MACROCHEM
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
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Nature
of Business and Summary of Significant Accounting
Policies.
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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 minimal revenues relating to the sale of any products currently
under development. The Company has incurred losses from operations every year
since its inception and the Company anticipates that operating losses may
continue for the foreseeable future. At December 31, 2008 the Company’s
accumulated deficit was approximately $101.1 million. The audit report of
Whitley Penn LLP, our independent public accounting firm on our 2008 financial
statements includes an explanatory paragraph concerning our ability to continue
as a going concern. The inclusion of this explanatory paragraph may materially
and adversely affect our ability to raise new capital. To continue to operate,
the Company will require significant additional funding. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The
Company was acquired by Access Pharmaceuticals, Inc. (“Access”) on February 25,
2009 per the agreement and plan of merger entered into on July 10, 2008. The
impact of this transaction is not reflected in these consolidated financial
statements. See Note 11.
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.
Principles of
Consolidation - The consolidated financial statements include the
financial statements of MacroChem Corporation and our wholly-owned subsidiary.
All intercompany balances and transactions have been eliminated in
consolidation.
Accounting Estimates
– The preparation of the consolidated 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. The
primary estimates underlying the Company’s consolidated 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
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised
2004), “Share-Based
Payment,”. Management bases its estimates on certain assumptions, which
it believes are reasonable in the circumstances, and while actual results could
differ from those estimates, management does not believe that any change in
those assumptions in the near term would have a significant effect on the
consolidated financial position or the results of operations.
Fair Value of Financial
Instruments – The carrying amounts of cash, cash equivalents, accounts
payable, notes payable and accrued expenses approximate their fair value because
of their short-term nature.
Cash and Cash
Equivalents – Cash and cash equivalents at December 31, 2008 are
primarily comprised of highly liquid investments with a maturity of three months
or less when purchased. There were no short-term investments at December 31,
2008. During the year we maintained deposits primarily in one financial
institution, which may at times exceed amounts covered by insurance provided by
the U.S. Federal Deposit Insurance Corporation ("FDIC"). We have not
experienced any losses related to amounts in excess of FDIC
limits.
F-6
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 $487,000 at December 31, 2008. 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. At
December 31, 2008:
Gross
carrying
value
$ 944,000
Accumulated
amortization
(487,000)
Net asset
value
$
457,000
The
aggregate estimated amortization expense for intangible assets remaining as of
December 31, 2008 is as follows (in thousands):
2009 $ 45
2010
45
2011
45
2012
45
2013 and
thereafter 277
Total $
457
For the
year ended December 31, 2008, amortization expense was $61,000.
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. No
impairment charges were recorded for the year ended December 31,
2008.
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. Research and
development also includes in-process research and development of $9,661,000 from
the acquisition of Virium in 2008.
Revenues - Our
revenues are generated from licensing and research and development agreements.
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104
(SAB 104), "Revenue
Recognition". License revenue is recognized over the remaining life of
the underlying patent. Research and development revenues are recognized as
services are performed.
Stock Based
Compensation – 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.’’
F-7
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 on
the grant date. Compensation cost related to restricted stock units granted to
non-employee directors and certain key employees was reflected as an expense as
services were rendered.
On
January 1, 2006, the Company adopted 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.
Stock
based compensation expense for the year ended December 31, 2008 is as
follows:
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Year
Ended
December
31,
2008
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|
|
|
|
|
|
|
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General
and administrative
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$
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507,000
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Income Taxes – Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided for deferred tax assets to the
extent their realization is in doubt.
As of
January 1, 2007, we adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes"
(“FIN 48”). The adoption did not have a material impact on our
consolidated financial statements or effective tax rate and did not result in
any unrecognized tax benefits. Interest costs and penalties related to income
taxes are classified as interest expense and general and administrative costs,
respectively, in our consolidated financial statements. For the year ended
December 31, 2008, we did not recognize any interest or penalty expense related
to income taxes. It is determined not to be reasonably likely for the amounts of
unrecognized tax benefits to significantly increase or decrease within the next
12 months. We are currently subject to a three year statute of limitations by
major tax jurisdictions. We and our subsidiary file income tax returns in the
U.S. federal jurisdiction.
Basic and Diluted (Loss)
Income Per Share – Basic earnings per share is computed using the
weighted average number of common shares outstanding during each year. For the
year ended December 31, 2008, 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 from stock options,
warrants and convertible debt not included in per share calculations under the
treasury stock method for 2008 were 25,768,998.
F-8
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Basic
and Diluted Income (Loss) Per Share
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Year
Ended
December
31,
2008
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|
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Basic
net (loss) income attributable to common stockholders
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$
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(10,240,000
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)
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Basic
and diluted net (loss) income per common share
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$
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(0.26
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)
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Weighted
average shares used to compute basic and diluted net (loss) income per
common share
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38,934,207
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Recent Accounting
Pronouncement– In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a market-based framework
or hierarchy for measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 is applicable whenever another accounting pronouncement
requires or permits assets and liabilities to be measured at fair value. SFAS
157 does not expand or require any new fair value measures; however the
application of this statement may change current practice. The requirements of
SFAS 157 became effective for our fiscal year 2008. However, in
February 2008 the FASB decided that an entity need not apply this standard
to nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis until the subsequent
year. Accordingly, our adoption of this standard on January 1, 2008 was
limited to financial assets and liabilities and did not have a material effect
on our financial condition or results of operations. The financial assets and
liabilities as reported in the Company's financial statements approximate their
respective fair value. The Company's warrant liability is included in level 2 of
the fair value hierarchy contained in SFAS 157. We are still in the process of
evaluating this standard with respect to its effect on nonfinancial assets and
liabilities and therefore have not yet determined the impact that it will have
on our financial statements upon full adoption.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities — including an amendment of FASB 115”
(“SFAS 159”) which allows an entity to choose to measure certain financial
instruments and liabilities at fair value. Subsequent measurements for the
financial instruments and liabilities an entity elects to fair value will be
recognized in earnings and this election is irrevocable. SFAS 159 also
establishes additional disclosure requirements. SFAS 159 is effective for the
Company beginning January 1, 2008. The Company has not elected to apply the
fair value option to any of its financial instruments.
In
December 2007, the FASB issued SFAS No.141 (revised 2007), “Business Combinations”
(“SFAS 141R”). SFAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS 141R is effective beginning January 1, 2009. The
Company is currently evaluating the potential impact of the adoption of SFAS
141R on its financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No.160, “Non Controlling Interests in
Consolidated Financial Statements-an amendment of Accounting Research
Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by the parties
other than parent, the amount of the consolidated net income attributable to the
parent and to the non controlling interest, changes in parent’s ownership
interest, and the valuation of retained non controlling equity investments when
a subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and interests of the non controlling owners. SFAS 160 is effective for
the Company beginning January 1, 2009. The Company is currently evaluating
the potential impact of the adoption of SFAS 160 on its financial position,
results of operations or cash flows.
F-9
In
March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative
Instruments and Hedging Activities-an
amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 enhances
disclosures about the Company’s derivative and hedging activities and thereby
improves the transparency of financial reporting. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Company is currently evaluating the potential impact
of the adoption of SFAS 161 on its financial position, results of operations or
cash flows.
On
October 10, 2008, the FASB issued FSP No. SFAS 157-3, ”Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active.” (“FSP SFAS
157-3”) clarifies the application of SFAS No. 157, “Fair Value Measurements,” in
a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP SFAS 157-3 is effective
immediately, including prior periods for which financial statements have not
been issued. The adoption of FSP SFAS 157-3 did not have a material impact
on the Company's consolidated financial statements.
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2.
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Property
and Equipment.
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Property
and equipment consists of the following as of December 31:
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2008
|
|
Office
equipment
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$ 493,000
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Less:
accumulated depreciation
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(485,000)
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Property
and equipment, net
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$ 8,000
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|
|
|
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3.
|
Accrued
Expenses and Other Liabilities.
|
Accrued
expenses and other liabilities consists of accrued patent expenses of $300,000
and other accrued expenses of $247,000 as of December 31, 2008.
4.
Debt
On August
27, 2008, the Company entered into a Note Purchase Agreement with Access
Pharmaceuticals, Inc., pursuant to which Access has loaned us in aggregate the
amount of $635,000 at December 31, 2008 and agreed to loan additional funds to
us as required to operate our business until the date of termination of the
agreement or until the merger transaction is completed. We have agreed to pay
interest to Access at the rate of 10% per annum.
See also
Note 8 – Virium Pharmaceuticals, Inc. Acquisition for details of the notes
related to the acquisition. Of the $825,000 outstanding at December 31, 2008,
$225,000 was held by SCO and related parties.
As
described at Note 8, default status of one of these notes at December 31, 2008
resulted in a beneficial conversion feature with a value of $188,000 recorded to
interest expense and additional paid-in capital.
All of
MacroChem’s outstanding debt and accrued interest was cancelled in exchange for
Access common stock upon acquisition, see Note 11.
5.
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.
F-10
Stock Option Plans –
The Company has three stock option plans, the 1994 Equity Incentive Plan (the
“1994 Plan”) and the 2001 Incentive Plan (the “2001 Plan”) and the 2008 Stock
Incentive Plan ( the “2008 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.
Under the
terms of the 2001 Plan, the Company may grant options to purchase up to a
maximum of 2,373,809 shares of common stock to certain employees, directors and
consultants. The options may be awarded as incentive stock options (employees
only) and non-incentive stock options (certain employees, directors and
consultants).
The 2008
Plan, 2001 Plan and the 1994 Plan state that the exercise price of options shall
not be less than fair market value at the date of grant. As of December 31,
2008, there were outstanding options under all plans to purchase 4,126,232
shares of common stock with 4,373,768 shares remaining available for future
grants under the 2001 and 2008 Plan.
Stock-Based
Compensation–
Effective January 1, 2006, the Company adopted FAS No. 123(R),
“Accounting for Stock-Based
Compensation,” (“FAS 123(R)”) using the modified prospective method,
which results in the provisions of FAS 123(R) being applied to the financial
statements on a going-forward basis. FAS 123(R) requires companies to recognize
stock-based compensation awards granted to its employees as compensation expense
on a fair value method. Under the fair value recognition provisions of FAS
123(R), stock-based compensation cost is measured at the grant date based on the
fair value of the award and is recognized as expense over the service period,
which generally represents the vesting period. The grant date fair value of
stock options is calculated using the Black-Scholes option-pricing model and the
grant date fair value of restricted stock is based on intrinsic value. The
expense recognized over the service period is required to include an estimate of
the awards that will be forfeited.
All
stock-based awards to non-employees are accounted for at their fair market value
in accordance with FAS 123(R) and Emerging Issues Task Force No. 96-18,
“Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.” Under this method, the
equity-based instrument was valued at either the fair value of the consideration
received or the equity instrument issued on the date of grant. The resulting
compensation cost was recognized and charged to operations over the service
period, which was usually the vesting period.
For
purposes of recording stock based compensation expense as required by Statement
No. 123(R), the fair values of each stock option granted under the
Company’s stock option plan for the fiscal year ended December 31, 2008,
was estimated as of the date of grant using the Black-Scholes option-pricing
model.
The fair
values of all 2008 stock option grants issued were determined using the
following weighted average assumptions:
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|
Year
Ended
December
31,
2008
|
|
Risk-free
interest rate
|
2.96
%
|
|
Expected
life of option grants
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6.0
years
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|
Expected
volatility of underlying stock
|
111
%
|
|
Expected
dividend payment rate, as a percentage of the stock price on the date of
grant
|
0
%
|
The
dividend yield assumption is based on the Company’s history and expectation of
future dividend payouts. The Company estimated stock price volatility using the
historical volatility in the market price of its common stock for the expected
term of the options. 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.
F-11
As
share-based compensation expense is recognized based on awards ultimately
expected to vest, it must be reduced for estimated forfeitures. FAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Forfeiture rates are calculated based on actual historical
forfeitures. The Company assumed a 100% forfeiture rate for all unvested options
at December 31, 2008 due to the acquisition by Access on February 25, 2009. See
Note 11.
The
expected term of the options represents the estimated period of time until
exercise and is based on historical experience of similar awards. The expected
life of employee stock options is, in part, a function of the options’ remaining
contractual life and the extent to which the option is in-the-money (i.e., the
average stock price during the period is above the strike price of the stock
option). We use the "simplified" method until we have enough historical
experience to provide a reasonable estimate of expected term.
Stock
Option Activity–
During the year ended December 31, 2008, the Company granted stock options to
existing employees and Directors, as part of the Company’s yearly review
process. All such options were granted with exercise prices equal to the current
market value of the underlying common stock on the date of grant. Stock option
activity was as follows:
|
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
Per
Share
|
|
Weighted-Average
Remaining
Contractual
Term
|
|
|
Balance,
December 31, 2007
|
|
3,020,249
|
|
$
|
3.90
|
|
|
|
|
Granted
|
|
4,840,000
|
|
|
0.30
|
|
|
|
|
Exercised
|
|
——
|
|
|
|
|
|
|
|
Canceled
|
|
(3,734,017
|
)
|
$
|
2.66
|
|
|
|
|
Outstanding at,
December 31,
2008
|
|
4,126,232
|
|
$
|
0.58
|
|
8.92
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2008
|
|
1,939,417
|
|
$
|
2.58
|
|
8.63
|
|
There was
no intrinsic value of options at December 31, 2008.
The
following table summarizes information relating to currently outstanding and
exercisable options as of December 31, 2008 as follows:
|
|
|
Outstanding
|
Weighted
|
|
Weighted
|
|
|
|
Weighted-Average
|
Average
|
Exercisable
|
Average
|
|
|
Number
of
|
Remaining
|
Exercise
|
Number
|
Exercise
|
|
Exercise Price
|
Shares
|
Contractual Life (in Yrs)
|
Price
|
of Shares
|
Price
|
|
$0.24
- $0.30
|
2,540,000
|
9.39
|
$0.29
|
927,498
|
$3.40
|
|
$0.60
- $1.62
|
1,575,000
|
8.18
|
$0.88
|
1,000,687
|
$1.60
|
|
$10.50
- $69.30
|
11,232
|
6.19
|
$22.76
|
11,232
|
$22.76
|
|
|
4,126,232
|
|
|
1,939,417
|
|
Stock
based compensation expense for the year ended December 31, 2008 related to stock
options was $485,000. As of December 31, 2008, there was no expected
unrecognized compensation cost related to unvested stock options granted under
the Company’s stock-based compensation plans as forfeitures were estimated at
100%.
All
outstanding options at December 31, 2008 were canceled February 25, 2009 with
the acquisition by Access Pharmaceuticals, Inc.
F-12
Stock and Stock Option
Issuances to Non-Employees – During 2008, no stock options were granted
to non-employees or consultants.
Restricted
Stock Activity
On
March 7, 2008, the Company issued 400,000 shares of common stock to a
consultant to the Company for services to be performed in the first three
quarters of 2008. The common shares vested immediately and were not
subject to forfeiture. The common shares had a fair value of $120,000 on
the grant date.
Stock and Stock Option
Issuances to Employees Outside the Stock Option Plans –
On
April 22, 2008, the Company issued 75,000 shares of common stock to the
Company’s Chairman Robert DeLuccia. The common shares vested immediately and
were not subject to forfeiture. The common shares had a fair value of $22,500
and was recorded to stock-based compensation expense.
During
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. None of these awards had vested as of December 31, 2008 and all
were cancelled upon acquisition by Access in 2009.
Authorized
Capital Stock
Authorized
capital stock consists of 100,000,000 shares of $.01 par value common stock of
which 45,873,412 shares are issued (45,872,883 are outstanding)
and 30,142,767 are reserved for issuance upon exercise of common stock
options, warrants and convertible notes at December 31,
2008. 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. On December 31,
2008, there were no shares of Series A, B or C Cumulative Preferred Stock
outstanding.
Stock
Sales
On
October 10, 2007, the Company entered into a Securities Purchase Agreement,
pursuant to which the Company issued in a private placement 5,891,667 shares of
its common stock and five-year warrants to purchase 1,767,500 shares of the
Company’s common stock at an exercise price of $0.60 per share, for aggregate
gross proceeds of $3,535,000. In connection with the private placement, all of
the 752.25 then outstanding shares of the Company’s Series C Cumulative
Convertible Preferred Stock were converted into a total of 12,571,850 shares of
common stock. In addition, outstanding warrants to purchase 8,648,102 shares of
common stock previously issued with the Series C Preferred have been reset
to purchase 17,885,848 shares of common stock at an exercise price of $0.60 per
share, pursuant to anti-dilution provisions of those warrants.
In
connection with the private placement, the Company entered into a Director
Designation Agreement dated as of October 1, 2007 with SCO Capital
Partners, LLC (“SCO”), a current stockholder and a purchaser in the private
placement, pursuant to which, for so long as SCO holds 20% of the Company’s
outstanding common stock, SCO has the right to designate two individuals to
serve on the Company’s Board of Directors. SCO previously held the right to
designate two individuals to serve on the Company’s Board of Directors for so
long as it held 20% of the Company’s outstanding Series C Preferred. SCO
was paid $150,000 in investor relations fees in 2008.
F-13
Warrants
As
discussed at Note 8, on June 23, 2008, the Company entered into a $425,000
Convertible Note agreement with new holders of convertible promissory notes
whose notes mature on December 12, 2008, subject to certain conditions. The
note holders received warrants to purchase 212,500 shares of common stock at an
exercise price of $.01 per share for a period of five years. These warrants were
valued at $51,000 using the Black Scholes model and are being amortized over the
term of the debt. As of December 31, 2008, none of the warrants had been
exercised.
As
discussed at Note 8, on June 23, 2008, the Company entered into a $400,000
Convertible Note agreement with new holders of convertible promissory notes
whose notes mature on December 6, 2008, subject to certain conditions. The
note holders received warrants to purchase 100,000 shares of common stock at an
exercise price of $.01 per share for a period of five years. These warrants were
valued at $24,000 using the Black Scholes model and are being amortized over the
term of the debt. As of December 31, 2008, none of the warrants had been
exercised.
On March
5, 2008, the Company entered into an agreement with a consultant for consulting
services, with the consultant receiving warrants to purchase 150,000 shares of
common stock at an exercise price of $0.38 for a period of five years. These
warrants were valued at $36,000 using the Black Scholes model. As of December
31, 2008, none of the warrants had been exercised.
On
October 10, 2007, in connection with the conversion of its Series C
Preferred Stock to shares of common stock, warrants to purchase 8,648,102 shares
of common stock previously issued with the Series C Preferred Stock have
been reset to purchase 17,885,847 shares with an exercise price of $.60 per
share pursuant to anti-dilution provisions in the warrants. On February 13,
2006, the Company closed a private placement in which institutional investors
received six-year warrants to purchase 11,510,018 shares of the Company’s common
stock at an exercise price of $0.60 per share (“Investor Warrants”). As of
December 31, 2008, none of the $0.60 Investor Warrants had been exercised. The
placement agent in the transaction received a warrant to purchase approximately
959,166 shares of common stock at a purchase price of $0.60 for a period of six
years (“Placement Agent Warrants”). As of December 31, 2008, none of these $0.60
Placement Agent Warrants had been exercised. On December 23, 2005, the
Company closed a private placement in which institutional investors received
warrants to purchase 4,999,997 shares of common stock at an exercise price of
$0.60 per share for a period of six years (“Investor Warrants”). As of December
31, 2008, 37,500 of these $0.60 Investor Warrants had been exercised. The
placement agent in this transaction received a warrant to purchase approximately
416,666 shares of common stock at a purchase price of $0.60 for a period of six
years (“Placement Agent Warrants”). As of December 31, 2008, none of the
$0.60 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” (“EITF 00-19”), 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 due to a put option in the agreement. Changes in the fair value
of such warrants are recorded as a charge or credit to operations each reporting
period. The Company valued the Investor Warrants and the Placement Agent
Warrants at $104,000 on December 31, 2008 using the Black-Scholes model with the
following assumptions: a risk-free interest rate of 1.0%, volatility of 115%,
expected life of 3 years and a dividend yield of 0%. The change in the value of
the warrants liability from the prior year resulted in a gain of
$3,972,000.
On
October 10, 2007, the Company closed a private placement in which
institutional investors received warrants to purchase 1,767,500 shares of common
stock for a period of five years. The exercise price of the warrants is $0.60
per share. The placement agent also received warrants to purchase 589,166 shares
of common stock for a period of five years. The exercise price of these warrants
is $0.60. At December 31, 2008, none of these warrants had been
exercised.
F-14
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 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, 2008, 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 1,190 shares
of common stock at a purchase price of $14.70 for a period of five years. As of
December 31, 2008, 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, 2008, none of the $87.78 warrants had been exercised.
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, subject to adjustments for stock dividends, splits and similar events.
The Rights are exercisable only if a person or group acquires 20% or more of the
Company’s outstanding common stock, or announces an intention to commence a
tender or exchange offer, the consummation of which would result in ownership by
such person or group of 20% or more of the Company’s outstanding common
stock.
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.
|
7.
|
Commitments
and Contingencies.
|
At
December 31, 2008, the Company had no long-term contractual
obligations.
RAI
Merger
On
April 17, 2008, the REIT Americas Inc. (“RAI”) and Virium
Pharmaceuticals agreed to terminate the Merger Agreement that had been entered
into on May 25, 2007 by and among RAI and Virium Pharmaceuticals. Upon
completion of a qualified financing, the Company will be obligated to pay RAI
$535,000 in consideration for agreeing to terminate the Merger
Agreement.
|
8.
|
Virium
Pharmaceuticals, Inc. Acquisition.
|
On
April 18, 2008, the Company acquired Virium Pharmaceuticals Inc.
(“Virium”), a privately held biotechnology company focused primarily on oncology
based technology, pursuant to the terms of an Agreement and Plan of Merger (the
“Merger Agreement”) dated as of April 18, 2008 by and among the Company,
VRM Acquisition, LLC, a Delaware limited liability company and a direct
wholly-owned subsidiary of the Company (“VRM Acquisition”), Virium and Virium
Holdings, Inc., a non-public Delaware corporation (“Holdings”) and the
parent of Virium. On the Effective Date, VRM Acquisition merged with and
into Virium with Virium continuing as the surviving company and a wholly-owned
subsidiary of the Company (the “Merger”). Pursuant to the Merger
Agreement, each share of Virium common stock outstanding at the Effective Time
was converted into the right to receive 0.89387756 shares of the Company’s
common stock (the “Merger Consideration”) resulting in an aggregate of
22,898,386 shares of MacroChem common stock being issued in the Merger. The
fair value of the shares issued on the closing date to the stockholders of
Virium was $6,870,000.
F-15
Virium
has a pipeline of oncology products that target a variety of niche cancer
indications. Virium’s product pipeline included a next generation
nucleoside analogue (small molecule) which it had licensed from the Southern
Research Institute in August 2007. This class of compounds has
demonstrated proven efficacy in certain hematological cancer indications.
Upon completing the merger, management has commenced a process of conducting a
strategic evaluation of each drug candidate in the Company’s newly constituted
product portfolio.
In
addition, all outstanding warrants to purchase shares of Virium common stock
were converted into warrants to purchase MacroChem common
stock. After giving effect to the Merger, these vested warrants,
which expire at various dates from 2012 to 2013, are exercisable to
purchase 446,938 shares of MacroChem common stock at an exercise price
of $0.671 and 223,469 shares of MacroChem common stock at an exercise price
of $1.119 per share. As described in more detail below, MacroChem also
assumed convertible notes of Virium.
On
April 23, 2008, MacroChem assumed all obligations under the convertible
promissory note in the aggregate principal amount of $500,000 issued to
Strategic Capital Resources, Inc. by Virium on May 30, 2007 (the
“First Convertible Note”). The First Convertible Note was due to mature on
April 25, 2008. The First Convertible Note had a 12% annual interest
rate until November 30, 2007, which increased to 15%
thereafter. MacroChem paid to Strategic Capital Resources, Inc.
$45,000 in cash which represents all accrued and unpaid interest on such note
through the date of consummation of the Merger plus $10,000. MacroChem made
this payment in consideration of Strategic Capital Resources, Inc.’s prior
agreement with Virium to extend the maturity date on its note from
March 26, 2008 to April 25, 2008. Upon closing
of MacroChem’s next round of equity financing, if any, the principal amount
of the First Convertible Note and all accrued interest may be converted into
MacroChem common stock at the discretion of each First Convertible Note holder
such that each holder will be entitled to acquire shares of MacroChem common
stock at $0.8950 per share, subject to anti-dilution adjustments.
On
June 6, 2008, the Company repaid a principal amount of $400,000 to the
holder of the First Convertible Note together with accrued and unpaid interest
thereon. Further, on June 23, 2008, the Company repaid the unpaid principal
balance of $100,000 together with accrued and unpaid interest thereon to the
remaining holder of the First Convertible Note. Additionally, the First
Convertible Note was repaid, in part, with funds from new holders of convertible
promissory notes whose notes mature on December 6, 2008. The new promissory
notes have a principal amount of $400,000 and a warrant to purchase 100,000
shares of common stock at $.01. The fair value of the warrants issued of
$24,000 is recorded as debt discount and is being amortized to interest expense
over the term of the debt. The notes have a 12% interest rate with accrued
interest due on or prior to the 5th day of each calendar month. These notes are
due to mature on the earlier of 1) closing of the next financing by the
Company or 2) December 6, 2008. The default status of these notes triggered
the convertibility of 50% of the principal at a rate of $0.018, which is 50% of
the average market price for five days preceding the triggering event. This
resulted in a beneficial conversion feature with a value of $188,000 recorded to
interest expense and additional paid-in capital. The principal amount of
$400,000 in notes was outstanding at December 31, 2008 and continued to accrue
interest until February 25, 2009, the date of the acquisition by
Access.
MacroChem
also assumed on the Effective Date all obligations under convertible promissory
notes in the aggregate principal amount of $500,000 issued by Virium on
December 12, 2007 (the “Second Convertible Notes”). The Second
Convertible Notes were to mature on the earlier of (a) the closing of any
equity financing by MacroChem or (b) June 12, 2008. The
Second Convertible Notes have a 12% annual interest rate with all accrued
interest due at maturity. Upon written consent to the borrower,
simultaneously with the next round of financing, the holders have the ability to
convert the entire outstanding principal and all accrued interest into shares.
The conversion price will be equal to 50% of the qualified offering
price.
F-16
In
June 2008, a principal amount of $425,000 of the Second Convertible Notes
were extended to a maturity of December 31, 2008, subject to certain
conditions and the Company repaid holders of the Second Convertible Notes a
principal amount of $75,000 and accrued interest of $5,000. To induce the
holders to extend the maturity, the Company issued 212,500 warrants to purchase
common stock at $.01. The fair value of the warrants issued of $51,053 is
recorded as debt discount and will be amortized to interest expense over the
term of the debt. The principal amount of $425,000 in notes was outstanding at
December 31, 2008 and continued to accrue interest until February 25, 2009, the
date of the acquisition by Access.
Prior to
the merger agreement, SCO Capital Partners, LLC (“SCO LLC”) together with its
affiliates Beach Capital LLC, SCO Securities LLC and SCO Capital Partners, L.P.
(collectively with SCO LLC, “SCO”) was the owner of the outstanding common stock
of MacroChem, including warrants to purchase certain shares, and also held a
majority of the outstanding stock of Holdings and warrants to purchase 112,500
shares of Virium common stock. Pursuant to a Director Designation Agreement
dated as of October 1, 2007 between MacroChem and SCO LLC, SCO LLC has the
right to designate two individuals to serve on MacroChem’s board of directors
for so long as SCO holds 20% of MacroChem’s outstanding common stock. The
current SCO director designees are Jeffrey B. Davis and Mark J. Alvino.
Mr. Davis is currently the president of SCO Securities LLC and Chief
Executive Officer of Access Pharmaceuticals, Inc. Prior to the Effective Date,
Mr. Davis was a director of Virium. Mr. Alvino is a former Managing
Director of SCO Financial Group LLC and currently an officer of Griffin
Securities, Inc. SCO Securities LLC acted as placement agent in
connection with MacroChem’s 2006 private placement.
Pursuant
to the terms of the Merger Agreement, at the Effective Time , all members
of the Special Committee, namely, John L. Zabriskie, Michael A. Davis, Paul S.
Echenberg, and Peter G. Martin resigned from the board of directors of
MacroChem.
Immediately
following these resignations, David P. Luci and Dr. James Pachence were
appointed to the board of directors of MacroChem. Dr. Pachence and
Mr. Luci will be entitled to the standard compensation payable to our
directors which as of April 22, 2008, is now applicable to all directors
and includes compensation of $12,000 annually, $1,000 per regular board meeting
attended, $500 for each special, telephone or committee meeting attended and the
stock option grants that our Compensation Committee from time to time deems
appropriate. On June 26, 2008, Dr. James Pachence resigned from the office of
Chief Executive Officer of the Company and resigned from his position as a
member of our board of directors, in each case, effective
immediately.
The
acquisition of Virium on April 18, 2008 was accounted for by the Company
under the purchase method of accounting in accordance with SFAS No. 141
“Business
Combinations”. Under the purchase method, assets acquired and liabilities
assumed by the Company were recorded at their estimated fair values at the date
of acquisition and the results of operations of the acquired company were
consolidated with those of the Company from the date of acquisition. Virium is
included in the Statement of Operations from the acquisition date on April 18,
2008.
The total
purchase price of $9,661,000, has been primarily allocated to be in-process
research and development and is comprised of $6,870,000 related to the
calculated value of the Company’s common stock issued of $0.30 per share,
$2,404,000 of liabilities the Company assumed in addition to $147,000 of
warrants issued to certain debt holders. Additionally, the Company incurred
$240,000 in professional fees.
The
components of the purchase price, which the Company has allocated to in-process
research and development, are summarized as follows:
|
Common
stock issued
|
|
$
|
6,870,000
|
|
|
Liabilities
assumed
|
|
2,404,000
|
|
|
Warrants
related to debt assumed
|
|
147,000
|
|
|
Transaction
costs
|
|
240,000
|
|
|
Total
purchase price
|
|
$
|
9,661,000
|
|
F-17
The
following unaudited pro forma information presents the 2008 results of the
Company as if the acquisition had occurred on January 1, 2008. The unaudited pro
forma results are not necessarily indicative of results that would have occurred
had the acquisition been in effect for the periods presented, nor are they
necessarily indicative of future results.
|
|
|
2008
|
|
|
|
|
(unaudited)
|
|
|
Net
income (loss)
|
|
$
|
(10,564,000)
|
|
|
|
|
|
|
|
Net
income (loss) per common share (basic and diluted)
|
|
$
|
(0.23)
|
|
|
Weighted
average common shares outstanding (basic and diluted)
|
|
45,754,492
|
|
Income
tax expense differs from the statutory amounts as follows:
2008
Income taxes at U.S. statutory
rate $ (3,482,000)
Change in valuation
allowance 4,832,000
Expenses not
deductible (1,350,000)
Total tax
expense $ -
Deferred
taxes are provided for the temporary differences between the financial reporting
bases and the tax bases of our assets and liabilities. The temporary differences
that give rise to deferred tax assets were as follows:
December
31,
2008
Deferred tax assets
Net operating loss carryforwards $
33,650,000
State
credit
2,393,000
Intangible
assets
383,000
Accrued
interest
253,000
Deferred
revenue
14,000
Other
231,000
Gross deferred tax
assets 36,924,000
Valuation
allowance
(36,924,000)
Net deferred
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, 2008, the Company has available net operating loss carryforwards of
approximately $98,972,000 for federal income tax purposes, expiring through 2028
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.
F-18
As of
January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes
(“FIN 48”). The adoption did not have a material impact on our
consolidated financial statements or effective tax rate and did not result in
any unrecognized tax benefits. Interest costs and penalties related to income
taxes are classified as interest expense and general and administrative costs,
respectively, in our consolidated financial statements. For the year ended
December 31, 2008, we did not recognize any interest or penalty expense related
to income taxes. It is determined not to be reasonably likely for the amounts of
unrecognized tax benefits to significantly increase or decrease within the next
12 months. We are currently subject to a three year statute of limitations by
major tax jurisdictions. We and our subsidiaries file income tax returns in the
U.S. federal jurisdiction.
|
10.
|
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 did not make any matching contributions for the year ended December 31,
2008.
|
11.
|
Subsequent
Event - Merger with Access Pharmaceuticals, Inc.
(Unaudited)
|
On
February 25, 2009 the Company closed its merger with Access Pharmaceuticals,
Inc. On July 10, 2008, Access Pharmaceuticals, Inc. (OTC BB: ACCP.OB)
announced it had signed an agreement and plan of merger with MacroChem, pursuant
to which MacroChem was merged with and into a wholly-owned subsidiary of Access.
Holders of MacroChem common shares and in-the money MacroChem warrants receive
approximately an aggregate of 2,500,000 shares of common stock of Access as
merger consideration at the closing of the merger. All other options and
warrants of MacroChem which were unexercised at the Effective Time of the merger
were automatically cancelled and void.
In
addition to the merger, the noteholders of MacroChem agreed to exchange their
notes and interest due on the notes in the total amount of $859,000 for 859,000
restricted shares of the Access’ common stock. The value of the shares issued
was determined based on the carrying value of the debt, which was established to
be the more readily determinable fair value.
In
addition, 125,000 shares of Access common stock were issued to former executives
of MacroChem for the settlement of employment agreements.