SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 0-13634
MACROCHEM CORPORATION
(Exact name of registrant as
specified in its charter)
Delaware 04-2744744
--------------------- ---------------------
(State of Organization) (I.R.S.Employer
Identification Number)
110 Hartwell Avenue, Lexington, Massachusetts, 02173
(Address of principal executive offices, Zip Code)
(617) 862-4003
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
As of July 31, 1996, there were 15,524,099 shares of Common Stock,
$.01 par value per share, of the Registrant outstanding.
<PAGE>
MACROCHEM CORPORATION
INDEX
Page Number
-----------
Part I Financial Information
Item I Financial Statements (Unaudited)
Balance Sheets
June 30, 1996 and December 31, 1995 3 - 4
Statements of Operations
Three Months and Six Months Ended June 30, 1996
and 1995 5
Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 6 - 7
Notes to Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 10
Part II Other Information
Item 4 Submission of Matters to a Vote of Security Holders 11
2
<PAGE>
MACROCHEM CORPORATION
BALANCE SHEETS (UNAUDITED)
ASSETS
------
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 4,064,961 $ 3,591,779
Accounts receivable 41,453 ---
Marketable securities 3,707,320 971,492
Certificates of deposit 627,705 287,000
Chemical supplies 50,534 50,534
Prepaid expenses and other current assets 85,547 61,757
--------- ---------
TOTAL CURRENT ASSETS 8,577,520 4,962,562
--------- ---------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation:
1996 - $420,795; 1995 - $374,300 342,127 307,390
--------- ---------
OTHER ASSETS
Patents, net of accumulated amortization:
1996 - $32,723; 1995 - $28,320 183,810 188,213
Deposits 4,460 4,460
--------- ---------
TOTAL OTHER ASSETS 188,270 192,673
--------- ---------
TOTAL ASSETS $ 9,107,917 $ 5,462,625
========= =========
(Continued)
3
<PAGE>
MACROCHEM CORPORATION
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
1996 1995
----------- -----------
CURRENT LIABILITIES
Current portion of capital
lease obligations $ 34,902 $ 36,616
Accounts payable and accrued expenses 299,535 290,345
Accrued compensation to stockholder/officer 47,050 97,050
Deferred rent 3,978 5,928
----------- -----------
TOTAL CURRENT LIABILITIES 385,465 429,939
----------- -----------
LONG-TERM LIABILITIES
Deferred rent, non-current portion --- 1,014
Capital lease - long term 40,021 55,245
----------- -----------
TOTAL LONG-TERM LIABILITIES 40,021 56,259
----------- -----------
TOTAL LIABILITIES 425,486 486,198
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, issued and outstanding,
15,511,599 shares and 13,129,321 shares
at June 30, 1996 and December 31, 1995,
respectively 155,116 131,293
Additional paid-in capital 24,941,832 19,801,473
Accumulated deficit (16,414,517) (14,956,339)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 8,682,431 4,976,427
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 9,107,917 $ 5,462,625
=========== ===========
The accompanying notes are an integral part of these unaudited financial
statements.
(Concluded)
4
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
------------------------------ ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Product sales and royalty income $ --- $ --- $ --- $ ---
Research contracts 82,905 --- 82,905 15,150
---------- ---------- ---------- ----------
TOTAL 82,905 --- 82,905 15,150
---------- ---------- ---------- ----------
OPERATING EXPENSES
Marketing, general and
administrative 432,273 359,769 837,750 699,352
Research and development 482,785 244,133 879,466 466,999
Consulting fees with related
parties 2,000 9,000 12,000 18,000
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 917,058 612,902 1,729,216 1,184,351
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS ( 834,153) ( 612,902) ( 1,646,311) ( 1,169,201)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 129,184 60,215 196,508 115,115
Interest expense ( 4,811) ( 1,381) ( 8,372) ( 2,400)
Other 198 4,236 ( 3) 4,236
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 124,571 63,070 188,133 116,951
---------- ---------- ---------- ----------
NET LOSS $( 709,582) $( 549,832) $( 1,458,178) $( 1,052,250)
---------- ---------- ---------- ----------
NET LOSS PER SHARE $( .05) $( .05) $( .10) $( .09)
---------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,476,934 11,987,280 14,939,219 11,779,615
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
5
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30,
---------------------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,458,178) $(1,052,250)
--------- ---------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 50,898 37,847
Amortization of discounts on
marketable securities ( 38,046) ( 93,811)
Gain on sale of equipment --- ( 3,925)
Stock option compensation 16,711 ---
Increase (decrease) in cash from:
Accounts receivable ( 41,453) ---
Prepaid expenses and other current assets ( 23,790) ( 10,393)
Accounts payable 9,190 21,509
Accrued compensation ( 50,000) ( 1,181)
Deferred rent ( 2,964) ( 2,964)
(Increase) decrease in other assets --- 14,100
--------- ---------
Total adjustments ( 79,454) ( 38,818)
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES (1,537,632) (1,091,068)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities and
certificates of deposit (6,478,487) (3,489,800)
Proceeds from maturities of marketable
securities and certificates of deposit 3,440,000 3,343,000
Expenditures for property and equipment ( 81,232) ( 40,298)
Proceeds from sale of equipment --- 4,800
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (3,119,719) ( 182,298)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net --- 2,227,000
Principal payments on capital lease ( 16,938) ( 7,531)
Proceeds from exercise of common stock options 396,157 8,750
Proceeds from exercise of common stock warrants 2,170,064 ---
Proceeds from exercise of unit purchase options 2,581,250 ---
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,130,533 2,228,219
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 473,182 954,853
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,591,779 585,458
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,064,961 $ 1,540,311
========= =========
The accompanying notes are an integral part of these unaudited financial
statements.
(Continued)
6
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
During the six months ended June 30, 1996 and 1995, cash paid for interest
was $8,372 and $2,400, respectively. The Company did not pay any income
taxes during these periods.
The accompanying notes are an integral part of these unaudited financial
statements.
(Concluded)
7
<PAGE>
MACROCHEM CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) As permitted by the rules of the Securities and Exchange Commission (the
"Commission") applicable to quarterly reports on Form 10-Q, these notes are
condensed and do not contain all disclosures required by generally accepted
accounting principles. Reference should be made to the financial statements
and related notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
In the opinion of management of the Company, the accompanying financial
statements reflect all adjustments which were of a normal recurring nature
necessary for a fair presentation of the Company's financial position,
results of operations and cash flows for the three and six months ended
June 30, 1996 and 1995.
The results disclosed in the Statements of Operations for the three and six
months ended June 30, 1996 are not necessarily indicative of the results to
be expected for the full year.
(2) 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 the second quarter
of 1996, the Company changed its definition of research and development to
more properly reflect personnel efforts and other resources previously
included in general and administrative expenses. This change had the effect
of increasing research and development expenses and decreasing general and
administrative expenses from amounts previously reported by approximately
$144,000 for the six months ended June 30, 1995 and approximately $67,000
for the three months ended June 30, 1995. The current reclassification of
these expenses resulted in an increase in research and development expenses
and a decrease in general and administrative expenses for the three months
and six months ended June 30, 1996 by $34,000 and $68,000, respectively.
(3) In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which was effective for the Company beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply
APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company will continue
to apply APB Opinion No. 25 to its stock-based compensation awards to
employees and will disclose the required pro forma effect on net income and
earnings per share.
(4) Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." This statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used and for long-lived
assets and certain identifiable intangibles which are to be disposed of.
The adoption of this statement had no effect on the financial position, or
results of operations or cash flows of the Company.
(5) Research contract revenues related to the Company's proprietary SEPA
technology are recognized upon completion of the contract due to the
uncertain completion and subsequent realization of the contract.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
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 tissues and bloodstream. The
Company currently derives no significant revenue from product sales, royalties
or license fees. The Company plans to develop specific SEPA(R) formulations for
use with proprietary and non-proprietary drugs manufactured by pharmaceutical
companies, and to commercialize these products through the formation of
partnerships, strategic alliances and license agreements with those companies.
In order to attract strategic partners, the Company is conducting limited
clinical testing of certain SEPA-enhanced drugs.
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 the licensees and the Company. The
timing of the Company's revenues may not match the timing of the Company's
associated product development expenses. To date, research and development
expenses have generally exceeded revenue in any particular period and/or fiscal
year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
During the three months ended June 30, 1996 the Company had approximately
$83,000 of revenues as compared to no revenues during the same period in 1995.
The $83,000 represents two completed research contracts related to the Company's
proprietary SEPA technology.
Marketing, general and administrative expenses increased approximately
$73,000 (20%) over the comparable 1995 period due primarily to increased
employee additions, increased investment banking fees, and increased patent and
licensing fees. These increases were partially offset by reduced legal fees.
Research and development costs in the 1996 period increased approximately
$239,000 (98%) over the comparable 1995 period due primarily to increased
employee additions and increased spending to test and evaluate the Company's
potential products. In the 1996 period the Company hired a Director of Research
and Development, increased clinical investigation efforts, and hired technical
consultants to assist in evaluating and testing these potential products.
Other income increased approximately $62,000, resulting primarily from
interest income earned on increased cash and short term investments.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Total revenue for the six months ended June 30, 1996 was approximately
$83,000 compared to approximately $15,000 for the same period in 1995. This
increase is due to the two research contracts completed in the second quarter of
1996.
Marketing, general and administrative expenses increased approximately
$138,000 (20%) over the comparable 1995 period due primarily to increased
employee additions, increased investment banking fees, and increased costs of
liability insurance. These increases were partially offset by reduced legal and
accounting fees.
9
<PAGE>
Research and development costs increased approximately $412,000 (88%)
over the comparable 1995 period due primarily to increased employee additions
and increased efforts to test and evaluate the Company's potential products by
increased clinical investigation efforts and technical consulting. It is
anticipated that research and development costs will continue to increase in the
second half of 1996 due to an increased level of clinical investigation efforts.
Other income increased approximately $71,000, resulting primarily from
interest income earned on increased cash and short term investments.
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, government grants
and research contracts.
As of June 30, 1996, the Company had working capital of approximately
$8,192,000 compared to $4,533,000 at December 31, 1995. The increase in working
capital during the six month period results primarily from the receipt of
approximately $5,147,000 from the exercise of unit purchase options and of
options and warrants to purchase common stock. Cash used in operations for the
six months ended June 30, 1996 was approximately $1.54 million.
The Company must rely on equity financing to fund operations, development
costs, and to obtain regulatory approvals and the manufacturing and marketing of
its products.
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 private or public
sale of its securities, the Company's working capital is expected to decline.
The Company's long term financial 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 clinical
testing of SEPA-enhanced compounds, proprietary manufacturing methods and
advanced technologies, and the ability of the Company to manufacture products
under those agreements, and the demand for its products or the products of its
licensees or strategic partners, if and when approved for sale by regulatory
authorities. In any event, substantial additional funds will be required before
the Company is able to generate revenues sufficient to support its operations.
There is no assurance that the Company will be able to obtain such additional
funds, or obtain them on terms favorable to the Company. The Company's inability
to raise such sufficient funds could require it to delay, scale back or
eliminate certain research and development programs.
The Company anticipates additional capital expenditures of approximately
$50,000 during the remainder of the fiscal year ending December 31, 1996.
The Company believes that its existing cash, cash equivalents and
marketable securities will be sufficient to meet its current operating expenses
and capital expenditure requirements for a period of at least the next twelve
months.
The foregoing statements include forward-looking statements which involve
risks and uncertainties. The Company's actual experience may differ materially
from that discussed above. Factors that might cause such a difference include,
but are not limited to, those discussed in this report.
10
<PAGE>
PART II OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On May 24, 1996, the Company held its Annual Meeting of Stockholders to
vote on the following proposals:
1. To elect five members to the Board of Directors. Nominees for Director
were: a) Willard M. Bright; b) Alvin J. Karloff; c) Peter G. Martin;
d) Carlos M. Samour; e) D. Ray Taylor ("Proposal No. 1").
2. To ratify the selection of Deloitte & Touche LLP, as independent
auditors to the Company for the fiscal year ending December 31, 1996
("Proposal No. 2").
3. To approve an amendment to the Corporation's Certificate of
Incorporation to increase the authorized Common Stock from 30,000,000
shares to 60,000,000 shares ("Proposal No. 3").
Each of the proposals was adopted with a total vote as follows:
Shares
Shares Voting Against Shares
Proposal Voting For or Authority Withheld Abstaining
-------- ---------- --------------------- ----------
No. 1
Willard M. Bright 11,709,447 76,688
Alvin J. Karloff 11,732,860 53,275
Peter G. Martin 11,732,747 53,388
Carlos M. Samour 11,732,860 53,275
D. Ray Taylor 11,345,185 408,938
No. 2 11,743,583 7,309 35,240
No. 3 11,167,282 571,038 47,815
11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MacroChem Corporation
---------------------
(Registrant)
August 13, 1996 /s/ Alvin J. Karloff
--------------------
Alvin J. Karloff
Chief Executive Officer and
Principal Financial Officer
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000743884
<NAME> MACROCHEM CORPORATION
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,692,666
<SECURITIES> 3,707,320
<RECEIVABLES> 41,453
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,577,520
<PP&E> 762,922
<DEPRECIATION> 420,795
<TOTAL-ASSETS> 9,107,917
<CURRENT-LIABILITIES> 385,465
<BONDS> 0
0
0
<COMMON> 155,116
<OTHER-SE> 8,527,315
<TOTAL-LIABILITY-AND-EQUITY> 9,107,917
<SALES> 82,905
<TOTAL-REVENUES> 82,905
<CGS> 0
<TOTAL-COSTS> 1,729,216
<OTHER-EXPENSES> 188,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,372
<INCOME-PRETAX> 1,458,178
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,458,178
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,458,178
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
