10-K/A 1 amendment10k.txt AMENDMENT TO 10-K As filed with the Securities and Exchange Commission on May 15, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K/A AMENDMENT 1 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND 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 of (I.R.S. Employer incorporation or organization) Identification No.) 110 Hartwell Avenue Lexington, Massachusetts 02421 ------------------------------ (Address of principal executive offices) (781) 862-4003 (Telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ---------------------------- (Title of Class) Series B Preferred Stock Purchase Rights, $.01 par value -------------------------------------------------------- (Title of Class) 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 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY NON-AFFILIATES, BASED UPON THE CLOSING PRICE OF SUCH STOCK ON MARCH 8, 2002 WAS APPROXIMATELY $86,000,000. AS OF MARCH 8, 2002, 28,163,054 SHARES OF COMMON STOCK, $.01 PAR VALUE, WERE OUTSTANDING. Pursuant to Rule 12b-15 of the Securities Act of 1934, we are filing this Annual Report on Form 10-K/A as Amendment No.1 to our Form 10-K, filed on March 29, 2002 for the purposes of providing revised information required by Item 8 of Part II, Item 12 of Part III and Item 14 of Part IV. Specifically, information regarding warrants exercised disclosed in Note 4 has been revised to correct for a typographical error. The disclosure contained herein speaks as of the date of filing of the Form 10-K. 1 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required under this Item 8 is set forth on pages 3 through 19 of this report. 2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of MacroChem Corporation: We have audited the accompanying balance sheets of MacroChem Corporation as of December 31, 2001 and 2000, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of MacroChem Corporation at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts March 18, 2002 3 MACROCHEM CORPORATION BALANCE SHEETS December 31, December 31, 2001 2000
------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 697,178 $ 589,773 Short-term investments 15,832,828 16,178,760 Accounts receivable 375,000 30,669 Receivable due from related party 24,164 22,564 Prepaid expenses and other current assets 170,505 241,304 ---------- ---------- Total current assets 17,099,675 17,063,070 Property & equipment, net 530,028 376,892 Other assets: Patents, net 598,647 512,802 Deposits 29,193 29,193 ---------- ---------- Total other assets 627,840 541,995 ---------- ---------- Total Assets $ 18,257,543 $ 17,981,957 ========== ========== LIABILITIES Current liabilities: Accounts payable $ 4,971 $ 330,658 Accrued expenses and other liabilities 1,354,992 763,275 ---------- ---------- Total current liabilities 1,359,963 1,093,933 Deferred rent 48,875 37,264 ---------- ---------- Total Liabilities 1,408,838 1,131,197 Commitments and contingencies (Note 5) STOCKHOLDERS' EQUITY Preferred stock, authorized and unissued , 6,000,000 shares --- --- Common stock, $.01 par value, 60,000,000 shares authorized; 28,158,054 and 24,730,783 shares issued at December 31, 2001 and 2000, respectively 281,580 247,308 Additional paid-in capital 73,019,790 60,787,144 Unearned compensation ( 71,156) ( 24,719) Accumulated deficit (55,373,788) (43,040,545) Less treasury stock, at cost, 253,346 and 276,174 shares at December 31, 2001 and 2000, respectively ( 1,007,721) ( 1,118,428) --- ---- ----- ---------- ---------- Total stockholders' equity 16,848,705 16,850,760 ---------- ---------- Total Liabilities and Stockholders' Equity $ 18,257,543 $ 17,981,957 ========== ==========
See notes to financial statements. 4 MACROCHEM CORPORATION STATEMENTS OF OPERATIONS
Years Ended December 31, ----------------------------------------------------------- 2001 2000 1999 ---- ---- ---- REVENUES Research contracts $ 829,385 $ 629,647 $ 464,332 ---------- ---------- ---------- OPERATING EXPENSES Research and development 9,791,438 5,280,641 5,423,138 Marketing, general and administrative 4,000,330 5,794,023 2,610,768 Consulting fees with related parties 61,750 52,000 48,000 ---------- ---------- ---------- TOTAL OPERATING EXPENSES 13,853,518 11,126,664 8,081,906 ---------- ---------- ---------- LOSS FROM OPERATIONS (13,024,133) (10,497,017) ( 7,617,574) ---------- ---------- ---------- OTHER INCOME (EXPENSE) Interest income 690,890 752,547 833,450 Interest expense --- ( 887) ( 2,945) ---------- ---------- ---------- TOTAL OTHER INCOME 690,890 751,660 830,505 ---------- ---------- ---------- NET LOSS $(12,333,243) $( 9,745,357) $( 6,787,069) ========== ========== ========== BASIC AND DILUTED NET LOSS PER SHARE $( 0.46) $( 0.43) $( 0.30) ========== ========== ========== SHARES USED TO COMPUTE BASIC AND DILUTED NET LOSS PER SHARE 26,607,363 22,854,646 22,311,890 ========== ========== ========== STOCK BASED COMPENSATION INCLUDED IN: 2001 2000 1999 ---- ---- ---- Research and development $216,226 $( 255,236) $ 51,160 Marketing, general and administrative 220,497 3,078,827 445,880 ------- --------- ------- $436,723 $ 2,823,591 $497,040 ======= ========= =======
See notes to financial statements. 5
MACROCHEM CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY Additional Cost of Total Common Stock Shares Common Paid-In Unearned Accumulated Treasury Stockholders' Issued Treasury Stock Capital Compensation Deficit Subtotal Stock Equity ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, JANUARY 1, 1999 22,281,245 (140,917) $222,812 $ 47,295,449 $(170,676) $(26,508,119) $ 20,839,466 $( 694,477) $20,144,989 Exercise of common stock warrants 137,319 --- 1,374 832,840 --- --- 834,214 --- 834,214 Exercise of common stock options 179,000 --- 1,790 531,366 --- --- 533,156 --- 533,156 Purchase of treasury stock --- ( 32,500) --- --- --- --- --- ( 147,570) (147,570) Stock based compensation (1) --- --- --- 708,837 (211,797) --- 497,040 --- 497,040 Stock issued to 401(k) trust --- 13,252 --- 18,962 --- --- 18,962 58,697 77,659 Net loss --- --- --- --- --- ( 6,787,069) ( 6,787,069) --- ( 6,787,069) ---------- ------- ------- ---------- ------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1999 22,597,564 (160,165) 225,976 49,387,454 (382,473) (33,295,188) 15,935,769 ( 783,350) 15,152,419 Issuances of common stock-net 1,921,235 --- 19,212 8,776,225 --- --- 8,795,437 --- 8,795,437 Exercise of common stock options 210,166 ( 12,563) 2,102 166,741 --- --- 168,843 ( 78,531) 90,312 Purchase of treasury stock --- (120,500) --- --- --- --- --- ( 334,698) ( 334,698) Stock based compensation (1) 1,818 --- 18 2,465,819 357,754 --- 2,823,591 --- 2,823,591 Stock issued to 401(k) trust --- 17,054 --- ( 9,095) --- --- 9,095) 78,151 69,056 Net loss --- --- --- --- --- ( 9,745,357) ( 9,745,357) --- ( 9,745,357) ---------- ------- ------- ---------- ------- ---------- ---------- --------- ---------- BALANCE, DECEMBER 31, 2000 24,730,783 (276,174) 247,308 60,787,144 ( 24,719) (43,040,545) 17,969,188 (1,118,428) 16,850,760 Issuances of common stock-net 1,572,047 --- 15,720 9,435,331 --- --- 9,451,051 --- 9,451,051 Exercise of common stock options 922,580 --- 9,226 1,970,590 --- --- 1,979,816 --- 1,979,816 Exercise of stock warrants 932,644 ( 2,330) 9,326 371,000 --- --- 380,326 ( 8,826) 371,500 Stock based compensation (1) --- --- --- 483,160 ( 46,437) --- 436,723 --- 436,723 Stock issued to 401(k) trust --- 25,158 --- ( 27,435) --- --- ( 27,435) 119,533 92,098 Net loss --- --- --- --- --- (12,333,243) (12,333,243) --- (12,333,243) ---------- ------- ------- --------- ------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 2001 28,158,054 (253,346) $281,580 $ 73,019,790 $( 71,156) $(55,373,788) $ 17,856,426 $(1,007,721) $16,848,705 ========== ======= ======= =========== ======= ========== ========== ========= ========== (1) See page 27 for details.
See notes to financial statements. 6
(1) STOCK BASED COMPENSATION Additional Common Stock Paid-In Unearned Shares Amount Capital Compensation Total ----------------------------------------------------------------------------------------------------------------------------------- 1999 Issuance of common stock options to non-employees --- --- $ 807,888 $(807,888) 0 Amortization and other changes in unearned compensation --- --- ( 99,051) 596,091 $ 497,040 ----- ----- --------- ------- --------- --- --- $ 708,837 $(211,797) $ 497,040 ===== ===== ========= ======= ========= 2000 Issuance of common stock in exchange for services 1,818 $ 18 $ 9372 ( 9,390) 0 Issuance of common stock options to non-employees --- --- 183,346 (183,346) 0 Amortization and other changes in unearned compensation --- --- ( 536,431) 550,490 14,059 Stock based compensation to employees --- --- 2,809,532 --- 2,809,532 ----- ----- --------- ------- --------- 1,818 $ 18 $ 2,465,819 $ 357,754 $2,823,591 ===== ===== ========= ======= ========= 2001 Issuance of common stock options to non-employees --- --- $ 82,458 $( 68,299) $ 14,159 Amortization and other changes in unearned compensation --- --- 129,200 21,862 151,062 Stock based compensation to employees and directors --- --- 316,262 --- 316,262 ----- ----- --------- ------- --------- --- --- $ 527,920 $( 46,437) $ 481,483 ===== ===== ========= ======= =========
See notes to financial statements. 7
MACROCHEM CORPORATION STATEMENTS OF CASH FLOWS Years Ended December 31, --------------------------------------------- 2001 2000 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(12,333,243) $(9,745,357) $(6,787,069) ---------- --------- --------- Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 181,696 174,091 244,986 Stock-based compensation 481,483 2,823,591 497,040 401(k) contributions in company common stock 92,098 69,056 77,659 Deferred rent 11,611 37,264 --- Deferred revenue --- ( 500,000) --- Change in assets and liabilities: Accounts receivable ( 344,331) 36,285 ( 18,561) Receivable due from related party ( 1,600) ( 1,604) ( 20,960) Prepaid expenses and other current assets 70,799 ( 74,822) 37,699 Accounts payable and accrued expenses 266,030 528,853 ( 206,092) Deferred compensation and related accrued interest --- ( 96,233) 2,670 ---------- --------- --------- Net cash used by operating activities (11,575,457) (6,748,876) (6,172,628) ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales/(purchases) of short-term investments-net 345,932 (1,313,781) 4,936,640 Deposits --- --- ( 24,733) Expenditures for property and equipment ( 307,212) ( 154,080) ( 179,067) Additions to patents ( 113,465) ( 62,851) ( 164,180) ---------- --------- --------- Net cash (used)/provided by investing activities ( 74,745) (1,530,712) 4,568,660 ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from exercise of common stock options 1,979,816 90,312 533,156 Net proceeds from issuance of common stock 9,406,291 8,795,437 --- Proceeds from exercise of warrants 371,500 --- 834,214 Net purchase of treasury stock --- ( 334,698) ( 147,570) ---------- --------- --------- Net cash provided (used) by financing activities 11,757,607 8,551,051 1,219,800 ---------- --------- ---------
See notes to financial statements. (Continued) 8 MACROCHEM CORPORATION STATEMENTS OF CASH FLOWS (Continued) YEARS ENDED DECEMBER 31, -------------------------------------------- 2001 2000 1999 ---- ---- ---- NET CHANGE IN CASH AND CASH EQUIVALENTS $107,405 $271,463 $(384,168) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 589,773 318,310 702,478 ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR $697,178 $589,773 $ 318,310 ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY: During 2001, the Company received 2,330 shares of Company stock relating to the exercise of 882,644 warrants on a "cashless" basis. During 2000, the Company received 12,563 shares of Company stock valued at $78,531 as payment of option exercises. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest aggregated $0, $886 and $2,945, respectively, for the years ended December 31, 2001, 2000 and 1999. The Company did not pay any income taxes during those periods. See notes to financial statements. (Concluded) 9 MACROCHEM CORPORATION NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MacroChem Corporation (the "Company") develops and licenses transdermal drug delivery compounds and systems intended to promote the delivery of drugs from the surface of the skin into the skin or the bloodstream. The Company has been engaged primarily in research and development since its inception in 1981 and has derived limited revenues from the commercial sale of its products, licensing of certain technology and feasibility studies. The Company has had no revenues relating to the sale of any products currently under development. The Company has incurred net losses every year since its inception and the Company anticipates that losses may continue for the foreseeable future. At December 31, 2001, the Company's accumulated deficit was approximately $55.4 million. The Company's ability to continue operations after its current capital resources are exhausted depends on its ability to obtain additional financing and achieve profitable operations, as to which no assurances can be given. However, the Company believes that its financial resources are sufficient to meet planned operating activities at least through December 31, 2002. The Company organizes itself as one segment reporting to the chief executive officer. Products and services consist primarily of research and development activities in the pharmaceutical industry. ACCOUNTING ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The primary estimates underlying the Company's financial statements include the carrying value and useful lives of the Company's patents and property and equipment, the valuation allowance established for the Company's deferred tax assets, and the underlying assumptions to apply the pricing model to value stock options under SFAS No. 123. Management bases its estimates on certain assumptions, which it believes are reasonable in the circumstances, and while actual results could differ from those estimates, management does not believe that any change in those assumptions in the near term would have a significant effect on the financial position or the results of operations. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses approximate their fair value because of their short-term nature. Short-term investments are carried at aggregate fair value. CONCENTRATION OF RISK - Cash and cash equivalents and short-term investments at December 31, 2001 and 2000 are primarily comprised of government agency securities and certificates of deposit. Accounts receivable at December 31, 2001 and 2000 are due from one customer. 100% of revenue for the years ended 10 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) December 31, 2001 and 2000 was derived from research contracts with two customers. 100% of revenue for the year ended December 31, 1999 was derived from research contracts with one customer. CASH AND CASH EQUIVALENTS - Cash equivalents consist of short-term, highly liquid investments with a maturity of three months or less when purchased. SHORT-TERM INVESTMENTS - The Company has classified its short-term investments as "available-for-sale" and, accordingly, carries such securities at aggregate fair value. Fair value has been determined based on quoted market prices. The cost of such securities approximates fair market value. Short-term investments are comprised of bank certificates of deposit, with maturities of 4 to 23 months, amounting to $294,730 and $3,261,013 at December 31, 2001 and 2000, respectively, and a liquid money market mutual fund with a carrying value of $15,538,098 and $12,917,747 at December 31, 2001 and 2000, respectively. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the related assets which range from five to ten years. PATENTS - The Company has filed applications for United States and foreign patents covering aspects of its technology. Costs and expenses incurred in connection with pending patent applications are deferred. Costs related to successful patent applications are amortized over the estimated useful lives of the patents, not exceeding 20 years, using the straight-line method. Accumulated costs related to patents or deferred patent application costs that are considered to have limited future value are charged to expense. Accumulated amortization aggregated approximately $172,600 and $144,900, respectively, at December 31, 2001 and 2000. On an on-going basis, the Company evaluates the recoverability of the net carrying value of various patents by reference to the patent's expected use in drug and other research activities as measured by outside interest in the Company's patented technologies and management's determination of potential future uses of such technologies. REVENUE RECOGNITION - Revenues are earned and recognized based upon the sale or licensing of product rights, completion of contractually identified development milestones, upon shipment of product, upon completion of a contract or upon the attainment of specific milestones or benchmarks specified in license or development agreements. Amounts received in advance are recorded as deferred revenue and are amortized over the life of the agreement or achievement of milestones. Research revenue associated with the research contracts is billed on a cost reimbursement basis, which includes direct costs incurred in connection with research activities and an allocation of certain other costs incurred by the Company. RESEARCH AND DEVELOPMENT - 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, whether performed by the Company or contracted with independent third parties. 11 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK BASED COMPENSATION - The Company has elected to continue to use the intrinsic value based method to account for employee stock option awards under the provisions of Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," and provides disclosures based on the fair value method in the notes to the financial statements as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation." Stock or other equity based compensation for non-employees must be accounted for under the fair value based method as required by SFAS No. 123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". Under this method, the equity based instrument is valued at either the fair value of the consideration received or of the equity instrument issued on the date of grant. The resulting compensation cost is recognized and charged to operations over the service period or the vesting period, whichever is shorter. INCOME TAXES - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which requires the use of the liability method. The objective of this method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities using tax rates in effect in the year(s) in which the differences are expected to reverse. NET INCOME (LOSS) PER SHARE - Basic earnings per share is computed using the weighted average number of common shares outstanding during each year. Diluted earnings per common share reflect the effect of the Company's outstanding options and warrants, except where such items would be anti-dilutive. Due to the net losses reported in 2001, 2000 and 1999, basic and diluted per share amounts are the same. For the years ended December 31, 2001, 2000 and 1999 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 2001, 2000 and 1999 were approximately 4,791,000, 4,761,000 and 3,999,000 shares, respectively. NEW ACCOUNTING PRONOUNCEMENTS - In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The adoption of SFAS No. 133 on January 1, 2001 had no impact on the Company's financial statements. In June 2001, the FASB issued two new pronouncements: SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 is effective as follows: a) use of the pooling-of-interest method is prohibited for business combinations initiated after June 30, 2001; and b) the provisions of SFAS No. 141 also apply to all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of acquisition is July 2001 or later). There are also transition provisions 12 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. SFAS No. 142 requires that upon adoption, amortization of these assets will cease and instead, the carrying value of goodwill and other intangible assets with indefinite lives will be evaluated for impairment on an annual basis. On January 1, 2002, the Company adopted these statements which will have no effect on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supercedes SFAS No. 121, and the accounting and reporting provisions of APB 30, for the disposal of a segment of a business. The provisions of SFAS No. 144 are required to be adopted by the Company effective January 1, 2002. On January 1, 2002, the Company adopted this statement which will have no effect on the Company's financial position or results of operations. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31: 2001 2000 ---- ---- Laboratory equipment $ 1,097,839 $ 896,726 Office equipment 418,683 355,959 Leasehold improvements 250,048 206,674 --------- --------- Total 1,766,570 1,459,359 Less: accumulated depreciation (1,236,542) (1,082,467) --------- --------- Property and equipment, net $ 530,028 $ 376,892 ========= ========= 3. ACCRUED EXPENSES Accrued expenses consists of the following as of December 31: 2001 2000 ---- ---- Accrued professional fees $ 133,300 $ 56,406 Accrued clinical trial costs 730,647 446,802 Accrued bonuses 205,000 --- Accrued other 286,045 260,067 --------- ------- $1,354,992 $763,275 13 4. Stockholders' Equity AUTHORIZED CAPITAL STOCK - Authorized capital stock consists of 60,000,000 shares of $.01 par value common stock of which 28,158,054 shares are issued (27,904,708 are outstanding) and 5,629,013 are reserved for issuance upon exercise of common stock options and warrants at December 31, 2001. Authorized and unissued preferred stock totals 6,000,000 shares, of which 600,000 shares have been designated Series B Preferred Stock. During 1998, the Company's Board of Directors authorized the repurchase of up to 1,000,000 shares of common stock at market price. The Company repurchased 0, 120,500 and 32,500 common shares in 2001, 2000 and 1999, respectively. At December 31, 2001, 253,346 repurchased shares remain available for future use and 679,587 shares are available to be repurchased. WARRANTS - During 2001, institutional investors received warrants to purchase an aggregate of 313,209 shares of common stock at a purchase price of $8.995 per share expiring in five years in connection with a private placement. The warrants are callable by the Company if the closing price of the stock is higher than $17.99 for 15 consecutive trading days at any time before expiration. As of December 31, 2001, none of the $8.995 warrants had been exercised. During 2000, as part of a financing, two institutional investors received warrants to purchase an aggregate of 363,322 shares of common stock at a purchase price of $5.90 per share expiring in five years. Through December 31, 2001, none of the $5.90 warrants had been exercised. In addition, the investors received a warrant to purchase additional shares at a purchase price of $.01 per share exercisable only upon certain conditions relating to the trading price of the common stock during the period following December 12, 2000. Through December 31, 2001, 880,314 of the $0.01 warrants had been exercised. There are no further exercises available under the $.01 warrants. The placement agent received a warrant to purchase 108,999 shares of common stock at a purchase price of $7.43 per share expiring in five years. Through December 31, 2001, 50,000 of the $7.43 warrants had been exercised. In 1996, in connection with services performed for the Company, the firm of Janssen-Meyers, L.P. received a warrant, exercisable immediately and expiring June 17, 1999, for the purchase of 145,800 shares of the Company's common stock at a price of $6.075 per share. During 1999 137,319 of these warrants were exercised for aggregate proceeds of $834,214 and 2,139 warrants expired. STOCK OPTION PLANS - The Company has four stock option plans, the 1984 Incentive Stock Option Plan (ISO Plan), the 1984 Non-Qualified Stock Option Plan (Non-Qualified Plan), the 1994 Equity Incentive Plan (1994 Plan) and the 2001 Incentive Plan (the 2001 Plan). Under the terms of the 1984 ISO and Non-Qualified Plans, the Company may no longer award any options. All options previously granted may be exercised at any time up to ten years from date of award. Under the terms of the 1994 Plan, the Company may grant options to purchase up to a maximum of 4,000,000 shares of common stock to certain employees, directors and consultants. The options may be awarded as incentive stock options (employees only) and non-incentive stock options (certain employees, directors and consultants). Under the terms of the 2001 Plan, the Company may grant options to purchase up to a maximum of 1,200,000 shares of common stock to certain employees, directors and consultants. The options may be awarded as incentive stock options (employees only) and non-incentive stock options (certain employees, directors and consultants). 14 The 2001 Plan, 1994 Plan and the ISO Plan state that the exercise price of options shall not be less than fair market value at the date of grant. The following table presents activity under all stock option plans: Weighted Average Number of Options Exercise Price ----------------- -------------- Outstanding January 1, 1999 3,847,721 $4.16 Granted 573,750 6.73 Exercised ( 179,000) 2.98 Canceled ( 243,180) 7.15 --------- Outstanding December 31, 1999 3,999,291 4.40 Granted 725,000 5.94 Exercised ( 210,166) 2.73 Expired ( 5,000) .44 Canceled ( 250,500) 7.81 --------- Outstanding December 31, 2000 4,258,625 4.64 Granted 1,081,200 3.80 Exercised ( 922,580) 2.15 Canceled ( 362,100) 4.41 --------- Outstanding December 31, 2001 4,055,145 4.99 ========= Exercisable at December 31: 2001 3,051,877 5.18 ========= 2000 3,603,350 4.26 ========= 1999 3,230,070 3.48 =========
The following table sets forth information regarding options outstanding at December 31, 2001: Weighted Ave. Weighted Ave. Range of Number of Number Exercise Price- Weighted Ave. Exercise Price- Exercise Options Currently Options Remaining Currently Prices Outstanding Exercisable Outstanding Life Exercisable ----------------------------------------------------------------------------------------------------------- $0.43 420,000 420,000 $ 0.4375 1.25 $ 0.4375 $1.50-$2.69 421,000 170,999 2.4894 7.82 2.5115 $2.75-$4.00 728,920 534,920 3.0855 1.65 3.1146 $4.09-$5.94 1,324,175 1,043,008 5.5216 3.56 5.5459 $6.06-$8.25 868,050 589,950 6.7582 5.07 7.0584 $9.00-$12.69 293,000 293,000 12.2522 6.36 12.2522 --------- --------- TOTAL 4,055,145 3,051,877 ========= =========
15 All options granted during the three year period ended December 31, 2001 were granted at the market price of the stock. Also, in June 2000, the Company extended the exercise period for 620,000 options that were previously issued to two former officers under the 1984 Non-Qualified Stock Option Plan, resulting in a non-cash stock compensation charge to operations of $2,809,532. The fair value of options on their grant date was measured using the Black/Scholes option pricing model. Key assumptions used to apply this pricing model are as follows: 2001 2000 1999 ---- ---- ---- Risk-free interest rate 4.38%-5.27% 5.67%-6.57% 5.01%-6.46% Expected life of option grants 6 years 6 years 6 years Expected volatility of underlying stock 128% 72%-82.18% 62.5%-95.6% Expected dividend payment rate, as a percentage of the stock price on the date of grant --- --- ---
The weighted average fair values of options granted during 2001, 2000 and 1999 were $ 3.42, $4.30 and $5.53, respectively. The option pricing model used was designed to value readily tradable stock options with relatively short lives. The options granted to employees are not tradable and have contractual lives of up to ten years. The Company uses the intrinsic value method to measure compensation expense associated with grants of stock options to employees. Had the Company used the fair value method to measure compensation, the reported net loss and basic and diluted net loss per share would have been as follows: 2001 2000 1999 ---- ---- ---- Net loss as reported $(12,333,243) $( 9,745,358) $(6,787,070) Compensation costs ( 2,196,840) ( 3,846,761) (2,270,636) ---------- ---------- --------- Proforma net loss $(14,530,083) $(13,592,119) $(9,057,706) =========== ========== ========= Proforma basic and diluted net loss per share $( .55) $( 0.59) $( 0.41) ========== ========== =========
16 UNEARNED COMPENSATION - The following table sets forth the changes to the Company's reported unearned compensation for the years ended December 31, 2001, 2000 and 1999 for the non-employee options: 2001 2000 1999 ---- ---- ---- Balance, January 1 $24,719 $ 382,473 $ 170,676 Options, warrants and common stock granted to non-employees at fair market value 68,299 192,736 807,888 Amortization of unearned compensation (21,862) ( 14,059) (497,040) Other changes in unearned compensation --- (536,431) ( 99,051) ------ ------- ------- Balance, December 31 $71,156 $ 24,719 $ 382,473 ====== ======== ========
STOCK AND STOCK OPTION ISSUANCES TO NON-EMPLOYEES - During 2001, 2000 and 1999, the Company issued 30,000, 39,636 and 129,000 stock grants and options, respectively, to non-employees and consultants and recorded unearned compensation of $68,299, $192,736 and $807,888, respectively. STOCK SALES - In October 2000, the Company sold 1,816,658 shares of common stock to two institutional investors, and 104,577 shares of common stock to a newly elected member of the Board of Directors. Net proceeds were $8,295,437 and $500,000, respectively. In July 2001, the Company sold 1,566,047 shares of common stock to institutional investors. Net proceeds were $9,406,000. SHAREHOLDER RIGHTS PLAN - The Company has adopted a shareholder rights plan. The Company declared a dividend consisting of one Right for each share of common stock outstanding on September 10, 1999. Stock issued after that date will be issued with an attached Right. Each Right entitles the holder, upon the occurrence of certain events, to purchase 1/100th of a share of Series B Preferred Stock of the Company at an initial exercise price of $50.00, subject to adjustments for stock dividends, splits and similar events. The Rights are exercisable only if a person or group acquires 20% or more of the Company's outstanding common stock, or announces an intention to commence a tender or exchange offer, the consummation of which would result in ownership by such person or group of 20% or more of the Company's outstanding common stock. The Board of Directors may, at its option after the occurrence of one of the events described above, exchange all of the then outstanding and exercisable Rights for shares of common stock at an exchange ratio of one share of common stock per Right. The Board of Directors may redeem the Rights at the redemption price of $0.01 per Right at any time prior to the expiration of the rights plan on August 13, 2009. Distribution of the Rights is not a taxable event to shareholders. The Board of Directors has authorized 600,000 shares of Series B Preferred Stock. 17 5. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS - The Company leases office space under an agreement expiring in 2005. The lease includes payment increases over the term of the agreement. The total amount of the lease payments is being charged to expense using the straight-line method over the term of the agreement. The Company has recorded deferred rent to reflect the excess of rental expense over cash payments since the inception of the agreement. Future minimum payments under the agreement are as follows: 2002 438,600 2003 451,800 2004 465,300 2005 78,400 EMPLOYMENT AND CONSULTING AGREEMENTS - The Company has employment and consulting agreements with various consultants and certain key employees. The terms of each key employee agreement provide that the employee is an employee at-will. The terms of the consulting agreements do not exceed one year. These agreements provide for annual payments of approximately $1,329,000. 6. INCOME TAXES No income tax provision or benefit has been provided for federal or state income tax purposes as the Company has incurred losses since inception. As of December 31, 2001, the Company has available net operating loss carryforwards of approximately $50.2 million for federal income tax purposes, expiring through 2021 and $33.3 million for state income tax purposes, expiring through 2006. In addition, the Company has unused investment and research and development tax credits for federal and state income tax purposes aggregating $1,248,700 and $755,100, respectively. The use of the federal net operating loss may also be restricted due to changes in ownership in accordance with definitions as stated in the Internal Revenue Code. The net tax effect of differences in the timing of certain revenue and expense items and the related carrying amounts of assets and liabilities for financial reporting and tax purposes are not material and, accordingly, are not displayed in the table below. The components of the Company's deferred tax assets as of December 31, 2001 and 2000 are as follows: 2001 2000 ---- ---- Deferred Tax Assets: Net operating loss carryforwards $ 19,156,000 $ 14,586,000 Tax credit carryforwards 2,004,000 1,520,000 ---------- ---------- 21,160,000 16,106,000 Valuation allowance (21,160,000) (16,106,000) ---------- ---------- Deferred tax asset, net $ --- $ --- ========== ========== 18 For the years ended December 31, 2001, 2000 and 1999, the valuation allowance was increased by approximately $5,054,000, $2,288,000 and 3,006,200, respectively, due to the uncertainty of future realization of currently generated net operating loss and tax credit carryforwards. 7. EMPLOYEE BENEFIT PLAN The Company sponsors a qualified 401(k) Retirement Plan (the "Plan") under which employees are allowed to contribute certain percentages of their pay, up to the maximum allowed under Section 401(k) of the Internal Revenue Code. Company contributions to the Plan are at the discretion of the Board of Directors. The Company contributed 25,158 shares of common stock in 2001, 17,054 shares of common stock in 2000, and 13,252 shares of common stock in 1999, valued at $92,098, $69,056, and $77,659, respectively. 19 ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth, as of March 1, 2002, certain information concerning ownership of the Company's common stock by (i) each person known by the Company to be the beneficial owner of more than five percent (5%) of the Company's common stock, (ii) each of the Company's Directors, (iii) each of the executive officers named in the Summary Compensation Table under "Executive Officers' Compensation" above and (iv) all Directors and executive officers as a group. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated. NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED OF CLASS -------------------------------------------------------------------------------- Alvin J. Karloff(2)(3)................. 1,090,000 3.9% Peter G. Martin(2) .................... 92,270 * Michael A. Davis(2).................... 87,000 * Robert J. DeLuccia(2).................. 28,933 * Paul S. Echenberg(2)................... 27,333 * John L. Zabriskie(2)................... 129,910 * Robert J. Palmisano(2)................. 550,000 2.0% Thomas C.K. Chan(2)(3)................. 16,666 * Bernard R. Patriacca(2)................ 45,000 * Paul J. Schechter(2)(3)................ 255,000 * Melvin A. Snyder(2)(3)................. 120,000 * All Directors and Officers as a Group (11 persons) (2)(3)................ 2,442,112 8.7% ------------------------------------------------------------------------------- * Less than one percent (1%). (1) The address of Mr. Karloff, Mr. Martin, Dr. Davis, Mr. DeLuccia, Mr. Echenberg, Dr. Zabriskie, Mr. Palmisano, Mr. Patriacca, Dr. Schechter, Mr. Snyder and Dr. Chan is c/o the Company, 110 Hartwell Avenue, Lexington, Massachusetts 02421. (2) Includes the following numbers of shares issuable upon the exercise of stock options exercisable within 60 days: Mr. Karloff-970,000; Mr. Martin-90,000; Dr. Davis-81,000; Mr. DeLuccia-23,333; Mr. Echenberg-23,333; Dr. Zabriskie-23,333; Mr. Palmisano-540,000; Dr. Chan-16,666; Mr. Patriacca-40,000; Dr. Schechter-255,000; and Mr. Snyder-120,000. (3) Does not include the following numbers of vested shares in the Company's 401(k) Plan contributed by the Company to match portions of cash contributions by the following Plan participants: Mr. Karloff-3,833; Dr. Schechter-4,263; Mr. Snyder-1,095; Dr. Chan - 1,197. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) The following Financial Statements as of December 31, 2001 and 2000 and for the three years in the period ended December 31, 2001 are filed herewith: Page ---- Independent Auditors' Report 3 Balance Sheets 4 Statements of Operations 5 Statements of Stockholders' Equity 6-7 Statements of Cash Flows 8-9 Notes to Financial Statements 10-19 (a)(2) The following Financial Statement Schedules are filed herewith: None. Schedules not included herein are omitted because they are not applicable or the required information appears in the Financial Statements or Notes thereto. (a)(3) The following exhibits are filed herewith or are incorporated by reference as may be indicated: 3a Certificate of Incorporation as amended, incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 3b Amended and Restated By-Laws of the Company, incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated August 13, 1999. 4a Stock Purchase Warrant, incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 4b Rights Agreement dated as of August 13, 1999 between the Company and American Stock Transfer & Trust Company, as Rights Agent, including Form of Certificate of Designation with respect to the Series B Preferred Stock, par value $.01 per share (attached as Exhibit A to the Rights Agreement), Form of Rights Certificate (attached as Exhibit B to the Rights Agreement), and Summary of Rights (attached as Exhibit C to the Rights Agreement), incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated August 13, 1999. 4c Common Stock Certificate, incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 21 4d Securities Purchase Agreement among the Company, Bay Harbor Investments, Inc. and Strong River Investments, Inc., incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated October 23, 2000. 4e Form of Closing Warrant dated as of October 23, 2000, incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated October 23, 2000. 4f Form of Adjustable Warrant dated as of October 23, 2000, incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated October 23, 2000. 4g Form of Registration Rights Agreement by and among the Company, Bay Harbor Investments, Inc. and Strong River Investments, Inc., incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated October 23, 2000. 4h Warrant issued to Leerink Swann & Company dated as of October 23, 2000, incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated October 23, 2000. 4i Securities Purchase Agreement among MacroChem Corporation, Pine Ridge Financial Ltd., DMG Legacy International, Ltd., SDS Merchant Fund, LP, Par Investment Partners, L.P., Narragansett I, LP, and Narragansett Offshore Ltd., incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated July 24, 2001. 4j Form of Warrant incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated July 24, 2001. 4k Form of Registration Rights Agreement by and among MacroChem Corporation, Pine Ridge Financial Ltd., DMG Legacy International, Ltd., SDS Merchant Fund, LP, Par Investment Partners, L.P., Narragansett I, LP, and Narragansett Offshore Ltd., incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated July 24, 2001. 10.10.1 MacroChem Corporation 2001 Incentive Plan incorporated by reference to exhibits to the Company's Form S-8 as filed on August 8, 2001. 10.10.2 1994 Equity Incentive Plan as amended November 14, 1997, incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. * 10.10.3 1984 Non-Qualified Stock Option Plan as amended November 15, 1996, incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. * 10.10.4 1984 Incentive Stock Option Plan as amended November 15, 1996, incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. * 22 10a Form of Employment Agreement between the Company and Mr. Alvin J. Karloff, incorporated by reference to exhibits to the Company's Registration Statement on Form S-1 (No. 33-62042). * 10a.1 Amendment to Employment Agreement between the Company and Mr. Alvin J. Karloff, incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. * 10b Form of Employment Agreement between the Company and Dr. Paul J. Schechter, incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. * 10c Form of Employment Agreement between the Company and Mr. Kenneth L. Rice, incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. * 10d Form of Employment Agreement between the Company and Mr. Mel Snyder, incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. * 10e Form of Employment Agreement between the Company and Mr. Robert J. Palmisano, incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. * 10f MacroChem Corporation Option Certificate between the Company and Robert J. Palmisano, incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. * 10g Form of Employment Agreement between the Company and Mr. Bernard R. Patriacca, incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. * 10h Form of Employment Agreement between the Company and Dr. Thomas C.K. Chan, incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2001.* 10.11 Lease between GLB Lexington Limited Partnership and the Company dated as of July 21, 1999, for space located at 110 Hartwell Avenue, Lexington, MA 02421, incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 23.1 Consent of Deloitte & Touche LLP (b) No Current Reports on Form 8-K were filed in the three-month period ended December 31, 2001. __________________________ *Management contract or compensatory plan or arrangement. 23 SIGNATURES Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused Amendment No. 1 to this report to be signed on its behalf by the undersigned, thereunto duly authorized. MACROCHEM CORPORATION Dated: May 15, 2002 By:/s/Robert J. Palmisano ---------------------- Robert J. Palmisano President & Chief Executive Officer 24