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, 1999
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 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 March 31, 1999, there were 22,183,434 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, 1999 and December 31, 1998 3-4
Statements of Operations
Three Months Ended March 31, 1999 and 1998 5
Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 6-7
Notes to Unaudited Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 12
PART II Other Information
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
------
March 31, December 31,
1999 1998
---------- ------------
CURRENT ASSETS:
Cash and cash equivalents $18,499,200 $20,504,097
Accounts receivable 43,740 48,393
Prepaid expenses and other
current assets 193,562 204,181
---------- ----------
TOTAL CURRENT ASSETS 18,736,502 20,756,671
---------- ----------
PROPERTY AND EQUIPMENT,
net of accumulated depreciation:
1999-$778,821; 1998-$731,080 449,547 397,483
---------- ----------
OTHER ASSETS:
Patents, net of accumulated amortization:
1999-$84,420; 1998-$79,600 362,238 351,110
Deposits 4,460 4,460
---------- ----------
TOTAL OTHER ASSETS 366,698 355,570
---------- ----------
TOTAL ASSETS $19,552,747 $21,509,724
========== ==========
(Continued)
<PAGE>
MACROCHEM CORPORATION
UNAUDITED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, December 31,
1999 1998
------------ -------------
CURRENT LIABILITIES:
Accounts payable $ 195,409 $ 116,246
Accrued clinical trial costs --- 498,716
Other accrued expenses 195,253 156,210
Deferred compensation and related
accrued interest 94,186 93,563
---------- ----------
TOTAL CURRENT LIABILITIES 484,848 864,735
---------- ----------
DEFERRED REVENUE 500,000 500,000
---------- ----------
TOTAL LIABILITIES 984,848 1,364,735
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock --- ---
Common Stock, $.01 par value;
authorized 60,000,000 shares;
issued 22,316,245 shares,
outstanding 22,183,434 shares at
March 31, 1999 and issued 22,281,245
shares, outstanding 22,140,328 at
December 31, 1998 223,162 222,812
Additional paid-in capital 48,135,716 47,295,449
Unearned compensation ( 568,031) ( 170,676)
Accumulated deficit (28,564,670) (26,508,119)
---------- ----------
Total 19,226,177 20,839,466
Less cost of treasury stock (132,811
shares at March 31, 1999 and
140,917 shares at December 31, 1998) ( 658,278) ( 694,477)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 18,567,899 20,144,989
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 19,552,747 $ 21,509,724
========== ==========
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,
------------------------------------
1999 1998
---- ----
REVENUES:
Research contract $ 58,746 $ ---
---------- ----------
TOTAL REVENUES 58,746 ---
---------- ----------
OPERATING EXPENSES:
Research and development 1,550,389 724,846
Marketing, general and administrative 777,594 482,744
Consulting fees with related parties 12,000 12,000
---------- ----------
TOTAL OPERATING EXPENSES 2,339,983 1,219,590
---------- ----------
LOSS FROM OPERATIONS ( 2,281,237) ( 1,219,590)
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 225,307 310,299
Interest expense ( 623) ( 1,965)
---------- ----------
TOTAL OTHER INCOME 224,684 308,334
---------- ----------
NET LOSS $( 2,056,551) $( 911,256)
========== ==========
BASIC AND DILUTED NET LOSS
PER SHARE $( 0.09) $( 0.04)
========== ==========
SHARES USED TO COMPUTE
BASIC AND DILUTED NET LOSS
PER SHARE 22,179,132 22,200,690
========== ==========
The accompanying notes are an integral part of these unaudited financial
statements.
<PAGE>
<TABLE>
<CAPTION>
MACROCHEM CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
------------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,056,551) $(911,256)
--------- -------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 52,561 42,275
Stock-based compensation 323,792 46,153
401(k) contribution in company common stock 18,794 ---
Increase (decrease) in cash from:
Accounts receivable 4,653 ---
Prepaid expenses and other current assets 10,619 ( 23,881)
Accounts payable and accrued expenses ( 380,510) 332,278
Deferred compensation and related accrued interest 623 1,446
--------- -------
Total adjustments 30,532 398,271
--------- -------
Net cash used by operating activities (2,026,019) (512,985)
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment ( 99,805) (169,106)
Additions to patents ( 15,948) ( 31,171)
--------- -------
Net cash used for investing activities ( 115,753) (200,277)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease --- ( 4,395)
Proceeds from exercise of common stock options 136,875 61,813
--------- -------
Net cash provided from financing activities 136,875 57,418
--------- -------
</TABLE>
(Continued)
<PAGE>
MACROCHEM CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS (Continued)
For the three months ended March 31,
------------------------------------
1999 1998
---- ----
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $( 2,004,897) $( 655,844)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 20,504,097 24,952,121
---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 18,499,200 $ 24,296,277
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest aggregated $0 and $519 for the three months ended
March 31, 1999 and 1998, 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, 1998.
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 as of March 31,1999 and March 31, 1998, and results of
operations and cash flows for the three months ended March 31, 1999 and
1998.
The results disclosed in the Statement of Operations for the three months
ended March 31, 1999 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) The Company granted 173,250 Common Stock Options under the 1994 Equity
Incentive Plan during the three months ended March 31, 1999. During this
same period, 35,000 options under the 1994 Equity Incentive Plan were
exercised. In addition, during this period, 16,334 options under the 1994
Equity Incentive Plan 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.
(4) Potential common shares are not included in the per share calculations for
diluted EPS, because the effect of their inclusion would be anti-dilutive.
Anti-dilutive potential shares not included in per share calculations for
March 31, 1999 and 1998 were approximately 2,534,000 and 2,439,000,
respectively.
(5) Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires businesses to disclose comprehensive
income and its components in their general-purpose financial statements.
Comprehensive income (loss) is equal to net income (loss) for the three
months ended March 31, 1999 and 1998.
(6) In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The provisions of SFAS No. 133 will
be effective for the Company beginning January 1, 2000. The Company has not
completed an evaluation of the effect of adopting SFAS No. 133 on the
Company's financial position and results of operations.
<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 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 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, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
During the three months ended March 31, 1999, the Company had $58,746 of
revenues as compared to no revenues during the same period in 1998. All of the
revenue for 1999 is represented by one research contract related to the
Company's proprietary SEPA technology.
Research and development expenses in the 1999 period increased
approximately $825,500 (114%) over the comparable 1998 period. Clinical trial
efforts and costs related to the Company's new product, Benefen(TM), accounted
for most of this increase over 1998.
Marketing, general and administrative expenses increased approximately
$294,850 (61%) over the comparable 1998 period. This increase is due primarily
to stock compensation and consulting fees associated with financial advisors and
an investment banker.
Total other income decreased approximately $83,650, resulting primarily
from decreased interest income earned on reduced cash and cash equivalents.
<PAGE>
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits, rather than four, to
represent a year. The Year 2000 ("Y2K") problem arises because date-sensitive
software or hardware written or developed in this fashion may not be able to
distinguish between 1900 and 2000, and programs written in this manner that
perform arithmetic operations, comparisons or sorting of date fields may yield
incorrect results when processing a Y2K date. The Y2K problem could potentially
cause system failures or miscalculations that could disrupt operations.
The Company has appointed a Director of Year 2000 Compliance who, along
with an outside Y2K consultant, recently performed a review, which included
testing, of the Company's computer systems. This review of internal financial
and information technology systems was completed in the fourth quarter of 1998.
The Company has evaluated and prioritized the problems, which are not considered
significant. The Company expects to continue to coordinate any Y2K problems with
the vendors that supplied noncompliant systems. The Company expects that any
remediation efforts would continue through mid-1999. However, there can be no
assurance that the Company's survey will identify all Y2K problems in these
systems or that the necessary corrective actions will be completed in a timely
manner.
The Company does not write its own application software, but depends on
third-party vendors. The Company intends to continuously identify and prioritize
critical vendors and suppliers and communicate with them about their plans and
progress in addressing the Y2K problem. The Company intends to implement a
policy to exclude the use of any vendors which are not Y2K compliant.
Based on the efforts described above, the Company currently believes that
its systems will be Y2K compliant in a timely manner. However, there can be no
assurance that all Y2K problems will be successfully identified, or that the
necessary corrective actions will be completed in a timely manner. Failure to
successfully identify and remediate such Y2K problems in a timely manner could
have a material adverse effect on the Company's results of operations, financial
position or cash flow.
The Company has not created a formal contingency plan for Y2K problems and
currently does not intend to create one. However, the Company intends to take
appropriate actions to mitigate the effects of third parties' failures to
remediate their Y2K issues and for unexpected failures in its own systems. Such
actions may include having arrangements for alternate suppliers and using manual
intervention where necessary. If it becomes necessary for the Company to take
these corrective actions, it is uncertain whether this would result in
significant interruptions of business operations or would have a material
adverse effect on the Company's results of operations, financial position or
cash flow.
As of March 31, 1999, the Company had not incurred significant costs
related to the Y2K problem, and does not expect to do so in the future. Overall,
the Company anticipates that incremental costs to the Company related to the Y2K
problem will not exceed $50,000, but there can be no assurance that such costs
will not be greater that anticipated.
<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 and products, government grants and
the limited sales of products and test materials. During the first three months
of 1999, the Company received aggregate net proceeds of approximately $136,875
from the exercise of stock options, compared to approximately $61,813 for the
three months ended March 31, 1998. At March 31, 1999 working capital was
approximately $18.3 million, compared to $19.9 million at December 31, 1998. The
reduction in the Company's working capital was due primarily to the cash used by
operating activities. 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 primarily to fund its operating activities.
Pursuant to a plan approved by the Company's Board of Directors, the
Company is authorized to repurchase 1,000,000 shares of its common stock to be
held as treasury shares for future use. During the three months ended March 31,
1999 the Company did not repurchase any shares. At March 31, 1999, 132,811
repurchased shares remain available for future use and 845,150 shares remain
available for repurchase.
Capital expenditures and additional patent development costs for the three
months ended March 31, 1999 were approximately $115,753. The Company anticipates
capital expenditures of approximately $350,000 for the remainder of the current
year.
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 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.
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 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.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
CASH AND CASH EQUIVALENTS
As of March 31, 1999, the Company is exposed to market risks which relate
primarily to changes in U.S. interest rates. The Company's cash equivalents are
subject to interest rate risk and will decline in value if interest rates
increase. Due to the short duration of these financial instruments, three months
or less, changes to interest rates would not have a material effect upon the
Company's financial position. A hypothetical 10% change in interest rates would
result in an increase or decrease of approximately $22,000 to reported interest
income within the Company's statement of operations for the three months ended
March 31, 1999.
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, 1998 AND, IN PARTICULAR, THE
SECTION ENTITLED "RISK FACTORS".
<PAGE>
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 11, 1999 /s/ Alvin J. Karloff
--------------------
Alvin J. Karloff
Chief Executive Officer
/s/ William P. Johnson
----------------------
William P. Johnson
Treasurer, Secretary and Principal
Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
FINANCIAL DATA SCHEDULE
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-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1
<CASH> $18,499,200
<SECURITIES> 0
<RECEIVABLES> 43,740
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,736,502
<PP&E> 1,228,368
<DEPRECIATION> 778,821
<TOTAL-ASSETS> 19,552,747
<CURRENT-LIABILITIES> 484,848
<BONDS> 0
0
0
<COMMON> 223,162
<OTHER-SE> 18,344,737
<TOTAL-LIABILITY-AND-EQUITY> 19,552,747
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 623
<INCOME-PRETAX> 2,056,551
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,056,551
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
