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
For the Fiscal Year Ended December 31, 2005
[ ] 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 02421-3134
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(Address of principal executive offices)
(781) 862-4003
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------- -----------------------------------------
Common Stock, $.01 par value N/A
Series B Preferred Stock Purchase
Rights, $.01 par value N/A
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes No X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).
Yes No X
As of June 30, 2005, the aggregate market value of common stock held by
non-affiliates of the registrant approximated $9,120,988 based upon the closing
price of the common stock as reported on the Nasdaq Capital Market as of the
close of business on that date. Shares of common stock held by each executive
officer and director and by each entity that owns 10% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
AS OF MARCH 14, 2006, 996,909 SHARES OF COMMON STOCK, $.01 PAR VALUE, WERE
OUTSTANDING.
Portions of the following documents are incorporated into the Parts of this
Report on Form 10-K indicated below:
None.
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PART I
ITEM 1. BUSINESS.
NOTE REGARDING FORWARD LOOKING STATEMENTS: THIS ANNUAL REPORT ON FORM 10-K
CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE
STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS OR PHRASES SUCH
AS "ANTICIPATE," "BELIEVE," "COULD," "EXPECT," "INTEND," "LOOK FORWARD," "MAY,"
"PLANNED," "POTENTIAL," "SHOULD," "WILL," AND "WOULD." THESE FORWARD-LOOKING
STATEMENTS REFLECT OUR CURRENT EXPECTATIONS AND ARE BASED ON CURRENTLY AVAILABLE
DATA. THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE
HARBOR" FOR SUCH FORWARD-LOOKING STATEMENTS. FORWARD LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES AND OUR 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 THE SECTION ENTITLED "RISK FACTORS". READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THESE CAUTIONARY STATEMENTS. READERS ARE ALSO URGED TO CAREFULLY
REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY, IN THIS
DOCUMENT, AS WELL AS THE COMPANY'S PERIODIC REPORTS ON FORMS 10-K, 10-Q AND 8-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC").
MacroChem's Internet address is www.macrochem.com, and the Company
maintains a website at that address. MacroChem makes available, on or through
its Internet website, without charge, its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports as soon as reasonably practicable after filing them electronically with
the SEC.
The business of MacroChem Corporation is further described in Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operation", which should be read in conjunction with the accompanying financial
statements and related footnotes.
In this Annual Report on Form 10-K, we use the terms "MacroChem", the
"Company", "we", "us" and "our" to refer to MacroChem Corporation. We were
organized and commenced operations as a Massachusetts corporation in 1981 and we
were reincorporated as a Delaware corporation on May 26, 1992. Our principal
executive offices are located at 110 Hartwell Avenue, Lexington, Massachusetts
02421-3134 and our phone number is (781) 862-4003.
SEPA(R), Opterone(R) and Topiglan(R) are registered trademarks of MacroChem
Corporation. EcoNail(TM), MacroDerm(TM) and DermaPass(TM) are trademarks of
MacroChem Corporation.
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On December 30, 2005 we implemented a 1-for-7 reverse stock split of our
common stock and on February 9, 2006 we implemented a subsequent 1-for-6 reverse
stock split of our common stock. Unless otherwise noted, data used throughout
this Annual Report on Form 10-K has been adjusted to reflect these reverse
splits.
OVERVIEW
We are a specialty pharmaceutical company that develops and seeks to
commercialize pharmaceutical products. Currently, our portfolio of product
candidates is based on our proprietary drug delivery technologies: SEPA,
MacroDerm and DermaPass. Our patented SEPA topical drug delivery technology
(SEPA is an acronym for "Soft Enhancement of Percutaneous Absorption," where
"soft" refers to the reversibility of the skin effect of the technology, and
"percutaneous" means "through the skin") enhances the efficiency and rate of
diffusion of drugs into and through the skin. We own a composition of matter
patent on the SEPA family of compounds, which will expire in November 2006. We
also own five composition of matter and use patents, with expiration dates
ranging from 2015 to 2019, for the combination of SEPA with numerous existing
classes of drugs, including antifungals and human sex hormones. Our patented
MacroDerm drug delivery technology encompasses a family of low to moderate
molecular weight polymers that impede dermal drug or chemical penetration, which
may be usable, for example, to prevent chemicals in insect repellant from
penetrating the skin. We own three patents covering the composition of matter
and methods of use of our MacroDerm polymers that expire in 2015. We have also
filed a patent application for our DermaPass family of transdermal absorption
enhancers that have a different drug delivery profile than SEPA, which we
believe could be used with a wider range of active pharmaceutical ingredients.
Our lead product candidate is EcoNail, a topically applied SEPA-based
econazole lacquer for the treatment of onychomycosis, a condition commonly known
as nail fungus. Econazole, a commercially available topical antifungal agent
most commonly used to treat fungal skin infections, inhibits in vitro growth of
the fungi most commonly implicated in onychomycosis. When used in EcoNail, SEPA
works by allowing more rapid and complete release of econazole from the lacquer
into and through the nail plate. In a pre-clinical study using human cadaver
nails, EcoNail delivered through the nail more than 14,000 times the minimum
concentration of econazole needed to inhibit the fungi most commonly associated
with onychomycosis. Following our laboratory studies, we conducted a randomized,
double blind controlled Phase 1 tolerance/human exposure trial of EcoNail in
eighteen patients with onychomycosis of the toenails. In this study, EcoNail was
well tolerated, and investigators reported no serious drug-related adverse
events. Serum assays used to determine the level of drug in the bloodstream
showed no detectable levels of econazole, further supporting EcoNail's systemic
safety profile. Full data from the 18-week trial were presented in May 2005 at
the annual meeting of the Society for Investigative Dermatology. We have a
composition of matter and use patent covering EcoNail that will expire in 2019.
We expect to commence a Phase 2 efficacy study of EcoNail in the second
quarter of 2006. We contemplate that this study will be conducted through a
contract research organization with significant experience in onychomycosis
trials.
4
Our other clinical stage product candidate, Opterone, is a topically
applied SEPA-based testosterone cream designed to treat male hypogonadism. Male
hypogonadism is a condition in which men have levels of circulating testosterone
below the normal range and may exhibit one or more associated symptoms,
including low energy levels, decreased sexual performance, loss of sex drive,
increased body fat or loss of muscle mass. We believe Opterone has significant
advantages over other testosterone delivery methods and that its formulation as
a cream should avoid an oily feel as well as application and cosmetic concerns
reported by some users of gel formulations. To the best of our knowledge,
Opterone is the first and only clinical development stage testosterone cream. In
August 2004, we announced the completion of a pharmacokinetics study of Opterone
in hypogonadal males. In May 2005, we announced results from a bioavailability
study of Opterone. In that study, patients using a 2.5 gram dose of Opterone
applied to the upper arms and shoulders reached the natural physiologic range of
testosterone levels over a 24-hour period. In December 2005, we received a
letter from the Division of Reproductive and Urologic Products of the U.S. Food
and Drug Administration, or FDA, in response to questions posed by us regarding
a proposed Phase 3 clinical program for Opterone. In the letter, the FDA
requested that we conduct additional investigation into multiple dose safety and
pharmacokinetics before beginning any eventual Phase 3 protocol. The additional
investigation and Phase 3 revisions will increase the time and expense
associated with the development of Opterone. The next step in the development
process for Opterone is a Phase 2 trial. We are seeking a partner to advance
development of this product candidate. We may elect not to develop Opterone
further if we cannot find a partner. We have a composition of matter and use
patent covering Opterone that will expire in 2017.
In addition to EcoNail and Opterone, we are evaluating several earlier
stage product candidates. We have developed and tested SEPA-based formulations
to deliver other active pharmaceutical ingredients including topical anesthetic
and topical non-steroidal anti-inflammatory drugs (NSAIDs). We have also tested
application of our MacroDerm polymers for use with cosmetics, pharmaceuticals
and consumer products like insect repellants and sunscreens to decrease skin
penetration and/or improve persistence on the skin. For example, our laboratory
data demonstrated that, when formulated with the insect repellant DEET,
increasing concentrations of MacroDerm reduces the amount of DEET that is
absorbed through human skin. We have performed initial laboratory experiments to
test the ability of DermaPass to improve transdermal delivery of various active
pharmaceutical ingredients.
Since inception, our primary source of funding for our operations has been
the private and public sale of our securities. On August 31, 2005, due to our
financial condition at the time and our inability to raise sufficient capital to
maintain operations, we discontinued all research and development activities and
terminated substantially all of our non-management personnel. In December 2005
and February 2006, we raised an aggregate of $8.25 million in a private
placement of our securities to institutional investors. As a result of this
private placement, we have begun to resume operations with a focus on advancing
clinical development of our lead product, EcoNail. Our ability to continue
operations after our current capital resources are exhausted depends on our
ability to secure additional financing and to become profitable, which we cannot
guarantee.
5
OUR STRATEGY
Our strategy is to become a leading provider of specialty pharmaceuticals
by innovating, developing and commercializing a portfolio of products through
the use of our proprietary drug delivery technologies, strategic partnering, or
in-licensing other products or technologies. Key elements of our strategy
include:
o CONTINUE CLINICAL DEVELOPMENT OF OUR LEAD PRODUCT CANDIDATE, ECONAIL.
In the near-term, we intend to focus most of our resources on
conducting and completing clinical trials of our EcoNail product
candidate.
o CREATE VALUE THROUGH STRATEGIC PARTNERSHIPS. Where appropriate, we
intend to seek partners to facilitate the development and
commercialization of our product candidates. In the near term, we plan
to seek a partner to advance development of our Opterone product
candidate.
o IN-LICENSE SELECTED PRODUCTS AND TECHNOLOGIES. We intend to identify
and inlicense products and technologies to complement and expand our
portfolio of product candidates.
o LEVERAGE AND EXPAND OUR EXISTING TECHNOLOGIES TO DEVELOP NEW PRODUCTS.
We believe pharmaceuticals and certain other commercial products used
on the skin may be formulated using our proprietary drug delivery
technologies and could have applications in the treatment of other
diseases and conditions. We will seek to identify new product
candidates by selecting and developing additional pharmaceuticals and
skin products that can be combined effectively with our technologies.
OUR DRUG DELIVERY TECHNOLOGIES
To be effective, drugs must reach an intended site in the body, at an
effective concentration, and for an appropriate length of time. Currently, the
vast majority of drugs are administered either orally or by injection. However,
there are numerous drugs for which these modes of administration are not well
suited. For example, oral administration of certain drugs may result in
irritation of the gastro-intestinal tract or undesirable rapid first pass
metabolism. First pass metabolism, which refers to the chemical breakdown of
compounds in the liver and gastro-intestinal tract, can result in a significant
reduction in the amount of drug reaching its intended site of activity in the
body. In some cases, liver damage may occur due to the toxicities associated
with the breakdown of a particular drug. In the case of injectable drugs,
administration may be painful and in many cases requires frequent and costly
office visits to treat chronic conditions.
One alternative method of administering drugs is topical delivery. Topical
delivery works by either introducing drugs into the skin (dermal delivery) for
the treatment of dermatologic or localized conditions and diseases, or through
the skin (transdermal delivery) and into the bloodstream for the treatment of
systemic conditions and diseases. Topical drug delivery has several advantages.
For example, topical drug delivery:
o helps to avoid inactivation of a drug caused by first pass metabolism
in the liver and gastro-intestinal tract;
o can provide local delivery of appropriate concentrations of a drug to
the intended site of action without systemic exposure;
6
o helps avoid gastro-intestinal distress caused by ingesting a drug; and
o simplifies drug administration to patients who have difficulty
swallowing oral dosage forms or who do not wish to endure the
discomfort of injections.
SEPA DRUG DELIVERY TECHNOLOGY
Delivering drug molecules through the skin is challenging. The skin
naturally serves as the primary barrier that prevents outside organisms,
chemicals and toxins from easily entering the body. Human skin is made up of two
layers: the outer layer or epidermis (which includes the stratum corneum) and
the inner layer or dermis. The stratum corneum acts as the main barrier to drug
delivery. The stratum corneum consists of corneocytes, which are dead, flattened
skin cells filled with keratin, and a lipid matrix, which is made up of
multi-layered oily molecules that hold the corneocytes together in a sheet.
Our SEPA drug delivery technology is a family of patented compounds that
can enhance the transport, penetration and controlled delivery of a wide range
of drugs through the skin. We have chosen SEPA 0009, a member of the SEPA
family, for clinical development. SEPA enhances transdermal drug delivery by
temporarily and reversibly disrupting the alignment of the lipid bilayer within
the lipid matrix in the stratum corneum. This disruption renders the skin
temporarily permeable, allowing a drug to diffuse through the stratum corneum in
the epidermis, and then into and through the dermis, where it can enter the
bloodstream through the capillaries.
SEPA possesses the following attributes:
o REVERSIBLE: The alignment of the lipid bilayer within the lipid
matrix in the stratum corneum reverts back to normal after SEPA has
diffused through it without causing permanent changes to the skin.
o RAPIDLY METABOLIZED: The human body rapidly metabolizes SEPA into
ethylene glycol and decanoic acid, two metabolites well understood
by regulatory agencies.
o CHEMICALLY NON-REACTIVE: SEPA does not react chemically with most
other organic molecules and, as a result, is compatible with a wide
range of active pharmaceutical ingredients.
o VERSATILE: The rate and amount of drug absorbed by the skin or body
in a SEPA-based formulation can be controlled by varying the
components in the formulation.
SEPA, when properly combined with active pharmaceutical ingredients, may
provide for a variety of convenient and easy-to-apply formulations, including
creams, gels, ointments, lacquers and solutions for the treatment of a wide
range of systemic and localized conditions. We believe that products
incorporating SEPA may allow selected drugs to be administered more effectively
and with improved patient compliance compared to alternative methods of drug
administration, such as ingestion and injection.
7
MACRODERM DRUG DELIVERY TECHNOLOGY
For chemicals that penetrate the skin too readily or that can be toxic if
significantly absorbed into the bloodstream, it may be desirable to retard the
rate of drug absorption to achieve an optimal delivery profile. For these
chemicals, we have developed our second drug delivery technology, called
MacroDerm, encompassing a series of low to moderate molecular weight polymers
that impede drug penetration through the skin. We believe MacroDerm may have
uses in cosmetics, personal care products and selected pharmaceuticals.
Potential applications include their formulation with sunscreens, moisturizers
and insect repellents to decrease skin penetration and improve persistence on
the skin. We have synthesized MacroDerm prototypes and we are seeking strategic
partners to evaluate, manufacture and market specific MacroDerm products.
NEW TRANSDERMAL DRUG DELIVERY TECHNOLOGY
We have also filed a patent application for DermaPass, a new family of
enhancers that we believe can be used with a wider variety of active
pharmaceutical ingredients than SEPA. We have performed initial laboratory
experiments to test the ability of DermaPass to improve transdermal delivery of
various active pharmaceutical ingredients.
OUR LEAD PRODUCT CANDIDATE: ECONAIL FOR ONYCHOMYCOSIS
Onychomycosis, a fungal infection of the nail, is predominantly an
infection of the toe nail bed and nail plate underlying the surface of a nail.
Typical symptoms of onychomycosis can include:
o nail discoloration;
o nail thickening;
o cracking and fissuring of the nail plate; and
o in severe cases, inflammation, pain and secondary infection of the nail
bed and adjacent skin.
According to FITZPATRICK'S DERMATOLOGY IN GENERAL MEDICINE (SIXTH EDITION),
onychomycosis is a common disease, the prevalence of which varies by geographic
region and ranges from approximately 2% to 18% of the worldwide population, with
up to 48% of the population experiencing onychomycosis at least once by age 70.
According to an article published in 2000 in the JOURNAL OF THE AMERICAN ACADEMY
OF DERMATOLOGY, a large scale study found that the prevalence of onychomycosis
in the normal population of North America was approximately 14%.
CURRENT TREATMENTS AND THEIR SHORTCOMINGS
Current treatment options for onychomycosis include oral drugs, debridement
(filing, trimming and scraping), nail avulsion (surgical or chemical excision of
the infected nail plate) and topical drug therapies. There are two oral
therapies marketed for the treatment of onychomycosis in the U.S.: Lamisil and
Sporanox. The leading oral treatment, Lamisil, has a complete cure rate of
approximately 38%, but also has a 15% relapse rate. Sporanox has a complete cure
rate of approximately 14%. Complete cure refers to mycological cure, or
8
simultaneous occurrence of a negative KOH (a potassium hydroxide staining method
for direct microscopic examination of nail scrapings) and a negative fungal
culture, plus clinical cure, or clearance of all signs of infection. One risk
associated with each of the oral treatments, both of which undergo substantial
first pass metabolism by the liver, is liver disease. As a result, patients must
continually monitor their liver function for signs of failure, including
fatigue, anorexia, nausea and/or vomiting, jaundice, dark urine or pale stools.
Such monitoring typically requires blood tests and associated office visits,
which can impact patient compliance. In the rare case that liver failure occurs,
it can result in death or the need for a liver transplant. Mechanical
debridement, which is a traditional podiatric approach to onychomycosis that
reduces the thickness of the nail, is not a cure for onychomycosis and requires
time, specialized instruments and experience. Nail avulsion, which requires
surgical or chemical removal of the nail plate causes discomfort and traumatizes
the nail bed.
TOPICAL ADMINISTRATION
The only topical onychomycosis drug currently marketed in the U.S. is
Penlac(R), a nail lacquer which has a complete cure rate of less than 10% and
requires up to 48 weeks of treatment, including periodic removal of any
unattached infected nail by a health care professional.
THE ECONAIL APPROACH
Topically delivered lacquer formulations, like EcoNail, have specific
advantages over other existing treatments because they are applied like nail
polish, treat fungal nail infections locally, and facilitate close and extended
contact between an antifungal drug and the outer, or dorsal, nail surface.
Developers of topical nail lacquers for onychomycosis face two major challenges.
First, lacquers with acceptable hardness, durability and drying time tend not to
release antifungal drugs from the lacquer matrix readily. Second, most
antifungal drugs do not penetrate into the deep, or ventral, nail plate
adequately when applied to the outer, or dorsal, nail surface, which results in
insufficient antifungal concentrations at the site of infection.
EcoNail is a topically applied lacquer formulation containing econazole and
SEPA for the topical treatment of onychomycosis. Econazole, a topical antifungal
agent, effectively inhibits IN VITRO growth of the fungi most commonly
implicated in onychomycosis. In contrast to SEPA's action in disrupting the
lipid bilayer of the skin, SEPA as used in EcoNail works to soften the lacquer
in which econazole is contained, thereby allowing for more rapid and complete
release of econazole from the lacquer into and through the nail. A 14-day study
of lacquers containing radioactively labeled econazole on human non-diseased
cadaver nails demonstrated that EcoNail delivered approximately seven times more
econazole to the ventral nail and 200 times more econazole to the nail bed than
a similar lacquer without SEPA. In this study, EcoNail delivered to the ventral
nail more than 14,000 times the minimum concentration of econazole needed to
inhibit the two most common fungi associated with onychomycosis. In addition, we
believe that EcoNail, as a locally applied lacquer, will have a reduced risk of
systemic side effects compared with oral treatments for onychomycosis.
9
CLINICAL DEVELOPMENT
Following our laboratory studies, we conducted a Phase 1 tolerance/human
exposure clinical trial of EcoNail in patients with onychomycosis and released
six week safety and tolerance data from that trial in November 2004. The trial
was a randomized, double-blind, controlled Phase 1 trial conducted at two U.S.
clinical sites. Eighteen patients with onychomycosis of the toenails completed
the safety-tolerability segment of the study, in which all fingernails and
toenails were treated twice daily for six weeks with either EcoNail or a control
nail lacquer. The six week safety-tolerability segment was followed by an
open-label segment of the trial in which all patients received EcoNail applied
once daily to all nails for an additional 12 weeks to extend patient exposure
experience.
The main objectives of this Phase 1 study were to test the safety and local
tolerability of EcoNail in patients with onychomycosis and to determine systemic
exposure to econazole. In this study, EcoNail was well tolerated, and
investigators reported no serious drug-related adverse events. Serum assays
showed no detectable levels of econazole, further supporting EcoNail's systemic
safety profile.
Full data from the 18 week trial were presented in May 2005 at the annual
meeting of the Society for Investigative Dermatology. As the next step in the
clinical development of EcoNail, we plan to commence a Phase 2 efficacy study in
the second quarter of 2006.
OTHER PRODUCT CANDIDATES
OPTERONE FOR HYPOGONADISM
Hypogonadism is a condition in which the testes produce insufficient
amounts of testosterone, a hormone responsible for normal growth and development
of the male sex organs and for maintenance of secondary male sex
characteristics. Hypogonadism is generally characterized by serum testosterone
levels of less than 300 nanograms per deciliter together with one or more of the
following signs or symptoms:
o low energy levels;
o decreased sexual performance;
o loss of sex drive;
o increased body fat;
o loss of muscle mass;
o reduced bone density; and
o mild depression.
According to the Endocrine Society, this disorder affects an estimated four
to five million men in the United States, approximately 200,000 of whom receive
hormone replacement therapy. According to a 2001 article published in THE
JOURNAL OF CLINICAL ENDOCRINOLOGY & METABOLISM, the incidence of hypogonadal
testosterone levels in U.S. males increases from approximately 20% in men over
the age of 60 to approximately 50% in men over the age of 80.
10
Diagnosis of testosterone-deficiency often occurs when a patient seeks
treatment for other conditions or symptoms. Routine testing of testosterone
levels has become a more common part of men's health evaluations by specialists,
although testosterone testing is still relatively new among the majority of
primary care physicians.
CURRENT TREATMENTS AND THEIR SHORTCOMINGS
Currently available treatment options for hypogonadism in the U.S. include
testosterone delivered via intramuscular injections, transdermal patches, buccal
tablets that are placed between the cheek and gum, and topical gels. Each of
these treatments, however, has certain disadvantages. Intramuscular injections
are often painful, require a medical office visit, and cause rapid increases in
circulating testosterone to supraphysiological levels within days of
administration, followed by rapid decreases. Patients often report severe acne,
unwanted hair growth, and increased aggression shortly after a testosterone
injection. Testosterone patches may be inconvenient to apply, can cause severe
skin irritation and require frequent rotation of the application site to avoid
skin lesions. The resulting discomfort can potentially reduce patient compliance
with the treatment. Buccal tablets, which must be applied twice daily between
the cheek and gum, can become displaced or swallowed and can cause taste
perversion and gum irritation. Topical gels, while more convenient to use than
other treatments, can require application of a large volume of product to the
patient's body, often drip during application or run when applied to the skin
and can produce an oily feel on the skin.
THE OPTERONE APPROACH
Opterone is our topically applied cream formulation of 1% testosterone and
SEPA. To the best of our knowledge, Opterone is the first and only clinical
development stage testosterone cream. In both laboratory and clinical settings,
we demonstrated that SEPA enhances the absorption of testosterone through the
skin. IN VITRO studies using human cadaver skin showed that our enhanced cream
formulation delivered two to three times more testosterone transdermally over a
24-hour period when compared to equivalent doses of the currently marketed gel
products. These IN VITRO studies also suggested that our enhanced cream
formulation may deliver comparable amounts of testosterone in smaller dose
volumes than currently marketed gel products. In addition, we believe that the
creamy texture and consistency, the non-oily feel and the other physical
attributes of Opterone cream will provide a more cosmetically pleasing
application than available gel treatments.
CLINICAL DEVELOPMENT
In August of 2004, we announced the top-line results of a pharmacokinetics
study of Opterone. The trial was designed to study the pharmacokinetics of
testosterone following administration of Opterone to hypogonadal adult males.
Thirty-two patients were randomized to receive one of three dose volumes of
Opterone, with all patients completing the assigned dosing regimen. In this
study, Opterone delivered testosterone into the bloodstream within the first few
hours of application and also provided a more sustained delivery of testosterone
over 24 hours compared to our prior gel formulation. We also observed that
Opterone was generally well tolerated with no patients dropping out of the study
due to adverse events. Local application site symptoms, when observed, were mild
to moderate and transient. Full data from the study were presented in June 2005
11
at the 8th International Congress of Andrology in Seoul, Korea. The results of
this dose proportionality study guided the design of a bioavailability study,
the next step in the clinical development plan.
In December 2004, we initiated a bioavailability study of Opterone. Results
from this trial were announced in May 2005. In the study, patients receiving a
2.5 gram dose of Opterone applied to the upper arms and shoulders, half the
amount of the recommended starting dose of currently marketed gel products,
reached the natural physiologic range of testosterone levels over a 24-hour
period. Within the trial, the treatment group receiving 2.5 grams of Opterone
applied to the upper arms and shoulders reached an average maximum circulating
total testosterone level of 577 ng/dL, while the three treatment groups in the
study ranged from 408 to 577 ng/dL. Typical circulating total testosterone
levels range from 300 to 1000 ng/dL. Opterone was well tolerated in the trial
with only mild adverse events, the most common being headache and mild
application site reaction.
On December 5, 2005, we received a response from the Division of
Reproductive and Urologic Products at the FDA to questions posed by us regarding
the proposed Phase 3 clinical program for Opterone. In the response, the FDA
reiterated its concerns regarding the skin irritation potential of SEPA related
to pre-clinical studies of SEPA, including without limitation, a 26-week
transgenic-mouse (Tg.AC) carcinogenicity study of SEPA. To address these
concerns as well as other issues related to Opterone's safety and efficacy
program, the FDA requested that we conduct additional investigation into
multiple dose safety and pharmacokinetics before beginning any eventual Phase 3
study. The FDA also requested that we revise our proposed Phase 3 protocol to
include additional patients and to extend patient exposure and safety follow-up.
The additional investigation and Phase 3 revisions will increase the time and
expense associated with the development of Opterone. Accordingly, the next step
in the development process for Opterone is a Phase 2 trial. We are seeking a
partner to advance development of this product candidate. We may elect not to
develop Opterone further if we cannot find a partner.
EARLIER STAGE PRODUCT CANDIDATES
We have also tested a number of formulations containing our proprietary
drug delivery technologies combined with various active pharmaceutical
ingredients. As we continue to build our product candidate portfolio, we review
our pre-clinical-stage product opportunities to identify those that show
sufficient promise to be advanced into clinical development. We evaluate each
new product candidate on its potential for success based on both scientific and
commercialization criteria. These criteria include:
o technical feasibility (formulation, product stability and laboratory
results);
o likelihood of laboratory results translating into a meaningful clinical
benefit;
o expected clinical studies needed and the regulatory pathway required to
obtain marketing approval;
o determination of the product candidate's expected competitive advantage
in the marketplace;
o duration of development timeline leading to commercialization;
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o financial investment needed for development and availability of
necessary financial resources; and
o expected sales and profitability.
COMPETITION
We compete with a number of companies, many of which are large,
multi-national organizations with worldwide distribution. We believe that our
major competitors in the drug delivery sector of the health care industry
include Bentley Pharmaceuticals, Inc., Biosante Pharmaceuticals, Inc., NexMed,
Inc., ALZA Corporation, Connetics Corporation, Antares Pharma, Inc. and Barrier
Therapeutics, Inc. Established competitors in the therapeutic areas that our
clinical stage product candidates seek to address include, with respect to
onychomycosis, Novartis AG, Johnson & Johnson and Sanofi Aventis (Dermik
Laboratories), and with respect to male hypogonadism, Solvay Pharmaceuticals,
Inc., Auxilium Pharmaceuticals, Inc., Watson Pharmaceuticals, Inc. and Columbia
Laboratories, Inc. Compared with us, these companies have or may have
substantially greater capital resources, research and development and technical
staff, facilities and experience in obtaining regulatory approvals, as well as
in manufacturing, marketing and distribution of products.
With respect to onychomycosis, Novartis AG and Johnson & Johnson each offer
an orally administered antifungal therapy and Sanofi Aventis (Dermik
Laboratories) offers a topical nail lacquer therapy for treating fungal
infections of the nail. A number of other companies, including Nexmed, Inc. and
MediQuest Therapeutics, Inc., are also developing topical and oral therapies for
these infections.
With respect to male hypogonadism, Solvay Pharmaceuticals, Inc. and
Auxilium Pharmaceuticals, Inc. each offer a topically administered testosterone
gel, Watson Pharmaceuticals, Inc. offers a testosterone patch, and Columbia
Laboratories, Inc. offers a testosterone buccal film product. A number of other
companies are also developing topical testosterone products.
We expect any products approved for sale to compete primarily on the basis
of efficacy, safety, patient compliance, reliability, convenience, price and
patent position. Generally, the first pharmaceutical product to reach the market
in a therapeutic or preventive area often has a significant commercial advantage
compared with later entrants to the market. Our competitive position will also
depend on our 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.
GOVERNMENT REGULATION
The production and marketing of our drug delivery systems and
pharmaceutical products are subject to regulation for safety, efficacy and
quality by numerous federal, state and local agencies and comparable agencies in
foreign countries.
In the United States, the Federal Food, Drug and Cosmetics 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 our proposed
products and technologies.
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Non-compliance with applicable requirements can result in fines and other
judicially imposed sanctions including recalls and criminal prosecutions based
on violation of statutory requirements by products, promotional practices,
clinical practices or manufacturing practices. 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
approve New Drug Applications (NDAs). The FDA also has the authority to withdraw
approval of drugs in accordance with statutory procedures.
The FDA approval procedure involves completion of certain pre-clinical and
manufacturing/stability studies and the submission of the results of these
studies to the FDA in an Investigational New Drug (IND) application in support
of performing clinical trials. IND allowance is then followed by performance of
human clinical trials, and additional pre-clinical and manufacturing quality
control studies, supporting safety, efficacy and manufacturing quality control.
The safety, chemistry, manufacturing and stability and clinical studies
developed under the IND are generally compiled into an NDA or Abbreviated New
Drug Application (ANDA) and submitted to the FDA for approval to market.
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 1 trials typically consist of testing
of the product in a small number of normal volunteers primarily for safety. In
Phase 2, in addition to safety, the efficacy of the product is typically
evaluated in a small patient population. Phase 3 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 identification 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 that endanger patients in the
trials are observed. In addition, the FDA may request Phase 4 clinical trials,
to be performed after marketing 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 clinical testing in human
subjects. If the FDA does not comment on or question 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 can 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. All products must
continue to comply with all FDA requirements and the conditions in an approved
application, including product specifications, manufacturing process and
labeling requirements. Failure to comply, or the occurrence of unanticipated
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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. For example, an ANDA
may be available for a new topical formulation of a drug which has already been
approved by the FDA in other topical dosage forms.
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 restarts the 180-day regulatory
review period 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, packaging and labeling of our proposed products are subject to
FDA regulation. We 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
before 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. Moreover,
differing reimbursement regulations in various foreign countries may affect
pricing of our drug candidates.
We cannot guarantee 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 our proposed products, cause
us to undertake costly procedures and furnish a competitive advantage to the
more substantially capitalized companies with which we plan to compete. In
addition, we cannot predict the extent of potentially adverse government
regulations that may arise from future administrative action or legislation.
RESEARCH AND DEVELOPMENT
In August 2005, at the direction of our board of directors, we discontinued
all research and development activities and terminated substantially all of our
non-management personnel. Following this staff reduction, in order to conduct
research and development activities, including stability studies, tests of our
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unique formulations and the design of manufacturing processes for our drug
delivery technologies, we will need to contract with third parties to perform
this work. We believe that there are numerous third party contractors who would
be able to perform such research and development activities.
Prior to the staff reduction in August 2005, we conducted our research and
development activities through our own staff and facilities, and also through
collaborative arrangements with universities, contract research organizations
and independent consultants. Research and developmental expenditures were
$2,938,026, $4,221,039 and $2,291,721 during the years ended December 31, 2003,
2004 and 2005, respectively. We also rely upon third parties to conduct clinical
studies and to obtain FDA and other regulatory approvals.
PATENTS, TRADEMARKS AND LICENSE RIGHTS
We own a composition of matter patent on the SEPA family of compounds,
which will expire in November 2006. We also own five composition of matter and
use patents, with expiration dates ranging from 2015 to 2019, for the
combination of SEPA with numerous existing classes of drugs, including
antifungals and human sex hormones. The patent for SEPA combined with
antifungals covers the combination of SEPA and econazole in EcoNail, and the
patent for SEPA combined with human sex hormones covers the combination of SEPA
and testosterone in Opterone.
With respect to our MacroDerm technology, we have three U.S. patents
covering the chemical composition and use of the MacroDerm polymers, which
expire in 2015.
We intend to seek other composition of matter and use patents regarding
various formulations based on our drug delivery technologies and for new
technologies. In 2005, we filed two new U.S. patent applications: one for the
combination of absorption enhancers with certain active pharmaceutical
ingredients for treatment of skin disorders and the other for improved delivery
of testosterone.
In addition to the patent activity, we have trademarks for the marks SEPA
and Opterone. We also have pending trademark applications for the marks
MacroDerm and EcoNail.
We believe that patent protection of our technologies, processes and
products is important to our future operations. The success of our proposed
products may depend, in part, upon our ability to obtain patent and trademark
protection. We intend to enforce our patent position and intellectual property
rights vigorously. The cost of enforcing our patent rights in lawsuits, if
necessary, may be significant and could interfere with our operations.
EMPLOYEES
As of December 31, 2005, we had four full time employees, none of whom are
dedicated to research and development and regulatory affairs. None of our
employees are covered by a collective bargaining agreement, and we consider
relations with our employees to be good.
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MANUFACTURING
In order to manufacture our product candidates for clinical trials and for
commercial distribution following FDA approval, we will need to contract with a
third party manufacturer to produce the product. We believe that there are
numerous third party manufacturers who would be able to manufacture our product
candidates for clinical trial purposes and on a commercial scale.
ITEM 1A. RISK FACTORS.
INVESTING IN OUR COMMON STOCK IS RISKY. IN ADDITION TO THE OTHER INFORMATION IN
THIS ANNUAL REPORT ON FORM 10-K, YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING
RISK FACTORS IN EVALUATING US AND OUR BUSINESS. IF ANY OF THE EVENTS DESCRIBED
IN THE FOLLOWING RISK FACTORS WERE TO OCCUR, OUR BUSINESS, FINANCIAL CONDITION
OR RESULTS OF OPERATIONS LIKELY WOULD SUFFER. IN THAT EVENT, THE TRADING PRICE
OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR A PART OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS
-----------------------------
WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT TO CONTINUE TO INCUR LOSSES AND
RELY EXTENSIVELY ON EXTERNAL FINANCING TO MAINTAIN OUR OPERATIONS. IF WE ARE
UNABLE TO OBTAIN EXTERNAL FINANCING, WE WOULD BE REQUIRED TO FURTHER LIMIT,
SCALE BACK OR CEASE OUR OPERATIONS ENTIRELY.
Since 1981, we have been engaged primarily in research and development and
have derived limited revenues from feasibility studies and the licensing of our
technology. We have not generated any material revenues from the sale of any
products. In addition, we have incurred net losses every year since we began
doing business and we anticipate that we will continue to incur losses for the
foreseeable future. As of December 31, 2005, we had an accumulated deficit of
approximately $82,584,992. For the fiscal years ended December 31, 2003, 2004
and 2005, we had a net loss of $5,661,694, $8,274,521, and $5,760,475,
respectively.
On August 31, 2005, due to our financial condition at the time and our
inability to raise sufficient capital to maintain operations, we discontinued
all research and development activities and terminated substantially all of our
non-management personnel. In December 2005 and February 2006, we raised an
aggregate of $8.25 million in a private placement of our securities to
institutional investors. As a result of this private placement, we have begun to
resume operations with a focus on advancing clinical development of our lead
product, EcoNail. Our ability to continue operations after our current capital
resources are exhausted depends on our ability to secure additional financing
and to become profitable, which we cannot guarantee.
Before we or any of our potential licensees may market any of our product
candidates, significant additional development efforts and substantial testing
will be necessary. We will require substantial additional financing to fund
clinical studies on our product candidates. We may not be able to secure
financing on favorable terms or at all. If we are unable to obtain external
financing, we would have to reduce, delay or eliminate our clinical studies.
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OUR PRODUCT CANDIDATES ARE IN THE EARLY STAGES OF DEVELOPMENT AND ARE SUBJECT TO
THE RISK OF FAILURE INHERENT IN THE DEVELOPMENT OF INNOVATIVE TECHNOLOGIES.
Various pharmaceutical companies have developed systems to enhance the
topical delivery of specific drugs, but relatively limited research has been
conducted about using topical delivery systems for a wider range of
pharmaceutical products. Topical delivery systems currently are used only in a
limited number of products. In addition, some topical delivery systems have
demonstrated adverse side effects for users, including skin irritation and
delivery difficulties.
Our product candidates are in the early stages of development and will
require significant further research, development, testing and regulatory
clearances. Our product candidates 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 our product candidates may be found
to be ineffective or toxic, or otherwise may fail to receive necessary
regulatory clearances.
OUR PRODUCT CANDIDATES MUST UNDERGO A RIGOROUS REGULATORY APPROVAL PROCESS,
WHICH INCLUDES EXTENSIVE PRE-CLINICAL AND CLINICAL TESTING, TO DEMONSTRATE
SAFETY AND EFFICACY BEFORE WE CAN MARKET THEM. IF THE RESULTS OF OUR
PRE-CLINICAL AND CLINICAL TESTING INDICATE THAT OUR PRODUCT CANDIDATES ARE NOT
SAFE OR EFFECTIVE, OUR BUSINESS WILL SUFFER.
Each of our product candidates, including EcoNail and Opterone, must
undergo a rigorous regulatory approval process, including significant
pre-clinical and clinical testing to demonstrate that they are safe and
effective for human use, before we can market them. Conducting clinical trials
is a lengthy, expensive and uncertain process. Completion of clinical trials may
take several years or more. In addition, our clinical trials may be delayed by
many factors, including:
o inability to fund clinical trials;
o slow or insufficient patient enrollment;
o failure of the FDA to approve our clinical trial protocols;
o inability to manufacture significant amounts of our product candidates
for use in a trial;
o safety issues; and
o government or regulatory delays.
In addition, the results of pre-clinical studies and early clinical trials
may not accurately predict results that we will obtain in later testing. A
number of other companies in the pharmaceutical industry have suffered
significant setbacks in advanced clinical trials, even after they achieved
promising results in earlier trials. If we, the FDA or physicians do not believe
that our clinical trials demonstrate that our product candidates are safe and
effective, our business, financial condition and results of operations will be
materially adversely affected.
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OUR PRODUCT CANDIDATES ARE SUBJECT TO SIGNIFICANT FDA SUPERVISION AND MAY NOT
SUCCESSFULLY COMPLETE THE EXTENSIVE REGULATORY APPROVAL PROCESS REQUIRED PRIOR
TO THE MARKETING OF ANY PHARMACEUTICAL PRODUCT.
Our activities are regulated by a number of government authorities in the
United States and other countries, including the FDA. The FDA regulates
pharmaceutical products, including their manufacture and labeling. Before
obtaining regulatory approval to market any product candidate under development,
we must demonstrate to the FDA that the product is safe and effective for use in
each proposed indication through, among other things, pre-clinical studies and
clinical trials. Data obtained from testing is subject to varying
interpretations which can delay, limit or prevent FDA approval.
On October 11, 2002, the FDA advised us that further clinical trials of our
drugs containing SEPA had been placed on clinical hold pending review of
questions surrounding a 26-week transgenic-mouse (Tg.AC) carcinogenicity study
of SEPA we performed in 1999. On April 10, 2003, the FDA lifted this clinical
hold. In releasing the hold, the FDA requested additional information on that
1999 study, which we have provided.
On December 5, 2005, we received a response from the Division of
Reproductive and Urologic Products at the FDA to questions posed by us regarding
the proposed Phase 3 clinical program for Opterone, a topical cream for male
testosterone deficiency containing our patented enhancer SEPA. In the response,
the FDA reiterated its safety concerns regarding the skin irritation potential
of SEPA related to pre-clinical studies of SEPA, including without limitation,
the 26-week transgenic-mouse (Tg.AC) carcinogenicity study of SEPA. The FDA also
expressed concern regarding skin irritation observed in some patients in
recently completed Opterone clinical studies. To address these concerns as well
as other issues related to Opterone's safety and efficacy program, the FDA
requested that we, if we intend to pursue clinical development of Opterone,
conduct additional investigation into multiple dose safety and pharmacokinetics
before beginning any eventual Phase 3 study. The FDA also confirmed the
requirement for other clinical pharmacology studies prior to any NDA submission
and requested that we revise our proposed Phase 3 protocol to include additional
patients and to extend patient exposure and safety follow-up. If we decide to
pursue the clinical development of Opterone, the additional investigation and
Phase 3 revisions will increase the time and expense associated with the
development of Opterone and may materially adversely affect our ability to find
a partner to advance the development of Opterone. Furthermore, there can be no
assurance that the results of the studies, if conducted, will address the FDA's
safety concerns or justify further development of Opterone or that any
SEPA-based product will be approved by the FDA.
To date, neither the FDA nor any of its international equivalents has
approved any of our technologies or product candidates for marketing. If the FDA
does not approve our product candidates for marketing, we will be materially
adversely affected.
We face additional risks associated with the regulatory approval process,
including:
o Changes in existing regulatory requirements could prevent or affect our
regulatory compliance. Federal and state laws, regulations and policies
may be changed with possible retroactive effect. In addition, how these
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rules actually operate can depend heavily on administrative policies
and interpretations over which we have no control. We also may lack the
experience with these policies and interpretations to assess their full
impact upon our business.
o Obtaining FDA clearances is time-consuming and expensive and we cannot
guarantee that such clearances will be granted or, if granted, will not
be withdrawn.
o The FDA review process may prevent us from marketing our product
candidates or may involve delays that significantly and negatively
affect our product candidates. We also may encounter similar delays in
foreign countries.
o Regulatory clearances may place significant limitations on the uses for
which any approved products may be marketed.
o Any marketed product and its manufacturer are subject to periodic
review by the FDA. Any discovery of previously unrecognized problems
with a product or a manufacturer could result in suspension or
limitation of previously obtained or new approvals.
BECAUSE THE REGULATORY APPROVAL PROCESS IS COMPLEX, WE CANNOT ACCURATELY PREDICT
THE REGULATORY APPROVAL TIMELINE FOR OUR PRODUCT CANDIDATES.
The laws and regulations administered by the FDA are complex, and
compliance with these laws and regulations requires substantial time, effort and
expense. Because of this complexity, and because the regulatory approval path
for our product candidates has not yet been confirmed by the FDA, we cannot
guarantee that our efforts will be sufficient to ensure compliance with all
applicable laws and regulations, nor can we accurately predict the regulatory
approval timeline for our product candidates.
IF OUR PRODUCT CANDIDATES ARE NOT ACCEPTED BY PHYSICIANS AND PATIENTS, WE MAY
NEVER BE PROFITABLE.
Even if our product candidates receive regulatory approval, we may not be
able to market them effectively, they may be uneconomical to market or third
parties may market equivalent or superior products. We will need to expend
significant effort to educate physicians and patients regarding any product
candidate that receives regulatory approval. Consequently, unless our product
candidates obtain market acceptance, we may never be profitable.
IF PHYSICIANS OR PATIENTS PERCEIVE THAT TESTOSTERONE REPLACEMENT THERAPIES
CREATE HEALTH RISKS, THE VIABILITY OF OPTERONE MAY BE QUESTIONED, AND OUR
BUSINESS AND THE PRICE OF OUR STOCK MAY BE NEGATIVELY AFFECTED.
Recent studies of female hormone replacement therapy products have reported
an associated increase in health risks. As a result of these studies, some
companies that sell or develop female hormone replacement products have
experienced decreased sales of these products, and in some cases, a decline in
their stock. From time to time, publications have suggested potential health
risks associated with testosterone replacement therapy, including fluid
retention, sleep apnea, breast tenderness or enlargement, increased red blood
20
cells, development of clinical prostate disease, increased cardiovascular
disease risk and the suppression of sperm production. It is possible that
studies on the effect of testosterone replacement therapy could demonstrate
these or other adverse health risks. This, along with the negative publicity
surrounding hormone replacement therapy in general, could negatively impact
market acceptance of Opterone, which could adversely affect our business and the
price of our stock.
WE DEPEND ON PATENTS TO PROTECT OUR TECHNOLOGIES AND IF OUR CURRENT PATENTS ARE
INEFFECTIVE OR WE ARE UNABLE TO SECURE AND MAINTAIN ADEQUATE PATENT PROTECTION,
OUR ABILITY TO COMPETE WITH OTHER PHARMACEUTICAL COMPANIES MAY BE NEGATIVELY
AFFECTED.
We believe that patent protection of our technologies, processes and
products is important to our future operations. The success of our product
candidates depends, in part, on our ability to secure and maintain adequate
patent protection.
Although we have filed and intend to file additional patent applications,
the patent application process is lengthy and expensive and there is no
guarantee that a patent will be issued or, if issued, that it will be of
commercial benefit to us. In addition, it is impossible to anticipate the
breadth or degree of protection that any patents we obtain may afford us.
Further, products that we develop could infringe patents held by third parties.
In these cases, we may have to obtain licenses from third parties, which may not
be available on commercially acceptable terms, if at all. We do not maintain
separate insurance to cover intellectual property infringement.
Our composition of matter patent covering SEPA expires in November 2006.
The expiration of that patent will enable competitors to develop SEPA-based
product candidates covering applications for which we have not obtained
composition and use patents. As a result, our competitive position may be
adversely affected.
Currently, we are not involved in any litigation, settlement negotiations
or other legal action regarding patent issues and are not aware of any patent
litigation threatened against us. We may, however, become involved in patent
litigation against third parties to enforce our patent rights, to invalidate
patents held by those third parties or to defend against claims of those third
parties. We intend to enforce our patent position and defend our intellectual
property rights vigorously. The cost to us of any patent litigation or similar
proceeding could be substantial and it may absorb significant management time.
In the event of an unfavorable resolution of any infringement litigation against
us, we may be enjoined from manufacturing or selling any products without a
license from a third party.
IF WE ARE NOT ABLE TO PROTECT THE CONFIDENTIALITY OF OUR PROPRIETARY INFORMATION
AND KNOW-HOW, THE VALUE OF OUR TECHNOLOGIES MAY BE ADVERSELY AFFECTED.
In addition to patent protection, we utilize significant unpatented
proprietary technology and rely on unpatented trade secrets and proprietary
know-how to protect certain aspects of our technologies. To the extent that we
rely on unpatented proprietary technology, we cannot guarantee that others will
not independently develop or obtain substantially equivalent or superior
technologies or otherwise gain access to our trade secrets, that any obligation
of confidentiality will be honored or that we will be able to effectively
protect our rights to our proprietary technologies.
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IF WE ARE NOT ABLE TO RETAIN OUR KEY PERSONNEL AND/OR RECRUIT ADDITIONAL KEY
PERSONNEL IN THE FUTURE, OUR BUSINESS MAY SUFFER.
The success of our business depends on our ability to attract, retain and
motivate qualified senior management personnel and qualified scientific
personnel. We consider Robert J. DeLuccia, our President and Chief Executive
Officer, to be a key employee and we have entered into an employment agreement
with him. We do not maintain key person life insurance on any of our employees.
In our industry, the competition for experienced personnel is intense and can be
expected to increase. From time to time we may face, and in the past have faced,
difficulties in attracting and retaining employees with the requisite experience
and qualifications. If we fail to retain or attract this type of personnel, it
could have a significant negative effect on our ability to develop our
technologies.
OUR FAILURE TO IDENTIFY PHARMACEUTICALS THAT ARE COMPATIBLE WITH OUR DRUG
DELIVERY TECHNOLOGIES OR ADDITIONAL PRODUCT CANDIDATES OR TECHNOLOGIES WOULD
IMPAIR OUR ABILITY TO GROW.
Our growth depends on our ability to identify drugs suitable for delivery
using our proprietary drug delivery technologies, our ability to identify other
product candidates or technologies, and our ability, financially or otherwise,
to obtain such product candidates and technologies. Identifying suitable drugs
or product candidates is a lengthy and complex process. Even if identified, the
drugs or product candidates may not be available to us or we may otherwise be
unable to enter into licenses or other agreements for their use. Other
companies, including those with substantially greater financial, marketing and
sales resources, may compete with us for the licensing or acquisition of drugs
and product candidates and we may not be able to enter into licenses or other
agreements on acceptable terms, or at all. If we are unable to identify and
license or acquire drugs that are compatible with our drug delivery technologies
or additional product candidates or technologies, our ability to grow our
portfolio of product candidates and our prospects would be adversely affected.
WE DO NOT HAVE ANY LABORATORY FACILITIES OR SCIENTIFIC PERSONNEL AND DEPEND ON
THIRD PARTIES TO CONDUCT RESEARCH AND DEVELOPMENT ACTIVITIES FOR OUR
TECHNOLOGIES AND PRODUCT CANDIDATES.
We do not have laboratory facilities or scientific personnel capable of
conducting research and development activities for our technologies and product
candidates and currently we do not have plans to obtain such facilities and
personnel. Accordingly, our ability to conduct research and development
activities is and will be limited and we will depend to a significant extent on
third-party contractors for such research and development activities. If any of
our third-party contractors fails to perform its obligations in a timely fashion
or in accordance with applicable regulations, it may adversely affect our
business. If we decide to establish internal research and development
capabilities, we would need to hire and retain significant additional personnel,
locate and acquire appropriate laboratory facilities, comply with extensive
government regulations, and obtain additional capital, which may not be
available on acceptable terms, or at all.
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WE DO NOT HAVE ANY MANUFACTURING FACILITIES AND DEPEND ON THIRD PARTIES TO
MANUFACTURE OUR PRODUCT CANDIDATES.
We do not have facilities capable of manufacturing any of our product
candidates and we do not have plans to obtain these facilities. Accordingly, we
will depend on third-party contractors, licensees, or corporate partners to
manufacture our products. If any of our third-party manufacturers fails to
perform its obligations in a timely fashion or in accordance with applicable
regulations, it may delay clinical trials, the commercialization of our product
candidates or our ability to supply our product candidates for sale. If we
decide to establish a commercial manufacturing facility, we would need to hire
and retain significant additional personnel, comply with extensive government
regulations, and obtain significant amounts of additional capital, which may not
be available on acceptable terms, or at all.
WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS, AND WE MAY NOT HAVE SUFFICIENT
PRODUCT LIABILITY INSURANCE TO COVER SUCH CLAIMS. IT MAY BE EXPENSIVE AND
DIFFICULT TO OBTAIN ADEQUATE INSURANCE COVERAGE.
The design, development, manufacture and sale of our product candidates
involve risk of liability claims and associated adverse publicity. We have
product liability insurance coverage with an aggregate policy limit of
approximately $10,000,000 for claims related to our product candidates that may
arise from clinical trials conducted prior to November 1, 2002. We also have
product liability insurance coverage with aggregate policy limits between
approximately $3,000,000 and $5,000,000 for claims related to our product
candidates that may arise from clinical trials conducted after September 25,
2003. In the event that our products receive regulatory approval and become
commercialized, we would need to acquire additional coverage. Product liability
insurance is expensive, may be difficult to obtain and may not be available on
acceptable terms, if at all. If we obtain coverage, we cannot guarantee that the
coverage limits of these insurance policies will be adequate. A successful claim
against us if we are uninsured, or which is in excess of our insurance coverage,
could have a material adverse effect on us and our financial condition.
WE RELY ON A THIRD-PARTY SUPPLIER FOR A NON-ACTIVE INGREDIENT IN SOME OF OUR
PRODUCT CANDIDATES AND, IN THE EVENT THE SUPPLIER IS UNABLE TO SUPPLY US WITH
ADEQUATE PRODUCT, OUR BUSINESS MAY BE NEGATIVELY AFFECTED IF WE ARE NOT ABLE TO
TIMELY OBTAIN A SUBSTITUTE INGREDIENT.
We rely on a third-party supplier, Seppic Inc., for a non-active ingredient
that is important to the formulation and production of some of our topical
product candidates. While we believe similar products are available from other
suppliers, if Seppic Inc. were unable or unwilling to supply its product in
sufficient quantities at a reasonable price, our results could suffer, as we may
encounter significant costs and delays in identifying and measuring the efficacy
of replacement third party products.
23
TOGETHER, CERTAIN OF OUR SHAREHOLDERS OWN A MAJORITY OF OUR STOCK AND COULD
ULTIMATELY CONTROL DECISIONS REGARDING US.
In our recent private placement, we issued 825.5 shares of our Series C
Cumulative Convertible Preferred Stock and warrants to purchase 7,861,912 shares
of our common stock. The Series C Cumulative Convertible Preferred Stock is
convertible into shares of common stock and votes together with the common stock
on an as-if-converted to common stock basis. Unless a holder of Series C
Cumulative Convertible Preferred Stock elects otherwise, its ability to convert
its Series C Cumulative Convertible Preferred Stock into common stock or to vote
on an as-if-converted to common stock basis is restricted to the extent that
such conversion would result in the holder owning more than 4.95% of our issued
and outstanding common stock or voting together with the common stock on an
as-if-converted to common stock basis in respect of more than 4.95% of our
issued and outstanding common stock. The warrants issued in the private
placement are subject to a similar restriction on their exercise. SCO Capital
Partners LLC, Beach Capital LLC and Perceptive Life Sciences Master Fund Ltd.
("Perceptive") have elected not to be governed by these restrictions, although
we have entered into an agreement with Perceptive whereby Perceptive's ability
to convert or vote their shares of Series C Preferred Stock will be subject to a
beneficial ownership cap of 9.95% instead of 4.95%. Consequently, giving effect
to the beneficial ownership cap restrictions, the Series C Preferred Stock
acquired by the investors is convertible into 4,057,882 shares of common stock
and the holders of the Series C Cumulative Convertible Preferred Stock vote on
an as-converted basis with the holders of our common stock, and therefore hold
approximately 80.28% of the voting power of our outstanding securities. Assuming
both the conversion of the Series C Cumulative Convertible Preferred Stock and
the exercise of all of the Warrants acquired by the investors, in each case
without regard to the beneficial ownership cap restrictions, the investors would
hold approximately 94% of the outstanding common stock of the Company. In
addition, for so long as 20% of the Series C Cumulative Convertible Preferred
Stock issued in the private placement remains outstanding, SCO Capital Partners
LLC has the right to designate two members to our board of directors. Jeffrey B.
Davis and Howard S. Fischer are currently serving on our board of directors as
the designees of SCO Capital Partners LLC
Because of the voting rights of the Series C Cumulative Convertible
Preferred Stock and the fact that the parties described above currently own a
large portion of our voting stock, they may be able to generally determine or
they will be able to significantly influence the outcome of corporate actions
requiring shareholder approval. As a result, these parties may be in a position
to control matters affecting our company, including amendments to our articles
of incorporation and bylaws; payment of dividends on our common stock; and
acquisitions, sales of all or substantially all of our assets, mergers or
similar transactions, including transactions involving a change of control. As a
result, some investors may be unwilling to purchase our common stock. In
addition, if the demand for our common stock is reduced because of these
shareholders' control of the Company, the price of our common stock could be
materially depressed.
24
CERTAIN OF OUR SHAREHOLDERS OWN LARGE BLOCKS OF OUR COMMON STOCK AND OWN
SECURITIES CONVERTIBLE OR EXERCISABLE INTO SHARES OF OUR COMMON STOCK, AND ANY
EXERCISES, CONVERSIONS OR SALES BY THESE SHAREHOLDERS COULD SUBSTANTIALLY LOWER
THE MARKET PRICE OF OUR COMMON STOCK.
Several of our shareholders, including those shareholders that acquired
Series C Cumulative Convertible Preferred Stock and warrants to acquire common
stock in our recent private placement, own large blocks of our voting stock. The
shares of our common stock owned by these shareholders (or issuable to them upon
exercise or conversion of warrants or Series C Cumulative Convertible Preferred
Stock) will be registered. Future sales of large blocks of our common stock by
any of the above investors could substantially depress our stock price.
RISKS RELATED TO OUR INDUSTRY
-----------------------------
OUR INDUSTRY IS HIGHLY COMPETITIVE AND OUR COMPETITORS HAVE OR MAY HAVE
SIGNIFICANTLY MORE RESOURCES THAN WE HAVE.
We compete with a number of firms, many of which are large, multi-national
organizations with worldwide distribution. We believe that our major competitors
in the drug delivery sector of the health care industry include Bentley
Pharmaceuticals, Inc., Biosante Pharmaceuticals, Inc., NexMed, Inc., ALZA
Corporation, Connetics Corporation, Antares Pharma, Inc. and Barrier
Therapeutics, Inc. Competitors with approved products in the therapeutic areas
that our clinical stage product candidates seek to address include, with respect
to onychomycosis:
o Novartis AG, maker of Lamisil(R), an oral therapy;
o Johnson & Johnson, maker of Sporanox(R), an oral therapy; and
o Sanofi Aventis (Dermik Laboratories), maker of Penlac, a topical nail
lacquer.
and with respect to male hypogonadism:
o Solvay Pharmaceuticals, Inc., maker of Androgel(R), a topical gel
therapy;
o Auxilium Pharmaceuticals, Inc., maker of Testim(R), a topical gel
therapy;
o Watson Pharmaceuticals, Inc., maker of Androderm(R), a transdermal
patch; and
o Columbia Laboratories, Inc., maker of Striant(R), a buccal film which
is placed between the patient's cheek and gum;
These companies have or may have substantially greater capital resources,
research and development and technical staff, facilities and experience in
obtaining regulatory approvals, as well as in manufacturing, marketing and
distributing products, than we do. Recent trends in this industry 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 also are 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
25
be the basis for competitive products which may be more effective or less costly
to use than any products that we currently are developing.
We expect any future products approved for sale 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 preventive area often has a significant commercial advantage
compared with later entrants to the market. Our competitive position also will
depend on our ability to resume research and development activities, engage
third parties to conduct research and development activities, 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.
GOVERNMENT AND PRIVATE INITIATIVES TO REDUCE HEALTH CARE COSTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON PHARMACEUTICAL PRICING AND ON OUR OPERATIONS.
The future revenues and profitability of, and availability of capital for,
biomedical and pharmaceutical companies may be affected by the continuing
efforts of governmental and private third-party payers to contain or reduce the
costs of health care through various means. Reimbursement by payors such as
government and managed care organizations has become an increasingly important
factor in the success of a drug, as has the listing of new products on large
formulary lists (as well as their designated "Tier" on such lists), including
those of managed care organizations, pharmaceutical benefit providers and group
buying organizations. Failure of a pharmaceutical product to be included on
formulary lists, to obtain a Tier position on such formulary lists which
provides for a sufficiently low patient cost, or to be reimbursed by government
or managed care organizations, could negatively impact the profitability of a
drug.
Furthermore, in some foreign markets pricing or profitability of
prescription pharmaceuticals is subject to government control and to possible
reform in the health care system. Frequently, it is not possible to obtain
pricing in foreign markets that is as favorable as that obtainable in the U.S.
In the U.S., there have been, and we expect there will continue to be, a number
of federal and state proposals to impose similar governmental control. While we
cannot predict whether any of these legislative or regulatory proposals will be
adopted, the announcement or adoption of these proposals could have a material
adverse effect on our prospects.
If we succeed in bringing to market one or more of our product candidates,
we cannot assure you that these product candidates will be cost effective or
that reimbursement to the consumer will be available or will be sufficient to
allow us to sell these products on a profitable basis.
26
RISKS RELATED TO THE SECURITIES MARKET
--------------------------------------
OUR STOCK PRICE HAS BEEN, AND LIKELY WILL CONTINUE TO BE, HIGHLY VOLATILE, AND
AS A RESULT, AN INVESTMENT IN OUR STOCK IS SUBJECT TO SUBSTANTIAL RISK.
The market price of our stock has been, and will likely continue to be,
highly volatile due to the risks and uncertainties described in this section of
this document, as well as other factors, including:
o the discontinuance in August 2005 of all of our research and product
development activities and our dependence on additional external
funding in resuming such activities;
o the results of our previously conducted clinical trials for our
SEPA-based formulations;
o conditions and publicity regarding the pharmaceutical industry
generally as well as the specific therapeutic areas our product
candidates seek to address;
o price and volume fluctuations in the stock market at large which do not
relate to our operating performance; and
o our ability to raise additional capital.
Over the two-year period ending December 31, 2005, the closing price of our
common stock as reported on The Nasdaq National Market, The Nasdaq Capital
Market, the Pink Sheets LLC and the OTC Bulletin Board ranged from a high of
$75.18 to a low of $1.26. On March 7, 2006, the closing price for our common
stock on the OTC Bulletin Board was $1.66. In the past, companies that have
experienced stock price volatility have sometimes been the subject of securities
class action litigation. If litigation were instituted on this basis, it could
result in substantial costs and a diversion of management's attention and
resources. As a result of this volatility, an investment in our stock is subject
to substantial risk.
ON NOVEMBER 22, 2005, OUR COMMON STOCK WAS DELISTED FROM THE NASDAQ CAPITAL
MARKET FOR FAILURE TO MEET ITS LISTING STANDARDS. OUR COMMON STOCK CURRENTLY IS
QUOTED ON THE OTC BULLETIN BOARD, WHICH INVESTORS MAY PERCEIVE AS LESS DESIRABLE
AND WHICH COULD NEGATIVELY AFFECT THE LIQUIDITY OF AN INVESTMENT IN OUR COMMON
STOCK.
Our listing on The Nasdaq Capital Market was conditioned on our compliance
with Nasdaq's continued listing requirements. The minimum standards for
continued listing on The Nasdaq Capital Market include stockholders' equity of
$2.5 million or market capitalization of $35 million and a minimum bid price of
$1.00.
On October 18, 2005, we received a Nasdaq Staff Determination indicating
that our securities were subject to delisting from The Nasdaq Capital Market as
we did not comply with the minimum bid price requirement for continued listing.
We requested a hearing before a Nasdaq Listing Qualifications Panel to review
the Staff Determination. On November 21, 2005, we withdrew our appeal of the
Nasdaq Staff Determination and our common stock was delisted from quotation on
the Nasdaq Capital Market effective as of Tuesday, November 22, 2005.
27
Immediately thereafter, our common stock was quoted on the Pink Sheets LLC, and
on December 22, 2005, our stock became eligible for quotation on the OTC
Bulletin Board and presently trades under the symbol "MACM.OB."
The over-the-counter market is generally considered to be a less efficient
system than markets such as Nasdaq or other national exchanges because of lower
trading volumes, transaction delays and reduced security analyst and news media
coverage. These factors could contribute to lower prices and larger spreads in
the bid and ask prices for our common stock. Additionally, trading of our common
stock in an over-the-counter market may make us less desirable to institutional
investors and may, therefore, limit our future equity funding options.
WE ARE CONTRACTUALLY OBLIGATED TO ISSUE SHARES IN THE FUTURE, DILUTING YOUR
INTEREST IN US.
As of March 7, 2006, our Series C Cumulative Convertible Preferred Stock is
convertible into an aggregate of, giving effect to the beneficial ownership
restrictions on conversion, 4,057,882 shares of common stock (7,861,900 shares
of common stock without regard to the beneficial ownership restrictions on
conversion). In addition, as of March 7, 2006, there are outstanding and
exercisable warrants to purchase approximately 8,725,270 shares of our common
stock, at a weighted average exercise price of $1.89 per share. As of March 7,
2006, there also are outstanding and exercisable options to purchase
approximately 430,264 shares of our common stock, at a weighted average exercise
price of $34.06 per share. Moreover, we expect to issue additional options to
purchase shares of our common stock to compensate employees, consultants and
directors and may issue additional shares to raise capital, acquire other
companies or technologies, to pay for services, or for other corporate purposes.
Any such issuances will have the effect of further diluting the interest of the
purchasers of the securities being sold in this offering.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
We currently occupy approximately 3,000 square feet of office and
laboratory space under a month-to-month sublease. This space is located on one
floor of a three story building in Lexington, Massachusetts. We believe that
this facility is adequate to meet our current requirements, and we are
evaluating our future facility requirements. We also believe that suitable
alternative locations are readily available.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently engaged in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
As described in our Current Report on Form 8-K filed on February 15, 2006,
an amendment to the Company's certificate of incorporation to effect a 1-for-6
reverse stock split of our common stock was approved on December 23, 2005 by
28
written consent of our stockholders holding a majority of the shares entitled to
vote on the matter. Additional information regarding the reverse stock split is
contained in our Information Statement filed with the Securities and Exchange
Commission on January 17, 2006.
29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET PRICE OF SECURITIES AND RELATED MATTERS
Our common stock is traded on the OTC Bulletin Board under the symbol
"MACM.OB." Prior to February 10, 2006, our common stock was traded on the OTC
Bulletin Board under the symbol "MCMP.OB." Between November 24, 2003 and
November 21, 2005, our common stock was traded on The Nasdaq Capital Market
under the symbol "MCHM" and, prior to November 24, 2003, it was traded on The
Nasdaq National Market under the symbol "MCHM."
The following chart shows the high and low closing prices for our common
stock for the periods indicated:
COMMON STOCK
MACM
YEAR ENDED HIGH LOW
DECEMBER 31, 2004
First Quarter $ 75.18 $ 34.44
Second Quarter 71.40 48.72
Third Quarter 55.86 31.08
Fourth Quarter 37.38 21.42
DECEMBER 31, 2005
First Quarter 33.60 16.38
Second Quarter 19.32 7.98
Third Quarter 12.18 2.10
Fourth Quarter 2.52 0.84
These prices are between dealers and do not reflect retail markups,
markdowns or commissions and may not necessarily represent actual transactions.
As of March 9, 2006, there were 672 holders of record of our common stock.
We have never paid cash dividends on our common stock and our Board of
Directors does not contemplate declaring any dividends in the foreseeable
future. We intend to retain any earnings to finance research, development, and
expansion of our business.
Information concerning securities authorized for issuance under equity
compensation plans appears in Part III, Item 12, "Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters."
30
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere in
this Annual Report on Form 10-K. The selected statement of operations data and
the selected balance sheet data for each year presented below have been derived
from our audited financial statements. These historical data are not necessarily
indicative of results to be expected for any future period.
On December 30, 2005 we implemented a 1-for-7 reverse stock split of our
common stock and on February 9, 2006 we implemented a subsequent 1-for-6 reverse
stock split of our common stock. Unless otherwise noted, data used throughout
this Annual Report on Form 10-K has been adjusted to reflect these reverse
splits.
------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
STATEMENTS OF OPERATIONS DATA:
SALE OF PATENT $ --- $ --- $ 1,000,000 $ --- $ ---
RESEARCH CONTRACTS --- --- 10,031 42,925 829,385
--------- --------- --------- --------- ----------
TOTAL REVENUES $ --- $ --- $ 1,010,031 $ 42,925 $ 829,385
RESEARCH AND DEVELOPMENT
EXPENSES 2,291,721 4,221,039 2,938,026 3,998,388 9,791,438
NET LOSS (5,760,475) (8,274,521) (5,661,694) (7,514,514) (12,333,243)
BENEFICIAL CONVERSION FEATURE $( 330,243) $ --- $ --- $ --- $ ---
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $(6,090,718) $(8,274,521) $(5,661,694) $(7,514,514) $(12,333,243)
BASIC AND DILUTED NET LOSS PER
SHARE $( 6.25) $( 9.23) $( 8.03) $( 11.30) $( 19.47)
SHARES USED TO COMPUTE
BASIC AND DILUTED NET
LOSS PER SHARE 974,367 896,039 704,621 664,965 633,508
BALANCE SHEET DATA:
WORKING CAPITAL $ 2,755,167 $ 5,635,331 $ 6,345,396 $ 8,704,944 $ 15,739,712
CURRENT ASSETS 3,130,197 6,403,182 7,325,361 9,119,723 17,099,675
TOTAL ASSETS 3,781,453 7,109,864 8,249,648 10,132,007 18,257,543
CURRENT LIABILITIES 375,030 767,851 979,965 414,779 1,359,963
TOTAL LIABILITIES 1,995,808 773.360 1,013,328 462,488 1,408,838
STOCKHOLDERS' EQUITY $ 1,455,402 $ 6,336,504 $ 7,236,320 $ 9,669,519 $ 16,848,705
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE
IN THIS ANNUAL REPORT ON FORM 10-K. IN ADDITION TO HISTORICAL INFORMATION, THE
FOLLOWING DISCUSSION AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-K CONTAIN
FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING
INFORMATION DUE TO THE FACTORS DISCUSSED UNDER "RISK FACTORS," "NOTE REGARDING
FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
GENERAL
We are a specialty pharmaceutical company that develops and seeks to
commercialize pharmaceutical products. Currently, our portfolio of product
candidates is based on our proprietary drug delivery technologies: SEPA,
MacroDerm and DermaPass. Our patented SEPA topical drug delivery technology
(SEPA is an acronym for "Soft Enhancement of Percutaneous Absorption," where
"soft" refers to the reversibility of the skin effect, and "percutaneous" means
"through the skin") enhances the efficiency and rate of diffusion of drugs into
and through the skin. Our patented MacroDerm drug delivery technology
encompasses a family of low to moderate molecular weight polymers that impede
dermal drug or chemical penetration. We have also filed a patent application for
our DermaPass family of transdermal absorption enhancers that have a different
drug delivery profile than SEPA, which we believe could be used with a wider
range of active pharmaceutical ingredients. Currently, we have two clinical
stage investigational new drugs: EcoNail, our lead product, for the treatment of
fungal infections of the nails and Opterone, for the treatment of male
hypogonadism. We believe that products incorporating our drug delivery
technologies may allow selected drugs to be administered more effectively and
with improved patient compliance compared to alternative methods of drug
administration, such as ingestion and injection.
Since inception, we have been engaged primarily in research and
development. We have not generated any meaningful revenues from operations and
we have sustained significant operating losses. We anticipate that we will
continue to incur significant losses for the foreseeable future. We cannot
guarantee that we will be successful in commercializing our products, or that we
will ever become profitable. As of December 31, 2005, we had an accumulated
deficit of approximately $82,584,992. Our product candidates are in discovery or
developmental stages and must undergo a rigorous regulatory approval process,
which includes costly and extensive pre-clinical and clinical testing, to
demonstrate safety and efficacy before we can market any resulting product. To
date, neither the FDA nor any of its international equivalents has approved any
of our product candidates for marketing. Please see our financial statements
included elsewhere in this Annual Report on Form 10-K for a more detailed
description of our financial history.
Our results of operations can vary significantly from year to year and
quarter to quarter, and depend, among other factors, on:
o the progress of clinical trials we conduct;
32
o the degree of our research, marketing and administrative efforts;
o our ability to raise additional capital;
o the signing of licenses and product development agreements;
o the timing of revenues recognized pursuant to license agreements; and
o the achievement of milestones by licensees.
The timing of our revenues may not match the timing of our associated
product development expenses. To date, our research and development expenses
generally have exceeded our revenues in any particular period or fiscal year.
We expect to continue to spend significant amounts on developing and
seeking regulatory approval of our lead product, EcoNail. Ultimately, if we
receive regulatory approval for EcoNail, significant expenses will be incurred
in connection with its commercialization. In addition, we also plan to identify
and develop, internally, through in-licensing, or through other collaborative
arrangements, additional product candidates and technologies that fit within our
growth strategy. If we identify potential product candidates, we will incur
additional costs in connection with testing and seeking regulatory approval of
those product candidates.
We recently completed a private placement of our securities to
institutional investors, consisting of two closings, for approximately
$8,255,000 in gross proceeds. The first closing of the private placement, in
which institutional investors acquired 250 shares of Series C Cumulative
Convertible Preferred Stock (the "Series C Preferred Stock") and six-year
warrants to purchase 2,380,951 shares of common stock at an exercise of $1.26
per share, for an aggregate purchase price of $2,500,000, took place on December
23, 2005 and is described in our Current Report on Form 8-K filed on December
27, 2005. The second closing of the private placement, in which institutional
investors acquired 575.5 shares of our Series C Preferred Stock and six-year
warrants to purchase 5,480,961 shares of the Company's common stock at an
exercise price of $1.26 per share, for an aggregate purchase price of
$5,755,000, occurred on February 13, 2006 and is described in our Current Report
on Form 8-K filed on February 16, 2006. The Series C Preferred Stock has a
liquidation value of $10,000 per share, is entitled to a dividend of 10% per
annum, payable in cash or shares of our common stock at our option, which
dividend rate is subject to increase to 14% upon the occurrence of certain
events. The number of shares of common stock into which each share of Series C
Preferred Stock is convertible is determined by dividing the liquidation value
per share plus all accrued and unpaid dividends thereon by $1.05. The conversion
price for the Series C Preferred Stock and the warrant exercise price are each
subject to a reset adjustment such that if the average of the price of the
common stock over the twenty trading days immediately preceding May 8, 2006 (the
"Average Price") is lower than the conversion and/or exercise price, then such
conversion and/or exercise price shall be adjusted to equal the Average Price.
33
We believe that our existing cash and cash equivalents of $3,023,436 as of
December 31, 2005 will be sufficient to meet our operating expenses and capital
expenditure requirements for at least the next twelve months. As noted above, on
February 13, 2006 we received $5,755,000 in gross proceeds ($5,265,100 net of
issuance costs but before legal and accounting costs) from the sale of our
Series C Preferred Stock and warrants to purchase shares of our common stock. We
intend to use these proceeds for working capital and other general corporate
purposes.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist of:
o salaries and expenses for our research and development personnel;
o payments to consultants, investigators, contract research organizations
and manufacturers in connection with our pre-clinical and clinical
trials;
o costs associated with conducting our clinical trials;
o costs of developing and obtaining regulatory approvals; and
o allocable costs, including occupancy and depreciation.
Because a significant portion of our research and development expenses
(including employee payroll and related benefits, laboratory supplies, travel,
dues and subscriptions, temporary help costs, consulting costs and allocable
costs such as occupancy and depreciation) benefit multiple projects or our drug
delivery technologies in general, we do not track these expenses by project. On
August 31, 2005, we discontinued all research and development activities and
terminated substantially all of our non-management personnel. For the fiscal
year ended December 31, 2005, we spent $2,291,721 on research and development,
including $22,965 and $111,739 in costs associated with clinical trials for
EcoNail and Opterone, respectively, and $2,157,017 in costs not specifically
tracked to a project. For the fiscal year ended December 31, 2004, we spent
$4,221,039 on research and development, including $469,515, $1,109,345 and
$388,360 in costs associated with our clinical trials for EcoNail, Opterone and
Topiglan (our topical formulation of SEPA and alprostadil for treatment of
erectile dysfunction), respectively, and $2,253,819 in costs not specifically
tracked to a project. For the fiscal year ended December 31, 2003, we spent
approximately $2,938,026 on research and development, including $1,584,000 in
costs associated with our clinical trial for Topiglan and $1,354,026 in costs
not specifically tracked to a project. EcoNail and Opterone were not in clinical
trials in 2003. Following a complete review of the results of a Phase 2
pharmacodynamic study of Topiglan in which Topiglan did not meet its primary
clinical endpoints, we have no plans for further clinical studies of Topiglan.
Accordingly, as of June 30, 2004, we recorded a reduction of $124,853 to the
carrying value of certain patent assets related to Topiglan. For the year ending
December 31, 2006, we expect to continue to spend significant amounts on
clinical trials for EcoNail.
Each of our research and development programs is subject to risks and
uncertainties, including the requirement to seek regulatory approval, that are
outside of our control. Moreover, the product candidates identified in these
research and development programs, which currently are in developmental stages,
must overcome significant technological, manufacturing and marketing challenges
34
before they can be successfully commercialized. As a result of these risks and
uncertainties, we are unable to predict with any certainty the period in which
material net cash inflows from these projects could be expected to commence or
the completion date of these programs. For example, we are seeking a partner to
advance development of our Opterone product candidate. We cannot predict whether
our efforts to find a partner will be successful nor can we predict the manner
and timing in which any eventual partner may elect to pursue development of
Opterone. In addition, these risks and uncertainties also prevent us from
estimating with any certainty the specific timing and future costs of our
clinical development programs, although historical trends at similarly situated
companies indicate that research and development expenses tend to increase in
later stages of clinical development. Our failure to obtain requisite
governmental approvals timely or at all will delay or preclude us from licensing
or marketing our products or limit the commercial use of our products, which
could adversely affect our business, financial condition and results of
operations.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses consist primarily of salaries and other related costs
for personnel, marketing and promotion, professional fees and facilities costs.
Assuming we are able to raise sufficient capital, we anticipate that marketing,
general and administrative expenses will increase over the next several years as
we begin, when appropriate, to license, partner, or market our product
candidates if and when they receive regulatory approval.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. Note 1 to our financial statements included elsewhere in
this Annual Report on Form 10-K includes a summary of the significant accounting
policies and methods we use in the preparation of our financial statements. The
following is a brief discussion of the more significant accounting policies and
methods that affect the judgments and estimates used in the preparation of our
financial statements.
RESEARCH AND DEVELOPMENT REVENUE. Generally, we recognize research and
development funding as revenue at the time the research and development
activities are performed under the terms of the related agreements, when the
counterparty is obligated to pay, and when no future performance obligation
exists. We make estimates of the status of performance with respect to research
and development contracts. In the past, we have found such estimates to be
sufficiently accurate for revenue recognition purposes. We bill research and
development revenue on a cost reimbursement basis, which includes direct costs
we incur in connection with research activities and an allocation of certain
other costs we incur.
PATENT ASSETS. We defer costs and expenses incurred in connection with
pending patent applications. We amortize costs related to successful patent
applications over the estimated useful lives of the patents using the
straight-line method. We charge accumulated patent costs and deferred patent
application costs related to patents that are considered to have limited future
value to operations. Estimates we use to determine the future value of deferred
patent costs include analysis of potential market size, time and cost to
35
complete clinical trials, anticipated interest in our products and potential
value for licensing or partnering opportunities. We recognize revenues derived
or expected to be derived from the sale, assignment, transfer, or licensing of
patents or other intellectual property based upon the terms of the relevant
agreement.
DEFERRED TAXES. As part of the process of preparing our financial
statements we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves estimating our actual
current tax exposure together with assessing temporary differences resulting
from differing treatments of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. In addition, as of
December 31, 2005, we had federal tax net operating loss carryforwards of
approximately $69,339,393, which expire through 2025. We also have research and
development credit carryforwards of $2,432,167. We have recorded a valuation
allowance to fully offset against these otherwise recognizable net deferred tax
assets due to the uncertainty surrounding the timing of the realization of the
tax benefit. In the event that we determine in the future that we will be able
to realize all or a portion of the net deferred tax benefit, an adjustment to
deferred tax valuation allowance would increase net income in the period in
which such a determination is made. The utilization of net operating loss
carryforwards and credits available to be used in any given year may be limited
in the event of significant changes in ownership interest, as defined.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004
We had no revenues for the years ended December 31, 2005 and December 31,
2004. For the year ending December 31, 2006, we do not expect to have any
revenues.
Research and development costs for 2005 decreased by $1,929,318, from
$4,221,039 in 2004 to $2,291,721 in 2005, a 45.7% decrease. The decrease is
primarily attributable to the cessation of research and development activities
in August 2005, including a reduction in spending on clinical trials of
$1,832,516 compared with 2004 and a reduction in payroll and related expenses of
$204,494 in 2005 as a result of a staff reduction in August 2005. The decrease
in research and development costs as a result of these reductions was offset in
part by increases in payments to technical consultants of $115,000 and other
miscellaneous research expenses. For the year ending December 31, 2006, we
expect to incur clinical trial costs of approximately $750,000.
Marketing, general and administrative costs for 2005 decreased by
$1,170,360, from $4,158,452 in 2004 to $2,988,092 in 2005, a 28.0% decrease. The
decrease is primarily attributable to a staff reduction in August 2005 which
resulted in a reduction of salary and related expenses of $524,562. In addition,
in 2005 legal and audit expenses decreased by approximately $230,000, travel
expenses decreased by $40,000, insurance expenses decreased by $75,000,
consulting and investor relations expenses decreased by $320,000 and market
development expenses decreased by $110,000. The aggregate decrease in marketing,
general and administrative costs was offset, in part, by a payment of
approximately $370,000 to certain executive officers and administrative staff
under transition agreements. For the year ending December 31, 2006, we expect
marketing, general and administrative costs to approximate $2,200,000.
36
As reported on a Current Report on Form 8-K filed on September 7, 2005, the
Company terminated substantially all its non-management personnel on August 31,
2005. The costs associated with this staff reduction and related expenses were
approximately $156,839. As reported on a Current Report on Form 8-K filed on
September 16, 2005, the Company entered into transition agreements with its
executive officers in September 2005. The transition agreements terminated the
existing employment and severance agreements between the Company and each
executive. Pursuant to the terms of the transition agreements, the executives
agreed that they would remain employed by the Company until November 30, 2005.
Three executives executed amendments to their transition agreements extending
their employment through December 31, 2005 and beyond. The total costs
associated with all executive transition agreements were approximately $709,646.
Of this total, approximately $320,000 was charged to marketing, general and
administrative expenses. These agreements also provided for aggregate payments
of approximately $35,000 on November 30, 2005 and $35,000 on December 15, 2005.
Total other income decreased by $39,421 or 37.5%, from $104,971 in 2004 to
$65,550 in 2005. The decrease is attributable to lower cash balances available
for investment purposes in 2005.
For the year ended December 31, 2005, our net loss was $5,760,475 as
compared to a loss of $8,274,521 for the previous year, a 30.4% decrease, which
was due to the factors mentioned above.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
We had no revenues for the year ended December 31, 2004. Revenues for the
year ended December 31, 2003 were $1,010,031, nearly all of which was
attributable to the proceeds from the sale of a patent (U.S. Patent No.
6,459,124), which related to antifungal topical compositions but which did not
use our SEPA platform technology. Accordingly, we believe the sale of the patent
will not materially adversely affect our future operations, cash flows and
financial position.
Research and development costs increased by $1,283,013 from $2,938,026 in
2003 to $4,221,039 in 2004, a 44 % increase. The increase in research and
development costs for 2004 is primarily attributable to an increase in employee
compensation of $177,034 associated with the addition of four new research and
development employees in late 2003 as well as an increase in clinical trials and
related costs of $1,034,555. Of total research and development expenses,
$361,141 in 2004 and $494,909 in 2003 were paid to independent third party
contractors.
Marketing, general and administrative expenses for 2004 aggregated
$4,158,452, an increase of $360,360 or 9%, from 2003's total of $3,798,092. The
increase in marketing, general and administrative expenses for 2004 is primarily
attributable to an increase of $239,942 (which increase was calculated by
excluding $55,000 in consulting fees paid to Robert J. DeLuccia in his role as
interim Chief Executive Officer during the six months ended June 30, 2003) in
consulting fees relating to investor relations and business development, and an
increase in accounting related fees of $129,700. The increase is further
attributable to the reduction to the carrying value of certain patent assets
related to Topiglan of $124,853. Finally, the aggregate size of the increase in
37
marketing, general and administrative expenses for 2004 was partially offset by
savings in recruitment costs as well as a reduction in the premium for Directors
and Officers Insurance.
Total other income increased by $34,578 or 49%, from $70,393 in 2003 to
$104,971 in 2004. The increase is attributable primarily to higher cash balances
available for investment purposes.
For the year ended December 31, 2004, our net loss was $8,274,521 as
compared to a loss of $5,661,694 for the previous year, a 46% increase, which
was due to the factors mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our primary source of funding for our operations has been
the private and public sale of our securities, and, to a lesser extent, the
licensing of our proprietary technology and products, research collaborations,
feasibility studies, government grants and the limited sales of products and
test materials. During 2003, we received net proceeds of $99,575 from the
exercise of stock options and warrants, and net proceeds of $2,971,605 as a
result of the sale of our common stock in a private placement. During 2004, we
received net proceeds of $443,817 from the exercise of warrants, and proceeds of
$6,681,275 (net of issuance costs) as a result of the sale of our common stock
in a private placement financing transaction. During 2005, we received net
proceeds of $87,500 from the exercise of warrants, and proceeds of $815,000
($601,342 net of issuance costs) as a result of the sale of our common stock and
proceeds of $2,500,000 ($2,125,943 net of issuance costs) as a result of the
sale of our Series C Cumulative Convertible Preferred Stock in private placement
financing transactions. On February 13, 2006, we received gross proceeds of
$5,755,000 ($5,265,100 net of issuance costs but before legal and accounting) as
a result of the sale of our Series C Cumulative Convertible Preferred Stock in a
private placement financing transaction.
At December 31, 2005, working capital was approximately $2.7 million,
compared to $5.6 million at December 31, 2004. The decrease in our working
capital reflects the use of funds in operations, partially offset by the receipt
of private placement proceeds and net proceeds from the exercise of warrants. On
March 9, 2004, we sold approximately 128,619 shares of our common stock for
$7,292,700 in gross proceeds ($6,681,275 net of issuance costs) in a private
placement to institutional investors. The investors also received warrants to
purchase approximately 25,717 shares of common stock at a purchase price of
$87.78 per share expiring five years from the closing date. On April 19, 2005,
we sold approximately 65,040 shares of our common stock to institutional
investors and to certain executive officers and directors of the Company for
$815,000 in gross proceeds ($601,342 net of issuance costs). The investors also
received warrants to purchase approximately 32,520 shares of common stock at
exercise prices $14.70 for the institutional investors and $21.84 for the
officers and directors. On December 23, 2005, we sold 250 shares of Series C
Cumulative Convertible Preferred Stock for $2,500,000 in gross proceeds
($2,125,943 net of issuance costs) in a private placement to institutional
investors. The investors also received warrants to purchase 2,380,951 shares of
common stock at an exercise of $1.26 per share. On February 13, 2006, we sold
575.5 shares of our Series C Cumulative Convertible Preferred Stock for
$5,755,000 in gross proceeds ($5,265,100 net of issuance costs but before legal
38
and accounting) in a private placement to institutional investors. The investors
also received warrants to purchase 5,480,961 shares of the Company's common
stock at an exercise price of $1.26 per share. Until such time as we obtain
agreements with third-party licensees or partners to provide funding for our
anticipated business activities, or otherwise generate revenue from the
commercialization of our products, we will use our working capital to fund our
operating activities.
Pursuant to a plan approved by our Board of Directors in 1998, we are
authorized to repurchase 23,809 shares of our common stock to be held as
treasury shares for future use. During the fiscal year ended December 31, 2005,
we did not repurchase any shares of common stock. At December 31, 2005, 529
repurchased shares remain available for future use and 16,180 shares remain
available for repurchase under the plan.
Capital expenditures were $14,519 and patent development costs were
$105,080 for the year ended December 31, 2005. Capital expenditures were $73,526
and patent development costs were $36,591 for the year ended December 31, 2004.
We anticipate additional capital and patent expenditures will be approximately
$100,000 for the fiscal year ending December 31, 2006.
On July 10, 2003, the Board of Directors approved retention payments for
certain key employees, including certain executive officers, in order to enhance
retention of those employees. We made payments of approximately $84,000 on
January 8, 2004 and we made payments of approximately $153,000 on July 2, 2004.
On August 31, 2005, at the direction of our Board of Directors, we discontinued
all research and development activities and terminated substantially all of our
non-management personnel. We made payments of approximately $156,839 in
connection with this staff reduction and related expenses. In September 2005,
the Company entered into transition agreements with its executive officers. The
transition agreements terminated the existing employment and severance
agreements between the Company and each executive. Pursuant to the terms of the
transition agreements, the executives agreed that they would remain employed by
the Company until November 30, 2005. Three executives executed amendments to
their transition agreements extending their employment through December 31, 2005
and beyond. We made payments of approximately $709,646 in connection with all
executive transition agreements. We also made aggregate payments of
approximately $35,000 on November 30, 2005 and $35,000 on December 15, 2005
under a separate provision of the transition agreements. There are no further
payments due as a result of the staff reduction or under the transition
agreements.
As of December 31, 2005, we had $3,023,436 in cash, cash equivalents and
short-term investments. As noted above, on February 13, 2006 we received
$5,755,000 in gross proceeds ($5,265,100 net of issuance costs but before legal
and accounting costs) from the sale of our Series C Preferred Stock and warrants
to purchase shares of our common stock. We believe that our existing cash and
cash equivalents will be sufficient to meet our operating expenses and capital
expenditure requirements for at least the next twelve months. Our cash
requirements may vary materially from those now planned because of changes in
the focus and direction of our research and development programs, competitive
and technical advances, patent developments or other developments. We will
require additional financing to continue operations after we exhaust our current
capital resources and to continue our long-term plans for clinical trials and
39
new product development. We expect to continue financing our operations through
sales of our securities, strategic alliances or other financing vehicles, if
any, that might become available to us on terms that we deem acceptable.
We do not enter into financial instrument transactions for trading or
speculative purposes. We do not intend to establish any special purpose entity
and do not have any material off balance sheet financing transactions. We do not
believe that inflation will have any significant effect on the results of our
operations.
At December 31, 2005, the Company had no long-term contractual obligations.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123R, Share-Based Payment ("SFAS
No. 123R"). This Statement is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123R focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
The Statement requires entities to recognize stock compensation expense for
awards of equity instruments to employees based on the grant-date fair value of
those awards (with limited exceptions). SFAS No. 123R is effective for the first
fiscal year that begins after December 15, 2005. MacroChem Corporation expects
to adopt SFAS No. 123R using the Statement's modified prospective application
method. The Company does not yet have an estimate of the effect on its
statements of operations of adopting SFAS No. 123R.
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements" ("SFAS No. 154"). SFAS No. 154 provides
guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes, unless impracticable, retrospective application as
the required method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted
accounting principle. SFAS No. 154 also provides guidance for determining
whether retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is
impracticable. The provisions of SFAS No. 154 are effective for accounting
changes and corrections of errors made in fiscal periods beginning after
December 15, 2005. The adoption of the provisions of SFAS No. 154 is not
expected to have a material impact on the Company's financial position or
results of operations.
40
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
----------------------------------------------------------------
2005 Quarters
Revenues $ --- $ --- $ --- $ ---
Net Loss Attributable to
Common Stockholders $(1,841,540) $(1,526,346) $(1,820,992) $ (901,840)
Net Loss per Share $ (1.99) $ (1.56) $ (1.83) $ (0.87)
(basic and diluted)
2004 Quarters
Revenues $ --- $ --- $ --- $ ---
Net Loss $(2,218,528) $(2,453,570) $(1,911,484) $(1,690,939)
Net Loss per Share $ (2.52) $ (2.51) $ (2.10) $ (2.10)
(basic and diluted)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As of December 31, 2005, we were exposed to market risks, which relate
primarily to changes in U.S. interest rates. Our cash equivalents and short-term
investments are subject to interest rate risk and will decline in value if
interest rates increase. Due to the short duration of these financial
instruments, generally one year or less, changes in interest rates would not
have a material effect on our financial position. A hypothetical 10% change in
interest rates would not have a material effect on our Statement of Operations
or Cash Flows for the twelve months ending December 31, 2005, based on December
31, 2005 balances.
THE FOREGOING STATEMENTS IN THIS REPORT INCLUDE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE THOSE DISCUSSED OR REFERRED
TO IN ITEM 1A, RISK FACTORS.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required under this Item 8 is set forth on pages 41 through
61 of this report.
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of MacroChem Corporation:
We have audited the accompanying balance sheet of MacroChem Corporation (the
"Company") as of December 31, 2005, and the related statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 2005. 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 audit.
We conducted our audit in accordance with the auditing standards of the Public
Company Accounting Standards Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2005, and the
results of their operations and their cash flows for the year ended December 31,
2005 in conformity with accounting principles generally accepted in the United
States of America.
/s/ VITALE, CATURANO & COMPANY, LTD.
Boston, Massachusetts
March 20, 2006
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of MacroChem Corporation:
We have audited the accompanying balance sheets of MacroChem Corporation (the
"Company") as of December 31, 2004, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2004. 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 the auditing standards of the Public
Company Accounting Standards Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 the Company as of December 31, 2004, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements at December 31, 2004, the Company's recurring losses
from operations raised substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of the uncertainty.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 24, 2005
43
MACROCHEM CORPORATION
BALANCE SHEETS
Fiscal Year ended December 31,
2005 2004
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,023,436 $ 4,888,868
Short-term investments --- 1,185,406
Prepaid expenses and other current assets 106,761 328,908
----------- -----------
Total current assets 3,130,197 6,403,182
Property and equipment, net 72,203 183,079
Other assets:
Patents, net 579,053 523,603
----------- -----------
Total other assets 579,053 523,603
----------- -----------
Total assets $ 3,781,453 $ 7,109,864
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable $ 125,478 $ 244,148
Accrued expenses and other liabilities 249,552 523,703
----------- -----------
Total current liabilities 375,030 767,851
Deferred rent --- 5,509
Warrants liability 1,620,778 ---
----------- -----------
Total liabilities 1,995,808 773,360
Commitments and contingencies (Note 5)
Preferred stock, $.01 par value, 6,000,000 shares authorized,
250 shares Series C Convertible issued and outstanding at
December 31, 2005 (Notes 4 and 8) 330,243 ---
----------- -----------
330,243 ---
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 100,000,000 shares authorized;
997,438 and 926,285 shares issued at December 31, 2005
and December 31, 2004, respectively 9,974 9,263
Additional paid-in capital 84,089,530 83,320,908
Accumulated deficit (82,584,992) (76,824,517)
Less treasury stock, at cost, 529 and 1,482 shares at December 31, 2005
and December 31, 2004, respectively (59,110) (169,150)
----------- -----------
Total stockholders' equity 1,455,402 6,336,504
----------- -----------
Total liabilities and stockholders' equity $ 3,781,453 $ 7,109,864
=========== ===========
See notes to financial statements.
44
MACROCHEM CORPORATION
STATEMENTS OF OPERATIONS
Fiscal Year Ended December 31,
2005 2004 2003
---------- ---------- ----------
REVENUES
Sale of patent $ --- $ --- $ 1,000,000
Research contracts --- --- 10,031
----------- ----------- -----------
TOTAL REVENUES --- --- 1,010,031
OPERATING EXPENSES
Research and development 2,291,721 4,221,039 2,938,026
Marketing, general and administrative 2,988,092 4,158,452 3,798,092
Consulting fees with related parties --- --- 6,000
Costs associated with staff reduction and transition
agreements 546,212 --- ---
----------- ----------- -----------
TOTAL OPERATING EXPENSES 5,826,025 8,379,492 6,742,118
----------- ----------- -----------
LOSS FROM OPERATIONS (5,826,025) (8,379,492) (5,732,087)
OTHER INCOME
Interest income 65,550 104,971 70,393
----------- ----------- -----------
TOTAL OTHER INCOME 65,550 104,971 70,393
----------- ----------- -----------
NET LOSS $(5,760,475) $(8,274,521) $(5,661,694)
=========== =========== ===========
BENEFICIAL CONVERSION FEATURE (NOTES 4 AND 8) (330,243) --- ---
----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(6,090,718) $(8,274,521) $(5,661,694)
=========== =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (6.25) $ (9.23) $ (8.03)
=========== =========== ===========
SHARES USED TO COMPUTE BASIC AND DILUTED NET LOSS PER SHARE 974,367 896,039 704,621
=========== =========== ===========
STOCK BASED COMPENSATION INCLUDED IN:
Research and development $ --- $ 8,069 $ 39,128
Marketing, general and administrative --- 21,122 69,468
----------- ----------- -----------
$ --- $ 29,191 $ 108,596
=========== =========== ===========
See notes to financial statements.
45
MACROCHEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Shares
------------------ Additional Unearned Cost of Total
Common Paid-In Compen- Accumulated Treasury Stockholders'
Issued Treasury Stock Capital sation Deficit Subtotal Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2003 670,548 (4,411) $ 6,705 $73,224,277 $ (382) $(62,888,302) $10,342,298 $(672,779) $ 9,669,519
Stock based compensation (1) - - - 110,665 (2,069) - 108,596 - 108,596
Exercise of common stock
options 5,419 - 54 99,521 - - 99,575 - 99,575
Stock issued to 401(k) trust - 1,641 - (304,439) - - (304,439) 353,158 48,719
Issuance of common stock, net 108,420 - 1,084 2,970,521 - - 2,971,605 - 2,971,605
Net loss - - - - - (5,661,694) (5,661,694) - (5,661,694)
------- -------- ------- ----------- ------- ------------ ----------- --------- -----------
BALANCE, DECEMBER 31, 2003 784,387 (2,770) 7,843 76,100,544 (2,451) (68,549,996) 7,555,941 (319,621) 7,236,320
======= ======== ======= =========== ======= ============ =========== ========= ===========
Stock based compensation (1) - - - 26,740 2,451 - 29,191 - 29,191
Exercise of warrants 9,011 - 90 443,727 - - 443,817 - 443,817
Stock issued to 401(k) trust - 1,288 - (91,411) - - (91,411) 150,471 59,060
Issuance of common stock, net 128,619 - 1,286 6,679,989 - - 6,681,275 - 6,681,275
Issuance of restricted stock 4,268 - 43 161,319 161,362 - 161,362
Net loss - - - - - (8,274,521) (8,274,521) - (8,274,521)
------- -------- ------- ----------- -------- ------------ ----------- --------- -----------
BALANCE, DECEMBER 31, 2004 926,285 (1,482) $ 9,263 $83,320,908 $ - $(76,824,517) $ 6,505,654 $(169,150) $ 6,336,504
======= ======== ======= =========== ======= ============ =========== ========= ===========
Exercise of warrants 6,012 - 60 87,440 - - 87,500 - 87,500
Stock issued to 401(k) trust - 953 - (94,431) - - (94,431) 110,040 15,609
Issuance of common stock, net 65,141 - 651 417,430 - - 418,081 - 418,081
Issuance of warrants in
connection with sale of - - - 173,806 - - 173,806 - 173,806
common stock
Issuance of common stock
warrants to non-employees - - - 184,377 - - 184,377 - 184,377
Net loss (5,760,475) (5,760,475) - (5,760,475)
------- -------- ------- ----------- ------- ------------ ----------- --------- -----------
BALANCE, DECEMBER 31, 2005 997,438 (529) $ 9,974 $84,089,530 $ - $(82,584,992) $ 1,514,512 $ (59,110) $ 1,455,402
======= ======== ======= =========== ======= ============ =========== ========= ===========
(1) See following page for details.
See notes to financial statements. (continued)
46
MACROCHEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(1) Stock Based Compensation
Common Stock Additional
---------------- Paid-In Unearned
Shares Amount Capital Compensation Total
---------------- ---------- ------------ ----------
2003
Issuance of common stock options to non-employees ---- $ ---- $ 35,108 $ (4,902) $ 30,206
Amortization and other changes in unearned compensation ---- ---- (11) 2,833 2,822
Stock based compensation to employees and directors ---- ---- 75,568 ---- 75,568
------ ------ --------- -------- ----------
---- $ ---- $ 110,665 $ (2,069) $ 108,596
====== ====== ========= ======== ==========
2004
Issuance of common stock options to non-employees ---- $ ---- $ 15,322 $ ---- $ 15,322
Amortization and other changes in unearned compensation ---- ---- 4,093 2,451 6,544
Stock based compensation to employees and directors ---- ---- 7,325 ---- 7,325
------ ------ --------- -------- ----------
---- $ ---- $ 26,740 $ 2,451 $ 29,191
====== ====== ========= ======== ==========
2005
Issuance of common stock options to non-employees ---- $ ---- $ ---- $ ---- $ ----
Amortization and other changes in unearned compensation ---- ---- ---- ---- ----
Stock based compensation to employees and directors ---- ---- ---- ---- ----
------ ------ --------- -------- ----------
---- $ ---- $ ---- $ ---- $ ----
====== ====== ========= ======== ==========
See notes to financial statements. (concluded)
47
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------
2005 2004 2003
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,760,475) $ (8,274,521) $ (5,661,694)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 175,024 172,906 185,847
Stock-based compensation --- 190,553 108,596
Loss on disposal --- 767 ---
401(k) contributions in company common stock 15,610 59,060 48,719
Deferred rent (5,509) (27,854) (14,346)
Reduction to capitalized patents --- 124,853 ---
Change in assets and liabilities:
Receivable due from related party --- --- 25,057
Prepaid expenses and other current assets 222,147 (12,842) (110,801)
Accounts payable and accrued expenses (392,821) (212,111) 565,186
Deposits --- 29,193 ---
------------- ------------- -------------
Net cash used by operating activities (5,746,024) (7,949,996) (4,853,436)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of short-term investments 1,185,406 2,000,000 5,000,000
Purchases of short-term investments --- (15,883) (51,178)
Expenditures for property and equipment (14,519) (73,526) (3,454)
Additions to patents (105,080) (36,591) (94,396)
------------- ------------- -------------
Net cash provided by investing activities 1,065,807 1,874,000 4,850,982
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of common stock
options --- --- 99,575
Net proceeds from issuance of Series C
Cumulative Convertible Preferred Stock 2,125,943 --- ---
Net proceeds from issuance of common stock 601,342 6,681,275 2,971,605
Proceeds from exercise of warrants 87,500 443,817 ---
------------- ------------- -------------
Net cash provided by financing activities $ 2,814,785 $ 7,125,092 $ 3,071,180
------------- ------------- -------------
See notes to financial statements. (Continued)
48
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31,
---------------------------------------------
2005 2004 2003
---- ---- ----
NET CHANGE IN CASH
AND CASH EQUIVALENTS $(1,865,432) $ 1,049,096 $ 3,068,726
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 4,888,868 3,839,772 771,046
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 3,023,436 $ 4,888,868 $ 3,839,772
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
The Company did not pay any cash for interest expense or income taxes during the
years ended December 31, 2005, 2004 and 2003.
In April 2005, the Company issued warrants to purchase 32,520 shares of its
Common Stock to institutional investors in connection with the sale of Common
Stock. The warrants were valued at $173,806 based on the relative fair value of
the warrants. In April of 2005, the Company issued a warrant for the purchase of
1,190 shares of its Common Stock to the placement agent in connection with the
sale of Common Stock. The warrant was valued using the Black Scholes model at
$9,455 and is recorded as a non-cash issuance cost.
In December of 2005, the Company issued warrants to purchase 2,380,951 shares of
its Common Stock to institutional investors in connection with the sale of
Series C Cumulative Convertible Preferred Stock. The warrants were valued at
$1,620,778 based on the fair value of the warrants. In December of 2005, the
Company issued warrants for the purchase of approximately 238,095 shares of its
Common Stock to the designees of the placement agent in connection with the sale
of Series C Cumulative Convertible Preferred Stock. The warrant was valued using
the Black Scholes model at $174,922 and is recorded as a non-cash issuance cost.
See notes to financial statements. (Concluded)
49
MACROCHEM CORPORATION
NOTES TO FINANCIAL STATEMENTS
All references to share amounts, share prices and per share data in these
Notes to Financial Statements reflect both the 1-for-7 reverse stock split
effected on December 30, 2005 and the 1-for-6 reverse stock split effected on
February 9, 2006. Accordingly, where appropriate, share amounts, share prices
and per share data have been adjusted to give retroactive effect of the reverse
splits.
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
MacroChem Corporation (the "Company") is a specialty pharmaceutical company
that develops and seeks to commercialize pharmaceutical products using its
proprietary drug delivery technologies.
The Company has been engaged primarily in research and development since
its inception in 1981 and has derived limited revenues from the commercial sale
of its products, licensing of certain technology and feasibility studies. The
Company has had no revenues relating to the sale of any products currently under
development. The Company has incurred net losses every year since its inception
and the Company anticipates that losses may continue for the foreseeable future.
At December 31, 2004, the Company's accumulated deficit was approximately $76.8
million. At December 31, 2004, the Company believed that its existing cash and
cash equivalents were sufficient to fund operations under the Company's
operating plan until July 2005. At December 31, 2005, the Company's accumulated
deficit was approximately $82,584,992. The Company's ability to continue
operations after its current capital resources are exhausted depends on its
ability to obtain additional financing and achieve profitable operations, as to
which no assurances can be given. The Company believes that its existing cash
and cash equivalents will be sufficient to fund operations under the Company's
current plan for at least the next twelve months. The Company's cash
requirements may vary materially from those now planned because of changes in
the focus and direction of its research and development programs, competitive
and technical advances, patent developments or other developments.
The Company organizes itself as one segment reporting to the chief
executive officer. Products and services consist primarily of research and
development activities in the pharmaceutical industry.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The primary estimates
underlying the Company's financial statements include the fair market value of
warrants included in liabilities, the carrying value and useful lives of the
Company's patents and property and equipment, the valuation allowance
established for the Company's deferred tax assets, and the underlying
assumptions to apply the pricing model to value stock options under SFAS No.
123. Management bases its estimates on certain assumptions, which it believes
are reasonable in the circumstances, and while actual results could differ from
those estimates, management does not believe that any change in those
50
assumptions in the near term would have a significant effect on the financial
position or the results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash
equivalents, accounts payable and accrued expenses approximate their fair value
because of their short-term nature. Short-term investments are carried at
aggregate fair value.
CONCENTRATION OF RISK - Cash and cash equivalents and short-term
investments at December 31, 2005 and 2004 are primarily comprised of government
agency securities and certificates of deposit.
CASH AND CASH EQUIVALENTS - Cash equivalents consist of short-term, highly
liquid investments with a maturity of three months or less when purchased.
SHORT-TERM INVESTMENTS - Short-term investments are a liquid money market
mutual fund with a carrying value of $0 and $1,185,406 at December 31, 2005 and
2004, respectively.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the related assets, which range from three to ten
years.
PATENTS - The Company has filed applications for United States and foreign
patents covering aspects of its technology. Costs and expenses incurred in
connection with pending patent applications are deferred. Costs related to
successful patent applications are amortized over the estimated useful lives of
the patents, not exceeding 20 years, using the straight-line method. Accumulated
patent costs and deferred patent application costs related to patents that are
considered to have limited future value are charged to expense. Accumulated
amortization aggregated approximately $324,008 and $274,379, respectively, at
December 31, 2005 and 2004. 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.
LONG-LIVED ASSETS - The Company reviews its long-lived assets for
impairment when events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable. Recoverability of such
assets to be held and used is measured by a comparison of the carrying amount of
the asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Following a complete review of the results
of a Phase 2 pharmacodynamic study of Topiglan in which Topiglan did not meet
its primary clinical endpoints, the Company has no plans for further clinical
studies of Topiglan at this time. Accordingly, in 2004, the Company recorded a
reduction of $124,853 to the carrying value of certain patent assets related to
Topiglan.
REVENUE RECOGNITION - The Company's business seeks to generate revenues
through the development, commercialization and licensing of drug products based
upon the Company's intellectual property. Revenues derived or expected to be
derived from the sale, assignment, transfer or licensing of patents or other
51
intellectual property are recognized based upon the terms of the relevant
agreement.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations as incurred. Such costs include proprietary research and development
activities and expenses associated with research and development contracts,
whether performed by the Company or contracted with independent third parties.
STOCK BASED COMPENSATION - The Company has applied the intrinsic value
method of accounting for stock options and awards granted to employees. The
Company has accounted for stock options and awards to non-employees using the
fair value method.
Under the intrinsic value method, compensation associated with stock awards
to employees is determined as the difference, if any, between the current fair
value of the underlying common stock on the date compensation is measured and
the price an employee must pay to exercise the award. The measurement date for
employee awards is generally the date of grant. Under the fair value method,
compensation associated with stock-based awards to non-employees is determined
based on the estimated fair value of the award itself, measured using either
current market data or an established option pricing model. The measurement date
for non-employee awards is generally the date performance of services is
complete.
The Company has used the intrinsic value method to account for stock-based
compensation to employees and directors. The following table illustrates the
effect on net loss and net loss per share if the Company had applied the fair
value method to stock-based employee and director compensation:
2005 2004 2003
----------- ----------- -----------
Net loss attributable to common
stockholders as reported $(6,090,718) $(8,274,521) $(5,661,694)
Add: Stock-based employee compensation
expense included in reported net loss --- 7,325 75,568
Deduct: Total stock-based employee compensation
measured using the fair value method (733,414) (1,038,725) (1,449,341)
----------- ----------- -----------
Pro forma net loss $(6,824,132) $(9,305,921) $(7,035,467)
=========== =========== ===========
Basic and diluted net loss per share - as
reported $ (6.25) $ (9.23) $ (8.03)
=========== =========== ===========
Basic and diluted net loss per share - pro
forma $ (7.00) $ (10.39) $ (9.98)
=========== =========== ===========
52
The fair value of options on their grant date was measured using the
Black/Scholes option pricing model. Key assumptions used to apply this pricing
model are as follows:
2005 2004 2003
------------- ------------- -----------
Risk-free interest rate 3.82% - 4.25% 3.05% - 4.14% 2.62%-3.47%
Expected life of option grants 6 years 6 years 6 years
Expected volatility of underlying stock 100% 97% 97%
Expected dividend payment rate, as a
percentage of the stock price on the
date of grant --- --- ---
The weighted average fair values of options granted during 2005, 2004 and
2003 were $10.02, $51.24 and $36.12, respectively.
The option pricing model used was designed to value readily tradable stock
options with relatively short lives. The options granted to employees are not
tradable and have contractual lives of up to ten years.
INCOME TAXES - The Company recognizes deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the Company's financial statements or tax returns. Deferred tax assets and
liabilities are determined based upon the difference between the financial
reporting basis and the tax basis of existing assets and liabilities using
enacted tax rates expected to be in effect in the year(s) in which the
differences are expected to reverse. A valuation allowance is provided against
deferred tax assets if it is more likely than not that such assets will not be
realized.
REVERSE STOCK SPLITS - On December 30, 2005 we implemented a 1-for-7
reverse stock split of our common stock and on February 9, 2006 we implemented a
subsequent 1-for-6 reverse stock split of our common stock. Unless otherwise
noted, data used throughout the Financial Statements have been adjusted to
reflect these reverse splits.
NET LOSS PER SHARE - Basic earnings per share is computed using the
weighted average number of common shares outstanding during each year. Diluted
earnings per common share reflect the effect of the Company's outstanding
options and warrants, except where such items would be anti-dilutive. Due to the
net losses reported in 2005, 2004 and 2003, basic and diluted per share amounts
are the same. For the years ended December 31, 2005, 2004 and 2003, potential
common shares are not included in the per share calculations for diluted EPS,
because the effect of their inclusion would be anti-dilutive. Anti-dilutive
potential shares not included in per share calculations under the treasury stock
method for 2005, 2004 and 2003 were 2,807,673, 155,919 and 129,785 shares,
respectively.
RECENT ACCOUNTING PRONOUNCEMENT - In December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 123R, Share-Based Payment ("SFAS No. 123R"). This Statement is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. SFAS No. 123R
53
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. The Statement requires
entities to recognize stock compensation expense for awards of equity
instruments to employees based on the grant-date fair value of those awards
(with limited exceptions). SFAS No. 123R is effective for the fiscal year that
begins after December 15, 2005. MacroChem Corporation expects to adopt SFAS No.
123R using the Statement's modified prospective application method. The Company
does not yet have an estimate of the effect on its statements of operations of
adopting SFAS No. 123R.
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements" ("SFAS No. 154"). SFAS No. 154 provides
guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes, unless impracticable, retrospective application as
the required method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted
accounting principle. SFAS No. 154 also provides guidance for determining
whether retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is
impracticable. The provisions of SFAS No. 154 are effective for accounting
changes and corrections of errors made in fiscal periods beginning after
December 15, 2005. The adoption of the provisions of SFAS No. 154 is not
expected to have a material impact on the Company's financial position or
results of operations.
2. PROPERTY AND EQUIPMENT.
Property and equipment consists of the following as of December 31:
2005 2004
----------- -----------
Laboratory equipment $ 1,139,249 $ 1,125,978
Office equipment 489,459 488,208
Leasehold improvements 250,049 250,048
----------- -----------
Total 1,878,757 1,864,234
Less: accumulated depreciation (1,806,554) (1,681,155)
---------- ----------
Property and equipment, net $ 72,203 $ 183,079
=========== ===========
3. ACCRUED EXPENSES.
Accrued expenses and other liabilities consists of the following as of
December 31:
2005 2004
----------- -----------
Accrued professional fees $ 115,192 $ 101,000
Accrued clinical trial costs --- 23,108
Accrued bonuses --- 213,688
Accrued vendor invoices 134,360 185,907
----------- -----------
$ 249,552 $ 523, 703
=========== ===========
54
4. STOCKHOLDERS' EQUITY.
AUTHORIZED CAPITAL STOCK - Authorized capital stock consists of 100,000,000
shares of $.01 par value common stock of which 997,438 shares are issued
(996,909 are outstanding) and 5,177,429 are reserved for issuance upon exercise
of common stock options and warrants and conversion of Series C Cumulative
Convertible Preferred Stock at December 31, 2005. Authorized preferred stock
totals 6,000,000 shares, of which 500,000 shares have been designated Series A
Preferred Stock, 600,000 shares have been designated Series B Preferred Stock
and 1500 shares have been designated Series C Cumulative Convertible Preferred
Stock (250 shares were outstanding at December 31, 2005). The Series C Preferred
Stock has a liquidation value of $10,000 per share, is entitled to a dividend of
10% per annum, payable in cash or shares of our common stock at our option,
which dividend rate is subject to increase to 14% upon the occurrence of certain
events. The Series C Preferred Stock is redeemable at the holder's election in
the event the Company fails or refuses to convert any shares of Series C
Preferred Stock in accordance with the terms of the Certificate of Designation,
Rights and Preferences of the Series C Preferred Stock. The number of shares of
common stock into which each share of Series C Preferred Stock is convertible is
determined by dividing the liquidation value per share plus all accrued and
unpaid dividends thereon by $1.05. The conversion price for the Series C
Preferred Stock and the warrant exercise price are each subject to a reset
adjustment such that if the average of the price of the common stock over the
twenty trading days immediately preceding May 8, 2006 (the "Average Price") is
lower than the conversion and/or exercise price, then such conversion and/or
exercise price shall be adjusted to equal the Average Price. During 1998, the
Company's Board of Directors authorized the repurchase of up to 23,809 shares of
common stock at market price. The Company repurchased no shares in 2003, 2004
and 2005. At December 31, 2005, 529 repurchased shares remain available for
future use and 16,180 shares are available to be repurchased.
STOCK SALES - In September 2003, the Company sold 108,420 shares of common
stock and warrants to purchase 21,684 shares of common stock to primarily
institutional investors. Gross proceeds were $3,246,000 ($2,971,505 net of
issuance costs) and were allocated between the common stock and the warrants
based on the relative fair value of the warrants and common stock. In March
2004, the Company sold 128,619 shares of common stock and warrants to purchase
25,723 shares of common stock to primarily institutional investors. Gross
proceeds were $7,292,700 ($6,681,274 net of issuance costs) and were allocated
between the common stock and the warrants based on the relative fair value of
the warrants and common stock. In April 2005, the Company sold approximately
65,040 shares of common stock and warrants to purchase 32,520 shares of common
stock to institutional investors and to certain executive officers and directors
of the Company. Gross proceeds were $815,000 ($601,342 net of cash issuance
costs) and were allocated between the common stock and the warrants based on the
relative fair value of the warrants and common stock. In December 2005, the
Company sold 250 shares of Series C Cumulative Convertible Preferred Stock and
warrants to purchase 2,380,951 shares of common stock to institutional
investors. Gross proceeds were $2,500,000 ($2,125,943 net of cash issuance
costs) and were allocated between the Series C Cumulative Convertible Preferred
Stock and the warrants based on the fair value of the warrants.
WARRANTS - On December 23, 2005, the Company closed a private placement in
which institutional investors received warrants to purchase 2,380,951 shares of
common stock at an exercise of $1.26 per share for a period of six years. As of
December 31, 2005, none of these $1.26 warrants had been exercised. The
55
placement agent in this transaction received a warrant to purchase approximately
238,905 shares of common stock at a purchase price of $1.05 for a period of five
years. As of December 31, 2005, none of the $1.05 warrants issued to the
placement agent had been exercised. In accordance with EITF 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," the warrants are included as a liability and valued at
fair market value until the Company meets the criteria under EITF 00-19 for
permanent equity. The Company valued the warrants at $1,620,778 on December 31,
2005 using the Black-Scholes method with the following assumptions: a risk-free
interest rate of 4.18%, volatility of 100%, and a dividend yield of 0%.
On April 19, 2005, the Company closed a private placement in which
institutional investors and certain executive officers and directors of the
Company received warrants to purchase approximately 32,520 shares of common
stock for a period of five years. The exercise price of the warrants is $14.70
per share for the institutional investors and $21.84 for the participating
executive officers and directors. As of December 31, 2005, approximately 6,012
of the $14.70 warrants issued to the institutional investors had been exercised
and none of the $21.84 warrants issued to participating executive officers and
directors had been exercised. The placement agent in this transaction received a
warrant to purchase approximately 1,190 shares of common stock at a purchase
price of $14.70 for a period of five years. As of December 31, 2005, none of the
$14.70 warrants issued to the placement agent had been exercised.
During 2004, the Company conducted a private placement in which primarily
institutional investors received warrants to purchase an aggregate of 25,723
shares of common stock at a purchase price of $87.78 per share for a period of
five years. As of December 31, 2005, none of the $87.78 warrants had been
exercised.
During 2003, the Company conducted a private placement in which primarily
institutional investors received warrants to purchase an aggregate of 21,684
shares of common stock at a purchase price of $49.266 per share for a period of
three years. As of December 31, 2005, 9,011 of the $49.266 warrants issued to
the institutional investors had been exercised. The placement agent in this
transaction received a warrant to purchase 3,571 shares of common stock at a
purchase price of $49.266 for a period of three years. As of December 31, 2005,
none of the $49.266 warrants issued to the placement agent had been exercised.
During 2001, institutional investors received warrants to purchase an
aggregate of 7,457 shares of common stock at a purchase price of $277.62 per
share expiring in five years in connection with a private placement. The
warrants are callable by the Company if the closing price of the stock is higher
than $755.58 for 15 consecutive trading days at any time before expiration. As a
result of subsequent financing transactions, the exercise price of these
warrants has been adjusted to $277.62 in accordance with the terms of the
warrants. As of December 31, 2005, none of these warrants had been exercised.
All share amounts and prices have been adjusted to reflect the 1-for-7
reverse stock split effective December 30, 2005 and the 1-for-6 reverse stock
split effective February 9, 2006.
STOCK OPTION PLANS - The Company has four stock option plans, the 1984
Incentive Stock Option Plan (ISO Plan), the 1984 Non-Qualified Stock Option Plan
(Non-Qualified Plan), the 1994 Equity Incentive Plan (1994 Plan) and the 2001
Incentive Plan (the 2001 Plan).
56
Under the terms of the 1984 ISO and Non-Qualified Plans, the Company may no
longer award any options. All options previously granted may be exercised at any
time up to ten years from the date of award.
Under the terms of the 1994 Plan, the Company may no longer award any
options. All options previously granted under the 1994 Plan may be exercised at
any time up to ten years from the date of award.
Under the terms of the 2001 Plan, the Company may grant options to purchase
up to a maximum of 123,809 shares of common stock to certain employees,
directors and consultants. On June 23, 2004, at the Company's Annual Meeting of
Stockholders, the Company's stockholders approved an amendment to the Company's
2001 Incentive Plan to increase the number of shares of Common Stock authorized
for issuance under the Incentive Plan by 95,238 from 28,571, resulting in a
maximum of 123,809 shares of common stock that may be granted as options. The
options may be awarded as incentive stock options (employees only) and
non-incentive stock options (certain employees, directors and consultants).
The 2001 Plan, 1994 Plan and the ISO Plan state that the exercise price of
options shall not be less than fair market value at the date of grant.
The following table presents activity under all stock option plans:
Weighted Average
Number of Options Exercise Price
----------------- ----------------
Outstanding December 31, 2002 102,951 $ 160.44
Granted 10,633 47.04
Exercised (5,419) 18.48
Canceled (21,158) 92.40
----------------- ----------------
Outstanding December 31, 2003 87,007 171.78
Granted 9,142 68.04
Exercised --- ---
Canceled (11,619) 125.16
----------------- ----------------
Outstanding December 31, 2004 84,530 167.16
Granted 39,319 12.67
Exercised --- ---
Canceled (17,153) 29.85
----------------- ----------------
Outstanding December 31, 2005 106,696 132.24
================= ================
Exercisable at December 31: 2005 88,360 $ 153.81
================= ================
2004 67,993 $ 192.78
================= ================
2003 71,024 $ 190.26
================= ================
57
The following table sets forth information regarding options outstanding at
December 31, 2005:
Weighted Ave. Weighted Ave.
Number of Number Exercise Exercise Price-
Range of Exercise Options Currently Price-Options Weighted Ave. Currently
Prices Outstanding Exercisable Outstanding Remaining Life Exercisable
----------------- ----------- ----------- ------------- -------------- ---------------
$7.98 - 17.22 26,715 14,778 $ 13.99 9.37 $ 17.22
26.46 - 48.30 16,885 14,977 37.61 7.25 32.15
53.34 - 111.51 17,694 13,203 84.51 6.61 89.98
126.84 - 246.75 26,339 26,339 215.03 2.35 215.03
249.40 - 532.90 19,063 19,063 311.71 4.08 311.71
----------- ----------- ------------- -------------- ---------------
TOTAL 106,696 88,360 $ 132.24 5.90 $153.81
=========== =========== ============= ============== ===============
All options granted during the three year period ended December 31, 2005
were granted with an exercise price equal to the market price of the stock.
At December 31, 2005, the Company has reserved 2,807,673 shares of common
stock for issuance under all stock option plans and for warrants outstanding.
UNEARNED COMPENSATION - The following table sets forth the changes to the
Company's reported unearned compensation for the years ended December 31, 2005,
2004 and 2003 for the non-employee options:
2005 2004 2003
------------- -------------- --------------
Balance, January 1 $ --- $ 2,451 $ 382
Options, warrants and common stock granted to
non-employees valued at fair market value --- 15,322 4,902
Amortization of unearned compensation --- (17,773) (2,822)
Other changes in unearned compensation --- --- (11)
------------- -------------- --------------
Balance, December 31 $ --- $ --- $ 2,451
------------- -------------- --------------
STOCK AND STOCK OPTION ISSUANCES TO NON-EMPLOYEES - During 2005, there were
no options granted to non-employees or consultants. During 2004 and 2003, the
Company issued 357 and 1,130 stock grants and options, respectively, to
non-employees and consultants and recorded unearned compensation of $15,322 and
$4,902, respectively.
STOCK AND STOCK OPTION ISSUANCES OUTSIDE THE STOCK OPTION PLANS - During
2003, an option to purchase 11,904 shares of common stock was granted to Robert
J. DeLuccia, the Company's new Chief Executive Officer, of which 3,571 shares
vested immediately, with the remainder vesting over two years, with an exercise
price of $44.52 per share.
SHAREHOLDER RIGHTS PLAN - The Company has adopted a shareholder rights
plan. The Company declared a dividend consisting of one Right for each share of
common stock outstanding on September 10, 1999. Stock issued after that date
will be issued with an attached Right.
Each Right entitles the holder, upon the occurrence of certain events, to
purchase 42/100th of a share of Series B Preferred Stock of the Company at an
initial exercise price of $2,100.00, subject to adjustments for stock dividends,
58
splits and similar events. The Rights are exercisable only if a person or group
acquires 20% or more of the Company's outstanding common stock, or announces an
intention to commence a tender or exchange offer, the consummation of which
would result in ownership by such person or group of 20% or more of the
Company's outstanding common stock.
On December 23, 2005, the shareholder rights plan was amended to provide
that the acquisition of the Company's Series C Cumulative Convertible Preferred
Stock and warrants to acquire shares of its common stock by the purchasers in
the Company's recent private placement, and any subsequent acquisition by the
purchasers of common stock upon the conversion or exercise of those securities,
would not result in the Rights becoming exercisable.
The Board of Directors may, at its option after the occurrence of one of
the events described above, exchange all of the then outstanding and exercisable
Rights for shares of common stock at an exchange ratio of one share of common
stock per Right.
The Board of Directors may redeem the Rights at the redemption price of
$0.01 per Right at any time prior to the expiration of the rights plan on August
13, 2009. Distribution of the Rights is not a taxable event to shareholders.
The Board of Directors has authorized 600,000 shares of Series B Preferred
Stock.
5. COMMITMENTS AND CONTINGENCIES.
At December 31, 2005, the Company had no long-term contractual obligations.
6. INCOME TAXES.
No income tax provision or benefit has been provided for federal or state
income tax purposes as the Company has incurred losses in all periods reported
and recoverability of these losses in future tax filings is uncertain. As of
December 31, 2005, the Company has available net operating loss carryforwards of
approximately $69,339,393 for federal income tax purposes, expiring through 2025
and $44,827,346 for state income tax purposes, expiring through 2010. In
addition, the Company has unused investment and research and development tax
credits for federal and state income tax purposes aggregating $1,576,194 and
$855,973, respectively. The use of the federal net operating loss may also be
restricted due to changes in ownership in accordance with definitions as stated
in the Internal Revenue Code.
Income taxes computed using the federal statutory income tax rate differs
from the Company's effective tax rate primarily due to the following:
Year ended December 31,
2005 2004
---- ----
Statutory U.S. federal tax rate (34.0%) (34.0%)
State taxes, net of federal tax benefit (6.2%) (6.2%)
Federal research and development credits (1.5%) (0.6%)
Valuation allowance on deferred tax assets 41.7% 40.8%
------- ------
-% -%
------- ------
59
The net tax effect of differences in the timing of certain revenue and
expense items and the related carrying amounts of assets and liabilities for
financial reporting and tax purposes are not material and, accordingly, are not
displayed in the table below. The components of the Company's deferred tax
assets as of December 31, 2005 and 2004 are as follows:
2005 2004
------------- --------------
Deferred Tax Assets:
Net operating loss carryforwards $ 26,386,000 $ 24,927,000
Tax credit carryforwards 2,432,000 2,546,000
------------- --------------
28,818,000 27,473,000
Valuation allowance (28,818,000) (27,473,000)
------------- --------------
Deferred tax asset, net $ --- $ ---
============= ==============
For the years ended December 31, 2005 and 2004, the valuation allowance was
increased by approximately $1,345,000 and $2,639,000, respectively, due to the
uncertainty of future realization of currently generated net operating loss and
tax credit carryforwards.
7. EMPLOYEE BENEFIT PLAN.
The Company sponsors a qualified 401(k) Retirement Plan (the "Plan") under
which employees are allowed to contribute certain percentages of their pay, up
to the maximum allowed under Section 401(k) of the Internal Revenue Code.
Company contributions to the Plan are at the discretion of the Board of
Directors. The Company contributed 953 shares of common stock in 2005, 1,286
shares of common stock in 2004 and 1,642 shares of common stock in 2003, valued
at $15,610, $59,060 and $48,719, respectively. The Company also contributed
$42,539 in cash to the Plan in 2005.
8. SUBSEQUENT EVENT.
In February 2006, the Company completed a private placement of its
securities to institutional investors, consisting of two closings, for
approximately $8.25 million in gross proceeds. The first closing of the private
placement, in which institutional investors acquired 250 shares of Series C
Cumulative Convertible Preferred Stock and six-year warrants to purchase
2,380,951 shares of common stock at an exercise of $1.26 per share, for an
aggregate purchase price of $2.5 million, took place on December 23, 2005 and is
reflected in the financial statements at December 31, 2005. The second closing
of the private placement, in which institutional investors acquired 575.5 shares
of Series C Cumulative Convertible Preferred Stock and six-year warrants to
purchase 5,480,961 shares of the Company's common stock at an exercise price of
$1.26 per share, for an aggregate purchase price of approximately $5.75 million,
occurred on February 13, 2006. As of December 31, 2005, none of the $1.26
warrants had been exercised. The placement agent in the transaction received a
warrant to purchase approximately 548,095 shares of common stock at a purchase
price of $1.05 for a period of six years. The Series C Preferred Stock has a
liquidation value of $10,000 per share, is entitled to a dividend of 10% per
annum, payable in shares of our common stock at our option, which dividend rate
is subject to increase to 14% upon the occurrence of certain events. The number
of shares of common stock into which each share of Series C Convertible
Preferred Stock is convertible is determined by dividing the liquidation value
per share plus all accrued and unpaid dividends thereon by $1.05. Unless a
holder of Series C Cumulative Convertible Preferred Stock elects otherwise, its
60
ability to convert its Series C Cumulative Convertible Preferred Stock into
common stock or to vote on an as-if-converted to common stock basis is
restricted to the extent that such conversion would result in the holder owning
more than 4.95% of our issued and outstanding common stock or voting together
with the common stock on an as-if-converted to common stock basis in respect of
more than 4.95% of our issued and outstanding common stock. The warrants issued
in the private placement are subject to a similar restriction on their exercise.
SCO Capital Partners LLC, Beach Capital LLC and Perceptive Life Sciences Master
Fund Ltd. ("Perceptive") have elected not to be governed by these restrictions,
although we have entered into an agreement with Perceptive whereby Perceptive's
ability to convert or vote its shares of Series C Preferred Stock is subject to
a beneficial ownership cap of 9.95% instead of 4.95%.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 24, 2006, Deloitte & Touche LLP ("Deloitte") resigned as our
independent registered public accounting firm.
Deloitte's report relating to the financial statements of the Company for
the year ended December 31, 2004 did not contain an adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to audit scope or
accounting principles, except the report contained an explanatory paragraph
relating to the Company's ability to continue as a going concern. Deloitte's
report relating to the financial statements of the Company for the year ended
December 31, 2003 did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified or modified as to uncertainty, audit scope or accounting
principles.
During the Company's fiscal years ended December 31, 2003 and December 31,
2004, and through January 24, 2006, the date which Deloitte resigned, the
Company had no disagreement with Deloitte on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to Deloitte's satisfaction, would have caused Deloitte to
make reference to the subject matter of the disagreement in connection with its
reports for such periods. During the Company's fiscal years ended December 31,
2003 and December 31, 2004, and through January 24, 2006, there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
On February 14, 2006 and effective the same date, on the recommendation of
the Company's Audit Committee, the Company engaged Vitale, Caturano & Company
Ltd. ("Vitale") as its independent registered public accounting firm to audit
the Company's financial statements as of and for the fiscal year ending December
31, 2005 and to perform procedures related to the financial statements included
in the Company's quarterly reports on Form 10-Q, beginning with quarter ended
March 31, 2006.
During the two most recent fiscal years and through February 14, 2006, the
Company has not consulted with Vitale on any matter which was the subject of any
disagreement or any reportable event as defined in Regulation S-K Item
304(a)(1)(iv) and Regulation S-K Item 304(a)(1)(v), respectively, or on the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements, relating to which either a written report
61
was provided to the Company or oral advice was provided that Vitale concluded
was an important factor considered by the Company in reaching a decision as to
the accounting, auditing or financial reporting issue.
ITEM 9A. CONTROL AND PROCEDURES.
As of the end of the period covered by this report, we carried out a
review, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as defined in the SEC
rules promulgated under the Securities Exchange Act of 1934, as amended), which
are designed to ensure that information required to be disclosed in our
Securities and Exchange Commission reports is properly and timely recorded,
processed, summarized and reported. Based upon that review, our Chief Executive
Officer and Chief Financial Officer concluded that while our disclosure controls
and procedures are effective in timely alerting them to material information
required to be included in our periodic filings with the Securities and Exchange
Commission, there is a lack of segregation of duties at the Company due to the
small number of employees dealing with general administrative and financial
matters. This constitutes a significant deficiency in financial reporting.
However, at this time management has decided that, considering the employees
involved and the control procedures in place, the risks associated with such
lack of segregation are insignificant, and the potential benefits of adding
additional employees to clearly segregate duties do not justify the expenses
associated with such increases. Management will continue to evaluate this
segregation of duties.
There were no changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and subsequent biographies set forth the year each of
our current directors was first elected and the age, positions, and offices
presently held by each director with the Company:
Name Age Position with MacroChem
- ----------------------------- ------ --------------------------------
John L. Zabriskie, Ph.D. 66 Chairman of the Board of Directors
Robert J. DeLuccia 60 President, Chief Executive Officer
and Vice Chairman of the Board of
Directors
Michael A. Davis, M.D., Sc.D. 64 Director
Paul S. Echenberg 62 Director
Peter G. Martin 57 Director
Jeffrey B. Davis 42 Director
Howard S. Fischer 43 Director
62
The following is a brief summary of the background of each of our
directors:
JOHN L. ZABRISKIE, PH.D., has served as a Director of MacroChem since 2000
and was elected Chairman of the Board of Directors in 2001. Since 2001, he has
been a co-founder and Director of PureTech Ventures, LLC. From 1997 to 2000, he
was Chairman, President and Chief Executive Officer of NEN Life Science
Products, which was sold to Perkin Elmer. In 1994, Dr. Zabriskie became
Chairman, President and Chief Executive Officer of Upjohn; he was responsible
for Upjohn's merger with Pharmacia, and became Chief Executive Officer of the
merged company. Before his appointment at Upjohn, he spent nearly 30 years with
Merck & Company, rising to Executive Vice President and President of Merck
Manufacturing Division. He is a member of the Board of Directors of PureTech
Ventures, LLC (since 2000) and the following publicly traded companies: Array
Biopharma (since 2001); Biosource International (since 2002); Momenta
Pharmaceuticals, Inc. (since 2001); and Kellogg Company (since 1995). Dr.
Zabriskie received a B.S. in chemistry from Dartmouth College and a Ph.D. in
organic chemistry from the University of Rochester.
ROBERT J. DELUCCIA has served as our President and Chief Executive Officer
and Vice Chairman of the Board of Directors since June 2003 and as a Director
since 2000. From 1998 to 1999, Mr. DeLuccia served as President and Chief
Executive Officer of Immunomedics, Inc., a Nasdaq-listed biopharmaceutical
company focused on the development and commercialization of antibody diagnostic
imaging and therapeutic products for cancer and infectious diseases. Prior to
Immunomedics, he was President of Sterling Winthrop Pharmaceuticals, the U.S.
subsidiary of Sanofi (now Sanofi-Aventis). Mr. DeLuccia began his career as a
pharmaceutical sales representative for Pfizer and progressed to Vice President
Marketing and Sales Operations for Pfizer's Roerig Division. He is also a member
of the board of directors of IBEX Technologies, a publicly traded (TSX)
pharmaceutical company specializing in the development of biological markers for
diagnosis, monitoring and treatment of cancer and arthritis, and TOPIGEN
Pharmaceuticals, Inc., a privately held biopharmaceutical company and developer
of anti-inflammatory respiratory products. Mr. DeLuccia holds both a B.S. and an
M.B.A. in marketing from Iona College.
MICHAEL A. DAVIS, M.D., SC.D., has served as a Director of MacroChem since
1997 and provided medical and pharmaceutical consulting services to MacroChem
from 1991 to 2003. He currently is Medical Director of E-Z-EM, Inc., a public
company engaged in supplying oral radiographic contrast media and medical
devices. Dr. Davis served as a Director of E-Z-EM from 1995 to 2004 and
currently holds the designation of Director Emeritus. In November of 2004 he was
elected a Director and Chairman of the Executive Committee of OmniCorder
Technologies, Inc. (renamed Advanced BioPhotonics, Inc.), a public company
engaged in infrared imaging of perfusion. In January 2006, he was appointed
Research Professor of Radiology at SUNY/Stony Brook. From 1980 to 2002, Dr.
Davis was Professor of Radiology and Nuclear Medicine and Director of the
Division of Radiologic Research at the University of Massachusetts Medical
School. From 1986 to 2002, he was Affiliate Professor of Biomedical Engineering
at Worcester Polytechnic Institute. From 1982 to 1997, Dr. Davis was Adjunct
Professor of Surgery at Tufts University School of Veterinary Medicine. In
addition, from February to November 1999 he was President and Chief Executive
Officer of Amerimmune Pharmaceuticals, Inc., a public company, and its wholly
owned subsidiary, Amerimmune Inc., which is engaged in developing drugs relating
to the immune system. From February 1999 to March 2003, Dr. Davis served as a
Director of both Amerimmune Pharmaceuticals, Inc. and Amerimmune Inc. Dr. Davis
63
received a B.S. and M.S. from Worcester Polytechnic Institute, an S.M. and Sc.D.
from the Harvard School of Public Health, an M.B.A. from Northeastern University
and an M.D. from the University of Massachusetts Medical School.
PAUL S. ECHENBERG has served as a Director of MacroChem since 2000. Since
1997, he has been the President and Chief Executive Officer of Schroders &
Associates Canada, Inc. and a director of Schroder Ventures Limited. These firms
provide merchant banking advisory services to a number of Canadian buy-out
funds. He is a director of the following publicly traded companies: E-Z-EM,
Inc., AngioDynamics, Inc. and Benvest Capital Inc., a merchant bank that he
co-founded. From 1989 through 1997, Mr. Echenberg was President of Eckvest
Equity, Inc., a private merchant bank providing consulting and personal
investment services that he founded. From 1970 to 1989, he was President and
Chief Executive Officer of Twinpak, Inc., a manufacturer of plastic packaging,
and from 1982 to 1989 he was Executive Vice President of CB Pak, Inc., a
publicly traded plastic, glass and packaging company. Mr. Echenberg received a
B.Sc. from McGill University and an M.B.A. from Harvard Business School.
PETER G. MARTIN has served as a Director of MacroChem since 1995. Since
1990, Mr. Martin has been an independent investment banker and venture
capitalist and currently an advisor to Enzo Biochem. Prior to 1990, he was a
commercial banker. Mr. Martin was initially elected to the Board of Directors as
the designee of David Russell, who privately purchased one million shares of our
Common Stock in 1995. Mr. Russell is no longer entitled to designate a Director
of MacroChem. Mr. Martin received a B.A. and J.D. from Fordham University and an
M.B.A. from Columbia University.
JEFFREY B. DAVIS has served as a Director of MacroChem since 2005. Since
1997, Mr. Davis has been president of SCO Securities LLC. Prior to joining SCO
Securities LLC, from 1995 to 1997, Mr. Davis served as senior vice president and
chief financial officer of HemaSure, Inc., a publicly traded development stage
healthcare technology company. From 1990 to 1995, he was vice president,
corporate finance, at Deutsche Morgan Grenfell, both in the U.S. and Europe.
Prior to that, he served in senior marketing and product management positions at
AT&T Bell Laboratories, where he was also a member of the technical staff, and
he was involved in marketing and product management at Philips Medical Systems
North America. Mr. Davis served previously on the board of Bioenvision, Inc.
(Nasdaq: BIVN) and currently is a member of the board of directors of Virium
Pharmaceuticals, Inc. and Access Pharmaceuticals, Inc., private biotechnology
companies. Mr. Davis was initially elected to the Board of Directors as the
designee of SCO Capital Partners LLC, who purchased three hundred shares of our
Series C Cumulative Convertible Preferred Stock in a private placement closing
in December 2005 and February 2006. SCO Capital Partners LLC has the right to
designate two individuals to serve on our board of directors for as long as at
least 20% of the shares of Series C Preferred Stock issued in that private
placement remain outstanding. Mr. Davis holds a BS in biomedical engineering
from Boston University and an MBA degree from The Wharton School, University of
Pennsylvania.
HOWARD S. FISCHER has served as a Director of MacroChem since 2005. Since
December 2005, Mr. Fischer has been a Managing Director of SCO Securities LLC.
Prior to that, from January 2005 to September 2005 he was an investment manager
and research analyst for Silverback Asset Management's life sciences fund. From
2001 to 2004, he was President of an independent healthcare advisory business,
64
providing consulting services to a number of venture capital firms and their
portfolio companies, private equity groups and public and private corporations;
in addition, he served as a valuation expert in arbitration proceedings. From
1997 to 2001 Mr. Fischer was Executive Director at UBS/PaineWebber Global
Healthcare Investment Banking and a Director at Prudential Securities Healthcare
Investment Banking. He began his investment banking career at Furman Selz LLC in
1986. Mr. Fischer was initially elected to the Board of Directors as the
designee of SCO Capital Partners LLC, who purchased three hundred shares of our
Series C Cumulative Convertible Preferred Stock in a private placement closing
in December 2005 and February 2006. SCO Capital Partners LLC has the right to
designate two individuals to serve on our board of directors for as long as at
least 20% of the shares of Series C Preferred Stock issued in that private
placement remain outstanding. Mr. Fischer holds an MBA from the University of
Chicago's Graduate School of Business and a BS degree from the Wharton School,
University of Pennsylvania.
AUDIT COMMITTEE
Mr. Martin (Chairman), Dr. Davis and Mr. Echenberg serve as members of the
Audit Committee, which was established to assist the Board of Directors by (1)
reviewing our financial results and recommending the selection of our
independent auditors; (2) reviewing the effectiveness, quality and integrity of
our accounting policies and practices, financial reporting and internal
controls; and (3) reviewing the scope of the audit, the fees charged by the
independent auditors and any transactions which may involve a potential conflict
of interest. The Board of Directors has determined that Mr. Echenberg is the
"audit committee financial expert." Each member of the Audit Committee meets the
definition of "independent" as required by the established criteria of the SEC.
EXECUTIVE OFFICERS
Name Age Position with MacroChem
- --------------------- ------- ----------------------------------------
Robert J. DeLuccia 60 President, Chief Executive Officer and
Vice Chairman of the Board of Directors
Glenn E. Deegan 39 Vice President and General Counsel
Bernard R. Patriacca 62 Vice President, Chief Financial Officer
and Treasurer
The following is a brief summary of the backgrounds of Mr. Deegan and Mr.
Patriacca. The background of our other executive officer, Mr. DeLuccia, is
summarized above.
GLENN E. DEEGAN, ESQ., has served as our Vice President, General Counsel
and Secretary since July 2003. From June 2001 until July 2003, Mr. Deegan served
as our Director of Legal Affairs and as General Counsel and Secretary. Prior to
joining MacroChem, he served as Assistant General Counsel of Summit Technology,
Inc. from 1999 to 2001. Earlier in his career, Mr. Deegan was engaged in the
private practice of law in Boston at Holland & Knight LLP from 1997 to 1999 and
at Nutter, McClennen & Fish, LLP from 1993 to 1997. Mr. Deegan also served as
law clerk to the Honorable Francis J. Boyle in the United States District Court
for the District of Rhode Island from 1992 to 1993. Mr. Deegan holds a B.S. from
Providence College and a J.D. from Boston College.
65
BERNARD R. PATRIACCA, C.P.A., has served as our Vice President, Chief
Financial Officer and Treasurer since April 2001. From 1997 to 2001, he served
as Vice President and Controller of Summit Technology, Inc. From 1994 to 1997,
he served as Vice President of Errands Etc., Inc., a privately held homeowners'
personal service company. From 1991 to 1994, Mr. Patriacca held senior financial
management positions at several privately held consumer services companies. From
1973 to 1991, he was employed in various capacities at Dunkin Donuts, Inc.,
including Chief Financial Officer and Director. Mr. Patriacca received an M.B.A.
and a B.S. from Northeastern University.
CODE OF CONDUCT AND ETHICS
MacroChem's Board of Directors has adopted a code of ethics and conduct
that applies to its principal executive officer, principal accounting officer or
controller, or persons performing similar functions. That Code of Ethics and
Conduct has been posted on MacroChem's Internet website at www.macrochem.com.
MacroChem would intend to satisfy the disclosure requirements under Item 10 of
Form 8-K regarding an amendment to, or waiver from, a provision of its Code of
Ethics and Conduct and that relates to a substantive amendment or material
departure from a provision of the Code by posting such information on its
internet website at www.macrochem.com.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who beneficially own more than 10 percent of
the Company's Common Stock to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Based solely on its review of the
copies of such reports received by it, and written representations from certain
reporting persons that no Forms 5 were required for those persons, the Company
believes that during 2005 all filing requirements applicable to its officers,
directors, and such 10 percent beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth the compensation earned by or paid or
awarded to Mr. DeLuccia, Mr. Patriacca, Dr. Chan, Mr. Deegan and Mr. Snyder
during each of the three fiscal years ended December 31, 2005:
66
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Awards
Restricted Securities
Other Annual Stock Underlying All Other
Name and Compensation Awards Options Compensation
Principal Position Year Salary ($) Bonus ($) ($)(1) ($)(2) (#)(3) ($)(4)
- -------------------------- ----- ---------- --------- ------------ ---------- ---------- ------------
Robert J. DeLuccia (5) 2005 192,000 --- 19,188 --- 9,423 48,000
President, Chief 2004 288,000 58,752 17,688 --- 6,472 -----
Executive Officer 2003 195,000 54,720 6,516 54,720 11,904 -----
Bernard R. Patriacca (6) 2005 133,333 --- 1,188 --- 4,951 198,808
Vice President, Chief 2004 193,750 32,400 1,188 --- 3,452 49,500
Financial Officer and 2003 185,000 29,360 1,032 29,360 1,142 28,000
Treasurer
Thomas C.K. Chan (7) 2005 136,667 --- 414 --- 7,982 203,969
Vice President, Research 2004 196,667 40,590 270 --- 4,102 49,500
& Development, Chief 2003 182,716 30,359 360 30,359 1,809 27,481
Technology Officer
Glenn E. Deegan (8) 2005 120,000 --- 162 --- 4,780 183,667
Vice President, 2004 165,156 30,240 162 --- 3,066 26,500
General Counsel and 2003 138,763 22,913 360 22,913 1,330 16,000
Secretary
Melvin A. Snyder (9) 2005 129,500 --- 1,188 --- 4,304 190,632
Vice President, Market 2004 194,250 24,242 1,188 --- 2,828 48,805
Development 2003 194,250 24,010 1,584 24,010 1,190 27,160
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes amounts paid for taxable group term life insurance. Also includes,
for Mr. DeLuccia, a monthly automobile allowance of $1,000 for 2003 and a
portion of 2004 and $1,500 for the remainder of 2004 and for 2005.
(2) Although the restricted stock reflected in this table was earned in 2003,
the awards were made in January 2004. The values in this table are as of
the date of the grant. As of December 31, 2005, the following number of
shares of restricted stock were held by the individuals listed in the
table: Mr. DeLuccia - 1,447, Mr. Patriacca - 776, Mr. Deegan - 606, Dr.
Chan - 803, and Mr. Snyder - 635. The value of those shares of restricted
stock as of December 31, 2005 were as follows: Mr. DeLuccia - $1,823.22,
Mr. Patriacca - $977.76, Mr. Deegan - $763.56, Dr. Chan - $1,011.78, and
Mr. Snyder - $800.01.
(3) Total stock option grants reported in the table for 2004 include the
following stock option awards which, although earned in 2004, were granted
on March 23, 2005: Mr. DeLuccia - 4,662; Mr. Patriacca - 2,571; Dr. Chan -
3,221; Mr. Deegan - 2,400; and Mr. Snyder - 1,924. These options were
granted at an exercise price of $17.22 per share. The options expire ten
years from the date of grant and vested fully on the date of grant.
(4) Represents the dollar value of MacroChem's contributions to our 401(k)
Retirement Plan, which are made in our common stock, as well as, for a
portion of fiscal year 2005, in cash. For fiscal year 2004, also represents
the following retention payments payable as of July 2, 2004: Mr. Patriacca
- $43,000; Dr. Chan - $43,000; Mr. Deegan - $20,000; and Mr. Snyder -
$43,000. For fiscal year 2005, also represents the following payments made
pursuant to Transition Agreements: Mr. DeLuccia - $48,000; Mr. Patriacca -
$191,808; Dr. Chan - $197,969; Mr. Deegan - $176,677; and Mr. Snyder -
$185,472.
(5) Mr. DeLuccia's employment commenced on July 1, 2003. Of total salary in
2003, $51,000 related to a consulting contract in connection with his role
as interim CEO. As part of Mr. DeLuccia's 2003 compensation, he received an
award of 1,447 shares of restricted stock on January 7, 2004, all of which
vested six months from the date of grant.
(6) Mr. Patriacca's employment commenced on April 23, 2001. As part of Mr.
Patriacca's 2003 compensation, he received an award of 776 shares of
restricted stock on January 7, 2004, all of which vested six months from
the date of grant.
(7) Dr. Chan was appointed Vice President, Research and Technology on September
24, 2001. As part of Dr. Chan's 2003 compensation, he received an award of
803 shares of restricted stock on January 7, 2004, all of which vested six
months from the date of grant. Dr. Chan's employment with the Company
terminated effective November 30, 2005.
67
(8) Mr. Deegan was appointed Vice President, General Counsel and Secretary on
July 10, 2003. As part of Mr. Deegan's 2003 compensation, he received an
award of 606 shares of restricted stock on January 7, 2004, all of which
vested six months from the date of grant.
(9) As part of Mr. Snyder's 2003 compensation, he received an award of 635
shares of restricted stock on January 7, 2004, all of which vested six
months from the date of grant. Mr. Snyder's employment with the Company
terminated effective November 30, 2005.
</FN>
STOCK OPTIONS
The following table provides information concerning the grant of stock
options during 2005 to Mr. DeLuccia, Dr. Chan, Mr. Deegan, Mr. Patriacca and Mr.
Snyder:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------
% of Total
Number of Options Potential Realizable Value
Securities Granted to Exercise at Assumed Annual Rates of
Underlying Employees or Base Stock Price Appreciation
Options in Fiscal Price Expiration for Option Term
Name Granted (#) Year ($/sh) Date 5%($) 10%($)
- -------------------- ----------- ---------- -------- ----------- --------------------------
Robert J. DeLuccia 4,662 (1) 11.9 17.22 3/23/15 $50,487 $127,945
Robert J. DeLuccia 4,761 (1) 12.0 10.50 7/20/15 31,439 79,672
Bernard R. Patriacca 2,571 (2) 6.5 17.22 3/23/15 27,843 70,559
Bernard R. Patriacca 2,380 (2) 6.1 10.50 7/20/15 15,716 39,828
Thomas C.K. Chan 3,221 (3) 8.3 17.22 3/23/15 34,882 88,398
Thomas C.K. Chan 4,761 (3) 12.0 10.50 7/20/15 31,439 79,672
Glenn E. Deegan 2,400 (4) 6.1 17.22 3/23/15 25,991 65,866
Glenn E. Deegan 2,380 (4) 6.1 10.50 7/20/15 15,716 39,828
Melvin A. Snyder 1,924 (5) 4.6 17.22 3/23/15 20,836 52,803
Melvin A. Snyder 2,380 (5) 6.1 10.50 7/20/15 15,716 39,828
<FN>
(1) A portion of the options granted to Mr. DeLuccia were granted in March 2005
at an exercise price of $17.22 per share. The options expire ten years from
the date of grant and vested fully on the date of grant. A portion of the
options granted to Mr. DeLuccia were granted in July 2005 at an exercise
price of $10.50 per share. The options expire ten years from the date of
grant and vest over the next three years.
(2) A portion of the options granted to Mr. Patriacca were granted in March
2005 at an exercise price of $17.22 per share. The options expire ten years
from the date of grant and vested fully on the date of grant. A portion of
the options granted to Mr. Patriacca were granted in July 2005 at an
exercise price of $10.50 per share. The options expire ten years from the
date of grant and vest over the next three years.
(3) A portion of the options granted to Dr. Chan were granted in March 2005 at
an exercise price of $17.22 per share. The options expire ten years from
the date of grant and vested fully on the date of grant. A portion of the
options granted to Dr. Chan were granted in July 2005 at an exercise price
of $10.50 per share. The options, which were to expire ten years from the
date of grant and vest over the next three years, were cancelled effective
November 30, 2005, the date Dr. Chan's employment with the Company
terminated.
(4) A portion of the options granted to Mr. Deegan were granted in March 2005
at an exercise price of $17.22 per share. The options expire ten years from
the date of grant and vested fully on the date of grant. A portion of the
options granted to Mr. Deegan were granted in July 2005 at an exercise
price of $10.50 per share. The options expire ten years from the date of
grant and vest over the next three years.
(5) A portion of the options granted to Mr. Snyder were granted in March 2005
at an exercise price of $17.22 per share. The options expire ten years from
the date of grant and vested fully on the date of grant. A portion of the
options granted to Mr. Snyder were granted in July 2005 at an exercise
price of $10.50 per share. The options, which were to expire ten years from
the date of grant and vest over the next three years, were cancelled
effective November 30, 2005, the date Mr. Snyder's employment with the
Company terminated.
</FN>
68
The following table provides information concerning option exercises during
the fiscal year ended December 31, 2005 and unexercised options held by Mr.
DeLuccia, Mr. Patriacca, Mr. Snyder, Dr. Chan, and Mr. Deegan, as of December
31, 2005:
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-The-Money Options at
at Year End Fiscal Year-End ($)(1)
Shares Acquired on Value Realized Exerciseable/ Exerciseable /
Name Exercise (#) ($) Unexerciseable Unexerciseable
- -------------------- ------------------ -------------- --------------------- ------------------------
Robert J. DeLuccia --- --- 19,073/5,697 NA/NA
Bernard R. Patriacca --- --- 10,840/3,348 NA/NA
Thomas C.K. Chan --- --- 10,065/0 NA/NA
Glenn E. Deegan --- --- 6,342/3,268 NA/NA
Melvin Snyder --- --- 11,089/0 NA/NA
<FN>
(1) The value of Mr. DeLuccia's, Mr. Patriacca's, Dr. Chan's, Mr. Deegan's and
Mr. Snyder's in-the-money unexercised options at the end of fiscal year
ended December 31, 2005 was determined by multiplying the number of options
held by the difference between the market price of common stock underlying
the options on December 31, 2005 ($1.26 per share) and the exercise price
of the options granted.
</FN>
DIRECTORS' COMPENSATION
Each of our non-employee Directors receives compensation of $12,000
annually, $1,000 per regular meeting attended for the chairman of each
committee, $1,000 per regular meeting attended, $500 for each special, telephone
or committee meeting attended and reimbursement of travel expenses in connection
with attending meetings of the Board of Directors. During a portion of 2005, our
non-employee directors voluntarily waived their right to receive fees for
attending telephonic meetings of the Board of Directors. No stock options were
granted to non-employee Directors during 2005.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
We entered into an employment agreement of indefinite length effective as
of February 13, 2006 with Robert J. DeLuccia. The agreement currently provides
for annual compensation of $288,000 and for the payment of nine months' salary
in the event he is terminated without cause or twelve month's salary in the
event he is terminated as a result of a change of control. The agreement also
provides for a monthly automobile allowance of $1,500. In addition, the
agreement precludes Mr. DeLuccia from competing with the Company during his
employment and for a period of two years thereafter, and from disclosing
confidential information. Prior to entering into Mr. DeLuccia's current
employment agreement, we entered into a transition agreement with Mr. DeLuccia
on September 16, 2005 which terminated his then existing employment agreement
including the severance pay provisions. The transition agreement, which
originally provided that Mr. DeLuccia would remain employed by the Company until
November 30, 2005, was subsequently amended to extend his employment through
February 2006. During 2005, Mr. DeLuccia received compensation totaling $258,000
pursuant to the employment and transition agreements then in effect.
69
We entered into an employment agreement of indefinite length effective as
of February 13, 2006 with Glenn E. Deegan. The agreement currently provides for
annual base compensation of $180,000, and precludes Mr. Deegan from competing
with the Company during his employment and for a period of two years thereafter,
and from disclosing confidential information. In addition, on February 13, 2006,
we entered into a Severance Agreement with Mr. Deegan. The Severance Agreement
provides for the payment of six months' salary in the event he is terminated
without cause or nine month's salary in the event he is terminated in connection
with or following a change of control, as defined in the agreement. Prior to
entering into Mr. Deegan's current employment and severance agreements, we
entered into a transition agreement with Mr. Deegan on September 12, 2005 which
terminated his then existing employment and severance agreements. The transition
agreement, which originally provided that Mr. Deegan would remain employed by
the Company until November 30, 2005, was subsequently amended to extend his
employment through February 2006. During 2005, Mr. Deegan received compensation
totaling $296,667 pursuant to the employment and transition agreements then in
effect.
We entered into an employment agreement of indefinite length effective as
of February 13, 2006 with Bernard Patriacca. The agreement currently provides
for annual base compensation of $200,000, and precludes Mr. Patriacca from
competing with the Company during his employment and for a period of two years
thereafter, and from disclosing confidential information. In addition, on
February 13, 2006, we entered into a Severance Agreement with Mr. Patriacca. The
Severance Agreement provides for the payment of six months' salary in the event
he is terminated without cause or nine month's salary in the event he is
terminated in connection with or following a change of control, as defined in
the agreement. Prior to entering into Mr. Patriacca's current employment and
severance agreements, we entered into a transition agreement with Mr. Patriacca
on September 12, 2005 which terminated his then existing employment and
severance agreements. The transition agreement, which originally provided that
Mr. Patriacca would remain employed by the Company until November 30, 2005, was
subsequently amended to extend his employment through February 2006. During
2005, Mr. Patriacca received compensation totaling $325,141 pursuant to the
employment and transition agreements then in effect.
On September 13, 2005, we entered into a transition agreement with
Thomas C.K. Chan which terminated his then existing employment and severance
agreements. The transition agreement provided that Dr. Chan would remain
employed by the Company until November 30, 2005. In addition, the transition
agreement precludes Dr. Chan from competing with us for a period of two years
and from disclosing confidential information. During 2005, Dr. Chan received
compensation totaling $334,636 pursuant to the employment and transition
agreements then in effect.
On September 12, 2005, we entered into a transition agreement with Melvin
A. Snyder which terminated his then existing employment and severance
agreements. The transition agreement provided that Mr. Snyder would remain
employed by the Company until November 30, 2005. In addition, the transition
agreement precludes Mr. Snyder from competing with us for a period of two years
and from disclosing confidential information. During 2005, Mr. Snyder received
compensation totaling $314,972 pursuant to the employment and transition
agreements then in effect.
70
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee consists of Dr. Michael Davis (Chairman), Dr.
John Zabriskie and Mr. Jeffrey Davis.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table details the Registrant's equity compensation plans:
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 106,696 $ 132.24 73,116
Equity compensation plans
not approved by
security holders 11,904 (1) $ 44.52 None
--------- -------- ---------
Total 118,600 $ 123.44 73,116
========= ======== =========
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) Represents 11,904 stock options granted to Robert J. DeLuccia in June 2003.
</FN>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 7, 2006 (except as noted),
information concerning ownership of our common stock by (1) each person known by
us to be the beneficial owner of more than five percent (5%) of our common
stock, (2) each of our directors, (3) each of the executive officers named in
the Summary Compensation Table under "Executive Officers' Compensation" above
and (4) all directors and executive officers as a group. Except as otherwise
indicated, the stockholders listed in the table have sole voting and investment
powers with respect to the shares indicated. There were a total of 996,909
shares of our common stock outstanding on March 7, 2006.
71
We have determined the number of shares beneficially owned by each
stockholder under rules promulgated by the SEC. The information is not
necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares as to which the individual
or entity has sole or shared voting or investment power and any shares as to
which the individual or entity has the right to acquire beneficial ownership
within 60 days after March 17, 2005 through the exercise of any stock option,
warrant or other right. The inclusion in the following table of those shares,
however, does not constitute an admission that the named stockholder is a direct
or indirect beneficial owner.
Name and Address Number of Shares Percentage
Class of Stock of Beneficial Owner Beneficially Owned of Class
FIVE PERCENT STOCKHOLDERS
Series C Preferred Stock Stephen S. Rouhandeh (1).............. 350 2.40%
Series C Preferred Stock Jeffrey B. Davis (2).................. 50 6.06%
Series C Preferred Stock Joseph Edelman (3).................... 150 8.17%
Series C Preferred Stock Whalehaven Capital Fund Limited (4)... 75 9.09%
DIRECTORS AND EXECUTIVE OFFICERS (5)
Series C Preferred Stock Robert J. DeLuccia (5)................ 0 *
Series C Preferred Stock Bernard R. Patriacca (5).............. 0 *
Series C Preferred Stock Melvin A. Snyder (5)(6)............... 0 *
Series C Preferred Stock Thomas C.K. Chan (5)(6)............... 0 *
Series C Preferred Stock Glenn E. Deegan (5)................... 0 *
Series C Preferred Stock Peter G. Martin (5)................... 0 *
Series C Preferred Stock Michael A. Davis (5).................. 0 *
Series C Preferred Stock Paul S. Echenberg (5)................. 0 *
Series C Preferred Stock John L. Zabriskie (5)................. 0 *
Series C Preferred Stock Jeffrey B. Davis (2)(7)............... 50 6.06%
Series C Preferred Stock Howard S. Fischer (7)................. 0 *
Series C Preferred Stock All directors and officers as a
group (11 persons)................ 50 6.06%
FIVE PERCENT STOCKHOLDERS
Common Stock Stephen S. Rouhandeh (1).............. 7,138,378 87.75%
Common Stock Joseph Edelman (3) 110,152 9.95%
Common Stock Galleon Management L.P. (8)........... 74,541 7.44%
Common Stock Arnold H. Snider (9).................. 68,585 6.88%
DIRECTORS AND EXECUTIVE OFFICERS (3)
Common Stock Robert J. DeLuccia (5)(10)............ 219,171 19.30%
Common Stock Bernard R. Patriacca (5)(10)(11)...... 71,489 6.70%
Common Stock Melvin A. Snyder (5)(6)(10)(11)....... 11,728 1.16%
Common Stock Thomas C.K. Chan (5)(6)(10)(11)....... 12,533 1.24%
Common Stock Glenn E. Deegan (5)(10)(11)........... 57,395 5.45%
Common Stock Peter G. Martin (5)(10)............... 18,625 1.83%
Common Stock Michael A. Davis (5)(10).............. 18,499 1.82%
Common Stock Paul S. Echenberg (5)(10)(12)......... 19,548 1.93%
Common Stock John L. Zabriskie (5)(10)(13)......... 36,747 3.60%
Common Stock Jeffrey B. Davis (2)(7)(14)........... 51,916 4.95%
Common Stock Howard S. Fischer (7)(15)............. 51,916 4.95%
All directors and officers as a
Common Stock group (11 persons) (8)(9)......... 524,567 40.08%
- ------------------
* Less than one percent (1%).
72
<FN>
(1) According to a Schedule 13D/A dated February 13, 2006, filed jointly by SCO
Capital Partners LLC, SCO Securities LLC, Beach Capital LLC and Steven H.
Rouhandeh, SCO Capital Partners LLC is the record owner of 300 shares of
Series C Convertible Preferred Stock and Beach Capital LLC is the record
owner of 50 shares of Series C Convertible Preferred Stock. Mr. Rouhandeh,
as Chairman and sole member of SCO Capital Partners LLC and managing member
of Beach Capital LLC, has sole dispositive and voting power with respect to
all shares listed in the table. The shares of common stock listed as
beneficially owned by Mr. Rouhandeh include 3,805,046 shares of common
stock issuable upon the exercise of warrants exercisable within 60 days and
3,333,332 shares of common stock issuable upon the conversion of Series C
Preferred Stock convertible within 60 days. The address of SCO Capital
Partners LLC, Beach Capital LLC and Mr. Rouhandeh is 1285 Avenue of the
Americas, 35th Floor, New York, New York 10019.
(2) Lake End Capital LLC is the record owner of the securities listed in the
table. Mr. Jeffrey Davis, as managing member of Lake End Capital LLC, has
sole dispositive and voting power with respect to all shares held of record
by Lake End Capital LLC. The shares of common stock listed as beneficially
owned by Jeffrey Davis include the shares of common stock issuable upon the
conversion of the Series C Preferred Stock held by Lake End Capital LLC and
upon exercise of the warrants held by Lake End Capital LLC within 60 days.
The Series C Preferred Stock and the warrants held by Lake End Capital LLC
are subject to restrictions on their conversion and exercise, respectively,
such that as a result of their conversion or exercise, Lake End Capital
LLC, together with its affiliates, cannot hold more than 4.95% of the
issued and outstanding common stock of the Company. The address of Lake End
Capital LLC is 33 Tall Oaks Drive, Summit, New Jersey 07501.
(3) According to a Schedule 13G dated February 16, 2006, Mr. Edelman has sole
dispositive and voting power with respect to the shares listed in the
table. The shares reported as beneficially owned by Mr. Edelman are held of
record by Perceptive Life Sciences Master Fund, Ltd., a Cayman Islands
company of which the investment manager is Perceptive Advisors LLC, a
Delaware limited liability company of which Mr. Edelman is the managing
member. The shares of common stock listed as beneficially owned by Mr.
Edelman include the shares of common stock issuable upon the conversion of
the Series C Preferred Stock beneficially owned by Mr. Edelman and upon
exercise of the warrants beneficially owned by Mr. Edelman within 60 days.
The Series C Preferred Stock and the warrants beneficially owned by Mr.
Edelman are subject to restrictions on their conversion and exercise,
respectively, such that as a result of their conversion or exercise, Mr.
Edelman, together with his affiliates, cannot hold more than 9.95% of the
issued and outstanding common stock of the Company. The address of Mr.
Edelman is c/o First New York Securities, LLC, 850 Third Avenue, 8th Floor,
New York, NY 10022.
(4) The address of Whalehaven Capital Fund Limited is 14 Par-La-Ville Road, 3rd
Floor, Hamilton HM08 Bermuda. The Series C Preferred Stock and the warrants
held by Whalehaven Capital Fund Limited are subject to restrictions on
their conversion and exercise, respectively, such that as a result of their
conversion or exercise, Whalehaven Capital Fund Limited, together with its
affiliates, cannot hold more than 4.95% of the issued and outstanding
common stock of the Company.
(5) The address of Mr. DeLuccia, Mr. Patriacca, Mr. Snyder, Dr. Chan, Mr.
Deegan, Mr. Martin, Dr. Davis, Mr. Echenberg and Dr. Zabriskie, is c/o
MacroChem, 110 Hartwell Avenue, Lexington, Massachusetts 02421.
(6) As of November 30, 2005, Mr. Snyder and Dr. Chan are no longer employed by
the Company. Other than with respect to the options and/or warrants held by
Mr. Snyder or Dr. Chan as described in note (10) below, the share ownership
of Mr. Snyder and Dr. Chan reflected in the table is as of November 30,
2005.
(7) On December 29, 2005, Mr. Jeffrey Davis and Mr. Fischer were appointed to
the Company's board of directors. Mr. Davis and Mr. Fischer were designated
by SCO Capital Partners LLC in accordance with terms and provisions of the
Purchase Agreement and constitute the "SCO Designated Directors" (as
defined in the Purchase Agreement). The address of Mr. Davis and Mr.
Fischer is 1285 Avenue of the Americas, 35th Floor, New York, New York
10019.
(8) According to a Schedule 13-G/A dated December 30, 2005, filed jointly by
Galleon Management, L.P. ("Galleon"), Raj Rajaratnam, Galleon Management,
L.L.C., Galleon Advisors, L.L.C., Galleon Captains Partners, L.P., Galleon
Captains Offshore, Ltd., Galleon Healthcare Partners, L.P., and Galleon
Healthcare Offshore, Ltd. (collectively, the "Galleon Entities"), Mr.
Rajaratnam, Galleon Management, L.L.C. and Galleon Management, L.P. have
shared dispositive and voting power with respect to all shares listed in
the table, Galleon Advisors, L.L.C. has shared dispositive and voting power
with respect to 10,953 of the shares listed in the table, Galleon Captains
Partners, L.P. has shared dispositive and voting power with respect to
7,120 of the shares listed in the table, Galleon Captains Offshore, Ltd.
has shared dispositive and voting power with respect to 28,480 of the
shares listed in the table, Galleon Healthcare Partners, L.P. has shared
dispositive and voting power with respect to 3,833 of the shares listed in
the table and Galleon Healthcare Offshore, Ltd. has shared dispositive and
voting power with respect to 29,500 of the shares listed in the table. The
73
shares listed as beneficially owned by Galleon include the following
numbers of shares issuable upon the exercise of warrants exercisable within
60 days: Galleon Captain's Offshore, Ltd.-678 shares; Galleon Captain's
Partners, LP-169 shares; Galleon Healthcare Offshore, Ltd.-4,214 shares;
and Galleon Healthcare Partners, LP-547 shares. The address of the
principal place of business of Galleon Management L.P. is 135 East 57th
Street, 16th Floor, New York, NY 10022.
(9) According to a Schedule 13-G/A dated December 31, 2005, filed jointly by
Arnold H. Snider, Deerfield Capital, L.P. ("Deerfield Capital"), Deerfield
Partners, L.P. ("Deerfield Partners"), Deerfield Management Company, L.P.
("Deerfield Management") and Deerfield International Limited ("Deerfield
International", and collectively with Arnold H. Snider, Deerfield Capital,
Deerfield Partners, Deerfield Management and Deerfield International, the
"Deerfield Entities"), Arnold H. Snider has shared dispositive and voting
power with respect to all shares listed in the table, Deerfield Capital and
Deerfield Partners have shared dispositive and voting power with respect to
29,629 of the shares listed in the table and Deerfield Management and
Deerfield International have shared dispositive and voting power with
respect to 38,956 of the shares listed in the table. The address of the
principal place of business of Deerfield International is c/o Hemisphere
Management (B.V.I.) Limited, Bison Court, Columbus Centre, P.O. Box 3460,
Road Town, Tortola, BVI. The address of the principal place of business of
each of the other entities is 780 Third Avenue, 37th Floor, New York, NY
10017.
(10) Includes the following numbers of shares issuable upon the exercise of
stock options and/or warrants exercisable within 60 days: Mr. Martin-18,571
shares; Dr. Davis-18,357 shares; Mr. DeLuccia-138,606 shares; Mr.
Echenberg-18,072 shares; Dr. Zabriskie-23,149 shares; Mr. Davis-15,000: Mr.
Fischer-15,000; Mr. Patriacca-70,042 shares; Mr. Snyder-11,093 shares; Dr.
Chan-10,624 shares; and Mr. Deegan-56,789 shares.
(11) Does not include the following numbers of vested shares in our 401(k) Plan
contributed by us to match portions of cash contributions by the following
Plan participants: Mr. Patriacca-545 shares; Mr. Snyder- 516 shares; Dr.
Chan-551 shares; and Mr. Deegan-560 shares.
(12) Includes 1,382 shares and 691 shares issuable upon the exercise of warrants
exercisable within 60 days that, in each case, are held by Eckvest Equity
Inc., of which Mr. Echenberg is the President and sole equity owner.
(13) Includes 11,061 shares and 5,530 shares issuable upon the exercise of
warrants exercisable within 60 days that, in each case, are held by Lansing
Brown Investments LLC, of which Dr. Zabriskie and his wife are the managers
and sole equity holders.
(14) Includes 36,916 shares of common stock issuable upon the conversion of
Series C Preferred Stock or the exercise of a warrant held of record by
Lake End Capital LLC as described in Note 2 above that is exercisable
within 60 days.
(15) Includes 36,916 shares of common stock issuable upon the exercise of a
warrant that is exercisable within 60 days.
</FN>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On December 23, 2005 and February 13, 2005, we issued an aggregate of 825.5
shares of our Series C Preferred Stock and warrants to purchase 7,861,900 shares
of our common stock in a private placement to institutional investors.
SCO Capital Partners LLC acquired a total of 300 shares of our Series C
Preferred Stock and warrants to purchase 2,857,142 shares of our common stock
for an aggregate purchase price of $3,000,000, and Beach Capital LLC acquired a
total of 50 shares of our Series C Preferred Stock and warrants to purchase
47,620 shares of our common stock for an aggregate purchase price of $500,000.
Mr. Stephen S. Rouhandeh is the sole member of SCO Capital Partners LLC and the
managing member of Beach Capital LLC, and as such has sole dispositive and
voting power with respect to the shares owned by SCO Capital Partners LLC and
Beach Capital LLC. The Series C Preferred Stock and warrants beneficially owned
by Mr. Rouhandeh are convertible and exercisable into approximately 87.75% of
our common stock. In addition, for so long as 20% of the Series C Preferred
Stock issued in the private placement remains outstanding, SCO Capital Partners
LLC has the right to designate two members to our board of directors. On
December 28, 2005, SCO Capital Partners LLC informed us that the initial SCO
director designees were Jeffrey B. Davis and Howard S. Fischer, and our board of
directors appointed them to our board on December 29, 2005.
74
Mr. Rouhandeh is also the Chairman of SCO Securities LLC, which acted as
the placement agent in connection with the private placement and which acts as a
financial advisor to us for a monthly fee of $12,500. In exchange for its
services as placement agent, SCO Securities LLC received a fee equal to 7% of
the gross proceeds, or $577,850, and six-year warrants to purchase 786,189
shares of our common stock at an exercise price of $1.05 per share. SCO
Securities LLC assigned its warrants to the following four persons in the
amounts listed: (i) warrants to purchase 471,713 shares of common stock to SCO
Capital Partners LLC; (ii) warrants to purchase 157,238 shares of common stock
to Lake End Capital LLC, (iii) warrants to purchase 78,619 shares of common
stock to Mark Alvino and (iv) warrants to purchase 78,619 shares of common stock
to Howard Fischer. We also paid SCO Securities LLC $82,550 for out-of-pocket
expenses incurred in connection with the transaction.
Mr. Jeffrey Davis, who was elected to our Board of Directors on December
29, 2005 as the designee of SCO Capital Partners LLC, is the managing member of
Lake End Capital LLC, an entity which purchased 50 shares of our Series C
Preferred Stock and warrants to purchase 476,190 shares of our common stock for
an aggregate purchase price of $500,000. As noted above, Lake End Capital LLC
also received warrants to purchase an additional 157,238 shares of our common
stock as a designee of SCO Securities LLC, the placement agent in our recent
private placement. Mr. Davis is the President of SCO Securities LLC. Subject to
conversion and exercise restrictions on the securities held by Lake End Capital
LLC as described in Item 12 of this Annual Report on Form 10-K, the Series C
Preferred Stock and warrants beneficially owned by Mr. Davis are convertible and
exercisable into 4.95% of our common stock.
Mr. Howard S. Fischer, who was elected to our Board of Directors on
December 29, 2005 as the designee of SCO Capital Partners LLC, is a Managing
Director of SCO Securities LLC. As noted above, Mr. Fischer received warrants to
purchase 78,619 shares of our common stock as a designee of SCO Securities LLC.
Subject to conversion and exercise restrictions on the warrants held by Mr.
Fischer, the warrants beneficially owned by Mr. Fischer are exercisable for
4.95% of our common stock.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Vitale, Caturano & Company, Ltd. is the Company's independent registered
public accounting firm. Prior to January 24, 2006, Deloitte & Touche LLP served
as the Company's independent registered public accounting firm. The following
table sets forth the estimated aggregate fees billed to the Company for the
fiscal year ended December 31, 2005 by Vitale, Caturano & Company, Ltd. and
Deloitte & Touche LLP, and for the fiscal year ended December 31, 2004 by
Deloitte & Touche LLP:
VITALE, CATURANO
& COMPANY, LTD. DELOITTE & TOUCHE LLP
2005 2005 2004
Audit Fees $ 60,000 $ 69,100 $ 188,000
Audit-Related Fees -- -- --
Tax Fees -- -- --
All Other Fees -- -- --
----------- ------------- -------------
Total $ 60,000 $ 69,100 $ 188,000
=========== ============= ============
75
AUDIT FEES
Audit fees were for professional services rendered for the audit of the
Company's annual financial statements, review of financial statements included
in the Company's quarterly reports on Form 10-Q and services that were provided
in connection with statutory and regulatory filings or engagements.
AUDIT-RELATED FEES
Audit-Related Fees refer to assurance and related services that are
reasonably related to the performance of the audit or review of Company's
consolidated financial statements and are not reported under "Audit Fees." The
Company did not pay any Audit-Related Fees during 2005 or 2004.
TAX FEES
Tax Fees refer to fees for professional services rendered regarding tax
compliance, tax advice or tax planning. The Company did not pay any Tax Fees to
Vitale, Caturano & Company, Ltd. or to Deloitte & Touche LLP during 2005 or
2004.
ALL OTHER FEES
All Other Fees refer to fees for services other than those described above.
The Company did not pay to Vitale, Caturano & Company, Ltd. or to Deloitte &
Touche LLP fees for any other services during 2005 or 2004.
PRE-APPROVAL POLICIES AND PROCEDURES
It is the policy of the Company that all services provided by the Company's
independent registered public accounting firm shall be pre-approved by the Audit
Committee. The Company's independent registered public accounting firm will
provide the Audit Committee with an engagement letter outlining the scope of the
audit services proposed to be performed during the fiscal year and the estimated
fees for such services. Pre-approval of audit and permitted non-audit services
may be given by the Audit Committee at any time up to one year before the
commencement of such services by the Company's independent registered public
accounting firm. Pre-approval must be detailed as to the particular services to
be provided. Pre-approval may be given for a category of services, provided that
(i) the category is narrow enough and detailed enough that management of the
Company will not be called upon to make a judgment as to whether a particular
proposed service by the Company's independent registered public accounting firm
fits within such pre-approved category of services and (ii) the Audit Committee
also establishes a limit on the fees for such pre-approved category of services.
During 2005, one hundred percent (100%) of the services provided by the
Company's independent registered public accounting firm were pre-approved by the
Audit Committee.
76
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)(1) The following Financial Statements as of December 31, 2005 and 2004 and
for the three years in the period ended December 31, 2005 are included
in Part II of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm - Vitale,
Caturano & Company, Ltd.
Report of Independent Registered Public Accounting Firm - Deloitte &
Touche LLP
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(a)(2) The following Financial Statement Schedules are filed herewith:
None.
Schedules not included herein are omitted because they are not applicable
or the required information appears in the Financial Statements or Notes
thereto.
(a)(3) The following exhibits are filed herewith or are incorporated by
reference as may be indicated:
3.1 Amended and Restated Certificate of Incorporation of MacroChem
Corporation dated as of February 9, 2006.
3.2 Amended and Restated Bylaws of MacroChem Corporation, incorporated
by reference to Exhibit 5 to our Current Report on Form 8-K dated
August 13, 1999 (File No. 0-13634).
4.1 Stock Purchase Warrant, incorporated by reference to Exhibit 4 to
our Annual Report on Form 10-K for the year ended December 31, 1996
(File No. 0-13634).
4.2 Rights Agreement dated as of August 13, 1999 between MacroChem and
American Stock Transfer & Trust Company, as Rights Agent, including
Form of Certificate of Designation with respect to the Series B
Preferred Stock, par value $.01 per share (attached as Exhibit A to
the Rights Agreement), Form of Rights Certificate (attached as
Exhibit B to the Rights Agreement), and Summary of Rights (attached
as Exhibit C to the Rights Agreement), incorporated by reference to
Exhibits 1, 2, 3 and 4, respectively, to our Current Report on Form
8-K dated August 13, 1999 (File No. 0-13634).
4.3 Amendment No. 1 to the Rights Agreement dated as of December 23,
2005 between MacroChem Corporation and American Stock Transfer &
Trust Company incorporated by reference to Exhibit 4.2 to our
Current Report on Form 8-K dated December 27, 2005 (File No.
0-13634).
77
4.4 Common Stock Certificate, incorporated by reference to Exhibit 4c to
our Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 0-13634).
4.5 Form of Common Stock Purchase Warrant dated as of April 19, 2005
incorporated by reference to Exhibit 10.4 to our Current Report on
Form 8-K dated April 22, 2005 (File No. 0-13634).
4.6 Certificate of Designations, Rights and Preferences of Series C
Cumulative Convertible Preferred Stock of MacroChem Corporation
incorporated by reference to Exhibit 4.1 to our Current Report on
Form 8-K dated December 27, 2005 (File No. 0-13634).
4.7 Common Stock Purchase Warrant, incorporated by reference to Exhibit
10.3 to our Current Report on Form 8-K dated December 27, 2005 (File
No. 0-13634).
4.8 Common Stock Purchase Warrant, incorporated by reference to Exhibit
10.3 to our Current Report on Form 8-K dated February 16, 2005 (File
No. 0-13634).
10.1* MacroChem Corporation 2001 Incentive Plan incorporated by reference
to Exhibit 99 to our Form S-8 as filed on August 8, 2001 (File No.
333-67080).
10.2* 1994 Equity Incentive Plan as amended November 14, 1997,
incorporated by reference to Exhibit 99.1 to our Annual Report on
Form 10-K for the year ended December 31, 1997 (File No. 0-13634).
10.3* 1984 Non-Qualified Stock Option Plan as amended November 15, 1996,
incorporated by reference to Exhibit 10.2 to our Annual Report on
Form 10-K for the year ended December 31, 1996 (File No. 0-13634).
10.4* 1984 Incentive Stock Option Plan as amended November 15, 1996,
incorporated by reference to Exhibit 10.3 to our Annual Report on
Form 10-K for the year ended December 31, 1996 (File No. 0-13634).
10.5* MacroChem Corporation Option Certificate between the Company and
Robert J. Palmisano, incorporated by reference to Exhibit 10.3 to
our Quarterly Report on Form 10-Q for the quarter ended June 30,
2001 (File No. 0-13634).
10.6* Form of Severance Agreement between MacroChem and Dr. Thomas C.K.
Chan, dated as of October 25, 2002 incorporated by reference to
Exhibit 10i to our Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 0-13634).
10.7* Form of Noncompetition Agreement between MacroChem and Glenn E.
Deegan, Esq., dated as of June 5, 2001 incorporated by reference to
Exhibit 10.12 to our Annual Report on Form 10-K for the year ended
December 31, 2003 (File No. 0-13634).
10.8* Form of Confidentiality Agreement between MacroChem and Glenn E.
Deegan, Esq., dated as of June 5, 2001 incorporated by reference to
Exhibit 10.13 to our Annual Report on Form 10-K for the year ended
December 31, 2003 (File No. 0-13634).
10.9* Form of Employment Agreement between MacroChem and Robert J.
DeLuccia incorporated by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the period ended September 30, 2003 (File
No. 0-13634).
78
10.10* MacroChem Corporation Option Certificate reflecting grant by
MacroChem to Robert J. DeLuccia incorporated by reference to Exhibit
10.2 to our Quarterly Report on Form 10-Q for the period ended
September 30, 2003 (File No. 0-13634).
10.11* Form of Retention Agreement between MacroChem and Bernard R.
Patriacca incorporated by reference to Exhibit 10.3 to our Quarterly
Report on Form 10-Q for the period ended September 30, 2003 (File
No. 0-13634).
10.12* Form of Retention Agreement between MacroChem and Melvin A. Snyder
incorporated by reference to Exhibit 10.4 to our Quarterly Report on
Form 10-Q for the period ended September 30, 2003 (File No.
0-13634).
10.13* Form of Retention Agreement between MacroChem and Thomas C.K. Chan
incorporated by reference to Exhibit 10.5 to our Quarterly Report on
Form 10-Q for the period ended September 30, 2003 (File No.
0-13634).
10.14* Form of Retention Agreement between MacroChem and Glenn E. Deegan
incorporated by reference to Exhibit 10.6 to our Quarterly Report on
Form 10-Q for the period ended September 30, 2003 (File No.
0-13634).
10.15* Form of Severance Agreement, dated as of December 17, 2004, by and
between MacroChem and Melvin A. Snyder incorporated by reference to
Exhibit 10.3 to our Current Report on Form 8-K dated February 3,
2005 (File No. 0-13634).
10.16* Transition Agreement, dated as of September 12, 2005, by and between
MacroChem Corporation and Bernard R. Patriacca, incorporated by
reference to Exhibit 10.2 to our Current Report on Form 8-K dated
September 16, 2005 (File No. 0-13634).
10.17* Transition Agreement, dated as of September 13, 2005, by and between
MacroChem Corporation and Thomas C.K. Chan, incorporated by
reference to Exhibit 10.3 to our Current Report on Form 8-K dated
September 16, 2005 (File No. 0-13634).
10.18* Transition Agreement, dated as of September 12, 2005, by and between
MacroChem Corporation and Melvin A. Snyder, incorporated by
reference to Exhibit 10.4 to our Current Report on Form 8-K dated
September 16, 2005 (File No. 0-13634).
10.19* Transition Agreement, dated as of September 12, 2005, by and between
MacroChem Corporation and Glenn E. Deegan, incorporated by reference
to Exhibit 10.5 to our Current Report on Form 8-K dated September
16, 2005 (File No. 0-13634).
10.20* Transition Agreement, dated as of September 16, 2005, by and between
MacroChem Corporation and Robert J. DeLuccia, incorporated by
reference to Exhibit 10.6 to our Current Report on Form 8-K dated
September 16, 2005 (File No. 0-13634).
10.21* Form of Employment Agreement, dated February 13, 2006, by and
between the Company and Robert J. DeLuccia incorporated by reference
to Exhibit 10.4 to our Current Report on Form 8-K dated February 16,
2006 (File No. 0-13634).
10.22* Form of Employment Agreement, dated February 13, 2006, by and
between the Company and Bernard R. Patriacca, including Form of
Confidential Information, Inventions and Non-Competition Agreement
(attached as Exhibit B to the Form of Employment Agreement),
incorporated by reference to Exhibit 10.5 to our Current Report on
Form 8-K dated February 16, 2006 (File No. 0-13634).
79
10.23* Form of Severance Agreement, dated February 13, 2006, by and between
the Company and Bernard R. Patriacca, incorporated by reference to
Exhibit 10.6 to our Current Report on Form 8-K dated February 16,
2006 (File No. 0-13634).
10.24* Form of Employment Agreement, dated February 13, 2006, by and
between the Company and Glenn E. Deegan, including Form of
Confidential Information, Inventions and Non-Competition Agreement
(attached as Exhibit B to the Form of Employment Agreement),
incorporated by reference to Exhibit 10.7 to our Current Report on
Form 8-K dated February 16, 2006 (File No. 0-13634).
10.25* Form of Severance Agreement, dated February 13, 2006, by and between
the Company and Glenn E. Deegan, incorporated by reference to
Exhibit 10.8 to our Current Report on Form 8-K dated February 16,
2006 (File No. 0-13634).
10.26 Securities Purchase Agreement among MacroChem, Bay Harbor
Investments, Inc. and Strong River Investments, Inc., incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K dated
October 23, 2000 (File No. 0-13634).
10.27 Form of Registration Rights Agreement by and among MacroChem, Bay
Harbor Investments, Inc. and Strong River Investments, Inc.,
incorporated by reference to Exhibit 10.4 to our Current Report on
Form 8-K dated October 23, 2000 (File No. 0-13634).
10.28 Securities Purchase Agreement among MacroChem, Pine Ridge Financial
Ltd., DMG Legacy International, Ltd., SDS Merchant Fund, LP, Par
Investment Partners, L.P., Narragansett I, LP, and Narragansett
Offshore Ltd., incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K dated July 24, 2001 (File No. 0-13634).
10.29 Form of Warrant incorporated by reference to Exhibit 10.2 to our
Current Report on Form 8-K dated July 24, 2001 (File No. 0-13634).
10.30 Form of Registration Rights Agreement by and among MacroChem, Pine
Ridge Financial Ltd., DMG Legacy International, Ltd., SDS Merchant
Fund, LP, Par Investment Partners, L.P., Narragansett I, LP, and
Narragansett Offshore Ltd., incorporated by reference to Exhibit
10.3 to our Current Report on Form 8-K dated July 24, 2001 (File No.
0-13634).
10.31 Securities Purchase Agreement, dated as of September 10, 2003, by
and among MacroChem and the purchasers listed on Schedule A thereto,
incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K dated September 12, 2003 (File No. 0-13634).
10.32 Form of Warrant dated as of September 10, 2003, incorporated by
reference to Exhibit 10.2 to our Current Report on Form 8-K dated
September 12, 2003 (File No. 0-13634).
10.33 Registration Rights Agreement, dated as of September 10, 2003, by
and among MacroChem and the investors listed on the signature page
thereto, incorporated by reference to Exhibit 10.3 to our Current
Report on Form 8-K dated September 12, 2003 (File No. 0-13634).
80
10.34 Securities Purchase Agreement, dated as of March 9, 2004, by and
among MacroChem and the purchasers listed on Schedule A thereto,
incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K dated March 10, 2004 (File No. 0-13634).
10.35 Form of Warrant dated as of March 9, 2004, incorporated by reference
to Exhibit 10.2 to our Current Report on Form 8-K dated March 10,
2004 (File No. 0-13634).
10.36 Registration Rights Agreement, dated as of March 9, 2004, by and
among MacroChem and the investors listed on the signature page
thereto, incorporated by reference to Exhibit 10.3 to our Current
Report on Form 8-K dated March 10, 2004 (File No. 0-13634).
10.37 Investor Rights Agreement dated as of December 23, 2005 between
MacroChem Corporation, SCO Capital Partners LLC and Lake End Capital
Partners LLC incorporated by reference to Exhibit 10.2 to our
Current Report on Form 8-K dated December 27, 2005 (File
No.0-13634).
10.38 Amended and Restated Investor Rights Agreement dated as of February
13, 2006, between MacroChem Corporation and the purchasers listed on
the signature pages thereto incorporated by reference to Exhibit
10.2 to our Current Report on Form 8-K dated February 16, 2006 (File
No.0-13634).
10.39 Securities Purchase Agreement, dated as of April 19, 2005, by and
between MacroChem Corporation and the institutional investors listed
on the signature pages thereto, incorporated by reference to Exhibit
10.1 to our Current Report on Form 8-K dated April 22, 2005 (File
No. 0-13634).
10.40 Securities Purchase Agreement, dated as of April 19, 2005, by and
between MacroChem Corporation and the directors and officers of
MacroChem Corporation listed on the signature pages thereto,
incorporated by reference to Exhibit 10.2 to our Current Report on
Form 8-K dated April 22, 2005 (File No. 0-13634).
10.41 Registration Rights Agreement, dated as of April 19, 2005 by and
among MacroChem Corporation and the purchasers listed on the
signature page thereto, incorporated by reference to Exhibit 10.3 to
our Current Report on Form 8-K dated April 22, 2005 (File No.
0-13634).
10.42 Preferred Stock and Warrant Purchase Agreement, dated as of December
23, 2005, by and between MacroChem Corporation and the purchasers
listed on Schedule 1 thereto, incorporated by reference to Exhibit
10.1 to our Current Report on Form 8-K dated December 27, 2005 (File
No. 0-13634).
10.43 Investor Rights Agreement, dated as of December 23, 2005 by and
among MacroChem Corporation and the purchasers listed on the
signature page thereto, incorporated by reference to Exhibit 10.2 to
our Current Report on Form 8-K dated December 27, 2005 (File No.
0-13634).
10.44 Amended and Restated Preferred Stock and Warrant Purchase Agreement,
dated as of February 13, 2006, by and between the Company and the
purchasers listed on the signature pages thereto, incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K dated
February 16, 2006 (File No. 0-13634).
81
10.45 Lease between GLB Lexington Limited Partnership and MacroChem dated
as of July 21, 1999, for space located at 110 Hartwell Avenue,
Lexington, MA 02421, incorporated by reference to Exhibit 10.11 to
our Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 0-13634).
10.46 First Amendment to Lease between GLB Lexington Limited Partnership
and MacroChem dated as of October 19, 2004, for space located at 110
Hartwell Avenue, Lexington, MA 02421, incorporated by reference to
Exhibit 10.39 to our Annual Report on Form 10-K for the year ended
December 31, 2004 (File No. 0-13634).
10.47 Sublease Agreement, dated as of August 31, 2005, by and between
MacroChem Corporation and ActivBiotics, Inc., incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K dated
September 16, 2005 (File No. 0-13634).
16.1 Letter from Deloitte & Touche LLP to the Securities and Exchange
Commission dated January 27, 2006, incorporated by reference to
Exhibit 16.1 to our Current Report on Form 8-K dated January 30,
2006 (File No. 0-13634).
23.1 Consent of Vitale, Caturano & Company, Ltd., an Independent
Registered Public Accounting Firm
23.2 Consent of Deloitte & Touche, LLP, an Independent Registered
Public Accounting Firm
31.1 Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------------
*Management contract or compensatory plan or arrangement
82
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, 2006 By: /s/ Robert J. DeLuccia
---------------------------- ----------------------------
Robert J. DeLuccia
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, 2006.
/s/ Robert J. DeLuccia President and
- --------------------------------- Chief Executive Officer
Robert J. DeLuccia
/s/ Bernard R. Patriacca Vice President and
- --------------------------------- Chief Financial Officer
Bernard R. Patriacca
/s/ John L. Zabriskie Chairman, Board of Directors
- ---------------------------------
John L. Zabriskie, Ph.D.
/s/ Peter G. Martin Director
- ---------------------------------
Peter G. Martin
/s/ Michael A. Davis Director
- ---------------------------------
Michael A. Davis, M.D.
/s/ Jeffrey B. Davis Director
- ---------------------------------
Jeffrey B. Davis
/s/ Paul S. Echenberg Director
- ---------------------------------
Paul S. Echenberg
/s/ Howard S. Fischer Director
- ---------------------------------
Howard S. Fischer
83