-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WAhzYMlLtNe3ENZhV3vnnds2EmdCueOUC7OH8ZcHFZ6O3QC7+zx/HqDX/6ArzN8F zB74XFwOxML+GGm8sMFneA== 0000915707-96-000065.txt : 19960401 0000915707-96-000065.hdr.sgml : 19960401 ACCESSION NUMBER: 0000915707-96-000065 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MACROCHEM CORP CENTRAL INDEX KEY: 0000743884 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 042744744 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13634 FILM NUMBER: 96541502 BUSINESS ADDRESS: STREET 1: 110 HARTWELL AVE CITY: LEXINGTON STATE: MA ZIP: 02173 BUSINESS PHONE: 6178624003 MAIL ADDRESS: STREET 1: 110 HARTWELL AVENUE CITY: LEXINGTON STATE: MA ZIP: 02173 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the Fiscal Year Ended December 31, 1995 [ ] 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 of (I.R.S. Employer incorporation or organization) Identification No.) 110 HARTWELL AVENUE LEXINGTON, MASSACHUSETTS 02173-3134 (Address of principal executive offices) (617) 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) Class A Warrants ---------------- (Title of Class) Class AA Warrants ----------------- (Title of Class) Class X Warrants ---------------- (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 average bid and asked prices for such stock on February 298, 1996 was approximately $95,940,000. As of February 298, 1996, 15,896,599 shares of common stock, $.01 par vlaue, were outstanding. Documents Incorporated By Reference Portions of the registrant's definitive Proxy Statement (the "Proxy Statement") for its 1996 Annual Meeting of Stockholders presently intended to be filed with the Securities and Exchange Commission by April 30, 1996 are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS. This report contains forward-looking statements that involve risks and uncertainties. The CompanyOs actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed or referred to in ORisk FactorsO. MacroChem's primary business is the development and commercialization of transdermal drug delivery compounds and systems designed to promote the delivery of drugs from the surface of the skin into the skin and into the bloodstream. SEPA" compounds, the Company's primary proposed products, when properly combined with particular drugs, create pharmaceutical formulations (creams, gels, solutions, etc.) that enhance the transdermal delivery of drugs into the skin and into the bloodstream. Modified SEPA" formulations combined with the Company's polymers and adhesives can also be used with patch formats to achieve the transdermal delivery of selected drugs as well. The Company believes that SEPA" compounds enhance the diffusion of drugs into and through the skin by making the outer layer of the skin (stratum corneum) more permeable to the drug molecule. Transdermal delivery provides an alternative method to other methods of drug administration (injection, oral dosage forms, inhalation), and may allow selected drugs to be administered more effectively, at a lower dose, with fewer adverse events and with improved patient compliance. The Company is developing specific SEPA" formulations for use with non-proprietary and proprietary drugs manufactured by pharmaceutical companies, and plans 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 pharmaceuticals. The Company believes that if the clinical trials are successful the results will aid the Company in attracting partners to assist in the promotion of the product. Because of the substantial costs involved in bringing a new pharmaceutical product or a new formulation of an old drug to the market, the Company may be required to rely on pharmaceutical companies to conduct all or part of the clinical trials necessary to gain regulatory approval to manufacture and to market any resulting product. The Company has acquired the rights to low molecular weight reactive polyvinyl pyrrolidone oligomers (PEVs) from the Consiglio Nazionale delle Ricerche, Italy's National Science Foundation. PEVs, when attached to enzymes and polypeptides, may reduce the level of side effects, increase the stability and increase the therapeutic response of these proteins. The Company has also developed a series of new low molecular weight polymers, termed MacroDermTM, for cosmetic use and the topical delivery of pharmaceuticals. During 1996 the agent will be studied by a consultant at the University of California at San Francisco in order to identify cosmetic applications. The Company does not maintain general product liability insurance, since the Company does not market SEPA"-drug products.or conduct clinical studies using SEPA"-drug products The Company recently commenced clinical studies and obtained specific product liability insurance relating to such studies. As of December 31, 1995, no asserted product liability claims exist against the Company. However, in the future, incidents could give rise to claims could exist which could exceed the Company's insurance coverage and resources. RESEARCH AND DEVELOPMENT: COLLABORATIVE ARRANGEMENTS The Company conducts its research and development activities through its own staff and facilities, as well as through collaborative arrangements with universities, contract research organizations and independent consultants. At present the Company has _19 __ full-time employees, 11 of whom are devoted to research and development and regulatory affairs. In addition, a certain a Company officer serves as Scientific Director and devotess approximately 75% of his his time to Rresearch and Ddevelopment. Research and developmental expenditures aggregated $1,109,500________, and $854,200 $931,500 and $446,484 during the years ended December 31, 1995, and December 31, 1994, and the nine months ended December 31, 1993, respectively. The Company is also dependent upon third parties to conduct complete clinical studies, obtain FDA and other regulatory approvals and manufacture and market a finished product. The Company anticipates incurring significant development expenditures in the future as the Company continues its efforts to develop its present compounds and new drug formulations and as it begins to research other technologies and to expand its toxicological and clinical studies of certain drugs. The Company conducts stability studies, tests its unique formulations and designs manufacturing processes for its SEPA" compounds and adhesive and polymer technologies at its facility and other facilities. The Company has finished its new cGMP (current Good Manufacturing Practices) facilities for the manufacture of dosage forms for pre-clinical and clinical evaluations. In addition, the Company has established the following ongoing research and development collaborative arrangements with respect to potential licensing candidates. In September 1994, the Company entered into a letter agreement with SmithKline Beecham Animal Health, then a division of SmithKline Beecham Corporation (after acquisition of this division by Pfizer from SmithKline Beecham, it was renamed Pfizer Animal Health) to collaborate in a program to increase the absorption of vaccines administered intranasally using SEPA", the Company's proprietary transdermal drug delivery compounds. The agreement with Pfizer Animal Health provides for the possibility of entering into a licensing agreement based upon the results of these initial studies. No assurance can be given, however, regarding the successful commercialization of these products. In August 1994, the Company entered into a letter agreement with Knoll Pharmaceutical Company commencing the initial phase of a drug development collaboration. The collaboration will examine the use of the Company's SEPA" drug delivery compounds in enhancing the transdermal delivery of one of Knoll's products. The agreement with Knoll provides for the possibility of entering into a licensing agreement based upon the results of these initial studies. No assurance can be given, however, regarding the successful commercialization of this product. In September 1990, the Company entered into a license agreement with Ascent Pharmaceuticals, Inc. ("Ascent") in which Ascent received an exclusive license to develop, test and market the Company's SEPA" compounds in combination with catecholamine bronchodilators for the treatment of respiratory disorders and, in combination with cromolyn sodium, to treat allergic disorders. Ascent is in the pre-clinical stage of its development program. However, no assurances can be given that the work conducted by Ascent will lead to the marketing of SEPA"- containing products for these indications. PRODUCTS AND TECHNOLOGIES BACKGROUND To be effective, drugs must reach an intended site in the body, at optimal concentration, at the proper time and for an appropriate length of time. Traditional methods of drug administration, such as oral ingestion, intramuscular and intravenous injections and inhalation, may be effective for a wide variety of drugs. However, depending upon the given drug, each method may have disadvantages. For example, in oral administration, a drug, which must pass through the gastrointestinal tract to be absorbed and metabolized, can break down, resulting in a lower amount of drug being therapeutically available. As a result, higher dosages of the drug must be used to produce the desired effect, which may cause irritation of the gastrointestinal tract and systemic toxicity. In addition, the rate at which orally administered drugs are absorbed may vary depending on several factors, including the drug's chemical properties, the patient's physiology, the length of time the drug remains in the gastrointestinal tract and the patient's meal patterns. Although the pharmaceutical industry has investigated a variety of alternative approaches for dealing with drug adverse events and loss in efficacy, through enteric coating of tablets, formulating with various waxes and cellulosic materials, microencapsulation and compressing tablets in various layers, the desired effects of these approaches are not always reproducible from patient to patient. TRANSDERMAL DRUG DELIVERY Transdermal drug delivery is the process of delivering drugs into the skin so that they can be effective in the treatment of dermatological problems and diseases or through the skin and into the bloodstream for the treatment of systemic diseases. The skin is made up of three layers: the outer layer, the stratum corneum, the middle layer or viable epidermis and the inner layer, the dermis. The stratum corneum, which serves as the skin's primary barrier to chemical penetration, consists of closely packed dead cells and fatty (lipid) material. The epidermis is composed of several layers of active cells and tissue and the dermis consists, in part, of tissue containing hair follicles, nerve endings and blood capillaries. Within the stratum corneum, lipid layers bind the dead cells together to form a protective barrier. Research conducted by MacroChem scientists shows that SEPA" compounds affect drug delivery by acting, in part, upon the stratum corneum to disrupt the alignment of the lipid molecules within the lipid layers. This disruption increases the porosity of the lipid-cell layers, allowing drugs to diffuse through the stratum corneum through the more porous epidermis to the dermis, where they enter the blood stream through the capillaries. The rate and amount of drug absorbed can be controlled by varying the formulation used. THE COMPANY'S DRUG-DELIVERY SYSTEMS AND OTHER PROPOSED PRODUCTS SEPA" COMPOUNDS The delivery of a drug through the skin isdependsent on the drug's physical and chemical characteristics (molecular size and shape, the drug's solubility in lipids and water, its melting point and whether it is lipophilic or hydrophilic). Since some drugs move through the skin too rapidly, the transdermal system must retard the rate of drug absorption to ensure optimal efficacy with minimum toxicity. Other drugs move through the skin with difficulty, so the transdermal system must be formulated to increase the drug's rate of absorption through the skin. Common methods of transdermal delivery use common chemicals such as ethanol or fatty compounds to enhance penetration. Although certain delivery methods using chemicals have proven to be somewhat effective with specific drugs, such as drugs used for the treatment of motion sickness or those used to treat hormone deficiencies, they have caused adverse events, such as skin irritation and sensitivity at the site of application. Some drugs, because of their physical characteristics or the amount of drug necessary to achieve the desired therapeutic effect, have not been successfully delivered transdermally to date. The Company has developed SEPA" compounds that are designed to enhance the transport, penetration and controlled delivery of drugs through the skin. SEPA" compounds are generally colorless, clear liquids that are intended to promote drug delivery by aiding drug molecules to penetrate the skin, diffuse into or through the skin layers and become absorbed into the bloodstream. The Company has set up its own facility for the in vitro testing of drug formulations containing SEPA", and is currently less dependent on outside laboratories for this type of testing. The Company is conducting conducts in vitro studies to evaluate the transdermal enhancing effect of SEPA" in combination with a variety of drugs. The Company chose these drugs, with their differing physical and chemical characteristics, as representative of a broad spectrum of potential drug products. Although the Company's research and development efforts with SEPA" are at an advanced stage, the Company must still conduct substantial additional studies to demonstrate the efficacy and safety of any SEPA"-drug formulation. The Company has found that specific drugs administered transdermally with SEPA" demonstrated increased transdermal absorption. Some of the drug formulations tested by the Company with SEPA" contain compounds generally recognized as unlikely or difficult candidates for transdermal delivery because of their physical and chemical properties and molecular size. As these drug formulations are further developed, the Company plans to conduct additional studies to investigate the efficacy and safety of some of these formulations. Although in vivo testing has been conducted on SEPA" compounds, more studies will be needed to demonstrate the safety and efficacy of SEPA" compounds in connection with specific drug INDs (Investigational New Drug Applications), NDAs (New Drug Applications) or ANDAs (Abbreviated New Drug Applications) expected to be made by the Company or its business partners to the United States Food and Drug Administration (FDA). These applications are part of the FDA requirements that must be filed by a company prior to marketing a new drug in the United States. The Company has secured FDA approval of an IND on a double-blind study of SEPA"Os enhancement of the delivery of ibuprofen through the skin directly into sore muscles, and plans to file several INDs using SEPA "with various drugs. The Company, in association with third parties, is currently conducting pre-clinical studies with SEPA" formulations in combination with specific drugs for a variety of applications. The Company believes that SEPA" compounds can be used with a broad variety of new and existing drugs to enhance their commercial value. The improved therapeutic effectiveness and convenience of a transdermal SEPA" product may substantially expand the existing market for a drug. In addition, a formulation containing a SEPA" compound may prove to be a superior alternative to the existing methods of administering certain drugs. MACRODERMTM DRUG DELIVERY SYSTEM The Company has developed a series of new low molecular weight polymers, termed MacroDermTM, for use with cosmetics and in the transdermal delivery of pharmaceuticals. Potential applications include their use with sunscreens, moisturizers, antifungals, antivirals, topical anesthetics, antipruretics and anti-acne preparations. The Company is currently supporting research at the University of California Medical Center in San Francisco on the use of MacroDermTM polymers in cosmetics and for the treatment of skin problems and diseases. REACTIVE POLYVINYL PYRROLIDONE (PEV) OLIGOMERS PEVs, licensed by the Company from the Consiglio Nazionale delle Ricerche, Italy's National Science Foundation, are low molecular weight Reactive Polyvinyl Pyrrolidones which could provide a significantly improved method of delivering therapeutic enzymes, proteins and drugs. The technology may result in reduced side effects (such as less antigenicity), increased stability and the more effective therapeutic response of proteins and drugs through the attachment of PEVs to these molecules. COMPETITION The Company competes with numerous firms, many of which are large, multi-national organizations with worldwide distribution. The Company believes that its major competitors in the drug-delivery sector of the health care industry include ALZA Corporation, Cygnus Therapeutic Systems, Elan Corporation, plc., Ciba-Geigy Limited and, Sandoz Limitedand The Procter & Gamble Company and Rhone-Poulenc Rorer in the treatment of bone disease. These firms have substantially greater capital resources, research and development and technical staffs, facilities and experience in obtaining regulatory approvals, as well as in manufacturing, marketing and distribution of products, than the Company. Recent trends in this area are toward further market consolidation of large drug companies into a smaller number of very large entities, further concentrating financial, technical and market strength and increasing competitive pressure in the industry. Academic institutions, hospitals, governmental agencies and other public and private research organizations are also conducting research and seeking patent protection and may develop competing products or technologies of their own through joint ventures or other arrangements. In addition, recently developed technologies or technologies that may be developed in the future may or could be the basis for competitive products. No assurance can be given that the Company's competitors will not succeed in developing technologies and products that are more effective or less costly to use than any that are currently being developed by the Company. The Company expects products approved for sale, if any, to compete primarily on the basis of product efficacy, safety, patient compliance, reliability, price and patent position. Generally, the first pharmaceutical product to reach the market in a therapeutic or preventative area is often at a significant advantage relative to later entrants to the market. The Company's competitive position will also depend on its ability to attract and retain qualified scientific and other personnel, develop effective proprietary products, implement production and marketing plans, obtain patent protection and secure adequate capital resources. EMPLOYEES As of March 1, 1996, the Company had 19 employees, 11 of whom are devoted to responsible for research and development and regulatory affairs. In addition, a Company officer devotes approximately 75% of his time to research and development. GOVERNMENT REGULATION The production and marketing of the Company's drug delivery systems and pharmaceutical products are subject to regulation for safety and efficacy by numerous federal, state and local agencies and comparable agencies in foreign countries. In the United States, the Federal Food, Drug and Cosmetic Act, the Public Health Service Act, the Controlled Substances Act and other federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, approval, advertising and promotion of the Company's proposed products and technologies. Non-compliance with applicable requirements can result in fines and other judicially imposed sanctions including recalls and criminal prosecutions based on products, promotional practices, or manufacturing practices that violate statutory requirements. In addition, administrative remedies can involve voluntary recalls or cessation of sale of products, administrative detention, public notice, voluntary changes in labeling, manufacturing or promotional practices, as well as refusal of the government to enter into supply contracts or to approve NDAs. The FDA also has the authority to withdraw approval of drugs in accordance with statutory procedures. The FDA approval procedure involves completion of pre-clinical studies and the submission of the results of these studies to the FDA in an IND application. IND approval is then followed by human clinical studies leading to an NDA. Pre-clinical studies involve laboratory evaluation of product characteristics and animal studies to assess the efficacy and safety of the product. Human clinical trials are typically conducted in three sequential phases, but the phases may overlap. Phase I trials consist of testing of the product in a small number of volunteers primarily for safety at one or more doses. In Phase II, in addition to safety, the efficacy of the product is evaluated in a small patient population. Phase III trials typically involve multicenter testing for safety and clinical efficacy in an expanded population of patients at geographically dispersed test sites. A clinical plan, or "protocol," accompanied by the approval of the institutions participating in the trials, must be submitted to the FDA prior to commencement of each clinical trial. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time if adverse events are observed in subjects. In addition, the FDA may request Phase IV trials after approval to resolve any lingering questions. A 30-day waiting period after the filing of each IND application is required by the FDA prior to the commencement of Phase I clinical testing in human subjects. If the FDA has not commented on or questioned the IND application within 30 days, initial clinical studies may begin. However, any FDA comments or questions must be answered to the satisfaction of the FDA before initial clinical testing can begin. In some instances, this process could result in substantial delay and expense. The results of the pre-clinical and clinical studies on new drugs are submitted to the FDA in the form of NDAs for approval to commence commercial sales. Following extensive review, the FDA may grant marketing approval, require additional testing or information or deny the application. Continued compliance with all FDA requirements and the conditions in an approved application, including product specifications, manufacturing process and labeling requirements, are necessary for all products. Failure to comply, or the occurrence of unanticipated adverse events during commercial marketing, could lead to the need for labeling changes, product recall, seizure, injunctions against distribution or other FDA-initiated action, which could delay further marketing until the products are brought into compliance. In certain cases, an ANDA may be filed in lieu of filing an NDA. An ANDA relies on bioequivalency tests that compare the applicant's drug with an already approved reference drug, rather than on clinical trials. An ANDA may be available to the Company for a new formulation of a drug which has already been approved by the FDA in other topical dosage forms. By concentrating on drug delivery systems employing existing drugs, the Company expects that the time for regulatory approval of certain products should be shorter than for entirely new substances. The NDA itself is a complicated and detailed document and must include the results of extensive animal, clinical and other testing, the cost of which is substantial. Although the FDA is required to review applications within 180 days of filing, in the process of reviewing applications the FDA frequently requests that additional information be submitted and starts the 180 day regulatory review period anew when the requested additional information is submitted. The effect of such requests and subsequent submissions can significantly extend the time for the NDA review process. Until an NDA is actually approved, no assurance can be given that the information requested and submitted will be considered adequate by the FDA to justify approval. In addition to the above, packaging and labeling of most of the Company's proposed products are subject to FDA regulation. The Company must get FDA approval for all labeling and packaging prior to marketing of a regulated product. Whether or not FDA approval has been obtained, approval of a product by a comparable regulatory authority must be obtained in most foreign countries prior to the commencement of marketing of the product in that country. The approval procedure varies from country to country and may involve additional testing, and the time required may differ from that required for FDA approval. Although some procedures for unified filings exist for certain European countries, in general each country has its own procedure and requirements, many of which are time consuming and expensive. Thus, substantial delays in obtaining required approvals from foreign regulatory authorities can result after the relevant applications are filed. After such approvals are obtained, further delays may be encountered before the products become commercially available. No assurance can be given that any required FDA or other governmental approval will be granted or, if granted, will not be withdrawn. Governmental regulation may prevent or substantially delay the marketing of the Company's proposed products, cause the Company to undertake costly procedures and furnish a competitive advantage to the more substantially capitalized companies with which the Company plans to compete. In addition, the extent of potentially adverse government regulations that may arise from future administrative action or legislation cannot be predicted. PATENTS AND LICENSE RIGHTS The Company was granted a U.S. patent in 1994 relating to certain compounds useful for treatment of osteoporosis and hypercalcemia. Corresponding foreign patents have also issued in several European countries and Canada. A related U.S. patent issued in 1995 for the use of these compounds in the treatment of hypercalcemia. The Company holds patents on its SEPA" compounds in the United States, Canada and throughout Europe and the SEPA" patent application is pending in Japan. The Company owns a U.S. patent on a transdermal medicator. The Company filed patent applications in the U.S., Canada and Europe for unique low molecular weight polyvinyl pyrrolidone molecules and their use in stabilizing enzymes and other types of proteins. Two patent applications were filed in 1995 for minoxidil with SEPA" once-a-day treatment for baldness. The Company also filed a patent application in 1995 on its MacroDermTM technology. The Company believes that patent protection of its technologies, processes and products is important to its future operations. The success of the Company's proposed products may depend, in part, upon the Company's ability to obtain patent protection. The Company intends to enforce its patent position and intellectual property rights vigorously. The cost of enforcing the Company's patent rights in lawsuits, if necessary, may be significant and could interfere with the Company's operations. Although the Company intends to file additional patent applications as management believes appropriate with respect to any new products or technological developments, no assurance can be given that any additional patents will be issued or, if issued, will be of commercial benefit to the Company. In addition, to anticipate the breadth or degree of protection that any such patents may afford is impossible. To the extent that the Company relies on unpatented proprietary technology, no assurance can be given that others will not independently develop or obtain substantially equivalent or superior technology or otherwise gain access to the Company's trade secrets, that any obligation of confidentiality will be honored or that the Company will be able to effectively protect its rights to proprietary technology. Further, no assurance can be given that any products developed by the Company will not infringe patents held by third parties or that, in such case, licenses from such third parties would be available on commercially acceptable terms, if at all. In connection with the prior research and development efforts of the Company, the Company owns several patents and possesses certain license rights in connection with other technologies, which it is not currently pursuing. RISK FACTORS In addition to the other information in this report, the following risk factors should be considered carefully in evaluating the Company and its business. This report contains forward-looking statements that involve risks and uncertainties. The CompanyOs 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 managementOs then-current expectations. Factors that might cause such a difference include, but are not limited to, those discussed or referred to below. HISTORY OF OPERATING LOSSES; NEED FOR CONTINUED WORKING CAPITAL 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 and licensing of certain technology. 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, 1995, the CompanyOs accumulated deficit was approximately $15___ million. The CompanyOs 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 assurance can be given. However, the Company believes that its financial resources are sufficient to meet planned operating activities for the next twelve months. The Company continues to pursue the commercialization of its SEPA technology through discussion and presentation of its technology to potential licensees. No assurance can be given that these discussions will lead to any licenses. No assurance can be given that any milestone fees or license fees will be received by the Company in the current fiscal year. For the foreseeable future, and until marketing approvals are obtained, and/or license agreements are entered into, if ever, the Company anticipates limited licensing revenue and no royalties from sales of products using SEPA for pharmaceutical purposes. TECHNOLOGY UNCERTAINTY AND EARLY STAGE DEVELOPMENT Although several systems have been developed by various pharmaceutical companies to enhance the transdermal delivery of specific drugs, relatively limited research has been conducted in the expansion of transdermal delivery systems to a wider range of pharmaceutical products. Although the Company has demonstrated in preclinical and clinical studies that its SEPA transdermal compounds may have applicability with a broad range of drugs, transdermal delivery systems are currently marketed for only a limited number of products. In addition, transdermal delivery systems used to date have often demonstrated adverse side effects for users, such as skin irritation and delivery difficulties. The CompanyOs proposed products are in the early development stage, require significant further research, development, testing and regulatory clearances and are subject to the risks of failure inherent in the development of products based on innovative technologies. These risks include the possibilities that any or all of the proposed products may be found to be ineffective or toxic, or otherwise may fail to receive necessary regulatory clearances; that the proposed products, although effective, may be uneconomical to market; or that third parties may market superior or equivalent products. Due to the extended testing and regulatory review process required before marketing clearance can be obtained, the Company does not expect to be able to realize revenues from the sale of any drugs for [several years]in the near term. NEED FOR SIGNIFICANT PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING Before the Company or any licensees of the Company may market any products based upon the CompanyOs technology, significant additional development efforts and substantial preclinical and clinical testing will be necessary. Unless substantial additional financing is obtained, the Company may not have substantial working capital to complete clinical studies on any proposed products. No assurance can be given that the Company will be able to enter into any secure suchadditional ventures financing on favorable terms, if at all. DEPENDENCE ON THIRD PARTIES FOR DEVELOPMENT; NO ASSURANCE OF LICENSED AGREEMENTS The Company intends to rely on licensees and joint venture arrangements to fund most of the costs relating to product development and clinical trials. Licensees may be expected to have the legal right to terminate funding a product at any time for any reason without significant penalty. The resources and attention devoted by a licensee to a product are not within the CompanyOs control, and this can result in delays in clinical testing, the preparation and prosecution orf regulatory filings and commercialization efforts. Further, no assurance can be given that the Company will be able to enter into new collaborative arrangements or that existing or future collaborative arrangements will be successful. PRIOR DEVELOPMENT EFFORTS Since the CompanyOs inception in 1981, the Company has engaged in research and development activities with respect to a variety of technologies and products, including polymers for medical and industrial use, dental adhesives, osteoporotic drugs and transdermal drug-delivery products. Although the Company has generated differing levels of revenue over the last several years, none of the CompanyOs products or technologies has ever generated sustained revenues and the Company has never had profitable operations. The Company has expended a substantial amount of its resources in researching and developing technology relating to these products as well as in connection with the research and development of its transdermal delivery systems. No assurance can be given that the CompanyOs development activities with respect to its transdermal delivery systems will be successful or that these efforts, as well, will not be eventually abandoned. LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES FOR MARKETING AND DISTRIBUTION OF PRODUCTS The Company intends to market and distribute its proposed products through others pursuant to licensing, joint venture, or similar collaborative arrangements or distribution agreements. The Company has no sales force or marketing organization. If the Company directly markets and sells any of such products, it will, among other things, have to attract and retain qualified or experienced marketing and sales personnel. No assurance can be given that the Company will be able to attract and retain qualified or experienced marketing and sales personnel or that any efforts undertaken by such personnel will be successful. Any contractual arrangements with others may result in a lack of control by the Company over any or all of the marketing and sales of such products. DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING The Company currently does not have facilities capable of manufacturing any proposed products in commercial quantities. Accordingly, the Company expects that it will be dependent to a significant extent on licensees, corporate partners or contract manufacturers for such manufacturing and for compliance with regulatory requirements for good manufacturing practices. The CompanyOs dependence on third parties for manufacturing may adversely affect the CompanyOs ability to develop and deliver products on a timely and competitive basis. If the Company decides to establish a commercial manufacturing facility, it will require substantial additional funds, will be required to hire and retain significant additional personnel and will be required to comply with extensive government regulations. No assurance can be given that the Company will be able to obtain additional capital to conduct such activities directly. RELIANCE ON KEY EMPLOYEES; LIMITED PERSONNEL; ABILITY TO ATTRACT AND RETAIN QUALIFIED SCIENTISTS The success of the Company is dependent on the efforts and abilities of Dr. Carlos M. Samour, its Chairman of the Board of Directors and Scientific Director, and Alvin J. Karloff, its Chief Executive Officer and President. Dr. Samour and Mr. Karloff are employed by the Company under employment agreements that are of indefinite length and include non-disclosure and non-competition provisions. The loss of either Dr. Samour or Mr. Karloff could have a material adverse effect on the CompanyOs business. The CompanyOs business also depends on access to scientific talent, competition for which is intense and can be expected to increase. THE COMPANYOS BUSINESS ALSO DEPENDS ON ITS RELATIONSHIPS WITH VARIOUS UNIVERSITIES. THE COMPANY HAS (1) AN AGREEMENT WITH THE UNIVERSITY OF PISA IN ITALY, PURSUANT TO WHICH RESEARCHERS AT THE UNIVERSITY OF PISA ARE ASSISTING THE COMPANY IN EXAMINING BOTH THE MECHANISMS OF SEPA ENHANCEMENT AND THE PHYSICAL AND CHEMICAL CHARACTERIZATION OF SEPA COMPOUNDS, AS WELL AS THE DEVELOPMENT OF NEW POLYMERS FOR USE IN TRANSDERMAL DRUG DELIVERY; (2) AN ON-GOING COLLABORATIVE RELATIONSHIP WITH THE UNIVERSITY OF PARIS IN FRANCE FOR CERTAIN ANIMAL AND HUMAN TESTING; AND (3) AN AGREEMENT WITH THE UNIVERSITY OF CALIFORNIA AT SAN FRANCISCO TO IDENTIFY COSMETIC APPLICATIONS. THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO RENEW OR CONTINUE ANY SUCH ARRANGEMENTS ON TERMS ACCEPTABLE TO THE COMPANY, IF AT ALL. COMPETITION, GOVERNMENT REGULATION, PATENTS AND LICENSE RIGHTS See these sections, above, for a description of risk factors relating to these matters. PRODUCT LIABILITY; NO GENERAL INSURANCE The design, development, manufacture and sale of the CompanyOs products involve an inherent risk of product liability claims and associated adverse publicity. The Company currently does not maintain general liability insurance and may need to acquire such insurance coverage prior to the commercial introduction of its products. No assurance can be given that the coverage limits of the CompanyOs insurance policies will be adequate. Such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms or at all. A successful claim brought against the Company if it is uninsured, or which is in excess of the CompanyOs insurance coverage, if any, could have a material adverse effect upon the Company and its financial condition. UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS The future revenues and profitability of, and availability of capital for biotechnology companies may be affected by the continuing efforts of governmental and third-party payors to contain or reduce the costs of health care through various means. For example, in certain foreign markets pricing or profitability of prescriptions pharmaceuticals is subject to government control. In the United States, there have been, and the Company expects there will continue to be, a number of federal and state proposals to implement similar government control. While the Company cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could have a material adverse effect on the CompanyOs prospects. ITEM 2. PROPERTIES. The Company leases 9,702 square feet of office and laboratory space in Lexington, Massachusetts. Details of the lease agreements are set out in Note 56 of the Financial Statements included in Item 8 of this Report and in the form of lease included as an exhibit to this Report. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the three months ended December 31, 1995, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET PRICE OF SECURITIES AND RELATED MATTERS The following chart sets forth the range of high and low bid prices for the Common Stock, Class A Warrants, Class AA Warrants and Class X Warrants for the periods indicated as obtained from NASDAQ and the NASD Electronic Bulletin Board:
Common Stock Class A Class AA Class Common Stock Warrants Warrants Warrants MCHM MCHML MCHMM MCHMN - ---------------------------------------------------------------------- - -------------- Year Ended High Low High Low High Low High Low December 31, 1994 First Quarter 4 1/8 2 1/8 2 3/4 1 3/8 3/8 3 1 Second Quarter 2 5/8 1 1/4 1 1/8 1/2 15/16 1/4 2 1/4 1/4 Third Quarter 2 3/16 1 1/21 1/16 3/8 3/4 1/4 1 1/2 Fourth Quarter 2 1/8 1 1/4 7/8 1/4 5 /8 1/4 1 1/2 December 31, 1995 First Quarter 2 15/16 1 1/8 3/4 1/4 5/8 1/8 1 1/2 1/2 Second Quarter 4 5/16 2 1/16 1 7/8 1/2 1 3/8 1/4 2 1/4 1/2 Third Quarter 6 1/2 3 3/8 3 3/8 1 1/2 2 3/8 7/8 4 1 Fourth Quarter 4 15/16 3 2 1/2 1 1/8 1 5/8 3/4 3 1 3/4
The above quotations represent prices between dealers and do not include retail markups, markdowns or commissions and may not necessarily reflect actual transactions. As of December 31, 1995, there were 391 ____ record holders of the Company's Common Stock. The Company has never paid dividends on its Common Stock and its Board of Directors does not contemplate declaring any dividends in the foreseeable future. The Company presently intends to retain earnings, if any, to finance research, development, and expansion of its business. ITEM 6. SELECTED FINANCIAL DATA.
TRANSITION PERIOD FROM APRIL 1 YEAR ENDED FISCAL YEAR ENDED MARCH 31 TO DECEMBER 31 DECEMBER 31 1992 1993 1993 1994 1995 STATEMENTS OF OPERATIONS DATA: Total revenue $501,252$1,027,730 $123,819 $44,710 $17,493 Net loss (124,369) (2,539)(1,465,454)(1,969,442)(2,465,837) Net loss per share (0.02) 0.00 (0.13) (0.17) (0.20) Balance Sheet Data: Working capital $148,869$6,508,411 $5,321,837$3,615,608$4,532,623 Current assets 244,213 6,664,117 5,633,155 3,955,357 4,962,562 Total assets 418,191 6,914,246 5,956,850 4,437,600 5,462,625 Current liabilities 95,344 155,706 311,318 339,749 429,939 Capital lease obligations -0- -0- -0- 59,715 91,861 Total liabilities 95,344 165,378 324,188 387,792 486,198 StockholdersO equity 322,847 6,748,868 5,632,662 4,049,808 4,976,427
ITEM 7. MANAGEMENTOS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion of the financial condition and results of operations for the Company should be read in conjunction with the acccompanying financial statements and related footnotes. GENERAL MacroChem's primary business is the development and commercialization of transdermal drug delivery compounds and systems designed to promote the delivery of drugs from the surface of the skin into the skin and 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 limited clinical testing of certain SEPA@-enhanced pharmaceuticals. The Company's results of operations vary significantly from year to year and quarter to quarter, and depend, among other factors, on the signing of new licenses and product development agreements, the timing of revenues recognized pursuant to license agreements, the achievement of milestones by licensees and the progress of clinical trials conducted by licensees and the Company. The timing of the Company's revenues may not match the timing of the Company's associated product development expenses. To date, research and development expenses have generally exceeded revenue in any particular period and/or fiscal year. In May 1993, the Company changed its fiscal year end from March 31 to December 31, effective December 31, 1993. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994 The Company has continued to incur losses from operations. For the year ended 1995, the net loss was approximately $2,465,000 as compared to a loss of $1,969,000 for the previous year, a 25% increase. For the 1995 and 1994 years the Company realized operating revenues of approximately $17,500 and $44,700, respectively, which were from the completion of feasibility studies. Marketing, general and administrative expenses for 1995 aggregated approximately $1,541,000, an increase of $317,000 or 26%, from 1994's total of $1,224,000. During 1995, the Company used outside service providers for certain administrative and accounting functions, incurred increased recruiting expenses for the replacement and addition of several executive level employees, and increased marketing its technology to potential licensees and strategic alliance partners. In early 1996, the Company hired a vice president of operations, a director of research and development and a director of finance. Research and development costs increased by approximately $178,000 from $932,000 in 1994 to $1,110,000 for 1995, a 19% increase. The Company has continued its emphasis on research and development of expanded uses of the Company's proprietary products. The construction of a pilot scale manufacturing facility, conforming to the FDA's current Good Manufacturing Practices (cGMP), during 1995, has increased the Company's internal research and development capabilities. This facility will allow for improvements in the manufacture and testing of its chemical compounds. 1996 costs are expected to increase due to the hiring of a director of research and development and to increased clinical study costs. Other income increased from a net amount of $177,000 in 1994 to $203,000 in 1995. This increase reflects greater cash on hand, offset in part by the effect of the flattening of US Treasury rates in the latter part of 1995. Interest expense was approximately $42,600 in 1995, reflecting management's decision to maximize available cash resources by acquiring new equipment through capital lease arrangements, rather than outright purchase. YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 1993 The Company had a net loss for the year ended December 31, 1994 of approximately $1,969,000, compared to a net loss for the nine months ended December 31, 1993 of $1,465,000. These losses continue to reflect the Company's lack of any significant license fee or development milestone fee agreements. Total revenue for 1994 approximated $44,700 compared to $123,800 in 1993, a decrease of $79,100. The decrease in revenues is attributable to a decrease in sales of SEPA" to The Upjohn Company, which terminated its two SEPA" license agreements with the Company in 1993 and 1994. Marketing, general and administrative expenses for 1994 approximated $1,224,000 as compared to $1,170,000 for the nine-month period ended December 31, 1993. Research and development expenditures aggregated $932,000 for 1994 compared to $446,000 for the 1993 period. This increase in research and development expenditures represents the Company's continuing commitment to the development of its patented technology and the investigation of expanded uses for it. Other income, net increased by approximately $75,000 from 1993 to 1994. The increase is attributable chiefly to increased interest income for a twelve month period in the 1994 year. 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 1995, the Company received aggregate net proceeds of approximately $3,376,000, from the exercise of stock options, stock warrants, unit purchase options and the issuance of new shares of common stock, compared to approximately $374,800 in 1994. At December 31, 1995 working capital was approximately $4,533,000 compared to $3,616,000 at December 31, 1994. The expected decrease in the Company's working capital, based upon the loss for the year ended December 31, 1995, was mitigated by the receipt of these net proceeds from the issuance of common stock. 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 expects its working capital to decline. In connection with the Company's January 1993 private placement, affiliates of the placement agent were granted options to purchase a specified number of the units sold in the private placement, at the same price as in the private placement. Subsequent to December 31, 1995, an affiliate of the placement agent exercised its option to purchase some of these additional units, at an aggregate exercise price of $2,581,000. In addition, the affiliate exercised common stock warrants for an aggregate exercise price of approximately $1,055,000 subsequent to December 31, 1995. 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. In addition to capital expenditures and additional patent development costs for the year ended December 31, 1995 of approximately $71,000, the Company entered into a capital lease for the acquisition of certain equipment. The Company anticipates capital expenditures of approximately $120,000 during the fiscal year ended December 31,1996. Additionally, the Company plans on conducting additional clinical studies for approximately $800,000 in 1996. The Company believes that its existing cash and cash equivalents, marketable securities and other investments 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. Recently Issued Accounting Standards - The Financial Accounting Standards Board (the "FASB") has issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement, which will be required in 1996, establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles which are to be disposed of. The Company has not yet determined the effect of implementing SFAS No. 121 on its financial position and results of operations in any future period. Postemployment Benefits - The FASB has issued SFAS No. 112, OEEmployersO Accounting for Postemployment Benefits,O which requires accrual of benefits (such as Eshort-term disability and severance benefits) provided by an employer to former or inactive employees and their beneficiaries after employment but before retirement. The Company adopted this statement during 1995 and the impact on the CompanyOs results of operations and financial position was not material. Fair Value of Financial Instruments - The FASB has issued SFAS No. 107, ODisclosures About Fair Value of EFinancial InstrumentsO which requires the disclosure of fair value of most financial instruments, both assets and liabilities, for which it is practical to estimate fair value. The Company adopted SFAS 107 during 1995. Stock-Based Compensation - In November 1995, the FASB issued SFAS 123, OAccounting for Stock-Based Compensation.O SFAS 123 addresses the financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 permits an entity to either record the effects of stock-based employee compensation plans in its financial statements or elect to provide the appropriate disclosures in the notes to the financial statements. The Company has elected to provide appropriate disclosures in the notes to financial statements, therefore there will be no impact on the CompanyOs results of operations or financial position. SFAS 123 is required to be adopted in 1996. The foregoing statements in this report include forward-looking statements that involve risks and uncertainties. The CompanyOs actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed or referred to in Item 1, Business - ORisk FactorsO. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. MacroChem Corporation Financial Statements Year Ended December 31, 1995 And Year Ended December 31, 1994 and Nine Months Ended December 31, 1993 INDEPENDENT AUDITORSO 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, 1995 and 1994, and the related statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1995 and 1994 and the nine months ended December 31, 1993. 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 generally accepted auditing standards. 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, 1995 and 1994, and the results of its operations and its cash flows for the years ended December 31, 1995 and 1994, and the nine months ended December 31, 1993, in conformity with generally accepted accounting principles. [SIGNATURE] DELOITTE & TOUCHE LLP Boston, Massachusetts March 1, 1996 MACROCHEM CORPORATION BALANCE SHEETS DECEMBER 31,
ASSETS 1995 1994 - ------ ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 3,591,779 $ 585,458 Marketable securities 971,492 3,279,375 Certificates of deposit 287,000 --- Chemical supplies 50,534 50,534 Prepaid expenses and other current assets 61,757 39,990 ------------- ----------- TOTAL CURRENT ASSETS 4,962,562 3,955,357 ------------- ----------- PROPERTY AND EQUIPMENT (NET) 307,390 274,880 ------------- ----------- OTHER ASSETS: Patents, net 188,213 203,053 Deposits 4,460 4,310 ------------- ----------- TOTAL OTHER ASSETS 192,673 207,363 ------------- ----------- TOTAL ASSETS $ 5,462,625 $ 4,437,600 ============= ============= MACROCHEM CORPORATION BALANCE SHEETS DECEMBER 31, (continued) LIABILITIES AND STOCKHOLDERSO EQUITY 1995 1994 - -------------------------------------- ----- ----- CURRENT LIABILITIES: Current portion of capitalized lease obligations$ 36,616$ 18,614 Accounts payable and accrued expenses 290,345 153,957 Accrued compensation 97,050 161,250 Deferred rent 5,928 5,928 ------------- ----------- TOTAL CURRENT LIABILITIES 429,939 339,749 ------------- ----------- CAPITALIZED LEASE OBLIGATIONS, Net of current portion 55,245 41,101 DEFERRED RENT, Noncurrent portion 1,014 6,942 ------------- ----------- TOTAL LONG-TERM LIABILITIES 56,259 48,043 ------------- ----------- TOTAL LIABILITIES 486,198 387,792 ------------- ----------- COMMITMENTS & CONTINGENCIES (Notes 6,7) STOCKHOLDERSO EQUITY: Preferred stock --- --- Common stock, $.01 par value, issued and outstanding, 13,129,321 shares and 11,569,643 shares at December 31, 1995 and 1994, respectively 131,293 115,696 Additional paid-in capital 19,801,473 16,424,614 Accumulated deficit (14,956,339) (12,490,502) ------------- ----------- TOTAL STOCKHOLDERSO EQUITY 4,976,427 4,049,808 ------------- ----------- TOTAL LIABILITIES AND STOCKHOLDERSO EQUITY $ 5,462,625 $ 4,437,600 ============= =============
MACROCHEM CORPORATION STATEMENTS OF OPERATIONS
Years Ended December 31, Nine Months Ended ------------------------- ----------------- 1995 1994 December 31, 1993 -------- -------- ----------------- REVENUES Research contracts $ 17,493 $ 44,710 $ 47,831 Product sales --- --- 75,988 ------------ ------------ ------------ TOTAL REVENUES 17,493 44,710 123,819 ------------ ------------ ------------ OPERATING EXPENSES Cost of product sales --- --- 53,500 Marketing, general and administrative 1,541,095 1,223,657 1,169,630 Research and development1,109,512 931,506 446,484 Consulting fees with related parties 36,000 36,000 22,000 ------------ ------------ ------------ TOTAL OPERATING EXPENSES 2,686,607 2,191,163 1,691,614 ------------ ------------ ------------ LOSS FROM OPERATIONS (2,669,114) (2,146,453) (1,567,795) ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest income 246,018 170,950 117,476 Interest expense ( 42,644) (1,199) --- Other (97) 7,260 (15,135) ------------ ------------ ------------ TOTAL OTHER INCOME 203,277 177,011 102,341 ------------ ------------ ------------ NET LOSS $(2,465,837) $(1,969,442) $(1,465,454) ============ ============ ============ NET LOSS PER SHARE $(.20) $(.17) $(.13) ====== ====== ====== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 12 ,331,560 11,558,105 10,874,172 ============ ============ ============
MACROCHEM CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCKADDITIONAL -------------------------------------- NUMBER OF PAR NUMBER OF PAR PAID-INACCUMULATED SHARES VALUE SHARES VALUE CAPITAL DEFICIT TOTAL - -------------------------------------------------------------------------------- - --------------------------------- BALANCE, MARCH 31, 1993 222,188$ 2,22210,690,979$ 106,910$ 15,695,342$ (9,055,606) $ 6,748,868 Issuance of common stock for services rendered and in settlement of accounts payable --- --- 5,000 50 25,450 --- 25,500 Conversion of preferred stock to common stock (127,188)(1,272) 254,376 2,543 ( 1,271) --- --- Exercise of common stock warrants --- --- 147,188 1,472 349,310 --- 350,782 Exercise of common stock options --- --- 26,000 260 14,303 --- 14,563 Costs associated with the registration and issuance of common stock and warrants --- --- --- --- (41,597) --- (41,597) Net loss --- --- --- --- --- (1,465,454) (1,465,454) ------------------------------------------------------------------------ BALANCE, DECEMBER 31, 199395,000 95011,123,543 111,235 16,041,537(10,521,060)5,632,662 Issuance of common stock for services rendered and in settlement of accounts payable --- --- 6,600 66 11,709 --- 11,775 Conversion of preferred stock to common stock(95,000) (950) 190,000 1,900 (950) --- --- Exercise of common stock warrants --- --- 246,500 2,465 371,035 --- 373,500 Exercise of common stock options --- --- 3,000 30 1,283 --- 1,313 Net loss --- --- --- --- --- (1,969,442) (1,969,442) ------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1994 --- ---11,569,643 115,696 16,424,614(12,490,502) 4,049,808 Issuance of common stock --- --- 1,300,000 13,000 3,262,000 --- 3,275,000 Issuance of common stock for services rendered--- --- 4,145 42 16,270 --- 16,312 Exercise of common stock warrants --- --- 51,700 517 90,358 --- 90,875 Exercise of common stock options --- --- 203,833 2,038 531,231 --- 533,269 Costs associated with issuance of common stock and warrants --- --- --- --- (523,000) --- (523,000) Net loss --- --- --- --- --- (2,465,837) (2,465,837) ------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1995 --- $---13,129,321$ 131,293 $ 19,801,473$ (14,956,339) $ 4,976,427 =========== ==================================================================
MACROCHEM CORPORATION STATEMENTS OF CASH FLOWS
YEARS ENDED NINE MONTHS DECEMBER 31,DECEMBER 31, ------------------------- 1995 1994 1993 ---------------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,465,837) $(1,969,442)$(1,465,454) ---------------------- ----------- Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 79,475 60,738 35,731 (Gain) loss on disposal of equipment(3,925) 3,740 -- Abandoned patent costs 22,592 -- -- Issuance of common stock in exchange for services 16,312 11,775 25,500 Amortization of discounts on marketable securities (152,316) (88,108) -- Increase (decrease) in cash from: Accounts receivable -- 34,000 (19,500) Prepaid expenses and other current assets(21,767) 4,026 28,724 Chemical supplies -- (50,534) -- Accounts payable and accrued expenses136,388 (22,933) 97,674 Accrued rent -- -- (19,362) Deferred compensation (64,200) 32,750 77,300 Deferred rent (5,928) (5,928) 3,198 Deposits ( 150) -- -- ---------------------- ----------- Total adjustments 6,481 (20,474) 229,265 ---------------------- ----------- Net cash used by operating activities (2,459,356)(1,989,916) (1,236,189) ---------------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment 4,800 -- -- Purchases of marketable securities (3,516,801)(5,491,267) -- Purchase of certificates of deposit (287,000) -- -- Proceeds from maturities of marketable securities 5,977,000 2,300,000 -- Expenditures for property and equipment(54,916)(130,666) (77,528) Additions to patents (16,558) (27,740) (31,769) ---------------------- ----------- Net cash provided (used) by investing activities 2,106,525(3,349,673) (109,297) ---------------------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease (16,992) (4,905) -- Proceeds from issuance of common stock3,275,000 -- -- Proceeds from exercise of common stock options 533,269 1,313 14,563 Proceeds from exercise of common stock warrants 90,875 373,500 350,782 Costs associated with the registration and issuance of common stock and warrants(523,000) -- (41,597) ---------------------- ----------- Net cash provided by financing activities 3,359,152 369,908 323,748 ---------------------- -----------
MACROCHEM CORPORATION STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31,NINE MONTHS ENDED 1995 1994DECEMBER 31, 1993 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 3,006,321 $(4,969,681) $(1,021,738) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 585,458 5,555,139 6,576,877 ----------- ----------- ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,591,779 $ 585,458 $ 5,555,139 =========== ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest aggregated $5,022, $1,199 and $0, respectively, for the years ended December 31, 1995 and 1994 and the nine months ended December 31, 1993. The Company did not pay any income taxes during those periods. SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES: Issuance of common stock for services rendered and in settlement of accounts payable $ 16,312 $ 11,775 $ 25,500 ========== ========== ========== Equipment acquired in exchange for capital lease obligation $ 49,138 $ 64,620 $ -- ========== ========== ==========
MACROCHEM CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THE NINE MONTHS ENDED DECEMBER 31, 1993 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 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 and licensing of certain technology. 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, 1995, the CompanyOs accumulated deficit was approximately $15 million. The CompanyOs 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 for the next twelve months. Change in Fiscal Year - In May 1993, the Company elected to change its fiscal year end from March 31, to December 31. This change was effective for the period ended December 31, 1993. Revenue Recognition - Revenues are earned and recognized based upon work performed, upon the sale or licensing of product rights, upon shipment of product, or upon the attainment of benchmarks specified in the related agreements. 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. In 1995, the Company changed its definition of research and development to more properly reflect personnel efforts and other resources previously included in general and administrative expenses. This change had the effect of increasing research and development and decreasing general and administrative costs from amounts previously reported by approximately $250,000 for the year ended December 31, 1994. No reclassifications were necessary relating to 1993 expenses since the allocation was comparable to the 1995 presentation. Cash Equivalents - Cash equivalents consist of short-term, highly liquid investments purchased with remaining maturities of three months or less. Marketable Securities - As of January 1, 1994 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The impact of adopting SFAS No. 115 was not material to the CompanyOs results of 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) operations and financial position. This statement requires that equity securities with readily determinable fair values and all investments in debt securities are classified and accounted for as follows: - - Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as investment securities and reported at amortized cost. - - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in operations. - - Debt and equity securities not classified as either investment securities or trading securities are classified as available-for- sale securities and reported at fair value, with unrealized gains and losses excluded from operations and reported in a separate component of stockholders' equity. The Company intends to hold until maturity its investments and accordingly, such investments are reported at amortized cost in the accompanying financial statements. Chemical supplies - Chemical supplies held for sale are stated at the lower of cost or market, on a first-in, first-out basis. 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 17 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 $28,000 and $20,000, respectively, at December 31, 1995 and 1994. 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. As a result of such evaluations, during 1995 the Company wrote off approximately $22,600 of costs associated with patents no longer having value. Income Taxes - The Company accounts for income taxes in accordance with 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. 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Loss Per Common Share - Net loss per common share is computed based on the weighted average number of common shares outstanding during each year. Common equivalent shares from convertible preferred stock, common stock options and common stock warrants are excluded from the computations as their effect is antidilutive. Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles 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 CompanyOs financial statements include the useful lives of the CompanyOs patents and the valuation allowance established for the CompanyOs deferred tax assets. 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 financial position or the results of operations. Recently Issued Accounting Standards - The Financial Accounting Standards Board (the "FASB") has issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement, which will be required in 1996, establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles which are to be disposed of. The Company has not yet determined the effect of implementing SFAS No. 121 on its financial position and results of operations in any future period. Postemployment Benefits - The FASB has issued SFAS No. 112, OEmployersO Accounting for Postemployment Benefits,O which requires accrual of benefits (such as short-term disability and severance benefits) provided by an employer to former or inactive employees and their beneficiaries after employment but before retirement. The Company adopted this statement during 1995 and the impact on the CompanyOs results of operations and financial position was not material. Fair Value of Financial Instruments - The FASB has issued SFAS No. 107, ODisclosures About Fair Value of Financial InstrumentsO which requires the disclosure of fair value of most financial instruments, both assets and liabilities, for which it is practical to estimate fair value. The Company adopted SFAS 107 during 1995. Stock-Based Compensation - In November 1995, the FASB issued SFAS 123, OAccounting for Stock-Based Compensation.O SFAS 123 addresses the financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 permits an entity to either record the effects of stock-based employee compensation plans in its financial statements or elect to provide the appropriate disclosures in the notes to the financial statements. The Company has elected to provide appropriate disclosures in the notes to financial statements, therefore there will be no impact on the CompanyOs results of operations or financial position. SFAS 123 is required to be adopted in 1996. Other - Certain items in the financial statements for the periods ended December 31, 1994 and 1993 have been reclassified to conform with current presentation. 2. MARKETABLE SECURITIES As of December 31, 1995, all marketable securities and certificates of deposit are classified as investment securities and carried at amortized cost. There have been no net realized gains or losses on the sale of securities for the years ended December 31, 1995 and 1994, or the nine month period ending December 31, 1993. The maturities of investment securities held at December 31, 1995 and 1994 are all one year or less. The carrying amounts and approximate market value of investment securities are as follows as of December 31, 1995 and 1994:
AmortizedUnrealized Market 1995 Cost Gain Value - ------ -------- ---------- ----------- U. S. Treasury Securities $ 971,492 $ 2,746 $ 974,238 Certificates of deposit (bearing interest rates ranging from 3.5% to 5.4%) 287,000 -- 287,000 ------------ -------- ----------- $ 1,258,492 $ 2,746 $ 1,261,238 ============ ========= ============ 1994 - ----- U. S. Treasury Securities $ 3,279,375 $ -- $ 3,279,375 ============ ========= ============
3. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31:
Laboratory equipment $ 448,577 $ 378,874 Office equipment 142,549 139,167 Leasehold improvements 90,564 74,596 --------- ---------- Total 681,690 592,637 Less: accumulated depreciation and amortization (374,300) (317,757) ---------- ---------- Property and equipment, net $ 307,390 $ 274,880 ========== ==========
4. CAPITALIZED LEASE OBLIGATIONS Equipment held under capital lease obligations included with owned property on the balance sheet consists of the following as of December 31, 1995:
Classification Laboratory equipment $ 113,758 Less: accumulated amortization ( 16,716) --------- $ 97,042 Future minimum lease payments under capital leases are as follows: 1996 $ 43,401 1997 42,837 1998 19,653 --------- Total minimum lease payments 105,891 Less: imputed interest (approximately 12.0%) ( 14,030) --------- Present value of minimum lease payments 91,861 Less: current portion 36,616 --------- Capital lease obligation, net of current portion $ 55,245 =========
5. STOCKHOLDERS' EQUITY Authorized Capital Stock - Authorized capital stock consists of 30,000,000 shares of $.01 par value common stock of which 13,129,321 shares are issued and 13,056,807 are reserved for conversion of common stock warrants and options at December 31, 1995. Authorized undesignated preferred stock total 5,500,000 shares. Stock Issuances - On May 30, 1995, MacroChem Corporation (the OCompanyO) sold 1,000,000 shares of common stock, par value $.01 per share, to a single investor (the OInvestorO) in a private placement. The sale price was $2.75 per share. Pursuant to the Common Stock Purchase Agreement between the Company and the Investor, the Investor has the right to designate one person to serve on the CompanyOs Board of Directors, as long as the designee is reasonably satisfactory to the Company. The firm of Janssen-Meyers, L.P. (OJ-MO) received a brokers fee of $357,500 from the Company for this private placement. Mr. Janssen and Mr. Meyers are principals of J-M and each own more than 10% of the CompanyOs voting securities. In January 1993, the Company completed a private placement offering whereby 142 units (the Units), each consisting of 30,000 shares of common stock, 10,000 Class A common stock warrants and 10,000 Class AA common stock warrants, were sold, or issued in exchange for certain notes payable, for $52,500 per Unit. Each Class A and Class AA common stock warrant is exercisable for one share of common stock at a price per share, subject to adjustment, of $3.00 and $4.50, respectively. As of November 9, 1994, under certain circumstances, based primarily upon the trading price of the Company's common stock, each Class A and AA common stock warrant is redeemable by the Company at a price of $.05 per warrant. The Class A and Class AA common stock warrants expire in December 1997. At December 31, 1995, 1,434,900 and 1,519,900 Class A and Class AA warrants were outstanding, respectively. Additionally, options were issued to affiliates of the placement agent of the offering which are exercisable for 118 and one-third of these Units at a price of $52,500 per Unit. These options expire in December 1997. During 1995, 10 Units were purchased by an affiliate of the placement agent. At December 31, 1995, options to purchase 108 and one-third of these Units remain outstanding. Subsequent to December 31, 1995, the placement agent and/or its affiliates exercised their option to purchase 49 1/6 additional Units with net proceeds to the Company of $2,581,000. In connection with the issuance of $300,000 of subordinated notes payable in August 1992 certain of the notes were issued to affiliates of the placement agent, of which $155,000 was repaid in January 1993 and $145,000 was converted to Units in the January 1993 offering described above, the Company issued warrants to purchase 300,000 shares of common stock at an initial exercise price of $1.75 per share. These warrants expire in September 1997. At December 31, 1995, exercisable warrants to purchase 238,500 shares of common stock remain outstanding. In June 1991, the Company sold 350,000 shares of common stock at a price of $1.25 per share. The price per share also included a warrant to purchase one share of common stock at a price of $2.50 per share. These warrants expired March 31, 1995. In December 1990, the Company sold 92,500 shares of Series A Convertible Preferred Stock at a price of $1.00 per share. In connection with this sale, an additional 237,188 shares of Series A Convertible Preferred Stock were issued in exchange for 189,750 shares of previously issued and 5. STOCKHOLDERS' EQUITY (CONTINUED) outstanding common stock. Each share of Series A Convertible Preferred Stock was convertible into two shares of common stock and a warrant to purchase one share of common stock at a price of $1.50 per share. In January 1994, the outstanding shares of Series A Convertible Preferred Stock were converted into common stock. The warrants expired during December 1993. Warrants issued in connection with the Company's initial public offering in 1985 expired March 31, 1995. In July 1995, the Company issued 240,000 warrants to a financial consultant to permit the holder to acquire 80,000 shares of the CompanyOs common stock at an exercise price of $3.00, $4.00, and $5.00, respectively. The warrants expire July 1999. Exercise of these warrants is permitted only if the Company and the financial consultant enter into a new consulting agreement on or before April 1, 1996. Registration - In November 1993 and as amended in September 1994 the Company completed a registration of the following securities: Title of Each Class of Securities Registered Amount Registered -------------------------------------------- ----------------- Common Stock, $.01 par value per share 4,410,000 Class A redeemable warrants 1,420,000 Shares of common stock underlying Class A warrants 1,420,000 Class AA redeemable warrants 1,420,000 Shares of common stock underlying Class AA warrants 1,420,000 Shares of common stock included in Unit Purchase Option 3,550,000 Class A warrants included in Unit Purchase Option 1,183,333 Shares of common stock underlying Class A warrants included in Unit Purchase Option 1,183,333 Class AA warrants included in Unit Purchase Option 1,183,333 Shares of common stock underlying Class A warrants included in Unit Purchase Option 1,183,333 Class X warrants 300,000 Shares of common stock underlying Class X warrants 300,000 Stock Plans - The Company has three stock option plans, the 1984 Incentive Stock Option Plan (ISO Plan), the 1984 Non-Qualified Stock Option Plan (Non-Qualified Plan) and the 1994 Equity Incentive Plan (1994 Plan). Under the terms of the 1984 Plans, as of April 1994, 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 2,500,000 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). 5. STOCKHOLDERS' EQUITY (CONTINUED) The exercise price of options under the ISO Plan and the incentive options from the 1994 Plan may not be less than fair market value at the date of grant. The exercise price of the Non-Qualified options and the non-incentive options from the 1994 Plan is determined by the Board of Directors. All options become exercisable as specified at the date of the grant.
A summary of activity under all plans is as follows: Number of Exercise Price Shares Per Share ----------- -------------- Outstanding at March 31, 1993 1,729,575 $0.43 to $7.38 Granted 310,100 $3.25 to $4.00 Exercised (26,000) $0.43 to $1.50 ----------- Outstanding at December 31, 1993 2,013,675 Granted 848,100 $1.69 to $3.00 Exercised (3,000) $0.43 Expired (181,000) $3.00 to $5.00 ----------- Outstanding at December 31, 1994 2,677,775 Granted 325,000 $1.56 to $7.75 Exercised (203,833) $0.43 to $3.63 Expired (13,000) $1.50 to $7.38 Cancelled (141,401) $1.69 to $4.00 ----------- Outstanding at December 31, 1995 2,644,541 =========== Exercisable at December 31, 1995 2,161,841 ===========
The following table presents the range of exercise prices for stock options outstanding at December 31, 1995:
Number of Exercise Price Shares Per share ------------------------------------------- 1,393,575 $0.43 401,200 $1.50 to $2.00 809,766 $3.00 to $4.00 35,000 $4.25 to $5.75 5,000 $7.75 ---------- 2,644,541 =========
5. STOCKHOLDERS' EQUITY (CONTINUED) Other Stock, Stock Option and Warrant Issuances - During the nine months ended December 31, 1993, the Company issued 5,000 shares of common stock for services rendered, valued at $25,500. In May 1993, the Company issued a warrant to purchase 75,000 shares of common stock at a price of $1.50 per share. The warrant was issued for services provided in selling shares of the Company's preferred stock in 1991. These warrants were exercised during the fiscal year ended December 31, 1994. During 1995 the Company issued 4,145 common shares and recorded compensation of $16,312 for services rendered. 6. COMMITMENTS AND CONTINGENCIES Lease Commitments - The Company has a five-year lease on its operating facility, which commenced in January 1992. The lease contains a three year renewal option. At December 31, 1995, future minimum lease payments under this lease agreement are as follows: 1996, $106,416 and 1997, $17,736. Total rental expense under all operating leases was approximately $104,000, $107,000 and $45,000 for the years ended December 31, 1995 and 1994, and the nine months ended December 31, 1993, respectively. Employment and Consulting Agreements - The Company has employment and consulting agreements with certain members of the Board of Directors, various consultants and certain key employees, with terms ranging from one year to an indefinite period of time. These agreements provide for annual payments of approximately $528,000. In addition, the consulting agreements also provide for additional payments to certain consultants of a fee equal to 5% of the net proceeds from the sale or licensing of the Company's products or technology to certain third parties. During the periods ended December 31, 1995, 1994 and 1993, no such additional amounts were earned by the related consultants. Royalty Agreements - The Company has entered into various license agreements which require the Company to pay royalties based upon a set percentage of certain product sales and license fee revenue. There were no such amounts paid in 1995, 1994 and 1993. Absence of Product Liability Insurance - The Company does not maintain product liability insurance. A clinical liability policy was obtained as of November, 1995. 7. AGREEMENTS WITH PLACEMENT AGENT AND CONSULTANTS In connection with the January 1993 private placement offering (Note 5), the Company entered into an agreement with the placement agent of that offering whereby: - - The Company granted to the placement agent the right of first refusal with respect to participating in all future financings by the Company within the five-year period expiring December 1997. This right of first refusal was terminated for a fee of $150,000, paid in connection with the issuance of one million shares of the Company's common stock, in May 1995. - - A two year consulting agreement, expiring December 31, 1994 at $35,000 per year. - - The placement agent is entitled to receive 4% of the proceeds collected in conjunction with the exercise of the Class A and Class AA common stock warrants sold in the private placement. - - The placement agent received a fee equal to 13% of the proceeds received by the Company in the offering. 8. INCOME TAXES No income tax provision or benefit has been provided for federal income tax purposes as the Company has incurred losses since inception. As of December 31, 1995, the Company has available net operating loss carryforwards of approximately $14,430,000 for federal income tax purposes, expiring through 2010 and $5,940,000 for state income tax purposes, expiring through 2000. In addition, the Company, for federal and state income tax purposes, has unused investment and research and development tax credits aggregating $251,000 and $55,000, respectively. The use of approximately $8,300,000 of the federal net operating losses are restricted to approximately $550,000 per year due to a change in ownership, which occurred in December 1992, in accordance with definitions as stated in the Internal Revenue Code. Deferred income taxes reflect 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 as well as net operating loss carryforwards. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1995 and December 31, 1994 are as follows:
1995 1994 Deferred Tax Assets: Net operating loss carryforwards $ 5,400,000 $4,760,000 Tax credit carryforwards 306,000 252,000 Other 34,000 68,000 ----------- --------- 5,740,000 5,080,000 Valuation allowance (5,740,000) (5,080,000) ----------- ----------- Deferred tax asset, net $ -- $ -- =========== ===========
8. INCOME TAXES (CONTINUED) For the years ended December 31, 1995 and 1994 and the nine month period ended December 31, 1993, the valuation allowance was increased by approximately $660,000, $851,000 and $748,100, respectively, due to the uncertainty of future realization of currently generated net operating loss carryforwards. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information requested by this item is incorporated by reference from the Company's Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. The information requested by this item is incorporated by reference from the Company's Proxy Statement. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information requested by this item is incorporated by reference from the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information requested by this item is incorporated by reference from the Company's Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) The following Financial Statements are filed herewith: Page Report of Independent Auditors 22 Balance Sheets 23 Statements of Operations 24 Statements of StockholdersO Equity 25 Statements of Cash Flows 26-27 Notes to Financial Statements 28-38 (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: 4(b) Amendment to warrant agreement. 10.12 Agreement between the Company and Janssen/Meyers Associates, L.P. 23.1 Consent of Deloitte & Touche LLP The following exhibit required to be filed herewith is incorporated by reference to the exhibits to the CompanyOs Registration Statement on Form S-8 (No. 33-85818). 99 1994 Equity Incentive Plan* The following exhibit required to be filed herewith is incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1993: 10.11 Lease agreement between MacroChem Corporation and Phoenix Home Life Mutual Insurance Company for space located at 110 Hartwell Avenue, Lexington, MA 02173. The following exhibits required to be filed herewith are incorporated by reference to the exhibits to the Company's Registration Statement on Form S-1 (No. 33-62042): 1a Agency Agreement between the Company and D.H. Blair Investment Banking Corp. 1b Unit Purchase Options 1c M/A Agreement between the Company and D.H. Blair Investment Banking Corp. 3a Certificate of Incorporation 3b Bylaws 3c State of Delaware Certificate of Agreement of Merger 4a Included in exhibits 3a, 3b and 3c 4b Specimen Class X Warrant Certificate 4c Specimen Class A Warrant Certificate 4d Specimen Class AA Warrant Certificate 4e Warrant Agreement among the Company, American Stock Transfer and Trust Company of New York and D.H. Blair Investment Banking Corp. 10a Form of Employment Agreement between the Company and Dr. Carlos M. Samour* 10b Form of Employment Agreement between the Company and Mr. Alvin J. Karloff* 10c Consulting Agreement between the Company and Mr. Abraham E. Cohen* 10d Consulting Agreement between the Company and Mr. E. Donald Shapiro* The following exhibit required to be filed herewith is incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended March 31, 1992: 10.10.1 1984 Non-Qualified Stock Option Plan as Amended March 1, 1991.* The following exhibit required to be filed herewith is incorporated by reference to the exhibits to the Company's Form 10-K for the year ended March 31, 1989: 10.9.1 Agreement of Sublease dated May 15, 1989 between MacroChem Corporation and Ascent Pharmaceuticals, Inc. The following exhibits required to be filed herewith are incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended March 31, 1988: 4.1 Form of Common Stock Certificate 10.10 1984 Stock Option Plan* The following exhibit required to be filed herewith is incorporated herein by reference to the exhibits to the Company's Form 10-K for the year ended March 31, 1987: 10.11 1984 Incentive Stock Option Plan, amended and restated.* (b) No current reports on Form 8-K were filed in the three-month period ended December 31, 1995. *Management contract or compensatory plan or arrangement SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MACROCHEM CORPORATION Dated: March 28, 1996 By: /s/ Alvin J. Karloff Alvin J. Karloff President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 28, 1996. /s/ Alvin J. Karloff Chief Executive Officer, Alvin J. Karloff President and Director /s/ Dr. Carlos M. Samour Chairman of the Board of Directors Dr. Carlos M. Samour and Scientific Director /s/ D. Ray Taylor Director D. Ray Taylor /s/ Dr. Willard M. Bright Director Dr. Willard M. Bright /s/ Abraham Cohen Director Abraham Cohen /s/ Peter G. Martin Director Peter G. Martin Exhibit 4(f) AMENDMENT TO WARRANT AGREEMENT Amendment dated July 6, 1995 (the "Amendment') to the Warrant Agreement dated as of December 14, 1992 (the "Agreement") by and among MacroChem Corporation (the "Company"), American Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent") and D. H. Blair Investment Banking Corp. ("Blair"). WHEREAS, with the consent of Blair pursuant to Section 4(p) of the Agency Agreement dated October 29, 1992 (the "Agreement") between the Company and Blair, the Company has appointed Janssen/Meyers Associates, L.P. ("Janssen/Meyers") to solicit exercises of the Company's Class A Common Stock Purchase Warrants (the "Class A Warrants") and Class AA Common Stock Purchase Warrants (the "Class AA Warrants"); WHEREAS, the Company and Blair acknowledge the need to compensate Janssen/Meyers for solicitation of exercises of the Warrants; WHEREAS, it is Blair's intention to oversee the solicitation of Warrant exercises pursuant to Paragraph 4(p) of the Agency Agreement; WHEREAS, the Company has appointed Janssen/Meyers Associates, L.P. ("Janssen/Meyers") to act as co-soliciting agent along with Blair in connection with any such warrant solicitation; and NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants herein contained, it is agreed as follows: 1. Section 4(b) of the Agreement is hereby amended by adding the following sentences: If, at the Exercise Date of any Class A Warrant exercised (x) after the sending of a notice of redemption to the holders of the Class A Warrants pursuant to Section 8(b) hereof and (y) during the term of a written consulting agreement between the Company and Janssen/Meyers, L.P. ("Janssen/Meyers") (excluding Warrants included in the Unit Purchase Option and excluding Warrants held by Janssen/Meyers or by Blair and their respective affiliates) (i) the market price of the Company's Common Stock is greater than the then Purchase Price of the Class A Warrant, (ii) the exercise of the Class A Warrant was solicited by Janssen/Meyers, (iii) the Class A Warrant was not held in a discretionary account, (iv) disclosure of compensation arrangements was made at the time of exercise, and (v) the solicitation of the exercise of the Class A Warrant was not in violation of Rule 10b-6 (as such rule or any successor rule may be in effect as of the time of exercise) promulgated under the Securities Exchange Act of 1934 (the conditions described in (i) through (v) of this sentence being referred to herein as the "Fee Conditions"), then the Warrant Agent simultaneously with the distribution of the Warrant Proceeds in respect of such Class A Warrant to the Company shall, on behalf of the Company, pay from the Warrant Proceeds a fee of 2% (the "Janssen/Meyers Fee") of the Purchase Price to Janssen/Meyers. If, at the Exercise Date of any Class AA Warrant exercised (x) after the sending of a notice of redemption to the holders of the Class AA Warrants pursuant to Section 8(b) hereof and (y) during the term of a written consulting agreement between the Company and Janssen/Meyers (excluding Warrants included in the Unit Purchase Option and excluding Warrants held by Janssen/Meyers or by Blair and their respective affiliates) all of the foregoing Fee Conditions are satisfied with respect to such Class AA Warrant, then the Warrant Agent simultaneously with the distribution of the Warrant Proceeds in respect of such Class AA Warrant to the Company shall, on behalf of the Company, pay from the Warrant Proceeds a fee of 2% (the "Janssen/Meyers Fee") of the Purchase Price to Janssen/Meyers. Blair agrees that it will reallow 1% of the Blair Fee to Janssen/Meyers in respect of exercises of Warrants on which the Janssen/Meyers Fee is payable pursuant to the two immediately preceding sentences. 2. Except as amended herein, the Agreement shall continue in full force and effect and shall be enforceable in accordance with its terms. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. MACROCHEM CORPORATION By:/s/ALVIN KARLOFF __________________________________ Authorized Officer AMERICAN STOCK TRANSFER & TRUST COMPANY By: /s/HERBERT J. LEMMER ____________________________________ Herbert J. Lemmer Vice President D.H. BLAIR INVESTMENT BANKING CORP. By: /s/MARTIN A. BELL ____________________________________ Martin A. Bell, Senior Vice President and General Counsel Acknowledged and Agreed to: JANSSEN/MEYERS ASSOCIATES, L.P. By: /s/B.MEYERS ________________________________ B. Meyers G.P. EXHIBIT 10.12 MACROCHEM CORPORATION 110 Hartwell Avenue Lexington, MA 02173-3134 July 27, 1995 Janssen/Meyers Associates, L.P. 17 State Street New York, N.Y. 10004 Gentlemen: This letter will confirm the understanding and agreement between Macrochem Corporation (the "Company") and Janssen-Meyers, L.P. (the "Consultant") as follows: 1. The Company hereby retains the Consultant to perform consulting services related to corporate finance and other financial service matters and to act as co-soliciting agent with D.H. Blair Investment Banking Corp. ("Blair") in connection with exercises of the Company's Class A Common Stock Purchase Warrants (the "Class A Warrants") and Class AA Common Stock Purchase Warrants (the "Class AA Warrants") (collectively, the "Warrants"), and the Consultant hereby accepts such retention and shall faithfully perform for the Company the duties described herein. In this regard, Consultant shall devote such reasonable business time and attention to matters on which the Company shall request its services, subject to the direction of the President of the Company, as shall be determined by Consultant. Consultant shall comply with all applicable laws and regulations in connection with the performance of its duties hereunder, including without limitation all Federal and State securities laws. 2. Term. The Consultant's retention hereunder shall be for a term of eight months beginning on the date of your acceptance hereof. The Company shall have the right to terminate this Agreement if the Consultant ceases to conduct business, is adjudged insolvent or bankrupt, if any assignment is made for the benefit of its creditors, or in the event of any proceeding by or against the Consultant seeking relief, reorganization or arrangement under any laws related to insolvency or in the event of a change in management or control of the Consultant. 3. Compensation. (a) The Consultant shall be compensated at the rate of $5,000 per month. (b) The Company shall pay such expenses of the Consultant incurred in connection with the discharge of its duties hereunder as shall be approved in advance by the President of the Company, such payment shall be made upon presentation by the Consultant of a request for same. (c) The Warrant Agreement dated as of December 14, 1992 by and among the Company, American Stock Transfer & Trust Company, as Warrant Agent and Blair shall be amended as set for in Exhibit A hereto. (d) In connection with the services to be rendered by Consultant hereunder, the Company hereby agrees to issue to the Consultant a four- year Warrant to purchase an aggregate of 240,000 shares of the Company's Common Stock, exercisable with respect to (i) the first 80,000 shares at an exercise price of $3.00 per share, (ii) the second 80,000 shares at an exercise price of $4.00 per share and (iii) the remaining 80,000 shares at an exercise price of $5.00 per share. The Warrant shall contain "piggyback" registration rights which shall be applicable during the term of the Warrant and shall become exercisable upon the expiration of the term of this Agreement as set forth in Section 2 hereof if, but only if, the Company and the Consultant have entered into a new consulting agreement on or before April 1, 1996. 4. Notices. Any notice hereunder shall be sent to the Company and the Consultant at their respective addresses above set forth. Any notice shall be given by registered or certified mail, postage prepaid, and shall be deemed to have been given when deposited in the United States mail. Either party may designate any other address to which notice shall be given, by giving written notice to the other of such change of address in the manner here provided. 5. Governing Law. This Agreement shall be construed and governed in accordance with the internal laws of the State of New York. 6. Entire Agreement. This Agreement contains the entire agreement between the parties and may not be altered or modified, except in writing and signed by the party to be charged thereby and supersedes any and all previous agreements between the parties. 7. Binding Effect. This Agreement is not assignable voluntarily or involuntarily, in whole or in part by either party without the prior written consent of the other party. This Agreement shall be binding upon the parties hereto and their respective successors and assigns, to the extent assignment is permitted hereunder. If you are in agreement with the foregoing, please execute in the space provided below and return one executed original of this letter which will constitute our agreement with respect to the subject matter hereof. Very truly yours, MACROCHEM CORPORATION Agreed to and accepted this 27 day of July, 1995. JANSSEN-MEYERS ASSOCIATES, L.P. By: /s/ Alvin J. Karloff By: /s/ B. Meyers Name: Alvin J. Karloff Name: B. Meyers Title: Pres/CEO Title: G.P. EXHIBIT 23.1 INDEPENDENT AUDITORSO CONSENT MacroChem Corporation We consent to the incorporation by reference in (i) registration Statement No. 33-48876 on Form S-8, (ii) Registration Statement No. 33- 85818 on Form S-8 and (iii) Registration Statement No. 33-82298 on Form S-3 of our report dated March 1, 1996, appearing in this Annual Report on Form 10-K of MacroChem Corporation for the fiscal year ended December 31, 1995. DELOITTE & TOUCHE LLP Boston, Massachusetts March 26, 1996 APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED AND EDGAR-FILED TEXTS. (1) Rule lines for tables are omitted. (2) Italic typefaces is displayed in normal type. (3) Boldface type is displayed in capital letters. (4) Footers (e.g. page numbers and OSee notes to financial statementsO) are omitted. (5) Because the printed page breaks are not reflected, certain tabular and columnar headings and symbols are displayed differently in this filing. (6) Bullet points and similar graphic symbols are omitted. (7) Page numbering is different. EX-27 2
5 DEC-31-1995 DEC-31-1995 YEAR 3,591,770 971,492 0 0 0 4,962,562 681,690 374,300 5,462,625 429,939 55,245 131,293 0 0 4,845,134 5,462,625 0 17,493 0 36,000 0 0 42,644 (2,465,837) 0 (2,465,837) 0 0 0 (2,465,837) (.20) 0
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