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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 [Fee Required]
For the Fiscal Year Ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission file number 0-13634
MACROCHEM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2744744
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 HARTWELL AVENUE
LEXINGTON, MASSACHUSETTS 02173-3134
(Address of principal executive offices)
(617) 862-4003
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Class A Warrants
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(Title of Class)
Class AA Warrants
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(Title of Class)
Class X Warrants
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or 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 average bid and asked prices for such
stock on February 298, 1996 was approximately $95,940,000. As of
February 298, 1996, 15,896,599 shares of common stock, $.01 par vlaue,
were outstanding.
Documents Incorporated By Reference
Portions of the registrant's definitive Proxy Statement (the
"Proxy Statement") for its 1996 Annual Meeting of Stockholders
presently intended to be filed with the Securities and Exchange
Commission by April 30, 1996 are incorporated by reference into Part
III of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
This report contains forward-looking statements that involve
risks and uncertainties. The CompanyOs 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 ORisk FactorsO.
MacroChem's primary business is the development and
commercialization of transdermal drug delivery compounds and systems
designed to promote the delivery of drugs from the surface of the skin
into the skin and into the bloodstream. SEPA" compounds, the Company's
primary proposed products, when properly combined with particular
drugs, create pharmaceutical formulations (creams, gels, solutions,
etc.) that enhance the
transdermal delivery of drugs into the skin and into the bloodstream.
Modified 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 as well. 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 method to other methods of drug administration (injection,
oral dosage forms, inhalation), and may allow selected drugs to be
administered more effectively, at a lower dose, with fewer adverse
events and with 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 acquired the rights to low molecular weight
reactive polyvinyl pyrrolidone oligomers (PEVs) from the Consiglio
Nazionale delle Ricerche, Italy's National Science Foundation. PEVs,
when attached to enzymes and polypeptides, may reduce the level of
side effects, increase the stability and increase the therapeutic
response of these proteins.
The Company has also developed a series of new low molecular
weight polymers, termed MacroDermTM, for cosmetic use and the topical
delivery of pharmaceuticals. During 1996 the agent will be studied by
a consultant at the University of California at San Francisco in order
to identify cosmetic applications.
The Company does not maintain general product liability
insurance, since the Company does not market SEPA"-drug products.or
conduct clinical studies using SEPA"-drug products The Company
recently commenced clinical studies and obtained specific product
liability insurance relating to such studies. As of December 31, 1995,
no asserted product liability claims exist against the Company.
However,
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in the future, incidents could give rise to claims could exist which
could exceed the Company's insurance coverage and resources.
RESEARCH AND DEVELOPMENT: COLLABORATIVE ARRANGEMENTS
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. At present the Company has _19 __ full-time
employees, 11 of whom are devoted to research and development and
regulatory affairs. In addition, a certain a Company officer serves as
Scientific Director and devotess approximately 75% of his his time to
Rresearch and Ddevelopment. Research and developmental expenditures
aggregated $1,109,500________, and $854,200 $931,500 and $446,484
during the years ended December 31, 1995, and December 31, 1994, and
the nine months ended December 31, 1993, respectively. The Company is
also dependent upon third parties to conduct complete clinical
studies, obtain FDA and other regulatory approvals and manufacture and
market a finished product.
The Company anticipates incurring significant development
expenditures in the future as the Company continues its efforts to
develop its present compounds and new drug formulations and as it
begins to research other technologies and to expand its toxicological
and clinical studies of certain drugs. The Company conducts stability
studies, tests its unique formulations and designs manufacturing
processes for its SEPA" compounds and adhesive and polymer
technologies at its facility and other facilities. The Company has
finished its new cGMP (current Good Manufacturing Practices)
facilities for the manufacture of dosage forms for pre-clinical and
clinical evaluations. In addition, the Company has established the
following ongoing research and development collaborative arrangements
with respect to potential licensing candidates.
In September 1994, the Company entered into a letter
agreement with SmithKline Beecham Animal Health, then a division of
SmithKline Beecham Corporation (after acquisition of this division by
Pfizer from SmithKline Beecham, it was renamed Pfizer Animal Health)
to collaborate in a program to increase the absorption of vaccines
administered intranasally using SEPA", the Company's proprietary
transdermal drug delivery compounds. The agreement with Pfizer Animal
Health provides for the possibility of entering into a licensing
agreement based upon the results of these initial studies. No
assurance can be given, however, regarding the successful
commercialization of these products.
In August 1994, the Company entered into a letter agreement with
Knoll Pharmaceutical Company commencing the initial phase of a drug
development collaboration. The collaboration will examine the use of
the Company's SEPA" drug delivery compounds in enhancing the
transdermal delivery of one of Knoll's products. The agreement with
Knoll provides for the possibility of entering into a licensing
agreement based upon the results of these initial studies. No
assurance can be given, however, regarding the successful
commercialization of this product.
In September 1990, the Company entered into a license
agreement with Ascent Pharmaceuticals, Inc. ("Ascent") in which Ascent
received an exclusive license to develop, test and market the
Company's SEPA" compounds in combination with catecholamine
bronchodilators for the treatment of respiratory disorders and, in
combination with cromolyn
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sodium, to treat allergic disorders. Ascent is in the pre-clinical
stage of its development program. However, no assurances can be given
that the work conducted by Ascent will lead to the marketing of SEPA"-
containing products for these indications.
PRODUCTS AND TECHNOLOGIES
BACKGROUND
To be effective, drugs must reach an intended site in the
body, at optimal concentration, at the proper time and for an
appropriate length of time. Traditional methods of drug
administration, such as oral ingestion, intramuscular and intravenous
injections and inhalation, may be effective for a wide variety of
drugs. However, depending upon the given drug, each method may have
disadvantages. For example, in oral administration, a drug, which
must pass through the gastrointestinal tract to be absorbed and
metabolized, can break down, resulting in a lower amount of drug being
therapeutically available. As a result, higher dosages of the drug
must be used to produce the desired effect, which may cause irritation
of the gastrointestinal tract and systemic toxicity.
In addition, the rate at which orally administered drugs are
absorbed may vary depending on several factors, including the drug's
chemical properties, the patient's physiology, 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 in efficacy, 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.
TRANSDERMAL DRUG DELIVERY
Transdermal drug delivery is the process of delivering drugs
into the skin so that they can be effective in the treatment of
dermatological problems and diseases or through the skin and into the
bloodstream for the treatment of systemic diseases.
The skin is made up of three layers: the outer layer, the
stratum corneum, the middle layer or viable epidermis and the inner
layer, the dermis. The stratum corneum, which serves as the skin's
primary barrier to chemical penetration, consists of closely packed
dead cells and fatty (lipid) material. The epidermis is composed of
several layers of active cells and tissue 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 scientists 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.
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THE COMPANY'S DRUG-DELIVERY SYSTEMS AND OTHER PROPOSED PRODUCTS
SEPA" COMPOUNDS
The delivery of a drug through the skin isdependsent on the
drug's physical and chemical characteristics (molecular size and
shape, the drug's solubility in lipids and water, its melting point
and whether it is lipophilic or hydrophilic).
Since some drugs move through the skin too rapidly, the
transdermal system must retard the rate of drug absorption to ensure
optimal efficacy with minimum toxicity. Other drugs move through the
skin with difficulty, so the transdermal system must be formulated to
increase the drug's rate of absorption through the skin. Common
methods of transdermal delivery use common chemicals such as ethanol
or fatty compounds to enhance penetration.
Although certain delivery methods using chemicals have
proven to be somewhat effective with specific drugs, such as drugs
used for the treatment of motion sickness or those used to treat
hormone deficiencies, they have caused adverse events, such as skin
irritation and sensitivity at the site of application. Some drugs,
because of their physical characteristics or the amount of drug
necessary to achieve the desired therapeutic effect, have not been
successfully delivered transdermally to date.
The Company has developed SEPA" compounds that are designed to
enhance the transport, penetration and controlled delivery of drugs
through the skin. SEPA" compounds are generally colorless, clear
liquids that are intended to promote drug delivery by aiding drug
molecules to penetrate the skin, diffuse into or through the skin
layers and become absorbed into the bloodstream.
The Company has set up its own facility for the in vitro testing
of drug formulations containing SEPA", and is currently less dependent
on outside laboratories for this type of testing. The Company is
conducting conducts in vitro studies to evaluate the transdermal
enhancing effect of SEPA" in combination with a variety of drugs. The
Company chose these drugs, with their differing physical and chemical
characteristics, as representative of a broad spectrum of potential
drug products. Although the Company's research and development
efforts with SEPA" are at an advanced stage, the Company must still
conduct substantial additional studies to demonstrate the efficacy and
safety of any SEPA"-drug formulation. The Company has found that
specific drugs administered transdermally with SEPA" demonstrated
increased transdermal absorption. Some of the drug formulations tested
by the Company with SEPA" contain compounds generally recognized as
unlikely or difficult candidates for transdermal delivery because of
their physical and chemical properties and molecular size. As these
drug formulations are further developed, the Company plans to conduct
additional studies to investigate the efficacy and safety of some of
these formulations.
Although in vivo testing has been conducted on SEPA"
compounds, more studies will be needed to demonstrate the safety and
efficacy of SEPA" compounds in connection with specific drug INDs
(Investigational New Drug Applications), NDAs (New Drug Applications)
or ANDAs (Abbreviated New Drug Applications) expected to be made by
the Company or its business partners to the United States Food and
Drug Administration (FDA). These applications are part of the FDA
requirements that must be filed by a company prior to marketing a new
drug in the United States. The Company has secured FDA approval
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of an IND on a double-blind study of SEPA"Os enhancement of the
delivery of ibuprofen through the skin directly into sore muscles, and
plans to file several INDs using SEPA "with various drugs. The
Company, in association with third parties, is currently conducting
pre-clinical studies with SEPA" formulations in combination with
specific drugs for a variety of applications.
The Company believes that SEPA" compounds can be used with a
broad variety of new and existing drugs to enhance their commercial
value. The improved therapeutic effectiveness and convenience of a
transdermal SEPA" product may substantially expand the existing market
for a drug. In addition, a formulation containing a SEPA" compound
may prove to be a superior alternative to the existing methods of
administering certain drugs.
MACRODERMTM DRUG DELIVERY SYSTEM
The Company has developed a series of new low molecular
weight polymers, termed MacroDermTM, for use with cosmetics and in the
transdermal delivery of pharmaceuticals. Potential applications
include their use with sunscreens, moisturizers, antifungals,
antivirals, topical anesthetics, antipruretics and anti-acne
preparations. The Company is currently supporting research at the
University of California Medical Center in San Francisco on the use of
MacroDermTM polymers in cosmetics and for the treatment of skin
problems and diseases.
REACTIVE POLYVINYL PYRROLIDONE (PEV) OLIGOMERS
PEVs, licensed by the Company from the Consiglio Nazionale
delle Ricerche, Italy's National Science Foundation, are low molecular
weight Reactive Polyvinyl Pyrrolidones which could provide a
significantly improved method of delivering therapeutic enzymes,
proteins and drugs. The technology may result in reduced side effects
(such as less antigenicity), increased stability and the more
effective therapeutic response of proteins and drugs through the
attachment of PEVs to these molecules.
COMPETITION
The Company competes with numerous firms, many of which are
large, multi-national organizations with worldwide distribution. The
Company believes that its major competitors in the drug-delivery
sector of the health care industry include ALZA Corporation, Cygnus
Therapeutic Systems, Elan Corporation, plc., Ciba-Geigy Limited and,
Sandoz Limitedand The Procter & Gamble Company and Rhone-Poulenc Rorer
in the treatment of bone disease. 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.
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The Company expects products approved for sale, if any, to
compete primarily on the basis of product efficacy, safety, patient
compliance, reliability, price and patent position. Generally, the
first pharmaceutical product to reach the market in a therapeutic or
preventative area is often at a significant advantage relative to
later entrants to the market. The Company's competitive position will
also depend on its ability to attract and retain qualified scientific
and other personnel, develop effective proprietary products, implement
production and marketing plans, obtain patent protection and secure
adequate capital resources.
EMPLOYEES
As of March 1, 1996, the Company had 19 employees, 11 of whom are
devoted to responsible for research and development and regulatory
affairs. In addition, a Company officer devotes approximately 75% of
his 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 and efficacy by numerous federal, state and local agencies and
comparable agencies in foreign countries. In the United States, the
Federal Food, Drug and Cosmetic 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 enter into supply
contracts or to approve NDAs. The FDA also has the authority to
withdraw approval of drugs in accordance with statutory procedures.
The FDA approval procedure involves completion of pre-clinical
studies and the submission of the results of these studies to the FDA
in an IND application. IND approval is then followed by human clinical
studies leading to an NDA.
Pre-clinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety
of the product. Human clinical trials are typically conducted in three
sequential phases, but the phases may overlap. Phase I trials consist
of testing of the product in a small number of volunteers primarily
for safety at one or more doses. In Phase II, in addition to safety,
the efficacy of the product is evaluated in a small patient
population. Phase III trials typically involve multicenter testing
for safety and clinical efficacy in an expanded population of patients
at geographically dispersed test sites. A clinical plan, or
"protocol," accompanied by the approval of the institutions
participating in the trials, must be submitted to the FDA prior to
commencement of each clinical trial. The FDA may order the temporary
or permanent discontinuation of a clinical trial at any time if
adverse
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events are observed in subjects. In addition, the FDA may request
Phase IV trials after 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 Phase I clinical
testing in human subjects. If the FDA has not commented on or
questioned the IND application within 30 days, initial clinical
studies may begin. However, any FDA comments or questions must be
answered to the satisfaction of the FDA before initial clinical
testing can begin. In some instances, this process could result in
substantial delay and expense.
The results of the pre-clinical and clinical studies on new drugs
are submitted to the FDA in the form of NDAs for approval to commence
commercial sales. Following extensive review, the FDA may grant
marketing approval, require additional testing or information or deny
the application. Continued compliance with all FDA requirements and
the conditions in an approved application, including product
specifications, manufacturing process and labeling requirements, are
necessary for all products. Failure to comply, or the occurrence of
unanticipated adverse events during commercial marketing, could lead
to the need for labeling changes, product recall, seizure, injunctions
against distribution or other FDA-initiated action, which could delay
further marketing until the products are brought into compliance.
In certain cases, an ANDA may be filed in lieu of filing an NDA.
An ANDA relies on bioequivalency tests that compare the applicant's
drug with an already approved reference drug, rather than on clinical
trials. An ANDA may be available to the Company for a new formulation
of a drug which has already been approved by the FDA in other topical
dosage forms. By concentrating on drug delivery systems employing
existing drugs, the Company expects that the time for regulatory
approval of certain products should be shorter than for entirely new
substances.
The NDA itself is a complicated and detailed document and must
include the results of extensive animal, clinical and other testing,
the cost of which is substantial. Although the FDA is required to
review applications within 180 days of filing, in the process of
reviewing applications the FDA frequently requests that additional
information be submitted and starts the 180 day regulatory review
period anew when the requested additional information is submitted.
The effect of such requests and subsequent submissions can
significantly extend the time for the NDA review process. Until an
NDA is actually approved, no assurance can be given that the
information requested and submitted will be considered adequate by the
FDA to justify approval.
In addition to the above, packaging and labeling of most of the
Company's proposed products are subject to FDA regulation. The
Company must get FDA approval for all labeling and packaging prior to
marketing of a regulated product.
Whether or not FDA approval has been obtained, approval of a
product by a comparable regulatory authority must be obtained in most
foreign countries prior to the commencement of marketing of the
product in that country. The approval procedure varies from country
to country and may involve additional testing, and the time required
may differ from that required for FDA approval. Although some
procedures for unified filings exist for certain European countries,
in general each country has its own procedure and requirements, many
of which are time consuming and expensive. Thus, substantial delays
in obtaining
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required approvals from foreign regulatory authorities can result
after the relevant applications are filed. After such approvals are
obtained, further delays may be encountered before the products become
commercially available.
No assurance can be given that any required FDA or other
governmental approval will be granted or, if granted, will not be
withdrawn. Governmental regulation may prevent or substantially delay
the marketing of the Company's proposed products, cause the Company to
undertake costly procedures and furnish a competitive advantage to the
more substantially capitalized companies with which the Company plans
to compete. In addition, the extent of potentially adverse government
regulations that may arise from future administrative action or
legislation cannot be predicted.
PATENTS AND LICENSE RIGHTS
The Company was granted a U.S. patent in 1994 relating to certain
compounds useful for treatment of osteoporosis and hypercalcemia.
Corresponding foreign patents have also issued in several European
countries and Canada. A related U.S. patent issued in 1995 for the use
of these compounds in the treatment of hypercalcemia. The Company
holds patents on its SEPA" compounds in the United States, Canada and
throughout Europe and the SEPA" patent application is pending in
Japan. The Company owns a U.S. patent on a transdermal medicator. The
Company filed patent applications in the U.S., Canada and Europe for
unique low molecular weight polyvinyl pyrrolidone molecules and their
use in stabilizing enzymes and other types of proteins. Two patent
applications were filed in 1995 for minoxidil with SEPA" once-a-day
treatment for baldness. The Company also filed a patent application
in 1995 on its MacroDermTM technology.
The Company believes that patent protection of its technologies,
processes and products is important to its future operations. The
success of the Company's proposed products may depend, in part, upon
the Company's ability to obtain patent protection.
The Company intends to enforce its patent position and
intellectual property rights vigorously. The cost of enforcing the
Company's patent rights in lawsuits, if necessary, may be significant
and could interfere with the Company's operations.
Although the Company intends to file additional patent
applications as management believes appropriate with respect to any
new products or technological developments, no assurance can be given
that any additional patents will be issued or, if issued, will be of
commercial benefit to the Company. In addition, to anticipate the
breadth or degree of protection that any such patents may afford is
impossible. To the extent that the Company relies on unpatented
proprietary technology, no assurance can be given that others will not
independently develop or obtain substantially equivalent or superior
technology or otherwise gain access to the Company's trade secrets,
that any obligation of confidentiality will be honored or that the
Company will be able to effectively protect its rights to proprietary
technology. Further, no assurance can be given that any products
developed by the Company will not infringe patents held by third
parties or that, in such case, licenses from such third parties would
be available on commercially acceptable terms, if at all.
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In connection with the prior research and development efforts of
the Company, the Company owns several patents and possesses certain
license rights in connection with other technologies, which it is not
currently pursuing.
RISK FACTORS
In addition to the other information in this report, the
following risk factors should be considered carefully in evaluating
the Company and its business. This report contains forward-looking
statements that involve risks and uncertainties. The CompanyOs 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
managementOs then-current expectations. Factors that might cause such
a difference include, but are not limited to, those discussed or
referred to below.
HISTORY OF OPERATING LOSSES; NEED FOR CONTINUED WORKING CAPITAL
The Company has been engaged primarily in research and
development since its inception in 1981 and has derived limited
revenues from the commercial sale of its products and licensing of
certain technology. The Company has had no revenues relating to the
sale of any products currently under development. The Company has
incurred net losses every year since its inception and the Company
anticipates that losses may continue for the foreseeable future. At
December 31, 1995, the CompanyOs accumulated deficit was approximately
$15___ million. The CompanyOs ability to continue operations after
its current capital resources are exhausted depends on its ability to
obtain additional financing and achieve profitable operations, as to
which no assurance can be given. However, the Company believes that
its financial resources are sufficient to meet planned operating
activities for the next twelve months.
The Company continues to pursue the commercialization of its SEPA
technology through discussion and presentation of its technology to
potential licensees. No assurance can be given that these discussions
will lead to any licenses. No assurance can be given that any
milestone fees or 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 CompanyOs proposed products are in the early development
stage, require significant further research, development, testing and
regulatory clearances and are subject to
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the risks of failure inherent in the development of products based on
innovative technologies. These risks include the possibilities that
any or all of the proposed products may be found to be ineffective or
toxic, or otherwise may fail to receive necessary regulatory
clearances; that the proposed products, although effective, may be
uneconomical to market; or that third parties may market superior or
equivalent products. Due to the extended testing and regulatory
review process required before marketing clearance can be obtained,
the Company does not expect to be able to realize revenues from the
sale of any drugs for [several years]in the near term.
NEED FOR SIGNIFICANT PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL
FINANCING
Before the Company or any licensees of the Company may market any
products based upon the CompanyOs 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 substantial working capital to
complete clinical studies on any proposed products. No assurance can
be given that the Company will be able to enter into any secure
suchadditional ventures financing on favorable terms, if at all.
DEPENDENCE ON THIRD PARTIES FOR DEVELOPMENT; NO ASSURANCE OF LICENSED
AGREEMENTS
The Company intends to rely on licensees and joint venture
arrangements to fund most of the costs relating to product development
and clinical trials. Licensees may be expected to have the legal
right to terminate funding a product at any time for any reason
without significant penalty. The resources and attention devoted by a
licensee to a product are not within the CompanyOs control, and this
can result in delays in clinical testing, the preparation and
prosecution orf regulatory filings and commercialization efforts.
Further, no assurance can be given that the Company will be able to
enter into new collaborative arrangements or that existing or future
collaborative arrangements will be successful.
PRIOR DEVELOPMENT EFFORTS
Since the CompanyOs 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 CompanyOs
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 CompanyOs development activities with
respect to its transdermal delivery systems will be successful or that
these efforts, as well, will not be eventually abandoned.
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES FOR
MARKETING AND DISTRIBUTION OF PRODUCTS
The Company intends to market and distribute its proposed
products through others pursuant to licensing, joint venture, or
similar collaborative arrangements or distribution agreements. The
Company has no sales force or marketing organization. If the Company
<PAGE>
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
CompanyOs dependence on third parties for manufacturing may adversely
affect the CompanyOs 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, and Alvin J. Karloff, its Chief
Executive Officer and President. Dr. Samour and Mr. Karloff are
employed by the Company under employment agreements that are of
indefinite length and include non-disclosure and non-competition
provisions. The loss of either Dr. Samour or Mr. Karloff could have a
material adverse effect on the CompanyOs business.
The CompanyOs business also depends on access to scientific
talent, competition for which is intense and can be expected to
increase.
THE COMPANYOS BUSINESS ALSO DEPENDS ON ITS RELATIONSHIPS WITH
VARIOUS UNIVERSITIES. THE COMPANY HAS (1) AN AGREEMENT WITH THE
UNIVERSITY OF PISA IN ITALY, PURSUANT TO WHICH RESEARCHERS AT THE
UNIVERSITY OF PISA ARE ASSISTING THE COMPANY IN EXAMINING BOTH THE
MECHANISMS OF SEPA ENHANCEMENT AND THE PHYSICAL AND CHEMICAL
CHARACTERIZATION OF SEPA COMPOUNDS, AS WELL AS THE DEVELOPMENT OF NEW
POLYMERS FOR USE IN TRANSDERMAL DRUG DELIVERY; (2) AN ON-GOING
COLLABORATIVE RELATIONSHIP WITH THE UNIVERSITY OF PARIS IN FRANCE FOR
CERTAIN ANIMAL AND HUMAN TESTING; AND (3) AN AGREEMENT WITH THE
UNIVERSITY OF CALIFORNIA AT SAN FRANCISCO TO IDENTIFY COSMETIC
APPLICATIONS. THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL BE ABLE
TO RENEW OR CONTINUE ANY SUCH ARRANGEMENTS ON TERMS ACCEPTABLE TO THE
COMPANY, IF AT ALL.
COMPETITION, GOVERNMENT REGULATION, PATENTS AND LICENSE RIGHTS
See these sections, above, for a description of risk factors
relating to these matters.
PRODUCT LIABILITY; NO GENERAL INSURANCE
The design, development, manufacture and sale of the CompanyOs
products involve an inherent risk of product liability claims and
associated adverse publicity. The Company currently does not maintain
general 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 CompanyOs
insurance policies will be adequate. Such insurance is expensive,
difficult to obtain and may not be available in the future on
acceptable terms or at all. A successful claim brought against the
Company if it is uninsured, or which is in excess of the CompanyOs
insurance coverage, if any, could have a material adverse effect upon
the Company and its financial condition.
<PAGE>
UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS
The future revenues and profitability of, and availability of
capital for biotechnology companies may be affected by the continuing
efforts of governmental and third-party payors to contain or reduce
the costs of health care through various means. For example, in
certain foreign markets pricing or profitability of prescriptions
pharmaceuticals is subject to government control. 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 CompanyOs prospects.
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 56 of the Financial Statements included in Item 8
of this Report and in the form of lease included as an exhibit to this
Report.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders
during the three months ended December 31, 1995, through the
solicitation of proxies or otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MARKET PRICE OF SECURITIES AND RELATED MATTERS
The following chart sets forth the range of high and low bid
prices for the Common Stock, Class A Warrants, Class AA Warrants and
Class X Warrants for the periods indicated as obtained from NASDAQ and
the NASD Electronic Bulletin Board:
<TABLE><CAPTION>
Common Stock Class A Class AA Class
Common Stock Warrants Warrants Warrants
MCHM MCHML MCHMM MCHMN
- ----------------------------------------------------------------------
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended High Low High Low High Low High Low
December 31, 1994
First Quarter 4 1/8 2 1/8 2 3/4 1 3/8 3/8 3 1
Second Quarter 2 5/8 1 1/4 1 1/8 1/2 15/16 1/4 2 1/4 1/4
Third Quarter 2 3/16 1 1/21 1/16 3/8 3/4 1/4 1 1/2
Fourth Quarter 2 1/8 1 1/4 7/8 1/4 5 /8 1/4 1 1/2
December 31, 1995
First Quarter 2 15/16 1 1/8 3/4 1/4 5/8 1/8 1 1/2 1/2
Second Quarter 4 5/16 2 1/16 1 7/8 1/2 1 3/8 1/4 2 1/4 1/2
Third Quarter 6 1/2 3 3/8 3 3/8 1 1/2 2 3/8 7/8 4 1
Fourth Quarter 4 15/16 3 2 1/2 1 1/8 1 5/8 3/4 3 1 3/4
</TABLE>
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, 1995,
there were 391 ____ record holders of the Company's Common Stock.
The Company has never paid dividends on its Common Stock and
its Board of Directors does not contemplate declaring any dividends in
the foreseeable future. The Company presently intends to retain
earnings, if any, to finance research, development, and expansion of
its business.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE><CAPTION>
TRANSITION PERIOD
FROM APRIL 1 YEAR ENDED
FISCAL YEAR ENDED MARCH 31 TO DECEMBER 31 DECEMBER 31
1992 1993 1993 1994 1995
<S> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Total revenue $501,252$1,027,730 $123,819 $44,710 $17,493
Net loss (124,369) (2,539)(1,465,454)(1,969,442)(2,465,837)
Net loss per share (0.02) 0.00 (0.13) (0.17) (0.20)
Balance Sheet Data:
Working capital $148,869$6,508,411 $5,321,837$3,615,608$4,532,623
Current assets 244,213 6,664,117 5,633,155 3,955,357 4,962,562
Total assets 418,191 6,914,246 5,956,850 4,437,600 5,462,625
Current liabilities 95,344 155,706 311,318 339,749 429,939
Capital lease obligations -0- -0- -0- 59,715 91,861
Total liabilities 95,344 165,378 324,188 387,792 486,198
StockholdersO equity 322,847 6,748,868 5,632,662 4,049,808 4,976,427
</TABLE>
ITEM 7. MANAGEMENTOS 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
acccompanying financial statements and related footnotes.
GENERAL
MacroChem's primary business is the development and
commercialization of transdermal drug delivery compounds and systems
designed to promote the delivery of drugs from the surface of the skin
into the skin and 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 limited clinical testing of certain SEPA@-enhanced
pharmaceuticals.
The Company's results of operations vary significantly from year
to year and quarter to quarter, and depend, among other factors, on
the signing of new licenses and product development agreements, the
timing of revenues recognized pursuant to license agreements, the
achievement of milestones by licensees and the progress of clinical
trials conducted by licensees and the Company. The timing of the
Company's revenues may not match the timing
<PAGE>
of the Company's associated product development expenses. To date,
research and development expenses have generally exceeded revenue in
any particular period and/or fiscal year.
In May 1993, the Company changed its fiscal year end from March
31 to December 31, effective December 31, 1993.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
The Company has continued to incur losses from operations. For
the year ended 1995, the net loss was approximately $2,465,000 as
compared to a loss of $1,969,000 for the previous year, a 25%
increase. For the 1995 and 1994 years the Company realized operating
revenues of approximately $17,500 and $44,700, respectively, which
were from the completion of feasibility studies.
Marketing, general and administrative expenses for 1995
aggregated approximately $1,541,000, an increase of $317,000 or 26%,
from 1994's total of $1,224,000. During 1995, the Company used
outside service providers for certain administrative and accounting
functions, incurred increased recruiting expenses for the replacement
and addition of several executive level employees, and increased
marketing its technology to potential licensees and strategic alliance
partners. In early 1996, the Company hired a vice president of
operations, a director of research and development and a director of
finance.
Research and development costs increased by approximately
$178,000 from $932,000 in 1994 to $1,110,000 for 1995, a 19% increase.
The Company has continued its emphasis on research and development of
expanded uses of the Company's proprietary products. The construction
of a pilot scale manufacturing facility, conforming to the FDA's
current Good Manufacturing Practices (cGMP), during 1995, has
increased the Company's internal research and development
capabilities. This facility will allow for improvements in the
manufacture and testing of its chemical compounds. 1996 costs are
expected to increase due to the hiring of a director of research and
development and to increased clinical study costs.
Other income increased from a net amount of $177,000 in 1994 to
$203,000 in 1995. This increase reflects greater cash on hand, offset
in part by the effect of the flattening of US Treasury rates in the
latter part of 1995. Interest expense was approximately $42,600 in
1995, reflecting management's decision to maximize available cash
resources by acquiring new equipment through capital lease
arrangements, rather than outright purchase.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE NINE MONTHS ENDED
DECEMBER 31, 1993
The Company had a net loss for the year ended December 31, 1994
of approximately $1,969,000, compared to a net loss for the nine
months ended December 31, 1993 of $1,465,000. These losses continue
to reflect the Company's lack of any significant license fee or
development milestone fee agreements.
<PAGE>
Total revenue for 1994 approximated $44,700 compared to $123,800
in 1993, a decrease of $79,100. The decrease in revenues is
attributable to a decrease in sales of SEPA" to The Upjohn Company,
which terminated its two SEPA" license agreements with the Company in
1993 and 1994.
Marketing, general and administrative expenses for 1994
approximated $1,224,000 as compared to $1,170,000 for the nine-month
period ended December 31, 1993.
Research and development expenditures aggregated $932,000 for
1994 compared to $446,000 for the 1993 period. This increase in
research and development expenditures represents the Company's
continuing commitment to the development of its patented technology
and the investigation of expanded uses for it.
Other income, net increased by approximately $75,000 from 1993 to
1994. The increase is attributable chiefly to increased interest
income for a twelve month period in the 1994 year.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the primary source of funding for the Company's
operations has been the private and public sale of its securities, and
to a lesser extent, the licensing of its proprietary technology and
products, government grants and the limited sales of products and test
materials. During 1995, the Company received aggregate net proceeds
of approximately $3,376,000, from the exercise of stock options, stock
warrants, unit purchase options and the issuance of new shares of
common stock, compared to approximately $374,800 in 1994. At
December 31, 1995 working capital was approximately $4,533,000
compared to $3,616,000 at December 31, 1994. The expected decrease in
the Company's working capital, based upon the loss for the year ended
December 31, 1995, was mitigated by the receipt of these net proceeds
from the issuance of 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 expects its working capital to decline.
In connection with the Company's January 1993 private placement,
affiliates of the placement agent were granted options to purchase a
specified number of the units sold in the private placement, at the
same price as in the private placement. Subsequent to December 31,
1995, an affiliate of the placement agent exercised its option to
purchase some of these additional units, at an aggregate exercise
price of $2,581,000. In addition, the affiliate exercised common
stock warrants for an aggregate exercise price of approximately
$1,055,000 subsequent to December 31, 1995.
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
<PAGE>
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.
In addition to capital expenditures and additional patent
development costs for the year ended December 31, 1995 of
approximately $71,000, the Company entered into a capital lease for
the acquisition of certain equipment.
The Company anticipates capital expenditures of approximately
$120,000 during the fiscal year ended December 31,1996. Additionally,
the Company plans on conducting additional clinical studies for
approximately $800,000 in 1996.
The Company believes that its existing cash and cash equivalents,
marketable securities and other investments will be sufficient to meet
its operating expenses and capital expenditure requirements for at
least the next twelve months. The Company's cash requirements may
vary materially from those now planned because of changes in focus and
direction of the Company's research and development programs,
competitive and technical advances, patent developments or other
developments. It is not believed that inflation will have any
significant effect on the results of the Company's operations.
Recently Issued Accounting Standards - The Financial Accounting
Standards Board (the "FASB") has issued SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." This statement, which will be required in 1996,
establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those
assets to be held and used and for long-lived assets and certain
identifiable intangibles which are to be disposed of. The Company has
not yet determined the effect of implementing SFAS No. 121 on its
financial position and results of operations in any future period.
Postemployment Benefits - The FASB has issued SFAS No. 112,
OEEmployersO Accounting for Postemployment Benefits,O which requires
accrual of benefits (such as Eshort-term disability and severance
benefits) provided by an employer to former or inactive employees and
their beneficiaries after employment but before retirement. The
Company adopted this statement during 1995 and the impact on the
CompanyOs results of operations and financial position was not
material.
Fair Value of Financial Instruments - The FASB has issued SFAS
No. 107, ODisclosures About Fair Value of EFinancial InstrumentsO
which requires the disclosure of fair value of most financial
instruments, both assets and liabilities, for which it is practical to
estimate fair value. The Company adopted SFAS 107 during 1995.
Stock-Based Compensation - In November 1995, the FASB issued SFAS
123, OAccounting for Stock-Based Compensation.O SFAS 123 addresses
the financial accounting and reporting standards for stock-based
employee compensation plans. SFAS 123 permits an entity to either
record the effects of stock-based employee compensation plans in its
financial statements or elect to provide the appropriate disclosures
in the notes to the financial statements. The Company has elected to
provide appropriate disclosures in the notes to financial statements,
therefore there will be no impact on the CompanyOs results of
operations or financial position. SFAS 123 is required to be adopted
in 1996.
<PAGE>
The foregoing statements in this report include forward-looking
statements that involve risks and uncertainties. The CompanyOs 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 - ORisk FactorsO.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MacroChem Corporation
Financial Statements
Year Ended December 31, 1995
And Year Ended December 31, 1994
and Nine Months Ended December 31, 1993
<PAGE>
INDEPENDENT AUDITORSO 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, 1995 and 1994, and the related
statements of operations, stockholders' equity, and cash flows for the
years ended December 31, 1995 and 1994 and the nine months ended
December 31, 1993. 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, 1995 and 1994, and the results of its operations and its
cash flows for the years ended December 31, 1995 and 1994, and the
nine months ended December 31, 1993, in conformity with generally
accepted accounting principles.
[SIGNATURE]
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 1, 1996
<PAGE>
MACROCHEM CORPORATION
BALANCE SHEETS
DECEMBER 31,
<TABLE><CAPTION>
ASSETS 1995 1994
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,591,779 $ 585,458
Marketable securities 971,492 3,279,375
Certificates of deposit 287,000 ---
Chemical supplies 50,534 50,534
Prepaid expenses and other
current assets 61,757 39,990
------------- -----------
TOTAL CURRENT ASSETS 4,962,562 3,955,357
------------- -----------
PROPERTY AND EQUIPMENT (NET) 307,390 274,880
------------- -----------
OTHER ASSETS:
Patents, net 188,213 203,053
Deposits 4,460 4,310
------------- -----------
TOTAL OTHER ASSETS 192,673 207,363
------------- -----------
TOTAL ASSETS $ 5,462,625 $ 4,437,600
============= =============
MACROCHEM CORPORATION
BALANCE SHEETS
DECEMBER 31,
(continued)
LIABILITIES AND STOCKHOLDERSO EQUITY 1995 1994
- -------------------------------------- ----- -----
CURRENT LIABILITIES:
Current portion of capitalized lease obligations$ 36,616$ 18,614
Accounts payable and accrued expenses 290,345 153,957
Accrued compensation 97,050 161,250
Deferred rent 5,928 5,928
------------- -----------
TOTAL CURRENT LIABILITIES 429,939 339,749
------------- -----------
CAPITALIZED LEASE OBLIGATIONS, Net of
current portion 55,245 41,101
DEFERRED RENT, Noncurrent portion 1,014 6,942
------------- -----------
TOTAL LONG-TERM LIABILITIES 56,259 48,043
------------- -----------
TOTAL LIABILITIES 486,198 387,792
------------- -----------
COMMITMENTS & CONTINGENCIES (Notes 6,7)
STOCKHOLDERSO EQUITY:
Preferred stock --- ---
Common stock, $.01 par value,
issued and outstanding, 13,129,321 shares
and 11,569,643 shares at December 31, 1995
and 1994, respectively 131,293 115,696
Additional paid-in capital 19,801,473 16,424,614
Accumulated deficit (14,956,339) (12,490,502)
------------- -----------
TOTAL STOCKHOLDERSO EQUITY 4,976,427 4,049,808
------------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERSO EQUITY $ 5,462,625 $ 4,437,600
============= =============
</TABLE>
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE><CAPTION>
Years Ended December 31, Nine Months Ended
------------------------- -----------------
1995 1994 December 31, 1993
-------- -------- -----------------
<S> <C> <C> <C>
REVENUES
Research contracts $ 17,493 $ 44,710 $ 47,831
Product sales --- --- 75,988
------------ ------------ ------------
TOTAL REVENUES 17,493 44,710 123,819
------------ ------------ ------------
OPERATING EXPENSES
Cost of product sales --- --- 53,500
Marketing, general and
administrative 1,541,095 1,223,657 1,169,630
Research and development1,109,512 931,506 446,484
Consulting fees with
related parties 36,000 36,000 22,000
------------ ------------ ------------
TOTAL OPERATING EXPENSES 2,686,607 2,191,163 1,691,614
------------ ------------ ------------
LOSS FROM OPERATIONS (2,669,114) (2,146,453) (1,567,795)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 246,018 170,950 117,476
Interest expense ( 42,644) (1,199) ---
Other (97) 7,260 (15,135)
------------ ------------ ------------
TOTAL OTHER INCOME 203,277 177,011 102,341
------------ ------------ ------------
NET LOSS $(2,465,837) $(1,969,442) $(1,465,454)
============ ============ ============
NET LOSS PER SHARE $(.20) $(.17) $(.13)
====== ====== ======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12 ,331,560 11,558,105 10,874,172
============ ============ ============
</TABLE>
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE><CAPTION>
PREFERRED STOCK COMMON STOCKADDITIONAL
--------------------------------------
NUMBER OF PAR NUMBER OF PAR PAID-INACCUMULATED
SHARES VALUE SHARES VALUE CAPITAL DEFICIT TOTAL
- --------------------------------------------------------------------------------
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1993 222,188$ 2,22210,690,979$ 106,910$ 15,695,342$ (9,055,606) $ 6,748,868
Issuance of common stock
for services
rendered and in
settlement of
accounts payable --- --- 5,000 50 25,450 --- 25,500
Conversion of preferred
stock to common stock (127,188)(1,272) 254,376 2,543 ( 1,271) --- ---
Exercise of common
stock warrants --- --- 147,188 1,472 349,310 --- 350,782
Exercise of
common stock options --- --- 26,000 260 14,303 --- 14,563
Costs associated
with the registration and
issuance of common
stock and warrants --- --- --- --- (41,597) --- (41,597)
Net loss --- --- --- --- --- (1,465,454) (1,465,454)
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 199395,000 95011,123,543 111,235 16,041,537(10,521,060)5,632,662
Issuance of common stock for
services rendered and
in settlement of
accounts payable --- --- 6,600 66 11,709 --- 11,775
Conversion of preferred
stock to common stock(95,000) (950) 190,000 1,900 (950) --- ---
Exercise of common
stock warrants --- --- 246,500 2,465 371,035 --- 373,500
Exercise of common
stock options --- --- 3,000 30 1,283 --- 1,313
Net loss --- --- --- --- --- (1,969,442) (1,969,442)
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 --- ---11,569,643 115,696 16,424,614(12,490,502) 4,049,808
Issuance of common stock --- --- 1,300,000 13,000 3,262,000 --- 3,275,000
Issuance of common
stock for services rendered--- --- 4,145 42 16,270 --- 16,312
Exercise of common stock warrants --- --- 51,700 517 90,358 ---
90,875
Exercise of common stock options --- --- 203,833 2,038 531,231 ---
533,269
Costs associated with
issuance of common
stock and warrants --- --- --- --- (523,000) --- (523,000)
Net loss --- --- --- --- --- (2,465,837) (2,465,837)
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 --- $---13,129,321$ 131,293 $ 19,801,473$ (14,956,339)
$ 4,976,427
=========== ==================================================================
</TABLE>
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE><CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31,DECEMBER 31,
-------------------------
1995 1994 1993
---------------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,465,837) $(1,969,442)$(1,465,454)
---------------------- -----------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 79,475 60,738 35,731
(Gain) loss on disposal of equipment(3,925) 3,740 --
Abandoned patent costs 22,592 -- --
Issuance of common stock in exchange
for services 16,312 11,775 25,500
Amortization of discounts on
marketable securities (152,316) (88,108) --
Increase (decrease) in cash from:
Accounts receivable -- 34,000 (19,500)
Prepaid expenses and other current assets(21,767) 4,026 28,724
Chemical supplies -- (50,534) --
Accounts payable and accrued expenses136,388 (22,933) 97,674
Accrued rent -- -- (19,362)
Deferred compensation (64,200) 32,750 77,300
Deferred rent (5,928) (5,928) 3,198
Deposits ( 150) -- --
---------------------- -----------
Total adjustments 6,481 (20,474) 229,265
---------------------- -----------
Net cash used by
operating activities (2,459,356)(1,989,916) (1,236,189)
---------------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 4,800 -- --
Purchases of marketable securities (3,516,801)(5,491,267) --
Purchase of certificates of deposit (287,000) -- --
Proceeds from maturities of
marketable securities 5,977,000 2,300,000 --
Expenditures for property and equipment(54,916)(130,666) (77,528)
Additions to patents (16,558) (27,740) (31,769)
---------------------- -----------
Net cash provided (used) by
investing activities 2,106,525(3,349,673) (109,297)
---------------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease (16,992) (4,905) --
Proceeds from issuance of common stock3,275,000 -- --
Proceeds from exercise of common stock options 533,269 1,313 14,563
Proceeds from exercise of common
stock warrants 90,875 373,500 350,782
Costs associated with the registration and
issuance of common stock and warrants(523,000) -- (41,597)
---------------------- -----------
Net cash provided by financing
activities 3,359,152 369,908 323,748
---------------------- -----------
</TABLE>
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
<TABLE><CAPTION>
YEARS ENDED DECEMBER 31,NINE MONTHS ENDED
1995 1994DECEMBER 31, 1993
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 3,006,321 $(4,969,681) $(1,021,738)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 585,458 5,555,139 6,576,877
----------- ----------- ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 3,591,779 $ 585,458 $ 5,555,139
=========== ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest aggregated $5,022, $1,199 and $0, respectively,
for the years ended December 31, 1995 and 1994 and the nine months
ended December 31, 1993. The Company did not pay any income taxes
during those periods.
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Issuance of common stock for services
rendered and in settlement of
accounts payable $ 16,312 $ 11,775 $ 25,500
========== ========== ==========
Equipment acquired in exchange for
capital lease obligation $ 49,138 $ 64,620 $ --
========== ========== ==========
</TABLE>
<PAGE>
MACROCHEM CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND THE NINE MONTHS ENDED DECEMBER 31, 1993
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 bloodstream.
The Company has been engaged primarily in research and development
since its inception in 1981 and has derived limited revenues from the
commercial sale of its products and licensing of certain technology.
The Company has had no revenues relating to the sale of any products
currently under development. The Company has incurred net losses
every year since its inception and the Company anticipates that losses
may continue for the foreseeable future. At December 31, 1995, the
CompanyOs accumulated deficit was approximately $15 million. The
CompanyOs ability to continue operations after its current capital
resources are exhausted depends on its ability to obtain additional
financing and achieve profitable operations, as to which no assurances
can be given. However, the Company believes that its financial
resources are sufficient to meet planned operating activities for the
next twelve months.
Change in Fiscal Year - In May 1993, the Company elected to change its
fiscal year end from March 31, to December 31. This change was
effective for the period ended December 31, 1993.
Revenue Recognition - Revenues are earned and recognized based upon
work performed, upon the sale or licensing of product rights, upon
shipment of product, or upon the attainment of benchmarks specified in
the related agreements.
Research and Development - Research and development costs are charged
to operations as incurred. Such costs include proprietary research
and development activities and expenses associated with research and
development contracts. In 1995, the Company changed its definition of
research and development to more properly reflect personnel efforts
and other resources previously included in general and administrative
expenses. This change had the effect of increasing research and
development and decreasing general and administrative costs from
amounts previously reported by approximately $250,000 for the year
ended December 31, 1994. No reclassifications were necessary relating
to 1993 expenses since the allocation was comparable to the 1995
presentation.
Cash Equivalents - Cash equivalents consist of short-term, highly
liquid investments purchased with remaining maturities of three months
or less.
Marketable Securities - As of January 1, 1994 the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
The impact of adopting SFAS No. 115 was not material to the CompanyOs
results of
<PAGE>
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
operations and financial position. This statement requires that
equity securities with readily determinable fair values and all
investments in debt securities are classified and accounted for as
follows:
- - Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as investment
securities and reported at amortized cost.
- - Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized
gains and losses included in operations.
- - Debt and equity securities not classified as either investment
securities or trading securities are classified as available-for-
sale securities and reported at fair value, with unrealized gains
and losses excluded from operations and reported in a separate
component of stockholders' equity.
The Company intends to hold until maturity its investments and
accordingly, such investments are reported at amortized cost in
the accompanying financial statements.
Chemical supplies - Chemical supplies held for sale are stated at the
lower of cost or market, on a first-in, first-out basis.
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 17 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 $28,000 and $20,000,
respectively, at December 31, 1995 and 1994.
On an on-going basis, the Company evaluates the recoverability of the
net carrying value of various patents by reference to the patent's
expected use in drug and other research activities as measured by
outside interest in the Company's patented technologies and
management's determination of potential future uses of such
technologies. As a result of such evaluations, during 1995 the
Company wrote off approximately $22,600 of costs associated with
patents no longer having value.
Income Taxes - The Company accounts for income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes", which requires the
use of the liability method. The objective of this method is to
establish deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities using tax rates in effect in the
year(s) in which the differences are expected to reverse.
<PAGE>
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Net Loss Per Common Share - Net loss per common share is computed
based on the weighted average number of common shares outstanding
during each year. Common equivalent shares from convertible preferred
stock, common stock options and common stock warrants are excluded
from the computations as their effect is antidilutive.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
The primary estimates underlying the CompanyOs financial statements
include the useful lives of the CompanyOs patents and the valuation
allowance established for the CompanyOs deferred tax assets.
Management bases its estimates on certain assumptions, which it
believes are reasonable in the circumstances, and while actual results
could differ from those estimates, management does not believe that
any change in those assumptions in the near term would have a
significant effect on financial position or the results of operations.
Recently Issued Accounting Standards - The Financial Accounting
Standards Board (the "FASB") has issued SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." This statement, which will be required in 1996,
establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those
assets to be held and used and for long-lived assets and certain
identifiable intangibles which are to be disposed of. The Company has
not yet determined the effect of implementing SFAS No. 121 on its
financial position and results of operations in any future period.
Postemployment Benefits - The FASB has issued SFAS No. 112,
OEmployersO Accounting for Postemployment Benefits,O which requires
accrual of benefits (such as short-term disability and severance
benefits) provided by an employer to former or inactive employees and
their beneficiaries after employment but before retirement. The
Company adopted this statement during 1995 and the impact on the
CompanyOs results of operations and financial position was not
material.
Fair Value of Financial Instruments - The FASB has issued SFAS No.
107, ODisclosures About Fair Value of Financial InstrumentsO which
requires the disclosure of fair value of most financial instruments,
both assets and liabilities, for which it is practical to estimate
fair value. The Company adopted SFAS 107 during 1995.
Stock-Based Compensation - In November 1995, the FASB issued SFAS 123,
OAccounting for Stock-Based Compensation.O SFAS 123 addresses the
financial accounting and reporting standards for stock-based
employee compensation plans. SFAS 123 permits an entity to either
record the effects of stock-based employee compensation plans in its
financial statements or elect to provide the appropriate disclosures
in the notes to the financial statements. The Company has elected to
provide appropriate disclosures in the notes to financial statements,
therefore there will be no impact on the CompanyOs results of
operations or financial position. SFAS 123 is required to be adopted
in 1996.
Other - Certain items in the financial statements for the periods
ended December 31, 1994 and 1993 have been reclassified to conform
with current presentation.
<PAGE>
2. MARKETABLE SECURITIES
As of December 31, 1995, all marketable securities and certificates of
deposit are classified as investment securities and carried at
amortized cost. There have been no net realized gains or losses on
the sale of securities for the years ended December 31, 1995 and 1994,
or the nine month period ending December 31, 1993. The maturities of
investment securities held at December 31, 1995 and 1994 are all one
year or less.
The carrying amounts and approximate market value of investment
securities are as follows as of December 31, 1995 and 1994:
<TABLE><CAPTION>
AmortizedUnrealized Market
1995 Cost Gain Value
- ------ -------- ---------- -----------
<S> <C> <C> <C>
U. S. Treasury Securities $ 971,492 $ 2,746 $ 974,238
Certificates of deposit
(bearing interest rates
ranging from 3.5% to 5.4%) 287,000 -- 287,000
------------ -------- -----------
$ 1,258,492 $ 2,746 $ 1,261,238
============ ========= ============
1994
- -----
U. S. Treasury Securities $ 3,279,375 $ -- $ 3,279,375
============ ========= ============
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31:
<TABLE><CAPTION>
<S> <C> <C>
Laboratory equipment $ 448,577 $ 378,874
Office equipment 142,549 139,167
Leasehold improvements 90,564 74,596
--------- ----------
Total 681,690 592,637
Less: accumulated depreciation and
amortization (374,300) (317,757)
---------- ----------
Property and equipment, net $ 307,390 $ 274,880
========== ==========
</TABLE>
<PAGE>
4. CAPITALIZED LEASE OBLIGATIONS
Equipment held under capital lease obligations included with owned
property on the balance sheet consists of the following as of December
31, 1995:
<TABLE><CAPTION>
<S> <C>
Classification
Laboratory equipment $ 113,758
Less: accumulated amortization ( 16,716)
---------
$ 97,042
Future minimum lease payments under capital leases are as follows:
1996 $ 43,401
1997 42,837
1998 19,653
---------
Total minimum lease payments 105,891
Less: imputed interest (approximately 12.0%) ( 14,030)
---------
Present value of minimum lease payments 91,861
Less: current portion 36,616
---------
Capital lease obligation, net of current portion $ 55,245
=========
</TABLE>
<PAGE>
5. STOCKHOLDERS' EQUITY
Authorized Capital Stock - Authorized capital stock consists of
30,000,000 shares of $.01 par value common stock of which 13,129,321
shares are issued and 13,056,807 are reserved for conversion of common
stock warrants and options at December 31, 1995. Authorized
undesignated preferred stock total 5,500,000 shares.
Stock Issuances - On May 30, 1995, MacroChem Corporation (the
OCompanyO) sold 1,000,000 shares of common stock, par value $.01 per
share, to a single investor (the OInvestorO) in a private placement.
The sale price was $2.75 per share. Pursuant to the Common Stock
Purchase Agreement between the Company and the Investor, the Investor
has the right to designate one person to serve on the CompanyOs Board
of Directors, as long as the designee is reasonably satisfactory to
the Company. The firm of Janssen-Meyers, L.P. (OJ-MO) received a
brokers fee of $357,500 from the Company for this private placement.
Mr. Janssen and Mr. Meyers are principals of J-M and each own more
than 10% of the CompanyOs voting securities.
In January 1993, the Company completed a private placement offering
whereby 142 units (the Units), each consisting of 30,000 shares of
common stock, 10,000 Class A common stock warrants and 10,000 Class AA
common stock warrants, were sold, or issued in exchange for certain
notes payable, for $52,500 per Unit. Each Class A and Class AA common
stock warrant is exercisable for one share of common stock at a price
per share, subject to adjustment, of $3.00 and $4.50, respectively.
As of November 9, 1994, under certain circumstances, based primarily
upon the trading price of the Company's common stock, each Class A and
AA common stock warrant is redeemable by the Company at a price of
$.05 per warrant. The Class A and Class AA common stock warrants
expire in December 1997. At December 31, 1995, 1,434,900 and
1,519,900 Class A and Class AA warrants were outstanding,
respectively.
Additionally, options were issued to affiliates of the placement agent
of the offering which are exercisable for 118 and one-third of these
Units at a price of $52,500 per Unit. These options expire in
December 1997. During 1995, 10 Units were purchased by an affiliate
of the placement agent. At December 31, 1995, options to purchase 108
and one-third of these Units remain outstanding. Subsequent to
December 31, 1995, the placement agent and/or its affiliates exercised
their option to purchase 49 1/6 additional Units with net proceeds to
the Company of $2,581,000.
In connection with the issuance of $300,000 of subordinated notes
payable in August 1992 certain of the notes were issued to affiliates
of the placement agent, of which $155,000 was repaid in January 1993
and $145,000 was converted to Units in the January 1993 offering
described above, the Company issued warrants to purchase 300,000
shares of common stock at an initial exercise price of $1.75 per
share. These warrants expire in September 1997. At December 31,
1995, exercisable warrants to purchase 238,500 shares of common stock
remain outstanding.
In June 1991, the Company sold 350,000 shares of common stock at a
price of $1.25 per share. The price per share also included a warrant
to purchase one share of common stock at a price of $2.50 per share.
These warrants expired March 31, 1995.
In December 1990, the Company sold 92,500 shares of Series A
Convertible Preferred Stock at a price of $1.00 per share. In
connection with this sale, an additional 237,188 shares of Series A
Convertible Preferred Stock were issued in exchange for 189,750 shares
of previously issued and
<PAGE>
5. STOCKHOLDERS' EQUITY (CONTINUED)
outstanding common stock. Each share of Series A Convertible
Preferred Stock was convertible into two shares of common stock and a
warrant to purchase one share of common stock at a price of $1.50 per
share. In January 1994, the outstanding shares of Series A
Convertible Preferred Stock were converted into common stock. The
warrants expired during December 1993.
Warrants issued in connection with the Company's initial public
offering in 1985 expired March 31, 1995.
In July 1995, the Company issued 240,000 warrants to a financial
consultant to permit the holder to acquire 80,000 shares of the
CompanyOs common stock at an exercise price of $3.00, $4.00, and
$5.00, respectively. The warrants expire July 1999. Exercise of
these warrants is permitted only if the Company and the financial
consultant enter into a new consulting agreement on or before
April 1, 1996.
Registration - In November 1993 and as amended in September 1994 the
Company completed a registration of the following securities:
Title of Each Class of Securities Registered Amount Registered
-------------------------------------------- -----------------
Common Stock, $.01 par value per share 4,410,000
Class A redeemable warrants 1,420,000
Shares of common stock underlying Class A warrants 1,420,000
Class AA redeemable warrants 1,420,000
Shares of common stock underlying Class AA warrants 1,420,000
Shares of common stock included in Unit Purchase Option 3,550,000
Class A warrants included in Unit Purchase Option 1,183,333
Shares of common stock underlying Class A warrants
included in Unit Purchase Option 1,183,333
Class AA warrants included in Unit Purchase Option 1,183,333
Shares of common stock underlying Class A warrants
included in Unit Purchase Option 1,183,333
Class X warrants 300,000
Shares of common stock underlying Class X warrants 300,000
Stock Plans - The Company has three stock option plans, the 1984
Incentive Stock Option Plan (ISO Plan), the 1984 Non-Qualified Stock
Option Plan (Non-Qualified Plan) and the 1994 Equity Incentive Plan
(1994 Plan). Under the terms of the 1984 Plans, as of April 1994, the
Company may no longer award any options. All options previously
granted may be exercised at any time up to ten years from date of
award.
Under the terms of the 1994 Plan, the Company may grant options to
purchase up to a maximum of 2,500,000 shares of common stock to
certain employees, directors and consultants. The options may be
awarded as incentive stock options (employees only) and non-incentive
stock options (certain employees, directors and consultants).
<PAGE>
5. STOCKHOLDERS' EQUITY (CONTINUED)
The exercise price of options under the ISO Plan and the incentive
options from the 1994 Plan may not be less than fair market value at
the date of grant. The exercise price of the Non-Qualified options
and the non-incentive options from the 1994 Plan is determined by the
Board of Directors.
All options become exercisable as specified at the date of the grant.
<TABLE><CAPTION>
A summary of activity under all plans is as follows:
Number of Exercise Price
Shares Per Share
----------- --------------
<S> <C> <C>
Outstanding at March 31, 1993 1,729,575 $0.43 to $7.38
Granted 310,100 $3.25 to $4.00
Exercised (26,000) $0.43 to $1.50
-----------
Outstanding at December 31, 1993 2,013,675
Granted 848,100 $1.69 to $3.00
Exercised (3,000) $0.43
Expired (181,000) $3.00 to $5.00
-----------
Outstanding at December 31, 1994 2,677,775
Granted 325,000 $1.56 to $7.75
Exercised (203,833) $0.43 to $3.63
Expired (13,000) $1.50 to $7.38
Cancelled (141,401) $1.69 to $4.00
-----------
Outstanding at December 31, 1995 2,644,541
===========
Exercisable at December 31, 1995 2,161,841
===========
</TABLE>
The following table presents the range of exercise prices for stock
options outstanding at December 31, 1995:
<TABLE><CAPTION>
Number of Exercise Price
Shares Per share
-------------------------------------------
<S> <C>
1,393,575 $0.43
401,200 $1.50 to $2.00
809,766 $3.00 to $4.00
35,000 $4.25 to $5.75
5,000 $7.75
----------
2,644,541
=========
</TABLE>
<PAGE>
5. STOCKHOLDERS' EQUITY (CONTINUED)
Other Stock, Stock Option and Warrant Issuances - During the nine
months ended December 31, 1993, the Company issued 5,000 shares of
common stock for services rendered, valued at $25,500. In May 1993,
the Company issued a warrant to purchase 75,000 shares of common stock
at a price of $1.50 per share. The warrant was issued for
services provided in selling shares of the Company's preferred stock
in 1991. These warrants were exercised during the fiscal year ended
December 31, 1994. During 1995 the Company issued 4,145 common shares
and recorded compensation of $16,312 for services rendered.
6. COMMITMENTS AND CONTINGENCIES
Lease Commitments - The Company has a five-year lease on its operating
facility, which commenced in January 1992. The lease contains a three
year renewal option. At December 31, 1995, future minimum lease
payments under this lease agreement are as follows: 1996, $106,416 and
1997, $17,736. Total rental expense under all operating leases was
approximately $104,000, $107,000 and $45,000 for the years ended
December 31, 1995 and 1994, and the nine months ended December 31,
1993, respectively.
Employment and Consulting Agreements - The Company has employment and
consulting agreements with certain members of the Board of Directors,
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 $528,000. In addition, the
consulting agreements also provide for additional payments to certain
consultants of a fee equal to 5% of the net proceeds from the sale or
licensing of the Company's products or technology to certain third
parties. During the periods ended December 31, 1995, 1994 and 1993,
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 1995, 1994 and 1993.
Absence of Product Liability Insurance - The Company does not maintain
product liability insurance. A clinical liability policy was
obtained as of November, 1995.
<PAGE>
7. AGREEMENTS WITH PLACEMENT AGENT AND CONSULTANTS
In connection with the January 1993 private placement offering (Note
5), the Company entered into an agreement with the placement agent of
that offering whereby:
- - The Company granted to the placement agent the right of first
refusal with respect to participating in all future financings by
the Company within the five-year period expiring December 1997.
This right of first refusal was terminated for a fee of $150,000,
paid in connection with the issuance of one million shares of the
Company's common stock, in May 1995.
- - A two year consulting agreement, expiring December 31, 1994 at
$35,000 per year.
- - The placement agent is entitled to receive 4% of the proceeds
collected in conjunction with the exercise of the Class A and
Class AA common stock warrants sold in the private placement.
- - The placement agent received a fee equal to 13% of the proceeds
received by the Company in the offering.
8. 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, 1995, the Company has available net
operating loss carryforwards of approximately $14,430,000 for federal
income tax purposes, expiring through 2010 and $5,940,000 for state
income tax purposes, expiring through 2000. In addition, the Company,
for federal and state income tax purposes, has unused investment and
research and development tax credits aggregating $251,000 and $55,000,
respectively. The use of approximately $8,300,000 of the federal net
operating losses are restricted to approximately $550,000 per year due
to a change in ownership, which occurred in December 1992, in
accordance with definitions as stated in the Internal Revenue Code.
Deferred income taxes reflect the net tax effect of differences in the
timing of certain revenue and expense items and the related carrying
amounts of assets and liabilities for financial reporting and tax
purposes as well as net operating loss carryforwards. Significant
components of the Company's deferred tax assets and liabilities as of
December 31, 1995 and December 31, 1994 are as follows:
<TABLE><CAPTION>
1995 1994
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $ 5,400,000 $4,760,000
Tax credit carryforwards 306,000 252,000
Other 34,000 68,000
----------- ---------
5,740,000 5,080,000
Valuation allowance (5,740,000) (5,080,000)
----------- -----------
Deferred tax asset, net $ -- $ --
=========== ===========
</TABLE>
8. INCOME TAXES (CONTINUED)
For the years ended December 31, 1995 and 1994 and the nine month
period ended December 31, 1993, the valuation allowance was
increased by approximately $660,000, $851,000 and $748,100,
respectively, due to the uncertainty of future realization of
currently generated net operating loss carryforwards.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information requested by this item is incorporated by
reference from the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information requested by this item is incorporated by
reference from the Company's Proxy Statement.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information requested by this item is incorporated by
reference from the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information requested by this item is incorporated by
reference from the Company's Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a)(1) The following Financial Statements are filed herewith:
Page
Report of Independent Auditors 22
Balance Sheets 23
Statements of Operations 24
Statements of StockholdersO Equity 25
Statements of Cash Flows 26-27
Notes to Financial Statements 28-38
(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:
<PAGE>
4(b) Amendment to warrant agreement.
10.12 Agreement between the Company and Janssen/Meyers Associates,
L.P.
23.1 Consent of Deloitte & Touche LLP
The following exhibit required to be filed herewith is
incorporated by reference to the exhibits to the CompanyOs
Registration Statement on Form S-8 (No. 33-85818).
99 1994 Equity Incentive Plan*
The following exhibit required to be filed herewith is
incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993:
10.11 Lease agreement between MacroChem Corporation and Phoenix
Home Life Mutual Insurance Company for space located at 110
Hartwell Avenue, Lexington, MA 02173.
The following exhibits required to be filed herewith are
incorporated by reference to the exhibits to the Company's
Registration Statement on Form S-1 (No. 33-62042):
1a Agency Agreement between the Company and D.H. Blair Investment
Banking Corp.
1b Unit Purchase Options
1c M/A Agreement between the Company and D.H. Blair Investment
Banking Corp.
3a Certificate of Incorporation
3b Bylaws
3c State of Delaware Certificate of Agreement of Merger
4a Included in exhibits 3a, 3b and 3c
4b Specimen Class X Warrant Certificate
4c Specimen Class A Warrant Certificate
4d Specimen Class AA Warrant Certificate
4e Warrant Agreement among the Company, American Stock Transfer and
Trust Company of New York and D.H. Blair Investment Banking Corp.
10a Form of Employment Agreement between the Company and Dr. Carlos
M. Samour*
10b Form of Employment Agreement between the Company and Mr. Alvin J.
Karloff*
10c Consulting Agreement between the Company and Mr. Abraham E.
Cohen*
10d Consulting Agreement between the Company and Mr. E. Donald
Shapiro*
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, 1992:
10.10.1 1984 Non-Qualified Stock Option Plan as Amended March 1,
1991.*
The following exhibit required to be filed herewith is
incorporated by reference to the exhibits to the Company's Form
10-K for the year ended March 31, 1989:
10.9.1 Agreement of Sublease dated May 15, 1989 between MacroChem
Corporation and Ascent Pharmaceuticals, Inc.
The following exhibits required to be filed herewith are
incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended March 31, 1988:
4.1 Form of Common Stock Certificate
10.10 1984 Stock Option Plan*
The following exhibit required to be filed herewith is
incorporated herein by reference to the exhibits to the Company's
Form 10-K for the year ended March 31, 1987:
10.11 1984 Incentive Stock Option Plan, amended and restated.*
(b) No current reports on Form 8-K were filed in the three-month
period ended December 31, 1995.
*Management contract or compensatory plan or arrangement
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MACROCHEM CORPORATION
Dated: March 28, 1996 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 28,
1996.
/s/ Alvin J. Karloff Chief Executive Officer,
Alvin J. Karloff President and Director
/s/ Dr. Carlos M. Samour Chairman of the Board of
Directors
Dr. Carlos M. Samour and Scientific Director
/s/ D. Ray Taylor Director
D. Ray Taylor
/s/ Dr. Willard M. Bright Director
Dr. Willard M. Bright
/s/ Abraham Cohen Director
Abraham Cohen
/s/ Peter G. Martin Director
Peter G. Martin
<PAGE>
Exhibit 4(f)
AMENDMENT TO WARRANT AGREEMENT
Amendment dated July 6, 1995 (the "Amendment') to the Warrant
Agreement dated as of December 14, 1992 (the "Agreement") by and among
MacroChem Corporation (the "Company"), American Stock Transfer & Trust
Company, as Warrant Agent (the "Warrant Agent") and D. H. Blair
Investment Banking Corp. ("Blair").
WHEREAS, with the consent of Blair pursuant to Section 4(p) of
the Agency Agreement dated October 29, 1992 (the "Agreement") between
the Company and Blair, the Company has appointed Janssen/Meyers
Associates, L.P. ("Janssen/Meyers") to solicit exercises of the
Company's Class A Common Stock Purchase Warrants (the "Class A
Warrants") and Class AA Common Stock Purchase Warrants (the "Class AA
Warrants");
WHEREAS, the Company and Blair acknowledge the need to compensate
Janssen/Meyers for solicitation of exercises of the Warrants;
WHEREAS, it is Blair's intention to oversee the solicitation of
Warrant exercises pursuant to Paragraph 4(p) of the Agency Agreement;
WHEREAS, the Company has appointed Janssen/Meyers Associates,
L.P. ("Janssen/Meyers") to act as co-soliciting agent along with Blair
in connection with any such warrant solicitation; and
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants herein contained, it is agreed as follows:
1. Section 4(b) of the Agreement is hereby amended by adding the
following sentences:
If, at the Exercise Date of any Class A Warrant exercised
(x) after the sending of a notice of redemption to the holders of
the Class A Warrants pursuant to Section 8(b) hereof and (y)
during the term of a written consulting agreement between the
Company and Janssen/Meyers, L.P. ("Janssen/Meyers") (excluding
Warrants included in the Unit Purchase Option and excluding
Warrants held by Janssen/Meyers or by Blair and their respective
affiliates) (i) the market price of the Company's Common Stock is
greater than the then Purchase Price of the Class A Warrant, (ii)
the exercise of the Class A Warrant was solicited by
Janssen/Meyers, (iii) the Class A Warrant was not held in a
discretionary account, (iv) disclosure of compensation
arrangements was made at the time of exercise, and (v) the
solicitation of the exercise of the Class A Warrant was not in
violation of Rule 10b-6 (as such rule or any successor rule may
be in effect as of the time of exercise) promulgated under the
Securities Exchange Act of 1934 (the conditions described in (i)
through (v) of this sentence being referred to herein as the "Fee
Conditions"), then the Warrant Agent simultaneously with the
distribution of the Warrant Proceeds in respect of such Class A
Warrant to the Company shall, on behalf of the Company, pay from
the Warrant Proceeds a fee of 2% (the "Janssen/Meyers Fee") of
the Purchase Price to Janssen/Meyers. If, at the Exercise Date
of any Class AA Warrant exercised (x) after the sending of a
notice of redemption to the holders of the Class AA Warrants
pursuant to Section 8(b) hereof and (y) during the term of a
written consulting agreement between the Company and
Janssen/Meyers (excluding Warrants included in the Unit Purchase
Option and excluding Warrants held by Janssen/Meyers or by Blair
and their respective affiliates) all of the foregoing Fee
Conditions are satisfied with respect to such Class AA Warrant,
then the Warrant Agent simultaneously with the distribution of
the Warrant Proceeds in respect of such Class AA Warrant to the
Company shall, on behalf of the Company, pay from the Warrant
Proceeds a fee of 2% (the "Janssen/Meyers Fee") of the Purchase
Price to Janssen/Meyers. Blair agrees that it will reallow 1% of
the Blair Fee to Janssen/Meyers in respect of exercises of
Warrants on which the Janssen/Meyers Fee is payable pursuant to
the two immediately preceding sentences.
2. Except as amended herein, the Agreement shall continue in
full force and effect and shall be enforceable in accordance with its
terms.
IN WITNESS WHEREOF, the parties have executed this Amendment as
of the date first above written.
MACROCHEM CORPORATION
By:/s/ALVIN KARLOFF
__________________________________
Authorized Officer
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By: /s/HERBERT J. LEMMER
____________________________________
Herbert J. Lemmer
Vice President
D.H. BLAIR INVESTMENT BANKING CORP.
By: /s/MARTIN A. BELL
____________________________________
Martin A. Bell, Senior Vice
President
and General Counsel
Acknowledged and Agreed to:
JANSSEN/MEYERS ASSOCIATES, L.P.
By: /s/B.MEYERS
________________________________
B. Meyers
G.P.
<PAGE>
EXHIBIT 10.12
MACROCHEM CORPORATION
110 Hartwell Avenue
Lexington, MA 02173-3134
July 27, 1995
Janssen/Meyers Associates, L.P.
17 State Street
New York, N.Y. 10004
Gentlemen:
This letter will confirm the understanding and agreement between
Macrochem Corporation (the "Company") and Janssen-Meyers, L.P. (the
"Consultant") as follows:
1. The Company hereby retains the Consultant to perform consulting
services related to corporate finance and other financial service
matters and to act as co-soliciting agent with D.H. Blair Investment
Banking Corp. ("Blair") in connection with exercises of the Company's
Class A Common Stock Purchase Warrants (the "Class A Warrants") and
Class AA Common Stock Purchase Warrants (the "Class AA Warrants")
(collectively, the "Warrants"), and the Consultant hereby accepts such
retention and shall faithfully perform for the Company the duties
described herein. In this regard, Consultant shall devote such
reasonable business time and attention to matters on which the Company
shall request its services, subject to the direction of the President
of the Company, as shall be determined by Consultant. Consultant
shall comply with all applicable laws and regulations in connection
with the performance of its duties hereunder, including without
limitation all Federal and State securities laws.
2. Term. The Consultant's retention hereunder shall be for a term
of eight months beginning on the date of your acceptance hereof. The
Company shall have the right to terminate this Agreement if the
Consultant ceases to conduct business, is adjudged insolvent or
bankrupt, if any assignment is made for the benefit of its creditors,
or in the event of any proceeding by or against the Consultant seeking
relief, reorganization or arrangement under any laws related to
insolvency or in the event of a change in management or control of the
Consultant.
3. Compensation.
(a) The Consultant shall be compensated at the rate of $5,000
per month.
(b) The Company shall pay such expenses of the Consultant
incurred in connection with the discharge of its duties hereunder as
shall be approved in advance by the President of the Company, such
payment shall be made upon presentation by the Consultant of a request
for same.
(c) The Warrant Agreement dated as of December 14, 1992 by and
among the Company, American Stock Transfer & Trust Company, as Warrant
Agent and Blair shall be amended as set for in Exhibit A hereto.
(d) In connection with the services to be rendered by Consultant
hereunder, the Company hereby agrees to issue to the Consultant a four-
year Warrant to purchase an aggregate of 240,000 shares of the
Company's Common Stock, exercisable with respect to (i) the first
80,000 shares at an exercise price of $3.00 per share, (ii) the second
80,000 shares at an exercise price of $4.00 per share and (iii) the
remaining 80,000 shares at an exercise price of $5.00 per share. The
Warrant shall contain "piggyback" registration rights which shall be
applicable during the term of the Warrant and shall become exercisable
upon the expiration of the term of this Agreement as set forth in
Section 2 hereof if, but only if, the Company and the Consultant have
entered into a new consulting agreement on or before April 1, 1996.
4. Notices. Any notice hereunder shall be sent to the Company and
the Consultant at their respective addresses above set forth. Any
notice shall be given by registered or certified mail, postage
prepaid, and shall be deemed to have been given when deposited in the
United States mail. Either party may designate any other address to
which notice shall be given, by giving written notice to the other of
such change of address in the manner here provided.
5. Governing Law. This Agreement shall be construed and governed in
accordance with the internal laws of the State of New York.
6. Entire Agreement. This Agreement contains the entire agreement
between the parties and may not be altered or modified, except in
writing and signed by the party to be charged thereby and supersedes
any and all previous agreements between the parties.
7. Binding Effect. This Agreement is not assignable voluntarily or
involuntarily, in whole or in part by either party without the prior
written consent of the other party. This Agreement shall be binding
upon the parties hereto and their respective successors and assigns,
to the extent assignment is permitted hereunder.
If you are in agreement with the foregoing, please execute in the
space provided below and return one executed original of this letter
which will constitute our agreement with respect to the subject matter
hereof.
Very truly yours,
MACROCHEM CORPORATION Agreed to and accepted this 27 day of
July, 1995.
JANSSEN-MEYERS ASSOCIATES, L.P.
By: /s/ Alvin J. Karloff By: /s/ B. Meyers
Name: Alvin J. Karloff Name: B. Meyers
Title: Pres/CEO Title: G.P.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORSO CONSENT
MacroChem Corporation
We consent to the incorporation by reference in (i) registration
Statement No. 33-48876 on Form S-8, (ii) Registration Statement No. 33-
85818 on Form S-8 and (iii) Registration Statement No. 33-82298 on
Form S-3 of our report dated March 1, 1996, appearing in this Annual
Report on Form 10-K of MacroChem Corporation for the fiscal year ended
December 31, 1995.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 26, 1996
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS.
(1) Rule lines for tables are omitted.
(2) Italic typefaces is displayed in normal type.
(3) Boldface type is displayed in capital letters.
(4) Footers (e.g. page numbers and OSee notes to financial
statementsO) are omitted.
(5) Because the printed page breaks are not reflected, certain
tabular and columnar headings and symbols are displayed
differently in this filing.
(6) Bullet points and similar graphic symbols are omitted.
(7) Page numbering is different.
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<ARTICLE> 5
<S> <C>
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<PERIOD-TYPE> YEAR
<CASH> 3,591,770
<SECURITIES> 971,492
<RECEIVABLES> 0
<ALLOWANCES> 0
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<BONDS> 55,245
<COMMON> 131,293
0
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<OTHER-SE> 4,845,134
<TOTAL-LIABILITY-AND-EQUITY>5,462,625
<SALES> 0
<TOTAL-REVENUES> 17,493
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<INCOME-PRETAX> (2,465,837)
<INCOME-TAX> 0
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