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 June 30, 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 Number)
110 HARTWELL AVENUE, LEXINGTON, MASSACHUSETTS 02421-3134
--------------------------------------------------------
(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 June 30, 1998, there were 22,275,245 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
Unaudited Balance Sheets
June 30, 1998 and December 31, 1997 3-4
Unaudited Statements of Operations
Three Months and Six Months Ended
June 30, 1998 and 1997 5
Unaudited Statements of Cash Flows
Six Months Ended June 30, 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 9-11
PART II Other Information
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 13
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
------------------------------
MACROCHEM CORPORATION
UNAUDITED BALANCE SHEETS
ASSETS
------
June 30, December 31,
1998 1997
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,954,957 $24,952,121
Marketable securities 21,197,757 ---
Prepaid expenses and other
current assets 158,181 117,683
---------- ----------
TOTAL CURRENT ASSETS 23,310,895 25,069,804
---------- ----------
PROPERTY AND EQUIPMENT,
net of accumulated depreciation:
1998-$644,596; 1997-$582,769 430,773 281,216
---------- ----------
OTHER ASSETS:
Patents, net of accumulated
amortization: 1998-$71,880;
1997-$59,603 299,452 268,356
Deposits 4,460 4,460
---------- ----------
TOTAL ASSETS $24,045,580 $25,623,836
========== ==========
(CONTINUED)
<PAGE>
MACROCHEM CORPORATION
UNAUDITED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
1998 1997
----------- ------------
CURRENT LIABILITIES:
Capitalized lease obligations $ 9,483 18,408
Accounts payable and accrued expenses 429,518 204,352
Deferred compensation and related
accrued interest 92,269 90,140
---------- ----------
TOTAL CURRENT LIABILITIES 531,270 312,900
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock --- ---
Common stock, $.01 par value;
authorized 60,000,000 shares;
issued and outstanding,
22,275,245 shares and
22,182,865 shares at June 30,
1998 and December 31, 1997,
respectively. 222,752 221,829
Additional paid-in capital 47,237,541 46,923,677
Unearned compensation ( 183,673) ( 169,322)
Accumulated deficit (23,762,310) (21,665,248)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 23,514,310 25,310,936
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 24,045,580 $ 25,623,836
========== ==========
The accompanying notes are an integral part of these unaudited financial
statements.
(Concluded)
<PAGE>
MACROCHEM CORPORATION
UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Research contracts $ --- $ --- $ --- $ 50,000
Product sales --- --- --- 650
----------- ---------- ---------- ----------
TOTAL REVENUES --- --- --- 50,650
----------- ---------- ---------- ----------
OPERATING EXPENSES:
Marketing, general and
administrative 471,496 478,101 954,240 879,908
Research and development 996,690 723,703 1,721,536 1,168,521
Consulting fees with
related parties 12,000 3,000 24,000 6,000
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 1,480,186 1,204,804 2,699,776 2,054,429
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS ( 1,480,186) ( 1,204,804) ( 2,699,776) ( 2,003,779)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 295,446 102,558 605,745 191,419
Interest expense ( 1,066) ( 1,943) ( 3,031) ( 4,145)
---------- ---------- ---------- ----------
TOTAL OTHER INCOME 294,380 100,615 602,714 187,274
---------- ---------- ---------- ----------
NET LOSS $( 1,185,806) $( 1,104,189) $( 2,097,062) $( 1,816,505)
========== ========== ========== ==========
BASIC AND DILUTED
NET LOSS PER SHARE $( 0.05) $( 0.07) $( 0.09) $( 0.11)
========== ========== ========== ==========
SHARES USED TO COMPUTE
BASIC AND DILUTED NET
LOSS PER SHARE 22,244,358 16,049,370 22,247,522 15,892,009
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
<PAGE>
MACROCHEM CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $( 2,097,062) $( 1,816,505)
---------- ----------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 86,971 61,274
Stock-based compensation 92,476 113,404
Loss on disposal of equipment --- 1,900
Amortization of discounts on
marketable securities --- ( 176)
Increase (decrease) in cash from:
Accounts receivable --- 9,127
Prepaid expenses and other current
assets ( 40,498) ( 25,853)
Accounts payable and accrued expenses 225,166 ( 6,880)
Deferred compensation and related
accrued interest 2,129 1330
Deferred rent --- ( 1,014)
Deferred income --- 34,850
Total adjustments 366,244 187,962
---------- ----------
Net cash used by operating activities ( 1,730,818) ( 1,628,543)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (21,197,757) ---
Proceeds from maturities of
marketable securities --- 22,000
Expenditures for property and equipment ( 224,251) ( 18,335)
Additions to patents ( 43,373) ( 33,042)
---------- ----------
Net cash used for investing activities (21,465,381) ( 29,377)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease ( 8,925) ( 18,886)
Proceeds from exercise of common
stock options 169,432 139,689
Proceeds from exercise of common
stock warrants 38,528 454,300
Proceeds from exercise of unit
purchase options --- 525,000
---------- ----------
Net cash provided from financing
activities 199,035 1,100,103
---------- ----------
(Continued)
<PAGE>
MACROCHEM CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
(Continued)
For The Six Months Ended June 30,
---------------------------------
1998 1997
---- ----
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $(22,997,164) $( 557,817)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 24,952,121 7,329,881
---------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,954,957 $ 6,772,064
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the six months ended June 30, 1998 and 1997, cash paid for interest
aggregated $902 and $2,815, 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 and
six months ended June 30, 1998 and 1997.
The results disclosed in the Unaudited Statements of Operations for
the three and six months ended June 30, 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 the
current presentation.
(3) In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", which is
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 368,000 common stock options under the 1994 Equity
Incentive Plan during the six months ended June 30, 1998. During this same
period, 62,000 options under the 1984 Non-Qualified Stock Option Plan, and
23,683 options under the 1994 Equity Incentive Plan were exercised. In
addition, during this period, 11,500 options under the 1994 Equity
Incentive Plan were forfeited. All options were granted 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 has no effect on the accompanying financial
statements.
(6) Marketable securities are carried at cost and it is the Company's intention
to hold these short term securities to maturity.
<PAGE>
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 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 JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
The Company had no revenues during the three months ended June 30, 1998 and
June 30, 1997.
Marketing, general and administrative expenses were essentially level
quarter to quarter. However, higher employee compensation was mostly offset by
lower general consulting fees.
Research and development expenses increased approximately $273,000 (38%)
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 $194,000, resulting primarily from
interest income earned on increased cash and marketable securities.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
During the six months ended June 30, 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
$74,000 (8%) 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 while higher employee compensation was mostly offset by
lower general consulting fees.
Research and development expenses increased approximately $553,000 (47%)
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 $415,000, resulting primarily from
interest income earned on increased cash and marketable securities.
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, research contracts, and the limited
sales of products and test materials.
The Company's working capital declined approximately $2.0 million from
December 31, 1997 to June 30, 1998. The Company's net loss from operations, net
of non cash items, of $1.9 million combined with expenditures for property,
equipment and patents of approximately $.3 million was partially offset by
proceeds of approximately $.2 million received upon the exercise of common stock
options and warrants.
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 patent development costs for the six months ended
June 30, 1998 aggregated approximately $268,000. The Company expects capital
expenditures and patent development costs for the remainder of the year to be
consistent with expenditures made to date.
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 marketable securities 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.
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 RELATED 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".
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 22, 1998, the Company held its Annual Meeting of Stockholders to
vote on the following proposals:
1. To elect six members of the Board of Directors. Nominees for
Director were: a) Carlos M. Samour; b) Alvin J. Karloff; c)
Willard M. Bright; d) Peter G. Martin; e) Stephen J. Riggi; f)
Michael A. Davis ("Proposal No. 1").
2. To ratify the appointment of Deloitte & Touche LLP, as
independent auditors for the Company for the fiscal year ending
December 31, 1998.
Each of the proposals was adopted with a total vote as follows:
Shares
Shares Voting Against or Shares Broker
Proposal Voting For Authority Withheld Abstaining Non-votes
- -------- ---------- ------------------ ---------- ---------
No. 1
Carlos M. Samour 19,885,708 233,006
Alvin J. Karloff 19,886,058 232,656
Willard M. Bright 19,886,058 232,656
Peter G. Martin 19,886,058 232,656
Stephen J. Riggi 19,886,058 232,656
Michael A. Davis 19,886,058 232,656
No. 2 20,034,783 52,400 31,531
ITEM 5. OTHER INFORMATION
Under recent changes to the Federal proxy rules, if a stockholder who
wishes to present a proposal at the Company's 1999 Annual Meeting that will not
be included in the Company's proxy statement fails to notify the Company by
April 7, 1999, then the proxies that management solicits for the 1999 Annual
Meeting will include discretionary authority to vote on the stockholder's
proposal, if it is properly brought before the meeting.
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.
<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, 1998 /S/ Alvin J. Karloff
--------------------
Alvin J. Karloff
President & C.E.O.
/S/ William P. Johnson
----------------------
William P. Johnson
Treasurer
<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 stockholder's
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> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Jun-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,954,957
<SECURITIES> 21,197,757
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 158,181
<PP&E> 1,075,369
<DEPRECIATION> 644,596
<TOTAL-ASSETS> 24,045,580
<CURRENT-LIABILITIES> 531,270
<BONDS> 0
0
0
<COMMON> 222,752
<OTHER-SE> 23,291,558
<TOTAL-LIABILITY-AND-EQUITY> 24,045,580
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,031
<INCOME-PRETAX> (2,097,062)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,097,062)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
