180 days
of filing, in the process of reviewing applications the FDA frequently requests
that additional information be submitted and starts the 180-day regulatory
review period anew when the requested additional information is submitted. The
effect of such requests and subsequent submissions can significantly extend the
time for the NDA review process. Until an NDA is actually approved, no assurance
can be given that the information requested and submitted will be considered
adequate by the FDA to justify approval.
In addition, packaging and labeling of most of the Company's proposed
products are subject to FDA regulation. The Company must get FDA approval for
all labeling and packaging prior to marketing of a regulated product.
Whether or not FDA approval has been obtained, approval of a product by a
comparable regulatory authority must be obtained in most foreign countries prior
to the commencement of marketing of the product in that country. The approval
procedure varies from country to country and may involve additional testing, and
the time required may differ from that required for FDA approval. Although some
procedures for unified filings exist for certain European countries, in general
each country has its own procedure and requirements, many of which are time
consuming and expensive. Thus, substantial delays in obtaining required
approvals from foreign regulatory authorities can result after the relevant
applications are filed. After such approvals are obtained, further delays may be
encountered before the products become commercially available.
No assurance can be given that any required FDA or other governmental
approval will be granted or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products, cause the Company to undertake costly procedures and furnish
a competitive advantage to the more substantially capitalized companies with
which the Company plans to compete. In addition, the extent of potentially
adverse government regulations that may arise from future administrative action
or legislation cannot be predicted.
PATENTS AND LICENSE RIGHTS
During 1998, the Company was granted one U.S. and one European patent. The
U.S. patent is directed to the Company's MacroDerm cationic polymers. The
European patent, with coverage in eight countries, is directed to the
combination of iontophoresis with certain classes of skin penetration enhancing
compounds.
The Company also received Notices of Allowance for two U.S. applications.
One of these is directed to other aspects of the MacroDerm cationic polymers.
The second is directed to topical formulations for Hormone Replacement Therapy
which incorporate the Company's SEPA skin penetration enhancing compounds.
Also during 1998, the Company filed one U.S. provisional application
directed to antifungal nail lacquer products and three International PCT
Applications corresponding to previously filed U.S. applications directed to the
Company's Topiglan(TM), NSAID, and Hormone Replacement Therapy products which
incorporate SEPA skin penetration enhancers.
Prosecution is ongoing in the United States for the MacroDerm non-cationic
polymer and NSAID patent applications and it is expected that allowable subject
matter will be acknowledged by the U.S. Patent and Trademark Office in 1999 in
each of these applications.
The Company believes that patent protection of its technologies, processes
and products is important to its future operations. The success of the Company's
proposed products may depend, in part, upon the Company's ability to obtain
patent protection.
Although the Company intends to file additional patent applications as
management believes appropriate with respect to any new products or
technological developments, no assurance can be given that any additional
patents will be issued or, if issued, will be of commercial benefit to the
Company. In addition, to anticipate the breadth or degree of protection that any
such patents may afford is impossible. To the extent that the Company relies on
unpatented proprietary technology, no assurance can be given that others will
not independently develop or obtain substantially equivalent or superior
technology or otherwise gain access to the Company's trade secrets, that any
obligation of confidentiality will be honored or that the Company will be able
to effectively protect its rights to proprietary technology. Further, no
assurance can be given that any products developed by the Company will not
infringe patents held by third parties or that, in such case, licenses from such
third parties would be available on commercially acceptable terms, if at all.
In connection with the prior research and development efforts of the
Company, the Company owns several patents and possesses certain license rights
in connection with other technologies, which it is not currently pursuing. The
Company intends to enforce its patent position and intellectual property rights
vigorously. The cost of enforcing the Company's patent rights in lawsuits, if
necessary, may be significant and could interfere with the Company's operations.
RISK FACTORS
In addition to the other information in this report, the following risk
factors should be considered carefully in evaluating the Company and its
business. This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements in this report and in
forward-looking statements made from time to time by the Company on the basis of
management's then-current expectations. Factors that might cause such a
difference include, but are not limited to, those discussed or referred to
below.
HISTORY OF OPERATING LOSSES; NEED FOR CONTINUED WORKING CAPITAL
The Company has been engaged primarily in research and development since
its inception in 1981 and has derived limited revenues from feasibility studies,
the commercial sale of its products and licensing of certain technology. The
Company has had no revenues relating to the sale of any products currently under
development. The Company has incurred net losses every year since its inception
and the Company anticipates that losses may continue for the foreseeable future.
See Item 8, "Financial Statements and Supplementary Data." At December 31, 1998,
the Company's accumulated deficit was approximately $26.5 million. The Company's
ability to continue operations after its current capital resources are exhausted
depends on its ability to obtain additional financing and achieve profitable
operations, as to which no assurance can be given. However, the Company believes
that its financial resources are sufficient to meet planned operating activities
for at least the next 12 months.
The Company continues to pursue the commercialization of its SEPA
technology through discussion and presentation of its technology to potential
licensees. No assurance can be given that these discussions will lead to any
licenses or that any license fees will be received by the Company in the current
fiscal year. For the foreseeable future, and until marketing approvals are
obtained, and/or license agreements are entered into, if ever, the Company
anticipates limited licensing revenue and no royalties from sales of products
using SEPA for pharmaceutical purposes.
TECHNOLOGY UNCERTAINTY AND EARLY STAGE DEVELOPMENT
Although several systems have been developed by various pharmaceutical
companies to enhance the transdermal delivery of specific drugs, relatively
limited research has been conducted in the expansion of transdermal delivery
systems to a wider range of pharmaceutical products. Although the Company has
demonstrated in preclinical and clinical studies that its SEPA transdermal
compounds may have applicability with a broad range of drugs, transdermal
delivery systems are currently marketed for only a limited number of products.
In addition, transdermal delivery systems used to date have often demonstrated
adverse side effects for users, such as skin irritation and delivery
difficulties.
The Company's proposed products are in the early development stage, require
significant further research, development, testing and regulatory clearances and
are subject to the risks of failure inherent in the development of products
based on innovative technologies. These risks include the possibilities that any
or all of the proposed products may be found to be ineffective or toxic, or
otherwise may fail to receive necessary regulatory clearances; that the proposed
products, although effective, may be uneconomical to market; or that third
parties may market superior or equivalent products. Due to the extended testing
and regulatory review process required before marketing clearance can be
obtained, the Company does not expect to be able to realize royalty revenues
from the sale of any drugs in the near term.
NEED FOR SIGNIFICANT PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING
Before the Company or any of its licensees may market any products based
upon the Company's technology, significant additional development efforts and
substantial preclinical and clinical testing will be necessary. Unless
substantial additional financing is obtained, the Company may not have
sufficient working capital to complete clinical studies on any proposed
products. No assurance can be given that the Company will be able to secure such
financing on favorable terms, if at all.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approval for the commercial sale of any of its
pharmaceutical products under development, the Company must demonstrate that the
product is safe and efficacious for use in each proposed indication. The results
of preclinical studies and early clinical trials may not be predictive of
results that will be obtained in large-scale testing, and there can be no
assurance that clinical trials of the Company's products will demonstrate the
safety and efficacy of its products or will result in marketable products. A
number of companies in the pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. If the Company were unable to demonstrate the safety and efficacy of
certain of its products, the Company might be adversely affected.
DEPENDENCE ON THIRD PARTIES FOR DEVELOPMENT; NO ASSURANCE OF
LICENSE ARRANGEMENTS
The Company intends to rely on licensees and joint venture arrangements to
fund most of the costs relating to product development and clinical trials.
Licensees may be expected to have the legal right to terminate funding a product
at any time for any reason without significant penalty. The resources and
attention devoted by a licensee to a product are not within the Company's
control, and this can result in delays in clinical testing, the preparation and
prosecution of regulatory filings and commercialization efforts. Further, no
assurance can be given that the Company will be able to enter into new
collaborative arrangements or that existing or future collaborative arrangements
will be successful.
PRIOR DEVELOPMENT EFFORTS HAVE NOT GENERATED SUSTAINED REVENUES OR ANY PROFITS
Since its inception in 1981, the Company has engaged in research and
development activities with respect to a variety of technologies and products,
including polymers for medical and industrial use, dental adhesives,
osteoporotic drugs and transdermal drug-delivery products. Although the Company
has generated differing levels of revenue over the last several years, none of
the Company's products or technologies has ever generated sustained revenues and
the Company has never had profitable operations. The Company has expended a
substantial amount of its resources in researching and developing technology
relating to these products as well as in connection with the research and
development of its transdermal delivery systems. No assurance can be given that
the Company's development activities with respect to its transdermal delivery
systems will be successful or that these efforts will not be eventually
abandoned.
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES FOR MARKETING
AND DISTRIBUTION OF PRODUCTS
The Company intends to market and distribute its proposed products through
others pursuant to licensing, joint venture, or similar collaborative
arrangements or distribution agreements. The Company has no sales force or
marketing organization. If the Company directly markets and sells any of such
products, it will, among other things, have to attract and retain qualified or
experienced marketing and sales personnel. No assurance can be given that the
Company will be able to attract and retain qualified or experienced marketing
and sales personnel or that any efforts undertaken by such personnel will be
successful. Any contractual arrangements with others may result in a lack of
control by the Company over any or all of the marketing and sales of such
products.
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING
The Company currently does not have facilities capable of manufacturing any
proposed products in commercial quantities. Accordingly, the Company expects
that it will be dependent to a significant extent on licensees, corporate
partners or contract manufacturers for such manufacturing and for compliance
with regulatory requirements for good manufacturing practices. The Company's
dependence on third parties for manufacturing may adversely affect the Company's
ability to develop and deliver products on a timely and competitive basis. If
the Company decides to establish a commercial manufacturing facility, it will
require substantial additional funds, will be required to hire and retain
significant additional personnel and will be required to comply with extensive
government regulations. No assurance can be given that the Company will be able
to obtain additional capital to conduct such activities directly.
RELIANCE ON KEY EMPLOYEES; LIMITED PERSONNEL; ABILITY TO ATTRACT AND
RETAIN QUALIFIED SCIENTISTS
The success of the Company is dependent on the efforts and abilities of Dr.
Carlos M. Samour, its Chairman of the Board of Directors and Scientific
Director, Alvin J. Karloff, its Chief Executive Officer and President, Dr.
Stephen J. Riggi, its Vice President, Operations and Dr. Paul J. Schechter, its
Vice President, Drug Development & Regulatory Affairs. 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 or Mr. Karloff could have a material adverse effect on
the Company's business.
The Company's business also depends on access to scientific talent,
competition for which is intense and can be expected to increase. There can be
no assurances that the Company will be able to retain its existing personnel or
to attract additional qualified employees.
COMPETITION; GOVERNMENT REGULATION; PATENTS AND LICENSE RIGHTS
See these sections, above, for a description of risk factors relating to
these matters.
RISKS OF PRODUCT LIABILITY CLAIMS; LACK OF PRODUCT LIABILITY INSURANCE; EXPENSE
AND DIFFICULTY OF OBTAINING ADEQUATE INSURANCE COVERAGE
The design, development, manufacture and sale of the Company's products
involve an inherent risk of liability claims and associated adverse publicity.
The Company currently has liability insurance to cover claims that may result
from clinical trials, but does not maintain product liability insurance and may
need to acquire such insurance coverage prior to the commercial introduction of
its products. No assurance can be given that the coverage limits of the
Company's insurance policies will be adequate. Such insurance is expensive, is
difficult to obtain and may not be available in the future on acceptable terms
or at all. A successful claim brought against the Company if it is uninsured, or
which is in excess of the Company's insurance coverage, if any, could have a
material adverse effect upon the Company and its financial condition.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS
The future revenues and profitability of, and availability of capital for
biomedical and pharmaceutical companies may be affected by the continuing
efforts of governmental and third-party payers to contain or reduce the costs of
health care through various means. For example, in certain foreign markets
pricing or profitability of prescription pharmaceuticals is subject to
government control and to reform in the health care system. In the United
States, there have been, and the Company expects there will continue to be, a
number of federal and state proposals to 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 succeeds 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 6
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, 1998, 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 Company's Common Stock is traded on NASDAQ under the symbol "MCHM." The
following chart sets forth the range of high and low closing prices for the
Common Stock for the periods indicated as obtained from NASDAQ:
COMMON STOCK
MCHM
YEAR ENDED HIGH LOW
DECEMBER 31, 1997
First Quarter $7 3/4 $4 15/16
Second Quarter 7 7/16 4 1/4
Third Quarter 9 1/2 4 3/4
Fourth Quarter 14 3/4 6 3/16
DECEMBER 31, 1998
First Quarter 13 3/8 7 1/2
Second Quarter 12 7/8 7
Third Quarter 8 7/16 3 1/8
Fourth Quarter 9 3/8 5 1/16
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, 1998, there were 433 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 1998, the Company issued the following securities which were not
registered under the Securities Act of 1933 at the time the securities were
issued:
o On May 22, 1998, 355 shares of the Company's Common Stock were issued
to a consultant in consideration of services to the Company.
o On November 12, 1998, 6,158 shares of the Company's Common Stock
were issued to its investment banker 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.
Years Ended December 31,
1994 1995 1996 1997 1998
---- ---- ----- ----- ----
STATEMENTS OF
OPERATIONS DATA:
Total revenues $ 44,710 $ 17,493 $ 129,786 $ 120,350 $ 274,749
Research and development 864,123 1,238,070 1,736,561 2,084,826 4,318,758
Net loss (1,969,442) (2,465,837) (3,139,796) (3,569,113) (4,842,871)
Basic and diluted net
loss per share (0.17) (0.20) (0.21) (0.21) (0.22)
Shares used to compute
basic and diluted net
loss per share 11,558,105 12,331,560 15,239,080 16,638,401 22,204,105
Balance Sheet Data:
Working capital $ 3,615,608 $ 4,532,623 $ 7,127,252 $24,756,904 $19,891,936
Current assets 3,955,357 4,962,562 7,495,715 25,069,804 20,756,671
Total assets 4,437,600 5,462,625 8,063,750 25,623,836 21,509,724
Current liabilities 339,749 429,939 368,463 312,900 864,735
Capitalized lease obligations 59,715 91,861 57,038 18,408 ---
Total liabilities 387,792 486,198 386,871 312,900 1,364,735
Stockholders' equity 4,049,808 4,976,427 7,676,879 25,310,936 20,144,989
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations for the Company should be read in conjunction with the accompanying
financial statements and related footnotes.
GENERAL
MacroChem's primary business is the development of pharmaceutical products
for commercialization by applying SEPA(R) (Soft Enhancer of Percutaneous
Absorption), its patented drug delivery technology. SEPA compounds, when
properly combined with drugs, provide pharmaceutical formulations (creams, gels,
solutions, etc.) that enhance the transdermal delivery of drugs into the skin or
into the bloodstream. The Company currently derives no significant revenue from
product sales, royalties or license fees. The Company plans to develop specific
SEPA formulations for use with proprietary and non-proprietary drugs
manufactured by pharmaceutical companies, and to commercialize these products
through the formation of partnerships, strategic alliances and license
agreements with those companies. In order to attract strategic partners the
Company is conducting clinical testing of certain SEPA-enhanced pharmaceuticals.
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, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
For the year ended December 31, 1998, the Company's net loss was
approximately $4,842,900 as compared to a loss of approximately $3,569,100 for
the previous year, a 36% increase. For 1998 and 1997, the Company realized
operating revenues of approximately $274,700 and $120,400, respectively, which
were primarily from feasibility studies.
Research and development costs increased by approximately $2,234,000 from
$2,084,800 in 1997 to $4,318,800 in 1998, a 107% increase. This increase
reflects the Company's continued acceleration of clinical testing of its
products and increased internal research and development efforts. The Company
expects that research and development costs will continue to increase
substantially in 1999, reflecting increased clinical testing efforts.
Marketing, general and administrative expenses for 1998 aggregated
approximately $1,925,000, a reduction of approximately $67,200, or 3%, from
1997's total of approximately $1,992,200, reflecting lower stock-based
compensation and consulting expenses partially offset by increased regulatory
fees and recruiting expenses. The Company expects that marketing, general and
administrative expenses will remain essentially the same for 1999 with the
exception of routine salary increases.
Other income increased from a net amount of approximately $417,500 in 1997
to approximately $1,174,200 in 1998. This increase reflects investment income
resulting from the investment of proceeds received from the exercise of Class A
and Class AA warrants during the latter part of 1997. With the exception of
outstanding stock options and warrants, at December 31, 1998 the Company does
not have any significant outstanding equity instruments which may provide a
source of funds in the future.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1997, the net loss was approximately
$3,569,100 as compared to a loss of $3,139,800 for the previous year, a 14%
increase. For the 1997 and 1996 years, the Company realized operating revenues
of approximately $120,400 and $129,800, respectively, which were primarily from
feasibility studies.
Research and development costs increased by approximately $348,200 from
$1,736,600 in 1996 to $2,084,800 for 1997, representing a 20% increase. This
increase reflects the Company's continued acceleration of clinical testing of
its products and increased internal research and development efforts.
Marketing, general and administrative expenses for 1997 aggregated
approximately $1,992,200, an increase of $99,600, or 5%, from 1996's total of
$1,892,600, reflecting increased securities registration expenses offset in part
by a reduction in general consulting expenses.
Other income increased from a net amount of $371,600 in 1996 to $417,500 in
1997. This increase reflects the investment income resulting from the investment
of proceeds received from the exercise of common stock equivalents during the
latter part of 1997.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits, rather than four, to
represent a year. The Year 2000 ("Y2K") problem arises because date-sensitive
software or hardware written or developed in this fashion may not be able to
distinguish between 1900 and 2000, and programs written in this manner that
perform arithmetic operations, comparisons or sorting of date fields may yield
incorrect results when processing a Y2K date. The Y2K problem could potentially
cause system failures or miscalculations that could disrupt operations.
The Company has appointed a Director of Year 2000 Compliance who, along
with an outside Y2K consultant, recently performed a review, which included
testing, of the Company's computer systems. This review of internal financial
and information technology systems was completed in the fourth quarter of 1998.
The Company has evaluated and prioritized the problems, which are not considered
significant. The Company expects to continue to coordinate any Y2K problems with
the vendors that supplied noncompliant systems. The Company expects that any
remediation efforts would continue through mid-1999. However, there can be no
assurance that the Company's survey will identify all Y2K problems in these
systems or that the necessary corrective actions will be completed in a timely
manner.
The Company does not write its own application software, but depends on
third-party vendors. The Company intends to continuously identify and prioritize
critical vendors and suppliers and communicate with them about their plans and
progress in addressing the Y2K problem. The Company intends to implement a
policy to exclude the use of any vendors which are not Y2K compliant.
Based on the efforts described above, the Company currently believes that
its systems will be Y2K compliant in a timely manner. However, there can be no
assurance that all Y2K problems will be successfully identified, or that the
necessary corrective actions will be completed in a timely manner. Failure to
successfully identify and remediate such Y2K problems in a timely manner could
have a material adverse effect on the Company's results of operations, financial
position or cash flow.
The Company has not created a formal contingency plan for Y2K problems and
currently does not intend to create one. However, the Company intends to take
appropriate actions to mitigate the effects of third parties' failures to
remediate their Y2K issues and for unexpected failures in its own systems. Such
actions may include having arrangements for alternate suppliers and using manual
intervention where necessary. If it becomes necessary for the Company to take
these corrective actions, it is uncertain whether this would result in
significant interruptions of business operations or would have a material
adverse effect on the Company's results of operations, financial position or
cash flow.
As of December 31, 1998, the Company had not incurred significant costs
related to the Y2K problem, and does not expect to do so in the future. Overall,
the Company anticipates that incremental costs to the Company related to the Y2K
problem will not exceed $50,000, but there can be no assurance that such costs
will not be greater that anticipated.
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 1998, the Company
received aggregate net proceeds of approximately $211,000 from the exercise of
stock options and stock warrants, compared to approximately $20.8 million in
1997. At December 31, 1998 working capital was approximately $19.9 million,
compared to $24.8 million at December 31, 1997. The reduction in the Company's
working capital was due primarily to the cash used by operating activities, the
Company's investment in equipment and the repurchase of the Company's common
stock. Until such time as the Company obtains agreements with third-party
licensees or partners to provide funding for the Company's anticipated business
activities or the Company is able to obtain funds through the private or public
sale of its securities, the Company's working capital will be utilized primarily
to fund its operating activities.
Pursuant to a plan approved by the Company's Board of Directors, the
Company is authorized to repurchase 1,000,000 shares of its common stock to be
held as treasury shares for future use. During 1998 the Company repurchased
154,850 shares at an aggregate cost of approximately $758,000. A December 31,
1998, 140,917 repurchased shares remain available for future use and 845,150
shares remain available for repurchase under the plan.
Capital expenditures and additional patent development costs for the year
ended December 31, 1998 were approximately $386,000. The Company anticipates
capital expenditures of approximately $300,000 during the fiscal year ending
December 31, 1999.
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 will be
sufficient to meet its operating expenses and capital expenditure requirements
for at least the next twelve months. The Company's cash requirements may vary
materially from those now planned because of changes in focus and direction of
the Company's research and development programs, competitive and technical
advances, patent developments or other developments. It is not believed that
inflation will have any significant effect on the results of the Company's
operations.
FUTURE ADOPTION OF ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The provisions of SFAS No. 133 will be effective for the
Company beginning January 1, 2000. The Company has not completed an evaluation
of the effect of adopting SFAS No. 133 to the Company's financial position or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CASH AND CASH EQUIVALENTS
As of December 31, 1998, the Company is exposed to market risks which
relate primarily to changes in U.S. interest rates. The Company's cash
equivalents are subject to interest rate risk and will decline in value if
interest rates increase. Due to the short duration of these financial
instruments, three months or less, changes to interest rates would not have a
material effect upon the Company's financial position. A hypothetical 10% change
in interest rates would result in an increase or decrease of approximately
$118,000 on interest income within the Company's statement of operations.
THE FOREGOING STATEMENTS IN THIS REPORT INCLUDE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED OR REFERRED TO IN ITEM 1, BUSINESS - "RISK FACTORS".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required under this Item 8 is set forth on pages 22 through
35 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, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 3, 1999
MACROCHEM CORPORATION
BALANCE SHEETS
DECEMBER 31,
ASSETS 1998 1997 LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------ ---- ---- ------------------------------------- ---- ----
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and cash equivalents $20,504,097 $24,952,121 Current portion of capitalized lease
Accounts receivable 48,393 --- obligations $ --- $ 18,408
Prepaid expenses and other Accounts payable and accrued expenses 771,172 204,352
current assets 204,181 117,683 Deferred compensation and related
---------- ---------- accrued interest 93,563 90,140
----------- ----------
TOTAL CURRENT ASSETS 20,756,671 25,069,804 TOTAL CURRENT LIABILITIES 864,735 312,900
---------- ---------- ----------- ----------
PROPERTY AND EQUIPMENT (NET) 397,483 281,216 DEFERRED REVENUE 500,000 ---
---------- ---------- ----------- ----------
OTHER ASSETS: TOTAL LIABILITIES 1,364,735 312,900
----------- ----------
Patents, net 351,110 268,356
Deposits 4,460 4,460 COMMITMENTS & CONTINGENCIES (Note 6)
---------- ----------
TOTAL OTHER ASSETS 355,570 272,816 STOCKHOLDERS' EQUITY:
---------- ---------- Preferred stock --- ---
Common stock, $.01 par value; authorized
60,000,000 shares; issued 22,281,245 shares,
outstanding 22,140,328 shares at
December 31, 1998 and issued and
outstanding, 22,182,865 shares
at December 31, 1997 222,812 221,829
Additional paid-in capital 47,295,449 46,923,677
Unearned compensation ( 170,676) ( 169,322)
Accumulated deficit (26,508,119) (21,665,248)
---------- ----------
Total 20,839,466 25,310,936
Less cost of treasury stock
(140,917 shares) ( 694,477) ---
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 20,144,989 25,310,936
---------- ----------
TOTAL LIABILITIES AND
TOTAL ASSETS $21,509,724 $25,623,836 STOCKHOLDERS' EQUITY $ 21,509,724 $ 25,623,836
========== ========== ========== ==========
See notes to financial statements.
MACROCHEM CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------------
1998 1997 1996
---- ---- ----
Revenues
Research contracts $ 274,749 $ 120,350 $ 129,786
----------- ---------- ----------
Operating Expenses
Research and development 4,318,758 2,084,826 1,736,561
Marketing, general and administrative 1,925,021 1,992,157 1,892,572
Consulting fees with related parties 48,000 30,000 12,000
----------- ---------- ----------
TOTAL OPERATING EXPENSES 6,291,779 4,106,983 3,641,133
----------- ---------- ----------
LOSS FROM OPERATIONS ( 6,017,030) ( 3,986,633) ( 3,511,347)
----------- ---------- ----------
Other Income (Expense)
Interest income 1,178,825 424,742 383,596
Interest expense ( 4,666) ( 7,222) ( 12,045)
----------- ---------- ----------
TOTAL OTHER INCOME 1,174,159 417,520 371,551
----------- ---------- ----------
NET LOSS $( 4,842,871) $( 3,569,113) $( 3,139,796)
=========== ========== ==========
BASIC AND DILUTED NET LOSS
PER SHARE $( .22) $( .21) $( .21)
=========== ========== ==========
SHARES USED TO COMPUTE BASIC
AND DILUTED NET LOSS PER
SHARE 22,204,105 16,638,401 15,239,080
========== ========== ==========
See notes to financial statements.
MACROCHEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Total Paid-In
Common Stock Shares Additional Capital and Cost of Total
Common Paid-In Unearned Accumulated Accumulated Treasury Stockholders'
Issued Treasury Stock Capital Compensation Deficit Deficit Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE,
JANUARY 1, 1996 13,129,321 $131,293 $19,801,473 $ --- $(14,956,339) $ 4,976,427 $ --- $ 4,976,427
Exercise of common
stock warrants 726,667 7,267 2,227,984 --- --- 2,235,251 2,235,251
Exercise of common
stock options 251,861 2,519 442,887 --- --- 445,406 445,406
Exercise of unit
purchase options 1,492,500 14,925 2,596,950 --- --- 2,611,875 2,611,875
Stock based
compensation 925 9 770,381 (222,674) --- 547,716 547,716
Net loss --- --- --- --- --- ( 3,139,796) ( 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 --- 7,676,879
Exercise of common
stock warrants 4,491,590 44,916 16,938,240 --- --- 16,983,156 16,983,156
Exercise of common
stock options 291,501 2,915 692,087 --- --- 695,002 695,002
Exercise of unit
purchase options 1,757,500 17,575 3,058,050 --- --- 3,075,625 3,075,625
Stock based
compensation 41,000 410 395,625 53,352 --- 449,387 449,387
Net loss --- --- --- --- --- ( 3,569,113) ( 3,569,113) --- ( 3,569,113)
---------- ------- ------- ---------- ------- ---------- ---------- ------- ----------
BALANCE,
DECEMBER 31, 1997 22,182,865 221,829 46,923,677 (169,322) (21,665,248) 25,310,936 --- 25,310,936
Exercise of common
stock warrants 6,342 63 38,465 38,528 38,528
Exercise of common
stock options 91,683 917 171,139 172,056 172,056
Purchase of treasury
stock (154,850) (757,599) ( 757,599)
Stock based
compensation 355 6,158 3 139,352 ( 1,354) 138,001 27,896 165,897
Stock issued to
401(k) trust 7,775 22,816 22,816 35,226 58,042
Net loss --- --- --- --- --- ( 4,842,871) ( 4,842,871) --- ( 4,842,871)
---------- ------- ------- ---------- ------- ---------- ---------- ------- ----------
BALANCE,
DECEMBER 31, 1998 22,281,245 (140,917) $222,812 $47,295,449 $(170,676) $(26,508,119) $ 20,839,466 $(694,477) $ 20,144,989
========== ======= ======= ========== ======= ========== ========== ======= ==========
See notes to financial statements.
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $( 4,842,871) $( 3,569,113) $(3,139,796)
---------- ---------- ---------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 181,175 123,888 116,967
Abandoned patent costs 5,604 --- ---
Loss on disposal of equipment --- 1,800 ---
Stock-based compensation 165,897 448,977 547,716
Amortization of discounts on
marketable securities --- --- ( 70,845)
401(k) contributions in company common stock 58,042 --- ---
Increase (decrease) in cash from:
Accounts receivable ( 48,393) 43,977 ( 43,977)
Prepaid expenses and other current assets ( 86,498) ( 17,650) 12,258
Accounts payable and accrued expenses 566,820 ( 36,986) ( 11,396)
Deferred compensation and related accrued
interest 3,423 2,659 ( 47,180)
Deferred rent --- ( 1,014) ( 5,928)
Deferred revenue 500,000 --- ---
---------- ---------- ---------
Total adjustments 1,346,070 565,651 497,615
---------- ---------- ---------
Net cash used by operating activities ( 3,496,801) ( 3,003,462) (2,642,181)
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment --- 100 ---
Purchases of marketable securities --- --- (5,743,755)
Purchase of certificates of deposit --- --- ( 734,732)
Proceeds from maturities of
marketable securities --- 21,824 6,771,000
Proceeds from maturities of certificates of deposit --- --- 1,015,000
Expenditures for property and equipment ( 277,445) ( 48,991) ( 136,306)
Additions to patents ( 108,355) ( 62,794) ( 48,633)
---------- ---------- ---------
Net cash (used) provided by investing activities ( 385,800) ( 89,861) 1,122,574
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of company stock ( 757,599) --- ---
Principal payments on capital lease ( 18,408) ( 38,630) ( 34,823)
Proceeds from issuance of common stock --- 410 ---
Proceeds from exercise of common stock options 172,056 695,002 445,406
Proceeds from exercise of common stock warrants 38,528 16,983,156 2,235,251
Proceeds from exercise of unit purchase options --- 3,075,625 2,611,875
---------- ---------- ---------
Net cash (used) provided by financing activities ( 565,423) 20,715,563 5,257,709
---------- ---------- ---------
(Continued)
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
---- ---- ----
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS $( 4,448,024) $17,622,240 $3,738,102
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 24,952,121 7,329,881 3,591,779
---------- ----------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR $20,504,097 24,952,121 $7,329,881
========== ========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest aggregated $1,243, $4,563, and $9,226, respectively, for
the years ended December 31, 1998, 1997 and 1996.
The Company did not pay any income taxes during those periods.
See notes to financial statements. (Concluded)
MACROCHEM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MacroChem Corporation (the "Company") develops and licenses transdermal drug
delivery compounds and systems intended to promote the delivery of drugs from
the surface of the skin into the skin or the bloodstream.
The Company has been engaged primarily in research and development since its
inception in 1981 and has derived limited revenues from the commercial sale of
its products, licensing of certain technology and feasibility studies. The
Company has had no revenues relating to the sale of any products currently under
development. The Company has incurred net losses every year since its inception
and the Company anticipates that losses may continue for the foreseeable future.
At December 31, 1998, the Company's accumulated deficit was approximately $26.5
million. The Company's ability to continue operations after its current capital
resources are exhausted depends on its ability to obtain additional financing
and achieve profitable operations, as to which no assurances can be given.
However, the Company believes that its financial resources are sufficient to
meet planned operating activities at least through December 31, 1999.
The Company organizes itself as one segment reporting to the chief operating
decision maker. Products and services consist primarily of research and
development activities in the pharmaceutical industry.
REVENUE RECOGNITION - Revenues are earned and recognized based upon 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.
CASH AND CASH EQUIVALENTS - Cash equivalents consist of short-term, highly
liquid investments with a maturity of three months or less when purchased.
CONCENTRATION OF RISK - Cash and cash equivalents at December 31, 1998 and 1997
are primarily comprised of government agency securities.
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 $79,600 and $59,600, respectively, at
December 31, 1998 and 1997.
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 1998
the Company wrote off $5,604 of costs associated with patents no longer having
value.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting for
Income Taxes", which requires the use of the liability method. The objective of
this method is to establish deferred tax assets and liabilities for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities using tax rates in effect in the year(s) in
which the differences are expected to reverse.
NET INCOME (LOSS) PER SHARE - Basic earnings per share is computed using the
weighted average number of common shares outstanding during each year. Diluted
earnings per common share reflect the effect of the Company's outstanding
options and convertible securities, except where such items would be
anti-dilutive. Due to the net losses, reported in 1998, 1997 and 1996, basic and
diluted per share amounts are the same. For the years ended December 31, 1998,
1997, and 1996 potential common shares are not included in the per share
calculations for diluted EPS, because the effect of their inclusion would be
anti-dilutive. Anti-dilutive potential shares not included in per share
calculations for 1998, 1997, and 1996 were approximately 3,347,000, 8,711,000,
and 8,283,000, respectively.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The primary estimates underlying the Company's
financial statements include the useful lives of the Company's patents, property
and equipment, the valuation allowance established for the Company's deferred
tax assets, and the underlying assumptions to apply the pricing model to value
stock options under SFAS No. 123. Management bases its estimates on certain
assumptions, which it believes are reasonable in the circumstances, and while
actual results could differ from those estimates, management does not believe
that any change in those assumptions in the near term would have a significant
effect on the financial position or the results of operations.
STOCK-BASED COMPENSATION - SFAS No. 123 ("Accounting for Stock-Based
Compensation") addresses the financial accounting and reporting standards for
stock or other equity-based compensation arrangements.
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.
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 from the equity instrument issued on the date of
grant. The resulting compensation cost is recognized and charged to operations
over the service period, which is usually the vesting period.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS - Effective January 1, 1998, the
Company adopted SFAS No. 130, "Reporting Comprehensive Income", which requires
businesses to disclose comprehensive income and its components in their
general-purpose financial statements. Comprehensive income (loss) is equal to
net income (loss) for the years ended December 31, 1998, 1997 and 1996.
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer deemed
useful.
FUTURE ADOPTION OF ACCOUNTING PRONOUNCEMENTS - In 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The provisions of SFAS No. 133 will
be effective for the Company beginning January 1, 2000. The Company has not
completed an evaluation of the effect of adopting SFAS No. 133 on the Company's
financial position and results of operations.
RECLASSIFICATIONS - Certain 1997 and 1996 amounts have been reclassified to
conform with the 1998 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
1998 1997
---- ----
Laboratory equipment $ 770,915 $ 589,398
Office equipment 208,399 167,331
Leasehold improvements 149,249 107,256
--------- -------
Total 1,128,563 863,985
Less: accumulated depreciation
and amortization ( 731,080) (582,769)
--------- -------
Property and equipment, net $ 397,483 $ 281,216
========= =======
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of December
31:
1998 1997
---- ----
Accounts payable $116,246 $ 17,154
Accrued professional fees 150,461 173,814
Accrued clinical trial costs 498,716 13,384
Accrued miscellaneous 5,749 ---
------- -------
$771,172 $204,352
======= =======
4. CAPITALIZED LEASE OBLIGATIONS
Equipment held under capital lease obligations included with owned property and
equipment on the balance sheet consisted of the following as of December 31:
1997
----
Laboratory equipment $ 113,758
Less: accumulated amortization ( 62,219)
--------
$ 51,539
========
During 1998, the remaining lease obligations were paid and the equipment title
reverted to the Company.
5. STOCKHOLDERS' EQUITY
AUTHORIZED CAPITAL STOCK - Authorized capital stock consists of 60,000,000
shares of $.01 par value common stock of which 22,281,245 shares are issued
(22,140,328 are outstanding) and 5,186,254 are reserved for issuance upon
exercise of common stock warrants and options at December 31, 1998. Authorized
and unissued preferred stock totals 6,000,000 shares. On August 31, 1998, the
Company's Board of Directors authorized the repurchase of up to 1,000,000 shares
of common stock at market price. During 1998 the Company repurchased 154,850
common shares. At December 31, 1998, 140,917 repurchased shares remain available
for future use and 845,150 shares are available to be repurchased.
STOCK ISSUANCES - The Company had issued 142 units (the "Units") and options for
an additional 118.333 Units in connection with a private placement in 1993. A
Unit consists of 30,000 shares of the Company's common stock at an exercise
price of $1.75 per common share, 10,000 Class A warrants and 10,000 Class AA.
Each Class A and AA warrant was convertible to one share of the Company's common
stock at a per share exercise price of $3.00 and $4.50 respectively. Outstanding
at January 1, 1996 were 108.333 options on Units.
During 1997 and 1996, 58.58 and 49.75 options on Units were exercised and
converted into 1,757,500 and 1,492,500 shares of common stock, respectively.
WARRANTS - Outstanding at January 1, 1996 were 2,518,233 Class A, 2,603,233
Class AA and 238,500 Class X warrants. Each warrant was exercisable for one
share of common stock at a price per share, subject to adjustment, for $3.00,
$4.50, and $1.75, respectively. The Class A and Class AA warrants were issued
subject to the 1993 private placement. The Class X warrants were issued in
connection with a private placement occurring in 1992.
During 1996, 592,667 Class A, 81,000 Class AA, and 53,000 Class X warrants were
exercised resulting in the issuance of 726,667 shares of common stock for
aggregate proceeds of $2,235,251. During 1997, 1,877,666 Class A, 2,463, 924
Class AA, and 150,000 Class X warrants were exercised resulting in the issuance
of 4,491,590 shares of common stock for aggregate proceeds of $16,983,156. All
unexercised remaining Class A, Class AA and Class X warrants expired during
1997.
In June 1996, in connection with services performed for the Company, the firm of
Janssen-Meyers, L.P. ("J-M") received a warrant, exercisable immediately and
expiring June 17, 1999, for the purchase of 145,800 shares of the Company's
common stock at a price of $6.075 per share. 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 paid J-M a monthly fee of $5,000 for consulting
services from December 1996 through April 1997.
STOCK OPTION PLANS - The Company has three stock option plans, the 1984
Incentive Stock Option Plan (ISO Plan), the 1984 Non-Qualified Stock Option Plan
(Non-Qualified Plan) and the 1994 Equity Incentive Plan (1994 Plan). Under the
terms of the 1984 ISO and Non-Qualified Plans, the Company may no longer award
any options. All options previously granted may be exercised at any time up to
ten years from date of award.
Under the terms of the 1994 Plan, the Company may grant options to purchase up
to a maximum of 4,000,000 shares of common stock to certain employees, directors
and consultants. The options may be awarded as incentive stock options
(employees only) and non-incentive stock options (certain employees, directors
and consultants).
The 1994 Plan and the ISO Plan state that the exercise price of options shall
not be less than fair market value at the date of grant. The exercise price of
the Non-Qualified options and the non-incentive options from the 1994 Plan is
determined by the Board of Directors. All options become exercisable as
specified at the date of grant.
The following table presents activity under all stock option plans:
Weighted Average
Number of Options Exercise Price
----------------- --------------
Outstanding January 1, 1996 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
Granted 247,500 7.027
Exercised ( 291,501) 2.384
Expired ( 10,000) 4.250
Canceled ( 87,820) 5.682
---------
Outstanding December 31, 1997 3,411,704 3.126
Granted 574,200 10.144
Exercised ( 91,683) 1.877
Canceled ( 46,500) 7.173
---------
Outstanding December 31, 1998 3,847,721 4.159
=========
Exercisable at December 31: 1998 3,065,518 $2.890
=========
1997 2,867,204 $2.582
=========
1996 2,312,501 $1.610
=========
The weighted average fair values of options granted during 1998, 1997 and 1996
were $8.38, $5.83 and $2.37, respectively.
All options granted during the three year period ended December 31, 1998 were
granted at the market price of the stock.
The fair value of options on their grant date was measured using the
Black/Scholes option pricing model. Key assumptions used to apply this pricing
model are as follows:
1998 1997 1996
---- ---- ----
Risk-free interest rate 4.08%-5.88% 5.35%-7.14% 5.25%
Expected life of option grants 10 years 10 years 5-10 years
Expected volatility of underlying stock 71%-112.4% 65.3%-87.7% 59.3%-99.2%
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, 1998:
Weighted Ave. Weighted Ave.
Range of Number of Number Exercise Price- Weighted Ave. Exercise Price-
Exercise Options Currently Options Remaining Currently
Prices Outstanding Exercisable Outstanding Life Exercisable
- -------------------------------------------------------------------------------------------------------
$0.43 1,254,080 1,254,080 $ 0.43 2.17 $0.43
$1.50-$2.00 107,166 107,166 $ 1.82 5.58 $1.82
$2.75-$4.00 639,600 639,600 $ 3.19 5.48 $3.19
$4.875-$5.875 1,096,675 961,675 $ 5.59 7.15 $5.55
$6.064-$8.25 382,200 102,997 $ 6.99 8.72 $7.15
$9.00-$12.688 368,000 --- $12.01 9.36 ---
The Company uses the intrinsic value method to measure compensation expense
associated with grants of stock options to employees and, prior to December 15,
1995, to suppliers of goods and services. Had the Company used the fair value
method to measure compensation, the reported net loss and basic and diluted net
loss per share would have been as follows:
1998 1997 1996
---- ---- ----
Net loss as reported $(4,842,871) $(3,569,113) $(3,139,796)
Compensation costs:
Employee (2,183,916) (2,495,545) (2,560,760)
Non-Employee ( 26,488) ( 31,785) ( 58,273)
--------- --------- ---------
Proforma net loss $(7,053,275) $(6,096,443) $(5,758,829)
========= ========= =========
Proforma basic and diluted
net loss per share $( 0.32) $( 0.37) $( 0.38)
========= ========= =========
It should be noted that the proforma amounts presented above are inexact in that
the pricing model was designed to value freely-traded options rather than
employee stock options. Proforma charges may be understated in relation to
future years since these proforma charges do not reflect the financial impact of
options granted prior to 1995.
UNEARNED COMPENSATION - The following table sets forth the changes to the
Company's reported unearned compensation for the years ended December 31, 1998,
1997 and 1996:
1998 1997 1996
---- ---- ----
Balance, January 1 $ 169,322 $ 222,674 $ 0
Common stock granted to non-employees
below fair market value --- 286,071 4,509
Options, warrants and common stock
granted to non-employees at
fair market value 117,248 378,422 765,881
Amortization of unearned compensation (115,894) (448,977) (547,716)
Unearned compensation forfeited --- (268,868) ---
------- ------- -------
Balance, December 31 $ 170,676 $ 169,322 $ 222,674
======= ======= =======
STOCK AND STOCK OPTION ISSUANCES -The Company issued 925 common shares and
recorded compensation of $4,509 for services rendered in 1996. During 1997, the
Company issued 41,000 common shares and recorded unearned compensation of
$286,071 at the date of issuance. During 1998, the Company issued 355 common
shares and recorded unearned compensation of $4,504 at the date of issuance.
During 1998, the Company issued 6,158 common shares and recorded $50,000 as
compensation for services rendered to the Company.
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company has a lease expiring on February 28, 2000 for
its operating facility. At December 31, 1998, future minimum lease payments
under this lease agreement are as follows: 1999, $174,816, and 2000, $29,136.
Total rental expense under all operating leases was approximately $187,400,
$162,500 and $106,000 for the years ended December 31, 1998, 1997, and 1996,
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 $735,000. 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 years ended December 31, 1998, 1997
and 1996, 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 1998, 1997 and 1996.
7. 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,
1998, the Company has available net operating loss carryforwards of
approximately $25.6 million for federal income tax purposes, expiring through
2018 and $16.7 million for state income tax purposes, expiring through 2003. In
addition, the Company has unused investment and research and development tax
credits for federal and state income tax purposes aggregating $374,000 and
$138,000, respectively. The use of the federal net operating loss may be
restricted due to changes in ownership in accordance with definitions as stated
in the Internal Revenue Code.
The net tax effect of differences in the timing of certain revenue and expense
items and the related carrying amounts of assets and liabilities for financial
reporting and tax purposes are not material and, accordingly, are not displayed
in the table below. The components of the Company's deferred tax assets as of
December 31, 1998 and 1997 are as follows:
1998 1997
---- ----
Deferred Tax Assets:
Net operating loss carryforwards $ 10,300,000 $ 8,000,000
Tax credit carryforwards 511,800 393,000
---------- ---------
$ 10,811,800 $ 8,393,000
Valuation allowance (10,811,800) (8,393,000)
---------- ---------
Deferred tax asset, net $ --- $ ---
========== =========
For the years ended December 31, 1998, 1997 and 1996, the valuation allowance
was increased by approximately $2,418,800, $1,340,000, and $1,313,000,
respectively, due to the uncertainty of future realization of currently
generated net operating loss and tax credit carryforwards.
8. EMPLOYEE BENEFIT PLAN
In 1998, the Company established a qualified 401(k) Retirement Plan (the "Plan")
under which employees are allowed to contribute certain percentages of their
pay, up to the maximum allowed under Section 401(k) of the Internal Revenue
Code. Company contributions to the Plan are at the discretion of the Board of
Directors. The Company contributed 7,775 shares of common stock in 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the age, positions, and offices presently
held by each Director with the Company:
Year
First
Became a
Name Age Director Position with Company
- ------------------------------------------------------------------------------
Carlos M. Samour ..... 78 1981 Chairman of the Board of Directors and
Scientific Director
Alvin J. Karloff...... 67 1990 Chief Executive Officer, President and
Director
Willard M. Bright .... 85 1993 Director
Peter G. Martin....... 50 1995 Director
Stephen J. Riggi...... 61 1996 Vice President, Operations and Director
Michael A. Davis...... 57 1997 Director and Consultant
The following is a brief summary of the background of each Director of the
Company:
CARLOS M. SAMOUR, PH.D., the Company's Chairman of the Board of Directors
and its Scientific Director, founded the Company in 1981. From 1958 until the
formation of the Company, Dr. Samour was director of the corporate research
laboratory at The Kendall Corporation, a general medical supply company, and its
Lexington Laboratory after Kendall was acquired by Colgate-Palmolive Corporation
in 1972. Dr. Samour is the inventor of many of the technologies under
development by the Company and is responsible for managing research and product
development activities. He received an M.S. from the Massachusetts Institute of
Technology and a Ph.D. in organic chemistry from Boston University.
ALVIN J. KARLOFF has served as the Company's Chief Executive Officer and
President and as a Director since January 1990. In 1986, Mr. Karloff founded
Medical and Scientific Enterprises, Inc., a privately held medical diagnostic
equipment company, where he served as Chairman, Chief Executive Officer and
President prior to joining the Company. Mr. Karloff was Director of Marketing
for Medical Products with New England Nuclear ("NEN"), a Dupont company, from
1984 to 1985, and from 1969 to 1984, he served as Marketing Manager, Sales
Manager, and in several other sales and marketing positions for NEN. Mr. Karloff
received a B.S. from the University of Massachusetts.
WILLARD M. BRIGHT, PH.D., has served as a Director of the Company since
December 1992. Since 1982, Dr. Bright has served as a Director (from 1982 to
July 1996 as Chairman of the Board of Directors) of Zoll Medical Corporation, a
publicly held medical supply company. Since 1973, he has served as a Director of
CSS Industries, Inc., a publicly held consumer products company. Prior to 1982,
Dr. Bright served as President and Chief Executive Officer of The Kendall
Corporation; as President of the Professional Products Division of Warner
Lambert; as President of Boehringer Manheim Corporation USA, a manufacturer of
medical products and biochemicals; and as President and Director of
Curtiss-Wright Corp., a manufacturer of aerospace and industrial products. Dr.
Bright received a B.S. and M.S. from the University of Toledo and a Ph.D. in
physical chemistry from Harvard University.
PETER G. MARTIN has served as a Director of the Company since 1995. Since
1990 Mr. Martin has been an independent investment banker and venture
capitalist. Prior to 1990 he was a commercial banker. Mr. Martin is also a
director of KFX, Inc., a public company that provides energy solutions, and
DermaRx Corporation, a public company that provides wound care products and
services. Mr. Martin was initially elected to the Board of Directors as the
designee of David Russell, who privately purchased 1 million shares of the
Company's Common Stock in 1995. Mr. Russell is no longer entitled to designate a
Director of the Company. Mr. Martin received a B.A. and J.D. from Fordham
University and an M.B.A. from Columbia University.
STEPHEN J. RIGGI, PH.D., has served as the Company's Vice President,
Operations since February 1996 and as a Director of the Company since August
1996. He was President and Chief Executive Officer of Telor Ophthalmic
Pharmaceuticals, Inc. from 1989 until 1994. Dr. Riggi served in research and
development positions with Lederle Laboratories from 1963 until 1974, and in
research and development and operations positions with the Pennwalt Company
Pharmaceutical Division, of which he became President in 1985. He is a graduate
of the University of Tennessee School of Basic Medical Sciences, where he
received master's and doctor's degrees in physiology and pharmacology.
MICHAEL A. DAVIS, M.D., SC.D., has served as a Director of the Company
since 1997. Since 1980 Dr. Davis has been Professor of Radiology and Nuclear
Medicine and Director, Division of Radiologic Research, University of
Massachusetts Medical School. Since 1982 Dr. Davis has been Adjunct Professor of
Surgery at Tufts University School of Veterinary Medicine, and since 1986,
Affiliate Professor of Biomedical Engineering at Worcester Polytechnic
Institute. He has provided medical consulting services to the Company since
1991. He is also a director of EZ EM, Inc., a public company engaged in
supplying oral radiographic contrast media, as well as medical devices. In
addition, since February 1999 he has been President and Chief Executive Officer
of Versailles Capital Corporation, a public company, and its wholly owned
subsidiary, Amerimmune Inc., which is engaged in developing drugs relating to
the immune system. Dr. Davis received a B.S. and M.S. from Worcester Polytechnic
Institute, an S.M. and Sc.D. from the Harvard School of Public Health, an M.B.A.
from Northeastern University and an M.D. from the University of Massachusetts
Medical School.
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and their positions with
the Company are as follows:
Name Age Position with Company
--------------------------------------------------------------------------
Carlos M. Samour..... 78 Chairman of the Board of Directors and Scientific
Director
Alvin J. Karloff..... 67 Chief Executive Officer, President and Director
Stephen J. Riggi..... 61 Vice President, Operations and Director
Paul J. Schechter.... 59 Vice President, Drug Development & Regulatory Affairs
William P. Johnson... 54 Treasurer and Secretary
The following is a brief summary of the backgrounds of Dr. Schechter and
Mr. Johnson. The backgrounds of the Company's other executive officers, Dr.
Samour, Mr. Karloff and Dr. Riggi, are summarized above.
PAUL J. SCHECHTER, M.D., PH.D., the Company's Vice President, Drug
Development and Regulatory Affairs since May 1998, was from 1973 to 1990 with
Merrell Dow Research Institute, where he attained the position of Vice President
for Clinical Research. He went on to become Vice President of Fujisawa
Pharmaceutical Company from 1990 to 1993. Most recently he served as Senior Vice
President, Drug Development with Hybridon, Inc. from 1993 to 1997. Dr. Schechter
holds an M.D. and Ph.D. in Pharmacology from the University of Chicago and a
B.S. from Columbia University, College of Pharmacy.
WILLIAM P. JOHNSON, Director of Finance of the Company since 1996, became
Treasurer and Secretary of the Company in May 1998. From 1985 to 1989, Mr.
Johnson was the Chief Financial Officer for Elscint, Inc. From 1989 to 1991 he
was Chief Financial Officer at Collaborative Research, Inc., and from 1991 to
1993 served as its Senior Vice President and General Manager. From 1993 to 1994,
Mr. Johnson was a General Consultant for Wellesley Partners, Ltd. He was Chief
Financial Officer for USTelecenters, Inc. from 1994 through 1995. Prior to
coming to the Company in 1996, Mr. Johnson was sole proprietor of Dekamel
Consulting Services. Mr. Johnson holds an M.B.A. from Babson College and a B.S.
in Accounting from Boston College.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who beneficially own more than 10
percent of the Company's Common Stock to file reports of ownership and changes
in ownership with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. Based solely on its review of the copies
of such reports received by it, and written representations from certain
reporting persons that no Forms 5 were required for those persons, the Company
believes that during 1998 all filing requirements applicable to its officers,
directors, and such 10 percent beneficial owners were complied with, except that
Peter Martin filed one late report covering an acquisition made during 1998.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth the compensation earned by or paid or
awarded to Dr. Samour, Mr. Karloff and Dr. Riggi during each of the three fiscal
years ended December 31, 1998 and to Dr. Schechter during the fiscal year ended
December 31, 1998:
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards
- --------------------------------------------------------------------------------------------
Securities
Other Annual Underlying All Other
Name and Principal Salary Bonus Compensation Options Compensation
Position Year $ $(1) $(2) # $(5)
- --------------------------------------------------------------------------------------------
Carlos M. Samour 1998 237,538 42,757 10,889 ----- 5,000
Chairman, Scientific 1997 198,749 35,775 10,894 ----- -----
Director and Director 1996 185,000 33,300 10,959 280,000 -----
Alvin J. Karloff 1998 237,563 42,761 13,453 ----- 5,000
President, Chief 1997 198,749 35,775 13,046 ----- -----
Executive Officer and 1996 185,000 33,300 13,140 240,000 -----
Director
Stephen J. Riggi 1998 175,000 ----- 1,175 ----- 5,000
Vice President, 1997 159,167 ----- 490 ----- -----
Operations and 1996(3) 133,557 ----- 408 180,000 -----
Director
Paul J. Schechter 1998(4) 116,667 ----- 392 180,000 5,000
Vice President,
Drug Development
& Regulatory Affairs
- --------------------------------------------------------------------------------------------
(1) Since March 1992, Dr. Samour and Mr. Karloff have each received, in lieu of
retirement benefits, annual payments equal to eighteen percent of their
salaries.
(2) Includes amounts paid for taxable group term life insurance. Also includes
for Dr. Samour and Mr. Karloff a monthly automobile allowance of $799, plus
a health insurance benefit equal to the annual premium each individual pays
under separate health insurance policies maintained by their former
employers, which health insurance benefit is paid in lieu of any other
health, medical or retirement benefits.
(3) Dr. Riggi's employment commenced on February 12, 1996.
(4) Dr. Schechter's employment commenced on May 1, 1998.
(5) Represents the dollar value of Company contributions to the 401(k) Plan
which was established in 1998. Company contributions are made in its common
stock.
STOCK OPTIONS
The following table provides information concerning the grant of stock
options during 1998 to Dr. Schechter (no stock options were granted during 1998
to Dr. Samour, Mr. Karloff or Dr. Riggi):
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------------------------
Potential
Realizable
Value
at Assumed
Annual Rates
Number of % of Total of Stock Price
Securities Options Exercise Appreciation for
Underlying Granted to or Base Option Term
Options Employees in Price Expiration 5% 10%
Name Granted (#) Fiscal Year ($/Sh) Date ($) ($)
- -----------------------------------------------------------------------------------------------
Paul J. Schechter 180,000(1) 31% 12.063 May 2008 1,365,000 3,460,000
- -----------------------------------------------------------------------------------------------
(1) The option granted to Dr. Schechter was granted in May 1998 under the
Corporation's 1994 Equity Incentive Plan at an exercise price of $12.063 per
share. The option expires ten years from the date of grant and vests with
respect to 60,000 shares in May in each of 1999, 2000 and 2001.
The following table provides information concerning unexercised options
held by Dr. Samour, Mr. Karloff, Dr. Riggi and Dr. Schechter as of December 31,
1998 (no options were exercised by these persons during the fiscal year ended
December 31, 1998):
AGGREGATED FISCAL YEAR-END OPTION VALUES
Number of Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options at Options at
Fiscal Year-End Fiscal Year-End
# $ (1)
- ----------------------------------------------------------------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ----------------------------------------------------------------------------
Carlos M. Samour (2) 695,080/ NA $2,250,000/ NA
Alvin J. Karloff 1,080,000/ NA $6,960,000/ NA
Stephen J. Riggi 120,000/ 60,000 $308,000/154,000
Paul J. Schechter 0/180,000 $0/ 0
- ----------------------------------------------------------------------------
(1) The value of Dr. Samour's, Mr. Karloff's, Dr. Riggi's and Dr.
Schechter's in-the-money unexercised options at the end of the fiscal
year ended December 31, 1998 was determined by multiplying the number
of options held by the difference between the market price of the
Common Stock underlying the options on December 31, 1998 ($8.438 per
share) and the exercise price of the options granted.
(2) Does not include options to purchase 300,000 shares of Common Stock
granted to Pierrette Samour, Dr. Samour's wife, of which he is deemed to
have beneficial ownership. If such 300,000 options were included, Dr. Samour
would be deemed to have had a total of 995,080 exercisable options as of
December 31, 1998, the value of which would have been $4,105,000.
DIRECTORS' COMPENSATION
Each non-employee Director of the Company receives compensation of $4,000
annually, $1,000 per meeting attended, $500 for each committee meeting attended,
$300 per telephone meeting and reimbursement of travel expenses in connection
with attending meetings of the Board of Directors. Dr. Bright receives
additional Director compensation of $1,000 per month. Dr. Samour, Mr. Karloff
and Dr. Riggi do not receive any additional compensation for their services as
Directors. During 1998 each non-employee Director was granted stock options as
follows: Dr. Bright - 30,000; Mr. Martin - 30,000; and Dr. Davis - 30,000. The
options are all exercisable at $12.688 per share and vest as to 10,000 shares on
each of May 22, 1999, May 22, 2000 and May 22, 2001.
The Company currently compensates Dr. Davis at the rate of $3,000 per month
for medical consulting services.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has entered into employment agreements of indefinite length
effective as of November 1, 1992 with each of Dr. Samour and Mr. Karloff. Each
agreement currently provides for annual compensation of $250,000. Each agreement
also provides for a monthly automobile allowance of $500 net of taxes and a
payment, in lieu of retirement benefits, equal to 18% of the individual's base
salary. Further, each agreement provides for the payment of 12 months' salary in
the event the individual is terminated without cause. In addition, each
agreement precludes the individual from competing with the Company during his
employment and for a period of one year thereafter, and from disclosing
confidential information.
The Company has entered into an employment agreement of indefinite length
effective as of March 25, 1996 with Dr. Riggi. The agreement currently provides
for annual compensation of $175,000 and for the payment of six months' salary in
the event he is terminated without cause. In addition, the agreement precludes
Dr. Riggi from competing with the Company during his employment and for a period
of two years thereafter, and from disclosing confidential information.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Dr. Bright (Chairman) and
Mr. Martin.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of February 26, 1999, certain
information concerning ownership of the Company's common stock by (i) each
person known by the Company to be the beneficial owner of more than five percent
(5%) of the Company's common stock, (ii) each of the Company's Directors, (iii)
each of the executive officers named in the Summary Compensation Table under
"Executive Officers' Compensation" above and (iv) all Directors and executive
officers as a group. Except as otherwise indicated, the stockholders listed in
the table have sole voting and investment powers with respect to the shares
indicated.
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED PERCENTAGE OF CLASS
- --------------------------------------------------------------------------------
Carlos M. and Pierrette E. Samour(2)... 1,459,400 6.6%
Alvin J. Karloff(2) ................... 1,080,000 4.9%
Willard M. Bright(2) .................. 76,800 *
Peter G. Martin(2) .................... 65,270 *
Stephen J. Riggi(2).................... 180,000 *
Michael A. Davis(2).................... 25,000 *
Paul J. Schechter(2)................... 60,000 *
Peter Janssen(3)....................... 1,476,411 6.6%
1780 Route 106
Muttontown, NY 11791
David H. Russell(4).................... 1,100,000 5.0%
45 Park Place South, Suite 103
Morristown, NJ 07960
All Directors and Officers as a Group
(8 persons) (2)..................... 3,013,136 13.6%
- --------------------------------------------------------------------------------
* Less than one percent (1%).
(1) The address of Dr. Samour, Mrs. Samour, Mr. Karloff, Dr. Bright, Mr.
Martin, Dr. Riggi, Dr. Davis and Dr. Schechter is c/o the Company, 110
Hartwell Avenue, Lexington, Massachusetts 02421.
(2) Includes the following number of shares issuable upon the exercise of stock
options exercisable within 60 days: Dr. and Mrs. Samour-995,080; Mr.
Karloff-1,080,000; Dr. Bright-50,000; Mr. Martin-40,000; Dr. Riggi-180,000;
Dr. Davis-25,000; Dr. Schechter-60,000; Mr. Johnson-66,666.
(3) Includes 36,450 shares issuable upon the exercise of warrants held by
Mr. Janssen, and 33,279 shares issuable upon exercise of a warrant
owned by Janssen-Meyers Associates, L.P. ("Janssen-Meyers"). Mr.
Janssen owns 50% of Janssen-Meyers and has voting and dispositive power
over 50% of the shares beneficially owned by Janssen-Meyers.
(4) The 1,100,000 shares shown for Mr. Russell include 100,000 shares owned
by Mr. Russell's wife; although Mr. Russell disclaims beneficial
ownership of such 100,000 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following Financial Statements as of December 31, 1998 and 1997 and
for the three years in the period ended December 31, 1998 are filed herewith:
Page
----
Independent Auditors' Report 22
Balance Sheets 23
Statements of Operations 24
Statements of Stockholders' Equity 25
Statements of Cash Flows 26-27
Notes to Financial Statements 28-36
(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:
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
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, 1997:
99.1 1994 Equity Incentive Plan as amended November 14, 1997*
The following exhibit required to be filed herewith is incorporated by
reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997:
3a Certificate of Incorporation as amended.
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 December 31, 1996:
4 Stock Purchase Warrant
10.10.2 1984 Non-Qualified 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 02421
10.13 Form of Employment Agreement between the Company and Dr. Stephen J.
Riggi*
The following exhibit required to be filed herewith is incorporated by
reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997:
10.10.3 1984 Incentive Stock Option Plan as amended November 15, 1996*
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 02421.
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):
3b Bylaws
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 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 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, 1998.
- --------------------------
*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 30, 1999 By:/s/Alvin J. Karloff
--------------------
Alvin J. Karloff
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March , 1999. .
/s/ Alvin J. Karoloff Chief Executive Officer,
Alvin J. Karloff President, and Director
/s/ William P. Johnson Treasurer, Secretary and Principal
William P. Johnson Financial Officer
/s/ Carlos M. Samour Chairman of the Board of Directors
Carlos M. Samour, Ph.D. and Scientific Director
/s/ Stephen J. Riggi Vice President, Operations and
Stephen J. Riggi, Ph.D. Director
/s/ Willard M. Bright Director
Willard M. Bright, Ph.D.
/s/ Peter G. Martin Director
Peter G. Martin
/s/ Michael A. Davis Director
Michael A. Davis, M.D.