SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission file number 0-13634
MACROCHEM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2744744
- ------------------------------ -------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
40 WASHINGTON STREET, SUITE 220, WELLESLEY HILLS, MASSACHUSETTS 02481
---------------------------------------------------------------------
(Address of principal executive offices, Zip Code)
781-489-7310
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes___X___ No_______
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.
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 Exchange Act).
Yes______ No___X___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 11, 2007:
- ----------------------------- ------------------------------
Common Stock, $.01 par value 3,187,792
1
EXPLANATORY NOTE
We are filing this Amendment No.1 to our Quarterly Report on Form 10-Q
("Amendment No.1") for the quarter ended March 31, 2006. The Quarterly Report on
Form 10-Q was originally filed on May 15, 2006 (the "Original Filing").
Amendment No. 1 is being filed in order to correct the classification of the
warrants issued to the placement agent for services rendered in connection with
our Series C Convertible Preferred Stock Offering in December 2005 and January
2006 (See Note 5 to the financial statements included in this Amendment No. 1).
The fair value of the placement agent warrants was originally accounted for as
an offset to the proceeds from the Series C Convertible Preferred Stock offering
and a credit to additional paid in capital. Upon further review of the terms of
the warrants, which include a put feature enabling the holder, at its option, to
require the Company to repurchase the warrants for cash in the event of a change
in control, the Company determined that the warrants meet the definition of a
derivative instrument as defined in SFAS 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. As such, the fair value of the warrants
should have been recorded in warrant liability pursuant to the guidance in
paragraphs 12 and 27 of EITF 00-19, ACCOUNTING FOR DERIVATIVE FINANCIAL
INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK, and
adjusted to their current fair value at each reporting period. The Balance
Sheet, Income Statement, Statement of Cash flows and related footnotes have been
adjusted accordingly for the correction of the error. The effect has been an
increase in the warrant liability of $755,833, a decrease in additional paid in
capital of $505,337 and in increase to net loss of $250,496 for the quarter
ended March 31, 2006. In addition, the Management's Discussion and Analysis of
Financial Condition and Results of Operations has been amended to reflect the
adjustment.
The year end December 31, 2005 balance sheet has been restated to reflect the
change in accounting for the Series C Cumulative Preferred Stock Offering
described above. As such, the Balance Sheet has been adjusted to reflect a
reclass of $174,922 from additional paid in capital to warrant liability. There
was no impact on the Statement of Operations or the Statement of Cash Flows for
the year ended December 31, 2005.
Except as described above, no other information in the Original Filing is
amended hereby. Amendment No. 1 does not reflect events occurring after the
filing of the Original Filing or modify or update those disclosures affected by
subsequent events. Accordingly, Amendment No. 1 should be read in conjunction
with our other filings made with the SEC subsequent to the filing of the
Original Filing.
2
MACROCHEM CORPORATION
INDEX TO FORM 10-Q/A
----------------------
PAGE NUMBER
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Balance Sheets
March 31, 2006 (Unaudited) and December 31, 2005 4
Condensed Statements of Operations for the
Three Months Ended March 31, 2006
and 2005 (Unaudited) 5
Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2006
and 2005 (Unaudited) 6
Notes to Unaudited Condensed Financial
Statements 8-18
Item 2 Management's Discussion and Analysis of 19-25
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6 Exhibits 26-27
SIGNATURES 28
EXHIBIT INDEX 29-30
3
ITEM 1. FINANCIAL STATEMENTS
MACROCHEM CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
(UNAUDITED) MARCH 31, 2006 DECEMBER 31, 2005
------------------------------------------------ -----------------
AS REPORTED ADJUSTMENT RESTATED RESTATED
------------- ------------- ------------- ------------
(See Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 767,500 $ 767,500 $ 3,023,436
Short-term investments 6,529,547 6,529,547 ---
Prepaid expenses and other current assets 393,481 393,481 106,761
------------- ------------- ------------- ------------
Total current assets 7,690,528 7,690,528 3,130,197
Property and equipment, net 60,729 60,729 72,203
Patents, net 580,936 580,936 579,053
------------- ------------- ------------- ------------
Total assets $ 8,332,193 $ 8,332,193 $ 3,781,453
============= ============= ============= ============
LIABILITIES
Current liabilities:
Accounts payable $ 170,888 170,888 $ 125,478
Accrued expenses and other liabilities 271,387 271,387 249,552
------------- ------------- ------------- ------------
Total current liabilities 442,275 442,275 375,030
Warrants liability (Note 5) 7,044,873 755,833 7,800,706 1,795,700
------------- ------------- ------------- ------------
Total liabilities 7,487,148 755,833 8,242,981 2,170,730
Commitments and contingencies (Note 3)
Preferred stock, $.01 par value, liquidation value of
$8,255,000 and $2,500,000; 6,000,000 shares
authorized, 825.5 and 250 shares Series C
Convertible issued and outstanding at March 31, 2006
and December 31, 2005, respectively
(Note 5) 342,138 342,138 330,243
------------- ------------- ------------- ------------
342,138 342,138 330.243
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 100,000,000 shares
authorized; 1,080,023 and 997,438 shares issued at
March 31, 2006 and December 31, 2005, respectively 10,800 10,800 9,974
Additional paid-in capital 85,016,725 (505,337) 84,511,388 83,914,608
Accumulated deficit (84,465,508) (250,496) (84,716,004) (82,584,992)
Less treasury stock, at cost, 529 shares at March 31,
2006 and December 31, 2005 (59,110) (59,110) (59,110)
------------- ------------- ------------- ------------
Total stockholders' equity 502,907 (755,833) (252,926) 1,280,480
------------- ------------- ------------- ------------
Total liabilities and stockholders' equity $ 8,332,193 $ 0 $ 8,332,193 $ 3,781,453
============= ============= ============= ============
The accompanying notes are an integral part of these unaudited condensed
financial statements.
4
MACROCHEM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2006 and 2005
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------
2006 2005
---------------------------------------------- ------------
AS REPORTED ADJUSTMENT RESTATED
OPERATING EXPENSES:
Research and development $ 65,982 $ 65,982 $ 1,030,061
Marketing, general and administrative 1,141,127 1,141,127 834,998
------------- ------------- ------------- ------------
TOTAL OPERATING EXPENSES 1,207,109 1,207,109 1,865,059
------------- ------------- ------------- ------------
LOSS FROM OPERATIONS (1,207,109) (1,207,109) (1,865,059)
OTHER INCOME:
Interest income 45,742 45,742 23,519
Loss on change in value of warrant liability (579,497) (250,496) (829,993) ---
------------- ------------- ------------- ------------
TOTAL OTHER INCOME AND EXPENSE (533,755) (250,496) (784,251) 23,519
------------- ------------- ------------- ------------
NET LOSS $ (1,740,864) $ (250,496) $ (1,991,360) $(1,841,540)
============= ============= ============= ============
BENEFICIAL CONVERSION FEATURE (NOTE 5) (11,895) (11,895) ---
DIVIDEND ON SERIES C CUMULATIVE PREFERRED STOCK
(139,652) ------------- (139,652) ---
------------- ------------- ------------- ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,892,411) $ (250,496) $ (2,142,907) $(1,841,540)
============= ============= ============= ============
BASIC AND DILUTED NET LOSS PER SHARE $ (1.75) $ (.23) $ (1.98) $ (1.99)
============= ============= ============= ============
SHARES USED TO COMPUTE BASIC AND DILUTED NET LOSS PER
SHARE
1,079,494 1,079,494 1,079,494 924,813
============= ============= ============= ============
The accompanying notes are an integral part of these unaudited condensed
financial statements.
5
MACROCHEM CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2006 and 2005
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------
2006 2005
---------------------------------------------- ------------
AS REPORTED ADJUSTMENT RESTATED
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,740,864) $ (250,496) $ (1,991,360) $(1,841,540)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 24,504 24,504 39,496
Stock-based compensation 457,954 457,954 ---
401(k) contributions in company common stock --- --- 15,610
Deferred rent --- --- (5,509)
Loss on change in value of warrant liability 579,497 250,496 829,993 ---
Change in assets and liabilities:
Prepaid expenses and other current assets (286,720) (286,720) (151,271)
Accounts payable and accrued expenses 67,245 67,245 102,748
Net cash used in operating activities (898,384) 0 (898,384) (1,840,466)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of short-term investments --- --- ---
Purchases of short-term investments (6,529,547) (6,529,547) (6,384)
Expenditures for property and equipment (436) (436) (14,526)
Additions to patents (14,477) (14,477) ---
Net cash provided by investing activities (6,544,460) (6,544,460) (20,910)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Series C Cumulative
Convertible Preferred Stock and Warrants 5,186,908 5,186,908 ---
Net cash provided by financing activities 5,186,908 5,186,908 ---
Net change in cash and cash equivalents (2,255,936) (2,255,936) (1,861,376)
Cash and cash equivalents at beginning of period 3,023,436 3,023,436 4,888,868
Cash and cash equivalents at end of period $ 767,500 $ 0 $ 767,500 $ 3,027,492
The accompanying notes are an integral part of these unaudited condensed
financial statements.
(Continued)
6
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
The Company did not pay any cash for interest expense or income taxes during the
three-month periods ended March 31, 2006 and 2005.
The accompanying notes are an integral part of these unaudited condensed
financial statements.
7
MACROCHEM CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
All references to share amounts, share prices and per share data in the
Unaudited Condensed Financial Statements and these accompanying Notes 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 to the reverse splits.
(1) BASIS OF PRESENTATION AND OPERATIONS
We are filing this Amendment No. 1 in order to correct the
classification of the warrants issued to the placement agent for
services rendered in connection with our Series C Convertible Preferred
Stock Offering in December 2005 and January 2006 (See Note 5 to the
financial statements included in this Amendment No. 1). The fair value
of the placement agent warrants was originally accounted for as an
offset to the proceeds from the Series C Convertible Preferred Stock
offering and a credit to additional paid in capital. Upon further
review of the terms of the warrants, which include a put feature
enabling the holder, at its option, to require the Company to
repurchase the warrants for cash in the event of a change in control,
the Company determined that the warrants meet the definition of a
derivative instrument as defined in SFAS 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. As such, the fair value of the
warrants should have been recorded in warrant liability pursuant to the
guidance in paragraphs 12 and 27 of EITF 00-19, ACCOUNTING FOR
DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED
IN, A COMPANY'S OWN STOCK, and adjusted to their current fair value at
each reporting period. The Balance Sheet, Income Statement, Statement
of Cash flows and related footnotes have been adjusted accordingly for
the correction of the error. The effect has been an increase in the
warrant liability of $755,833, a decrease in additional paid in capital
of $505,337 and in increase to net loss of $250,496 for the quarter
ended March 31, 2006. In addition, the Management's Discussion and
Analysis of Financial Condition and Results of Operations has been
amended to reflect the adjustment.
The year end December 31, 2005 balance sheet has been restated to
reflect the change in accounting for the Series C Cumulative Preferred
Stock Offering described above. As such, the Balance Sheet has been
adjusted to reflect a reclass of $174,922 from additional paid in
capital to warrant liability. There was no impact on the Statement of
Operations or the Statement of Cash Flows for the year ended December
31, 2005.
The financial statements included herein have been prepared by
MacroChem Corporation ("MacroChem" or the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the accompanying unaudited condensed financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows of the Company at the dates and
for the periods indicated. The unaudited condensed financial statements
8
included herein should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
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 will continue for the foreseeable future. At
March 31, 2006, the Company's accumulated deficit was $84,716,004. At
March 31, 2006, the Company believes that its existing cash and cash
equivalents are sufficient to fund operations under the Company's
operating plan for at least the next twelve months. 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'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.
The results disclosed in the Statement of Operations for the three
months ended March 31, 2006 are not necessarily indicative of the
results to be expected for the full year.
(2) STOCK BASED COMPENSATION
STOCK INCENTIVE PLANS
The Company has granted options to purchase the Company's common stock
to employees and directors under various stock incentive plans. Under
the plans, employees and non-employee directors are eligible to receive
awards of various forms of equity-based incentive compensation,
including stock options, restricted stock, and performance awards,
among others. The plans are administered by the Board of Directors or
the Compensation Committee of the Board of Directors, which determine
the terms of the awards granted. Stock options are generally granted
with an exercise price equal to the market value of a share of common
stock on the date of grant, have a term of ten years or less, and vest
over terms of two to three years from the date of grant.
ADOPTION OF SFAS 123(R)
Prior to January 1, 2006, the Company accounted for stock-based
compensation issued to employees using the intrinsic value method,
which follows the recognition and measurement principles of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and Financial Accounting Standards Board ("FASB")
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." Generally, no stock-based employee
compensation cost related to stock options was reflected in net income,
as all options granted under stock-based compensation plans had an
exercise price equal to the market value of the underlying common stock
9
on the grant date. Compensation cost related to restricted stock units
granted to non-employee directors and certain key employees was
reflected in net loss as services were rendered.
On January 1, 2006, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment," using
the modified prospective method, which requires measurement of
compensation cost for all stock awards at fair value on the date of
grant and recognition of compensation over the requisite service period
for awards expected to vest. The fair value of stock options is
estimated using the Black-Scholes valuation model, and the fair value
of restricted stock units is determined based on the number of shares
granted and the quoted price of the Company's common stock on the date
of grant. Such value is recognized as expense over the requisite
service period, net of estimated forfeitures, using the straight-line
attribution method. The estimate of awards that will ultimately vest
requires significant judgment, and to the extent actual results or
updated estimates differ from the Company's current estimates, such
amounts will be recorded as a cumulative adjustment in the period
estimates are revised. The Company considers many factors when
estimating expected forfeitures, including types of awards, employee
class and historical employee attrition rates. Actual results, and
future changes in estimates, may differ substantially from the
Company's current estimates.
On March 29, 2005, the Securities and Exchange Commission ("SEC")
published Staff Accounting Bulletin ("SAB") No. 107, which provides the
Staff's views on a variety of matters relating to stock-based payments.
SAB No. 107 requires that stock-based compensation be classified in the
same expense line items as cash compensation. The Company has
classified stock-based compensation during the three months ended March
31, 2006 within the same operating expense line items as cash
compensation paid to employees.
Stock-based compensation expense under SFAS No. 123(R) was $457,954
during the three months ended March 31, 2006. As a result of adopting
SFAS No. 123(R) on January 1, 2006, the Company's loss from operations
and net loss for the three months ended March 31, 2006 were $457,954
lower than if it had continued to account for share-based compensation
using the intrinsic method of accounting. Basic and diluted net loss
per share would have been $1.81 if the Company had not adopted SFAS No.
123(R), compared to the reported basic and diluted net loss per share
of $1.98. The incremental impact of SFAS No. 123(R) during the three
months ended March 31, 2006 represents stock-based compensation expense
related to stock options.
VALUATION ASSUMPTIONS FOR STOCK OPTIONS
The fair value of stock options granted during the three months ended
March 31, 2005 and 2006 was estimated using the Black-Scholes
option-pricing model with the following assumptions:
10
THREE MONTHS ENDED MARCH 31,
2006 2005
---- ----
Risk-free interest rate 4.72% 4.25%
Expected life of option grants 6 years 6 years
Expected volatility of underlying stock 102% 95%
Expected dividend payment rate, as a
percentage of the stock price on the
date of grant --- ---
The dividend yield assumption is based on the Company's history and
expectation of future dividend payouts. The expected volatility is
based on a combination of the Company's historical stock price and
implied volatility. The selection of implied volatility data to
estimate expected volatility was based upon the availability of
actively traded options on the Company's stock. The risk-free interest
rate assumption is based upon the U.S. Treasury yield curve in effect
at the time of grant for periods corresponding with the expected life
of the option. The expected life of employee stock options represents
the weighted-average period the stock options are expected to remain
outstanding.
PRO FORMA INFORMATION FOR PERIOD PRIOR TO SFAS 123(R) ADOPTION
In accordance with FAS 123R, the Company adopted the provisions of FAS
123R at January 1, 2006 using the modified prospective approach. Under
this method, prior periods are not restated. Had the Company previously
recognized compensation costs as prescribed by FAS 123, previously
reported net loss, basic earnings per share and diluted earnings per
share would have changed to the pro forma amounts shown as follows:
THREE MONTHS ENDED
MARCH 31,
2005
Net loss as reported $ (1,841,540)
Add: Stock-based employee compensation expense
included in reported net loss ---
Deduct: Total stock-based employee compensation
measured using the fair value method ( 298,805)
-----------
Pro forma net loss $ (2,140,345)
=============
Basic and diluted net loss per share - as reported $ (1.99)
=================
Basic and diluted net loss per share - pro forma $ (2.31)
=================
11
(3) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS- In accordance with certain capital lease contracts,
in the event that they are terminated early, approximately $50,950
would be owed as early termination payments.
(4) BASIC AND DILUTED LOSS PER SHARE
The following table sets forth the computation of basic and diluted
loss per share:
THREE MONTHS ENDED MARCH 31,
------------------------------
2006 2005
---- ----
Numerator for basic and diluted loss per
share:
Net loss attributable to common
stockholders $(2,142,907) $(1,841,540)
============ ============
Denominator for basic and diluted loss per
share:
Weighted average shares outstanding 1,079,494 924,813
============ ============
Net loss per share - basic and diluted $( 1.98) $( 1.99)
============ ============
Potential common shares are not included in the per share calculations
for diluted EPS, because the effect of their inclusion would be
anti-dilutive. Anti-dilutive potential shares not included in per share
calculations for the three months ended March 31, 2006 and 2005 were
17,645,966 and 170,699, respectively.
(5) STOCKHOLDERS' EQUITY
AUTHORIZED CAPITAL STOCK - Authorized capital stock consists of
100,000,000 shares of $.01 par value common stock of which 1,080,023
shares are issued (1,079,494 are outstanding) and 17,645,966 are
reserved for issuance upon exercise of common stock options and
warrants and conversion of Series C Cumulative Convertible Preferred
Stock at March 31, 2006. 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
1,500 shares have been designated Series C Cumulative Convertible
Preferred Stock (825.5 shares were outstanding at March 31, 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 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.
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
12
repurchased no shares in 2003, 2004 and 2005. At March 31, 2006, 529
repurchased shares remain available for future use and 16,180 shares
are available to be repurchased.
SERIES C CONVERTIBLE PREFERRED STOCK - On December 23, 2005, pursuant
to the terms of a Preferred Stock and Warrant Purchase Agreement (the
"Purchase Agreement"), the Company completed the first closing of a
private placement (the "Series C Financing") in which institutional
investors (the "Purchasers") 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 price of $1.26 per share, for an aggregate purchase price of
$2.5 million (the "First Closing"). The net proceeds from the First
Closing were $2,125,943. In the second closing of the Series C
Financing, on February 13, 2006, the Company issued to institutional
investors (the "Purchasers") 575.5 shares of Series C Preferred Stock
and six-year warrants (the "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 (the "Second
Closing"). The net proceeds from the Second Closing were $5,186,908.
The terms of the Series C Preferred Stock and Warrants issued in the
First Closing and the Second Closing were identical.
RELEVANT MATERIAL TERMS: The terms and provisions of the Series C
Preferred Stock are set forth in the Certificate of Designations,
Rights and Preferences of Series C Cumulative Convertible Preferred
Stock (the "Certificate of Designations"). Certain material terms of
the Series C Preferred Stock relevant to this response are summarized
below:
OBLIGATIONS TO REGISTER SHARES: When issued, the securities offered and
sold to the Purchasers in the Series C Financing were not registered
under the Securities Act of 1933, as amended (the "Securities Act") and
were sold in reliance upon the exemption from securities registration
afforded by Regulation D under the Securities Act. All of the
Purchasers represented to MacroChem that they were "accredited
investors", as defined in Rule 501 of Regulation D. In connection with
the Series C Financing, MacroChem entered into an Investor Rights
Agreement with the Purchasers, pursuant to which MacroChem was required
to file a registration statement with the Securities and Exchange
Commission covering the resale of the common stock issuable upon
conversion of the Series C Preferred Stock, issuable as payment of
dividends on the Series C Preferred Stock and issuable upon exercise of
the Warrants and the warrants issued to the placement agent, no later
than March 27, 2006, and to use its best efforts to cause the
registration statement to become effective within a specified time
period. The Investor Rights Agreement further provides that if a
registration statement is not filed or declared effective within
specified time period, the Company would be required to pay each holder
an amount in cash, as liquidated damages, equal to 2.0% per month of
the aggregate purchase price paid by such holder in the private
placement for the common stock and warrants then held.
DIVIDENDS: The Series C Preferred Stock accrues dividends at the rate
of 10% of the stated price annually, payable quarterly in cash or
common stock. The first dividend payment date was March 31, 2006.
LIQUIDATION: Upon liquidation, dissolution or winding up, the holders
of Series C Preferred Stock are entitled, before any distributions are
made to the holders of the common stock, or any other class or series
of capital stock of the Company ranking junior to the Series C
13
Preferred Stock as to such distributions, to be paid an amount equal to
$10,000 per share and any unpaid dividends thereon, subject to
adjustment.
VOTING: The Certificate of Designations contains a provision that
restricts a holder of Series C Preferred Stock from (i) converting
Series C Preferred Stock into common stock to the extent that such
conversion would result in the holder owning more than 4.95% of the
issued and outstanding common stock of the Company or (ii) voting
together with the common stock on an as-if-converted to common stock
basis in respect of more than 4.95% of the issued and outstanding
common stock of the Company. The Warrants issued pursuant to the
purchase agreement contain a similar restriction (collectively, the
"Beneficial Ownership Cap"). A holder of Series C Preferred Stock or a
Warrant may elect, subject to certain conditions, to be exempt from the
Beneficial Ownership Cap. Subject to the Beneficial Ownership Cap
restrictions, as of the date of the second closing of the private
placement financing in February 2006 (the "Second Closing"), the Series
C Preferred Stock acquired by the purchasers was convertible into
4,057,885 shares of common stock and the holders of the Series C
Preferred Stock vote on an as-converted basis with the holders of our
common stock, and therefore held approximately 80.28% of the voting
power of our outstanding securities. Assuming both the conversion of
the Series C Preferred Stock and the exercise of all of the Warrants
acquired by the purchasers, in each case subject to the Beneficial
Ownership Cap restrictions, the purchasers would have held
approximately 89.06% of the outstanding common stock of the Company as
of the date of the Second Closing.
REDEMPTION: If the Company fails or refuses to convert any shares of
Series C Preferred Stock in accordance with the terms of the Series C
Preferred Stock, the holders of the Series C Preferred Stock are
entitled to elect to require the Company to redeem their Series C
Preferred Stock. In the event of a redemption, the redemption price per
share of Series C Preferred Stock is an amount in cash equal to the
greater of (1) all accrued but unpaid dividends as of the date the
holder makes the demand for redemption with respect to each share to be
redeemed plus the $10,000 liquidation preference per share or (2) the
total number of shares of common stock into which such Series C
Preferred Stock is convertible multiplied by the then-current market
price of the common stock.
Given that the redemption provision described above does not embody an
unconditional obligation requiring the Company to redeem the instrument
at a specified or determinable date or upon an event certain to occur,
the Series C Preferred Stock is not a mandatorily redeemable financial
instrument. Therefore, the Company determined that the guidance in FAS
150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY, which requires liability classification
for mandatorily redeemable financial instruments, does not apply.
Rule 5-02.28 of Regulation S-X requires securities with redemption
features that are not solely within the control of the issuer to be
classified outside of permanent equity. The holders of the Series C
Preferred Stock control a majority of the voting power of the Company's
common stock and, as a result of this control, could directly or
indirectly influence the triggering of the redemption provision by, for
example, refusing to approve an increase in the authorized but unissued
shares of common stock of the Company if, in the future, such increase
were necessary to effect the conversion of the Series C Preferred
Stock. Accordingly, the redemption provision is not solely within the
Company's control, and thus the Series C Preferred Stock is not
permanent equity.
14
Because the Series C Preferred Stock did not qualify for treatment as a
liability or as permanent equity as described above, the Company
recorded the portion of the proceeds attributable to the Series C
Preferred Stock as mezzanine equity pursuant to EITF Topic D-98,
CLASSIFICATION AND MEASUREMENT OF REDEEMABLE SECURITIES. Because the
Company has a substantial amount of authorized but unissued common
stock (in excess of 95 million shares), the occurrence of a redemption
event is not considered probable, and thus the carrying value of the
Series C Preferred Stock was not accreted to its redemption value.
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 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. 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
15
as all of the Series C Preferred Stock was eligible for conversion upon
issuance.
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. In February 2006, the Company sold 575.5 shares of Series
C Cumulative Convertible Preferred Stock and warrants to purchase
5,480,952 shares of common stock to institutional investors. Gross
proceeds were $5,755,000 ($5,186,908 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 February 13, 2006, the Company closed a private placement
in which institutional investors received six-year warrants to purchase
5,480,961 shares of the Company's common stock at an exercise price of
$1.26 per share ("Investor Warrants"). As of March 31, 2006, none of
the $1.26 Investor 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 ("Placement Agent Warrants"). As of March 31, 2006, none of these
$1.05 Placement Agent Warrants had been exercised. 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 price of $1.26 per share for a period of six years
("Investor Warrants"). As of March 31, 2006, none of these $1.26
Investor Warrants had been exercised. The 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 six years
("Placement Agent Warrants"). As of March 31, 2006, none of the $1.05
Placement Agent Warrants 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 Investor Warrants
and the Placement Agent 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 Investor Warrants
and the Placement Agent Warrants at $7,800,706 on March 31, 2006 using
the Black-Scholes method with the following assumptions: a risk-free
interest rate of 4.82%, volatility of 100%, and a dividend yield of 0%.
16
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 March 31,
2006, 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 March 31,
2006, 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 March 31, 2006, 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 March 31, 2006,
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 March 31, 2006, 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 March 31,
2006, none of these warrants had been exercised.
STOCK OPTION PLANS - The Company has two stock option plans, the 1994
Equity Incentive Plan (1994 Plan) and the 2001 Incentive Plan (the 2001
Plan).
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. During
the three-month period ended March 31, 2006, no options were granted or
exercised and 4,212 options were cancelled under the 1994 Plan.
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. During the three months ended
March 31, 2006, no options were granted or exercised and 638 options
were cancelled under the 2001 Plan.
STOCK AND STOCK OPTION ISSUANCES OUTSIDE THE STOCK OPTION PLANS -
During the three months ended March 31, 2006, options to purchase an
aggregate of 945,000 shares of common stock were granted to executive
officers and directors of the Company.
17
One third of the options vested on the date of grant and the remaining
options vest over a two year period with an exercise price of $1.62.
During the three months ended March 31, 2006, 75,000 shares of
restricted stock were granted to Robert J. DeLuccia, the Company's
Chief Executive Officer. The restricted stock vests if and when the
Company's common stock trades at or above $4.00 per share for thirty
consecutive trading days.
(6) COMPREHENSIVE LOSS
Comprehensive loss is equal to the Company's net loss for the three
months ended March 31, 2006 and 2005.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTE REGARDING FORWARD LOOKING STATEMENTS
This report and the documents incorporated in this report by reference may
contain "forward-looking statements" within the meaning of 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 upon currently
available data. The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for such forward-looking statements. In order to comply with the
terms of the safe harbor, we note that a variety of factors could cause actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the forward-looking statements. These factors
include, but are not limited to: our history of operating losses, our decision
to discontinue research and development activities and our need for additional
external financing; our need for significant additional product development
efforts and additional financing; technological uncertainty relating to
transdermal drug delivery systems; the early stage of development of our
proposed products; the lack of success of our prior development efforts;
uncertainties related to clinical trials of our proposed products; uncertainties
relating to government regulation and regulatory approvals; our dependence on
third parties for the FDA application process; uncertainties regarding market
acceptance of our product candidates; uncertainties regarding the potential
health risks of hormone replacement therapies; our ability to identify and
obtain rights to products or technologies in order to build our portfolio of
product candidates; our ability to recruit additional key employees; our limited
personnel and our dependence on continued access to scientific talent; no
assurance of our entering into license arrangements; our lack of laboratory
facilities and scientific personnel and uncertainties regarding our reliance on
third parties to conduct research and development activities for our
technologies and product candidates; uncertainties relating to competition,
patents and proprietary technology; our dependence on third parties to conduct
research and development activities; our dependence on third-party suppliers and
manufacturers; uncertainties relating to risks of product liability claims, lack
of product liability insurance, and expense and difficulty of obtaining adequate
insurance coverage; our majority shareholders, who own a large portion of our
voting stock, could control company decisions and could substantially lower the
market price of our common stock if they were to sell large blocks of our common
stock in the future; uncertainty of pharmaceutical pricing and related matters;
volatility of our stock price; the effect that our quotation on the OTC Bulletin
Board will have on the liquidity of our common stock; and dilution of our shares
as a result of our contractual obligation to issue shares in the future.
Additional information on these and other factors which could affect the
Company's actual results and experience are included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2005 and, in particular, the
section entitled "Risk Factors".
These or other events or circumstances could cause our actual performance
or financial results in future periods to differ materially from those expressed
in the forward-looking statements. We undertake no obligation to make any
revisions to the forward-looking statements contained in this report or the
documents incorporated by reference in this report, or to update the
forward-looking statements to reflect events or circumstances occurring after
the date of this report.
19
GENERAL
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 Quarterly Report on Form 10-Q has been adjusted to reflect these reverse
splits.
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(R),
MacroDerm(TM) and DermaPass(TM). 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 March 31, 2006, we had an accumulated deficit
of $84,716,004. 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.
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;
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
20
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 may 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
We believe that our existing cash and cash equivalents and short term
investments of $7,297,047 as of March 31, 2006 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 ($5,186,908 net of cash issuance 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 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.
21
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
three-month period ended March 31, 2006, we spent $65,982 on research and
development, including $64,632 in costs associated with a clinical trial for
EcoNail and $1,350 in costs not specifically tracked to a project. For the three
months ended March 31, 2005, we spent $1,030,061 on research and development,
including $172,469 and $258,940 in costs associated with our clinical trials for
EcoNail and Opterone, respectively, and $598,652 in costs not specifically
tracked to a project.
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
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. Moreover, we may elect not to develop Opterone further if we cannot
find a partner. 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 within our
Annual Report on Form 10-K for the year ended December 31, 2005, 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.
22
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
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.
RESEARCH AND DEVELOPMENT. Research and development costs are expensed as
incurred.
WARRANTS LIABILITY. Based on certain terms in the warrants that we issued
in connection with the sale of our Series C Cumulative Convertible Preferred
Stock, we determined that the warrants should be classified as a liability and
valued at fair market value each reporting period, with the changes in fair
value recorded in earnings, in accordance with EITF 00-19, "Accounting for
Derivative Financial Investments Indexed to, and Potentially Settled in, a
Company's Own Stock." We will continue to evaluate the warrants under EITF 00-19
to determine when, if ever, they meet certain criteria under EITF 00-19 for
permanent equity.
RESULTS OF OPERATIONS
We had no revenues for the three months ended March 31, 2006 and March 31,
2005. For the year ending December 31, 2006, we do not expect to have any
revenues.
For the three-month period ended March 31, 2006, research and development
costs decreased by $964,079, or 93.6%, to $65,982 from $1,030,061 in the
three-month period ended March 31, 2005. The decrease is primarily attributable
to the temporary cessation of research and development activities in August
2005, including a reduction in spending on clinical trials of $366,777 in the
three-month period ended March 31, 2006 compared with the same period in 2005 as
well as a reduction in payroll and related expenses of $269,937 and a reduction
in laboratory operating expenses of $327,365 in the three-month period ended
March 31, 2006 as a result of a staff reduction in August 2005. For each of the
next three quarters, we expect research and development spending to increase
from the level seen in the first quarter of 2006 as we commence a clinical trial
for EcoNail.
For the three-month period ended March 31, 2006, marketing, general and
administrative costs increased by $306,129, or 36.7%, to $1,141,127, from
$834,998 in the three-month period ended March 31, 2005. The increase is
primarily attributable to the Company's adoption of SFAS No. 123R, which
requires the expensing of stock options granted to employees based on the fair
value on the date of the grant, resulting in an expense of $457,954. The Company
also incurred additional costs of $60,236 relating to certain SEC filings and
reverse stock splits. The increase was partially offset by savings attributable
to a staff reduction in August 2005 which resulted in a reduction of salary and
related expenses of $137,443 during the three-month period ended March 31, 2006.
In addition, in the three-month period ended March 31, 2006, legal and audit
expenses decreased by approximately $13,000, insurance expenses decreased by
approximately $12,000, and consulting and investor relations expenses decreased
by $42,293. For each of the next three quarters, we expect marketing, general
and administrative spending to approximate the same level as seen in the first
quarter of 2006.
23
Other income decreased by $807,770 to a loss of $784,251 in the three-month
period ended March 31, 2006 from a gain of $23,519 in the three-month period
ended March 31, 2005. The decrease is primarily attributable to a loss
associated with the change in value of warrant liability of $829,993 in the
three-month period ended March 31, 2005. The decrease is partially offset by an
increase in interest income of $22,223, or 94%, to $45,742 in the three-month
period ended March 31, 2006 from $23,519 in the three-month period ended March
31, 2005. The increase in interest income is due to higher amounts of cash
available for investing purposes and higher interest rate returns available for
cash that is invested.
For the reasons described above, net loss increased by $149,820, or 8.1%,
to $1,991,360 in the three-month period ended March 31, 2006 from $1,841,540 in
the three-month period ended March 31, 2005.
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 the first three months of 2006, we received no proceeds
from the exercise of options and warrants, and gross proceeds of $5,755,000
($5,186,908 net of cash issuance costs) as a result of the sale of our Series C
Cumulative Convertible Preferred Stock in a private placement financing
transaction. During the first three months of 2005, we received no proceeds from
the exercise of options and warrants or the sale of stock.
At March 31, 2006, working capital was approximately $7,248,200, compared
to $3,828,900 at March 31, 2005. The increase in our working capital reflects
the receipt of private placement proceeds, partially offset by the use of funds
in operations. On February 13, 2006, we sold 575.5 shares of our Series C
Cumulative Convertible Preferred Stock for $5,755,000 in gross proceeds
($5,186,908 net of cash issuance costs) 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 three-month period ended March 31,
2006, we did not repurchase any shares of common stock. At March 31, 2006, 529
repurchased shares remain available for future use and 16,180 shares remain
available for repurchase under the plan.
Capital expenditures were $436 and patent development costs were $14,477
for the first three months of 2006. Capital expenditures were $14,526 and there
were no patent development costs for the three-month period ended March 31,
2005. We anticipate additional capital and patent expenditures will be
approximately $75,000 for the remainder of the fiscal year ending December 31,
2006.
On August 31, 2005, at the direction of our Board of Directors, we
discontinued all research and development activities and terminated
24
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 March 31, 2006, we had $7,297,047 in cash, cash equivalents and
short-term investments. 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 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 March 31, 2006, the Company had no long-term contractual obligations.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
25
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS.
The following is a list of exhibits to this Quarterly Report on Form 10-Q/A:
3.1 Amended and Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2005 (File No. 0-13634).
3.2 Amended and Restated By-Laws of the Company, incorporated by
reference to Exhibit 5 to the Company's Current Report on Form 8-K
dated August 13, 1999 (File No. 0-13634).
4.1 Common Stock Purchase Warrant, incorporated by reference to Exhibit
10.3 to our Current Report on Form 8-K dated February 16, 2006 (File
No. 0-13634).
10.1 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).
10.2 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 Form of Severance Agreement, dated February 13, 2006, by and
between the Company and Glenn E. Deegan, incorporated by reference to
26
Exhibit 10.8 to our Current Report on Form 8-K dated February 16, 2006
(File No. 0-13634).
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.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MACROCHEM CORPORATION
(Registrant)
April 11, 2007 /S/ ROBERT J. DELUCCIA
-----------------------------------------------------
Robert J. DeLuccia
President and Chief Executive Officer
(Principal Executive Officer)
/S/ BERNARD R. PATRIACCA
-----------------------------------------------------
Bernard R. Patriacca
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
28
EXHIBIT INDEX
The following is a list of exhibits to this Quarterly Report on Form 10-Q/A:
3.1 Amended and Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2005 (File No. 0-13634).
3.2 Amended and Restated By-Laws of the Company, incorporated by
reference to Exhibit 5 to the Company's Current Report on Form 8-K
dated August 13, 1999 (File No. 0-13634).
4.1 Common Stock Purchase Warrant, incorporated by reference to Exhibit
10.3 to our Current Report on Form 8-K dated February 16, 2006 (File
No. 0-13634).
10.1 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).
10.2 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 Form of Severance Agreement, dated February 13, 2006, by and
between the Company and Glenn E. Deegan, incorporated by reference to
29
Exhibit 10.8 to our Current Report on Form 8-K dated February 16, 2006
(File No. 0-13634).
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.
30