BERNARD R. PATRIACCA
Vice President and Chief Financial Officer
March 16, 2007
Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
Division of Corporation Finance
Mail Stop 6010
United States Securities and Exchange Commission
Washington, DC 20549
RE: MACROCHEM CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005
FILE NO. 0-13634
Dear Mr. Rosenberg:
Set forth below is a response of MacroChem Corporation ("MACROCHEM" or the
"COMPANY") to the Commission's Oral Comments conveyed during a telephone
conference with SEC Senior Staff Accountant Mark Brunhofer on March 2, 2007 that
pertain to MacroChem's Annual Report on Form 10-K for the year ended December
31, 2005 (File No. 0-13634) (the "FORM 10-K") filed on March 28, 2006.
The responses below are keyed to the comment numbers referenced in the telephone
conference with the Commission.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005
FINANCIAL STATEMENTS
NOTE 4: STOCKHOLDERS' EQUITY
AUTHORIZED CAPITAL STOCK, PAGE 55
STOCK SALES, PAGE 55
1. COMMENT: WE ACKNOWLEDGE YOUR PROPOSED DISCLOSURE PROVIDED IN RESPONSE TO
OUR PREVIOUS COMMENT #3. IT APPEARS THAT YOUR PROPOSED DISCLOSURE REGARDING
YOUR ACCOUNTING OF YOUR SERIES C PREFERRED STOCK AS BEING AKIN TO EQUITY
IMPLIES THAT THE FACT THAT THE SERIES C SHAREHOLDER CONTROL OF YOUR COMPANY
IS A DETERMINING FACTOR. PLEASE REVISE YOUR DISCLOSURE TO REVISE THIS
Mr. Jim B. Rosenberg - 2 - March 16, 2007
Senior Assistant Chief Accountant - Division of Corporation Finance
IMPLICATION AND BALANCE IT WITH THE FACTORS YOU CONSIDERED AS BEING AKIN TO
DEBT.
RESPONSE:
The following revised draft disclosure amends and replaces that
portion of the consolidated draft disclosure originally set forth in
response to Comment 1 under the heading "Conversion" in the Company's
letter to the Commission dated February 23, 2007:
CONVERSION: Each convertible preferred share is convertible into
shares of common 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 but unpaid dividends thereon by $1.05. The conversion price
for the Series C Preferred Stock and the Warrant exercise price were
each subject to reset adjustment such that if the average price of the
common stock over the twenty trading days immediately preceding May 8,
2006 (the "Average Price") was lower than the conversion and/or
exercise price, then such conversion and/or exercise price would have
been adjusted to equal the Average Price.
The Company evaluated whether the embedded conversion feature in the
Series C Preferred Stock required bifurcation and determined, in
accordance with paragraph 12 of SFAS 133, that the economic
characteristics and risks of the embedded conversion feature in the
Series C Preferred Stock were clearly and closely related to the
underlying common stock. In conducting this evaluation, the Company
recognized that the cumulative fixed dividend and the potential
redemption requirement of the Series C Preferred Stock are
characteristics of debt. The Company also recognized, however, that
the Series C Preferred Stock had the following equity like
characteristics: the Series C Preferred Stock clearly gives the
stockholders both existing and ongoing rights of ownership (i.e., a
residual interest), as the holders of Series C Preferred Stock are
entitled to vote on an as-converted basis with the holders of our
common stock; the dividend, while fixed, is payable quarterly in cash
or common stock at the Company's election, and, to date, the Company's
Board of Directors has declared each quarterly dividend to be paid in
shares of common stock; the redemption rights of the Series C
preferred stock are perpetual and do not have a stated maturity or
redemption date, unlike debt instruments; and the right of the holders
of the Series C Preferred stock to receive payments, including the
liquidation preference, is not secured by any collateral.
Consequently, when all of the economic characteristics and risks of
the Series C Preferred Stock are considered as a whole, the Company
Mr. Jim B. Rosenberg - 3 - March 16, 2007
Senior Assistant Chief Accountant - Division of Corporation Finance
concluded that the Series C Preferred Stock is more akin to equity
than to debt and, as a result, the Company concluded that bifurcation
was not required under SFAS 133.
Pursuant to the guidance in paragraph 5 of EITF 00-27, APPLICATION OF
ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS, we allocated the
proceeds from the Series C financing between the Series C Preferred
Stock and the warrants based upon their estimated fair values as of
the closing date resulting in $330,243 being allocated to the Series C
Preferred Stock and $1,620,778 being allocated to the warrants. We
then calculated the intrinsic value of the beneficial conversion
feature embedded in the Series C Preferred Stock. As the amount of the
beneficial conversion feature exceeded the value allocated to the
Series C Preferred Stock, the amount of the beneficial conversion
feature recorded was limited to the proceeds allocated to the Series C
Preferred Stock. The beneficial conversion value of $330,243 was
recognized as an additional discount on the Series C Preferred Stock
which amount was immediately accreted and treated as a deemed dividend
to the holder of the shares of Series C Preferred Stock as all of the
Series C Preferred Stock was eligible for conversion upon issuance.
2. COMMENT: WE ACKNOWLEDGE YOUR RESPONSE TO OUR PREVIOUS COMMENT #6. PLEASE
FILE AN ITEM 4.02 FORM 8-K AND AMENDED PRIOR PERIOD FORMS 10-K AND 10-Q OR
EXPLAIN TO US WHY THESE FILINGS ARE NOT WARRANTED OR REQUIRED.
RESPONSE:
The Company will file amended Form 10-Q's for the periods ended March
31, 2006, June 30, 2006 and September 30, 2006 to amend the treatment
of the placement agent warrants.
In applying guidance from SAB 99 "Materiality" and SAB 103 to the
financial statements contained in our Form 10-K for the year ended
December 31, 2005, the Company determined that the misclassification
of the warrants issued to the private placement agent, valued at
$174,922, was immaterial to the users of the financial statements.
According to the guidance in SAB 99, "an assessment of materiality
requires that one view the facts in the context of the `surrounding
circumstances'." Referencing shorthand from accounting literature, SAB
99 further states that both "quantitative" and "qualitative" factors
must be considered in assessing an item's materiality.
With respect to our Form 10-K for the year ended December 31, 2005,
the correction of the error would result in no impact to either the
Statement of Operations or the Statement of Cash Flow, as there was no
change in the market price of the stock from the closing date December
Mr. Jim B. Rosenberg - 4 - March 16, 2007
Senior Assistant Chief Accountant - Division of Corporation Finance
23, 2005 to the year end of December 31, 2005, and therefore no mark
to market adjustment. Quantitatively, the $174,922 represents only
4.6% of total liabilities and stockholders' equity of $3,781,453 at
December 31, 2005. Moreover, as the reclassification would merely be a
re-class entry between the Additional Paid in Capital and the Warrants
liability accounts, total liabilities and stockholders' equity would
remain unchanged. From a qualitative perspective, the Company has
mainly conducted research activities to date and has generated very
little operating revenue. As a result, taking into account the
surrounding circumstances as required by SAB 99, the Company
determined that the judgment of a reasonable person relying upon the
financials would not have been changed or influenced by the inclusion
or correction of the error. Accordingly, the Company concluded that an
amended Form 10-K for the year ended December 31, 2005 is not
required. The Company will correct the error as of January 1, 2006 and
will make the necessary disclosures in the Form 10-K for the year
ended December 31, 2006 in accordance with the guidance from SAB 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements."
In applying the guidance in SAB 99, the Company further concluded that
filing of an Item 4.02 Form 8-K is not required. If one takes into
account all of the surrounding circumstances of the adjustments for
the quarters ended March 31, 2006, June 30, 2006 and September 30,
2006, a reasonable person would conclude that the adjustments have no
impact on the reliability of the financial statements as presented in
the Form 10-Q's for the respective quarters. Given that the Company
has mainly conducted research activities to date and has generated
very little operating revenue and the warrants were issued as part of
the fee paid to the placement agent in the private placement, a
reasonable person would conclude that non-cash increases and decreases
to Net Income associated with these warrants does not have an impact
on the reliability of the financial statements in general, and in
particular the Statement of Cash Flows, which for a company with no
revenues would be considered the most important financial statement in
the eyes of a reasonable investor. Given these factors, the Company
has concluded that an Item 4.02 Form 8-K is not required and the
financial statements as filed may be relied upon for the quarters
ended March 31, 2006, June 30, 2006 and September 30, 2006.
Mr. Jim B. Rosenberg - 5 - March 16, 2007
Senior Assistant Chief Accountant - Division of Corporation Finance
3. COMMENT: PLEASE REPRESENT TO US THAT YOU WILL INCLUDE PROPOSED REVISED
DISCLOSURES IN YOUR FUTURE EXCHANGES AND FILINGS.
RESPONSE:
The Company represents that it will include the proposed revised
disclosures contained in this letter, and in its letters dated January
19, 2007 and February 23, 2007, in future exchange filings.
In connection with these responses to your comments, the Company acknowledges
that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
o staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Please direct any comments or questions on MacroChem's responses to me at (781)
489-7310. Thank you.
Sincerely,
/s/ Bernard R. Patriacca
Bernard R. Patriacca
cc: Robert J. DeLuccia
Glenn E. Deegan
Dwight W. Quayle
Justin A. McCormack