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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2004
or
[ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _________
Commission File Number 0-9314
ACCESS PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 83-0221517
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(State of Incorporation) (I.R.S. Employer I.D. No.)
2600 Stemmons Freeway, Suite 176, Dallas, TX 75207
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (214) 905-5100
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, One Cent ($0.01)
Par Value Per Share American Stock Exchange
- ----------------------------- -------------------------------------------
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an Accelerated Filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the outstanding voting stock held by
non-affiliates of the registrant as of June 30, 2004 was approximately
$85,395,000.
As of March 20, 2005 there were 15,524,734 shares of Access Pharmaceuticals,
Inc. Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of Registrant's Definitive Proxy
Statement filed with the Commission pursuant to Regulation 14A in connection
with the 2005 Annual Meeting are incorporated herein by reference into Part III
of this report. Other references incorporated are listed in the exhibit list in
Part IV of this report.
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PART I
ITEM 1. BUSINESS
This Form 10-K (including the information incorporated by reference) contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties. These statements include
without limitations statements relating to anticipated product approvals and
timing thereof, the terms of future licensing arrangements, our ability to
secure additional financing for our operations and our expected cash burn rate.
These statements relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expects," "plans," "could," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
or other comparable terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including the
risks outlined under "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by such forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of filing this Form 10-K to conform
such statements to actual results.
BUSINESS
Access Pharmaceuticals, Inc. (Access) is a Delaware corporation. We are an
emerging pharmaceutical company focused on developing both novel low development
risk product candidates and technologies with longer-term major product
opportunities.
Together with our subsidiaries, we have proprietary patents or rights to seven
drug delivery technology platforms:
- synthetic polymer targeted delivery,
- vitamin mediated targeted delivery
- vitamin mediated oral delivery,
- bioerodible cross-linker technology,
- mucoadhesive disc technology,
- hydrogel particle aggregate technology, and
- Residerm(R) topical delivery.
In addition, we have acquired the amlexanox patents and technology for the
treatment of mucosal and skin disorders.
We use our proprietary technology to develop products and product candidates.
Our patents and trade secrets protect our marketed products, amlexanox 5% paste
(marketed under the trade names Aphthasol(R) and Aptheal(R)) and Zindaclin(R),
and our product candidates that are currently in the drug development phase,
DACH platinum (AP 5346), polymer platinate (AP 5280) and OraDisc(TM).
We are marketing amlexanox 5% paste, the first U.S. Food and Drug Administration
(FDA) approved product for the treatment of canker sores, under the trade name
Aphthasol(R) in the United States. In September 2001, ProStrakan Limited, our
United Kingdom partner, received marketing authorization to market amlexanox 5%
paste in the U. K. under the trade name Aptheal(R). We have received marketing
approval in 10 European Union countries following completion of the Mutual
Recognition Procedure (MRP). Approval to market was granted in Austria, Germany,
Greece, Finland, Ireland, Luxembourg, The Netherlands, Norway, Portugal, and
Sweden. We are developing new formulations and delivery forms of amlexanox,
including mucoadhesive disc delivery. In 2004, we received approval of our new
drug application for OraDisc(TM) A from the United States Food and Drug
Administration (FDA). OraDisc(TM) A is an improved delivery system for
amlexanox. The OraDisc(TM) technology is a proprietary mucoadhesive patch that
gradually erodes and releases an active ingredient when applied to the inside of
the mouth.
In addition, ProStrakan has used our patented Residerm(R) technology to develop
a zinc clindamycin formulation for the treatment of acne. ProStrakan began
marketing zinc clindamycin in the United Kingdom under the trade name
1
Zindaclin(R) in March 2002. The process to achieve marketing authorization for
Zindaclin(R) throughout Europe has now been completed, with approvals in most
European Union countries including the new member states and several
non-European countries. We anticipate that in the next twelve months approvals
will be obtained in additional other countries.
KEY DEVELOPMENTS
As of March 30, 2005 the Company executed a Standby Equity Distribution
Agreement (SEDA) with Cornell Capital Partners. Under the SEDA, the Company may
issue and sell to Cornell Capital Partners common stock for a total purchase
price of up to $15,000,000. The purchase price for the shares is equal to their
market price, which is defined in the SEDA as 98% of the lowest volume weighted
average price of the common stock during a specified period of trading days
following the date notice is given by the Company that it desires to access the
SEDA. Further, we have agreed to pay Cornell Capital Partners, L.P. 3.5% of the
proceeds that we receive under the Equity Line of Credit. The amount of each
draw down is subject to a maximum amount of $1,000,000. The terms of the SEDA do
not allow us to make any draw downs if the draw down would cause Cornell Capital
to own in excess of 9.9% of our outstanding shares of common stock. The Company
believes that because of the ability of Cornell Capital to sell shares under a
registration statement and as a result of Cornell Capital's business model
Access does not believe that Cornell would accumulate 9.9% of the outstanding
common stock of the Company. Upon closing of the transaction, Cornell Capital
Partners will receive a one-time commitment fee of 146,500 shares of the
Company's common stock. On the same date, the Company entered into a Placement
Agent Agreement in escrow with Newbridge Securities Corporation, a registered
broker-dealer. Pursuant to the Placement Agent Agreement, upon closing of the
transaction the Company will pay a one-time placement agent fee of 3,500 shares
of common stock.
In addition, as of March 30, 2005, the Company executed a Securities Purchase
Agreement with Cornell Capital Partners and Highgate House Funds. Under the
Securities Purchase Agreement, upon closing Cornell Capital Partners and
Highgate House Funds are obligated to purchase an aggregate of $2,633,000
principal amount of Secured Convertible Debentures from the Company (net
proceeds to the Company of $2,360,000). The Secured Convertible Debentures
accrue interest at a rate of 7% per year and mature 12 months from the issuance
date with scheduled monthly repayment commencing on November 1, 2005 to the
extent that the Secured Convertible Debenture has not been converted to common
stock. The Secured Convertible Debenture is convertible into the Company's
common stock at the holder's option any time up to maturity at a conversion
price equal to $4.00. The Secured Convertible Debentures are secured by all of
the assets of the Company. The Company has the right to redeem the Secured
Convertible Debentures upon 3 business days notice for 110% of the amount
redeemed. Pursuant to the Securities Purchase Agreement, the Company is required
to issue to the holders an aggregate of 50,000 shares of common stock of the
Company.
Each of the SEDA, Security Purchase Agreement and related agreements are in
escrow pending our filing of this Form 10K and issuance of shares of common
stock required to be issued under the agreement.
OraDisc(TM) A was approved by the FDA in September 2004.
This successful development is an important technology milestone that supports
the development of the OraDisc(TM) range of products. To achieve OraDisc(TM) A
approval, in addition to performing the necessary clinical studies to prove
efficacy, we conducted an irritation study, a 28-day safety study and drug
distribution studies. Additionally, we demonstrated safety in patients down to
12 years of age. Patients in the 700 patient clinical study and 28-day safety
study completed a survey that produced very positive results with regard to
perceived effectiveness, ease of application, ability of the disc to remain in
place and purchase intent. These data give strong support to our overall
development program. The survey data confirms market research studies that
indicate a strong patient acceptance of this delivery device.
Now that OraDisc(TM) A is approved as a prescription product, we intend to move
this product to market as rapidly as possible. Initially, we plan either alone
or with a marketing partner to embark on a dental campaign to gain professional
endorsement for this product. Ultimately, it is our objective to move this
product from prescription status to an over-the-counter consumer product. To
accomplish these commercialization objectives, we intend to out license
OraDisc(TM) A. In addition to royalty payments, we believe that a licensing
agreement could include an upfront licensing payment and future significant
payments on the achievement of milestones.
It is also our objective to gain regulatory approval for OraDisc(TM) A in all
the major global markets. In Western Europe the OraDisc(TM) A product has been
licensed and we are in the process of extending our licensing coverage to cover
all major global markets.
2
On February 24, 2004 we closed a private placement sale of our common stock
pursuant to which we sold 1,789,371 shares of our common stock at a per share
price of $5.40. We received gross proceeds of $9,663,000 from this offering and
had expenses of $647,000. The investors also received 5 year warrants to
purchase 447,344 shares of our common stock at an exercise price of $7.10 per
share and the placement agents received warrants in the offering to purchase
156,481 shares of our common stock at an exercise price of $5.40 per share.
On January 8, 2004 we announced that we had signed a licensing agreement with
Wyeth Consumer Healthcare, a division of Wyeth, granting Wyeth the North
American rights to develop and market an over-the-counter (OTC) product
utilizing our OraDisc(TM) technology pending any required regulatory approvals.
This agreement grants an exclusive license to market the OraDisc(TM) product in
the United States, Canada and Mexico, with additional rights to extend the
marketing rights worldwide.
We were incorporated in Wyoming in 1974 as Chemex Corporation, and in 1983 we
changed our name to Chemex Pharmaceuticals, Inc. We changed our state of
incorporation from Wyoming to Delaware on June 30, 1989. In 1996 we merged with
Access Pharmaceuticals, Inc., a private Texas corporation, and changed our name
to Access Pharmaceuticals, Inc. Our principal executive office is located at
2600 Stemmons Freeway, Suite 176, Dallas, Texas 75207; our telephone number is
(214) 905-5100.
PRODUCTS
We have used our drug delivery technology platforms to develop the following
products and product candidates:
MARKETED PRODUCTS
APHTHASOL(R) AND APTHEAL(R) (AMLEXANOX 5% PASTE)
Amlexanox 5% paste is the first drug approved by the FDA for the treatment of
canker sores. Independent market research indicates that more than 8 million
patients visit dentists per year in the United States with complaints of canker
sores. Current estimates indicate that approximately 20% of the U.S. adult
population suffers from canker sores.
We completed a Phase IV study in Ireland in November 2000 to determine if the
application of amlexanox 5% paste at the first sign or symptom of canker sores
can abort ulcer formation or further accelerate healing. The results confirmed
that amlexanox 5% paste was effective in preventing the formation of an ulcer
when used at the first sign or symptom of the disease. If this label extension
is approved by regulatory authorities it could provide a major marketing
opportunity to expand use of the product and to attract sufferers of canker
sores to contact medical practitioners to request the product.
On July 22, 2002, we acquired from GlaxoSmithKline the patents, trademarks and
technology covering the use of amlexanox for the treatment of mucosal and skin
disorders. The two major components of the acquisition are the US marketing
rights to amlexanox 5% paste, which is currently marketed for the treatment of
canker sores under the trademark Aphthasol(R), and the remaining worldwide
marketing rights for this indication which were the subject of a prior licensing
agreement between the companies.
Our amlexanox 5% paste is marketed in the US as Aphthasol(R). Block Drug Company
had manufactured the 5% amlexanox paste since the product was approved by the
FDA in 1996 in a FDA-approved Puerto Rico facility. At such time when we
acquired the US rights to Aphthasol(R), we entered into a Supply Agreement
whereby Block Drug Company was to produce Aphthasol(R) for us for a defined
period of time at its Puerto Rico facility. We were subsequently advised by
Block Drug Company that it was unable to comply with the terms of the Supply
Agreement and that it would not be able to produce Aphthasol(R) for us. Due to
Block Drug Company's production failure, we had sufficient product to supply
wholesalers only through June 2003. We selected Contract Pharmaceuticals Ltd.
Canada as our new manufacturer of amlexanox 5% paste and full scale production
was completed in September 2004. Aphthasol(R) was re-introduced in September
2004.
We licensed the exclusive United Kingdom and Ireland rights for the sale and
marketing of amlexanox 5% paste for the treatment of canker sores to ProStrakan
in August 1998. Under the terms of this license, ProStrakan was responsible
3
for and assumed all costs associated with the regulatory approval process,
including product registration, for amlexanox in the United Kingdom and the
European Union (EU). Additionally, ProStrakan will make milestone payments to us
on achievement of performance objectives and we will receive royalties on
product sales of amlexanox.
An international outlicensing program for amlexanox is ongoing. In addition to
our license agreement with ProStrakan, licensing agreements have been executed
with Zambon Group for France, Germany, Holland, Belgium, Luxembourg,
Switzerland, Brazil, Columbia and Italy; Meda AB for Scandinavia, the Baltic
states and Iceland; Laboratorios Esteve for Spain, Portugal and Greece; Mipharm
S.p.A. for Italy; Paladin Labs Inc. for Canada, EpiTan, Ltd. for Australia and
New Zealand, and Orient Europharma, Co., Ltd for Taiwan, Hong-Kong, Philippines,
Thailand and Singapore. Contract Pharmaceuticals Ltd. Canada has also been
selected as our European supplier of amlexanox 5% paste and has been approved
for European supply.
ProStrakan received marketing authorization for amlexanox 5% paste in the United
Kingdom in September 2001. ProStrakan's trade name for the product is
Aptheal(R). Approval to market was granted in Austria, Germany, Greece, Finland,
Ireland, Luxembourg, The Netherlands, Norway, Portugal, and Sweden. Approvals
were not received under the Mutual Recognition Procedure for France, Italy and
Belgium. We plan to reapply for approvals in such countries.
The Therapeutic Products Programme, the Canadian equivalent of the FDA, has
issued a notice of compliance permitting the sale of amlexanox 5% paste, called
Apthera(R), in Canada to Paladin Labs Inc., our Canadian partner.
RESIDERM(R) A GEL - ZINDACLIN(R) (ZINC-CLINDAMYCIN)
The complexing of zinc to a drug has the effect of enhancing the penetration of
the drug into the skin and the retention of the drug in the skin. This
phenomenon is called the "reservoir effect," and it makes zinc potentially
effective for the delivery of dermatological drugs. We have a broad patent
covering the use of zinc for such purposes. This technology is called
ResiDerm(R).
We have developed, in conjunction with ProStrakan, zinc clindamycin for the
treatment of acne which is marketed under the trade name Zindaclin(R). Topical
acne drugs constitute an approximately $750 million per year market and
clindamycin is a widely prescribed drug for the treatment of acne. Clinical
studies indicate that the addition of zinc results in Zindaclin(R) being as
effective applied once daily as the market leading clindamycin product applied
twice daily. The activity of zinc and clindamycin, the improved stability of the
product and the potential for zinc to overcome certain bacterial resistance are
other potential product benefits.
In February 1998, we licensed the exclusive worldwide rights for the
manufacturing, sales and marketing of zinc clindamycin pursuant to a license
agreement with ProStrakan. Under the terms of the license agreement, ProStrakan
has agreed to fund the development costs of zinc clindamycin and any additional
compounds developed utilizing our zinc patent, including product registrations.
We will share equally in all milestone payments received from the sublicensing
of the compound. In addition, we will receive a royalty on sales of products
based on this technology.
ProStrakan currently is marketing zinc clindamycin in the United Kingdom under
the trade name Zindaclin(R). The process to achieve marketing authorization for
Zindaclin(R) throughout Europe now has been completed, with approvals in most
European Union countries including the new member states and several
non-European countries. We anticipate that in the next twelve months approvals
will be obtained in additional countries. In addition, in May 2002 ProStrakan
signed a Licensing Agreement with Fujisawa GmbH, which granted a license to
Fujisawa for rights to market Zindaclin(R) in continental western Europe.
Additional licenses and or distribution agreements have been signed in other
countries with other companies.
Milestone Payments And Royalties By Product
The following table reflects aggregate milestone payments received through
December 31, 2004, aggregate possible milestone payments under agreements signed
as of December 31, 2004 and royalties received through December 31, 2004.
4
Milestones Royalties
Received through Aggregate Possible Received through
Product 12/31/04 Milestones 12/31/04
- ---------------------------- ---------------- ------------------ ----------------
Aphthasol(R) and OraDisc(TM) $ 1,376,000 $ 6,242,000 $ -
Zindaclin(R) $ 1,426,000 $ 1,168,000 $ 139,000
PRODUCTS IN DEVELOPMENT STATUS
POLYMER PLATINATE
Chemotherapy, surgery and radiation are the major components in the clinical
management of cancer patients. Chemotherapy is usually the primary treatment of
hematologic malignancies, which cannot be excised by surgery. Chemotherapy is
increasingly used as an adjunct to radiation and surgery to improve their
effectiveness and serves as the primary therapy for some solid tumors and
metastases. For chemotherapeutic agents to be effective in treating cancer
patients, however, the agent must reach the target cells in effective quantities
with minimal toxicity in normal tissues.
The current optimal strategy for chemotherapy involves exposing patients to the
most intensive cytotoxic regimens that they can tolerate and clinicians attempt
to design a combination of chemotherapeutic drugs, a dosing schedule and a
method of administration to increase the probability that cancerous cells will
be destroyed while minimizing the harm to healthy cells. Notwithstanding
clinicians' efforts, most current chemotherapeutic drugs have significant
shortcomings that limit the efficacy of chemotherapy. For example, certain
cancers are inherently unresponsive to chemotherapeutic agents. Alternatively,
other cancers may initially respond, but subgroups of cancer cells acquire
resistance to the drug during the course of therapy and the resistant cells may
survive and cause a relapse. Serious toxicity, including bone marrow
suppression, renal toxicity, neuropathy, or irreversible cardiotoxicity, are
some of the limitations of current anti-cancer drugs that can prevent their
administration in curative doses.
Currently, platinum compounds are one of the largest selling categories of
chemotherapeutic agents, with annual sales in excess of $2.0 billion. As is the
case with all chemotherapeutic drugs, the use of such compounds is associated
with serious systemic side effects. The drug delivery goal therefore is to
enhance delivery of the drug to the tumor and minimize the amount of drug
affecting normal organs in the body.
POLYMER PLATINATE (AP 5346) DACH PLATINUM
The extensive experience we have gained developing AP5280 has been applied to
extend our platinum developments to include the DACH form of platinum.
Oxaliplatin, another form of DACH platinum, which was initially approved in
France and in Europe in 1999 for the treatment of colorectal cancer is now also
being marketed in the United States and is generating worldwide sales in excess
of $1.5 billion annually. Carboplatin and Cisplatin, two approved platinum
chemotherapy drugs, are not indicated for the treatment of metastatic colorectal
cancer. Oxaliplatin, in combination with 5-flurouracil and folinic acid is
indicated for the first-line treatment of metastatic colorectal cancer in Europe
and the U.S. The colorectal cancer market is a significant opportunity as there
are over 500,000 reported new cases annually in the developed world, increasing
at a rate of approximately three percent per year.
Utilizing the biocompatible water-soluble polymer HPMA as a drug carrier, AP5346
links DACH platinum to the polymer in a manner which permits the selective
release of platinum in tumors. The polymer capitalizes on the biological
differences in the permeability of blood vessels at tumor sites versus normal
tissue. In this way, tumor selective delivery and platinum release is achieved.
The ability to inhibit tumor growth has been evaluated in more than ten
preclinical models. Compared with the marketed product Oxaliplatin, AP5346
showed superiority in a number of these models. Preclinical studies of the
delivery of platinum to tumors in an animal model have shown that, compared with
oxaliplatin at equitoxic doses, AP5346 delivers in excess of 16 times more
platinum to the tumor. An analysis of tumor DNA, which is the main target for
anti-cancer platinum agents, has shown that AP5346 delivers approximately 14
times more platinum to tumor DNA. Results from preclinical efficacy studies
conducted in the B16 and other tumor models have also shown that AP5346 is
superior to oxaliplatin in inhibiting the growth of tumors. An extensive
preclinical package has been developed supporting the development of AP5346.
5
In the first quarter of 2005 we completed a Phase I clinical study in a
multi-center study conducted in Europe, enrolled approximately 26 patients. The
reporting of this study is expected to be completed in the second quarter of
2005. The European trial was designed to identify the maximum tolerated dose,
dose limiting toxicities, the pharmacokinetics of the platinum in plasma and the
possible antitumor activity of AP5346. The open-label, non-randomized,
dose-escalation Phase I study was performed at two European centers. AP5346 was
administered as an intravenous infusion over one hour, once a week on days 1, 8
and 15 of each 28-day cycle to patients with solid progressive tumors. We have
obtained preliminary reports on results in 26 patients with a broad
cross-section of tumor types, with doses ranging from 80-1,280 mg Pt/m2.
Of the 26 patients, 10 were not evaluable for tumor response, principally due to
withdrawal from the study prior to completing the required cycle. Of the 16
evaluable patients, 2 demonstrated a partial response and 4 experienced stable
disease. One of the patients who attained a partial response had a melanoma with
lung metastasis; a CT scan revealed a tumor decrease of greater than 50%. The
other patient who responded had ovarian cancer; she had a reduction in lymph
node metastasis and remission of a liver metastasis. Also of note, a patient
with cisplatin resistant cervical cancer showed a short lasting significant
reduction in lung metastasis after 3 doses. However, due to toxicity, the
patient could not be retreated to determine whether the partial response could
be maintained.
We received clearance in January 2005 from the US Food and Drug Administration
for our Investigational New Drug Application (IND) for AP5346 allowing the
Company to proceed with a Phase I clinical trial for this drug candidate. We
plan to initiate a study of AP5346 in combination with fluorouracil and
leucovorin to evaluate drug safety and to establish a starting dose for future
Phase II studies utilizing this combination. Upon the successful completion of
this Phase I study, we plan to initiate a Phase II study to determine the
efficacy of AP5346 in combination with fluorouracil and leucovorin in colorectal
cancer patients compared with the oxaliplatin/fluorouracil/leucovorin
combination, which is used extensively to treat colorectal cancer.
Due to the superior pre-clinical and clinical results achieved relative to
AP5280, AP5346 is now our lead clinical candidate. Additionally, since
oxaliplatin has now been shown to have activity in solid tumors, in addition to
colorectal cancer, we believe that the opportunity for AP5346 has been further
expanded. Consequently, further development of AP5280 has been deferred pending
the clinical results achieved with AP5346.
ORADISC(TM)
Treatment of oral conditions generally relies upon the use of medications
formulated as gels and pastes, that are applied to lesions in the mouth. The
duration of effectiveness of these medications is typically short because the
applied dose is worn away through the mechanical actions of speaking, eating,
and tongue movement, and is washed away by saliva flow. To address these
problems, Access developed a novel, cost-effective, commercially-viable,
mucoadhesive film product that is bioerodible. This technology, known as
OraDisc(TM), comprises a multi-layered film having an adhesive layer, a
pre-formed film layer, and a coated backing layer. Depending upon the intended
application, a pharmaceutically active compound can be formulated within any of
these layers, providing for a wide range of potential applications. The disc is
simply applied by pressing it against the inner surface of the mouth. The disc
stays in place, eroding over a period of time, so that subsequent removal is
unnecessary. The disc delivers the drug over a period of time controlled by the
rate of erosion of the disc, which is in turn controlled by the formulation of
the backing layer.
OraDisc(TM) A was initially developed as a drug delivery system to treat canker
sores with the same active ingredient (amlexanox) that is used in Aphthasol(R).
We anticipate that higher amlexanox concentrations will be achieved at the
disease site, increasing the effectiveness of the product, called OraDisc(TM) A.
OraDisc(TM) A was approved by the FDA in September 2004.
This successful development is an important technology milestone which supports
the development of the OraDisc(TM) range of products. To achieve OraDisc(TM) A
approval, in addition to performing the necessary clinical studies to prove
efficacy, we conducted an irritation study, a 28-day safety study and drug
distribution studies. Additionally, we demonstrated safety in patients down to
12 years of age. Patients in the 700 patient clinical study and 28-day safety
study completed a survey which produced very positive results with regard to
perceived effectiveness, ease of application, ability of the disc to remain in
place and purchase intent. These data give strong support to our overall
development
6
program. The survey data confirms market research studies which indicate a
strong patient acceptance of this delivery device.
Now that OraDisc(TM) A is approved as a prescription product, we intend to move
this product to market as rapidly as possible. Initially, we plan to embark on a
dental campaign to gain professional endorsement for this product. Ultimately,
it is our objective to move this product from prescription status to an
over-the-counter consumer product. To accomplish these commercialization
objectives, we intend to out license OraDisc(TM) A. In addition to royalty
payments, we believe that a licensing agreement could include an upfront
licensing payment and future significant payments on the achievement of
milestones.
It is also our objective to gain regulatory approval for OraDisc(TM) A in all
the major global markets. In Western Europe the OraDisc(TM) A product has been
licensed and we are in the process of extending our licensing coverage to cover
all major global markets.
We have continued to develop the OraDisc(TM) technology, and we have generated
or are exploring additional prototype drug delivery products, including those
for pain palliation in the oral cavity, gingivitis, cough and cold treatment,
breath freshener, tooth whitening and other dental applications. In January
2004, we announced the signing of an agreement with Wyeth Consumer Healthcare
for the development of an OTC product based upon the OraDisc(TM) technology.
MUCOADHESIVE LIQUID TECHNOLOGY (MLT)
Mucositis is a debilitating condition involving extensive inflammation of mouth
tissue that affects an estimated 550,000 cancer patients in the United States
undergoing chemotherapy and radiation treatment. Any treatment that would
accelerate healing and/or diminish the rate of appearance would have a
significant beneficial impact on the quality of life of these patients and may
allow for more aggressive chemotherapy.
We filed an IND with the FDA in December 1999 and developed a Phase II protocol
to investigate a mouthwash formulation for the prevention and treatment of
mucositis in head and neck cancer patients treated with radiation with or
without chemotherapy. Over 90% of head and neck cancer patients treated with
radiation and chemotherapy experience mucositis. This study commenced in the
first quarter of 2000. We enrolled 58 patients in the initial study which was
performed at multiple sites throughout the United States.
In July 2001, we announced results from our Phase II randomized clinical study
of the prevention and treatment of mucositis. The data developed confirmed that
our mucoadhesive liquid technology (MLT) could represent an important
advancement in the management and prevention of mucositis.
The data were retrospectively compared with two historical patient databases to
evaluate the potential advantages that this technology may represent in the
prevention, treatment and management of mucositis. The patient evaluation was
conducted using the oral mucositis assessment scale, which qualifies the disease
severity on a scale of 0-5. Key highlights of the comparison with the historical
patient databases are as follows:
- the average severity of the disease was reduced by approximately 40%;
- the maximum intensity of the mucositis was approximately 35% lower;
and
- the median peak intensity was approximately 50% lower.
Given the results achieved with our MLT, and the fact that in the study an
amlexanox rinse showed no additional benefit, we do not plan to conduct
additional clinical studies evaluating amlexanox as a preventative product
candidate for mucositis. Following the completion of the Phase II study we
conducted additional formulation development work to optimize the MLT technology
prior to advancing clinical development. The topical application of the MLT was
tested for its ability to attenuate the course of radiation-induced oral
mucositis in an established hamster model. The study results clearly indicate
the ability to prevent the onset of ulcerative mucositis, or delay the onset and
reduce the severity of mucositis. Further clinical development of this program
has been placed on hold to focus our resources on our high potential cancer
therapeutics. Further development will be dependent on securing a strategic
partner.
7
DRUG DEVELOPMENT STRATEGY
A part of our integrated drug development strategy is to form creative alliances
with centers of excellence in order to obtain alternative lead compounds while
minimizing the overall cost of research. We have signed agreements with
ProStrakan for the delivery of topical therapeutic agents which exploit our zinc
patent. Additionally, certain of our polymer platinate technology have resulted
in part from a research collaboration with The School of Pharmacy, University of
London.
Our strategy is to initially focus on utilizing our technology in combination
with approved drug substances to develop novel patentable formulations of
existing therapeutic and diagnostic products. We believe that this will expedite
product development, both preclinical and clinical, and ultimately product
approval. To reduce financial risk and equity financing requirements, we are
directing our resources to the preclinical and early clinical phases of
development. Where the size of the necessary clinical studies and cost
associated with the later clinical development phases are significant, we plan
to outlicense to, or co-develop with, marketing partners our current product
candidates.
We will continue to expand our internal core capabilities of chemistry,
formulation, analytical methods development, clinical development, biology and
project management to maximize product opportunities in a timely manner. We
will, however, contract the manufacturing scaleup, certain preclinical testing
and product production to research organizations, contract manufacturers and
strategic partners. There will be some instances where there may be significant
cost savings for us to do some manufacturing scaleup (such as with our
OraDisc(TM) program) and preclinical testing. We will evaluate those instances
and may do the work ourselves in order to achieve cost savings. Given the
current cost containment and managed care environment both in the United States
and overseas and the difficulty for a small company to effectively market its
products, we do not currently plan to become a fully integrated pharmaceutical
company.
Consequently, we expect to form strategic alliances for product development and
to outlicense the commercial rights to development partners. By forming
strategic alliances with major pharmaceutical and diagnostic companies, we
believe that our technology can be more rapidly developed and successfully
introduced into the marketplace.
SCIENTIFIC BACKGROUND
The ultimate criteria for effective drug delivery is to control and optimize the
localized release of the drug at the target site and rapidly clear the
non-targeted fraction. Conventional drug delivery systems such as controlled
release, sustained release, transdermal systems and others are designed for
delivering active product into the systemic circulation over time with the
objective of improving patient compliance. These systems do not address the
biologically relevant issues such as site targeting, localized release and
clearance of drug. The major factors that impact the achievement of this
ultimate drug delivery goal are the physical characteristics of the drug and the
biological characteristics of the disease target sites. The physical
characteristics of the drug affect solubility in biological systems, its
biodistribution throughout the body, and its interactions with the intended
pharmacological target sites and undesired areas of toxicity. The biological
characteristics of the diseased area impact the ability of the drug to
selectively interact with the intended target site to allow the drug to express
the desired pharmacological activity.
We believe that our drug delivery technology platforms are differentiated from
conventional drug delivery systems in that they seek to apply a disease-specific
approach to improve the drug delivery process with formulations to significantly
enhance the therapeutic efficacy and reduce toxicity of a broad spectrum of
products.
CORE DRUG DELIVERY TECHNOLOGY PLATFORMS
Our current drug delivery technology platforms for use in cancer chemotherapy,
dermatology and oral disease are:
- Synthetic Polymer Targeted Drug Delivery Technology;
- Vitamin Mediated Targeted Delivery Technology;
- Vitamin Mediated Oral Delivery Technology;
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- Bioerodible Cross-Linker Technology;
- Mucoadhesive Disc Technology;
- Hydrogel Particle Aggregate Technology; and
- Residerm(R) Topical Delivery Technology.
Each of these platforms is discussed below:
SYNTHETIC POLYMER TARGETED DRUG DELIVERY TECHNOLOGY
In collaboration with The School of Pharmacy, University of London, we have
developed a synthetic polymer technology, which utilizes
hydroxypropylmethacrylamide with platinum, designed to exploit enhanced
permeability and retention, or EPR, at tumor sites to selectively accumulate
drug and control drug release. Many solid tumors possess vasculature that is
hyperpermeable, or leaky, to macromolecules. In addition to this enhanced
permeability, tumors usually lack effective lymphatic and/or capillary drainage.
Consequently, tumors selectively accumulate circulating macromolecules,
including, for example, up to 10% of an intravenous dose in mice. This effect
has been termed EPR, and is thought to constitute the mechanism of action of
styrene-maleic/anhydride-neocarzinostatin, or SMANCS, which is in regular
clinical use in Japan for the treatment of hepatoma. These polymers take
advantage of endothelial permeability as the drug carrying polymers are trapped
in tumors and then taken up by tumor cells. Linkages between the polymer and
drug can be designed to be cleaved extracellularly or intracellularly. The drug
is released inside the tumor mass while polymer/drug not delivered to tumors is
renally cleared from the body. Data generated in animal studies have shown that
the polymer/drug complexes are far less toxic than free drug alone and that
greater efficacy can be achieved. Thus, these polymer complexes have
demonstrated significant improvement in the therapeutic index of anti-cancer
drugs, including, for example, platinum.
VITAMIN MEDIATED TARGETED DELIVERY TECHNOLOGY
Most drugs are effective only when they reach a certain minimum concentration in
the region of disease, yet are well distributed throughout the body contributing
to undesirable side effects. It is therefore advantageous to alter the natural
biodistribution of a drug to have it more localized where it is needed. Our
vitamin mediated targeted delivery technology utilizes the fact that in many
diseases where there is rapid growth and/or cell division, the demand for
certain vitamins increases. By coupling the drug to an appropriate vitamin, the
vitamin serves as a carrier to increase the amount of drug at the disease site
relative to its normal distribution.
One application of this technology is in tumor targeting. The use of cytotoxic
drugs is one of the most common methods for treating a variety of malignancies
including solid and non-solid tumors. The drawbacks of chemotherapeutic
treatments, which include tumor resistance, cancer relapse and toxicity from
severe damage to healthy tissues, has fuelled a scientific quest for novel
treatments that are specifically targeted to malignant cells thus reducing
damage to collateral tissues.
The design of targeted therapies involves exploitation of the difference between
the structure and function of normal cells compared with malignant cells.
Differences include the increased levels of surface molecules on cancer cells,
which makes them more sensitive to treatment regimes that target surface
molecules and differences in blood supply within and around tumor cells compared
with normal cells.
Two basic types of targeting approaches are utilized, passive tumor targeting
and active tumor targeting.
- passive tumor targeting involves transporting anti-cancer agents through
the bloodstream to tumor cells using a "carrier" molecule. Many different
carrier molecules, which can take a variety of forms (micelles,
nanoparticles, liposomes and polymers), are being investigated as each
provides advantages such as specificity and protection of the anti-cancer
drug from degradation due to their structure, size (molecular weights) and
particular interactions with tumor cells. Our polymer platinate program is
a passive tumor targeting technology.
9
- active tumor targeting involves attaching an additional fragment to the
anticancer drug and the carrier molecule to create a new "targeted" agent
that will actively seek a complementary surface molecule to which it binds
(preferentially located on the exterior of the tumor cells). The theory is
that the targeting of the anti-cancer agent through active means to the
affected cells should allow more of the anti-cancer drug to enter the
tumor cell, thus amplifying the response to the treatment and reducing the
toxic effect on bystander, normal tissue.
Examples of active targeting fragments include antibodies, growth factors and
vitamins. Our scientists have specifically focused on using vitamin B12 and
folate to more effectively target anti-cancer drugs to solid tumors.
It has been known for some time that vitamin B12 and folic acid are essential
for tumor growth and as a result, receptors for these vitamins are up-regulated
in certain tumors. Vitamin B12 receptor over-expression occurs in breast, lung,
leukemic cells, lymphoma cells, bone, thyroid, colon, prostate and brain cancers
and some other tumor lines, while folate receptor over-expression occurs in
breast, lung, ovarian, endometrial, renal, colon, brain and cancers of myeloid
hemotopoietic cells and methotrexate-sensitive tumors.
VITAMIN MEDIATED ORAL DELIVERY TECHNOLOGY
Oral delivery is the preferred method of administration of drugs where either
long-term or daily use (or both) is required. However many therapeutics,
including peptide and protein drugs, are poorly absorbed when given orally. With
more and more peptide and protein based biopharmaceuticals entering the market,
there is an increasing need to develop an effective oral delivery system for
them, as well as for long-standing injected drugs such as insulin.
The difficulty in administering proteins orally is their susceptibility to
degradation by digestive enzymes, their inability to cross the intestinal wall
and their rapid excretion by the body. Over the years, many different
methodologies for making protein drugs available orally have been attempted.
Most of the oral protein delivery technologies involve protecting the protein
degradation in the intestine. More recently, strategies have been developed that
involve attaching the protein or peptide to a molecule that transports the
protein across the gut wall. However, the field of oral drug delivery of
proteins and peptides has yet to achieve successful commercialization of a
product (although positive results have been achieved in early clinical trials
for some products under development).
Many pharmaceutically active compounds such as proteins, peptides and cytotoxic
agents cannot be administered orally due to their instability in the
gastrointestinal tract or their inability to be absorbed and transferred to the
bloodstream. A technology that would allow many of these actives to be taken
orally would greatly enhance their acceptance and value. Several technologies
for the protection of sensitive actives in the gastro-intestinal tract and/or
enhancement of gastro-intestinal absorption have been explored and many have
failed.
Our proprietary technology for oral drug delivery utilizes the body's natural
vitamin B12 (VB12) transport system in the gut. The absorption of VB12 in the
intestine occurs by way of a receptor-mediated endocytosis. Initially, VB12
binds to intrinsic factor (IF) in the small intestine, and the VB12-IF complex
then binds to the IF receptor on the surface of the intestine. Receptor-mediated
endocytosis then allows the transport of VB12 across the gut wall. After binding
to another VB12-binding protein, transcobalamin II (TcII), VB12 is transferred
to the bloodstream.
Our scientists discovered that VB12 will still be transported by this process
even when drugs, macromolecules, or nanoparticles are coupled to VB12. Thus VB12
serves as a carrier to transfer these materials from the intestinal lumen to the
bloodstream. For drugs and macromolecules that are stable in the
gastro-intestinal tract, the drug or macromolecule can be coupled directly (or
via a linker) to VB12. If the capacity of the VB12 transport system is
inadequate to provide an effective blood concentration of the active, transport
can be amplified by attaching many molecules of the drug to a polymer, to that
VB12 is also attached. A further option, especially for drugs and macromolecules
that are unstable in the intestine, is to formulate the drug in a nanoparticle
which is then coated with VB12. Once in the bloodstream, the active is released
by diffusion and/or erosion of the nanoparticle. Utilization of nanoparticles
also serves to `amplify' delivery by transporting many molecules at one time due
to the inherently large surface area.
Our proprietary position in this technology involves the conjugation of vitamin
B12 and/or folic acid (or their analogs) to a polymer to which is also attached
the drug to be delivered, or attached to a nanoparticle in which the
10
drug is incorporated. Since many molecules of the drug are attached to a single
polymer strand, or are incorporated in a single nanoparticle, disease targeting
is amplified compared to simpler conjugates involving one molecule of the
vitamin with one drug molecule. However, in situations when such a simple
conjugate might be preferred, our patents also encompass these VB12-drug
conjugates.
BIOERODIBLE CROSS-LINKER DELIVERY TECHNOLOGY
Our scientists have developed a novel series of bioerodible cross-linkers that
have the potential to be utilized with hydrogels in a number of drug delivery
applications as well as several non-pharmaceutical applications. Hydrogels are
very large molecules with complex three-dimensional structures capable of
storing either small molecule drugs or much larger peptide and protein
therapeutics. These molecules are stored within the matrix of the hydrogel. Most
hydrogels are not bioerodible, therefore they deliver their payload of drug by
diffusion of these molecules through the interconnecting chambers of the
hydrogel. Once all of the drug has been delivered, non-bioerodible hydrogels
remain in the body (unless surgically removed) as they cannot be broken down and
eliminated. By comparison, our hydrogels possess bioerodible linking groups with
well-defined rates of degradation in biological systems, and so release their
payload of drugs by both diffusion and erosion of the hydrogel matrix. By
selecting linkers with appropriate degradation rates, much greater control of
drug release rates can be achieved. Once the drug has been released, erosion of
the hydrogel continues until no solid hydrogel remains, eliminating the need to
use an additional procedure to remove the drug delivery device. The hydrogel
erodes to form much smaller water-soluble fractions which are readily eliminated
from the body.
A number of possible drug delivery systems may be able to be developed using the
Access bioerodible cross-linker technology, ranging from nanoparticles for
intravenous administration, to larger devices which may be implanted, wound
packaging materials, medicated and non-medicated for decubitus and vascular
ulcers, medicated films and gels for topical applications, burn dressing and
dressing for skin donor sites.
MUCOADHESIVE DISC TECHNOLOGY
Treatment of oral conditions generally relies upon the use of medications
formulated as gels and pastes, which are applied to lesions in the mouth. The
duration of effectiveness of these medications is typically short because the
applied dose is worn away through the mechanical actions of speaking, eating,
and tongue movement, and is washed away by saliva flow. To address these
problems, Access developed a mucoadhesive film product that we believe is novel,
cost-effective, commercially-viable and is bioerodible. This technology, known
as OraDisc(TM), comprises a multi-layered film having an adhesive layer, a
pre-formed film layer, and a coated backing layer. Depending upon the intended
application, a pharmaceutically active compound can be formulated within any of
these layers, providing for a wide range of potential applications. The disc is
simply applied by pressing it against the inner surface of the mouth. The disc
stays in place, eroding over a period of time, so that subsequent removal is
unnecessary. The disc delivers the drug over a period of time controlled by the
rate of erosion of the disc, which is in turn controlled by the formulation of
the backing layer.
OraDisc(TM) was initially developed as a drug delivery system to treat canker
sores with the same active ingredient (amlexanox) that is used in Aphthasol(R).
We anticipate that higher amlexanox concentrations will be achieved at the
disease site, increasing the effectiveness of the product, called OraDisc(TM) A.
We have continued to develop the OraDisc(TM) technology, and we have generated
or are exploring additional prototype drug delivery products, including those
for pain palliation in the oral cavity, gingivitis, cough and cold treatment,
breath freshener, tooth whitening and other dental applications.
HYDROGEL PARTICLE AGGREGATE TECHNOLOGY
Our hydrogel particle aggregate technology provides unique materials with a
broad range of properties and potential applications. While a conventional bulk
hydrogel is an "infinite" network of loosely cross-linked hydrophilic polymers
that swells when placed in polar solvents, we have discovered that a variety of
unique biomaterials can be formed through the aggregation of hydrogel nano or
micro-particles. This concept takes advantage of the inherent biocompatibility
of hydrogels while overcoming problems with local stress and strain, which cause
bulk hydrogels to shear. Unlike bulk hydrogels, these hydrogel particle
aggregates are shape retentive, can be extruded or molded and offer properties
suitable for use in a variety of in vivo medical devices,
11
and in novel drug delivery systems, by providing tailored regions of drug
incorporation and release. The polymers used in the hydrogel particle aggregate
technology have been extensively researched by the academic and scientific
community and commercialized into several major medical products. They are
generally accepted as safe, non-toxic and biocompatible.
This technology utilizes the inherent physical attractive forces between
nanoparticles themselves and between nanoparticles and a polar solvent such as
water. These particles form bulk materials that can have the same size as
infinite bulk networks but allow chemical variability and much greater
resistance to permanent mechanical deformation. The aggregate demonstrates many
physical properties identical to those of a bulk hydrogel. However, there are
important differences between aggregates and bulk materials. For example,
"tough" elastomeric hydrogels used in tissue engineering constructs typically
fail catastrophically when placed under high strain or shear forces. As the
network begins to fail under stress, the material physically breaks down.
Hydrogel nanoparticle aggregates exhibit superior performance compared to bulk
materials under stress as the nanoparticles can slip past each other allowing
local deformation and repair.
Another major advantage of the hydrogel particle aggregate technology is the
ability to tailor the degradation of hydrogel nanoparticles and hydrogel
nanoparticle aggregates. Our degradable cross-linker technology can be
incorporated into the hydrogel nanoparticles allowing the formation of
nanoparticles containing drug with degradation and drug release at specific
rates. Potentially, aggregate materials can be formulated containing mixtures of
particles degrading at different rates, and/or formulations containing different
drugs each released at a predefined controlled rate.
A second level of controlled degradation is provided by the ability to tailor
the rate of particle erosion from the physically coalesced aggregate. The
hydrogel can be formulated such that the aggregate is extremely tough and
resilient, or formulated so that it can slowly erode at controlled rates. This
is achieved through simple compositional changes during nanoparticle synthesis.
The spaces between nanoparticles, or holes in the lattice, can be tailored by
varying the nanoparticle size. These spaces have been used to encapsulate
proteins during aggregate formation. The ability to trap a wide range of
bioactive compounds between these particles in the presence of water solutions
offers another major advantage, since this media is less deleterious to many
compounds than solvents typically used with other drug delivery materials. These
aggregates can easily be designed to remain together indefinitely in vivo, or
break apart at specific rates. Pharmaceutically-active compounds trapped in a
non-degradable aggregate will be released from the hydrogel by diffusion, while
release is controlled by both diffusion and rate of erosion in degradable
aggregates.
This technology has a variety of potential applications, such as in-dwelling
medicated catheters, medicated stents, artificial discs, tissue scaffold and
controlled-release drug delivery systems. We continue to develop the technology
and specific applications utilizing this technology, while seeking to establish
collaborations and partnerships to explore other applications.
RESIDERM(R) TOPICAL DELIVERY TECHNOLOGY
We have granted a license to ProStrakan for the development of compounds that
utilize our zinc technology. The use of zinc ions to formulate topical products
produces a reservoir of drug in the skin to increase the effectiveness of
topically applied products and to reduce toxicity. There are many localized
disease conditions, which are effectively treated by topical application of
suitable pharmaceutical agents. In order for such treatments to be maximally
effective, it is necessary that as much of the active agent as possible be
absorbed into the skin where it can make contact with the disease condition in
the dermal tissue without being lost by rubbing off on clothing or evaporation.
At the same time, the agent must not penetrate so effectively through the skin
that it is absorbed into the systemic circulation. This latter factor is
especially important in order to minimize unwanted side effects of the
pharmacologically active agent. The ideal vehicle for topically applied
pharmaceuticals is one that can rapidly penetrate the skin and produce a
"reservoir effect" in the skin or mucous membranes. Such a reservoir effect can
be produced by complexing of suitable pharmaceutical agents with zinc ions, by
an as yet unknown mechanism. This "reservoir effect" is defined as an
enhancement of the skin or membrane's ability to both absorb and retain
pharmacological agents, that is:
- to increase skin or membrane residence time;
12
- to decrease drug transit time; and
- to reduce transdermal flux.
A number of compounds are known to enhance the ability of pharmacologically
active agents to penetrate the skin, but have the disadvantage of allowing rapid
systemic dispersion away from the site of disease. Many topical agents, such as
the retinoids used in the treatment of acne, and methotrexate, used in the
treatment of psoriasis, are systemically toxic. There is, therefore, a need for
a method of enhancing the ability of such agents to penetrate the skin so that a
lesser total dosage may be used, while at the same time their ability to move
from the skin to the systemic circulation is minimized.
Research Projects, Products and Products in Development
ACCESS DRUG PORTFOLIO
Licensing Clinical
Compound Originator Partner Indication FDA Filing Stage (1)
- ------------------------------ ---------- ------------- --------------- -------------- ------------
Cancer
Polymer Platinate (AP5346) (2) Access - - Ovarian, Phase I
U London Colorectal Clinical
cancer Development(5)
Topical Delivery
Amlexanox(3) Takeda ProStrakan, Aphthous ulcers NDA Approved
Zambon
Esteve, Meda,
Mipharm,
Paladin
OraDisc(TM) Amlexanox (3) Access ProStrakan, Aphthous ulcers NDA Approved
Biodegradable Polymer Disc Zambon
Esteve, Meda,
Mipharm,
Paladin
Residerm(R) A Access ProStrakan, Acne PLA (6) Approved (7)
Zinc Clindamycin(4) Fujisawa
OraDisc(TM) Benzocaine Access - Oral pain OTC N/A
Vitamin Mediated Delivery
Oral Delivery System Access - (8) Various Research Pre-Clinical
Vitamin Targeted Therapeutics Access - Anti-tumor Research Pre-Clinical
(1) For more information, see "Government Regulation" for description of
clinical stages.
(2) Licensed from the School of Pharmacy, The University of London.
Subject to royalty and milestone payments.
(3) Acquired from GlaxoSmithKline - Block Drug Company. Amlexanox
licensing agreements executed with the following parties for the
prevention and treatment of aphthous ulcers:
- ProStrakan Limited for UK and Ireland manufacturing and
marketing rights.
13
- Zambon Group for France, Germany, Holland, Belgium,
Luxembourg, Switzerland, Brazil, Columbia and Italy
manufacturing and marketing rights.
- Laboratories Dr. Esteve SA for Spain, Portugal and Greece
manufacturing and marketing rights.
- Mipharm SpA for Italy manufacturing and marketing rights.
- Meda, AB for Scandinavia, the Baltic states and Iceland
marketing rights.
- Paladin Labs Inc. for Canada manufacturing and marketing
rights.
- EpiTan, Ltd. for Australia and New Zealand marketing rights.
- Orient Europharma. Co. Ltd. for Taiwan, Hong-Kong, Malaysia,
Philippines, Thailand and Singapore marketing rights.
(4) Licensed worldwide manufacturing and marketing rights to ProStrakan
who sublicensed to:
- Fujisawa GmbH for continental Europe marketing rights.
- EpiTan for Australia and New Zealand marketing rights.
- Hyundai for Korea marketing rights.
- Taro Pharmaceuticals for Israel marketing rights.
- Biosintetica for Brazil marketing rights.
- Various companies for other smaller countries for marketing
rights.
(5) Clinical studies being conducted in Europe and US.
(6) United Kingdom equivalent of an NDA.
(7) Marketing approval received from the Medicines Control Agency in the
U.K. and product launched in March 2002. In addition there the
product has been extensively approved throughout the European Union.
(8) Research collaboration agreement with Celltech Group plc.
We begin the product development effort by screening and formulating potential
product candidates, selecting an optimal active and formulation approach and
developing the processes and analytical methods. Pilot stability, toxicity and
efficacy testing are conducted prior to advancing the product candidate into
formal preclinical development. Specialized skills are required to produce these
product candidates utilizing our technology. We have a core internal development
capability with significant experience in developing these formulations.
Once the product candidate has been successfully screened in pilot testing, our
scientists, together with external consultants, assist in designing and
performing the necessary preclinical efficacy, pharmacokinetic and toxicology
studies required for IND submission. External investigators and scaleup
manufacturing facilities are selected in conjunction with our consultants. The
initial Phase I and Phase II studies are conducted by institutions and
investigators supervised and monitored by our employees and contract research
organizations. We do not plan to have an extensive clinical development
organization as we plan to have the advance phases of this process conducted by
a development partner. Should we conduct Phase III clinical studies we expect to
engage a contract research organization to perform this work.
We contract with third party contract research organizations to complete our
large clinical trials and for data management of all of our clinical trials.
Generally, we manage the smaller Phase I and II trials ourselves. Currently, we
have one Phase I trial in process, one planned Phase I trials and two Phase II
trials planned for this year.
With all of our product development candidates, we cannot assure you that the
results of the in vitro or animal studies are or will be indicative of the
results that will be obtained if and when these product candidates are tested in
humans. We cannot assure you that any of these projects will be successfully
completed or that regulatory approval of any product will be obtained.
14
We expended approximately $5,417,000, $6,096,000 and $7,024,000 on research and
development during the years 2004, 2003 and 2002, respectively.
PATENTS
We believe that the value of technology both to us and to our potential
corporate partners is established and enhanced by our broad intellectual
property positions. Consequently, we have already been issued and seek to obtain
additional U.S. and foreign patent protection for products under development and
for new discoveries. Patent applications are filed with the U.S. Patent and
Trademark Office and, when appropriate, with the Paris Convention's Patent
Cooperation Treaty (PCT) Countries (most major countries in Western Europe and
the Far East) for our inventions and prospective products.
Two U.S. patents and one European patent have issued and one U.S. patent and two
European patent applications are pending for polymer platinum compounds. The two
patents and patent applications are the result in part of our collaboration with
The School of Pharmacy, University of London, from which the technology has been
licensed and include a synthetic polymer, hydroxypropylmethacrylamide
incorporating platinates, that can be used to exploit enhanced permeability and
retention in tumors and control drug release. The patents and patent
applications include a pharmaceutical composition for use in tumor treatment
comprising a polymer-platinum compound through linkages that are designed to be
cleaved under selected conditions to yield a platinum which is selectively
released at a tumor site. The patents and patent applications also include
methods for improving the pharmaceutical properties of platinum compounds.
One U.S. and two European patents have issued and one European patent is pending
for the use of zinc as a pharmaceutical vehicle for enhancing the penetration
and retention of drug in the skin. The patents and patent application cover the
method of inducing a reservoir effect in skin and mucous membranes to enhance
penetration and retention of topically applied therapeutic and cosmetic
pharmacologically active agents. The patents and patent application also relate
to topical treatment methods including such reservoir effect enhancers and to
pharmaceutical compositions containing them.
We have one U.S. patent and one European patent is pending for our bioerodible
cross-linker technology. A number of possible drug delivery systems can be
developed using the Access bioerodible cross-linker technology, ranging from
nanoparticles for intravenous administration, to larger devices which may be
implanted, wound packaging materials, medicated and non-medicated for decubitus
and vascular ulcers, medicated films and gels for topical applications, burn
dressing and dressing for skin donor sites.
We have one U.S. patent and have filed one U.S. and one European patent
application for our OraDisc(TM) technology. This oral delivery vehicle
potentially overcomes the difficulties encountered in using conventional paste
and gel formulations for conditions in the mouth. Utilizing this technology, we
anticipate that higher drug concentrations will be achieved at the disease site
increasing the effectiveness of the product.
We have filed two U.S. patent applications and two European patent applications
for our mucoadhesive liquid technology. Our patent applications cover a range of
products utilizing our mucoadhesive liquid technology for the management of the
various phases of mucositis.
We have filed two U.S. patent applications and two European patent applications
for our hydrogel particle aggregate technology. Our patent applications have a
variety of potential applications, such as in-dwelling medicated catheters,
medicated stents, artificial discs, tissue scaffold and controlled-release drug
delivery systems.
Through our Access Pharmaceuticals Australia Pty. Limited subsidiary we have
three patented targeted therapeutic technologies:
- - folate conjugates of polymer therapeutics, to enhance tumor delivery by
targeting folate receptors, which are upregulated in certain tumor types
with two U.S. and two European patent applications;
- - the use of vitamin B12 to target the transcobalamin II receptor which is
upregulated in numerous diseases including cancer, rheumatoid arthritis,
certain neurological and autoimmune disorders with two U.S. patents and
three U.S. and four European patent applications; and
15
- - oral delivery of a wide variety of molecules which cannot otherwise be
orally administered, utilizing the active transport mechanism which
transports vitamin B12 into the systemic circulation with six U.S. patents
and two European patents and one U.S. and one European patent application.
We also have a patent for amlexanox and the worldwide rights, excluding Japan,
for the use of amlexanox for oral and dermatological use.
We have a strategy of maintaining an ongoing line of patent continuation
applications for each major category of patentable carrier and delivery
technology. By this approach, we are extending the intellectual property
protection of our basic targeting technology and initial agents to cover
additional specific carriers and agents, some of which are anticipated to carry
the priority dates of the original applications.
GOVERNMENT REGULATION
We are subject to extensive regulation by the federal government, principally by
the FDA, and, to a lesser extent, by other federal and state agencies as well as
comparable agencies in foreign countries where registration of products will be
pursued. Although a number of our formulations incorporate extensively tested
drug substances, because the resulting formulations make claims of enhanced
efficacy and/or improved side effect profiles, they are expected to be
classified as new drugs by the FDA.
The Federal Food, Drug and Cosmetic Act and other federal, state and foreign
statutes and regulations govern the testing, manufacturing, safety, labeling,
storage, shipping and record keeping of our products. The FDA has the authority
to approve or not approve new drug applications and inspect research, clinical
and manufacturing records and facilities.
Among the requirements for drug approval and testing is that the prospective
manufacturer's facilities and methods conform to the FDA's Code of Good
Manufacturing Practices regulations, which establish the minimum requirements
for methods to be used in, and the facilities or controls to be used during, the
production process. Such facilities are subject to ongoing FDA inspection to
insure compliance.
The steps required before a pharmaceutical product may be produced and marketed
in the U.S. include preclinical tests, the filing of an IND with the FDA, which
must become effective pursuant to FDA regulations before human clinical trials
may commence, numerous phases of clinical testing and the FDA approval of a NDA
prior to commercial sale.
Preclinical tests are conducted in the laboratory, usually involving animals, to
evaluate the safety and efficacy of the potential product. The results of
preclinical tests are submitted as part of the IND application and are fully
reviewed by the FDA prior to granting the sponsor permission to commence
clinical trials in humans. All trials are conducted under International
Conference on Harmonization, or ICH, good clinical practice guidelines. All
investigator sites and sponsor facilities are subject to FDA inspection to
insure compliance. Clinical trials typically involve a three-phase process.
Phase I, the initial clinical evaluations, consists of administering the drug
and testing for safety and tolerated dosages and in some indications such as
cancer and HIV, as preliminary evidence of efficacy in humans. Phase II involves
a study to evaluate the effectiveness of the drug for a particular indication
and to determine optimal dosage and dose interval and to identify possible
adverse side effects and risks in a larger patient group. When a product is
found safe, an initial efficacy is established in Phase II, it is then evaluated
in Phase III clinical trials. Phase III trials consist of expanded
multi-location testing for efficacy and safety to evaluate the overall benefit
to risk index of the investigational drug in relationship to the disease
treated. The results of preclinical and human clinical testing are submitted to
the FDA in the form of an NDA for approval to commence commercial sales.
The process of forming the requisite testing, data collection, analysis and
compilation of an IND and an NDA is labor intensive and costly and may take a
protracted time period. In some cases, tests may have to be redone or new tests
instituted to comply with FDA requests. Review by the FDA may also take
considerable time and there is no guarantee that an NDA will be approved.
Therefore, we cannot estimate with any certainty the length of the approval
cycle.
16
We are also governed by other federal, state and local laws of general
applicability, such as laws regulating working conditions, employment practices,
as well as environmental protection.
COMPETITION
The pharmaceutical and biotechnology industry is characterized by intense
competition, rapid product development and technological change. Competition is
intense among manufacturers of prescription pharmaceuticals and other product
areas where we may develop and market products in the future. Most of our
potential competitors are large, well established pharmaceutical, chemical or
healthcare companies with considerably greater financial, marketing, sales and
technical resources than are available to us. Additionally, many of our
potential competitors have research and development capabilities that may allow
such competitors to develop new or improved products that may compete with our
product lines. Our potential products could be rendered obsolete or made
uneconomical by the development of new products to treat the conditions to be
addressed by our developments, technological advances affecting the cost of
production, or marketing or pricing actions by one or more of our potential
competitors. Our business, financial condition and results of operation could be
materially adversely affected by any one or more of such developments. We cannot
assure you that we will be able to compete successfully against current or
future competitors or that competition will not have a material adverse effect
on our business, financial condition and results of operations. Academic
institutions, governmental agencies and other public and private research
organizations are also conducting research activities and seeking patent
protection and may commercialize products on their own or with the assistance of
major health care companies in areas where we are developing product candidates.
We are aware of certain development projects for products to treat or prevent
certain diseases targeted by us, the existence of these potential products or
other products or treatments of which we are not aware, or products or
treatments that may be developed in the future, may adversely affect the
marketability of products developed by us.
The principal competitors in the polymer area are Cell Therapeutics, Daiichi,
Enzon and Inhale which are developing alternate drugs in combination with
polymers. We believe we are the only company conducting clinical studies in the
polymer drug delivery of platinum compounds. We believe that the principal
current competitors to our polymer targeting technology fall into two
categories: monoclonal antibodies and liposomes. We believe that our technology
potentially represents a significant advance over these older technologies
because our technology provides a system with a favorable pharmacokinetic
profile.
A number of companies are developing or may in the future engage in the
development of products competitive with the Access polymer delivery system.
Several companies are working on targeted monoclonal antibody therapy including
Bristol-Myers Squibb, Centocor (acquired by Johnson & Johnson), GlaxoSmithKline,
Imclone and Xoma. Currently, liposomal formulations being developed by Gilead
Sciences and Alza Corporation (acquired by Johnson & Johnson), are the major
competing intravenous drug delivery formulations that deliver similar drug
substances.
Products developed from our Residerm(R) technology will compete for a share of
the existing market with numerous products which have become standard treatments
recommended or prescribed by dermatologists. Zindaclin(R), which is the first
product developed utilizing our Residerm(R) technology, will compete with
products including Benzamycin, marketed by a subsidiary of Aventis; Cleocin-T
and a generic topical clindamycin, marketed by Pharmacia; Benzac, marketed by a
subsidiary of L'Oreal; and Triaz, marketed by Medicis Pharmaceutical Corp.
Aphthasol(R) is the only clinically proven product to accelerate the healing of
canker sores. There are numerous products, including prescription steroids such
as Kenalog in OraBase, and many over-the-counter pain relief formulations that
incorporate a local anesthetic used for the treatment of this condition.
In the area of advanced drug delivery, which is the focus of our early stage
research and development activities, a number of companies are developing or
evaluating enhanced drug delivery systems. We expect that technological
developments will occur at a rapid rate and that competition is likely to
intensify as various alternative delivery system technologies achieve similar if
not identical advantages.
Even if our products are fully developed and receive required regulatory
approval, of which there can be no assurance, we believe that our products can
only compete successfully if marketed by a company having expertise and a strong
presence in the therapeutic area. Consequently, we do not currently plan to
establish an internal marketing organization. By forming strategic alliances
with major and regional pharmaceutical companies,
17
management believes that our development risks should be minimized and that the
technology potentially could be more rapidly developed and successfully
introduced into the marketplace.
EMPLOYEES
As of March 15, 2005, we had 35 full time employees, 17 of whom have advanced
scientific degrees. Of these employees, 31 are engaged in, or directly
supporting research and development activities and four are in business
administration positions. We have never experienced employment-related work
stoppages and consider that we maintain good relations with our personnel. In
addition, to complement our internal expertise, we have contracts with
scientific consultants, contract research organizations and university research
laboratories that specialize in various aspects of drug development including
clinical development, regulatory affairs, toxicology, process scale-up and
preclinical testing.
WEB AVAILABILITY
We make available free of charge through our web site, www.accesspharma.com, our
annual reports on Form 10-K and other reports required under the Securities and
Exchange Act of 1934, as amended, as soon as reasonably practicable after such
reports are filed with, or furnished to, the Securities and Exchange Commission
as well as certain of our corporate governance policies, including the charters
for the Board of Director's audit, compensation and nominating and corporate
governance committees and our code of ethics, corporate governance guidelines
and whistleblower policy. We will provide to any person without charge, upon
request, a copy of any of the foregoing materials. Any such request must be made
in writing to Access Pharmaceuticals, Inc., 2600 Stemmons Freeway, Suite 176,
Dallas, TX 75207 attn: Investor Relations.
RISK FACTORS
This Annual Report on Form 10-K contains certain statements that are
forward-looking within the meaning of Section 27a of the Securities Act of 1933,
as amended, and Section 21E of the Securities and Exchange Act of 1934, as
amended, and that involve risks and uncertainties, including, but not limited to
the uncertainties associated with research and development activities, clinical
trials, our ability to raise capital, the timing of and our ability to achieve
regulatory approvals, dependence on others to market our licensed products,
collaborations, future cash flow, the timing and receipt of licensing and
milestone revenues, the future success of our marketed products and products in
development, our ability to manufacture amlexanox products in commercial
quantities, our sales projections, and the sales projections of our licensing
partners, our ability to achieve licensing milestones and other risks described
below as well as those discussed elsewhere in this 10-K, documents incorporated
by reference and other documents and reports that we file periodically with the
Securities and Exchange Commission. Forward-looking statements contained in this
Form 10-K include, but are not limited to anticipated product approvals and
timing thereof, the terms of future licensing arrangements, our ability to
secure additional financing for our operations, our net cash burn rate for the
next twelve months to be approximately $600,000 per month, our outstanding
convertible notes, and our expected capital expenditures.
WE HAVE EXPERIENCED A HISTORY OF LOSSES AND WE EXPECT TO INCUR FUTURE LOSSES.
We have recorded minimal revenue to date and we have incurred a cumulative
operating loss of approximately $64.4 million through December 31, 2004. Losses
for the years ended 2004, 2003 and 2002 were $10,238,000, $6,935,000 and
$9,384,000, respectively. Our losses have resulted principally from costs
incurred in research and development activities related to our efforts to
develop clinical drug candidates and from the associated administrative costs.
We expect to incur additional operating losses over the next several years. We
also expect cumulative losses to increase due to expanded research and
development efforts and preclinical and clinical trials. Our net cash burn rate
for the twelve months of 2004 was approximately $750,000 per month. We project
our net cash burn rate for the next twelve months to be approximately $600,000
per month. Capital expenditures are forecasted to be minor for the next twelve
months since most of our new equipment is leased and the lease expense is
included in the calculation of the net cash burn rate.
WE DO NOT HAVE SIGNIFICANT OPERATING REVENUE AND WE MAY NEVER ATTAIN
PROFITABILITY.
To date, we have funded our operations primarily through private sales of common
stock and convertible notes. Contract research payments and licensing fees from
corporate alliances and mergers have also provided funding for our
18
operations. Our ability to achieve significant revenue or profitability depends
upon our ability to successfully complete the development of drug candidates, to
develop and obtain patent protection and regulatory approvals for our drug
candidates and to manufacture and commercialize the resulting drugs. We have not
received significant royalties for sales of amlexanox, Zindaclin(R) or
OraDisc(TM) products to date and we may not generate significant revenues or
profits from the sale of these products in the future. Furthermore, we may not
be able to ever successfully identify, develop, commercialize, patent,
manufacture, obtain required regulatory approvals and market any additional
products. Moreover, even if we do identify, develop, commercialize, patent,
manufacture, and obtain required regulatory approvals to market additional
products, we may not generate revenues or royalties from commercial sales of
these products for a significant number of years, if at all. Therefore, our
proposed operations are subject to all the risks inherent in the establishment
of a new business enterprise. In the next few years, our revenues may be limited
to minimal product sales and royalties, any amounts that we receive under
strategic partnerships and research or drug development collaborations that we
may establish and, as a result, we may be unable to achieve or maintain
profitability in the future or to achieve significant revenues in order to fund
our operations.
A FAILURE TO OBTAIN NECESSARY ADDITIONAL CAPITAL IN THE FUTURE COULD JEOPARDIZE
OUR OPERATIONS.
We have issued an aggregate of $13,530,000 of convertible notes, which are due
in two parts -- $8,030,000 is due on September 13, 2005 and $5,500,000 is due on
September 13, 2008. The notes may convert to common stock at a conversion price
of $5.50 and we can redeem the notes for the principal amount of the notes plus
interest if our common stock trades above a price of $8.25 for any period of ten
consecutive trading days prior to our notice of redemption. We are also issuing
$2,633,000 of Secured Convertible Notes due March 31, 2006. Such Secured
Convertible Notes convert at $4.00 per share. We do not have sufficient funds to
repay our convertible notes at their maturity. We may not be able to restructure
the convertible notes or obtain additional financing to repay them on terms
acceptable to us, if at all. If we raise additional funds by selling equity
securities including in connection with our SEDA with Cornell Capital, the
relative equity ownership of our existing investors would be diluted and the new
investors could obtain terms more favorable than previous investors. A failure
to restructure our convertible notes or obtain additional funding to repay the
convertible notes and support our working capital and operating requirements,
could cause us to be in default of our convertible notes and prevent us from
making expenditures that are needed to allow us to maintain our operations.
OUR FINANCIAL CONDITION AND THE RESTRICTIVE COVENANTS CONTAINED IN OUR
OUTSTANDING CONVERTIBLE NOTES MAY LIMIT OUR ABILITY TO BORROW ADDITIONAL FUNDS
OR TO RAISE ADDITIONAL EQUITY AS MAY BE REQUIRED TO FUND OUR FUTURE OPERATIONS.
We incurred significant losses from operations of $9.1 million for the year
ended December 31, 2004 and $8.2 million for the year ended December 31, 2003.
Moreover, the terms of our outstanding Convertible Notes may limit our ability
to, among other things:
- incur additional debt;
- pay cash dividends, redeem, retire or repurchase our stock or
change our capital structure;
- enter into certain transactions with affiliates;
- create additional liens on our assets; or
- issue certain types of preferred stock or issue common stock at
below market prices.
Our ability to borrow additional funds or raise additional equity may be limited
by our financial condition, in addition to the terms of our outstanding debt.
Additionally, events such as our inability to continue to reduce our loss from
continuing operations, could adversely affect our liquidity and our ability to
attract additional funding as required.
WE MAY NOT BE ABLE TO PAY OUR DEBT AND OTHER OBLIGATIONS AND OUR ASSETS MAY BE
SEIZED AS A RESULT.
We may not generate the cash flow required to pay our liabilities as they become
due. As of March 30, 2005, our outstanding debt included approximately $8.03
million of our Convertible Subordinated Notes due in September 2005, $5.5
million of our Convertible Subordinated Notes due in September 2008 and
$2,633,000 of our Secured Convertible Notes due in March 2006.
19
We may be unable to repay or repurchase the secured convertible notes due in
March 2006 and convertible subordinated notes due in September 2005 and
September 2008 upon a repurchase event and be forced into bankruptcy.
The holders of our Convertible Notes may require us to repurchase or prepay all
of the outstanding Convertible Notes under certain circumstances. We may not
have sufficient cash reserves to repurchase the Convertible Notes at such time,
which would cause an event of default under the Convertible Notes and may force
us to declare bankruptcy.
OUR OBLIGATIONS UNDER THE SECURED DEBENTURES ARE SECURED BY ALL OF OUR ASSETS
Our obligations under the $2,633,000 Secured Debentures are secured by all of
our assets. As a result, if we default under the terms of the Secured Debentures
or related agreements, including our failure to issue shares of common stock
upon conversion by the holder, our failure to timely file a registration
statement or have such registration statement declared effective, breach of any
covenant, representation or warranty in the Securities Purchase Agreement or
related Secured Debentures or the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against the Company could require the
early repayment of the convertible debentures, if the default is not cured with
the specified grace period. In addition we could be required to issue and the
holders would have the ability to sell up to 2,891,723 shares of our Common
Stock and/or the holders could foreclose their security interest and liquidate
some or all of the assets of the Company and we could cease to operate.
OUR STANDBY EQUITY DISTRIBUTION AGREEMENT MAY HAVE A DILUTIVE IMPACT ON OUR
STOCKHOLDERS.
We are to a great extent dependent on external financing to fund our operations.
Our financial needs may be partially provided from the SEDA. The issuance of
shares of our common stock under SEDA will have a dilutive impact on our other
stockholders and the issuance or even potential issuance of such shares could
have a negative effect on the market price of our common stock. In addition, if
we access the SEDA, we will issue shares of our common stock to Cornell Capital
Partners at a discount of 2% of the lowest daily volume weighted average of our
common stock during a specified period of trading days after we access the SEDA.
Issuing shares at a discount will further dilute the interests of other
stockholders.
To the extent that Cornell sells shares of our common stock issued under SEDA to
third parties, our stock price may decrease due to the additional selling
pressure in the market. The perceived risk of dilution from sales of stock to or
by Cornell may cause holders of our common stock to sell their shares, or it may
encourage short sales of our common stock or either similar transactions. This
could contribute to a decline in the stock price of our common stock.
WE MAY NOT SUCCESSFULLY COMMERCIALIZE OUR DRUG CANDIDATES.
Our drug candidates are subject to the risks of failure inherent in the
development of pharmaceutical products based on new technologies and our failure
to develop safe, commercially viable drugs would severely limit our ability to
become profitable or to achieve significant revenues. We may be unable to
successfully commercialize our drug candidates because:
- some or all of our drug candidates may be found to be unsafe or
ineffective or otherwise fail to meet applicable regulatory standards or
receive necessary regulatory clearances;
- our drug candidates, if safe and effective, may be too difficult to
develop into commercially viable drugs;
- it may be difficult to manufacture or market our drug candidates on a
large scale;
- proprietary rights of third parties may preclude us from marketing our
drug candidates; and
- third parties may market superior or equivalent drugs.
THE SUCCESS OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES, UPON WHICH WE PRIMARILY
FOCUS, IS UNCERTAIN.
Our primary focus is on our research and development activities and the
commercialization of compounds covered by proprietary biopharmaceutical patents
and patent applications. Research and development activities, by their nature,
preclude definitive statements as to the time required and costs involved in
reaching certain objectives. Actual research and development costs, therefore,
could exceed budgeted amounts and estimated time frames may
20
require extension. Cost overruns, unanticipated regulatory delays or demands,
unexpected adverse side effects or insufficient therapeutic efficacy will
prevent or substantially slow our research and development effort and our
business could ultimately suffer. We anticipate that we will remain principally
engaged in research and development activities for an indeterminate, but
substantial, period of time.
WE MAY BE UNABLE TO OBTAIN NECESSARY ADDITIONAL CAPITAL TO FUND OPERATIONS IN
THE FUTURE.
We require substantial capital for our development programs and operating
expenses, to pursue regulatory clearances and to prosecute and defend our
intellectual property rights. We believe that our existing capital resources,
interest income, product sales, royalties and revenue from possible licensing
agreements and collaborative agreements will be sufficient to fund our currently
expected operating expenses (other than debt obligations including the
$8,030,000 of convertible notes which are required to be repaid in September
2005 and $2,633,000 in March 2006) and capital requirements for twelve months.
However, unless our convertible notes convert to common stock prior to their
maturity or are restructured, we will need to raise substantial additional
capital to support our ongoing operations and debt obligations because our
convertible notes will mature and/or our actual cash requirements may vary
materially from those now planned and will depend upon numerous factors,
including :
- the sales levels of our marketed products;
- the results of our research and development programs;
- the timing and results of preclinical and clinical trials;
- our ability to maintain existing and establish new
collaborative agreements with other companies to provide
funding to us;
- technological advances; and
- activities of competitors and other factors.
If we do raise additional funds by issuing equity securities, further dilution
to existing stockholders would result and future investors may be granted rights
superior to those of existing stockholders. If adequate funds are not available
to us through additional equity offerings, we may be required to delay, reduce
the scope of or eliminate one or more of our research and development programs
or to obtain funds by entering into arrangements with collaborative partners or
others that require us to issue additional equity securities or to relinquish
rights to certain technologies or drug candidates that we would not otherwise
issue or relinquish in order to continue independent operations.
WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP, MARKET, OR COMMERCIALIZE OUR PRODUCTS
OR OUR PRODUCT CANDIDATES WITHOUT ESTABLISHING NEW RELATIONSHIPS AND MAINTAINING
CURRENT RELATIONSHIPS.
Our strategy for the research, development and commercialization of our
potential pharmaceutical products may require us to enter into various
arrangements with corporate and academic collaborators, licensors, licensees and
others, in addition to our existing relationships with other parties.
Specifically, we may seek to joint venture, sublicense or enter other marketing
arrangements with parties that have an established marketing capability or we
may choose to pursue the commercialization of such products on our own. We may,
however, be unable to establish such additional collaborative arrangements,
license agreements, or marketing agreements as we may deem necessary to develop,
commercialize and market our potential pharmaceutical products on acceptable
terms. Furthermore, if we maintain and establish arrangements or relationships
with third parties, our business may depend upon the successful performance by
these third parties of their responsibilities under those arrangements and
relationships. For our commercialized products we currently rely upon the
following relationships in the following marketing territories for sales,
manufacturing or regulatory approval efforts:
- amlexanox 5% paste
- ProStrakan Ltd. - United Kingdom and Ireland manufacturing,
marketing rights and regulatory approval
- Zambon Group - France, Germany, Holland, Belgium, Luxembourg,
Switzerland, Brazil, Colombia and Italy manufacturing and
marketing rights
- Laboratories Dr. Esteve SA - Spain, Portugal and Greece
manufacturing and marketing rights
21
- Meda, AB for Scandinavia, the Baltic states and Iceland marketing
rights
- Mipharm SpA for Italy manufacturing and marketing rights
- Paladin Labs, Inc. for Canada manufacturing and marketing rights
- EpiTan, Ltd. for Australia and New Zealand for marketing rights
- Orient Europharma, Co., Ltd. for Taiwan, Hong-Kong, Malaysia,
Philippines, Thailand and Singapore for marketing rights
- Zindaclin(R) and Residerm(R)
- ProStrakan Ltd. - worldwide manufacturing, marketing and
regulatory approval rights
- Fujisawa GmbH - sublicensed continental Europe marketing rights
- EpiTan, Ltd. - sublicensed Australia and New Zealand marketing
rights
- Hyundai - sublicensed Korea marketing rights
- Taro - sublicensed Israel marketing rights
- Biosintetica - sublicensed Brazil marketing rights
- Six companies for eleven other smaller countries - sublicensed
marketing rights
For one of our OraDisc(TM) products in development, on January 6, 2004, we
entered into an exclusive license and supply agreement with Wyeth Consumer
Healthcare for sales of the product in North America. If this product is
marketed, we will be dependent upon Wyeth Consumer Healthcare for sales of such
product in this territory.
Our ability to successfully commercialize, and market our products and product
candidates could be limited if a number of these existing relationships were
terminated.
Furthermore, our strategy with respect to our polymer platinate program is to
enter into a licensing agreement with a pharmaceutical company pursuant to which
the further costs of developing a product would be shared with our licensing
partner. Although we have had discussions with potential licensing partners with
respect to our polymer platinate program, to date we have not entered into any
licensing arrangement. We may be unable to execute our licensing strategy for
polymer platinate.
WE MAY BE UNABLE TO SUCCESSFULLY MANUFACTURE OUR PRODUCTS AND OUR PRODUCT
CANDIDATES IN CLINICAL QUANTITIES OR FOR COMMERCIAL PURPOSES WITHOUT THE
ASSISTANCE OF CONTRACT MANUFACTURERS, WHICH MAY BE DIFFICULT FOR US TO OBTAIN
AND MAINTAIN.
We have limited experience in the manufacture of pharmaceutical products in
clinical quantities or for commercial purposes and we may not be able to
manufacture any new pharmaceutical products that we may develop. As a result, we
have established, and in the future intend to establish arrangements with
contract manufacturers to supply sufficient quantities of products to conduct
clinical trials and for the manufacture, packaging, labeling and distribution of
finished pharmaceutical products if any of our potential products are approved
for commercialization. If we are unable to contract for a sufficient supply of
our potential pharmaceutical products on acceptable terms, our preclinical and
human clinical testing schedule may be delayed, resulting in the delay of our
clinical programs and submission of product candidates for regulatory approval,
which could cause our business to suffer. Our business could suffer if there are
delays or difficulties in establishing relationships with manufacturers to
produce, package, label and distribute our finished pharmaceutical or other
medical products, if any, market introduction and subsequent sales of such
products. Moreover, contract manufacturers that we may use must adhere to
current Good Manufacturing Practices, as required by the FDA. In this regard,
the FDA will not issue a pre-market approval or product and establishment
licenses, where applicable, to a manufacturing facility for the products until
the manufacturing facility passes a pre-approval plant inspection. If we are
unable to obtain or retain third party manufacturing on commercially acceptable
terms, we may not be able to commercialize our products as planned. Our
potential dependence upon third parties for the manufacture of our products may
adversely affect our ability to generate profits or acceptable profit margins
and our ability to develop and deliver such products on a timely and competitive
basis.
Our amlexanox 5% paste is marketed in the US as Aphthasol(R). We selected
Contract Pharmaceuticals Ltd. Canada as our new manufacturer of amlexanox 5%
paste and they manufactured product for the US market and initial qualifying
batches of the product for Europe. We re-launched Aphthasol(R) in the US market
in September 2004 and recorded sales in the third and fourth quarters of 2004.
22
Amlexanox 5% paste was approved by regulatory authorities for sale in the UK.
Approval to market was granted in Austria, Germany, Greece, Finland, Ireland,
Luxembourg, The Netherlands, Norway, Portugal, and Sweden. We did not receive
approvals for France, Italy and Belgium. We licensed manufacturing rights to
ProStrakan, Zambon, Esteve and Mipharm for specific countries in Europe.
Contract Pharmaceuticals Ltd. Canada has also been selected as our European
supplier of amlexanox 5% paste and this facility has been approved for European
supply.
We licensed our patents for worldwide manufacturing and marketing for
Zindaclin(R) and our ResiDerm(R) technology to ProStrakan Ltd. for the period of
the patents. We receive a share of the licensing revenues and royalty on the
sales of the product. ProStrakan has a contract manufacturer for Zindaclin(R)
which is a European Union approved facility. Zindaclin(R) was approved in the UK
and throughout Europe in most European Union countries including new member
states and several non-European markets. Zindaclin(R) is marketed in the UK,
France, Germany, Ireland, Belgium, Cyprus, Israel and Korea. Zindaclin(R) is
under review in other markets including Australia, New Zealand, Brazil and
others.
We received regulatory approval from the FDA to manufacture and sell OraDisc(TM)
A in September 2004 and are proceeding with our manufacturing and marketing
plans for 2005.
AP5346 is manufactured by third parties for our Phase I/II clinical trials.
Manufacturing is ongoing for the current clinical trials. Certain manufacturing
steps are conducted by the Company to enable significant cost savings to be
realized.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION WHICH INCREASES OUR COST OF
DOING BUSINESS AND MAY AFFECT OUR ABILITY TO COMMERCIALIZE ANY NEW PRODUCTS THAT
WE MAY DEVELOP.
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of pharmaceutical products through lengthy
and detailed laboratory, preclinical and clinical testing procedures and other
costly and time-consuming procedures to establish their safety and efficacy. All
of our drugs and drug candidates require receipt and maintenance of governmental
approvals for commercialization. Preclinical and clinical trials and
manufacturing of our drug candidates will be subject to the rigorous testing and
approval processes of the FDA and corresponding foreign regulatory authorities.
Satisfaction of these requirements typically takes a significant number of years
and can vary substantially based upon the type, complexity and novelty of the
product. The status of our principal products is as follows:
- 5% amlexanox paste is an approved product for sale in the US
(Aphthasol(R)); approved in the UK and Canada but not yet sold;
approved in ten EU countries;
- Zindaclin(R) is an approved product for sale in the UK and
extensively throughout European Union countries; in the approval
process in other markets.
- OraDisc(TM) A is an approved product for sale in the US as of
September 2004; we are completing steps for manufacturing and
sale of the product in 2005.
- Our other OraDisc(TM) products are currently in the pre-clinical
phase.
- AP5346 is currently in a Phase I trial in Europe.
- AP5346 has been approved for a Phase I trial in the US by the
FDA.
- Mucoadhesive liquid technology patient recruitment in the
clinical trial is on hold pending commercial developments.
- Vitamin mediated delivery technology is currently in the
pre-clinical phase.
- We also have other products in the preclinical phase.
Due to the time consuming and uncertain nature of the drug candidate development
process and the governmental approval process described above, we cannot assure
you when we, independently or with our collaborative partners, might submit a
New Drug Application, or "NDA", for FDA or other regulatory review.
Government regulation also affects the manufacturing and marketing of
pharmaceutical products. Government regulations may delay marketing of our
potential drugs for a considerable or indefinite period of time, impose costly
procedural requirements upon our activities and furnish a competitive advantage
to larger companies or companies more experienced in regulatory affairs. Delays
in obtaining governmental regulatory approval could adversely affect our
marketing as well as our ability to generate significant revenues from
commercial sales. Our drug candidates
23
may not receive FDA or other regulatory approvals on a timely basis or at all.
Moreover, if regulatory approval of a drug candidate is granted, such approval
may impose limitations on the indicated use for which such drug may be marketed.
Even if we obtain initial regulatory approvals for our drug candidates, Access,
our drugs and our manufacturing facilities would be subject to continual review
and periodic inspection, and later discovery of previously unknown problems with
a drug, manufacturer or facility may result in restrictions on the marketing or
manufacture of such drug, including withdrawal of the drug from the market. The
FDA and other regulatory authorities stringently apply regulatory standards and
failure to comply with regulatory standards can, among other things, result in
fines, denial or withdrawal of regulatory approvals, product recalls or
seizures, operating restrictions and criminal prosecution.
THE UNCERTAINTY ASSOCIATED WITH PRECLINICAL AND CLINICAL TESTING MAY AFFECT OUR
ABILITY TO SUCCESSFULLY COMMERCIALIZE NEW PRODUCTS.
Before we can obtain regulatory approvals for the commercial sale of any of our
potential drugs, the drug candidates will be subject to extensive preclinical
and clinical trials to demonstrate their safety and efficacy in humans.
Preclinical or clinical trials of any of our future drug candidates may not
demonstrate the safety and efficacy of such drug candidates at all or to the
extent necessary to obtain regulatory approvals. In this regard, for example,
adverse side effects can occur during the clinical testing of a new drug on
humans which may delay ultimate FDA approval or even lead us to terminate our
efforts to develop the drug for commercial use. Companies in the biotechnology
industry have suffered significant setbacks in advanced clinical trials, even
after demonstrating promising results in earlier trials. In particular,
OraDisc(TM) and polymer platinate have taken longer to progress through clinical
trials than originally planned. This extra time has not been related to concerns
of the formulations but rather due to the lengthy regulatory process. The
failure to adequately demonstrate the safety and efficacy of a drug candidate
under development could delay or prevent regulatory approval of the drug
candidate. A delay or failure to receive regulatory approval for any of our drug
candidates could prevent us from successfully commercializing such candidates
and we could incur substantial additional expenses in our attempts to further
develop such candidates and obtain future regulatory approval.
WE MAY INCUR SUBSTANTIAL PRODUCT LIABILITY EXPENSES DUE TO THE USE OR MISUSE OF
OUR PRODUCTS FOR WHICH WE MAY BE UNABLE TO OBTAIN INSURANCE COVERAGE.
Our business exposes us to potential liability risks that are inherent in the
testing, manufacturing and marketing of pharmaceutical products. These risks
will expand with respect to our drug candidates, if any, that receive regulatory
approval for commercial sale and we may face substantial liability for damages
in the event of adverse side effects or product defects identified with any of
our products that are used in clinical tests or marketed to the public. We
generally procure product liability insurance for drug candidates that are
undergoing human clinical trials. Product liability insurance for the
biotechnology industry is generally expensive, if available at all, and as a
result, we may be unable to obtain insurance coverage at acceptable costs or in
a sufficient amount in the future, if at all. We may be unable to satisfy any
claims for which we may be held liable as a result of the use or misuse of
products which we have developed, manufactured or sold and any such product
liability claim could adversely affect our business, operating results or
financial condition.
WE MAY INCUR SIGNIFICANT LIABILITIES IF WE FAIL TO COMPLY WITH STRINGENT
ENVIRONMENTAL REGULATIONS OR IF WE DID NOT COMPLY WITH THESE REGULATIONS IN THE
PAST.
Our research and development processes involve the controlled use of hazardous
materials. We are subject to a variety of federal, state and local governmental
laws and regulations related to the use, manufacture, storage, handling and
disposal of such material and certain waste products. Although we believe that
our activities and our safety procedures for storing, using, handling and
disposing of such materials comply with the standards prescribed by such laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such accident, we
could be held liable for any damages that result and any such liability could
exceed our resources.
INTENSE COMPETITION MAY LIMIT OUR ABILITY TO SUCCESSFULLY DEVELOP AND MARKET
COMMERCIAL PRODUCTS.
The biotechnology and pharmaceutical industries are intensely competitive and
subject to rapid and significant technological change. Our competitors in the
United States and elsewhere are numerous and include, among others,
24
major multinational pharmaceutical and chemical companies, specialized
biotechnology firms and universities and other research institutions.
The following products may compete with polymer platinate:
- - Cisplatin, marketed by Bristol-Myers-Squibb, the originator of the drug, and
several generic manufacturers;
- - Carboplatin, marketed by Bristol-Myers-Squibb in the US; and
- - Oxaliplatin, marketed exclusively by Sanofi-Synthelabo.
The following companies are working on therapies and formulations that may be
competitive with our polymer platinate:
- - Antigenics and Regulon are developing liposomal formulations; and
- - American Pharmaceutical Partners, Cell Therapeutics, Daiichi, Enzon and Debio
are developing alternate drugs in combination with polymers and other drug
delivery systems.
The following products may compete with Residerm(R) products:
- - Benzamycin, marketed by a subsidiary of Aventis;
- - Cleocin-T and a generic topical clindamycin, marketed by Pfizer;
- - Benzac, marketed by Galderma; and
- - Triaz, marketed by Medicis Pharmaceutical Corp.
Technology and prescription steroids such as Kenalog in OraBase, developed by
Bristol-Myers Squibb, may compete with our commercialized Aphthasol(R) product.
OTC products including Orajel - Del Laboratories and Anbesol - Wyeth Consumer
Healthcare also compete in the aphthous ulcer market.
Companies working on therapies and formulations that may be competitive with our
vitamin mediated drug delivery system are Bristol-Myers-Squibb, Centocor
(acquired by Johnson & Johnson), GlaxoSmithKline, Imclone and Xoma which are
developing targeted monoclonal antibody therapy.
Amgen, CuraGen, McNeil, MGI Pharma and OSI Pharmaceuticals are developing
products to treat mucositis that may compete with our mucoadhesive liquid
technology.
BioDelivery, Biovail Corporation, Cellgate, CIMA Labs, Inc., Depomed Inc.,
Emisphere Technologies, Inc., Eurand, Flamel Technologies, Nobex and Xenoport
are developing products which compete with our oral drug delivery system.
Many of these competitors have and employ greater financial and other resources,
including larger research and development, marketing and manufacturing
organizations. As a result, our competitors may successfully develop
technologies and drugs that are more effective or less costly than any that we
are developing or which would render our technology and future products obsolete
and noncompetitive.
In addition, some of our competitors have greater experience than we do in
conducting preclinical and clinical trials and obtaining FDA and other
regulatory approvals. Accordingly, our competitors may succeed in obtaining FDA
or other regulatory approvals for drug candidates more rapidly than we do.
Companies that complete clinical trials, obtain required regulatory agency
approvals and commence commercial sale of their drugs before their competitors
may achieve a significant competitive advantage. Drugs resulting from our
research and development efforts or from our joint efforts with collaborative
partners therefore may not be commercially competitive with our competitors'
existing products or products under development.
OUR ABILITY TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR DRUG CANDIDATES WILL
SUBSTANTIALLY DEPEND UPON THE AVAILABILITY OF REIMBURSEMENT FUNDS FOR THE COSTS
OF THE RESULTING DRUGS AND RELATED TREATMENTS.
25
The successful commercialization of, and the interest of potential collaborative
partners to invest in the development of our drug candidates, may depend
substantially upon reimbursement of the costs of the resulting drugs and related
treatments at acceptable levels from government authorities, private health
insurers and other organizations, including health maintenance organizations, or
HMOs. To date, the costs of our marketed products Aphthasol(R) and Zindaclin(R)
generally have been reimbursed at acceptable levels; however, the amount of such
reimbursement in the United States or elsewhere may be decreased in the future
or may be unavailable for any drugs that we may develop in the future. Limited
reimbursement for the cost of any drugs that we develop may reduce the demand
for, or price of such drugs, which would hamper our ability to obtain
collaborative partners to commercialize our drugs, or to obtain a sufficient
financial return on our own manufacture and commercialization of any future
drugs.
THE MARKET MAY NOT ACCEPT ANY PHARMACEUTICAL PRODUCTS THAT WE SUCCESSFULLY
DEVELOP.
The drugs that we are attempting to develop may compete with a number of
well-established drugs manufactured and marketed by major pharmaceutical
companies. The degree of market acceptance of any drugs developed by us will
depend on a number of factors, including the establishment and demonstration of
the clinical efficacy and safety of our drug candidates, the potential advantage
of our drug candidates over existing therapies and the reimbursement policies of
government and third-party payers. Physicians, patients or the medical community
in general may not accept or use any drugs that we may develop independently or
with our collaborative partners and if they do not, our business could suffer.
In 1996, the 5% amlexanox paste product was approved for sale in the United
States. To date, the product sales have not been significant. On July 22, 2002,
we acquired the rights to it from Block Drug Company. The product has been
approved in the UK and Canada but has not been launched in any markets other
than the United States. We re-launched Aphthasol(R) in the US market in
September 2004 and recorded sales in the third and fourth quarters of 2004.
We received regulatory approval from the FDA to manufacture and sell OraDisc(TM)
A in September 2004 and are proceeding with our manufacturing and marketing
plans for 2005.
TRENDS TOWARD MANAGED HEALTH CARE AND DOWNWARD PRICE PRESSURES ON MEDICAL
PRODUCTS AND SERVICES MAY LIMIT OUR ABILITY TO PROFITABLY SELL ANY DRUGS THAT WE
MAY DEVELOP.
Lower prices for pharmaceutical products may result from:
- third-party payers' increasing challenges to the prices
charged for medical products and services;
- the trend toward managed health care in the United States
and the concurrent growth of HMOs and similar organizations
that can control or significantly influence the purchase of
healthcare services and products; and
- legislative proposals to reform healthcare or reduce
government insurance programs.
The cost containment measures that healthcare providers are instituting,
including practice protocols and guidelines and clinical pathways, and the
effect of any healthcare reform, could limit our ability to profitably sell any
drugs that we may successfully develop. Moreover, any future legislation or
regulation, if any, relating to the healthcare industry or third-party coverage
and reimbursement, may cause our business to suffer.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS.
26
Our success depends, in part, on our ability to obtain U.S. and foreign patent
protection for our drug candidates and processes, preserve our trade secrets and
operate our business without infringing the proprietary rights of third parties.
Legal standards relating to the validity of patents covering pharmaceutical and
biotechnological inventions and the scope of claims made under such patents are
still developing and there is no consistent policy regarding the breadth of
claims allowed in biotechnology patents. The patent position of a biotechnology
firm is highly uncertain and involves complex legal and factual questions. We
cannot assure you that any existing or future patents issued to, or licensed by,
us will not subsequently be challenged, infringed upon, invalidated or
circumvented by others. As a result, although we, together with our
subsidiaries, are either the owner or licensee to 24 U.S. patents and to 19 U.S.
patent applications now pending, and 8 European patents and 15 European patent
applications, we cannot assure you that any additional patents will issue from
any of the patent applications owned by, or licensed to, us. Furthermore, any
rights that we may have under issued patents may not provide us with significant
protection against competitive products or otherwise be commercially viable.
Our patents for the following technologies expire in the years and during the
date ranges indicated below:
- 5% amlexanox paste in 2011
- Zindaclin(R) and Residerm(R) between 2007 and 2011
- OraDisc(TM) in 2020
- AP5280 in 2021
- AP5346 in 2021
- Mucoadhesive technology, patents are pending
- Vitamin mediated technology between 2004 and 2019
In addition, patents may have been granted to third parties or may be granted
covering products or processes that are necessary or useful to the development
of our drug candidates. If our drug candidates or processes are found to
infringe upon the patents or otherwise impermissibly utilize the intellectual
property of others, our development, manufacture and sale of such drug
candidates could be severely restricted or prohibited. In such event, we may be
required to obtain licenses from third parties to utilize the patents or
proprietary rights of others. We cannot assure you that we will be able to
obtain such licenses on acceptable terms, if at all. If we become involved in
litigation regarding our intellectual property rights or the intellectual
property rights of others, the potential cost of such litigation, regardless of
the strength of our legal position, and the potential damages that we could be
required to pay could be substantial.
OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF, OR FAIL TO ATTRACT, KEY
PERSONNEL.
We are highly dependent upon the efforts of our senior management and scientific
team, including our President and Chief Executive Officer, Kerry Gray. The loss
of the services of one or more of these individuals could delay or prevent the
achievement of our research, development, marketing, or product
commercialization objectives. While we have employment agreements with Mr. Gray
and David Nowotnik, PhD our Senior Vice President Research and Development,
their employment may be terminated by them or us at any time. Mr. Gray's and Dr.
Nowotnik's agreements expire within one year and are extendable each year on the
anniversary date. We do not have employment contracts with our other key
personnel. We do not maintain any "key-man" insurance policies on any of our key
employees and we do not intend to obtain such insurance. In addition, due to the
specialized scientific nature of our business, we are highly dependent upon our
ability to attract and retain qualified scientific and technical personnel. In
view of the stage of our development and our research and development programs,
we have restricted our hiring to research scientists and a small administrative
staff and we have made only limited investments in manufacturing, production,
sales or regulatory compliance resources. There is intense competition among
major pharmaceutical and chemical companies, specialized biotechnology firms and
universities and other research institutions for qualified personnel in the
areas of our activities, however, and we may be unsuccessful in attracting and
retaining these personnel.
OWNERSHIP OF OUR SHARES IS CONCENTRATED, TO SOME EXTENT, IN THE HANDS OF A FEW
INVESTORS WHICH COULD LIMIT THE ABILITY OF OUR OTHER STOCKHOLDERS TO INFLUENCE
THE DIRECTION OF THE COMPANY.
Larry N. Feinberg (Oracle Partners LP, Oracle Institutional Partners LP and
Oracle Investment Management Inc.) and Heartland Advisors, Inc. each
beneficially owned approximately 12.0% and 11.1%, respectively, of our
27
common stock as of December 31, 2004. Accordingly, they collectively may have
the ability to significantly influence or determine the election of all of our
directors or the outcome of most corporate actions requiring stockholder
approval. They may exercise this ability in a manner that advances their best
interests and not necessarily those of our other stockholders.
PROVISIONS OF OUR CHARTER DOCUMENTS COULD DISCOURAGE AN ACQUISITION OF OUR
COMPANY THAT WOULD BENEFIT OUR STOCKHOLDERS AND MAY HAVE THE EFFECT OF
ENTRENCHING, AND MAKING IT DIFFICULT TO REMOVE, MANAGEMENT.
Provisions of our Certificate of Incorporation, By-laws and Stockholders Rights
Plan may make it more difficult for a third party to acquire control of our
company, even if a change in control would benefit our stockholders. In
particular, shares of our preferred stock may be issued in the future without
further stockholder approval and upon such terms and conditions, and having such
rights, privileges and preferences, as our Board of Directors may determine,
including, for example, rights to convert into our common stock. The rights of
the holders of our common stock will be subject to, and may be adversely
affected by, the rights of the holders of any of our preferred stock that may be
issued in the future. The issuance of our preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire control of us. This could limit the price that certain
investors might be willing to pay in the future for shares of our common stock
and discourage these investors from acquiring a majority of our common stock.
Further, the existence of these corporate governance provisions could have the
effect of entrenching management and making it more difficult to change our
management.
AMEX LISTING REQUIREMENTS.
Our common stock is presently listed on the American Stock Exchange under the
symbol AKC. All companies listed on the American Stock Exchange are required to
comply with certain continued listing standards, including corporate governance
requirements, maintaining stockholders' equity at required levels, obtaining
shareholder approvals for certain transactions, share price requirements and
other rules and regulations of the American Stock Exchange. If we are unable to
remedy any listing standard noncompliance with the American Stock Exchange under
its regulations and within the required time frames for such remediation, or
otherwise regain compliance or obtain shareholder approval for any transaction
requiring approval, we cannot assure you that our common stock will continue to
remain eligible for listing on the American Stock Exchange. In the event that
our common stock is delisted from the American Stock Exchange its market value
and liquidity could be materially adversely affected.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD LOWER OUR STOCK PRICE.
The market price for our common stock could drop as a result of sales of a large
number of our presently outstanding shares our shares that we may issue or
be obligated to issue in the future. All of the 15,524,734 shares of our common
stock that are outstanding as of March 15, 2005, are unrestricted and freely
tradable or tradable pursuant to a resale registration statement or under Rule
144 of the Securities Act.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Effective internal controls are necessary for us to provide reliable financial
reports. If we cannot provide reliable financial reports, our operating results
could be harmed. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
While we continue to evaluate and improve our internal controls, we cannot be
certain that these measures will ensure that we implement and maintain adequate
controls over our financial processes and reporting in the future. Any failure
to implement required new or improved controls, or difficulties encountered in
their implementation, could harm our operating results or cause us to fail to
meet our reporting obligations.
We have completed documenting and testing our internal control procedures in
order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act,
which requires annual management assessments of the effectiveness of our
internal control over financial reporting and a report by our independent
registered public accounting firm addressing these assessments. For the year
ended December 31, 2004, our management has determined that our internal control
over financial reporting was effective to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. Please refer to management's annual report on internal
control over financial reporting, and the report by Grant Thornton LLP, which
appear later in this report. If we fail to maintain the adequacy of our internal
controls, as such standards are modified, supplemented or amended from time to
time, we may not be able to ensure that we can conclude on an ongoing basis that
we have effective internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an
effective internal control environment could cause investors to lose confidence
in our reported financial information, which could have a material adverse
effect on our stock price.
ITEM 2. PROPERTIES
We maintain one facility of approximately 17,000 square feet for administrative
offices and laboratories in Dallas, Texas. We have a lease agreement for the
facility, which terminates in March 2006. Adjacent space may be available for
expansion which we believe would accommodate growth for the foreseeable future.
Our subsidiary, Access Pharmaceuticals Australia Pty. Limited, leases
approximately 7,000 square feet for offices and laboratories in Sydney, New
South Wales, Australia.
We believe that our existing properties are suitable for the conduct of our
business and adequate to meet our present needs.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS
Mr. Kerry P. Gray, 52, has been our President and Chief Executive Officer and a
director since January 1996. Prior to such time, from June 1993, Mr. Gray served
as President and Chief Executive Officer of Access Pharmaceuticals, Inc., a
private Texas corporation. Previously, Mr. Gray served as Vice President and
Chief Financial Officer of PharmaSciences, Inc., a company he co-founded to
acquire technologies in the drug delivery area. From May 1990 to August 1991,
Mr. Gray was Senior Vice President, Americas, Australia and New Zealand of
Rhone-Poulenc Rorer, Inc. Prior to the Rorer/Rhone Poulenc merger, he had been
Area Vice President Americas of Rorer International Pharmaceuticals. Previously,
from January 1986 to May 1988, he was Vice President, Finance of Rorer
International Pharmaceuticals, having served in that same capacity for the
Revlon Health Care Group of companies before their acquisition by Rorer Group.
Between 1975 and 1985, he held various senior financial positions with the
Revlon Health Care Group.
David P. Nowotnik, Ph.D., 56, has been Senior Vice President Research and
Development since January 2003 and had been Vice President Research and
Development from 1998. From 1994 until 1998, Dr. Nowotnik had been with Guilford
Pharmaceuticals, Inc. in the position of Senior Director, Product Development
and was responsible for a team of scientists developing polymeric
controlled-release drug delivery systems. From 1988 to 1994 he was with
Bristol-Myers Squibb researching and developing technetium radiopharmaceuticals
and MRI contrast agents. From 1977 to 1988 he was with Amersham International
leading the project which resulted in the discovery and development of Ceretec.
Mr. Stephen B. Thompson, 51, has been Vice President since 2000 and our Chief
Financial Officer since 1996. From 1990 to 1996, he was Controller and
Administration Manager of Access Pharmaceuticals, Inc., a private Texas
corporation. Previously, from 1989 to 1990, Mr. Thompson was Controller of
Robert E. Woolley, Inc. a hotel real estate company where he was responsible for
accounting, finances and investor relations. From 1985 to 1989, he was
Controller of OKC Limited Partnership, an oil and gas company where he was
responsible for accounting, finances and SEC reporting. Between 1975 and 1985 he
held various accounting and finance positions with Santa Fe International
Corporation.
29
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has traded on the American Stock Exchange, or AMEX, since March
30, 2000 under the trading symbol AKC. The following table sets forth, for the
periods indicated, the high and low closing prices for our common stock as
reported by AMEX for fiscal years 2004 and 2003.
COMMON STOCK
--------------------
HIGH LOW
--------- --------
FISCAL YEAR ENDED DECEMBER 31, 2004
First quarter $ 6.42 $ 5.09
Second quarter 7.95 5.50
Third quarter 6.33 2.53
Fourth quarter 5.66 2.97
FISCAL YEAR ENDED DECEMBER 31, 2003
First quarter $ 2.74 $ 1.75
Second quarter 3.50 1.81
Third quarter 4.40 2.91
Fourth quarter 5.50 3.75
We have never declared or paid any cash dividends on our preferred stock or
common stock and we do not anticipate paying any cash dividends in the
foreseeable future. The payment of dividends, if any, in the future is within
the discretion of our board of directors and will depend on our earnings,
capital requirements and financial condition and other relevant facts. We
currently intend to retain all future earnings, if any, to finance the
development and growth of our business.
The number of record holders of Access common stock at March 30, 2005 was
approximately 5,900. On March 30, 2005, the closing price for the common stock
as quoted on the AMEX was $2.50. There were 15,524,734 shares of common stock
outstanding at March 20, 2005.
RECENT SALES OF UNREGISTERED SECURITIES
None
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE UNDER EQUITY
BE ISSUED UPON EXERCISE EXERCISE PRICE OF COMPENSATION PLANS
OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
- ------------- ----------------------- ------------------- ------------------------
Equity compensation plans
approved by security
holders
1995 Stock Awards Plan 2,182,181 3.76 129,780
2001 Restricted Stock Plan 126,474 -- 38,762
Equity compensation plans
not approved by security
holders 500,000 2.50 --
2000 Special Stock Option Plan
ISSUER PURCHASES OF EQUITY SECURITIES
None
30
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR NET LOSS PER SHARE)
The following data has been derived from our audited consolidated financial
statements and notes thereto appearing elsewhere in this Form 10-K and prior
audited consolidated financial statements of Access and notes thereto. The data
should be read in conjunction with the "Selected Financial Data" and Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this Form
10-K.
For the Year Ended December 31,
---------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS DATA:
Total revenues $ 549 $ 1,295 $ 1,147 $ 243 $ 107
Operating loss (9,079) (8,213) (8,700) (6,308) (6,058)
Interest and miscellaneous income 226 2,559 594 1,451 972
Interest and other expense 1,385 1,281 1,278 1,170 342
Net loss (10,238) (6,935) (9,384) (6,027) (5,428)
COMMON STOCK DATA:
Net loss per basic and diluted
common share $ (0.68) $ (0.52) $ (0.72) $ (0.47) $ (0.49)
Weighted average basic and
diluted common shares
outstanding 15,162 13,267 13,104 12,857 11,042
December 31,
---------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short term investments $ 2,261 $ 2,587 $ 9,776 $ 20,126 $ 25,809
Restricted cash 1,284 649 468 600 -
Total assets 11,090 11,811 19,487 25,487 30,526
Deferred revenue 1,199 1,184 1,199 508 551
Convertible notes 13,530 13,530 13,530 13,530 13,530
Total liabilities 17,751 17,636 18,998 16,409 15,522
Total stockholders' equity (deficit) (6,661) (5,825) 489 9,078 15,004
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and related notes included in this Form 10-K.
OVERVIEW
We are an emerging pharmaceutical company focused on developing both novel low
development risk product candidates and technologies with longer-term major
product opportunities. We are a Delaware corporation.
Together with our subsidiaries, we have proprietary patents or rights to seven
drug delivery technology platforms:
- - synthetic polymer targeted delivery,
- - vitamin mediated targeted delivery,
- - vitamin mediated oral delivery,
- - bioerodible cross-linker technology,
- - mucoadhesive disc technology,
- - hydrogel particle aggregate technology, and
- - Residerm(R) topical delivery.
In addition, we are marketing in the United States - Aphthasol(R), the first FDA
approved product for the treatment of canker sores. We are developing new
formulations and delivery forms of amlexanox including mucoadhesive disc
delivery and mucoadhesive liquid delivery.
Our amlexanox 5% paste is marketed in the US as Aphthasol(R). Block Drug Company
had manufactured the 5% amlexanox paste since the product was approved by the
FDA in 1996 in an approved Puerto Rico facility. At such time when we acquired
the US rights to Aphthasol(R), we entered into a Supply Agreement whereby Block
Drug Company was to produce Aphthasol(R) for us for a defined period of time at
its Puerto Rico facility. We were subsequently advised by Block Drug Company
that it was unable to comply with the terms of the Supply Agreement and that it
would not be able to produce Aphthasol(R) for us. Due to Block Drug Company's
production failure, we had sufficient product to supply wholesalers only through
June 2003. We selected Contract Pharmaceuticals Ltd. Canada as our new
manufacturer of amlexanox 5% paste and it completed full scale production in
September 2004. We re-launched Aphthasol(R) in the US market in September 2004
and recorded sales in the third and fourth quarters of 2004.
Since our inception, we have devoted our resources primarily to fund our
research and development programs. We have been unprofitable since inception and
to date have received limited revenues from the sale of products. We cannot
assure you that we will be able to generate sufficient product revenues to
attain profitability on a sustained basis or at all. We expect to incur losses
for the next several years as we continue to invest in product research and
development, preclinical studies, clinical trials and regulatory compliance. As
of December 31, 2004, our accumulated deficit was $64,465,000.
Subsequent to the end of the period being reported on (December 31, 2004), the
Company finalized an agreement with Cornell Capital Partners and Highgate House
Funds providing funding in the form of a Secured Convertible Debenture for net
proceeds of approximately $2,360,000, and an Equity Distribution Agreement under
which the Company can draw up to $15,000,000 in working capital over a 2-year
period (see further discussion under Liquidity).
On February 24, 2004 we closed a private placement sale of our common stock
pursuant to which we sold 1,789,371 shares of our common stock at a per share
price of $5.40. We received gross proceeds of $9,663,000 from this sale and had
expenses of $615,000. The investors also received 5 year warrants at an exercise
price of $7.10 per share to purchase 447,344 shares of our common stock and the
placement agents received warrants in the offering at an exercise price of $5.40
per share to purchase 156,481 shares of our common stock.
32
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2004 AND 2003
Our licensing revenue in 2004 was $104,000, as compared to licensing revenue of
$729,000 in 2003, a decrease of $625,000 due to one time initial licensing fees
in 2003. We recognize licensing revenue over the period of the performance
obligation under our licensing agreements. Licensing revenue recognized in both
2004 and 2003 was from several agreements including agreements related to
various amlexanox projects and Residerm(R).
Product sales of Aphthasol(R) totaled $351,000 in 2004, as compared to product
sales of $532,000 in 2003. Sales were limited in 2004 due to a supply
interruption of the product. Supplies were manufactured in the third quarter of
2004 and sales commenced in late September 2004.
Royalty income for 2004 was $94,000 as compared to $34,000 in 2003, an increase
of $60,000 due to higher sales of Zindaclin(R) in additional countries.
Our total research spending for the year ended December 31, 2004 was $5,417,000,
as compared to $6,096,000 in 2003, a decrease of $679,000. The decrease in
expenses was the result of:
- lower clinical development costs ($622,000) for our OraDisc(TM) A
clinical trial which was completed in 2003;
- lower costs for the AP5280 and AP5346 polymer platinate clinical
trials ($374,000) of which the AP5280 trial was completed in
2003; and
- other net decreases ($201,000).
These decreases were partially offset by:
- higher production and testing costs for Aphthasol(R) and start-up
costs for OraDisc(TM) A ($117,000);
- higher scientific salary and salary related expenses due to
additional staff ($269,000); and
- higher expenses in our Australian operations ($132,000).
Our cost of product sales was $239,000 for 2004 as compared to $277,000 in 2003,
a decrease of $38,000. The decrease in the cost of product sales was due to
reduced Aphthasol(R) sales in 2004 due to the supply interruption.
Our total general and administrative expenses were $3,199,000 for 2004, an
increase of $685,000 over 2003 expenses of $2,514,000, due to:
- higher professional fees and expenses ($339,000) principally due
to increased accounting and legal fees associated with compliance
with the Sarbanes-Oxley Act, new contracts and legal proceedings;
- higher business consulting expenses for new business development
activities ($88,000);
- higher fees for a healthcare consultant review ($133,000);
- higher patent and license expenses ($51,000);
- higher salary and related expense ($63,000); and
- other net increases ($11,000).
Depreciation and amortization was $773,000 in 2004 as compared to $621,000 in
2003, an increase of $152,000 due to the impairment of a license which is no
longer effective ($109,000) and from the acquisition of new capital equipment
($43,000).
Our loss from operations in 2004 was $9,079,000 as compared to a loss of
$8,213,000 in 2003.
Interest and miscellaneous income was $226,000 for 2004 as compared to
$2,559,000 for 2003, a decrease of $2,333,000. The decrease in miscellaneous
income of $2,280,000 was due to a one time payment associated with a
33
settlement agreement with Block Drug Company in 2003 and a decrease in interest
income due to lower cash balances and lower interest rates in 2004 as compared
with 2003.
Interest and miscellaneous expense was $1,385,000 for 2004 as compared to
$1,281,000 for the same period in 2003, an increase of $104,000. The expense to
record an impairment in investment $112,000 and the change in interest expense
was $8,000.
Net loss for 2004 was $10,238,000, or a $0.68 basic and diluted loss per common
share compared with a loss of $6,935,000, or a $0.52 basic and diluted loss per
common share, for 2003.
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002
Our licensing revenue in 2003 was $729,000, as compared to licensing revenue of
$853,000 in 2002, a decrease of $124,000. We recognize licensing revenue over
the period of the performance obligation under our licensing agreements.
Licensing revenue recognized in both 2003 and 2002 was from several agreements,
including agreements related to various amlexanox projects and Residerm(R).
Product sales of Aphthasol(R) totaled $532,000 in 2003, as compared to product
sales of $194,000 in 2002. Our first sales were recorded in December 2002. As a
result of the Aphthasol(R) supply situation discussed above, there were no
product sales of Aphthasol(R) between July 2003 and August 2004.
In 2002 we had a research and development agreement which provided $89,000 in
revenue. The agreement expired in 2002 and we had no such revenue in 2003.
Royalty income for 2003 was $34,000 as compared to $11,000 in 2002, an increase
of $23,000.
Our total research spending for the year ended December 31, 2003 was $6,096,000,
as compared to $7,024,000 in 2002, a decrease of $928,000. The decrease in
expenses was the result of:
- lower clinical development costs ($812,000) for the amlexanox
OraDisc(TM) project; and
- lower development and clinical development costs for our polymer
platinate project ($773,000).
These decreases were offset by:
- higher salary and salary related expenses due to additional staff
($278,000);
- higher expenses due to the full year impact of our Australian
operations ($254,000);
- higher internal lab costs due to the additional staff and projects
($102,000); and
- other net increases ($23,000).
Our cost of product sales was $277,000 for 2003 as compared to $107,000 in 2002.
The commencement of our Aphthasol(R) sales began in the fourth quarter of 2002.
Our total general and administrative expenses were $2,514,000 for 2003, an
increase of $237,000 over 2002 expenses of $2,277,000, due to:
- higher professional fees and expenses ($81,000);
- higher shareholder-investor relations expenses ($144,000);
- higher patent and license expenses ($60,000);
- higher salary and related expense ($50,000); and
- higher rent expenses ($31,000).
These increases were offset by lower withholding taxes on foreign revenues
($129,000).
Depreciation and amortization was $621,000 in 2003 as compared to $439,000 in
2002, an increase of $182,000 primarily resulting from the acquisition of new
capital equipment and a full year of amortization of acquired patents.
34
Our loss from operations in 2003 was $8,213,000 as compared to a loss of
$8,700,000 in 2002.
Our interest and miscellaneous income was $2,559,000 for 2003 as compared to
$594,000 for 2002, an increase of $1,965,000. The increase in miscellaneous
income of $2,280,000 was due to a one time settlement agreement with Block Drug
Company relating to Block's contractual obligation to supply Aphthasol(R) to us.
Pursuant to the settlement, Block made a onetime cash payment to us and we were
also relieved of certain future payment obligations to Block under the Asset
Sale Agreement pursuant to which we purchased from Block the assets relating to
amlexanox. Under the settlement agreement, Block was relieved of its obligation
to supply amlexanox to us. The increase in interest and miscellaneous income was
partially offset by a decrease in interest income due to lower cash balances and
lower interest rates in 2003 as compared with 2002.
Interest expense was $1,281,000 for 2003 as compared to $1,278,000 for the same
period in 2002, an increase of $3,000.
Net loss for 2003 was $6,935,000, or a $0.52 basic and diluted loss per common
share compared with a loss of $9,384,000, or a $0.72 basic and diluted loss per
common share, for 2002.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through private sales of common stock
and convertible notes and our principal source of liquidity is cash and cash
equivalents. Contract research payments, licensing fees and milestone payments
from corporate alliances and mergers have also provided funding for operations.
As of December 31, 2004 our cash and cash equivalents and short-term investments
were $2,261,000 and our working capital was $(7,788,000). Our working capital at
December 31, 2004 represented a decrease of $8,994,000 as compared to our
working capital as of December 31, 2003 of $1,206,000. The decrease in working
capital was due mainly to $8,030,000 of convertible notes that is coming due
within twelve months and by the loss from operations for the twelve months ended
December 31, 2004 offset by a private placement of common stock and warrants
raising $9.1 million of net proceeds.
As of December 31, 2004, the Company had a working capital deficit of
approximately $7,788,000. As of that date, the Company did not have enough
capital to achieve its near, medium or long-term goals. Subsequent to that date,
the Company reached an agreement which management believes will provide
sufficient capital to achieve its short-term goals, and depending upon results
may provide sufficient capital to meet its long-term goals.
As of March 30, 2005 the Company executed a Standby Equity Distribution
Agreement (SEDA) with Cornell Capital Partners. Under the SEDA, the Company may
issue and sell to Cornell Capital Partners common stock for a total purchase
price of up to $15,000,000. The purchase price for the shares is equal to their
market price, which is defined in the SEDA as 98% of the lowest volume weighted
average price of the common stock during a specified period of trading days
following the date notice is given by the Company that it desires to access the
SEDA. Further, we have agreed to pay Cornell Capital Partners, L.P. 3.5% of the
proceeds that we receive under the Equity Line of Credit. The amount of each
draw down is subject to a maximum amount of $1,000,000. The terms of the SEDA do
not allow us to make any draw downs if the draw down would cause Cornell Capital
to own in excess of 9.9% of our outstanding shares of common stock. The Company
believes that because of the ability of Cornell Capital to sell shares under a
registration statement and as a result of Cornell Capital's business model
Access does not believe that Cornell would accumulate 9.9% of the outstanding
common stock of the Company. Upon closing of the transaction, Cornell Capital
Partners will receive a one-time commitment fee of 146,500 shares of the
Company's common stock. On the same date, the Company entered into a Placement
Agent Agreement in escrow with Newbridge Securities Corporation, a registered
broker-dealer. Pursuant to the Placement Agent Agreement, upon closing of the
transaction the Company will pay a one-time placement agent fee of 3,500 shares
of common stock.
In addition, as of March 30, 2005, the Company executed a Securities Purchase
Agreement with Cornell Capital Partners and Highgate House Funds. Under the
Securities Purchase Agreement, upon closing Cornell Capital Partners and
Highgate House Funds are obligated to purchase an aggregate of $2,633,000
principal amount of Secured Convertible Debentures from the Company (net
proceeds to the Company of $2,360,000). The Secured Convertible Debentures
accrue interest at a rate of 7% per year and mature 12 months from the issuance
date with scheduled monthly repayment commencing on November 1, 2005 to the
extent that the Secured Convertible Debenture has not been converted to common
stock. The Secured Convertible Debenture is convertible into the Company's
common stock at the holder's option any time up to maturity at a conversion
price equal to $4.00. The Secured Convertible Debentures are secured by all of
the assets of the Company. The Company has the right to redeem the Secured
Convertible Debentures upon 3 business days notice for 110% of the amount
redeemed. Pursuant to the Securities Purchase Agreement, the Company is required
to issue to the holders an aggregate of 50,000 shares of common stock of the
Company.
35
Each of the SEDA, Security Purchase Agreement and related agreements are in
escrow pending our filing of this Form 10K and issuance of shares of common
stock required to be issued under the agreement.
On February 24, 2004 we closed a private placement sale of our common stock
pursuant to which we sold 1,789,371 shares of our common stock at a per share
price of $5.40. We received gross proceeds of $9,663,000 from this sale and had
expenses of $647,000. The investors also received 5 year warrants at an exercise
price of $7.10 per share to purchase 447,344 shares of our common stock and the
placement agents received warrants in the offering at an exercise price of $5.40
per share to purchase 156,481 shares of our common stock.
We have also issued an aggregate of $13,530,000 of convertible notes, which are
due in two parts -$8,030,000 is due on September 13, 2005 and $5,500,000 is due
on September 13, 2008. The notes which bear interest at a rate of 7.7% per annum
with $1,042,000 of interest due annually on each September 13, may convert to
common stock at a conversion price of $5.50 per share. Should the holders of the
notes not elect to convert them to common stock, or if we are not able to force
the conversion of the notes by their terms, we must repay the amounts on the due
dates. A failure to restructure our existing convertible notes or obtain
necessary additional capital in the future could jeopardize our operations. We
do not have sufficient funds to repay our convertible notes at their maturity.
We may not be able to restructure the convertible notes or obtain additional
financing to repay them on terms acceptable to us, if at all. If we raise
additional funds by selling equity securities, the relative equity ownership of
our existing investors would be diluted and the new investors could obtain terms
more favorable than previous investors. A failure to restructure our convertible
notes or obtain additional funding to repay the convertible notes and support
our working capital and operating requirements, could cause us to be in default
of our convertible notes and prevent us from making expenditures that are needed
to allow us to maintain our operations.
We have generally incurred negative cash flows from operations since inception,
and have expended, and expect to continue to expend in the future, substantial
funds to complete our planned product development efforts. Since inception, our
expenses have significantly exceeded revenues, resulting in an accumulated
deficit as of December 31, 2004 of $64,465,000. We expect that our existing
capital resources together with anticipated licensing revenues and royalties
will be adequate to fund our current level of operations for twelve months
excluding any obligation to repay the convertible notes and the debt service on
the convertible notes. We cannot assure you that we will ever be able to
generate significant product revenue or achieve or sustain profitability. We
currently do not have the cash resources to repay our Convertible Notes due in
September 2005. Our financing plan through the use of the SEDA or other sales
of equity are expected to provide the resources to repay such notes.
We plan to expend substantial funds to conduct research and development
programs, preclinical studies and clinical trials of potential products,
including research and development with respect to our acquired and developed
technology. Our future capital requirements and adequacy of available funds will
depend on many factors, including:
- the ability to convert, repay or restructure our outstanding
convertible notes and debentures;
- the successful commercialization of amlexanox and Zindaclin(R);
- the ability to establish and maintain collaborative arrangements with
corporate partners for the research, development and commercialization
of products;
- continued scientific progress in our research and development programs;
- the magnitude, scope and results of preclinical testing and clinical
trials;
- the costs involved in filing, prosecuting and enforcing patent claims;
- the costs involved in conducting clinical trials;
- competing technological developments;
- the cost of manufacturing and scale-up;
- the ability to establish and maintain effective commercialization
arrangements and activities; and
- successful regulatory filings.
36
We have devoted substantially all of our efforts and resources to research and
development conducted on our own behalf. The following table summarizes research
and development spending by project category (in thousands), which spending
includes, but is not limited to, payroll and personnel expense, lab supplies,
preclinical expense, development cost, clinical trial expense, outside
manufacturing expense and consulting expense:
Twelve Months ended
December 31,
----------------------------- Inception To
Project 2004 2003 Date (1)
- ----------------------- ------------ ------------ -------------
Polymer Platinate
(AP5280 and AP5346) $ 2,330 $ 2,559 $ 15,111
OraDisc(TM) 1,084 1,387 7,307
Bioerodible Hydrogel
Technology and
Nanoparticles and
Nanoparticle Networks 951 978 3,299
Vitamin Mediated
Targeted Delivery 748 614 1,703
Mucoadhesive Liquid
Technology (MLT) 51 34 1,480
Others (2) 253 524 5,020
------------ ------------ -------------
Total $ 5,417 $ 6,096 $ 33,920
============ ============ =============
(1) Cumulative spending from inception through December 31, 2004.
(2) The following projects are among the ones included in this line item:
Carbohydrate targeting, amlexanox cream and gel and other related
projects.
Due to uncertainties and certain of the risk factors described above, including
those relating to our ability to successfully commercialize our drug candidates,
our ability to obtain necessary additional capital to fund operations in the
future, our ability to successfully manufacture our products and our product
candidates in clinical quantities or for commercial purposes, government
regulation to which we are subject, the uncertainty associated with preclinical
and clinical testing, intense competition that we face, market acceptance of our
products and protection of our intellectual property, it is not possible to
reliably predict future spending or time to completion by project or product
category or the period in which material net cash inflows from significant
projects are expected to commence. If we are unable to timely complete a
particular project, our research and development efforts could be delayed or
reduced, our business could suffer depending on the significance of the project
and we might need to raise additional capital to fund operations, as discussed
in the risk factors above, including without limitation those relating to the
uncertainty of the success of our research and development activities and our
ability to obtain necessary additional capital to fund operations in the future.
As discussed in such risk factors, delays in our research and development
efforts and any inability to raise additional funds could cause us to eliminate
one or more of our research and development programs.
We plan to continue our policy of investing available funds in certificates of
deposit, money market funds, government securities and investment-grade
interest-bearing securities. We do not invest in derivative financial
instruments.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United State of America requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the
reported period. In applying our accounting principles, we must often make
individual estimates and assumptions regarding expected outcomes or
uncertainties. As you might expect, the actual results or outcomes are often
different than the estimated or assumed amounts. These differences are usually
minor and are included in our consolidated financial statements as soon as they
are known. Our estimates, judgments and assumptions are continually
37
evaluated based on available information and experience. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
REVENUE
Revenue associated with up-front license, technology access and research and
development funding payments under collaborative agreements is recognized
ratably over the performance period of the agreement. Determination of the
performance period involves judgment on management's part.
ASSET IMPAIRMENT
On January 1, 2002, we adopted SFAS 142, "Goodwill and Other Intangible Assets."
Upon adoption, we performed a transitional impairment test on our recorded
intangible assets that consisted primarily of acquisition related goodwill and
license intangibles. We also performed an annual impairment test in the fourth
quarter of 2004. The analysis resulted in no goodwill impairment charge in 2004.
We will be required to perform this test on at least an annual basis.
Our intangible assets at December 31, 2004 consist primarily of goodwill,
patents acquired in acquisitions and licenses, which were recorded at fair value
on the acquisition date.
Based on an assessment of our accounting policies and underlying judgments and
uncertainties affecting the application of those policies, we believe that our
consolidated financial statements provide a meaningful and fair perspective of
us. We do not suggest that other general factors, such as those discussed
elsewhere in this report, could not adversely impact our consolidated financial
position, results of operations or cash flows. The impairment test involves
judgment on the part of management as to the value of goodwill, licenses and
intangibles.
OFF-BALANCE SHEET TRANSACTIONS
None
CONTRACTUAL OBLIGATIONS
The Company's contractual obligations as of December 31, 2004 are set forth
below.
Payment Due by Period
------------------------------------------------
Total Less Than 1 Year 1-3 Years
------------- ---------------- -------------
Long-Term Debt
Obligations $ 13,992,000 $ 8,335,000 $ 5,657,000
Capital Lease
Obligations 118,000 82,000 36,000
------------- ---------------- -------------
Total $ 14,110,000 $ 8,417,000 $ 5,693,000
============= ================ =============
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash and short-term investments in certificates of deposit,
corporate securities with high quality ratings, and U.S. government securities.
These investments are not held for trading or other speculative purposes. These
financial investment securities all mature in 2005 and 2006 and their estimated
fair value approximates cost. Changes in interest rates affect the investment
income we earn on our investments and, therefore, impact our cash flows and
results of operations. A hypothetical 50 basis point decrease in interest rates
would result in a decrease in annual interest income and a corresponding
increase in net loss of approximately $24,000. The estimated effect assumes no
changes in our short-term investments at December 31, 2004. We do not believe
that we
38
are exposed to any market risks, as defined. We are not exposed to risks for
changes in commodity prices, or any other market risks.
ITEM 8. FINANCIAL AND SUPPLEMENTARY DATA
Financial statements required by this Item are incorporated in this 10-K on
pages F-1 through F-20. Reference is made to Item 15 of this Form -10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9(A). CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our chief executive
officer and our chief financial officer, after evaluating the
effectiveness of our "disclosure controls and procedures" (as defined in
Rules 13a-15(e) and 15d-(e) of the Securities and Exchange Act of 1934) as
of the end of the period covered by this annual report, have concluded
that as of that date, our disclosure controls and procedures were
effective in ensuring that information required to be disclosed by us in
this annual report is accumulated and communicated by our management, to
allow timely decisions regarding required disclosure.
(b) Management's report on internal control over financial reporting. Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-(f). Management assessed the effectiveness of our
internal controls over financial reporting using criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
- "Internal Control Integrated Framework". Based on our evaluation using
those criteria, our management concluded that our internal control over
financial reporting was effective as of December 31, 2004. Our
management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004, has been audited by Grant
Thornton LLP, an independent registered public accounting firm, as stated
in their attestion report which is included in this annual report on Form
10-K in Item 15.
(c) Changes in internal controls. There were no changes in our internal
controls during the fourth quarter of 2004 that have materially affected,
or are reasonably likely to material affect, our internal controls.
(d) Management's response to Report of Independent Registered Public
Accounting Firm. Our auditors have reached a different conclusion on our
internal control over financial reporting than we have reached. Their
conclusion is that we have two material weaknesses in the areas of
segregation of duties and as a result of an aggregation of three separate
significant deficiencies where the effectiveness of the controls are
dependent on segregation of duties, as set forth in their attestation
report. Their conclusion also points out that "these material weaknesses
did not result in any adjustments to the annual or interim consolidated
financial statements ..." and that "this report does not affect (their)
report dated March 31, 2005" reflecting their opinion on the financial
statements.
Management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is a process designed by, or under the supervision of, our
principal executive and principal financial officers, and effected by our
board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance
with generally accepted accounting principles including those policies and
procedures necessary to prepare, authorize, approve, maintain, record and
report accurately.
Adequate segregation of duties is an important consideration in
determining if a company's control activities are effective in achieving
the objectives of internal control. A fundamental element of internal
39
control is the segregation of certain key duties. The basic idea
underlying segregation of duties is that no employee or group should be in
a position both to perpetrate and to conceal errors or fraud in the normal
course of their duties.
An essential feature of segregation of duties/responsibilities within an
organization is that no one employee or group of employees has exclusive
control over any transaction or group of transactions. In addition, a
control over the processing of a transaction should not be performed by
the same individual who is responsible for recording or reporting the
transaction.
Based on the size of the Company, the complexity of our operations, the
number of transactions and the internal controls in place management
believes that the resources that were devoted to financial reporting in
2004 were appropriate. We do not expect that our internal control over
financial reporting will prevent or detect all error and all fraud. Over
time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures.
Continuous evaluation of controls is required.
Planned Remediation Action to Address Internal Control Weakness Identified
by External Auditors
Based on the above criteria the external auditors have determined that
proper segregation of duties does not exist within the accounting and
finance area. While the Company considers that there may be a perceived
lack of segregation of duties within the business, management believes
that sufficient controls are in place, including subsequent reviews of
transactions and results, budget versus actual comparisons and ethical
programs, that would limit the potential for a misstatement of the
financial statements that is more than inconsequential and the current
internal control environment provides reasonable assurance that material
misstatements in the financial statements would be prevented or detected
on a timely basis by employees in the normal course of performing their
assigned functions.
Furthermore, management believes there is adequate segregation of duties
within the business and given the history of the individuals above with
the business, believes that the chances of collusion resulting in
financial reporting fraud would be more than remote. In 2004 and in prior
periods there have been no incidences where it has been necessary to make
material adjustments to the annual or interim consolidated financial
statements due to breakdown in our internal controls.
However, the Company recognizes that this is a perceived material weakness
and is taking the necessary steps to mitigate this risk. Management and
the Audit Committee has considered the need for ongoing monitoring of
internal controls under Sarbanes-Oxley as well as strengthening the
internal controls of the business by the engagement of an outside
accounting/finance consulting firm to perform quarterly procedures
designed to assist in the maintaining and monitoring of an effective
control environment and to mitigate the risk related to a lack of
segregation of duties between senior accounting/finance personnel.
Standing alone, Sarbanes-Oxley requires quarterly and annual assessments
of the internal control structure and reporting function. As processes
change, management is required to update documentation and perform
adequate levels of testing to provide assurance that existing and any new
procedure is functioning appropriately. Furthermore, as the Company grows
documentation requirements are expected to be ongoing so the Company will
be making the documentation and internal control process improvement an
overriding theme.
The consulting firm is expected to report and take instructions directly
from the Audit Committee although management will be involved in assisting
in determining the scope of the quarterly and annual procedures. Terms and
conditions of this engagement are still under consideration.
40
ITEM 9(B). OTHER INFORMATION
As of March 30, 2005 the Company executed a Standby Equity Distribution
Agreement (SEDA) with Cornell Capital Partners. Under the SEDA, the Company may
issue and sell to Cornell Capital Partners common stock for a total purchase
price of up to $15,000,000. The purchase price for the shares is equal to their
market price, which is defined in the SEDA as 98% of the lowest volume weighted
average price of the common stock during a specified period of trading days
following the date notice is given by the Company that it desires to access the
SEDA. Further, we have agreed to pay Cornell Capital Partners, L.P. 3.5% of the
proceeds that we receive under the Equity Line of Credit. The amount of each
draw down is subject to a maximum amount of $1,000,000. The terms of the SEDA do
not allow us to make any draw downs if the draw down would cause Cornell Capital
to own in excess of 9.9% of our outstanding shares of common stock. The Company
believes that because of the ability of Cornell Capital to sell shares under a
registration statement and as a result of Cornell Capital's business model
Access does not believe that Cornell would accumulate 9.9% of the outstanding
common stock of the Company. Upon closing of the transaction, Cornell Capital
Partners will receive a one-time commitment fee of 146,500 shares of the
Company's common stock. On the same date, the Company entered into a Placement
Agent Agreement in escrow with Newbridge Securities Corporation, a registered
broker-dealer. Pursuant to the Placement Agent Agreement, upon closing of the
transaction the Company will pay a one-time placement agent fee of 3,500 shares
of common stock.
In addition, as of March 30, 2005, the Company executed a Securities Purchase
Agreement with Cornell Capital Partners and Highgate House Funds. Under the
Securities Purchase Agreement, upon closing Cornell Capital Partners and
Highgate House Funds are obligated to purchase an aggregate of $2,633,000
principal amount of Secured Convertible Debentures from the Company (net
proceeds to the Company of $2,360,000). The Secured Convertible Debentures
accrue interest at a rate of 7% per year and mature 12 months from the issuance
date with scheduled monthly repayment commencing on November 1, 2005 to the
extent that the Secured Convertible Debenture has not been converted to common
stock. The Secured Convertible Debenture is convertible into the Company's
common stock at the holder's option any time up to maturity at a conversion
price equal to $4.00. The Secured Convertible Debentures are secured by all of
the assets of the Company. The Company has the right to redeem the Secured
Convertible Debentures upon 3 business days notice for 110% of the amount
redeemed. Pursuant to the Securities Purchase Agreement, the Company is required
to issue to the holders an aggregate of 50,000 shares of common stock of the
Company.
Each of the SEDA, Security Purchase Agreement and related agreements are in
escrow pending our filing of this Form 10K and issuance of shares of common
stock required to be issued under the agreement.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS. The information required by this item with respect to directors
(including with respect to the audit committee of our Board of Directors) and
reports of beneficial ownership will be contained in our definitive Proxy
Statement ("Proxy Statement") for our 2005 Annual Meeting of Stockholders to be
held on May 13, 2005 and is incorporated herein by reference. We will file the
Proxy Statement with the Securities and Exchange Commission not later than April
29, 2005.
CODE OF ETHICS. We have adopted a Code of Business Conduct and Ethics (the
"Code") that applies to all of our employees (including executive officers) and
directors. The Code is available on our website at www.accesspharma.com. We
intend to satisfy the disclosure requirement regarding any waiver of a provision
of the Code applicable to any executive officer or director, by posting such
information on such website. Access shall provide to any person without charge,
upon request, a copy of the Code. Any such request must be made in writing to
Access, c/o Investor Relations, 2600 Stemmons Freeway, Suite 176, Dallas, TX
75207.
Our corporate governance guidelines and the charters of the audit committee,
compensation committee and nominating and corporate governance committee of the
Board of Directors are available on our website at www.accesspharma.com. Access
shall provide to any person without charge, upon request, a copy of any of the
foregoing materials. Any such request must be made in writing to Access, c/o
Investor Relations, 2600 Stemmons Freeway, Suite 176, Dallas, TX 75207.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Proxy Statement
and is incorporated herein by reference.
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Proxy Statement
and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be contained in the Proxy Statement
and is incorporated herein by reference.
42
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Financial Statements and Exhibits Page
- ------------------------------------ ----
1. Financial Statements. The following financial statements are submitted as part of this report:
Reports of Registered Independent Public Accounting Firm......................................... F-1
Consolidated Balance Sheets at December 31, 2004 and 2003 ....................................... F-4
Consolidated Statements of Operations and Comprehensive Loss for 2004, 2003 and 2002............. F-5
Consolidated Statements of Stockholders' Equity (Deficit) for 2004, 2003 and 2002................ F-6
Consolidated Statements of Cash Flows for 2004, 2003 and 2002.................................... F-7
Notes to Consolidated Financial Statements....................................................... F-8
2. Financial Statement Schedules
No financial statement schedules are included because they are not
required or the information is included in the financial statements or
notes thereto.
3. Exhibits
Exhibit Number
- --------------
2.1 Amended and Restated Agreement of Merger and Plan of Reorganization
between Access Pharmaceuticals, Inc. and Chemex Pharmaceuticals, Inc.,
dated as of October 31, 1995 (Incorporated by reference to Exhibit A of
the our Registration Statement on Form S-4 dated December 21, 1995,
Commission File No. 33-64031)
3.0 Articles of incorporation and bylaws:
3.1 Certificate of Incorporation (Incorporated by Reference to Exhibit 3(a)
of our Form 8-B dated July 12, 1989, Commission File Number 9-9134)
3.2 Certificate of Amendment of Certificate of Incorporation filed August
21, 1992
3.3 Certificate of Merger filed January 25, 1996. (Incorporated by reference
to Exhibit E of our Registration Statement on Form S-4 dated December
21, 1995, Commission File No. 33-64031)
3.4 Certificate of Amendment of Certificate of Incorporation filed January
25, 1996. (Incorporated by reference to Exhibit E of our Registration
Statement on Form S-4 dated December 21, 1995, Commission File No.
33-64031)
3.5 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 of
our Form 10-Q for the quarter ended June 30, 1996)
3.6 Certificate of Amendment of Certificate of Incorporation filed July 18,
1996. (Incorporated by reference to Exhibit 3.8 of our Form 10-K for the
year ended December 31, 1996)
3.7 Certificate of Amendment of Certificate of Incorporation filed June 18,
1998. (Incorporated by reference to Exhibit 3.8 of our Form 10-Q for the
quarter ended June 30, 1998)
3.8 Certificate of Amendment of Certificate of Incorporation filed July 31,
2000. (Incorporated by reference to Exhibit 3.8 of our Form 10-Q for the
quarter ended March 31, 2001)
3.9 Certificate of Designations of Series A Junior Participating Preferred
Stock filed November 7, 2001 (Incorporated by reference to Exhibit 4.1.h
of our Registration Statement on Form S-8, dated December 14, 2001,
Commission File No. 333-75136)
10.0 Material contracts:
10.1 Irrevocable Assignment of Proprietary Information with Dr. Charles G.
Smith (Incorporated by reference to Exhibit 10.6 of our Form 10-K for
the year ended December 31, 1991)
10.2 Asset Purchase and Royalty Agreement between Block Drug Company, Inc.
and us dated June 7, 1995 (Incorporated by reference to Exhibit 10.28 of
our Form 10-Q for the quarter ended June 30, 1995)
43
3.0 Exhibits (continued)
Exhibit Number
- --------------
*10.3 1995 Stock Option Plan (Incorporated by reference to Exhibit F of our
Registration Statement on Form S-4 dated December 21, 1995, Commission
File No. 33-64031)
10.4 Patent Purchase Agreement dated April 5, 1994 between David F. Ranney
and Access Pharmaceuticals, Inc. (Incorporated by reference to Exhibit
10.16 of the our Form 10-K for the year ended December 31, 1995)
10.5 First Amendment to Patent Purchase Agreement dated January 23, 1996
between David F. Ranney and us (Incorporated by reference to Exhibit
10.17 of our Form 10-K for the year ended December 31, 1995)
10.6 Lease Agreement between Pollock Realty Corporation and us dated July 25,
1996 (Incorporated by reference to Exhibit 10.19 of our Form 10-Q for
the quarter ended September 30, 1996)
10.7 Platinate HPMA Copolymer Royalty Agreement between The School of
Pharmacy, University of London and the Company dated November 19, 1996
(Incorporated by reference to Exhibit 10.19 of our Form 10-Q for the
quarter ended September 30, 1996)
10.8 Agreement of Merger and Plan of Reorganization, dated May 23, 1997 among
us, Access Holdings, Inc and Tacora Corporation (Incorporated by
reference to Exhibit 10.11 of the Company's Form 10-K for the year ended
December 31, 1997)
10.9 License Agreement between ProStrakan Limited and us dated February 26,
1998 (Certain portions are subject to a grant of confidential treatment)
(Incorporated by reference to Exhibit 10.12 of our Form 10-Q for the
quarter ended March 31, 1998)
10.10 Agreement between us and Block Drug Company, Inc. (Certain portions are
subject to a grant of confidential treatment) (Incorporated by reference
to Exhibit 10.13 of our Form 10-Q for the quarter ended June 30, 1998)
*10.11 Employment Agreement of Mr. Kerry P. Gray (Incorporated by reference to
our Registration Statement on Form SB-2 dated January 11, 1999,
Commission File No. 333-62463)
10.12 Letter Agreement between us and David F. Ranney (Incorporated by
reference to our Registration Statement on Form SB-2 dated January 11,
1999, Commission File No. 333-62463)
10.13 License Agreement between Block Drug Company and us dated December 21,
1998 (Certain portions are subject to a grant of confidential treatment)
(Incorporated by reference to Exhibit 10.11 of our Form 10-K for the
year ended December 31, 1998)
10.14 Agreement of Merger and Plan of Reorganization, dated as of February 23,
1999 among us, Access Holdings, Inc. and Virologix Corporation
(Incorporated by reference to Exhibit 2.2 of the Company's Form 8-K
filed on August 3, 1999)
*10.15 Employment Agreement of David P. Nowotnik, PhD (Incorporated by
reference to Exhibit 10.19 of our Form 10-K for the year ended December
31, 1999)
*10.16 401(k) Plan (Incorporated by reference to Exhibit 10.20 of our Form 10K
for the year ended December 31, 1999)
*10.17 2000 Special Stock Option Plan and Agreement (Incorporated by reference
to Exhibit 10.24 of our Form 10-Q for the quarter ended September 30,
2000)
10.18 Form of Convertible Note (Incorporated by reference to Exhibit 10.24 of
our Form 10-Q for the quarter ended September 30, 2000)
10.19 Supplemental Lease Agreement between Pollock Realty Corporation and us
dated February 9, 2002. (Incorporated by reference to Exhibit 10.19 of
our Form 10-Q for the quarter ended June 30, 2002)
10.20 Rights Agreement, dated as of October 31, 2001 between the Registrant
and American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 99.1 of our Current Report on Form
8-K dated October 19, 2001)
*10.21 2001 Restricted Stock Plan (incorporated by reference to Appendix A of
our Proxy Statement filed on April 16, 2001)
10.22 Supplemental Lease Agreement between Pollock Realty Corporation and us
dated September 15, 2002. (Incorporated by reference to Exhibit 10.24 of
our Form 10-K for the year ended December 31, 2001)
10.23 Amendment to 1995 Stock Option Plan (Incorporated by reference to
Exhibit 10.25 of our Form 10-K for the year ended December 31, 2001)
44
3.0 Exhibits (continued)
Exhibit Number
- --------------
10.24 Asset Sale Agreement among BIOA Pty. Limited, Access Pharmaceuticals
Australia Pty. Limited, Human Therapeutics Limited and us dated February
26, 2002. (Certain portions are subject to a grant of confidential
treatment) (Incorporated by reference to Exhibit 10.26 of our Form 10-Q
for the quarter ended March 31, 2002)
10.25 Asset Sale Agreement between Block Drug Company, Inc. and us dated July
22, 2002. (Certain portions are subject to a grant of confidential
treatment) (Incorporated by reference to Exhibit 10.27 of our Form 10-Q
for the quarter ended September 30, 2002)
10.26 License and Supply Agreement between Wyeth, acting through its Wyeth
Consumer Healthcare Division and us dated January 6, 2004. (Certain
portions are subject to a grant of confidential treatment) (Incorporated
by reference to Exhibit 10.26 of our Form 10-Q for the quarter ended
March 31, 2004)
21. Subsidiaries of the registrant
23.0 Consent of Experts and Counsel
23.1 Consent of Grant Thornton LLP
31.01 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.02 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.01 Chief Executive Officer Certification Chief Financial Officer
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Management contract or compensatory plan required to be filed as an
Exhibit to this Form pursuant to Item 15(c) of the report
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACCESS PHARMACEUTICALS, INC.
Date March 31, 2005 By: /s/ Kerry P. Gray
--------------------------------
Kerry P. Gray
President and Chief Executive
Officer
Date March 31, 2005 By: /s/ Stephen B. Thompson
--------------------------------
Stephen B. Thompson
Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date March 31, 2005 By: /s/ Kerry P. Gray
--------------------------------
Kerry P. Gray
President and Chief Executive
Officer, Director
Date March 31, 2005 By: /s/ Stuart M. Duty
--------------------------------
Stuart M. Duty, Director
Date March 31, 2005 By: /s/ J. Michael Flinn
--------------------------------
J. Michael Flinn, Director
Date March 31, 2005 By: /s/ Stephen B. Howell
--------------------------------
Stephen B. Howell, Director
Date March 31, 2005 By: /s/ Max Link
--------------------------------
Max Link, Director
Date March 31, 2005 By: /s/ Herbert H. McDade, Jr.
--------------------------------
Herbert H. McDade, Jr., Director
Date March 31, 2005 By: /s/ John J. Meakem
--------------------------------
John J. Meakem, Jr., Director
46
REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of Access Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Access
Pharmaceuticals, Inc. (the "Company"), as of December 31, 2004 and 2003, and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2004. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Our audit included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Access
Pharmaceuticals, Inc., as of December 31, 2004 and 2003, and the results of its
consolidated operations and its consolidated cash flows for each of the three
years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 31, 2005, expressed an adverse opinion both with respect to
management's assessment of internal control and the Company's internal control
over financial reporting as of December 31, 2004.
/s/ GRANT THORNTON LLP
Dallas, Texas
March 31, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of Access Pharmaceuticals, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls Over Financial Reporting, that Access
Pharmaceuticals, Inc. (the "Company"), maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established
in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment, and an opinion on the effectiveness of the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. We have identified the following material weaknesses that have not
been identified as material weaknesses in management's assessment. These
material weaknesses did not result in any adjustments to the annual or interim
consolidated financial statements, however; these material weaknesses could
result in a material misstatement to future annual or interim consolidated
financial statements that would not be prevented or detected.
1. The Company has a limited number of personnel with responsibility for
accounting and financial reporting matters. As a result, there is a lack of
segregation of duties over the initiation, authorization, recording and
reporting of transactions and the preparation and review of financial statements
by persons sufficiently independent of the transactions. These segregation of
duties issues also extend to the Company's information technology controls
whereby the personnel limitations result in individuals having the ability to
initiate, approve and record transactions.
2. Our evaluation of the design of the Company's internal controls identified
the following significant deficiencies that individually are not considered a
material weakness; however, compensating or mitigating controls to prevent
material misstatements occurring as a result of these deficiencies are dependent
on adequate segregation of duties. Because of the inadequate segregation of
duties present in the Company's control environment, these deficiencies
represent, in the aggregate, a material weakness.
- Lack of formal controls to monitor compliance with existing
policies, practices and procedures, including within the information
technology environment.
- Reliance on undocumented controls to verify the accuracy of
transactions and financial reporting.
F-2
- Consistency in the performance of manual controls and approvals at
the transaction level and review of accounting and financial
reporting information used to prepare financial statements.
These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2004 financial statements, and
this report does not affect our report dated March 31, 2005, on those financial
statements.
In our opinion, because of the effect of the material weaknesses described above
on the achievement of the objectives of the control criteria, management's
assessment that Access Pharmaceuticals, Inc., maintained effective internal
control over financial reporting as of December 31, 2004, is not fairly stated,
in all material respects, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Also in our opinion, because of the effect of the material
weaknesses described above on the achievement of the objectives of the control
criteria, Access Pharmaceuticals, Inc., has not maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Access Pharmaceuticals, Inc., as of December 31, 2004 and 2003, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 2004, and our report dated March 31, 2005, expressed an unqualified
opinion thereon.
/s/ GRANT THORNTON LLP
Dallas, Texas
March 31, 2005
F-3
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 December 31, 2003
----------------- -----------------
ASSETS
Current assets
Cash and cash equivalents $ 1,775,000 $ 727,000
Short term investments, at cost 486,000 1,860,000
Accounts and other receivables 791,000 1,149,000
Inventory 125,000 185,000
Prepaid expenses and other current assets 1,093,000 898,000
----------------- -----------------
Total current assets 4,270,000 4,819,000
----------------- -----------------
Property and equipment, net 1,040,000 1,004,000
Debt issuance costs, net 130,000 313,000
Patents, net 2,315,000 2,652,000
Licenses, net 125,000 367,000
Goodwill, net 1,868,000 1,868,000
Restricted cash and other assets 1,342,000 788,000
----------------- -----------------
Total assets $ 11,090,000 $ 11,811,000
================= =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 2,131,000 $ 1,780,000
Accrued interest payable 311,000 311,000
Deferred revenues 1,199,000 1,184,000
Current portion of note payable and other future obligations 8,417,000 338,000
----------------- -----------------
Total current liabilities 12,058,000 3,613,000
Long-term obligations for purchased patents - 211,000
Note payable, net of current portion 193,000 282,000
Convertible notes 5,500,000 13,530,000
----------------- -----------------
Total liabilities 17,751,000 17,636,000
----------------- -----------------
Commitments and contingencies
Stockholders' deficit
Preferred stock - $.01 par value; authorized 2,000,000 shares;
none issued or outstanding - -
Common stock - $.01 par value; authorized 50,000,000 shares;
issued, 15,524,734 at December 31, 2004 and
13,397,034 at December 31, 2003 155,000 134,000
Additional paid-in capital 59,010,000 49,597,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted stock grants (309,000) (294,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Accumulated other comprehensive loss (3,000) 14,000
Accumulated deficit (64,465,000) (54,227,000)
----------------- -----------------
Total stockholders' deficit (6,661,000) (5,825,000)
----------------- -----------------
Total liabilities and stockholders' deficit $ 11,090,000 $ 11,811,000
================= =================
The accompanying notes are an integral part of these statements.
F-4
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year ended December 31,
---------------------------------------------------
2004 2003 2002
-------------- ------------ --------------
Revenues
License revenues $ 104,000 $ 729,000 $ 853,000
Product sales 351,000 532,000 194,000
Research and development - - 89,000
Royalty income 94,000 34,000 11,000
-------------- ------------ --------------
Total revenues 549,000 1,295,000 1,147,000
Expenses
Research and development 5,417,000 6,096,000 7,024,000
Cost of product sales 239,000 277,000 107,000
General and administrative 3,199,000 2,514,000 2,277,000
Depreciation and amortization 773,000 621,000 439,000
-------------- ------------ --------------
Total expenses 9,628,000 9,508,000 9,847,000
-------------- ------------ --------------
Loss from operations (9,079,000) (8,213,000) (8,700,000)
Other income (expense)
Interest and miscellaneous income 226,000 2,559,000 594,000
Interest and other expense (1,385,000) (1,281,000) (1,278,000)
-------------- ------------ --------------
(1,159,000) 1,278,000 (684,000)
-------------- ------------ --------------
Net loss $ (10,238,000) $ (6,935,000) $ (9,384,000)
============== ============ ==============
Basic and diluted loss per common
share $ (0.68) $ (0.52) $ (0.72)
============== ============ ==============
Weighted average basic and diluted
common shares outstanding 15,162,256 13,266,733 13,104,060
============== ============ ==============
Net loss $ (10,238,000) $ (9,384,000) $ (6,027,000)
Other comprehensive loss - -
Foreign currency translation adjustment (17,000) 28,000 (14,000)
-------------- ------------ --------------
Comprehensive loss $ (10,255,000) $ (9,356,000) $ (6,041,000)
============== ============ ==============
The accompanying notes are an integral part of these statements.
F-5
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated
Notes Unamortized other
Common Stock Additional receivable value of comprehensive
---------------------- paid-in from restricted Treasury income Accumulated
Shares Amount capital stockholders stock grants stock (loss) deficit
---------- ---------- ------------ ------------ ------------ --------- ------------- ------------
Balance, January 1, 2002 12,909,000 $ 132,000 $ 48,057,000 $(1,045,000) $ (154,000) $ (4,000) $ - $(37,908,000)
Common stock for cash
exercise of warrants and
options 13,000 - 31,000 - - - - -
Common stock issued for
cashless exercise of
warrants 14,000 - - - - - - -
Common stock issued,
purchase of assets 173,000 - 632,000 - - - - -
Warrants issued - - 80,000 - - - - -
Issuance of restricted
stock grants 50,000 - 189,000 - (190,000) - - -
Other comprehensive loss - - - - - - (14,000) -
Amortization of
restricted stock grants - - - - 67,000 - - -
Net loss - - - - - - - (9,384,000)
---------- ---------- ------------ ----------- ----------- --------- ------------ ------------
Balance, December 31, 2002 13,159,000 132,000 48,989,000 (1,045,000) (277,000) (4,000) (14,000) (47,292,000)
Common stock issued for
cash exercise of
warrants and options 103,000 1,000 266,000 - - - - -
Common stock issued for
cashless exercise of
warrants 80,000 1,000 (1,000) - - - - -
Warrants issued - - 233,000 - - - - -
Issuance of restricted
stock grants 55,000 - 110,000 - (111,000) - - -
Other comprehensive
income - - - - - - 28,000 -
Amortization of
restricted stock grants - - - - 94,000 - - -
Net loss - - - - - - - (6,935,000)
---------- ---------- ------------ ----------- ----------- --------- ------------ ------------
Balance, December 31, 2003 13,397,000 134,000 49,597,000 (1,045,000) (294,000) (4,000) 14,000 (54,227,000)
Common stock issued
for cash, net of
offering costs 1,789,000 18,000 8,998,000 - - - - -
Common stock issued for
cash exercise of
warrants and options 117,000 1,000 282,000 - - - - -
Common stock issued for
cashless exercise of
warrants 210,000 2,000 (2,000) - - - - -
Issuance of restricted
stock grants 12,000 - 135,000 - (135,000) - - -
Other comprehensive
loss - - - - - - (17,000) -
Amortization of
restricted stock grants - - - - 120,000 - - -
Net loss - - - - - - - (10,238,000)
---------- ---------- ------------ ----------- ----------- --------- ------------ ------------
Balance, December 31, 2004 15,525,000 $ 155,000 $ 59,010 000 $(1,045,000) $ (309,000) $ (4,000) $ (3,000) $(64,465,000)
========== ========== ============ =========== =========== ========= ============ ============
The accompanying notes are an integral part of these statements.
F-6
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------------------------
2004 2003 2002
---------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (10,238,000) $ (6,935,000) $ (9,384,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Warrants issued in payment of
consulting expenses - 57,000 34,000
Impairment of investment 112,000 - -
Amortization of restricted stock grants 120,000 94,000 67,000
Depreciation and amortization 773,000 621,000 439,000
Amortization of debt costs 183,000 183,000 183,000
Other long-term obligations - - 43,000
Change in operating assets and liabilities:
Accounts receivable 358,000 47,000 (1,080,000)
Inventory 60,000 353,000 (461,000)
Prepaid expenses and other current assets (195,000) 130,000 (241,000)
Other assets (666,000) (209,000) 130,000
Accounts payable and accrued expenses 401,000 (689,000) 983,000
Accrued interest payable - - 1,000
Deferred revenue 15,000 (15,000) 691,000
---------------- ------------- -------------
Net cash used in operating activities (9,077,000) (6,363,000) (8,595,000)
Cash flows from investing activities:
Capital expenditures (221,000) (336,000) (403,000)
Redemptions of short-term investments
and certificates of deposit, net 1,374,000 6,472,000 4,368,000
Purchase of businesses, net of cash acquired - - (1,313,000)
---------------- ------------- -------------
Net cash provided by investing activities 1,153,000 6,136,000 2,652,000
Cash flows from financing activities:
Payments of notes payable (310,000) (784,000) (107,000)
Proceeds from stock issuances, net 9,299,000 266,000 32,000
---------------- ------------- -------------
Net cash provided by (used in) financing activities 8,989,000 (518,000) (75,000)
---------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents 1,065,000 (745,000) (6,018,000)
Effect of exchange rate changes on cash and
cash equivalents (17,000) 28,000 36,000
Cash and cash equivalents at beginning of year 727,000 1,444,000 7,426,000
---------------- ------------- -------------
Cash and cash equivalents at end of year $ 1,775,000 $ 727,000 $ 1,444,000
================ ============= =============
Cash paid for interest $ 1,073,000 $ 1,281,000 $ 1,083,000
Cash paid for income taxes - - -
Supplemental disclosure of noncash transactions
Acquisitions of Australia patents
Assets acquired - - 676,000
Stock and warrants issued - - (676,000)
Value of restricted stock grants 135,000 111,000 190,000
Assets under capital lease
capitalized during the year 59,000 126,000 -
The accompanying notes are an integral part of these statements.
F-7
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three years ended December 31, 2004
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Access Pharmaceuticals, Inc. is a diversified emerging pharmaceutical company
engaged in the development of novel therapeutics based primarily on the
adaptation of existing therapeutic agents using its proprietary drug delivery
platforms. Our efforts have been principally devoted to research and
development, resulting in significant losses since inception on February 24,
1988. Prior to 2002, we presented our financial statements as a development
stage enterprise.
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows.
Principles of Consolidation
The consolidated financial statements include the financial statements of
Access Pharmaceuticals, Inc. and our wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
We consider all highly liquid instruments with an original maturity of three
months or less to be cash equivalents for purposes of the statements of cash
flows. We invest our excess cash in government and corporate securities. Cash
and cash equivalents consist primarily of cash in banks, money market funds
and short-term corporate securities. All other investments are reported as
short-term investments.
Short-term Investments
Short term investments consist of certificates of deposit. All short term
investments are classified as held to maturity. The cost of debt securities
is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. The cost of
securities sold is based on the specific identification method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over estimated useful lives ranging from three to
seven years.
Patents and Applications
We expense internal patent and application costs as incurred because, even
though we believe the patents and underlying processes have continuing value,
the amount of future benefits to be derived therefrom are uncertain.
Purchased patents are capitalized and amortized over the life of the patent.
Licenses
We recognize the purchase cost of licenses and amortize them over their
estimated useful lives.
Allowance for Doubtful Accounts
The Company estimates the collectibility of its trade accounts receivable. In
order to assess the collectibility of these receivables, the Company
monitors the current creditworthiness of each customer and analyzes the
balances aged beyond the customer's credit terms. These evaluations may
indicate a situation in which a certain customer cannot meet its financial
obligations due to deterioration of its financial viability, credit ratings
or bankruptcy. The allowance requirements are based on current facts and are
reevaluated and adjusted as additional information is received. Trade
accounts receivable are reserved when it is probable that the balance will
not be collected.
F-8
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Revenue Recognition
Licensing revenues are recognized over the period of our performance
obligation. Licensing agreements generally require payments of fees on
executing the agreement with milestone payments based on regulatory approvals
and cumulative sales. Some agreements allow for the return of a portion of
the initial execution fee if regulatory approvals are not received. In these
cases the refundable balance is included as deferred revenue. Many of our
agreements are for ten years with automatic extensions. Sponsored research
and development revenues are recognized as research and development
activities are performed under the terms of research contracts. Advance
payments received are recorded as deferred revenue until the related research
activities are performed. Royalty income is recognized as earned at the time
the licensed product is sold. Option revenues are recognized when the
earnings process is completed pursuant to the terms of the respective
contract.
Revenue from product sales is recognized when the customer's order is shipped
from our third party logistics company's warehouse.
Research and Development Expenses
Pursuant to SFAS No. 2, "Accounting for Research and Development Costs," our
research and development costs are expensed as incurred. Research and
development expenses include, but are not limited to, payroll and personnel
expense, lab supplies, preclinical, development cost, clinical trial expense,
outside manufacturing and consulting. The cost of materials and equipment or
facilities that are acquired for research and development activities and that
have alternative future uses are capitalized when acquired.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided for deferred tax assets to
the extent their realization is in doubt
Loss Per Share
We have presented basic loss per share, computed on the basis of the weighted
average number of common shares outstanding during the year, and diluted loss
per share, computed on the basis of the weighted average number of common
shares and all dilutive potential common shares outstanding during the year.
Potential common shares result from stock options, convertible notes and
warrants. However, for all years presented, all outstanding stock options,
convertible notes and warrants are anti-dilutive.
Investment Securities
Investment securities consist of available for sale equity securities and
short term investment are accounted for by the cost method. Available for
sale securities are carried at fair value based on quoted market prices.
Unrealized holding gains and losses, net of the related tax effect, on
available for sale securities are excluded from earnings and are reported as
a separate component of stockholders' equity until realized. Decline in the
fair value of any available for sale security below cost that is determined
to be other than temporary is charged to the statement of income. Realized
gains and losses from the sale of available for sale securities are
determined on average cost method and are included in earnings. Short-term
investments consist of certificate of deposits, are held to maturity and are
stated at cost.
Exchange Rate Translation
For international operations, local currencies have been determined to be the
functional currencies. We translate assets and liabilities to their U.S.
dollar equivalents at rates in effect at the balance sheet date and record
translation adjustments in Shareholders' equity. We translate statement of
income accounts at average rates for the period. Transaction adjustments are
recorded in Other (income)/expense.
Restricted Cash
Restricted cash is cash that is or may be committed for a particular
purpose. We have restricted cash for a deferred license agreement ($839,000),
for a note payable ($233,000), and for rent guarantees for a manufacturing
agreement and laboratory ($213,000).
F-9
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Acquisition-Related Intangible Assets and Change In Accounting Principles
Effective January 1, 2002, we adopted SFAS 142, "Goodwill and Other
Intangible Assets." Under SFAS 142, goodwill is no longer amortized but is
subject to an impairment test at least annually or more frequently if
impairment indicators arise. Separately identified and recognized intangible
assets resulting from business combinations completed before July 1, 2001
that did not meet the new criteria for separate recognition of intangible
assets were subsumed in goodwill upon adoption. The intangible assets of the
company that did not meet the separate recognition criteria were licenses and
acquired patents. We continue to amortize intangible assets that meet the new
criteria over their useful lives. In accordance with SFAS 142, we performed a
transitional impairment test of goodwill as of January 1, 2002, and an annual
test in the fourth quarter of 2004, 2003 and 2002, which did not result in an
impairment of goodwill.
Intangible assets consist of the following (in thousands):
December 31, 2004 December 31, 2003 December 31, 2002
--------------------------- ---------------------------- ----------------------------
Gross Gross Gross
carrying Accumulated carrying Accumulated carrying Accumulated
value amortization value amortization value amortization
------------ ------------- ------------ ------------ ------------ --------------
Amortizable intangible
assets
Patents $ 3,179 $ 864 $ 3,179 $ 527 $ 3,179 $ 188
Licenses 500 375 830 463 830 381
------------ ------------- ------------ ------------ ------------ --------------
Total $ 3,679 $ 1,239 $ 4,009 $ 990 $ 4,009 $ 569
============ ============= ============ ============ ============ ==============
Intangible assets not
subject to
amortization
Goodwill $ 2,464 $ 596 $ 2,464 $ 596 $ 2,464 $ 596
============ ============ ============ ============ ============ ==============
The Company determined that one of its licenses was no longer useful for its
current business focus and expensed $109,000 for the license net of amortization
and royalty payable.
Amortization expense related to intangible assets totaled $420,000, $421,000 and
$301,000 for the year ended December 31, 2004, 2003 and 2002, respectively.
The aggregate estimated amortization expense for intangible assets remaining
as of December 31, 2004 is as follows (in thousands):
2005 $ 388
2006 388
2007 363
2008 338
2009 338
Thereafter 625
----------
Total $ 2,440
==========
F-10
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Stock-Based Compensation
We account for our stock option plan in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Compensation expense is
recorded only if the current market price of the underlying stock exceeds the
exercise price on the date of grant. We have adopted the disclosure
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, which recognizes the fair value of
all stock-based awards on the date of grant.
At December 31, 2004 we had two stock-based employee compensation plans,
which are described more fully in Note 11. No stock-based employee
compensation cost, other than compensation associated with options assumed in
acquisitions, is reflected in net loss, as all options granted under those
plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect
on net loss and net loss per share if we had applied the fair value
recognition provisions of SFAS 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
December 31,
------------------------------------------------
2004 2003 2002
------------- ------------ -------------
Net loss
As reported $(10,238,000) $(6,935,000) $ (9,384,000)
Pro forma stock option expense (738,000) (1,232,000) (1,662,000)
------------- ------------ -------------
Pro forma (10,976,000) (8,167,000) (11,046,000)
============= ============ =============
Basic and diluted loss per share
As reported ($ .68) ($ .52) ($ .72)
Pro forma stock option expense (.05) (.09) (.12)
------------- ------------ -------------
Pro forma ($ .73) ($ .61) ($ .84)
============= ============ =============
The effect of our outstanding options and warrants are anti-dilutive when we
have a net loss. The fully diluted shares are:
December 31,
---------------------------------------------
2004 2003 2002
---------- ---------- ----------
Fully diluted shares 20,567,301 18,837,344 18,786,202
Stock compensation expense for options granted to nonemployees has been
determined in accordance with SFAS 123 and EITF 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services," as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured.
Recent Accounting Pronouncement
On December 16, 2004, the FASB issued FAS 123R, "Share-Based Payment -- An
Amendment of FASB Statements No. 123 and 95", (FAS 123R) which is effective
for public companies in periods beginning after June 15, 2005. We will be
required to implement the proposed standard no later than the quarter that
begins July 1, 2005. The cumulative effect of adoption, if any, applied on a
modified prospective basis, would be measured and recognized on July 1, 2005.
FAS 123R addresses the accounting for transactions in which an enterprise
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of
such equity instruments. FAS 123R would eliminate the ability to account for
share-based compensation transactions using APB 25, and generally would
require instead that such transactions be accounted for using a fair-value
based method. Companies will be required to recognize an expense for
compensation cost related to share-based payment arrangements including stock
options and employee stock purchase plans.
F-11
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
We are currently evaluating option valuation methodologies and assumptions of
FAS 123R related to share based payments and the effect of adopting this
pronouncement.
Use of Estimates
In preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
We tested goodwill for impairment based on estimates of fair value. It is at
least reasonably possible that the estimates used by us will be materially
different from actual amounts. These differences could result in the
impairment of all or a portion of our goodwill, which could have a materially
adverse effect on our results of operations.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, short-term investments and
certificates of deposit approximates fair value due to the short maturity of
these items. It is not practical to estimate the fair value of the Company's
long-term debt because quoted market prices do not exist and there were no
available securities to use as a basis to value our debt.
NOTE 2 - LIQUIDITY
The Company incurred significant losses from operations of $9.1 million for
the year ended December 31, 2004 and $8.2 million for the year ended December
31, 2003. Additionally, at December 31, 2004, we have a working capital
deficit of $7,788,000. As of December 31, 2004, we did not have sufficient
funds to repay our convertible notes at their maturity and support our
working capital and operating requirements. As described below, in March
2005, we entered into financing arrangements we believe will allow us to meet
our obligations under the convertible notes in the event we are unable to
restructure or cause on terms acceptable to us.
As of March 30, 2005, the Company executed a Standby Equity Distribution
Agreement (SEDA) with Cornell Capital Partners. Under the SEDA, the Company
may issue and sell to Cornell Capital Partners common stock for a total
purchase price of up to $15,000,000. The purchase price for the shares is
equal to their market price, which is defined in the SEDA as 98% of the
lowest volume weighted average price of the common stock during a specified
period of trading days following the date notice is given by the Company that
it desires to access the SEDA. Further, we have agreed to pay Cornell Capital
Partners, L.P. 3.5% of the proceeds that we receive under the Equity Line of
Credit. The amount of each draw down is subject to a maximum amount of
$1,000,000. The terms of the SEDA do not allow us to make any draw downs if
the draw down would cause Cornell Capital to own in excess of 9.9% of our
outstanding shares of common stock. Based on the number of shares of our
common stock currently outstanding, at volume weighted average price of
$2.50, we could sell to Cornell Capital approximately $3,900,000 of our
common stock subject to the 9.9% limitation. Thus, in order for the Company
to receive all the funding available under the SEDA and have the financial
resources it needs for operations and debt service, Cornell Capital must sell
through to the market a significant portion of the shares it purchases under
the arrangement. The Company believes that because the shares sold to Cornell
Capital will be covered by an effective registration statement and Cornell
Capital has a history of not holding significant positions in companies in
which it invests, the shares purchased by Cornell Capital will be sold to the
marketplace to maintain ownership below 9.9%. Provided that continuing sales
to the marketplace are possible, the Company believes Cornell Capital will
not accumulate 9.9% of the outstanding common stock of the Company; and,
accordingly, the Company will be able to fully utilize the $15,000,000 made
available through the SEDA.
Upon closing of the transaction, Cornell Capital Partners will receive a
one-time commitment fee of 146,500 shares of the Company's common stock. On
the same date, the Company entered into a placement agent agreement in escrow
with Newbridge Securities Corporation, a registered broker-dealer. Pursuant
to the placement agent agreement, upon closing of the transaction the Company
will pay a one-time placement agent fee of 3,500 shares of common stock.
In addition, as of March 30, 2005, the Company executed a securities purchase
agreement with Cornell Capital Partners and Highgate House Funds. Under the
securities purchase agreement, upon closing Cornell Capital Partners and
Highgate House Funds are obligated to purchase an aggregate of $2,633,000
principal amount of secured convertible debentures from the Company (net
proceeds to the Company of $2,360,000). The secured convertible debentures
accrue interest at a rate of 7% per year and mature 12 months from the
issuance date with scheduled monthly repayment commencing on November 1, 2005
to the extent that the secured convertible debenture has not been converted
to common stock. The secured convertible debenture is convertible into the
Company's common stock at the holder's option any time up to maturity at a
conversion price equal to $4.00. The secured convertible debentures are
secured by all of the assets of the Company. The Company has the right to
redeem the secured convertible debentures upon 3 business days notice for
110% of the amount redeemed. Pursuant to the securities purchase agreement,
the Company is required to issue to the holders an aggregate of 50,000 shares
of common stock of the Company.
The Company believes that based on the funds available from the agreements
referred to above, as well as revenues from our operations, the Company will
have the ability to pay its debt and other obligations as they come due.
F-12
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 3 - ACQUISITIONS
Our wholly-owned subsidiary, Access Pharmaceuticals Australia Pty. Limited
acquired the targeted therapeutic technology business of Biotech Australia
Pty. Ltd under an Asset Sale Agreement dated February 26, 2002. Under the
terms of the Asset Sale Agreement, Access Pharmaceuticals Australia Pty.
Limited acquired the patents to three targeted therapeutics technologies and
retained the scientific group that has developed this technology. The total
consideration payable by us will be paid in a combination of cash and stock
over a three-year period and is dependent on the achievement of certain
technology milestones. We paid $500,000 at closing and an additional total of
up to $525,000 will be paid over a three-year period. We also issued as
consideration 172,584 shares of our common stock (valued at $633,000) and
warrants to purchase 25,000 shares of our common stock at an exercise price
of $5.00 per share (valued at $43,000 using the Black-Scholes option pricing
model). The liability of $175,000 at December 31, 2004 was paid in 2005.
The three patented targeted therapeutic technologies acquired in this
transaction are:
- folate conjugates of polymer therapeutics to enhance tumor delivery
by targeting folate receptors which are upregulated in certain tumor
types;
- the use of vitamin B12 to target the transcobalamin II receptor
which is upregulated in numerous diseases including cancer,
rheumatoid arthritis and certain neurological and autoimmune
disorders; and
- oral delivery of a wide variety of molecules, which cannot otherwise
be orally administered, using the active transport mechanism which
transports vitamin B12 into the systemic circulation.
The cost of the acquisition has been assigned principally to patents and will be
amortized over the remaining useful life of the patents which averages ten
years.
On July 22, 2002, we acquired from GlaxoSmithKline the patents, trademarks and
technology covering the use of amlexanox for the treatment of mucosal and skin
disorders. The two major components of the acquisition are the US marketing
rights to amlexanox 5% paste which is currently marketed for the treatment of
canker sores under the trademark Aphthasol(R), and the remaining worldwide
marketing rights for this indication which were the subject of a prior licensing
agreement between the companies. Under the terms of the agreement, we made an
initial upfront payment of $750,000 and an additional payment of $250,000 on
January 22, 2003.
NOTE 4 - RELATED PARTY TRANSACTIONS
Under a former consulting agreement between Thoma Corporation ("Thoma") and
us, Thoma received payments for consulting services and reimbursement of
direct expenses. Herbert H. McDade, Jr., our past Chairman of the Board of
Directors, is an owner of Thoma Corp. Thoma received payments for consulting
services and was also reimbursed for expenses as follows:
Consulting Expense
Year Fees Reimbursement
- ---- ----------- -------------
2002 $ 18,000 $ -
F-13
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 4 - RELATED PARTY TRANSACTIONS - CONTINUED
Stephen B. Howell, M.D., a Director, receives payments for consulting
services and reimbursement of direct expenses and has also received warrants
for his consulting services. Dr. Howell's payments for consulting services,
expense reimbursements and warrants are as follows:
Consulting Expense Exercise Fair
Year Fees Reimbursement Warrants Price Value
- ---- ---------- ------------- -------- --------- -----------
2004 $ 58,000 $ 9,000 - $ - $ -
2003 60,000 6,000 30,000 3.00 30,000
2002 55,000 3,000 10,000 4.91 37,000
See Note 10 for a discussion of our Restricted Stock Purchase Program.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
---------------------------------
2004 2001
--------------- ------------
Laboratory equipment $ 2,208,000 $ 1,972,000
Laboratory and building improvements 167,000 166,000
Furniture and equipment 204,000 196,000
--------------- ----------
2,579,000 2,334,000
Less accumulated depreciation and amortization 1,539,000 1,330,000
--------------- ------------
Net property and equipment $ 1,040,000 $ 1,004,000
=============== ============
Depreciation and amortization on property and equipment was $244,000, $200,000,
and $138,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
NOTE 6 - 401(k) PLAN
We have a tax-qualified employee savings and retirement plan (the "401(k)
Plan") covering all our employees. Pursuant to the 401(k) Plan, employees may
elect to reduce their current compensation by up to the statutorily
prescribed annual limit ($13,000 in 2004; $12,000 in 2003; and $11,000 in
2002) and to have the amount of such reduction contributed to the 401(k)
Plan. We have a 401(k) matching program whereby we contribute for each dollar
a participant contributes a like amount, with a maximum contribution of 2% of
a participant's earnings. The 401(k) Plan is intended to qualify under
Section 401 of the Internal Revenue Code so that contributions by employees
or by us to the 401(k) Plan, and income earned on 401(k) Plan contributions,
are not taxable to employees until withdrawn from the 401(k) Plan, and so
that contributions by us, if any, will be deductible by us when made. At the
direction of each participant, we invest the assets of the 401(k) Plan in any
of 23 investment options. Company contributions under the 401(k) Plan were
approximately $46,000 in 2004; $45,000 in 2003; and $37,000 in 2002.
F-14
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 7 - NOTE PAYABLE AND OTHER OBLIGATIONS
On September 20, 2001, we completed a $600,000 installment loan with a bank.
The balance at December 31, 2004 is $233,000 and at December 31, 2003 was
$354,000. The loan was used to purchase capital equipment and for leasehold
improvements to expand our laboratory and office space. The loan is due in 60
equal installments, including interest at 6.5%. The loan is secured by a
$233,000 certificate of deposit classified as an other asset at December 31,
2004.
On February 26, 2002, our wholly-owned subsidiary, Access Pharmaceuticals
Australia Pty. Limited acquired the targeted therapeutic technology business
of Biotech Australia Pty. Ltd under an Asset Sale Agreement. The last
$175,000 payment was due and paid in the first quarter of 2005.
Future maturities of the note payable and other obligations are as follows:
Notes Payable
Future and other Capital
Maturities obligations leases Total
- --------------- -------------- ------------ -------------
2005 $305,000 $ 82,000 $387,000
2006 103,000 36,000 139,000
Thereafter 53,000 - 54,000
-------------- ------------ -------------
$461,000 $118,000 $580,000
============== ============ =============
NOTE 8 - CONVERTIBLE NOTES
On September 20, 2000, we completed a $13.5 million convertible note
offering. The offering was placed with three investors. Our convertible notes
are due in two parts, $8,030,000 due on September 13, 2005 and $5,500,000 due
on September 13, 2007. The notes bear interest at 7.7% per annum with
$1,041,000 of interest due annually on September 13th. The notes have a fixed
conversion price of $5.50 per share of common stock and may be converted by
the note holder or us under certain circumstances as defined in the note. If
the notes are not converted we will have to repay the notes on the due dates.
Total expenses of issuance were $915,000 and are amortized over the life of
the notes.
NOTE 9 - COMMITMENTS
At December 31, 2004, we have commitments under noncancelable operating
leases for office and research and development facilities and equipment as
follows:
Operating
leases
---------
2005 $ 305,000
2006 181,000
2007 140,000
2008 47,000
---------
Total future minimum lease payments $ 673,000
=========
Rent expense for the years ended December 31, 2004, 2003 and 2002 was $166,000,
$165,000 and $138,000, respectively.
F-15
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 10 - STOCKHOLDERS' EQUITY
Restricted Stock Purchase Program
On October 12, 2000, the Board of Directors authorized a Restricted Stock
Purchase Program. Under the Program, the Company's executive officers and
corporate secretary were given the opportunity to purchase shares of
common stock in an individually designated amount per participant
determined by the Compensation Committee of the Board of Directors. A
total of 190,000 shares were purchased under the Program by four eligible
participants at $5.50 per share, the fair market value of the common stock
on October 12, 2000, for an aggregate consideration of $1,045,000. The
purchase price was paid through the participant's delivery of a
50%-recourse promissory note payable to the Company for three executive
officer participants and a full-recourse promissory note payable to the
Company for the corporate secretary. Each note bears interest at 5.87%
compounded semi-annually and has a maximum term of ten years. The notes
are secured by a pledge of the purchased shares to the Company. The
Company recorded the notes receivable from participants in this Program of
$1,045,000 as a reduction of equity in the Consolidated Balance Sheet.
Interest on the notes is neither being collected nor accrued.
The stock granted under the Program other than to the corporate secretary
vested ratably over a four year period and is now fully vested. The stock
granted to the corporate secretary vested on the date of grant.
Warrants
There were warrants to purchase a total of 770,420 shares of common stock
outstanding at December 31, 2004. All warrants were vested and exercisable
at December 31, 2004. The warrants had various prices and terms as
follows:
Warrants Exercise Expiration
Summary of Warrants Outstanding Price Date
- ---------------------------------------- ----------- --------- ----------
2004 offering (a) 447,344 $ 7.10 2/24/09
2004 offering (a) 156,481 5.40 2/24/09
2003 financial advisor (b) 72,000 3.90 10/30/08
2003 scientific consultant (c) 30,000 3.00 1/1/06
2002 warrants offered in acquisition (d) 25,000 5.00 2/26/05
2002 scientific consultant (e) 10,000 4.96 2/01/09
2001 scientific consultant (f) 15,000 3.00 1/1/08
2000 offering (g) 14,595 2.50 3/01/05
-----------
Total 770,420
===========
a) In connection with offering of common stock in 2004, warrants to purchase
a total of 603,825 shares of common stock were issued. All of the warrants
are exercisable immediately and expire five years from date of issuance.
b) During 2003, financial advisors received warrants to purchase 72,000
shares of common stock at any time from October 30, 2003 until October 30,
2008, for financial consulting services rendered in 2003 and 2004. All the
warrants are exercisable. The fair value of the warrants was $2.82 per
share on the date of the grant using the Black-Scholes pricing model with
the following assumptions: expected dividend yield 0.0%, risk-free
interest rate 2.9%, expected volatility 92% and a term of 5 years.
F-16
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 10 - STOCKHOLDERS' EQUITY - CONTINUED
c) During 2003, a director who is also a scientific advisor received
warrants to purchase 30,000 shares of common stock at an exercise
price of $3.00 per share at any time from January 1, 2003 until
January 1, 2006, for scientific consulting services rendered in
2003. The fair value of the warrants was $.99 per share on the date
of the grant using the Black-Scholes pricing model with the
following assumptions: expected dividend yield 0.0%, risk-free
interest rate 3.26%, expected volatility 98% and a term of 3 years.
d) During 2002, a company received warrants to purchase 25,000 shares
of common stock at an exercise price of $5.00 per share at any time
from February 26, 2002 until February 26, 2005. The warrants were
issued in connection with the acquisition of patents in Australia.
The fair value of the warrants was $1.72 per share on the date of
the grant using the Black-Scholes pricing model with the following
assumptions: expected dividend yield 0.0%, risk-free interest rate
3.67%, expected volatility 81% and a term of 3 years. The warrants
expired on February 26, 2005 without being exercised.
e) During 2002, a director who is also a scientific advisor received
warrants to purchase 10,000 shares of common stock at an exercise
price of $4.91 per share at any time from February 1, 2002 until
February 1, 2009, for scientific consulting services rendered in
2002. The fair value of the warrants was $3.70 per share on the date
of the grant using the Black-Scholes pricing model with the
following assumptions: expected dividend yield 0.0%, risk-free
interest rate 3.90%, expected volatility 81% and a term of 7 years.
f) During 2001, a director who is also a scientific advisor received
warrants to purchase 15,000 shares of common stock at an exercise
price of $3.00 per share at any time from January 1, 2001 until
January 1, 2008, for scientific consulting services rendered in
2001. The fair value of the warrants was $2.74 per share on the date
of the grant using the Black-Scholes pricing model with the
following assumptions: expected dividend yield 0.0%, risk-free
interest rate 5.03%, expected volatility 118% and a term of 7 years.
g) In connection with offerings of common stock in 2000, warrants to
purchase a total of 509,097 shares of common stock were issued. All
of the warrants are exercisable immediately and expire five years
from date of issuance.
2001 Restricted Stock Plan
We have a restricted stock plan, the 2001 Restricted Stock Plan, under which
200,000 shares of our authorized but unissued common stock were reserved for
issuance to certain employees, directors, consultants and advisors. The
restricted stock granted under the plan generally vests over five years, 25%
two years after the grant date with additional 25% vesting every anniversary
date. All stock is vested after five years. At December 31, 2004 there were
161,238 shares granted and 38,762 shares available for grant under the 2001
Restricted Stock Plan.
F-17
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 11 - STOCK OPTION PLANS
We have a stock option plan, as amended, (the "1995 Stock Awards Plan"),
under which 2,500,000 shares of our authorized but unissued common stock
were reserved for issuance to optionees including officers, employees, and
other individuals performing services for us. The 1995 Stock Awards Plan
replaced the previously approved stock option plan (the "1987 Stock Awards
Plan"). On February 11, 2000 we adopted the 2000 Special Stock Option Plan
and Agreement (the "Plan"). The Plan provides for the award of options to
purchase 500,000 shares of the authorized but unissued shares of common
stock of the Company. Options granted under all the plans generally vest
ratably over a four to five year period and are generally exercisable over
a ten-year period from the date of grant. Stock options are generally
granted with an exercise price equal to the market value at the date of
grant.
At December 31, 2004, there were 129,780 additional shares available for
grant under the 1995 Stock Awards Plan.
The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 2004, 2003 and 2002, respectively:
dividend yield of 0% for all periods; volatility of 41%, 117% and 98%;
risk-free interest rates of 3.61%, 2.26% and 2.03%, respectively, and
expected lives of four years for all periods. The weighted average fair
values of options granted were $2.18, $1.56 and $2.46 per share during
2004, 2003 and 2002, respectively.
Summarized information for the 1995 Stock Awards Plan is as follows:
Weighted-
average
exercise
Shares price
---------- ---------
Outstanding options at January 1, 2002 1,280,584 $ 3.68
Granted, fair value of $2.46 per share 493,000 3.53
Exercised (2,428) 2.08
Forfeited (60,000) 3.17
----------
Outstanding options at December 31, 2002 1,711,156 3.59
Granted, fair value of $1.56 per share 374,500 2.20
Exercised (28,000) 2.55
Forfeited (4,000) 2.70
----------
Outstanding options at December 31, 2003 2,053,656 3.45
Granted, fair value of $2.18 per share 314,200 5.75
Exercised (109,695) 2.38
Forfeited (75,980) 4.21
----------
Outstanding options at December 31, 2004 2,182,181 3.76
==========
Exercisable at December 31, 2002 997,570 3.35
Exercisable at December 31, 2003 1,389,185 3.49
Exercisable at December 31, 2004 1,671,160 3.64
F-18
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 11 - STOCK OPTION PLANS - CONTINUED
Further information regarding options outstanding under the 1995 Stock
Awards Plan at December 31, 2004 is summarized below:
Weighted average
Number of ----------------------- Number of Weighted-average
shares Remaining Exercise shares exercise
Range of exercise prices outstanding life in years price exercisable price
- ------------------------ ----------- ------------- -------- ----------- -------------------
$2.00-2.18 417,063 6.5 $ 2.01 333,436 $ 2.01
$2.30-2.81 352,100 7.8 2.44 275,183 2.47
$2.94-3.99 716,318 6.4 3.43 585,104 3.36
$4.05-7.8125 696,700 7.7 5.82 477,437 5.80
----------- -----------
2,182,181 1,671,160
=========== ===========
Under the 2000 Special Stock Option Plan, 500,000 options were issued in
2000 and are outstanding at December 31, 2004. All of the options in the
2000 Special Stock Option Plan were exercisable at December 31, 2004,
468,749 of the options were exercisable at December 31, 2003 and 343,749
of the options were exercisable at December 31, 2002. All of the options
expire on March 1, 2010 and have an exercise price of $2.50 per share.
All issued options under the 1987 Stock Awards Plan expired in 2004. No
further grants can be made. Summarized information for the 1987 Stock
Awards Plan is as follows:
Weighted-
average
Stock exercise
options price
-------- ---------
Outstanding awards at January 1, 2002 26,002 $ 46.18
Forfeited (8,824) 90.45
--------
Outstanding awards at December 31, 2002 17,178 23.31
Forfeited (5,750) 35.00
--------
Outstanding awards at December 31, 2003 11,428 17.42
Forfeited (11,428) 17.42
--------
Outstanding awards at December 31, 2004 -
========
F-19
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 12 - INCOME TAXES
Income tax expense differs from the statutory amounts as follows:
2004 2003 2002
------------ ------------- -------------
Income taxes at U.S. statutory rate $ (3,442,000) $ (2,358,000) $ (3,191,000)
Change in valuation allowance 1,493,000 (111,000) 1,153,000
Expenses not deductible 7,000 40,000 15,000
Expiration of net operating loss and general
business credit carryforwards, net of revisions 1,942,000 2,429,000 2,023,000
------------ ------------- -------------
Total tax expense $ - $ - $ -
============ ============= =============
Deferred taxes are provided for the temporary differences between the
financial reporting bases and the tax bases of our assets and liabilities.
The temporary differences that give rise to deferred tax assets were as
follows:
December 31,
-----------------------------------------------
2004 2003 2002
------------ ------------- -------------
Deferred tax assets (liabilities)
Net operating loss carryforwards $ 20,808,000 $ 20,193,000 $ 20,487,000
General business credit carryforwards 2,094,000 1,960,000 1,356,000
Property, equipment and goodwill 259,000 113,000 119,000
------------ ------------- -------------
Gross deferred tax assets 23,161,000 22,266,000 21,962,000
Valuation allowance (23,161,000) (22,266,000) (21,962,000)
------------ ------------- -------------
Net deferred taxes $ - $ - $ -
============ ============= =============
At December 31, 2004, we had approximately $55,488,000 of net operating
loss carryforwards and approximately $2,094,000 of general business credit
carryforwards. These carryforwards expire as follows:
Net operating General business
loss carryforwards credit carryforwards
------------------ --------------------
2005 $ 3,014,000 $ 26,000
2006 587,000 38,000
2007 994,000 26,000
2008 4,004,000 138,000
2009 1,661,000 185,000
Thereafter 45,228,000 1,680,000
------------ ------------
$ 55,488,000 $ 2,094,000
============ ============
As a result of a merger on January 25, 1996, a change in control occurred
for federal income tax purposes which limits the utilization of pre-merger
net operating loss carryforwards of approximately $3,100,000 to
approximately $530,000 per year.
F-20
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 2004
NOTE 13 - SETTLEMENT WITH BLOCK DRUG COMPANY
On July 22, 2002 we entered into a Supply Agreement whereby Block Drug
Company (Block) was required to produce Aphthasol(R) for us for a defined
period of time at its Puerto Rico facility. Subsequently we were advised
by Block that it was unable to produce Aphthasol(R) for us pursuant to the
Supply Agreement. In May 2003, we reached a settlement with Block relating
to this matter whereby Block made a one-time cash payment to us, we
recorded $2,280,000 in Miscellaneous Income and Block was relieved of its
obligations under the Supply Agreement and the Asset Sale Agreement,
pursuant to which we had purchased certain assets relating to amlexanox
and Aphthasol(R) from Block, and we were relieved from certain future
obligations under the Asset Sale Agreement.
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Our results of operations by quarter for the years ended December 31, 2004
and 2003 were as follows (in thousands, except per share amounts):
2004 Quarter Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ------------ -----------
Revenue $ 20 $ 68 $ 185 $ 276
Operating loss (2,064) (2,176) (2,229) (2,610)
Net loss $ (2,351) $ (2,553) $ (2,428) $ (2,906)
=========== =========== ============ ===========
Basic and diluted loss per
common share $ (0.17) $ (0.17) $ (0.16) $ (0.18)
=========== =========== ============ ===========
2003 Quarter Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ------------ -----------
Revenue $ 393 $ 683 $ 11 $ 208
Operating loss (2,194) (1,694) (1,943) (2,382)
Net income (loss) $ (2,411) $ 316 $ (2,206) $ (2,634)
=========== =========== ============ ===========
Basic and diluted income (loss) per
common share $ (0.18) $ 0.02 $ (0.17) $ (0.19)
=========== =========== ============ ===========
F-21