Table of Contents

 

 

 

**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 September 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, 22nd Floor, New York, New York 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 November 19, 2008:** |
|------------------------------|------------|---------------------------------------------|
| Common Stock, $.01 par value |       | 45,872,883                                  |

 

 

 

----

Table of Contents

 

INDEX TO FORM 10-Q

 
| ** **    | ** **                                                                                                                               | **Page Number** |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------|----------------------|
| PART I   | FINANCIAL INFORMATION                                                                                                                    |                 |
|          |                                                                                                                                     |                 |
| Item 1        | Financial Statements                                                                                                                     |                 |
|          |                                                                                                                                     |                 |
|          | Condensed   Consolidated Balance Sheets September 30, 2008 (Unaudited) and  December 31, 2007                             | 3                    |
|          |                                                                                                                                     |                 |
|          | Condensed  Consolidated  Statements of Operations for the Three and Nine Months  Ended September 30, 2008 and 2007 (Unaudited) | 4                    |
|          |                                                                                                                                     |                 |
|          | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  September 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

----

Table of Contents

 

**Item1. Financial Statements**

 

MACROCHEMCORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                                                                                                                      | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                      | ** ** | **(Unaudited)**                  | ** ** | **(Note 1)**               | ** ** |
|                                                                                                                                                                                                                            |       |                             |       |                            |       |
| **ASSETS**                                                                                                                                                                                                                      |       |                             |       |                            |       |
| Current assets:                                                                                                                                                                                                                 |       |                             |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                                                      |       | $                                | 32,879     |                            | $          | 2,423,519 |   |
| Short-term  investments                                                                                                                                                                                                         |       | —                           |       | 759,247                         |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                      |       | 116,124                          |       | 131,047                         |       |
| Total current  assets                                                                                                                                                                                                           |       | 149,003                          |       | 3,313,813                       |       |
|                                                                                                                                                                                                                            |       |                             |       |                            |       |
| Property and  equipment, net                                                                                                                                                                                                    |       | 10,523                           |       | 22,042                          |       |
| Other assets                                                                                                                                                                                                                    |       | 50,900                           |       | —                          |       |
| Patents, net                                                                                                                                                                                                                    |       | 484,099                          |       | 517,600                         |       |
|                                                                                                                                                                                                                            |       |                             |       |                            |       |
| Total assets                                                                                                                                                                                                                    |       | $                                | 694,525    |                            | $          | 3,853,455 |   |
|                                                                                                                                                                                                                            |       |                             |       |                            |       |
| **LIABILITIES**                                                                                                                                                                                                                 |       |                             |       |                            |       |
| Current  liabilities:                                                                                                                                                                                                           |       |                             |       |                            |       |
| Accounts payable                                                                                                                                                                                                                |       | $                                | 1,428,488  |                            | $          | 94,439 |   |
| Accrued expenses  and other liabilities                                                                                                                                                                                         |       | 586,979                          |       | 310,195                         |       |
| Deferred revenue                                                                                                                                                                                                                |       | 5,304                            |       | —                          |       |
| Accrued interest  on notes payable                                                                                                                                                                                              |       | 8,250                            |       | —                          |       |
| Note payable -  related party                                                                                                                                                                                                   |       | 225,000                          |       | —                          |       |
| Convertible  notes payable, net                                                                                                                                                                                                 |       | 791,487                          |       | —                          |       |
| Total current  liabilities                                                                                                                                                                                                      |       | 3,045,508                        |       | 404,634                         |       |
|                                                                                                                                                                                                                            |       |                             |       |                            |       |
| Warrants  liability (Note 4)                                                                                                                                                                                                    |       | 190,282                          |       | 4,076,488                       |       |
| Deferred revenue                                                                                                                                                                                                                |       | 25,469                           |       | —                          |       |
|                                                                                                                                                                                                                            |       |                             |       |                            |       |
| Total  liabilities                                                                                                                                                                                                              |       | 3,261,259                        |       | 4,481,122                       |       |
|                                                                                                                                                                                                                            |       |                             |       |                            |       |
| Commitments and  contingencies (Note 3)                                                                                                                                                                                         |       |                             |       |                            |       |
|                                                                                                                                                                                                                            |       |                             |       |                            |       |
| **STOCKHOLDERS’  DEFICIT**                                                                                                                                                                                                 |       |                             |       |                            |       |
| Cumulative  preferred stock, $.01 par value, 6,000,000 shares authorized; none Issued                                                                                                                                           |       | —                           |       | —                          |       |
| Common stock,  $.01 par value, 100,000,000 shares authorized; 45,873,412 issued and  45,872,883 outstanding as of September 30, 2008 and 22,500,026 shares  issued and 22,499,497 outstanding as of December 31, 2007 |       | 458,734                          |       | 225,000                         |       |
| Additional  paid-in capital                                                                                                                                                                                                     |       | 97,683,242                       |       | 90,054,421                      |       |
| Accumulated  deficit                                                                                                                                                                                                            |       | (100,649,600                     | )          | (90,847,978                     | )          |
| Less treasury  stock, at cost, 529 shares at September 30, 2008 and December 31,  2007                                                                                                                                |       | (59,110                          | )          | (59,110                         | )          |
| Total  stockholders’ deficit                                                                                                                                                                                               |       | (2,566,734                       | )          | (627,667                        | )          |
|                                                                                                                                                                                                                            |       |                             |       |                            |       |
| Total liabilities  and stockholders’ deficit                                                                                                                                                                               |       | $                                | 694,525    |                            | $          | 3,853,455 |   |

 

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

 

3

----

Table of Contents

 

MACROCHEMCORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three andnine months ended September 30, 2008 and 2007

(Unaudited)

 
| ** **                                                                     | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Other Income                                                                   |       | $                                                                      | 1,326      | ** **                                                            | **—** |   | $ | 2,652 | ** ** | **—** | ** ** |
| TOTAL OTHER  INCOME                                                            |       | 1,326                                                                  | ** ** | **—**                                                            |       | 2,652 |   |   |   |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **OPERATING  EXPENSES:**                                                       |       |                                                                   |       |                                                                  |       |   |   |   |   |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Research and  development                                                      |       | 385,997                                                                |       | 490,788                                                               |       | 916,940 |   | 1,047,187 |   |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Marketing,  general and administrative                                         |       | 742,401                                                                |       | 851,925                                                               |       | 2,962,453 |   | 2,754,187 |   |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| In- process  research and development                                          |       | —                                                                 |       | —                                                                |       | 9,656,794 |   | — |   |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **TOTAL  OPERATING EXPENSES**                                                  |       | 1,128,398                                                              |       | 1,342,713                                                             |       | 13,536,187 |   | 3,801,374 |   |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **LOSS  FROM OPERATIONS**                                                      |       | (1,127,072                                                             | )          | (1,342,713                                                            | )          | (13,533,535 | ) | (3,801,374 | ) |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **OTHER  (EXPENSE) INCOME:**                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Interest income  (expense), net                                                |       | (85,738                                                                | )          | 6,445                                                                 |       | (160,759 | ) | 59,590 |   |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gain (loss) on  change in value of warrant liability                           |       | 418,489                                                                |       | 596,473                                                               |       | 3,886,206 |   | (1,194,396 | ) |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gain on sale of  equipment                                                     |       | —                                                                 |       | —                                                                |       | 6,466 |   | 68,000 |   |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **TOTAL  OTHER INCOME (EXPENSE)**                                              |       | 332,751                                                                |       | 602,918                                                               |       | 3,731,913 |   | (1,066,806 | ) |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **NET  LOSS**                                                                  |       | (794,321                                                               | )          | (739,795                                                              | )          | (9,801,622 | ) | (4,868,180 | ) |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **DIVIDEND  ON SERIES C CUMULATIVE PREFERRED STOCK**                           |       | —                                                                 |       | (189,608                                                              | )          | — |   | (575,407 | ) |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **NET  LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS**                              |       | $                                                                      | (794,321   | )                                                                     | $          | (929,403 | ) | $ | (9,801,622 | ) | $ | (5,443,587 | ) |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **BASIC  NET LOSS PER COMMON SHARE**                                           |       | $                                                                      | (0.02      | )                                                                     | $          | (0.25 | ) | $ | (0.27 | ) | $ | (1.63 | ) |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **DILUTED  NET LOSS PER COMMON SHARE**                                         |       | $                                                                      | (0.02      | )                                                                     | $          | (0.25 | ) | $ | (0.27 | ) | $ | (1.63 | ) |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **WEIGHTED  AVERAGE SHARES USED TO COMPUTE BASIC NET LOSS PER COMMON SHARE**   |       | 45,837,547                                                             |       | 3,680,875                                                             |       | 36,604,749 |   | 3,334,612 |   |
|                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **WEIGHTED  AVERAGE SHARES USED TO COMPUTE DILUTED NET LOSS PER COMMON SHARE** |       | 45,837,547                                                             |       | 3,680,875                                                             |       | 36,604,749 |   | 3,334,612 |   |

 

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

 

4

----

Table of Contents

 

MACROCHEMCORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the ninemonths ended September 30, 2008 and 2007

(Unaudited)

 
| ** **                                                                   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                         |       |       |       |       |       |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                    |       |       |       |       |       |
| Net loss                                                                     |       | $          | (9,801,622 | )          | $          | (4,868,180 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |       |       |       |       |
| In-process  research and development                                         |       | 9,656,794  |       | —     |       |
| Depreciation and  amortization                                               |       | 48,202     |       | 50,295     |       |
| Stock-based  compensation                                                    |       | 654,871    |       | 456,482    |       |
| Stock issued for  services                                                   |       | 120,000    |       | —     |       |
| (Gain)/loss on  change in value of warrant liability                         |       | (3,886,206 | )          | 1,194,396  |       |
| Changes in  operating assets and liabilities, net of acquisition:            |       |       |       |       |       |
| Prepaid expenses  and other current assets                                   |       | (35,977    | )          | (20,478    | )          |
| Accounts payable  and accrued expenses                                       |       | 287,473    |       | 55,144     |       |
|                                                                         |       |       |       |       |       |
| Net cash used in  operating activities                                       |       | (2,956,465 | )          | (3,132,342 | )          |
|                                                                         |       |       |       |       |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                   |       |       |       |       |       |
| Sales of  short-term investments                                             |       | 759,247    |       | 2,652,192  |       |
| Addition to  patents                                                         |       | (42        | )          | —     |       |
| Expenditures for  property and equipment                                     |       | (3,140     | )          | —     |       |
| Payments for  acquisition of Virium, net of cash acquired                    |       | (240,240   | )          | —     |       |
| Net cash  provided by investing activities                                   |       | 515,825    |       | 2,652,192  |       |
|                                                                         |       |       |       |       |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                   |       |       |       |       |       |
| Proceeds from  debt issuance                                                 |       | 400,000    |       | —     |       |
| Proceeds from  note payable - related party                                  |       | 225,000    |       | —     |       |
| Repayment of  debt                                                           |       | (575,000   | )          | —     |       |
| Net cash  provided by financing activities                                   |       | 50,000     |       | —     |       |
|                                                                         |       |       |       |       |       |
| Net change in  cash and cash equivalents                                     |       | (2,390,640 | )          | (480,150   | )          |
| Cash and cash  equivalents at beginning of period                            |       | 2,423,519  |       | 738,264    |       |
|                                                                         |       |       |       |       |       |
| Cash and cash  equivalents at end of period                                  |       | $          | 32,879     |       | $          | 258,114 |   |

 

5

----

Table of Contents

 

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

 

SUPPLEMENTAL DISCLOSURESOF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

See Note 7 for theacquisition of Virium Pharmaceuticals, Inc and consideration (principallyshares, warrants and assumption of $1,000,000 debt) issued /assumed.

 

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

 

6

----

Table of Contents

 

**MACROCHEMCORPORATION**

 

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**(1) ****         Basisof Presentation and 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 condensedconsolidated statements of operations for the three and nine months ended September 30,2008 are not necessarily indicative of the results to be expected for the fullyear. The unaudited condensed consolidated financial statements included hereinshould be read in conjunction with the audited financial statements and thenotes thereto included in the Company’s Annual Report on Form 10-K for thefiscal year ended December 31, 2007.  The condensed consolidatedbalance sheet as of December 31, 2007 has been derived from the auditedfinancial statements included in the Company’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 September 30,2008, the Company’s accumulated deficit was $100,649,600. On July 10,2008, the Company entered into an agreement and plan of merger with AccessPharmaceuticals, Inc.(“Access”). However, management believes that ourcontinuation as a going concern depends on our ability to obtain additionalfinancing, to consummate a strategic transaction or to make alternativearrangements to fund our operations.  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 our 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.  These matters raise substantial doubt aboutthe Company’s ability to continue as a going concern.  The accompanyingfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

**(2) ****         Stock-BasedCompensation**

 

*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

----

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 and consultants).

 

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, 2001Plan and the 1994 Plan state that the exercise price of options shall not beless than fair market value at the date of grant. As of September 30,2008, there were outstanding options under all plans to purchase 5,651,988shares of common stock with 6,003,545 shares remaining available for futuregrants under the 2001 and 2008 Plan.

 

*Stock-BasedCompensation*

 

Effective January 1,2006, the Company adopted SFAS No. 123(R), “Accounting for Stock-BasedCompensation,” (“SFAS 123(R)”) using the modified prospective method, whichresults in the provisions of SFAS 123(R) being applied to the financialstatements on a going-forward basis. SFAS 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 SFAS 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 withSFAS 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

----

Table of Contents

 

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

 

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

 
| ** **                               | ** ** | **Three and Nine  Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
| Risk-free  interest rate                 |       | 2.00%                                                               |       | 4.16% |   |
| Expected life of  option grants          |       | 6 years                                                             |       | 6 years |   |
| Expected  volatility of underlying stock |       | 110%                                                                |       | 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. SFAS 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 term of the optionsrepresents the estimated period of time until exercise and is based onhistorical experience of similar awards. 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

----

Table of Contents

 

*StockOption Activity*

 

Stock option activity forthe nine months ended September 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                  |       | $                                                              | 0.19       |                                               | 9.56       |                            | $          | — |   |
| Exercised                                 |       | —                     |       | $                                                              | —     |                                               | —     |                            | $          | — |   |
| Cancelled or  expired                     |       | (2,208,261                 | )          | $                                                              | 0.73       |                                               | 8.94       |                            | $          | — |   |
| **Outstanding,  September 30, 2008** |       | 5,651,988                  |       | $                                                              | 2.05       |                                               | 8.96       |                            | $          | — |   |
| Exercisable,  September 30, 2008     |       | 2,352,940                  |       | $                                                              | 5.78       |                                               | 8.95       |                            | $          | — |   |

 

As of September 30,2008 there was $800,768 of total expected unrecognized compensation costrelated to unvested stock options granted under the Company’s stock- basedcompensation plans. The cost is to be recognized over a period of up to threeyears.

 

The weighted average fairvalue of options granted during the nine months ended September 30, 2008 was$0.25

 

*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.

 

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) ****         Commitmentsand Contingencies**

 

Lease Commitments

 

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

 
| ** **       | ** ** | **Payments Due in** | ** ** |
|------------------|------------|-------------------------------|------------|
| ** **       | ** ** | **Total**                     | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|             |       |                          |       |   |   |   |   |   |   |
| Occupancy Leases |       | $                             | 213,988    |   | $ | 33,788 |   | $ | 135,150 |   | $ | 45,050 |   |
| Total            |       | $                             | 213,988    |   | $ | 33,788 |   | $ | 135,150 |   | $ | 45,050 |   |

 

Other Commitments andContingencies

 

RAI Merger

 

On April 17, 2008,the REIT Americas  Inc. (“RAI”) and Virium Pharmaceuticals agreed toterminate the Merger Agreement that had been entered into on May 25, 2007by and among RAI and Virium Pharmaceuticals. Upon completion of a qualifiedfinancing, the Company will be obligated to pay RAI $535,000 in considerationfor agreeing to terminate the Merger Agreement.

 

10

----

Table of Contents

 

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

 

*AuthorizedCapital Stock*

 

Authorized capital stockconsists of 100,000,000 shares of $.01 par value common stock of which45,873,412 shares are issued (45,872,883 are outstanding) and 29,942,508 arereserved for issuance upon exercise of common stock options and warrants at September 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 September 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 September 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 September 30, 2008, none of these $0.60 PlacementAgent Warrants had been exercised. On December 23, 2005, the Companyclosed a private placement in which institutional investors received warrantsto purchase 4,999,997 shares

 

11

----

Table of Contents

 

of common stock at anexercise price of $0.60 per share for a period of six years (“Investor Warrants”).As of September 30, 2008, 37,500 of these $0.60 Investor Warrants had beenexercised. The placement agent in this transaction received a warrant topurchase approximately 416,666 shares of common stock at a purchase price of$0.60 for a period of six years (“Placement Agent Warrants”).  As of September 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 due to a put option in the agreement.Changes in the fair value of such warrants are recorded as a charge or creditto operations each reporting period. The Company valued the Investor Warrantsand the Placement Agent Warrants at $190,282 on September 30, 2008 usingthe Black-Scholes model with the following assumptions: a risk-free interestrate of 2.00%, volatility of 110%, expected life of 1 year and a dividend yieldof 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. Theplacement agent also received warrants to purchase 589,166 shares of commonstock for a period of five years. The exercise price of these warrants is$0.60. At September 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 September 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 September 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 September 30,2008, none of the $87.78 warrants had been exercised.

 

On June 23, 2008,the Company entered into a $400,000 Convertible Note agreement with new holdersof convertible 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 These warrants were valued at $24,000 using the BlackScholes model and are being amortized over the term of the debt. As of September 30,2008, none of the warrants had been exercised.

 

**(5) ****         Basicand 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

 

12

----

Table of Contents

 

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 September 30, 2008and 2007, respectively there were 5,651,988 and 2,714,059 options and38,244,282 and 17,885,848 warrants outstanding for the purchase of shares ofcommon stock.  However, diluted per share amounts presented in theaccompanying condensed consolidated statements of operations for the three andnine months ended September 30, 2008 and 2007 are the same as basic pershare amounts because the assumed effects of the exercise of the Company’soptions and warrants that were outstanding during all or part of the periodwould have been anti-dilutive due to the Company being in a net loss position.

 

13

----

Table of Contents

 

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

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS157 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. SFAS 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 SFAS 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 SFAS 157 did nothave a significant impact on the Company’s financial position, results ofoperations or cash flows.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities — including an amendment of FASB 115” (“SFAS 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. SFAS 159 also establishesadditional disclosure requirements. SFAS 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 SFAS No.141 (revised 2007), “Business Combinations” (“SFAS 141R”).SFAS 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. SFAS 141R also establishes disclosure requirementsto enable the evaluation of the nature and financial effects of the businesscombination. SFAS 141R is effective beginning January 1, 2009. The Companyis currently evaluating the potential impact of the adoption of SFAS 141R onits financial 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

 

14

----

Table of Contents

 

No. 51” (“SFAS 160”).SFAS 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. SFAS 160 also establishes disclosure requirements that clearly identify anddistinguish between the interests of the parent and interests of the noncontrolling owners. SFAS 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” (“SFAS 161”).SFAS 161 enhances disclosures about the Company’s derivative and hedgingactivities and thereby improves the transparency of financial reporting. SFAS161 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 SFAS 161 on its financialposition, results of operations or cash flows.

 

On October 10, 2008,the FASB issued FSP No. SFAS 157-3, “Determining the Fair Value of aFinancial Asset When the Market for That Asset Is Not Active.” (“FSP SFAS 157-3”)clarifies the application of SFAS No. 157, “Fair Value Measurements,” in amarket that is not active and provides an example to illustrate keyconsiderations in determining the fair value of a financial asset when themarket for that financial asset is not active. FSP SFAS 157-3 is effectiveimmediately, including prior periods for which financial statements have notbeen issued. The Company is currently evaluating the potential impact of theadoption of FSP SFAS 157-3 on its financial position, results of operations orcash flows.

 

**(7)****          ****Mergers**

 

**A.****           ****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 Viriumcontinuing as the surviving company and a wholly-owned subsidiary of theCompany (the “Merger”).  Pursuant to the Merger Agreement, each share ofVirium common stock outstanding at the Effective Time was converted into theright to receive 0.89387756 shares of the Company’s common stock (the “MergerConsideration”) resulting in an aggregate of 22,899,206 shares of MacroChemcommon stock being issued in the Merger. The fair value of the shares issued onthe closing date to the stockholders of Virium was $6,869,618.

 

15

----

Table of Contents

 

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   MacroChem common stock.  Aftergiving effect to the Merger, these vested  warrants, which expire atvarious dates from 2012 to 2013, are   exercisable to purchase446,938 shares of MacroChem common stock at an exercise price of $0.671 and223,469 shares of MacroChem common stock at an exercise price of $1.119 pershare.  As described in more detail below, MacroChem also assumedconvertible 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 principal balance of$100,000 together with accrued and unpaid interest thereon to the remainingholder of the First Convertible Note.   Additionally, the FirstConvertible Note was repaid, in part, with funds from new holders ofconvertible promissory notes whose notes mature on December 6, 2008. Thenew promissory notes have a principal amount of $400,000 and a warrant topurchase 100,000 shares of common stock at $.01.  The fair value of thewarrants issued of $24,000 is recorded as debt discount and are being amortizedto interest expense over the term of the debt. The notes have a 12% interestrate with accrued interest due on or prior to the 5 th  day of each calendar month. Thesenotes are due to mature on the earlier of  1) closing of the nextfinancing 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 common stock suchthat each Second Convertible Note holder will be entitled to acquire shares ofMacroChem Common Stock at $0.8950 per share. Additionally, upon written consentto the borrower, simultaneously with the next round of financing, the holdershave the ability to convert the entire outstanding principal and all accruedinterest into shares. The conversion price will be equal to 50% of thequalified offering price.

 

In June 2008, aprincipal amount of $425,000 of the Second Convertible Notes were rolled forwardto a maturity of December 31, 2008, subject to certain conditions and theCompany repaid holders of the Second Convertible Notes a principal amount of$75,000 and accrued interest of $4,568.  To induce the holders to extendthe maturity, the Company issued 212,500 warrants to purchase common stock at$.01. The fair value of the warrants issued of $51,053 is recorded as debtdiscount and will be amortized to interest expense over the term of the debt.

 

Prior to the mergeragreement,, SCO Capital Partners, LLC (“SCO LLC”) together with its affiliatesBeach Capital LLC, SCO Securities LLC and SCO Capital Partners, L.P.(collectively with SCO LLC, “SCO”) was the owner of the outstanding commonstock of MacroChem, including warrants to purchase certain shares, and alsoheld a majority of the outstanding stock of Holdings and warrants to purchase112,500 shares of Virium common stock. Pursuant to a Director DesignationAgreement dated as of October 1, 2007 between MacroChem and SCO LLC, SCOLLC has the right to designate two individuals to serve on MacroChem’s board ofdirectors for so long as SCO holds 20% of MacroChem’s outstanding commonstock.  The current SCO director designees are Jeffrey B. Davis and MarkJ. Alvino.  Mr. Davis is currently the president of SCO SecuritiesLLC and Chief Executive Officer of Access Pharmaceuticals, Inc. Prior tothe Effective Date, Mr. Davis 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.

 

16

----

Table of Contents

 

Pursuant to the terms ofthe Merger Agreement, at  the Effective Time , all members of the SpecialCommittee, namely, John L. Zabriskie, Michael A. Davis, Paul S. Echenberg, andPeter G. Martin resigned from the board of directors of MacroChem.

 

Immediately followingthese resignations, David P. Luci and Dr. James Pachence were appointed tothe 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 stockoption grants that our Compensation Committee from time to time deemsappropriate. On June 26, 2008, Dr. James Pachence resigned from theoffice of Chief Executive Officer of the Company and resigned from his positionas a member of our board of directors, in each case, effective immediately.

 

The acquisition of Viriumon April 18, 2008 was accounted for by the Company under the purchasemethod of accounting in accordance with Statement of Financial AccountingStandards No. 141 “ Business Combinations”. Under the purchase method,assets acquired 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 $9,656,794, 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 $0.30 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 formaresults are not necessarily indicative of results that would have occurred hadthe acquisition been in effect for the periods presented, nor are theynecessarily indicative of future results.

 
| ** **                                                      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net loss                                                        |       | $                                                        | (794,321   | )                                                       | $          | (3,605,005 | ) | $ | (10,125,596 | ) | $ | (15,151,486 | ) |
| Net loss per  common share (basic and diluted)                  |       | $                                                        | (0.02      | )                                                       | $          | (0.14 | ) | $ | (0.22 | ) | $ | (0.58 | ) |
| Weighted average  common shares outstanding (basic and diluted) |       | 45,837,547                                               |       | 26,580,081                                              |       | 45,714,287 |   | 26,233,818 |   |

 

(a) The nine-months endedSeptember 30, 2008 and 2007 includes a non-recurring charge of $9,656,794 forin-process research and development.

 

**(8) ****       ****Merger -AccessPharmaceuticals, Inc.**

 

On July 10, 2008,Access Pharmaceuticals, Inc. (OTC BB: ACCP.OB) announced it had signed anagreement and plan of merger with MacroChem, pursuant to which MacroChem isexpected to be merged with and into a wholly-owned subsidiary of AccessPharmaceuticals Inc. The merger transaction is expected to close in the fourthquarter of 2008.  Holders of MacroChem common shares and inthe moneyMacroChem warrants will receive an aggregate of 2,500,000 shares of commonstock of Access as merger consideration at the closing of the merger. All otheroptions and warrants of MacroChem which are unexercised at the Effective Timeof the merger shall automatically be cancelled and void.

 

**(9) ****       ****Note Purchase Agreement**

 

On August 27, 2008,the Company entered into a Note Purchase Agreement with Access, pursuant towhich Access has loaned us an initial loan amount of $225,000 and agreed toloan additional funds to us as required to operate the Company’s business.  The note is due upon the earlier of December31, 2008 or the date of termination of the agreement and plan of the mergertransaction.  The Company agreed to payinterest to Access at the rate of 10% per annum.

 

17

----

Table of Contents

 

**Item 2.****           ****Management’s Discussionand Analysis of 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 be identified by theuse of forward-looking words or phrases such as “anticipate,” “believe,” “could,”“expect,” “intend,” “look forward,” “may,” “planned,” “potential,” “should,” “will,”and “would.”  These forward-looking statements reflect our currentexpectations and are based upon currently available data. The PrivateSecurities Litigation Reform Act of 1995 provides a “safe harbor” for such forward-lookingstatements. In order to comply with the terms of the safe harbor, we note thata variety of factors could cause actual results and experience to differmaterially from the anticipated results or other expectations expressed in theforward-looking statements. These factors include, but are not limited to: ourhistory of operating losses, our decision to discontinue research anddevelopment activities and our need for additional external financing; our needfor significant additional product development efforts and additionalfinancing; technological uncertainty relating to transdermal drug deliverysystems; the early stage of development of our proposed products; the lack ofsuccess of our prior development efforts; uncertainties related to clinicaltrials of our proposed products; uncertainties relating to governmentregulation and regulatory approvals; our dependence on third parties for theFDA application process; uncertainties regarding market acceptance of ourproduct candidates; uncertainties regarding the potential health risks ofhormone replacement therapies; our ability to identify and obtain rights toproducts or technologies in order to build our portfolio of product candidates;our ability to recruit additional key employees; our limited personnel and ourdependence on continued access to scientific talent; no assurance of ourentering into license arrangements; our lack of laboratory facilities andscientific personnel and uncertainties regarding our reliance on third partiesto conduct research and development activities for our technologies and productcandidates; uncertainties relating to competition, patents and proprietarytechnology; our dependence on third parties to conduct research and developmentactivities; our dependence on third-party suppliers and manufacturers;uncertainties relating to risks of product liability claims, lack of productliability insurance, and expense and difficulty of obtaining adequate insurancecoverage; our majority shareholders, who own a large portion of our votingstock, could control company decisions and could substantially lower the marketprice of our common stock if they were to sell large blocks of our common stockin the future; uncertainty of pharmaceutical pricing and related matters; volatilityof our stock price; the effect that our quotation on the OTC Bulletin Boardwill have on the liquidity of our common stock; and dilution of our shares as aresult of our contractual obligation to issue shares in the future. Additionalinformation on these and other factors which could affect the Company’s actualresults and experience are included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007 and, in particular, the sectionentitled “Risk Factors”.

 

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

 

18

----

Table of Contents

 

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 September 30, 2008, our portfolio of proprietary productcandidates are based on our drug delivery technologies: SEPA, MacroDerm andDermaPass. Our SEPA topical drug delivery technology (SEPA is an acronym for “SoftEnhancement of Percutaneous Absorption,” where “soft” refers to thereversibility of the skin effect, and “percutaneous” means “through the skin”)enhances the efficiency and rate of diffusion of drugs into and through theskin. Our patented MacroDerm drug delivery technology encompasses a family oflow to moderate 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 activepharmaceutical ingredients. Our product candidates include two clinical stageinvestigational new drugs: EcoNail, for the treatment of fungal infections ofthe nails and pexiganan, for the treatment of mild diabetic foot infection(DFI). We believe that products incorporating our drug delivery technologiesmay allow selected drugs to be administered more effectively and with improvedpatient compliance compared to alternative methods of drug administration, suchas ingestion and injection.

 

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 September 30,2008, we had an accumulated deficit of $100,649,600. 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 and administrative efforts;     |
|   |   |                                                                   |
| · |   | our ability to raise  additional capital;                              |
|   |   |                                                                   |
| · |   | the signing of licenses  and product development agreements;           |
|   |   |                                                                   |
| · |   | the timing of revenues  recognized pursuant to license agreements; and |
|   |   |                                                                   |
| · |   | the achievement of  milestones by licensees.                           |

 

19

----

Table of Contents

 

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 10,2008. As of September 30, 2008, our existing cash, cash equivalents andshort term investments totaled $32,879. 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, contract research organizations and manufacturers  in connection with our |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|

pre-clinical and clinicaltrials;
|   |   |                                                    |
|--------|--------|---------------------------------------------------------|
| · |   | costs associated with  conducting our clinical trials;  |
|   |   |                                                    |
| · |   | costs of developing and  obtaining regulatory approvals |

 

20

----

Table of Contents

 

·          allocablecosts, 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 September 30, 2008, wespent $385,997 on research and development costs  primarily related to the clinical trial forEconail. For the three month period ended September 30, 2007, we spent$490,788 on research and development, including $127,913 in costs associatedwith a clinical trial for Econail, and $314,284 in costs associated with the in licensing of Suponex (pexiganan acetate)and $48,591 in costs not specifically tracked to a project.

 

For the nine-month periodended September 30, 2008, we spent $916,940 on research and developmentincluding $614,700 in costs associated with a clinical trial for Econail,$295,110 in costs associated with the in-licensing of pexiganan acetate fromGeneara, and $7,130 in costs not specifically tracked to a project. Opteronewas not in clinical trial in 2008.  For the nine months ended September,2007 we spent $1,047,187 on research and development, including $592,742 incosts associated with a clinical trial for Econail and $314,824 in costsassociated with the in licensing of Suponex (pexignan acetate) and $140,861 incosts not specifically 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 anduncertainties, we are unable to predict with any certainty the period in whichmaterial net cash inflows from these projects could be expected to commence orthe completion 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 andadministrative expenses consist primarily of salaries and other related costsfor personnel, marketing and promotion, professional fees and facilities costs.Assuming we are able to raise sufficient capital, we anticipate that marketing,general and administrative expenses will increase over the next several yearsas we begin, when appropriate, to license, partner, or market our productcandidates if and when 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

 

21

----

Table of Contents

 

policies and methods thataffect the judgments and estimates used in the preparation of our condensedconsolidated financial statements.

 

*Researchand Development*. Research and development costs are expensedas incurred.

 

*PatentAssets*. We defer costs and expenses incurred in connectionwith pending patent applications. We amortize costs related to successfulpatent applications over the estimated useful lives of the patents using thestraight-line method. We charge accumulated patent costs and deferred patentapplication costs related to patents that are considered to have limited futurevalue to operations. Estimates we use to determine the future value of deferredpatent costs include analysis of potential market size, time and cost tocomplete clinical trials, anticipated interest in our products and potentialvalue for licensing or partnering opportunities.

 

*DeferredTaxes*. As part of the process of preparing our financialstatements we are required to estimate our income taxes in each of thejurisdictions in which we operate. This process involves estimating our actualcurrent tax exposure together with assessing temporary differences resultingfrom differing treatments of items for tax and accounting purposes. We haverecorded a valuation allowance to fully offset against these otherwiserecognizable net deferred tax assets due to the uncertainty surrounding thetiming of the realization of the tax benefit. In the event that we determine inthe future that we will be able to realize all or a portion of the net deferredtax benefit, an adjustment to deferred tax valuation allowance would increasenet income in the period in which such a determination is made. The utilizationof net operating loss carryforwards and credits available to be used in anygiven year may be limited in the event of significant changes in ownershipinterest, as defined.

 

*WarrantLiability.* Based on certain terms in the warrants that weissued in connection with the sale of our Series C Cumulative ConvertiblePreferred Stock, we determined that the warrants should be classified as aliability and valued at fair market value each reporting period, with thechanges in fair value recorded in earnings, in accordance with EITF 00-19, “Accountingfor Derivative Financial Investments Indexed to, and Potentially Settled in, aCompany’s Own Stock.”  We will continue to evaluate the warrants underEITF 00-19 to determine when, if ever, they meet certain criteria under EITF00-19 for permanent equity.

 

*Stock-BasedCompensation.*  On January 1, 2006, the Companyadopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-BasedPayment,” using the modified prospective method, which requires measurement ofcompensation cost for all stock awards at fair value on the date of grant andrecognition of compensation over the requisite service period for awardsexpected to vest. The fair value of stock options is estimated using theBlack-Scholes valuation model, and the fair value of restricted stock units isdetermined based on the number of shares granted and the quoted price of theCompany’s common stock on the date of grant. Such value is recognized asexpense over the requisite service period, net of estimated forfeitures, usingthe straight-line attribution method. The estimate of awards that willultimately vest requires significant judgment, and to the extent actual resultsor updated estimates differ from the Company’s current estimates, such amountswill be recorded as a cumulative adjustment in the period estimates arerevised. The Company considers many factors when estimating expectedforfeitures, including types of awards, employee class and historical employeeattrition rates. Actual results, and future changes in estimates, may differsubstantially from the Company’s current estimates.

 

22

----

Table of Contents

 

**Resultsof Operations**

 

We had $1,326 and norevenues for the three- month periods ended September 30, 2008 and 2007,respectively, and had $2,652 and no revenues for the nine- month periods ended September 30,2008 and 2007, respectively. The increases in revenue is due to the recognitionof an up-front fee of $50,000 assumed from Virium merger. This fee is beingrecognized over life of the agreement. For the year ending December 31,2008 and the foreseeable future, we expect to have any meaningful revenues.

 

       For the three- month period ended September 30, 2008, research anddevelopment costs decreased $104,791, or 21% to $385,997 from $490,788 in thethree- month period ended September 30, 2007. The decrease is primarilyattributable to the completion of previous clinical trials.

 

For the nine- monthperiod ended September 30, 2008, research and development costs decreasedby $130,247, or 12 % to $916,940 from $1,047,187 in the nine- month periodended September 30, 2007. This decrease is primarily attributable to thedecrease in spending on clinical trials as well as a decrease in generalresearch and development consulting costs.

 

For the three- monthperiod ended September 30, 2008, marketing, general and administrativecosts decreased by $109,524, or 13% to $742,401 from $851,925 in the three-month period ended September 30, 2007. This decrease is primarilyattributable to a decrease in public relation fees of $88,030 and a decrease inofficers’ salaries by $57,093. This increase was partially offset by anincrease in office rents of $55,548

 

For the nine- monthperiod ended September 30, 2008, marketing, general and administrativecosts increased by $208,266, or 8% to $2,962,453 from $2,754,187 in the nine- monthperiod ended September 30, 2007. The increase is primarily attributable toan increase in stock based compensation of $242,389, severance payments of$158,786, financial advisory services of $101,804 and rent expense of $114,489.This increase was partially offset by decreases in public relations fees of$237,390, patent search fees of $119,642 and franchise tax fees of $42,260.

 

Other income and expensedecreased by $270,167 due to a gain of $332,751 in the three- month period ended September 30, 2008compared with a gain of  $602,918 in thethree- month period ended September 30, 2007. The decrease is primarilyattributable to a decrease in the loss associated with the change in value ofthe warrant liability of  $177,984 forthe three- month period ended September 30, 2008. Interest expenseincreased by $83,373 in the three- month period ended September 30, 2008from $0 in the three- month period ended September 30, 2007. The increasein interest expense is payments due to debt holders assumed from the Viriummerger agreement.

 

Other income and expenseincreased by $4,798,719 due to a gain of $3,731,913 in the nine- month periodended September 30, 2008 compared with a loss of $1,066,806 in the nine-month period ended September 30, 2007. The increase is primarilyattributable to an increase in the gain associated with the change in value ofthe warrant liability of $5,080,602 for the nine month period ended September 30,2008. Interest expense increased by $186,856 in the nine- month period ended September 30,2008 from $0 in the nine- month period ended September 30, 2007. Theincrease in interest expense is payments due to debt holders assumed from theVirium merger agreement.

 

     In-process research and development costs of $9,656,794 are attributed to theacquisition of Virium Pharmaceuticals Inc. in April of 2008. Theacquisition costs are comprised of $6,869,618 related to the calculated valueof 22,899,206 shares of the Company’s stock issued to Virium shareholdersvalued at $.30 per share, $2,403,916 of net liabilities and assets assumed aspart of the merger, $143,020 related to the calculated value of 670,408warrants issued to Virium shareholders and $240,240 in transaction costs.

 

For the reasons describedabove, the Company’s  condensedconsolidated financial statements reflect a net loss of $794,321 in the three-month period ended September 30, 2008 compared with a net loss of $739,795in the three- month period ended September 30, 2007. For the nine- monthperiod ended September 30, 2008, the Company’s condensed consolidated financialstatements reflect a net loss of $9,801,622 compared with a net loss of$4,868,180 for the nine- months ended September 30, 2007.

 

**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 September 30,2008, working capital was approximately $(2,896,505), compared to $1,613,120 atSeptember 30, 2007. The decrease in our working capital reflects use offunds 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

 

23

----

Table of Contents

 

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 September 30,2008, we had $32,879 in cash, cash equivalents and short-term investments. On July 10,2008, the Company entered into an agreement and plan of merger with AccessPharmaceuticals 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” (“SFAS 157”). SFAS157 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. SFAS No. 157-2, “EffectiveDate of FASB Statement

 

24

----

Table of Contents

 

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 SFAS157 for all financial assets and liabilities required to be measured at fairvalue on a recurring basis, prospectively from January 1, 2008. Theapplication of SFAS 157 did not have a significant impact on the Company’sfinancial position, results of operations or cash flows.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – including an amendment of FASB 115” (“SFAS 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. SFAS 159 also establishesadditional disclosure requirements. SFAS 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 SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS141R”). SFAS 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. SFAS 141R also establishes disclosure requirementsto enable the evaluation of the nature and financial effects of the businesscombination. SFAS 141R is effective beginning January 1, 2009. The Companyis currently evaluating the potential impact of the adoption of SFAS 141R onits financial 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” (“SFAS160”). SFAS 160 establishes accounting and reporting standards for ownershipinterests in subsidiaries held by the parties other than parent, the amount ofthe 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. SFAS 160 also establishes disclosure requirements that clearlyidentify and distinguish between the interests of the parent and interests ofthe non controlling owners. SFAS 160 is effective for the Company beginning January 1,2009. The Company is currently evaluating the potential impact of the adoptionof SFAS 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” (“SFAS 161”). SFAS161enhances disclosures about the Company’s derivative and hedging activities andthereby improves the transparency of financial reporting. SFAS 161 is effectivefor financial statements issued for fiscal years and interim periods beginningafter November 15, 2008. The Company is currently evaluating the potentialimpact of the adoption of SFAS 161 on its financial position, results ofoperations or cash flows.

 

On October 10, 2008,the FASB issued FSP No. SFAS 157-3, “Determining the Fair Value of aFinancial Asset When the Market for That Asset Is Not Active.” FSP SFAS 157-3clarifies the application of SFAS No. 157, “Fair Value Measurements,” in amarket that is not active and provides an example to illustrate keyconsiderations in determining the fair value of a financial asset when themarket for that financial asset is not active. FSP SFAS 157-3 is effectiveimmediately, including prior periods for which financial statements have notbeen issued. The Company is currently evaluating the potential impact of theadoption of SFAS 157-3 on its financial position, results of operations or cashflows.

 

25

----

Table of Contents

 

**Mergers.**

 

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.

 

On July 10, 2008,Access Pharmaceuticals, Inc. (OTC BB: ACCP.OB) announced it hadsigned an agreement and plan of merger with MacroChem pursuant to whichMacroChem is expected to be merged with and into a wholly-owned subsidiary ofAccess. The merger transaction is expected to close in the fourth quarter of2008.  Holders of MacroChem common shares and in- the- money MacroChemwarrants will receive an aggregate of 2,500,000 shares of common stock ofAccess Pharmaceuticals as merger consideration. All other options and warrantsof MacroChem which are unexercised at the Effective Time of the merger shallautomatically be cancelled and void.

 

26

----

Table of Contents

 

**Other Events.**

 

On August 27, 2008,we entered into a Note Purchase Agreement with Access, pursuant to which Accesshas loaned us an initial loan amount of $225,000 and agreed to loan additionalfunds to us as required to operate our business.  The note is due upon the earlier of December31, 2008 or the date of termination of the agreement and plan of the mergertransaction.  We have agreed to payinterest to Access at the rate of 10% per annum.

 

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

 

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

 

As of September 30,2008, we were exposed to market risks, which relate primarily to changes inU.S. interest rates. Our cash equivalents and short-term investments aresubject to interest rate risk and will decline in value if interest ratesincrease. Due to the short duration of these financial instruments, generallyone year or less, changes in interest rates would not have a material effect onour financial position. A hypothetical 10% change in interest rates would nothave a material effect on our Condensed Consolidated Statements of Operationsor Cash Flows for the three and nine months ended September 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 a lack of segregation of duties atthe Company due to the small number of employees dealing with generaladministrative and financial matters. This constitutes a material weakness infinancial reporting. However, management has addressed these issues, in part,by appointing a financial controller who began employment with the Company in May 2008. Management will continue to evaluate the segregation of duties specifically andthe finance and accounting function generally.

 

27

----

Table of Contents

 

There were no changes inour internal control over financial reporting that occurred during the quarterended September 30, 2008 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

**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.

 

***The Company may not continue as a going concern if themerger with Access Pharmaceuticals is not consummated.***

 

The Company signed the merger agreement with AccessPharmaceuticals on July 10, 2008 and expects to close the transaction inthe fourth quarter of 2008 at which time the Company would become awholly-owned subsidiary of Access.  If forany reason the merger transaction is not consummated, the Company may not beable to continue as a going concern because the Company no longer has anysignificant cash resource to fund operations. If the Company cannot continue as a going concern, you will lose all ora substantial portion of any investment in the Company.

 

***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 prior topublic 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,guidance or interpretations will change, and what the impact of such changes,if any, may be.

 

28

----

Table of Contents

 

**Item6.        Exhibits.**

 

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

 
| 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. |

 

29

----

Table of Contents

 

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)                                                    |
|                   |                                                            |
| November 19, 2008 | /s/  David P.  Luci                                   |
|                   | David P. Luci                                                   |
|                   |   (Principal  Executive & Financial Officer) |
|                   |                                                            |
|                   | /s/  Lawrence  Reilly                                 |
|                   | Lawrence Reilly                                                 |
|                   |   (Principal  Accounting Officer)                     |

 

30

----

Table of Contents

 

**EXHIBIT INDEX**

 

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

 
| 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. |

 

31

----