** **

 

** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-Q**

 

**(Mark One)**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) Of**

** THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                        |
| ** ** | ** ** | **For  the quarterly period ended June 30, 2008**                                                            |

 

**or**

 
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

** THE  SECURITIES EXCHANGE ACT OF 1934**                                                     |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                             |
| ** ** | ** ** | **For  the Transition Period from           to             ** |

 

**Commissionfile number 0-13634**

 

**MACROCHEMCORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                      | ** ** | **04-2744744**                         |
|-------------------------------------------------------------------|------------|----------------------------------------|
| (State or Other  Jurisdiction

of Incorporation  or Organization) |       | (I.R.S. Employer

Identification  No.) |

 

**80Broad Street, 22****nd****Floor, New York, NewYork 10004**

(Address ofprincipal executive offices, Zip Code)

 

**212-514-8094**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.

Yes         x         No       o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large accelerated filer   o     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer   o       |   | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes         o         No       x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Class**                     | ** ** | **Outstanding  at August 14, 2008:** |
|-------------------------------|------------|-------------------------------------------|
| Common Stock,  $.01 par value |       | 45,798,412                                |

 

 

 

----

 

INDEX TO FORM 10-Q

 
|          |   | ** **                                                                                                                         | ** ** | **Page Number** |
|---------------|--------|------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|
| PART I   |   | FINANCIAL INFORMATION                                                                                                              |       |                 |
|          |   |                                                                                                                               |       |                 |
| Item 1        |   | Financial Statements                                                                                                               |       |                 |
|          |   |                                                                                                                               |       |                 |
|          |   | Condensed  Consolidated Balance Sheets June 30,  2008 (Unaudited) and December 31, 2007                             |       | 3                    |
|          |   |                                                                                                                               |       |                 |
|          |   | Condensed  Consolidated  Statements of Operations  for the Three and Six Months Ended June 30, 2008 and 2007 (Unaudited) |       | 4                    |
|          |   |                                                                                                                               |       |                 |
|          |   | Condensed Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007  (Unaudited)                 |       | 5-6                  |
|          |   |                                                                                                                               |       |                 |
|          |   | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                    |       | 7-17                 |
|          |   |                                                                                                                               |       |                 |
| Item 2        |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                        |       | 18-27                |
|          |   |                                                                                                                               |       |                 |
| Item 3        |   | Quantitative  and Qualitative Disclosures about Market Risk                                                                        |       | 27                   |
|          |   |                                                                                                                               |       |                 |
| Item 4        |   | Controls and  Procedures                                                                                                           |       | 27                   |
|          |   |                                                                                                                               |       |                 |
| PART II  |   | OTHER INFORMATION                                                                                                                  |       |                 |
|          |   |                                                                                                                               |       |                 |
| Item 1A       |   | Risk Factors                                                                                                                       |       | 28                   |
|          |   |                                                                                                                               |       |                 |
| Item 6        |   | Exhibits                                                                                                                           |       | 29                   |
|          |   |                                                                                                                               |       |                 |
| SIGNATURES    |   |                                                                                                                               |       | 30                   |
|          |   |                                                                                                                               |       |                 |
| EXHIBIT INDEX |   |                                                                                                                               |       | 31                   |

 

2

----

 

**Item1. Financial Statements**

 

MACROCHEMCORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                                                                                | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **(Unaudited)**             | ** ** | **(Note 1)**               | ** ** |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| **ASSETS**                                                                                                                                                                                |       |                        |       |                            |       |
| Current assets:                                                                                                                                                                           |       |                        |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                |       | $                           | 175,362    |                            | $          | 2,423,519 |   |
| Short-term  investments                                                                                                                                                                   |       | 259,246                     |       | 759,247                         |       |
| Prepaid expenses  and other current assets                                                                                                                                                |       | 234,761                     |       | 131,047                         |       |
| Total current  assets                                                                                                                                                                     |       | 669,369                     |       | 3,313,813                       |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Property and  equipment, net                                                                                                                                                              |       | 13,035                      |       | 22,042                          |       |
| Other assets                                                                                                                                                                              |       | 50,900                      |       | —                          |       |
| Patents, net                                                                                                                                                                              |       | 495,162                     |       | 517,600                         |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Total assets                                                                                                                                                                              |       | $                           | 1,228,466  |                            | $          | 3,853,455 |   |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| **LIABILITIES**                                                                                                                                                                           |       |                        |       |                            |       |
| Current  liabilities:                                                                                                                                                                     |       |                        |       |                            |       |
| Accounts payable                                                                                                                                                                          |       | $                           | 1,143,676  |                            | $          | 94,439 |   |
| Accrued expenses  and other liabilities                                                                                                                                                   |       | 572,249                     |       | 310,195                         |       |
| Deferred revenue                                                                                                                                                                          |       | 5,304                       |       | —                          |       |
| Accrued interest  on notes payable                                                                                                                                                        |       | 16,092                      |       | —                          |       |
| Convertible notes  payable, net                                                                                                                                                           |       | 749,947                     |       | —                          |       |
| Total current  liabilities                                                                                                                                                                |       | 2,487,268                   |       | 404,634                         |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Warrants  liability (Note 4)                                                                                                                                                              |       | 608,771                     |       | 4,076,488                       |       |
| Deferred revenue                                                                                                                                                                          |       | 26,795                      |       | —                          |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Total  liabilities                                                                                                                                                                        |       | 3,122,834                   |       | 4,481,122                       |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Commitments and  contingencies (Note 3)                                                                                                                                                   |       |                        |       |                            |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| **STOCKHOLDERS’  DEFICIT**                                                                                                                                                           |       |                        |       |                            |       |
| Preferred stock,  $.01 par value, 6,000,000 shares authorized; liquidation value of $0                                                                                                    |       | —                      |       | —                          |       |
| Common stock,  $.01 par value, 100,000,000 shares authorized; 45,798,412 and 22,500,026  shares issued and outstanding as of June 30, 2008 and December 31,  2007, respectively |       | 457,984                     |       | 225,000                         |       |
| Additional  paid-in capital                                                                                                                                                               |       | 97,562,037                  |       | 90,054,421                      |       |
| Accumulated  deficit                                                                                                                                                                      |       | (99,855,279                 | )          | (90,847,978                     | )          |
| Less treasury  stock, at cost, 529 shares at June 30, 2008 and December 31, 2007                                                                                                |       | (59,110                     | )          | (59,110                         | )          |
| Total  stockholders’ deficit                                                                                                                                                         |       | (1,894,368                  | )          | (627,667                        | )          |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Total  liabilities and stockholders’ deficit                                                                                                                                         |       | $                           | 1,228,466  |                            | $          | 3,853,455 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

3

----

 

MACROCHEM CORPORATION

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

For the three and six months ended June 30, 2008 and 2007

(Unaudited)

 
| ** **                                                                     | ** ** | **For the Three Months Ended  June 30,** | ** **  | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|-------------|-----------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                                                          | ** **  | **2007**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Other Income                                                                   |       | $                                                                 | 1,326       | ** **                                                      | **—** |   | $ | 1,326 | ** ** | **—** | ** ** |
| Total Other  Income                                                            |       | 1,326                                                             | ** **  | **—**                                                      |       | 1,326 |   |   |   |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **OPERATING  EXPENSES:**                                                       |       |                                                              |        |                                                            |       |   |   |   |   |
| ** **                                                                     |       |                                                              |        |                                                            |       |   |   |   |   |
| Research and  development                                                      |       | 18,972                                                            |        | 257,949                                                         |       | 530,943 |   | 556,398 |   |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| Marketing,  general and administrative                                         |       | 1,248,489                                                         |        | 897,953                                                         |       | 2,220,052 |   | 1,902,264 |   |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| In- process  research and development                                          |       | 9,656,794                                                         |        | —                                                          |       | 9,656,794 |   | — |   |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **TOTAL  OPERATING EXPENSES**                                                  |       | 10,924,255                                                        |        | 1,155,902                                                       |       | 12,407,789 |   | 2,458,662 |   |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **LOSS  FROM OPERATIONS**                                                      |       | (10,922,929                                                       | )           | (1,155,902                                                      | )          | (12,406,463 | ) | (2,458,662 | ) |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **OTHER  (EXPENSE) INCOME:**                                                   |       |                                                              |        |                                                            |       |   |   |   |   |
| ** **                                                                     |       |                                                              |        |                                                            |       |   |   |   |   |
| Interest income  (expense)                                                     |       | (94,189                                                           | )           | 18,615                                                          |       | (75,021 | ) | 53,145 |   |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| Gain (loss) on  change in value of warrant liability                           |       | 885,778                                                           |        | (1,515,006                                                      | )          | 3,467,717 |   | (1,790,869 | ) |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| Gain on sale of  equipment                                                     |       | —                                                            |        | 52,000                                                          |       | 6,466 |   | 68,000 |   |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **TOTAL  OTHER INCOME (LOSS)**                                                 |       | 791,589                                                           |        | (1,444,391                                                      | )          | 3,399,162 |   | (1,669,724 | ) |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **NET  LOSS**                                                                  |       | (10,131,340                                                       | )           | (2,600,293                                                      | )          | (9,007,301 | ) | (4,128,386 | ) |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **DIVIDEND  ON SERIES C CUMULATIVE PREFERRED STOCK**                           |       | —                                                            |        | (193,100                                                        | )          | — |   | (385,799 | ) |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **NET  LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS**                              |       | $                                                                 | (10,131,340 | )                                                               | $          | (2,793,393 | ) | $ | (9,007,301 | ) | $ | (4,514,185 | ) |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **BASIC  NET LOSS PER COMMON SHARE**                                           |       | $                                                                 | (0.25       | )                                                               | $          | (0.86 | ) | $ | (0.28 | ) | $ | (1.48 | ) |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **DILUTED  NET LOSS PER COMMON SHARE**                                         |       | $                                                                 | (0.25       | )                                                               | $          | (0.86 | ) | $ | (0.28 | ) | $ | (1.48 | ) |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **WEIGHTED  AVERAGE SHARES USED TO COMPUTE BASIC NET LOSS PER COMMON SHARE**   |       | 41,269,719                                                        |        | 3,256,959                                                       |       | 31,937,620 |   | 3,048,776 |   |
|                                                                           |       |                                                              |        |                                                            |       |   |   |   |   |
| **WEIGHTED  AVERAGE SHARES USED TO COMPUTE DILUTED NET LOSS PER COMMON SHARE** |       | 41,269,719                                                        |        | 3,256,959                                                       |       | 31,937,620 |   | 3,048,776 |   |

 

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.

 

4

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MACROCHEMCORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six monthsended June 30, 2008 and 2007

(Unaudited)

 
| ** **                                                                   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                         |       |       |       |       |       |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                    |       |       |       |       |       |
| Net loss                                                                     |       | $          | (9,007,301 | )          | $          | (4,128,386 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |       |       |       |       |
| In-process  research and development                                         |       | 9,656,794  |       | —     |       |
| Depreciation and  amortization                                               |       | 34,626     |       | 33,344     |       |
| Stock-based  compensation                                                    |       | 532,916    |       | 307,255    |       |
| Stock issued for  services                                                   |       | 80,000     |       | —     |       |
|                                                                         |       |       |       |       |       |
| (Gain)/loss on  change in value of warrant liability                         |       | (3,467,717 | )          | 1,790,869  |       |
| Changes in  operating assets and liabilities, net of acquisition:            |       |       |       |       |       |
| Prepaid expenses  and other current assets                                   |       | (114,614   | )          | (77,992    | )          |
| Accounts payable  and accrued expenses                                       |       | (44,441    | )          | 49,434     |       |
|                                                                         |       |       |       | —     |       |
| Net cash used in  operating activities                                       |       | (2,329,737 | )          | (2,025,476 | )          |
|                                                                         |       |       |       |       |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                   |       |       |       |       |       |
| Sales of  short-term investments                                             |       | 500,001    |       | 2,048,169  |       |
| Addition to  patents                                                         |       | (41        | )          | —     |       |
| Expenditures for  property and equipment                                     |       | (3,140     | )          | —     |       |
| Payments for  acquisition of Virium, net of cash acquired                    |       | (240,240   | )          | —     |       |
| Net cash  provided by investing activities                                   |       | 256,580    |       | 2,048,169  |       |
|                                                                         |       |       |       |       |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                   |       |       |       |       |       |
| Proceeds from  debt issuance                                                 |       | 400,000    |       | —     |       |
| Repayment of  debt                                                           |       | (575,000   | )          | —     |       |
| Net cash used in  investing activities                                       |       | (175,000   | )          | —     |       |
|                                                                         |       |       |       |       |       |
| Net change in  cash and cash equivalents                                     |       | (2,248,157 | )          | 22,693     |       |
| Cash and cash  equivalents at beginning of period                            |       | 2,423,519  |       | 738,264    |       |
|                                                                         |       |       |       |       |       |
| Cash and cash  equivalents at end of period                                  |       | $          | 175,362    |       | $          | 760,957 |   |
|                                                                         |       |       |       |       |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                          |       |       |       |       |       |
|                                                                         |       |       |       |       |       |
| Debt discount  related to convertible debt issuance                          |       | $          | 93,053     |       | $          | — |   |

 

See Note 7 for theacquisition of Virium Pharmaceuticals, Inc and consideration (principally shares,warrants and assumption of debt) issued /assumed.

 

5

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The Company did not payany cash for income taxes during the three and six month periods ended June 30,2008 and 2007.

 

SUPPLEMENTAL DISCLOSURESOF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

The Company issued commonstock with a fair value of $120,000 on the date of issuance to a consultantduring the six-month period ended June 30, 2008.

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

6

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**MACROCHEMCORPORATION**

 

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**(1)****            ****Basis of Presentationand Operations**

 

The unaudited condensedconsolidated financial statements included herein have been prepared byMacroChem Corporation (“MacroChem” or the “Company”) without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations. In the opinion of management, the accompanyingunaudited condensed consolidated financial statements include all adjustments(consisting only of normal recurring adjustments) necessary to present fairlythe financial position, results of operations and cash flows of the Company atthe dates and for the periods indicated. The results disclosed in the Statementof Operations for the three and six months ended June 30, 2008 are notnecessarily indicative of the results to be expected for the full year. Theunaudited condensed consolidated financial statements included herein should beread in conjunction with the audited financial statements and the notes theretoincluded in the Company’s Annual Report on Form 10-K for the fiscal yearended December 31, 2007.  The condensed balance sheet as of December 31,2007 has been derived from the audited financial statements included in theCompany’s Form 10-K for that year.

 

The Company has beenengaged primarily in research and development since its inception in 1981 andhas derived limited revenues from the commercial sale of its products,licensing of certain technology and feasibility studies. The Company hasincurred losses from operations every year since its inception and the Companyanticipates that losses will continue for the foreseeable future. At June 30,2008, the Company’s accumulated deficit was $99,855,279. On July 8, 2008,the Company entered into an agreement and plan of merger with AccessPharmaceuticals. However, management believes that our continuation as a goingconcern depends on our ability to obtain additional financing, to consummate astrategic transaction or to make alternative arrangements to fund ouroperations.  There can be no assurance that the Company will be able toobtain additional financing, to consummate a strategic transaction, or to makealternative arrangements to fund our operations. The Company’s cash requirementsmay vary materially from those now planned because of changes in the focus anddirection of its research and development programs, identification ofadditional product candidates and technologies, competitive and technicaladvances, patent developments or other developments related to the status offund raising.  These matters raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  The accompanying financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

**(2)****            ****Stock-Based Compensation**

 

*StockIncentive Plans*

 

The Company has grantedoptions to purchase the Company’s common stock to employees and directors undervarious stock incentive plans. Under the plans, employees

 

7

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Table of Contents

 

and non-employeedirectors are eligible to receive awards of various forms of equity-basedincentive compensation, including stock options, restricted stock, andperformance awards, among others. The plans are administered by the Board ofDirectors or the Compensation Committee of the Board of Directors, whichdetermine the terms of the awards granted. Stock options are generally grantedwith an exercise price equal to the market value of a share of common stock onthe date of grant, have a term of ten years or less, and vest over terms of twoto three years from the date of grant.

 

*StockOption Plans*

 

The Company has threestock option plans, the 1994 Equity Incentive Plan (the “1994 Plan”) and the2001 Incentive Plan (the “2001 Plan”) and the 2008 Stock Incentive Plan ( the “2008Plan”).

 

Under the terms of the1994 Plan, the Company may no longer award any options. All options previouslygranted under the 1994 Plan may be exercised at any time up to ten years fromthe date of award.

 

Under the terms of the2001 Plan, the Company may grant options to purchase up to a maximum of2,373,809 shares of common stock to certain employees, directors andconsultants. The options may be awarded as incentive stock options (employeesonly) and non-incentive stock options (certain employees, directors andconsultants).

 

Under the terms of the2008 Plan, the Company may grant options to purchase up to a maximum of8,500,000 shares of future grants of options.

 

The  2008 Plan, 2001 Plan and the 1994 Plan statethat the exercise price of options shall not be less than fair market value atthe date of grant. As of June 30, 2008, there were outstanding optionsunder all plans to purchase 5,651,988 shares of common stock with 6,003,545shares remaining available for future grants under the 2001 Plan.

 

*Stock-BasedCompensation*

 

Effective January 1,2006, the Company adopted FAS No. 123(R), “Accounting for Stock-BasedCompensation,” (“FAS 123(R)”) using the modified prospective method, whichresults in the provisions of FAS 123(R) being applied to the financialstatements on a going-forward basis. FAS 123(R) requires companies torecognize stock-based compensation awards granted to its employees ascompensation expense on a fair value method. Under the fair value recognitionprovisions of FAS 123(R), stock-based compensation cost is measured at thegrant date based on the fair value of the award and is recognized as expenseover the service period, which generally represents the vesting period. Thegrant date fair value of stock options is calculated using the Black-Scholesoption-pricing model and the grant date fair value of restricted stock is basedon fair value on the date of grant.  The expense recognized over theservice period is required to include an estimate of the awards that will beforfeited.

 

All stock-based awards tonon-employees are accounted for at their fair market value in accordance withFAS 123(R) and Emerging Issues Task Force No. 96-18, “Accounting forEquity Instruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services.” Under this method, theequity-based instrument was valued at either the fair value of theconsideration received or the equity instrument issued on the date of grant.The resulting compensation cost was recognized and charged to operations overthe service period, which was usually the vesting period.

 

8

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For purposes of recordingstock-based compensation expense as required by FAS 123(R), the fairvalues of each stock option granted under the Company’s stock option plan forthe three and six months ended June 30, 2008 were estimated as of the dateof grant using the Black-Scholes option-pricing model.

 

The fair values of allstock option grants issued were determined using the following assumptions:

 
| ** **                               | ** ** | **Three and Six  Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                                      | ** ** | **2007** | ** ** |
| Risk-free  interest rate                 |       | 2.96%                                                         |       | 4.49% |   |
| Expected life of  option grants          |       | 6 years                                                       |       | 6 years |   |
| Expected  volatility of underlying stock |       | 113%                                                          |       | 113% |   |
| Expected  dividend yield                 |       | 0%                                                            |       | 0% |   |

 

The dividend yieldassumption is based on the Company’s history and expectation of future dividendpayouts. The Company estimated the stock price volatility using the historicalvolatility in the market price of its common stock for the expected term of theoptions. The risk-free interest rate assumption is based upon the U.S. Treasuryyield curve in effect at the time of grant for periods corresponding with theexpected life of the option.

 

As share-basedcompensation expense is recognized based on awards ultimately expected to vest,it must be reduced for estimated forfeitures. FAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.Forfeiture rates are calculated based on actual historical forfeitures.

 

The expected life ofemployee stock options represents the weighted-average period the stock optionsare estimated to remain outstanding. The expected life of employee stockoptions is, in part, a function of the options’ remaining contractual life andthe extent to which the option is in-the-money (i.e., the average stock priceduring the period is above the strike price of the stock option).

 

9

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*StockOption Activity*

 

Stock option activity forthe six months ended June 30, 2008 was as follows:

 
| ** **                              | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price  Per Share** | ** ** | **Weighted-Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------|------------|
| **Outstanding  December 31, 2007** |       | 3,020,249                  |       | $                                                              | 3.90       |                                               | 8.97       | ** **                      | **$**      | **—** | ** ** |
|                                    |       |                       |       |                                                           |       |                                               |       |                            |       |
| Granted                                 |       | 4,840,000                  |       | $                                                              | —     |                                               | —     |                            | $          | — |   |
| Exercised                               |       | —                     |       | $                                                              | —     |                                               | —     |                            | $          | — |   |
| Cancelled or  expired                   |       | (2,208,261                 | )          | $                                                              | —     |                                               | —     |                            | $          | — |   |
| **Outstanding,  June 30, 2008**    |       | 5,651,988                  |       | $                                                              | 2.05       |                                               | 9.21       |                            | $          | — |   |
| Exercisable,  June 30, 2008        |       | 2,352,940                  |       | $                                                              | 5.78       |                                               |       |                            | $          | — |   |

 

*RestrictedStock Activity*

 

On March 7, 2008,the Company issued 400,000 shares of common stock to a consultant to theCompany 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 of which$40,000 is included in prepaid expenses as of June 30, 2008.

 

On April 22, 2008,the Company issued 75,000 shares of common stock to the Company’s ChairmanRobert DeLuccia. The common shares vested immediately and were not subject toforfeiture. The common shares had a fair value of $22,500.

 

**(3)****            ****Commitments andContingencies**

 

Lease Commitments -

 

The Company has thefollowing commitments as of June 30, 2008:

 
| ** **       | ** ** | **Payments  Due in** | ** ** |
|------------------|------------|----------------------|------------|
| ** **       | ** ** | **Total**            | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|             |       |                 |       |   |   |   |   |   |   |
| Occupancy Leases |       | $                    | 335,869    |   | $ | 145,795 |   | $ | 145,024 |   | $ | 45,050 |   |
| Total            |       | $                    | 335,869    |   | $ | 145,795 |   | $ | 145,024 |   | $ | 45,050 |   |

 

Other Commitments andContingencies

 

RAI Merger

 

On April 17, 2008,the REIT Americas  Inc. (“RAI”) andVirium Pharmaceuticals agreed to terminate the Merger Agreement that had beenentered into on May 25, 2007 by and among RAI and Virium Pharmaceuticals.Upon completion of a qualified financing, the Company will be obligated to payRAI $535,000 in consideration for agreeing to terminate the Merger Agreement.

 

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**(4)****            ****Stockholders’ Equity**

 

*AuthorizedCapital Stock*

 

Authorized capital stockconsists of 100,000,000 shares of $.01 par value common stock of which45,798,411 shares are issued (45,797,882 are outstanding) and 29,942,508 arereserved for issuance upon exercise of common stock options and warrants at June 30,2008.  Authorized preferred stock totals 6,000,000 shares, of which500,000 shares have been designated Series A Preferred Stock, 600,000shares have been designated Series B Preferred Stock and 1,500 shares havebeen designated Series C Cumulative Convertible Preferred Stock. On June 30,2008 there were no shares of Series A, B or C Cumulative Preferred Stockoutstanding.

 

*StockSales*

 

On October 10, 2007,the Company entered into a Securities Purchase Agreement, pursuant to which theCompany issued in a private placement 5,891,667 shares of its common stock andfive-year warrants to purchase 1,767,500 shares of the Company’s common stockat 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 thenoutstanding shares of the Company’s Series C Cumulative ConvertiblePreferred Stock were converted into a total of 12,571,850 shares of commonstock. In addition, outstanding warrants to purchase 8,648,102 shares of commonstock previously issued with the Series C Preferred have been reset topurchase 17,885,848 shares of common stock at an exercise price of $0.60 pershare, pursuant to anti-dilution provisions of those warrants.

 

In connection with theprivate placement, the Company entered into a Director Designation Agreementdated as of October 1, 2007 with SCO Capital Partners, LLC (“SCO”), acurrent stockholder and a purchaser in the private placement, pursuant towhich, 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 Boardof Directors. SCO previously held the right to designate two individuals toserve on the Company’s Board of Directors for so long as it held 20% of theCompany’s outstanding Series C Preferred.

 

*Warrants*

 

On October 10, 2007,in connection with the conversion of its Series C Preferred Stock toshares of common stock, warrants to purchase 8,648,102 shares of common stockpreviously issued with the Series C Preferred Stock have been reset topurchase 17,885,847 shares with an exercise price of $.60 per share pursuant toanti-dilution provisions in the warrants. On February 13, 2006, theCompany closed a private placement in which institutional investors receivedsix-year warrants to purchase 11,510,018 shares of the Company’s common stockat an exercise price of $0.60 per share (“Investor Warrants”). As of June 30,2008, none of the $0.60 Investor Warrants had been exercised. The placementagent in the transaction received a warrant to purchase approximately 959,166shares of common stock at a purchase price of $0.60 for a period of six years (“PlacementAgent Warrants”). As of June 30, 2008, none of these $0.60 Placement AgentWarrants had been exercised. On December 23, 2005, the Company closed aprivate placement in which institutional investors received warrants topurchase 4,999,997 shares

 

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of common stock at anexercise price of $0.60 per share for a period of six years (“Investor Warrants”).As of June 30, 2008, 37,500 of these $0.60 Investor Warrants had been exercised.The placement agent in this transaction received a warrant to purchaseapproximately 416,666 shares of common stock at a purchase price of $0.60 for aperiod of six years (“Placement Agent Warrants”).  As of June 30,2008, none of the $0.60 Placement Agent Warrants had been exercised. Inaccordance with EITF 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock (“EITF 00-19”),the Investor Warrants and the Placement Agent Warrants are included as aliability and valued at fair market value until the Company meets the criteriaunder EITF 00-19 for permanent equity. Changes in the fair value of suchwarrants are recorded as a charge or credit to operations each reportingperiod. The Company valued the Investor Warrants and the Placement AgentWarrants at $608,771 on June 30, 2008 using the Black-Scholes model withthe following assumptions: a risk-free interest rate of 2.63%, volatility of111%, expected life of 1 year and a dividend yield of 0%.

 

On October 10, 2007,the Company closed a private placement in which institutional investorsreceived warrants to purchase 1,767,500 shares of common stock for a period offive years. The exercise price of the warrants is $0.60 per share. The placementagent also received warrants to purchase 589,166 shares of common stock for aperiod of five years. The exercise price of these warrants is $0.60. At June 30,2008, none of these warrants had been exercised.

 

On April 19, 2005,the Company closed a private placement in which institutional investors andcertain executive officers and directors of the Company received warrants topurchase 32,520 shares of common stock for a period of five years. The exerciseprice of the warrants is $14.70 per share for the institutional investors and$21.84 for the participating executive officers and directors. As of June 30,2008, 6,012 of the $14.70 warrants issued to the institutional investors hadbeen exercised and none of the $21.84 warrants issued to participatingexecutive officers and directors had been exercised. The placement agent inthis transaction received a warrant to purchase 1,190 shares of common stock ata purchase price of $14.70 for a period of five years. As of June 30,2008, none of the $14.70 warrants issued to the placement agent had beenexercised.

 

During 2004, the Companyconducted a private placement in which primarily institutional investorsreceived warrants to purchase an aggregate of 25,723 shares of common stock ata purchase price of $87.78 per share for a period of five years. As of June 30,2008, none of the $87.78 warrants had been exercised.

 

On June 23, 2008,the Company entered into a Convertible Note agreement with new holders ofconvertible promissory notes whose notes mature on December 6, 2008,subject to certain conditions. The note holders received warrants to purchase100,000 shares of common stock at an exercise price of $.01 per share for aperiod of five years. As of June 30, 2008, none of the warrants had beenexercised.

 

**(5)****            ****Basic and Diluted (Loss)Income Per Share-**

 

TheCompany presents “basic” earnings (loss) per share and, if applicable, “diluted”earnings per share pursuant to the provisions of Statement of FinancialAccounting Standards No. 128, “Earnings per Share”. Basic earnings(loss) per share is calculated by dividing net income or loss by theweighted average number of common shares outstanding during each period. Thecalculation of diluted earnings per share is similar to that of basic earningsper share, except that the denominator is increased to include the number ofadditional common shares that would have been outstanding if all potentiallydilutive common shares, such as those issuable upon the exercise of outstandingstock options and warrants were issued during the

 

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period and the treasurystock method had been applied to the proceeds from the exercise of the optionsand warrants and net income or loss was adjusted for changes in warrantliabilities.

 

As of June 30, 2008,there were options and warrants outstanding for the purchase of shares ofcommon stock.  However, diluted per share amounts presented in theaccompanying condensed statements of operations for the three and six monthsended June 30, 2008 and 2007 are the same as basic per share amountsbecause the assumed effects of the exercise of the Company’s options andwarrants that were outstanding during all or part of the period would have beenanti-dilutive due to the Company being in a net loss position.

 

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**(6)****            ****Recent AccountingPronouncements**

 

In September 2006,the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS157 establishes a common definition of fair value to be used whenever GAAPrequires (or permits) assets or liabilities to be measured at fair value, anddoes not expand the use of fair value in any new circumstances. It alsorequires expanded disclosure about the extent to which companies measure assetsand liabilities at fair value, the information used to measure fair value, andthe effect of fair value measurements on earnings. On February 12, 2008,FASB issued proposed FASB Staff Position No. FAS No. 157-2, “EffectiveDate of FASB Statement No. 157” which defers the effective date for allnonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (that is, at least annually) to fiscal years beginning after November 15,2008.  The Company adopted FAS 157 for all financial assets andliabilities required to be measured at fair value on a recurring basis,prospectively from January 1, 2008. The application of FAS 157 did nothave a significant impact on the Company’s financial position, results ofoperations or cash flows.

 

In February 2007,the FASB issued FAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities — including an amendment of FASB 115” (“FAS 159”)which allows an entity to choose to measure certain financial instruments andliabilities at fair value. Subsequent measurements for the financialinstruments and liabilities an entity elects to fair value will be recognizedin earnings and this election is irrevocable. FAS 159 also establishesadditional disclosure requirements. FAS 159 is effective for the Companybeginning January 1, 2008. The Company has not elected to apply the fairvalue option to any of its financial instruments.

 

In December 2007,the FASB issued FAS No.141 (revised 2007), “Business Combinations” (“FAS 141R”).FAS 141R establishes principles and requirements for how an acquirer recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed, any non controlling interest in the acquiree and thegoodwill acquired. FAS 141R also establishes disclosure requirements to enablethe evaluation of the nature and financial effects of the business combination.FAS 141R is effective beginning January 1, 2009. The Company is currentlyevaluating the potential impact of the adoption of FAS 141R on its financialposition, results of operations or cash flows.

 

In December 2007,the FASB issued SFAS No.160, “Non Controlling Interests in ConsolidatedFinancial Statements-an amendment of Accounting Research Bulletin

 

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No. 51” (“FAS 160”).FAS 160 establishes accounting and reporting standards for ownership interestsin subsidiaries held by the parties other than parent, the amount of theconsolidated net income attributable to the parent and to the non controllinginterest, changes in parent’s ownership interest, and the valuation of retainednon controlling equity investments when a subsidiary is deconsolidated. FAS 160 also establishes disclosure requirements that clearly identify anddistinguish between the interests of the parent and interests of the noncontrolling owners. FAS 160 is effective for the Company beginning January 1,2009. The Company is currently evaluating the potential impact of the adoptionof FAS 160 on its financial position, results of operations or cash flows.

 

In March 2008, theFASB issued SFAS No. 161 “Disclosures about Derivative Instruments andHedging Activities-an amendment of FASB Statement No. 133” (“FAS 161”).FAS 161 enhances disclosures about the Company’s derivative and hedgingactivities and thereby improves the transparency of financial reporting. FAS161 is effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. The Company is currentlyevaluating the potential impact of the adoption of FAS 161 on its financialposition, results of operations or cash flows.

 

**(7)****            ****Merger**

 

**Virium Pharmaceuticals, Inc**

 

On April 18, 2008,the Company acquired Virium Pharmaceuticals Inc. (“Virium”), a privately heldbiotechnology company focused primarily on oncology based technology, pursuantto the terms of an Agreement and Plan of Merger (the “Merger Agreement”) datedas of April 18, 2008 by and among the Company, VRM Acquisition, LLC, aDelaware limited liability company and a direct wholly-owned subsidiary of theCompany (“VRM Acquisition”), Virium and Virium Holdings, Inc., anon-public Delaware corporation (“Holdings”) and the parent of Virium.  Onthe Effective Date, VRM Acquisition merged with and into Virium with Virium continuingas the surviving company and a wholly-owned subsidiary of the Company (the “Merger”). Pursuant to the Merger Agreement, each share of Virium common stockoutstanding at the Effective Time was converted into the right to receive0.89387756 shares of the Company’s common stock (the “Merger Consideration”)resulting in an aggregate of 22,899,206 shares of MacroChem common stock beingissued in the Merger. The fair value of the shares issued on the closingdate to the stockholders of Virium was $6,869,618.

 

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Virium has a pipeline ofoncology products that target a variety of niche cancer indications. Virium’s product pipeline included a next generation nucleoside analogue (smallmolecule) which it had licensed from the Southern Research Institute in August 2007. This class of compounds has demonstrated proven efficacy in certainhematological cancer indications.  Upon completing the merger, managementhas commenced a process of conducting a strategic evaluation of each drugcandidate in the Company’s newly constituted product portfolio.

 

In addition, alloutstanding warrants to purchase shares of Virium common stock were convertedinto warrants to purchase      MacroChemcommon stock.  After giving effect to the Merger, these vested  warrants, which expire at various dates from2012 to 2013, are   exercisable topurchase 446,938 shares of MacroChem common stock at an exercise priceof $0.671 and 223,469 shares of MacroChem common stock at an exercise priceof $1.119 per share.  As described in more detail below, MacroChem alsoassumed convertible notes of Virium.

 

On April 23, 2008,MacroChem assumed all obligations under the convertible promissory note in theaggregate principal amount of $500,000 issued to Strategic Capital Resources, Inc.by Virium on May 30, 2007 (the “First Convertible Note”).  The FirstConvertible Note was due to mature on April 25, 2008.  The FirstConvertible Note had a 12% annual interest rate until November 30, 2007,which increased to 15% thereafter.  MacroChem paid to Strategic CapitalResources, Inc. $44,726 in cash which represents all accrued and unpaidinterest on such note through the date of consummation of the Merger plus$10,000. MacroChem made this payment in consideration of Strategic CapitalResources, Inc.’s prior agreement with Virium to extend the maturity dateon its note from March 26, 2008 to April 25, 2008.  Upon closingof  MacroChem’s next round of equity financing, if any, the principalamount of the First Convertible Note and all accrued interest may be convertedinto MacroChem common stock at the discretion of each First Convertible Noteholder such that each holder will be entitled to acquire shares of MacroChemcommon stock at $0.8950 per share, subject to anti-dilution adjustments.

 

On June 6, 2008, theCompany repaid a principal amount of $400,000 to the holder of the FirstConvertible Note together with accrued and unpaid interest thereon. Further, on June 23, 2008, the Company repaid the unpaid principalbalance of $100,000 together with accrued and unpaid interest thereon to theremaining holder of the First Convertible Note.   Additionally, the First Convertible Note wasrepaid, in part, with funds from new holders of convertible promissory notes whosenotes mature on December 6, 2008. The new promissory notes have aprincipal amount of $400,000 and a warrant to purchase 100,000 shares of commonstock at $.01.  The fair value of thewarrants issued of $24,000 is recorded as debt discount and will be amortizedto interest expense over the term of the debt. The notes have a 12% interestrate with accrued interest due on or prior to the 5th day of each calendar month. These notes aredue to mature on the earlier of  1)closing of the next financing by the Company or 2) December 6, 2008.

 

MacroChem also assumed onthe Effective Date all obligations under convertible promissory notes in theaggregate principal amount of $500,000 issued by Virium on December 12,2007 (the “Second Convertible Notes”).  The Second Convertible Notes wereto mature on the earlier of (a) the closing of any equity financingby  MacroChem or (b) June 12, 2008.  The Second ConvertibleNotes have a 12% annual interest rate with all accrued interest due atmaturity.  Upon closing of MacroChem’s next round of equity financing, ifany, the principal amount of the Second Convertible Notes and all accruedinterest thereon will be automatically converted into MacroChem commonstock such that each Second Convertible Note holder will be entitled toacquire shares of MacroChem Common Stock at $0.8950 per share. Additionally,upon written consent to the borrower, simultaneously with the next round offinancing, the holders have the ability to convert the entire outstandingprincipal and all accrued interest into shares. The conversion price will beequal to 50% of the qualified offering price.

 

In June 2008, aprincipal amount of $425,000 of the Second Convertible Notes were rolledforward to a maturity of December 31, 2008, subject to certain conditionsand the Company repaid holders of the Second Convertible Notes a principalamount of $75,000 and accrued interest of $4,568.  To induce the holdersto extend the maturity, the Company issued 212,500 warrants to purchase commonstock at $.01. The fair value of the warrants issued of $51,053 isrecorded  as debt discount and will beamortized to interest expense over the term of the debt.

 

Prior to themerger agreement,, SCO Capital Partners, LLC (“SCO LLC”) together with itsaffiliates Beach Capital LLC, SCO Securities LLC and SCO Capital Partners, L.P.(collectively with SCO LLC, “SCO”) was the beneficial owner of the outstandingcommon stock of MacroChem, including warrants to purchase 8,075,498 shares, andalso held approximately 87.4% of the outstanding stock of Holdings and warrantsto purchase 112,500 shares of Virium common stock. Pursuant to a DirectorDesignation Agreement dated as of October 1, 2007 between MacroChem andSCO LLC, SCO LLC has the right to designate two individuals to serve on MacroChem’sboard of directors for so long as SCO holds 20% of MacroChem’s outstandingcommon stock.  The current SCO director designees are Jeffrey B. Davis andMark J. Alvino.  Mr. Davis is currently the president of SCOSecurities LLC and prior to the Effective Date was a director of Virium.  Mr. Alvinois a former Managing Director of SCO Financial Group LLC and currently anofficer of Griffin Securities, Inc.  SCO Securities LLC acted asplacement agent in connection with MacroChem’s 2006 private placement.

 

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Pursuant to theterms of the Merger Agreement, at  the Effective Time , all members of theSpecial Committee, namely, John L. Zabriskie, Michael A. Davis, Paul S.Echenberg, and Peter G. Martin resigned from the board of directors ofMacroChem.

 

Immediatelyfollowing these resignations, David P. Luci and Dr. James Pachence wereappointed to the board of directors of MacroChem.  Dr. Pachence and Mr. Luciwill be entitled to the standard compensation payable to our directors which asof April 22, 2008, is now applicable to all directors and includescompensation of $12,000 annually, $1,000 per regular board meeting attended,$500 for each special, telephone or committee meeting attended and the stock optiongrants that our Compensation Committee from time to time deems appropriate.

 

The acquisition of Viriumon April 18, 2008 was accounted for by the Company under the purchasemethod of accounting in accordance with Statement of Financial Accounting StandardsNo. 141 “ Business Combinations”. Under the purchase method, assetsacquired and liabilities assumed by the Company were recorded at theirestimated fair values at the date of acquisition and the results of operationsof the acquired company were consolidated with those of the Company from thedate of acquisition

 

The total purchase priceof $9,626,794, has been primarily allocated to be in-process research anddevelopment and is comprised of $6,869,618 related to the calculated value ofthe Company’s common stock issued of $,30 per share, 2,441,696 of liabilitiesthe Company assumed in addition to $143,020 of warrants issued to certain debtholders. Additionally, the Company incurred $240,240 in professional fees andgained $37,780 in assets.

 

The components of thepurchase price, which the Company has preliminarily allocated to in-processresearch and development, are summarized as follows:

 
| Common stock  issued                 |   | $         | 6,869,618 |   |
|--------------------------------------|--------|-----------|-----------|--------|
| Liabilities and  assets assumed, net |   | 2,403,916 |      |
| Warrants related  to debt assumed    |   | 143,020   |      |
| Transaction  costs                   |   | 240,240   |      |
| Total purchase  price                |   | $         | 9,656,794 |   |

 

The following unauditedpro forma information presents the 2008 and 2007 results of the Company as ifthe acquisition had occurred on January 1, 2007.  The unaudited pro forma results are notnecessarily indicative of results that would have occurred had the acquisitionbeen in effect for the periods presented, nor are they necessarily indicativeof future results.

 
| ** **                                                      | ** ** | **Six Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                                          | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income  (loss)                                              |       | $                                                 | 326,846    |                                                | $          | (14,561,287 | ) | $ | (545,354 | ) | $ | (12,649,461 | ) |
|                                                            |       |                                              |       |                                                |       |   |   |   |   |
| Net income  (loss) per common share (basic and diluted)         |       | $                                                 | 0.01       |                                                | $          | (0.56 | ) | $ | (0.01 | ) | $ | (0.48 | ) |
| Weighted average  common shares outstanding (basic and diluted) |       | 45,651,979                                        |       | 25,947,982                                          |       | 45,798,411 |   | 26,156,165 |   |

 

 

**(8)****          ****Subsequent events**

 

On July 10, 2008, Access Pharmaceuticals, Inc.(OTC BB: ACCP.OB) announced it had signed an agreement and plan of merger withMacroChem pursuant to which MacroChem is expected to be merged with and into awholly-owned subsidiary of Access Pharmaceuticals Inc. The merger transactionis expected to close in the third quarter of 2008.  Holders of MacroChem common shares andin-the- money MacroChem warrants will receive an aggregate of 2,500,000 sharesof common stock of Access Pharmaceuticals, Inc. as merger consideration.All other options and warrants of MacroChem which are unexercised at theEffective Time of the merger shall automatically be cancelled and void.

 

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**Item 2.****           ****Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**NoteRegarding Forward Looking Statements**

 

This report and thedocuments incorporated in this report by reference may contain “forward-lookingstatements” within the meaning of Section 21E of the Securities ExchangeAct of 1934, as amended (the “ Exchange Act “). These statements may beidentified 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 reflectour current expectations and are based upon currently available data. ThePrivate Securities Litigation Reform Act of 1995 provides a “safe harbor” forsuch forward-looking statements. In order to comply with the terms of the safeharbor, we note that a variety of factors could cause actual results andexperience to differ materially from the anticipated results or otherexpectations expressed in the forward-looking statements. These factorsinclude, but are not limited to: our history of operating losses, our decisionto discontinue research and development activities and our need for additionalexternal financing; our need for significant additional product developmentefforts and additional financing; technological uncertainty relating totransdermal drug delivery systems; the early stage of development of ourproposed 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; ourdependence on third parties for the FDA application process; uncertaintiesregarding market acceptance of our product candidates; uncertainties regardingthe potential health risks of hormone replacement therapies; our ability toidentify and obtain rights to products or technologies in order to build ourportfolio of product candidates; our ability to recruit additional keyemployees; our limited personnel and our dependence on continued access toscientific talent; no assurance of our entering into license arrangements; ourlack of laboratory facilities and scientific personnel and uncertaintiesregarding our reliance on third parties to conduct research and developmentactivities for our technologies and product candidates; uncertainties relatingto competition, patents and proprietary technology; our dependence on thirdparties to conduct research and development activities; our dependence onthird-party suppliers and manufacturers; uncertainties relating to risks ofproduct liability claims, lack of product liability insurance, and expense anddifficulty of obtaining adequate insurance coverage; our majority shareholders,who own a large portion of our voting stock, could control company decisionsand could substantially lower the market price of our common stock if they wereto sell large blocks of our common stock in the future; uncertainty ofpharmaceutical pricing and related matters; volatility of our stock price; theeffect that our quotation on the OTC Bulletin Board will have on the liquidityof our common stock; and dilution of our shares as a result of our contractualobligation to issue shares in the future. Additional information on these andother factors which could affect the Company’s actual results and experienceare included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2007 and, in particular, the section entitled “RiskFactors”.

 

These or other events orcircumstances could cause our actual performance or financial results in futureperiods to differ materially from those expressed in the forward-lookingstatements. We undertake no obligation to make any revisions to theforward-looking statements contained in this report or the documentsincorporated by reference in this report, or to update

 

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the forward-lookingstatements to reflect events or circumstances occurring after the date of thisreport.

 

**General**

 

We are a specialtypharmaceutical company that develops and seeks to commercialize pharmaceuticalproducts. As of June 30, 2008, our portfolio of proprietary product candidatesare based on our drug delivery technologies: SEPA, MacroDerm and DermaPass. OurSEPA topical drug delivery technology (SEPA is an acronym for “Soft Enhancementof Percutaneous Absorption,” where “soft” refers to the reversibility of theskin effect, and “percutaneous” means “through the skin”) enhances theefficiency and rate of diffusion of drugs into and through the skin. Ourpatented MacroDerm drug delivery technology encompasses a family of low tomoderate molecular weight polymers that impede dermal drug or chemicalpenetration. We have also filed a patent application for our DermaPass familyof transdermal absorption enhancers that have a different drug delivery profilethan SEPA, which we believe could be used with a wider range of active pharmaceuticalingredients. Our product candidates include two clinical stage investigationalnew drugs: EcoNail, for the treatment of fungal infections of the nails andpexiganan, for the treatment of mild diabetic foot infection (DFI). We believethat products incorporating our drug delivery technologies may allow selecteddrugs to be administered more effectively and with improved patient compliancecompared to alternative methods of drug administration, such as ingestion andinjection.

 

Since inception, we havebeen engaged primarily in research and development. We have not generated anymeaningful revenues from operations and we have sustained significant operatinglosses. We anticipate that we will continue to incur significant losses for theforeseeable future. We cannot guarantee that we will be successful incommercializing our products, or that we will ever become profitable. As of June 30,2008, we had an accumulated deficit of $99,855,279. Our product candidates arein discovery or developmental stages and must undergo a rigorous regulatoryapproval process, which includes costly and extensive pre-clinical and clinicaltesting, to demonstrate safety and efficacy before we can market any resultingproduct. To date, neither the FDA nor any of its international equivalents hasapproved any of our product candidates for marketing.

 

Our results of operationscan vary significantly from year-to-year and quarter-to-quarter, and depend,among other factors, on:

 

·       the progress of clinical trials we conduct;

 

·       the degree of our research, marketing andadministrative efforts;

 

·       our ability to raise additional capital;

 

·       the signing of licenses and product developmentagreements;

 

·       the timing of revenues recognized pursuant to licenseagreements; and

 

·       the achievement of milestones by licensees.

 

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We expect to continuespending funds on developing and seeking regulatory approval of our leadproduct candidates, EcoNail and pexiganan. Ultimately, if we receive regulatoryapproval for either product, significant expenses will be incurred inconnection with its commercialization. In addition, we also plan to identifyand develop, internally, through in-licensing, or through other collaborativearrangements, additional product candidates and technologies that fit withinour growth strategy. If we identify potential product candidates, we will incuradditional costs in connection with testing and seeking regulatory approval ofthose product candidates.

 

On October 10, 2007,the Company entered into a Securities Purchase Agreement, pursuant to which theCompany issued in a private placement 5,891,667 shares of its common stock andfive-year warrants to purchase 1,767,500 shares of the Company’s common stockat an exercise price of $0.60 per share, for aggregate proceeds of $3,535,000.In connection with the private placement, all of the 752.25 then outstandingshares of the Company’s Series C Cumulative Convertible Preferred Stockwere 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 previouslyissued with the Series C Preferred have been reset to purchase 17,885,848shares of common stock at an exercise price of $0.60 per share, pursuant toanti-dilution provisions of those warrants.

 

In connection with theprivate placement, the Company entered into a Director Designation Agreementdated as of October 1, 2007 with SCO Capital Partners, LLC (“SCO”), acurrent stockholder and a purchaser in the private placement, pursuant towhich, 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 boardof directors. SCO previously held the right to designate two individuals toserve on the Company’s board of directors for so long as it held 20% of theCompany’s outstanding Series C Preferred.

 

The Company entered intoan agreement and plan of merger with Access Pharmaceuticals, Inc. on July 8,2008. As of June 30, 2008, our existing cash, cash equivalents and shortterm investments totaled $434,609. The Company’s continuation as a goingconcern depends on its ability to obtain additional financing, to consummate astrategic transaction or to make alternative arrangements to fund itsoperations, which cannot be guaranteed. There can be no assurance that theCompany will be able to obtain additional financing, to consummate a strategictransaction, or to make alternative arrangements to fund its operations. TheCompany’s cash requirements may vary materially from those now planned becauseof changes in the focus and direction of its research and development programs,identification of additional product candidates and technologies, competitiveand technical advances, patent developments or other developments related tothe status of fund raising.

 

*Researchand Development Expenses*. Research and development expenses consist of:

 

·            payments to consultants, investigators, contractresearch organizations and manufacturers in connection with our pre-clinicaland clinical trials;

 

·           costs associated with conducting our clinical trials;

 

·           costs of developing and obtaining regulatory approvals

 

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·           allocable costs, including occupancy and depreciation.

 

Because a significantportion of our research and development expenses (including laboratorysupplies, travel, dues and subscriptions, temporary help costs, consultingcosts and allocable costs such as occupancy and depreciation) benefit multipleprojects or our drug delivery technologies in general, we do not track theseexpenses by project. For the three months ended June 30, 2008, we spent$18,972 on research and development costs related to the clinical trial forEconail For the three month period ended June 30, 2007, we spent $257,949on research and development, including $235,315 in costs associated with aclinical trial for Econail and $22,634 in costs not specifically tracked to aproject.

 

 For the six-month period ended June 30,2008, we spent $530,943 on research and development including $228,403 in costsassociated with a clinical trial for Econail, $295,410 in costs associated withthe in-licensing of pexiganan acetate from Geneara, and $7,130 in costs notspecifically tracked to a project. Opterone was not in clinical trial in2008.  For the six months ended June 30,2007 we spent $556,398 on research and development, including $464,829 in costsassociated with a clinical trial for Econail and $91,569 in costs notspecifically tracked to a project.

 

Each of our research anddevelopment programs is subject to risks and uncertainties, including therequirement to seek regulatory approval, that are outside of our control.Moreover, the product candidates identified in these research and developmentprograms, which currently are in developmental stages, must overcomesignificant technological, manufacturing and marketing challenges before theycan be successfully commercialized. As a result of these risks and uncertainties,we are unable to predict with any certainty the period in which material netcash inflows from these projects could be expected to commence or thecompletion date of these programs. For example, we are seeking a partner toadvance development of our Opterone product candidate. We cannot predictwhether our efforts to find a partner will be successful nor can we predict themanner and timing in which any eventual partner may elect to pursue developmentof Opterone. In addition, these risks and uncertainties also prevent us fromestimating with any certainty the specific timing and future costs of ourclinical development programs, although historical trends at similarly situatedcompanies indicate that research and development expenses tend to increase inlater stages of clinical development. Our failure to obtain requisitegovernmental approvals timely or at all will delay or preclude us fromlicensing or marketing our products or limit the commercial use of ourproducts, which could adversely affect our business, financial condition andresults of operations.

 

*Marketing,General and Administrative Expenses*. Marketing, general and administrative expensesconsist primarily of salaries and other related costs for personnel, marketingand promotion, professional fees and facilities costs. Assuming we are able toraise sufficient capital, we anticipate that marketing, general andadministrative expenses will increase over the next several years as we begin,when appropriate, to license, partner, or market our product candidates if andwhen they receive regulatory approval.

 

**CriticalAccounting Policies and Estimates**

 

Our discussion andanalysis of our financial condition and results of operations are based on ourfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Thefollowing is a brief discussion of the more significant accounting

 

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policies and methods thataffect the judgments and estimates used in the preparation of our financialstatements.

 

*Researchand Development*.Research and development costs are expensed as incurred.

 

*PatentAssets*. We defercosts and expenses incurred in connection with pending patent applications. Weamortize costs related to successful patent applications over the estimated usefullives of the patents using the straight-line method. We charge accumulatedpatent costs and deferred patent application costs related to patents that areconsidered to have limited future value to operations. Estimates we use todetermine the future value of deferred patent costs include analysis ofpotential market size, time and cost to complete clinical trials, anticipatedinterest in our products and potential value for licensing or partneringopportunities.

 

*DeferredTaxes*. As part ofthe process of preparing our financial statements we are required to estimateour income taxes in each of the jurisdictions in which we operate. This processinvolves estimating our actual current tax exposure together with assessingtemporary differences resulting from differing treatments of items for tax andaccounting purposes. We have recorded a valuation allowance to fully offsetagainst these otherwise recognizable net deferred tax assets due to theuncertainty surrounding the timing of the realization of the tax benefit. Inthe event that we determine in the future that we will be able to realize allor a portion of the net deferred tax benefit, an adjustment to deferred taxvaluation allowance would increase net income in the period in which such adetermination is made. The utilization of net operating loss carryforwards andcredits available to be used in any given year may be limited in the event ofsignificant changes in ownership interest, as defined.

 

*WarrantLiability.* Basedon certain terms in the warrants that we issued in connection with the sale ofour Series C Cumulative Convertible Preferred Stock, we determined thatthe warrants should be classified as a liability and valued at fair marketvalue each reporting period, with the changes in fair value recorded inearnings, in accordance with EITF 00-19, “Accounting for Derivative FinancialInvestments 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.

 

*Stock-BasedCompensation.* On January 1, 2006, the Company adopted Statement of FinancialAccounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” using themodified prospective method, which requires measurement of compensation costfor all stock awards at fair value on the date of grant and recognition ofcompensation over the requisite service period for awards expected to vest. Thefair value of stock options is estimated using the Black-Scholes valuationmodel, and the fair value of restricted stock units is determined based on thenumber of shares granted and the quoted price of the Company’s common stock onthe date of grant. Such value is recognized as expense over the requisiteservice period, net of estimated forfeitures, using the straight-lineattribution method. The estimate of awards that will ultimately vest requiressignificant judgment, and to the extent actual results or updated estimatesdiffer from the Company’s current estimates, such amounts will be recorded as acumulative adjustment in the period estimates are revised. The Companyconsiders many factors when estimating expected forfeitures, including types ofawards, employee class and historical employee attrition rates. Actual results,and future changes in estimates, may differ substantially from the Company’scurrent estimates.

 

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**Resultsof Operations**

 

We had $1,326 and norevenues for the three and six month periods ended June 30, 2008 and 2007,respectively. The increase in revenue is due to the recognition of an up-frontfee of $50,000 assumed from Virium merger. This fee is  being recognized over life of the agreement.For the year ending December 31, 2008 and the foreseeable future, weexpect to have any meaningful revenues.

 

        For the three month period ended June 30,2008, research and development costs decreased $238,977, or 93% to $18,972 from$257,949 in the three month period ended June 30, 2007. The decrease isprimarily attributable to the completion of previous clinical trials.

 

For the six month periodended June 30, 2008, research and development costs decreased by $25,455,or 5% to $530,943 from $556,398 in the six month period ended June 30,2007. This decrease is primarily attributable to the decrease in spending onclinical trials as well as a decrease in general research and developmentconsulting costs.

 

For the three monthperiod ended June 30, 2008, marketing, general and administrative costsincreased by $350,536, or 39% to $1,248,489 from $897,953 in the three monthperiod ended June 30, 2007. This increase is primarily attributable to anincrease in stock based compensation of $253,010, legal fees of $93,858,consulting fees of $69,210, rent expense of $51,390 and severance pay of$20,000. This increase was partially offset by a decrease in public relationfees of $100,254.

 

For the six month periodended June 30, 2008, marketing, general and administrative costs increasedby $317,788, or 17% to $2,220,052 from $1,902,264 in the six month period endedJune 30, 2007. The increase is primarily attributable to an increase instock based compensation of $229,661, severance payments of $168,786, legalfees of $46,760, consulting fees of $59,087, financial advisory services of$76,804 and rent expense of $58,941. This increase was partially offset bypublic relations fees of $149,361, patent search fees of $75,914, audit fees of$24,828, franchise tax fees of $28,154.

 

Other income and expenseincreased by $2,235,980 due to a gain of $791,589 in the three month periodended June 30, 2008 compared with a loss of $1,444,391 in the three monthperiod ended June 30, 2007. The increase is primarily attributable to anincrease in the gain associated with the change in value of the warrantliability of $2,400,784 for the three month period ended June 30, 2008.Interest income decreased by $9,322, or 50% to $9,293 in the three month periodended June 30, 2008 from $18,615 in the three month period ended June 30,2007. The increase in interest expense is payments due to debt holders assumedfrom the Virium merger agreement.

 

Other income and expenseincreased by $5,068,886 due to a gain of $3,399,162 in the six month periodended June 30, 2008 compared with a loss of $1,669,724 in the six monthperiod ended June 30, 2007. The increase is primarily attributable to anincrease in the gain associated with the change in value of the warrantliability of $5,258,586 for the six month period ended June 30, 2008.Interest income decreased by $128,166, or 241% to ($75,021) in the six monthperiod ended June 30, 2008 from $53,145 in the six month period ended June 30,2007. The increase in interest expense is payments due to debt holders assumedfrom the Virium merger agreement.

 

      In-process research and development costsof $9,656,794 are attributed to the acquisition of Virium Pharmaceuticals Inc.in April of 2008. The acquisition costs are comprised of $6,869,618related to the calculated value of 22,899,206 shares of the Company’s stockissued to Virium shareholders valued at $.30 per share, $2,403,916 of netliabilities and assets assumed as part of the merger, $143,020 related to thecalculated value of 670,408 warrants issued to Virium shareholders and $240,240in transaction costs.

 

For the reasons describedabove, the Company’s financial statements reflect a net loss of $10,131,340 inthe three month period ended June 30, 2008 compared with a net loss of$2,600,293 in the three month period ended June 30, 2007. For the sixmonth period ended June 30, 2008, the Company’s financial statementsreflect a net loss of $9,007,301 compared with a net loss of $4,128,386.

 

**Liquidityand Capital Resources**

 

Since inception, ourprimary source of funding for our operations has been the private and publicsale of our securities, and, to a lesser extent, the licensing of ourproprietary technology and products, research collaborations, feasibilitystudies, government grants and the limited sales of products and testmaterials.

 

At June 30, 2008,working capital was approximately $(1,799,899), compared to $2,783,000 at June 30,2007. The decrease in our working capital reflects use of funds for operations.

 

On October 10, 2007,the Company entered into a Securities Purchase Agreement, pursuant to which theCompany issued in a private placement 5,891,667 shares of its common stock andfive-year warrants to purchase 1,767,500 shares of the Company’s common stockat an exercise price of $0.60 per share, for gross proceeds of $3,535,000($3,046,245 net of issuance costs). In connection with the private placement,all of the 752.25 then outstanding shares of the Company’s Series CCumulative Convertible Preferred Stock were converted into a total of 

 

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12,571,850 shares ofcommon stock. In addition, outstanding warrants to purchase 8,648,102 shares ofcommon stock previously issued with the Series C Preferred have been resetto purchase 17,885,848 shares of common stock at an exercise price of $0.60 pershare, pursuant to anti-dilution provisions of those warrants.

 

In connection with theprivate placement, the Company entered into a Director Designation Agreementdated as of October 1, 2007 with SCO Capital Partners, LLC (“SCO”), acurrent stockholder and a purchaser in the private placement, pursuant towhich, 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 boardof directors. SCO previously held the right to designate two individuals toserve on the Company’s Board of Directors for so long as it held 20% of theCompany’s outstanding Series C Preferred.

 

Until such time as weobtain agreements with third-party licensees or partners to provide funding forour anticipated business activities, or otherwise generate revenue from thecommercialization of our products, we will use our working capital to fund ouroperating activities.

 

As of June 30, 2008,we had $434,608 in cash, cash equivalents and short-term investments. On July 8,2008, the Company entered into an agreement and plan of merger with AccessPharmacueitcals Inc. The Company’s continuation as a going concern depends onits ability to obtain additional financing, to consummate a strategictransaction or to make alternative arrangements to fund its operations, whichcannot be guaranteed. Our cash requirements may vary materially from those nowplanned because of changes in the focus and direction of our research anddevelopment programs, competitive and technical advances, patent developmentsor other developments. To continue to operate, the Company will requiresignificant additional funding. The Company is assessing opportunities to raisecapital and expects to continue financing operations through sales ofsecurities, strategic alliances and other financing vehicles, if any, thatmight become available to the Company on terms that it deems acceptable. TheCompany cannot assure that sufficient funds will be available to the Company,if they are available at all, to enable the Company to continue to operate. Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

We do not enter intofinancial instrument transactions for trading or speculative purposes. We donot intend to establish any special purpose entity and do not have any materialoff balance sheet financing transactions. We do not believe that inflation willhave any significant effect on the results of our operations.

 

**RecentAccounting Pronouncements**

 

In September 2006,the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS157 establishes a common definition of fair value to be used whenever GAAPrequires (or permits) assets or liabilities to be measured at fair value, anddoes not expand the use of fair value in any new circumstances. It alsorequires expanded disclosure about the extent to which companies measure assetsand liabilities at fair value, the information used to measure fair value, andthe effect of fair value measurements on earnings. On February 12, 2008,the FASB issued proposed FASB Staff Position No. FAS No. 157-2, “EffectiveDate of FASB Statement

 

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No. 157” whichdefers the effective date for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (that is, at least annually) tofiscal years beginning after November 15, 2008. The Company adopted FAS157 for all financial assets and liabilities required to be measured at fairvalue on a recurring basis, prospectively from January 1, 2008. The applicationof FAS 157 did not have a significant impact on the Company’s financialposition, results of operations or cash flows.

 

In February 2007,the FASB issued FAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – including an amendment of FASB 115” (“FAS 159”),which allows an entity to choose to measure certain financial instruments andliabilities at fair value. Subsequent measurements for the financialinstruments and liabilities an entity elects to fair value will be recognizedin earnings and this election is irrevocable. FAS 159 also establishesadditional disclosure requirements. FAS 159 is effective for the Companybeginning January 1, 2008. The Company has not elected to apply the fairvalue option to any of its financial instruments.

 

In December 2007,the FASB issued FAS No. 141 (revised 2007), “Business Combinations” (“FAS141R”). FAS 141R establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, any non controlling interest in the acquireeand the goodwill acquired. FAS 141R also establishes disclosure requirements toenable the evaluation of the nature and financial effects of the businesscombination. FAS 141R is effective beginning January 1, 2009. The Companyis currently evaluating the potential impact of the adoption of FAS 141R on itsfinancial position, results of operations or cash flows.

 

In December 2007,the FASB issued SFAS No. 160, “Non Controlling Interests in ConsolidatedFinancial Statements-an amendment of Accounting Research Bulletin No. 51”(“FAS 160”). FAS 160 establishes accounting and reporting standards forownership interests in subsidiaries held by the parties other than parent, theamount of the consolidated net income attributable to the parent and to the noncontrolling interest, changes in parent’s ownership interest, and the valuationof retained non controlling equity investments when a subsidiary isdeconsolidated. FAS 160 also establishes disclosure requirements that clearlyidentify and distinguish between the interests of the parent and interests ofthe non controlling owners. FAS 160 is effective for the Company beginning January 1,2009. The Company is currently evaluating the potential impact of the adoptionof FAS 160 on its financial position, results of operations or cash flows.

 

In March 2008, theFASB issued SFAS No.161, “Disclosures about Derivative Instruments and HedgingActivities-an amendment of FASB Statement No.133” (“FAS 161”). FAS161 enhancesdisclosures about the Company’s derivative and hedging activities and therebyimproves the transparency of financial reporting. FAS 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008. The Company is currently evaluating the potentialimpact of the adoption of FAS 161 on its financial position, results ofoperations or cash flows.

 

In December 2007,the FASB issued FAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements-an amendment of Accounting Research Bulletin No. 51”

 

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(“FAS 160”). FAS 160clarifies the classification in a company’s consolidated balance sheet and theaccounting for and disclosure of transactions between the company and holdersof noncontrolling interests. FAS 160 is effective for the Company January 1,2009. Early adoption is not permitted. The Company does not expect the adoptionof FAS 160 to have a material impact on its financial statements upon adoption.

 

**Merger.**

 

On April 18, 2008,the Company acquired Virium Pharmaceuticals Inc. (“Virium”), a privately heldbiotechnology company focused primarily on oncology based technology, pursuantto the terms of an Agreement and Plan of Merger (the “Merger Agreement”) datedas of April 18, 2008 (the “Effective Time”) by and among the Company, VRMAcquisition, LLC, a Delaware limited liability company and a directwholly-owned subsidiary of the Company (“VRM Acquisition”), Virium and ViriumHoldings, Inc., a non-public Delaware corporation (“Holdings”) and theparent of Virium.  On the Effective Date, VRM Acquisition merged with andinto Virium with Virium continuing as the surviving company and a wholly-ownedsubsidiary of the Company (the “Merger”).  Pursuant to the MergerAgreement, each share of Virium common stock outstanding at the Effective Timewas converted into the right to receive 0.89387756 shares of the Company’scommon stock (the “Merger Consideration”) resulting in an aggregate of22,899,206 shares of MacroChem common stock being issued in theMerger. The fair value of the shares issued on the closing date to thestockholders of Virium was $6,869,618.

 

Virium has a pipeline ofoncology products that target a variety of niche cancer indications. Virium’s product pipeline included a next generation nucleoside analogue (smallmolecule) which it had licensed from the Southern Research Institute in August 2007. This class of compounds has demonstrated proven efficacy in certainhematological cancer indications.

 

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Upon completing themerger, management has commenced a process of conducting a strategic evaluationof each drug candidate in the Company’s newly constituted product portfolio.

 

**Other Events.**

 

On June 26, 2008, Dr. JamesPachence resigned from the office of Chief Executive Officer of the Company andresigned from his position as a member of our board of directors, in each case,effective immediately.  Dr. Pachencedecided to pursue other career opportunities.

 

On April 22,2008, 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 ofMacroChem.

 

On April 22, 2008,David P. Luci and Dr. James Pachence were appointed to the board ofdirectors of MacroChem.  Dr. Pachence and Mr. Luci will beentitled to the standard compensation payable to our directors which as of April 22,2008, is now applicable to all directors and includes compensation of $12,000annually, $1,000 per regular board meeting attended, $500 for each special,telephone or committee meeting attended and the stock option grants that ourCompensation Committee from time to time deems appropriate

 

**Subsequent  Events.**

 

On July 10, 2008, Access Pharmaceuticals, Inc. (OTC BB: ACCP.OB)announced it had signed an agreement and plan of merger with MacroChem pursuantto which MacroChem is expected to be merged with and into a wholly-ownedsubsidiary of Access. The merger transaction is expected to close in the thirdquarter of 2008.  Holders of MacroChemcommon shares and in- the- money MacroChem warrants will receive an aggregateof 2,500,000 shares of common stock of Access Pharmaceuticals as merger consideration.All other options and warrants of MacroChem which are unexercised at theEffective Time of the merger shall automatically be cancelled and void.

 

**Item3. Quantitative and Qualitative Disclosures about Market Risk**

 

**Cash,Cash Equivalents and Short-Term Investments**

 

As of June 30, 2008,we were exposed to market risks, which relate primarily to changes in U.S.interest rates. Our cash equivalents and short-term investments are subject tointerest rate risk and will decline in value if interest rates increase. Due tothe short duration of these financial instruments, generally one year or less,changes in interest rates would not have a material effect on our financialposition. A hypothetical 10% change in interest rates would not have a materialeffect on our Statement of Operations or Cash Flows for the three and sixmonths ended June 30, 2008.

 

**Item4. Controls and Procedures**

 

As of the end of theperiod covered by this report, we carried out a review, under the supervisionand with the participation of our management, including our Chairman, Presidentand Chief Business Officer, of the effectiveness of our disclosure controls andprocedures (as defined in the SEC rules promulgated under the SecuritiesExchange Act of 1934, as amended), which are designed to ensure thatinformation required to be disclosed in our Securities and Exchange Commissionreports is properly and timely recorded, processed, summarized and reported.Based upon that review, management concluded that our disclosure controls andprocedures are not effective in timely alerting them to material informationrequired to be included in our periodic filings with the Securities andExchange Commission and that there is a lack of control over complex andnon-routine transactions and  there is alack of segregation of duties at the Company due to the small number ofemployees dealing with general administrative and financial matters. Thisconstitutes a material weakness in financial reporting. However, management hasaddressed these issues, in part, by appointing a financial controller who beganemployment with the Company in May 2008.  Management will continue toevaluate the segregation of duties specifically and the finance and accountingfunction generally.

 

Complex and Unusual Transactions Weaknesses – Based onthe limited resources internally available to the Company in the performance ofaccounting functions, the Company’s resources lacked the level of accountingknowledge, experience and training in the application of certain accountingprinciples generally accepted in the United States of America. The lack ofsufficient and adequately trained accounting personnel and communication amongthose personnel resulted in the Company incorrectly reporting certaintransactions related to the acquisition of Virium Pharmaceuticals, Inc.This error was detected by our independent registered public accountants intheir review of this current report on Form 10-Q.

 

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There were no otherchanges in our internal control over financial reporting that occurred duringthe quarter ended June 30, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting  Notwithstanding the foregoing, on March 19, 2008, Mr. Patriacca,our then-current CFO, retired and was replaced by David P. Luci as the Company’sChief Financial Officer.  On April 22, 2008, Mr. Luci wasappointed to the position of President & Chief Business Officer, andnow serves as the principal executive officer of the Company.

 

**PART II– OTHER INFORMATION**

 

**Item1A.         Risk Factors.**

 

Except as set forthbelow, there have been no material changes to the risk factors included in Item1A of Part I of our annual Report on Form 10-K for the year ended December 31,2007.

 

***Federal regulatory reforms may create additional burdensthat would cause us to incur additional costs and may adversely affect ourability to commercialize our products.***

 

From time to time,legislation is drafted, introduced and passed in Congress that couldsignificantly change the statutory provisions governing the approval,manufacturing and marketing of products regulated by the FDA. For example, on September 27,2007, the Food and Drug Administration Amendments Act of 2007 (the “FDAAA”) wasenacted, giving the FDA enhanced post-market authority, including the authorityto require post-market studies and clinical trials, labeling changes based onnew safety information, and compliance with a risk evaluation and mitigationstrategy approved by the FDA. The FDA’s post-market authority takes effect 180days after the enactment of the law. Failure to comply with any requirementsunder the FDAAA may result in significant penalties. The FDAAA also authorizessignificant civil money penalties for the dissemination of false or misleadingdirect-to-consumer advertisements and allows the FDA to require companies tosubmit direct-to-consumer television drug advertisements for FDA review priorto public dissemination. Additionally, the new law expands the clinical trialregistry so that sponsors of all clinical trials, except for Phase I trials,are required to submit certain clinical trial information for inclusion in theclinical trial registry data bank. In addition to the FDAAA, FDA regulationsand guidance are often revised or reinterpreted by the agency in ways that maysignificantly affect our business and our products. It is impossible to predictwhether further legislative changes will be enacted, or FDA regulations, guidanceor interpretations will change, and what the impact of such changes, if any,may be.

 

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**Item6.        Exhibits.**

 

Thefollowing is a list of exhibits to this Quarterly Report on Form 10-Q:

 
| 2.1    |   | Merger Agreement, dated  April 10, 2008, by and between Access Pharmaceuticals, Inc., MACM  Acquisition Corp. and MacroChem Corporation                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                  |
| 10.1   |   | Employment Agreement,  dated April 22, 2008, by and between the registrant and Dr. James  Pachence.                                                                                         |
|   |   |                                                                                                                                                                                                  |
| 10.2   |   | Employment Agreement,  dated April 22, 2008, by and between the registrant and David P.  Luci, Esq.                                                                                         |
|   |   |                                                                                                                                                                                                  |
| 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. |

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the Registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                   | MacroChem Corporation                                            |
|------------------------|------------------------------------------------------------------|
|                   | (Registrant)                                                     |
|                   |                                                             |
| August  14,  2008 | /s/  David  P. Luci                                    |
|                   | David P. Luci       (Principal Executive Officer) |
|                   |                                                             |
|                   | /s/  Lawrence  Reilly                                  |
|                   | Lawrence Reilly   (Principal Accounting Officer)       |

 

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**EXHIBIT INDEX**

 

Thefollowing is a list of exhibits to this Quarterly Report on Form 10-Q:

 
| 2.1    |   | Merger Agreement, dated  April 10, 2008, by and between Access Pharmaceuticals, Inc., MACM  Acquisition Corp. and MacroChem Corporation                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                  |
| 10.1   |   | Employment Agreement,  dated April 22, 2008, by and between the registrant and Dr. James  Pachence.                                                                                         |
|   |   |                                                                                                                                                                                                  |
| 10.2   |   | Employment Agreement,  dated April 22, 2008, by and between the registrant and David P.  Luci, Esq.                                                                                         |
|   |   |                                                                                                                                                                                                  |
| 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. |

 

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