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 quarterly period ended March 31, 1998
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 or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
110 HARTWELL AVENUE, LEXINGTON, MASSACHUSETTS 02173
---------------------------------------------------
(Address of principal executive offices, Zip Code)
781-862-4003
------------
(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 (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of March 31, 1998, there were 22,202,865 shares of Common Stock, $.01
par value per share, of the Registrant outstanding.
<PAGE>
MACROCHEM CORPORATION
INDEX
-----
PAGE NUMBER
-----------
PART I Financial Information
Item 1 Unaudited Financial Statements
Balance Sheets
March 31, 1998 and December 31, 1997 3-4
Statements of Operations
Three Months Ended March 31, 1998 and 1997 5
Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 6-7
Notes to Unaudited Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II Other Information
Item 6 Exhibits and Reports on Form 8-K 11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
MACROCHEM CORPORATION
UNAUDITED BALANCE SHEETS
ASSETS
------
March 31, December 31,
1998 1997
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $24,296,277 $24,952,121
Prepaid expenses and other
current assets 141,564 117,683
---------- ----------
TOTAL CURRENT ASSETS 24,437,841 25,069,804
---------- ----------
PROPERTY AND EQUIPMENT,
net of accumulated depreciation:
1998-$603,395; 1997-$582,769 416,829 281,216
---------- ----------
OTHER ASSETS:
Patents, net of accumulated amortization:
1998-$68,385; 1997-$59,603 290,745 268,356
Deposits 4,460 4,460
---------- ----------
TOTAL ASSETS $25,149,875 $25,623,836
========== ==========
(Continued)
<PAGE>
MACROCHEM CORPORATION
UNAUDITED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1998 1997
------------- ----------------
CURRENT LIABILITIES:
Capitalized lease obligations $ 14,013 $ 18,408
Accounts payable and accrued
expenses 536,630 204,352
Deferred compensation and related
accrued interest 91,586 90,140
---------- ----------
TOTAL CURRENT LIABILITIES 642,229 312,900
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock --- ---
Common Stock, $.01 par value;
authorized 60,000,000 shares;
issued and outstanding 22,202,865
shares and 22,182,865 shares at
March 31, 1998 and December 31,
1997, respectively. 222,029 221,829
Additional paid-in capital 46,985,290 46,923,677
Unearned compensation ( 123,169) ( 169,322)
Accumulated deficit (22,576,504) (21,665,248)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 24,507,646 25,310,936
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 25,149,875 $ 25,623,836
---------- ----------
The accompanying notes are an integral part of these unaudited financial
statements.
(Concluded)
<PAGE>
MACROCHEM CORPORATION
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1998 1997
---- ----
REVENUES:
Research contracts $ --- $ 50,000
Product sales --- 650
---------- ----------
TOTAL REVENUES $ --- $ 50,650
---------- ----------
OPERATING EXPENSES:
Marketing, general and administrative 482,744 401,807
Research and development 724,846 444,818
Consulting fees with related parties 12,000 3,000
---------- ----------
TOTAL OPERATING EXPENSES 1,219,590 849,625
---------- ----------
LOSS FROM OPERATIONS ( 1,219,590) ( 798,975)
---------- ----------
OTHER INCOME (EXPENSE):
Interest Income 310,299 88,861
Interest Expense ( 1,965) ( 2,202)
---------- ----------
TOTAL OTHER INCOME 308,334 86,659
---------- ----------
NET LOSS $( 911,256) $( 712,316)
========== ==========
BASIC AND DILUTED NET LOSS
PER SHARE $( 0.04) $( 0.05)
========== ==========
SHARES USED TO COMPUTE
BASIC AND DILUTED NET LOSS
PER SHARE 22,200,690 15,732,443
========== ==========
The accompanying notes are an integral part of these unaudited financial
statements.
<PAGE>
MACROCHEM CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(911,256) $(712,316)
------- -------
Adjustments to reconcile net loss to
net cash used by operating
activities:
Depreciation and amortization 42,275 30,953
Stock-based compensation 46,153 41,313
Amortization of discounts on
marketable securities --- ( 176)
Increase (decrease) in cash from:
Accounts receivable --- 43,977
Prepaid expenses and other current
assets ( 23,881) ( 49,264)
Accounts payable and accrued expenses 332,278 35,710
Deferred compensation and related
accrued interest 1,446 665
Deferred rent --- ( 1,014)
------- -------
Total adjustments 398,271 102,164
------- -------
Net cash used by operating activities (512,985) (610,152)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of marketable
securities --- 22,000
Expenditures for property and equipment (169,106) ( 10,354)
Additions to patents ( 31,171) ( 21,020)
------- -------
Net cash used for investing activities (200,277) ( 9,374)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease ( 4,395) ( 9,315)
Proceeds from exercise of common stock
options 61,813 135,033
Proceeds from exercise of common stock
warrants --- 264,800
Proceeds from exercise of unit purchase
options --- 315,000
------- -------
Net cash provided from financing
activities 57,418 705,518
------- -------
(Continued)
<PAGE>
MACROCHEM CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1998 1997
---- ----
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $( 655,844) $ 85,992
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 24,952,121 7,329,881
---------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 24,296,277 $7,415,873
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest aggregated $519 and $1,536 for the three months ended
March 31, 1998 and 1997, respectively.
The Company did not pay any income taxes during those periods.
The accompanying notes are an integral part of these unaudited financial
statements.
(Concluded)
<PAGE>
MACROCHEM CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(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, 1997.
In the opinion of management of the Company, the accompanying unaudited
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
months ended March 31, 1998 and 1997.
The results disclosed in the Statement of Operations for the three months
ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full year.
(2) Certain prior year amounts have been reclassified to conform to their
current presentation.
(3) In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", which was
effective for periods ending after December 15, 1997. SFAS No. 128 requires
the Company to restate amounts previously reported as earnings per share to
comply with the requirements of SFAS No. 128. The Company has determined
that the adoption of SFAS No. 128 has had no effect on previously reported
earnings per share since the results would be anti-dilutive.
(4) The Company granted 75,000 Common Stock Options under the 1994 Equity
Incentive Plan during the three months ended March 31, 1998. During this
same period, 12,000 options under the 1984 Non-Qualified Stock Option Plan
and 8,000 options under the 1994 Equity Incentive Plan were exercised. In
addition, during this period, no options were canceled. All options were
issued with an exercise price at the fair market value of the underlying
common stock determined on the date of grant.
(5) In March 1998, the Company adopted Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." The Company has determined that the
adoption of SFAS No. 130 had no effect on the accompanying financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAl CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
MacroChem Corporation's primary business is the development of
pharmaceutical products for commercialization by applying SEPA(R) (Soft Enhancer
of Percutaneous Absorption), its patented topical drug delivery technology. SEPA
compounds, when properly combined with drugs, provide pharmaceutical
formulations (creams, gels, solutions, etc.) that enhance the transdermal
delivery of drugs into the skin or into the bloodstream. The Company currently
derives no revenue from product sales, royalties or license fees. The Company
plans to develop specific SEPA formulations for use with proprietary and
non-proprietary drugs manufactured by pharmaceutical companies, and to
commercialize these products through the formation of partnerships, strategic
alliances and license agreements with those companies. In order to attract
strategic partners, the Company is conducting clinical testing of certain
SEPA-enhanced drugs.
The Company's results of operations can vary significantly from year to
year and quarter to quarter, and depend, among other factors, on the signing of
new licenses and product development agreements, the timing of revenues
recognized pursuant to license agreements, the achievement of milestones by
licensees, the progress of clinical trials conducted by the licensees and the
Company and the degree of research, marketing and administrative effort. The
timing of the Company's revenues may not match the timing of the Company's
associated product development expenses. To date, research and development
expenses have generally exceeded revenue in any particular period and/or fiscal
year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
During the three months ended March 31, 1998, the Company had no revenues
as compared to $50,650 of revenues during the same period in 1997. $50,000 (of
the 1997 revenue) represented one completed research contract related to the
Company's proprietary SEPA technology.
Marketing, general and administrative expenses increased approximately
$81,000 (20%) over the comparable 1997 period. Expenses associated with listing
of the Company's common stock on the NASDAQ National Market were the primary
reason for this increase.
Research and development expenses in the 1998 period increased
approximately $280,000 (63%) over the comparable 1997 period. Increased clinical
trial efforts and costs related to the hiring of key research and regulatory
affairs executives accounted for most of this increase over 1997.
Other income increased approximately $222,000, resulting primarily from
interest income earned on increased cash and cash equivalents.
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, research contracts and
the limited sales of products and test materials.
The Company's working capital decreased approximately $961,000 from
December 31, 1997 to March 31, 1998. This reduction resulted primarily from the
impact of the net loss for the quarter in addition to the expenditures related
to fixed assets and patents.
Until such time as the Company obtains agreements with third-party
licensees or partners to provide funding for the Company's anticipated business
activities or the Company is able to obtain funds through the private or public
sale of its securities, the Company's working capital will be utilized to fund
its activities.
Capital expenditures and additional patent development costs for the three
months ended March 31, 1998 aggregated approximately $200,000. The Company
expects additional capital expenditures and patent development costs for the
remainder of the year to aggregate approximately $370,000.
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 clinical testing
of SEPA enhanced compounds; proprietary manufacturing methods and advanced
technologies; the ability of the Company to enter into additional licensing
arrangements or other strategic alliances; the ability of the Company to
manufacture products under those arrangements; and the demand for its products
or the products of its licensees or strategic partners if and when approved for
sale by regulatory authorities. In any event, substantial additional funds will
be required before the Company is able to generate revenues sufficient to
support its long term operations. There is no assurance that the Company will be
able to obtain such additional funds on favorable terms, if at all. The
Company's inability to raise sufficient funds could require it to delay, scale
back or eliminate certain research and development programs.
The Company believes that its existing cash and cash equivalents will be
sufficient to meet its operating expenses and capital expenditure requirements
for at least the next twelve months. The Company's cash requirements may vary
materially from those now planned because of potential 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.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN
FORWARD-LOOKING STATEMENTS MADE FROM TIME TO TIME BY THE COMPANY ON THE BASIS OF
MANAGEMENT'S THEN-CURRENT EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO THE FOLLOWING: THE COMPANY'S HISTORY
OF OPERATING LOSSES AND NEED FOR CONTINUED WORKING CAPITAL; TECHNOLOGICAL
UNCERTAINTY RELATING TO TRANSDERMAL DRUG DELIVERY SYSTEMS AND THE EARLY STAGE OF
DEVELOPMENT OF THE COMPANY'S PROPOSED PRODUCTS; THE COMPANY'S NEED FOR
SIGNIFICANT ADDITIONAL PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING;
UNCERTAINTIES RELATED TO CLINICAL TRIALS OF THE COMPANY'S PROPOSED PRODUCTS; THE
COMPANY'S DEPENDENCE ON THIRD PARTIES FOR COMMERCIALIZATION; NO ASSURANCE OF
LICENSE ARRANGEMENTS; THE LACK OF SUCCESS OF THE COMPANY'S PRIOR DEVELOPMENT
EFFORTS; UNCERTAINTIES RELATING TO GOVERNMENT REGULATION AND REGULATORY
APPROVALS; THE COMPANY'S DEPENDENCE ON THIRD PARTIES FOR THE FDA APPLICATION
PROCESS; THE COMPANY'S LACK OF EXPERIENCED MARKETING PERSONNEL AND DEPENDENCE ON
THIRD PARTIES FOR MARKETING AND DISTRIBUTION; THE COMPANY'S DEPENDENCE ON THIRD
PARTIES FOR MANUFACTURING; THE COMPANY'S RELIANCE ON KEY EMPLOYEES, THE LIMITED
PERSONNEL OF THE COMPANY AND ITS DEPENDENCE ON ACCESS TO SCIENTIFIC TALENT;
UNCERTAINTIES RELATING TO COMPETITION, PATENTS AND PROPRIETARY TECHNOLOGY;
UNCERTAINTIES RELATING TO RISKS OF PRODUCT LIABILITY CLAIMS, LACK OF PRODUCT
LIABILITY INSURANCE, AND EXPENSE AND DIFFICULTY OF OBTAINING ADEQUATE INSURANCE
COVERAGE; UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS; AND OTHER
FACTORS. ADDITIONAL INFORMATION ON THESE AND OTHER FACTORS WHICH COULD AFFECT
THE COMPANY'S ACTUAL RESULTS AND EXPERIENCE ARE INCLUDED IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND, IN PARTICULAR, THE
SECTION ENTITLED "RISK FACTORS".
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed herewith:
27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
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)
May 6, 1998 /S/ ALVIN J. KARLOFF
--------------------
Alvin J. Karloff
Chief Executive Officer and
Principal Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's balance sheet, statement of operations, statement of stockholders'
equity and statement of cash flows and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000743884
<NAME> MacroChem Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Mar-31-1998
<EXCHANGE-RATE> 1
<CASH> $24,296,277
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,437,841
<PP&E> 1,020,224
<DEPRECIATION> 603,395
<TOTAL-ASSETS> 25,149,875
<CURRENT-LIABILITIES> 642,229
<BONDS> 0
0
0
<COMMON> 222,029
<OTHER-SE> 24,285,617
<TOTAL-LIABILITY-AND-EQUITY> 25,149,875
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,965
<INCOME-PRETAX> (911,256)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $(911,256)
<EPS-PRIMARY> $(0.04)
<EPS-DILUTED> $(0.04)
</TABLE>
