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 September 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 October 31, 1996, there were 15,526,524 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
September 30, 1996 and December 31, 1995 3 - 4
Statements of Operations
Three Months and Nine Months Ended
September 30, 1996 and 1995 5
Statements of Cash Flows
Nine Months Ended September 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
<PAGE>
MACROCHEM CORPORATION
BALANCE SHEETS (UNAUDITED)
ASSETS
------
September 30, December 31,
1996 1995
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 5,241,267 $ 3,591,779
Accounts receivable --- ---
Marketable securities 2,200,760 971,492
Certificates of deposit 393,555 287,000
Prepaid expenses and other current assets 103,850 112,291
----------- -----------
TOTAL CURRENT ASSETS 7,939,432 4,962,562
---------- ---------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation:
1996 - $445,839; 1995 - $374,300 333,616 307,390
---------- ----------
OTHER ASSETS
Patents, net of accumulated amortization:
1996 - $35,423; 1995 - $28,320 219,289 188,213
Deposits 4,460 4,460
----------- ------------
TOTAL OTHER ASSETS 223,749 192,673
---------- ----------
TOTAL ASSETS $ 8,496,797 $ 5,462,625
========= =========
(Continued)
<PAGE>
MACROCHEM CORPORATION
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, December 31,
1996 1995
---- ----
CURRENT LIABILITIES
Current portion of capital
lease obligations $ 39,192 $ 36,616
Accounts payable and accrued expenses 252,458 290,345
Accrued compensation to stockholder/officer 47,050 97,050
Deferred rent 2,496 5,928
----------- -----------
TOTAL CURRENT LIABILITIES 341,196 429,939
----------- -----------
LONG-TERM LIABILITIES
Deferred rent, non-current portion --- 1,014
Capital lease - long term 26,910 55,245
----------- -----------
TOTAL LONG-TERM LIABILITIES 26,910 56,259
----------- -----------
TOTAL LIABILITIES 368,106 486,198
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, issued and outstanding,
15,526,524 shares and 13,129,321
shares at September 30, 1996 and
December 31, 1995, respectively 155,265 131,293
Additional paid-in capital 24,974,192 19,801,473
Accumulated deficit (17,000,766) (14,956,339)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 8,128,691 4,976,427
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 8,496,797 $ 5,462,625
=========== ===========
The accompanying notes are an integral part of these unaudited financial
statements.
(Concluded)
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Product sales and royalty income $ 2,904 $ 108 $ 2,904 $ 108
Research contracts --- --- 82,905 15,150
---------- ---------- ----------- -----------
TOTAL 2,904 108 85,809 15,258
---------- ---------- ----------- -----------
OPERATING EXPENSES
Marketing, general and
administrative 269,323 319,775 1,092,118 1,014,635
Research and development 383,120 328,940 1,277,541 796,506
Consulting fees with related
parties 3,000 9,000 15,000 27,000
---------- ---------- ----------- -----------
TOTAL OPERATING EXPENSES 655,443 657,715 2,384,659 1,838,141
---------- ---------- ----------- -----------
LOSS FROM OPERATIONS ( 652,539) ( 657,607) (2,298,850) ( 1,822,883)
---------- ---------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 67,487 68,036 263,995 183,150
Interest expense ( 1,196) ( 1,313) ( 9,568) ( 3,666)
Other ( 1) ( 313) ( 4) ( 48)
---------- ---------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 66,290 66,410 254,423 179,436
---------- ---------- ----------- -----------
NET LOSS $( 586,249) $( 591,197) $(2,044,427) $(1,643,447)
---------- ---------- ----------- -----------
NET LOSS PER SHARE $( .04) $( .05) $( .14) $( .14)
---------- ---------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,522,218 12,709,683 15,134,688 12,093,045
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,044,427) $(1,643,447)
--------- ---------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 78,642 57,692
Abandoned patent costs --- 20,703
Amortization of discounts on
marketable securities ( 62,336) ( 134,589)
Gain on sale of equipment --- ( 3,925)
Stock option compensation 21,220 ---
Increase (decrease) in cash from:
Accounts receivable --- ---
Prepaid expenses and other current assets 8,441 ( 9,742)
Accounts payable ( 37,887) 23,422
Accrued compensation ( 50,000) ( 4,202)
Deferred rent ( 4,446) ( 4,446)
Increase in other assets --- ( 6,753)
--------- ---------
Total adjustments ( 46,366) ( 61,840)
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES (2,090,793) (1,705,287)
--------- ---------
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 5,205,000 5,259,000
Expenditures for property and equipment ( 97,765) ( 50,521)
Proceeds from sale of equipment --- 4,800
Additions to patents ( 38,179) ---
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (1,409,431) 1,723,479
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net --- 2,227,000
Principal payments on capital lease ( 25,759) ( 12,202)
Proceeds from exercise of common stock options 424,157 533,270
Proceeds from exercise of common stock warrants 2,170,064 90,000
Proceeds from exercise of unit purchase options 2,581,250 ---
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,149,712 2,838,068
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,649,488 2,856,260
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,591,779 585,458
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,241,267 $ 3,441,718
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements. (Continued)
<PAGE>
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
During the nine months ended September 30, 1996 and 1995, cash paid for
interest was $9,568 and $3,666, 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)
<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 nine months ended
September 30, 1996 and 1995.
The results disclosed in the Statements of Operations for the three and
nine months ended September 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 1996, the Company
changed its definition of operating expenses to more properly reflect
personnel efforts and other resources. This change affected the 1995
operating expense presentation by decreasing research and development
expenses and increasing general and administrative expenses from amounts
previously reported by approximately $104,000 for the nine months ended
September 30, 1995 and approximately $34,000 for the three months ended
September 30, 1995.
(3) In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (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 in the Company's Annual Report on Form 10-K for the year
ending December 31, 1996.
(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
uncertainty of contract completion.
<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 SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
During the three months ended September 30, 1996 and September 30, 1995,
the Company had no significant revenues.
Marketing, general and administrative expenses decreased approximately
$50,000 (16%) over the comparable 1995 period due primarily to lower legal fees.
This decrease was partially offset by increased employee additions.
Research and development costs in the 1996 period increased approximately
$54,000 (16%) over the comparable 1995 period due primarily to increased
employee additions partially offset by reduced contract spending to test and
evaluate the Company's potential products.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Total revenue for the nine months ended September 30, 1996 was
approximately $86,000 compared to approximately $15,000 for the same period in
1995. This increase is due primarily to two research contracts completed in the
second quarter of 1996.
Marketing, general and administrative expenses increased approximately
$77,000 (8%) over the comparable 1995 period due primarily to increased employee
additions, and increased investment banking fees. These increases were partially
offset by reduced legal and accounting fees.
Research and development costs increased approximately $481,000 (60%)
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.
Other income increased approximately $75,000, resulting primarily from
interest income earned on increased cash and short term investments.
<PAGE>
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 September 30, 1996, the Company had working capital of
approximately $7.6 million compared to $4.5 million at December 31, 1995. The
increase in working capital during the nine month period results primarily from
the receipt of approximately $5.2 million from the exercise of unit purchase
options and of options and warrants to purchase common stock. Cash used in
operations for the nine months ended September 30, 1996 was approximately $2.1
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
$30,000 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. Reference should be made
to the Company's Annual Report on Form 10-K for the year ended December 31, 1995
and, in particular, the section entitled "Risk Factors".
<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)
November 14, 1996 /s/Alvin J. Karloff
-------------------
Alvin J. Karloff
Chief Executive Officer and
Principal Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,634,822
<SECURITIES> 2,200,760
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,939,432
<PP&E> 779,455
<DEPRECIATION> 445,839
<TOTAL-ASSETS> 8,496,797
<CURRENT-LIABILITIES> 341,196
<BONDS> 0
0
0
<COMMON> 155,265
<OTHER-SE> 7,973,426
<TOTAL-LIABILITY-AND-EQUITY> 8,496,797
<SALES> 85,809
<TOTAL-REVENUES> 85,809
<CGS> 0
<TOTAL-COSTS> 2,384,659
<OTHER-EXPENSES> 254,423
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,568
<INCOME-PRETAX> (2,044,427)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,044,427)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,044,427)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
