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, 1999
or
/ / Transition Report pursuant to Section 13 of 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
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(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
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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. _______
The aggregate market value of the outstanding voting stock held by non-
affiliates of the registrant as of March 28, 2000 was approximately
$68,387,000.
As of March 28, 2000 there were 10,946,433 shares of Access Pharmaceuticals,
Inc. Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of Registrant's Definitive
Proxy Statement filed with the Commission pursuant to Regulation 14A in
connection with the 2000 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.
PART I
ITEM 1. BUSINESS
Access Pharmaceuticals is a Delaware corporation in the development
stage. 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 have
proprietary patents or rights to five technology platforms: synthetic
polymers, bioerodible hydrogels, Residerm TM, carbohydrate targeting
technology, and agents for the prevention and treatment of viral disease,
including HIV. In addition, our partner Block Drug Company, or
Block, is marketing in the United States Aphthasol TM, the first FDA-
approved product for the treatment of canker sores. We are developing
new formulations and delivery forms to evaluate this product in
additional clinical indications. We have licensed the rights to amlexanox
for the treatment of canker sores from Block for certain countries
excluding the U.S. and the worldwide rights for certain additional
indications including mucositis and oral diseases.
Recent Developments
On March 28, 2000, our application for listing on the American Stock
Exchange, or AMEX was approved and we began trading on AMEX on
March 30, 2000 under the symbol AKC.
On March 1, 2000, with the assistance of an investment bank, we
completed the closing of a private offering, receiving gross proceeds of
$12.0 million, less issuance costs of approximately $89,500, at a per
share price of $2.50, from the private placement of 4,800,000 shares of
common stock. The placement agent for the offering received warrants
to purchase 459,806 shares of common stock at $2.50 per share, in
accordance with the offering terms and elected to receive approximately
520,000 shares of common stock in lieu of certain sales commissions and
expenses.
On February 25, 2000, we signed licensing agreements granting
Mipharm S.p.A. marketing and manufacturing rights for amlexanox for
numerous indications including the prevention and treatment of canker
sores and mucositis, oral lichen planus and atopic dermatitis. These
agreements cover Italy, Switzerland, Turkey and Lebanon. Under the
terms of these agreements, Mipharm will make an equity investment in
us, pay upfront licensing fees, make milestone payments and we will
receive a percentage of the product sales made in the territory. Mipharm
will have the option to license other product developments in the fields
of dermatology and gynecology in the territory.
On July 20, 1999, Access Holdings, a Delaware corporation and our
wholly-owned subsidiary, merged with and into Virologix Corporation,
a privately held Delaware corporation focused on the development of
product candidates for the prevention and treatment of viral diseases,
including HIV. Upon the consummation of the merger, the separate
existence of Access Holdings ceased, Virologix became our wholly-
owned subsidiary and each outstanding share of Virologix' common
stock was converted into 0.231047 shares of our common stock,
representing 999,963 shares of our common stock.
Business
We are an emerging pharmaceutical company developing drug delivery
systems and advanced polymer technology for application in cancer
treatment, dermatology and oral diseases. In addition, we have
developed a drug to treat canker sores that was sold to Block and which
Block currently is marketing in the United States under the name
Aphthasol TM, subject to a royalty agreement with us. Our lead
compounds and the potential markets for those compounds are as
follows.
Marketed Product
Amlexanox 5% Paste (Aphthasol TM)
This product currently is the only compound approved by the FDA for
the treatment of canker sores. Independent market research sponsored
by us indicates that more than 7 million patients visit doctors or 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, of which 15 million patients claim that their
canker sores recur.
1
Currently, we are conducting a study in Ireland 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. If
these results confirm that early application of the product can improve
treatment, this will provide a major marketing opportunity to expand
usage of the product and to attract sufferers of canker sores to contact
medical practitioners to request the product.
In 1995, we sold our rights to amlexanox to Block, subject to a retained
royalty. On June 8, 1998, we entered into an agreement to license these
rights back from Block for certain international markets. Pursuant to this
agreement, we announced on August 18, 1998 that we signed a License
Agreement for the United Kingdom and Ireland with Strakan Limited,
or Strakan, to license amlexanox for the treatment of canker sores.
Under the terms of this agreement, Strakan will be responsible for and
will bear all costs associated with the regulatory approval process for
amlexanox in the United Kingdom and the European Union, will pay
milestones based on cumulative sales revenue and will pay a royalty on
sales of amlexanox. We also announced that Strakan has filed a product
license application for amlexanox 5% paste for treatment of canker sores
with regulatory authorities in the United Kingdom. We anticipate that the
amlexanox 5% paste product will be registered throughout Europe in
early 2000. Product registrations have been submitted in additional
markets including Canada.
An international outlicensing program for amlexanox is ongoing. In
addition to the agreement with Strakan, licensing agreements have been
signed with Meda for Scandinavia, the Baltic states and Iceland;
Laboratorios Esteve for Spain, Portugal and Greece; Mipharm for Italy,
Switzerland, Turkey and Lebanon; and, a letter of intent has been signed
with Paladin Laboratories for Canada.
Products in Development Status
Polymer Platinate (AP 5280)
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 limitations 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 or irreversible cardiotoxicity, is another limitation 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 $800 million.
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 is a chemotherapeutic agent that we believe has the
potential to have significantly superior effectiveness in treating numerous
cancers compared to existing platinum compounds. Our patented
Polymer Platinate product seeks to achieve this goal by attaching a large
polymer to a small platinum molecule. This method exploits the usually
leaky or hyperpermeable nature of the cells that line the walls of blood
vessels that feed tumors by allowing the large Polymer Platinate
molecule to enter the tumor in preference to other tissue, which do not
have leaky or hyperpermeable blood vessels. In addition, the
capillary/lymphatic drainage system of tumors is not well developed and
limited, so the drug gets trapped in the tumor. This dual effect is called
enhanced permeability and retention, or EPR. In addition, the polymer
is designed to shield the platinum from interactions with normal cells
while the drug circulates within the body, thereby reducing toxicity. The
proposed mechanism of how
2
Polymer Platinate is taken up by tumor cells bypasses known membrane-
associated mechanisms for development of tumor resistance, a common cause
of failure of chemo-therapeutic drugs over the course of treatment.
In animal models, our Polymer Platinate has delivered up to 70 times the
amount of platinum to tumors compared with cisplatin, the standard
platinum formulation, at the maximum tolerated dose. Our Polymer
Platinate was approximately as effective in inhibiting tumor growth as
cisplatin alone at doses up to 10 times less toxic. In terms of dosing, in
animal studies, up to 70 times more platinum has been injected using our
Polymer Platinate, which could be clinically significant as platinum has
a steep dose response curve. Consequently, clinical outcome could be
greatly improved as a result of the ability to deliver additional amounts
of the drug to the tumor.
We have developed the Polymer Platinate AP5280 clinical formulation,
defined the manufacturing and analytical methods and commenced the
production of Good Manufacturing Practice, or GMP, material for
clinical trials. We are aggressively moving this project toward clinical
development, with GLP toxicology studies initiated, which is the major
preclinical activity remaining to be completed. We plan to commence
human clinical trials for our Polymer Platinate in the second quarter
2000.
OraDisc TM (Amlexanox)
We, in conjunction with Atrix Laboratories, are working to develop a
mucoadhesive disc that adheres to the canker sores and slowly erodes
over time locally releasing the drug.
The OraDisc TM formulation is potentially an improved delivery vehicle
for the oral delivery of amlexanox which potentially overcomes the
difficulties encountered in using conventional paste and gel formulations
for conditions in the mouth, that is, applying the drug and keeping it in
place over time.
The first GMP production of the amlexanox disc has been completed. A
clinical study to evaluate this product in oral wound healing was
completed in early December with positive results.
A significantly larger GMP production batch to produce material for the
planned clinical studies, to evaluate this formulation for both the
prevention and treatment of canker sores has been completed. The
prevention study has commenced in Europe and the treatment study will
commence in the second quarter 2000. We have developed two clinical
trial protocols for the OraDisc TM development program and engaged
the clinical site that will perform the major portion of the clinical trials.
Utilizing this technology, we anticipate that higher drug concentrations
will be achieved at the disease site increasing the effectiveness of the
product.
An Investigational New Drug Application has been filed with the FDA
and clinical studies are scheduled to commence in the United States in
the second quarter 2000.
OraRinse TM (Amlexanox)
We signed in 1998 a license agreement with Block for the rights to
develop amlexanox for use in chemotherapy and radiation induced
mucositis. Mucositis is a debilitating condition involving extensive
inflammation of mouth tissue that affects an estimated 400,000 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 believe amlexanox could provide a clinical benefit
in treating and preventing this condition because of the clinical
similarities of mucositis to canker sores for which amlexanox has proven
efficacy and the positive results achieved in the oral wound healing
study.
An IND has been filed with the FDA and a Phase II protocol developed
to investigate a mouthwash formulation for the prevention and treatment
of mucositis in head and neck cancer patients treated with radiation and
chemotherapy. This study has commenced in the first quarter of 2000.
Over 90% of head and neck cancer patients treated with radiation and
chemotherapy experience mucositis. We plan to enroll approximately 60
patients in the initial study which will be performed at multiple sites
throughout the United States. Results of this study will direct the future
clinical development plans for OraRinse TM.
3
Amlexanox Cream
We are currently generating and assembling the data for an IND
submission to the FDA for amlexanox cream for the treatment of atopic
dermatitis, a condition which is prevalent in 3% of the adult population
and 10% of the pediatric population. We anticipate that this filing will
be made in the second quarter 2000. We plan to commence a Phase II
clinical study in the first half of 2000, and we anticipate completion of
this study by year-end 2000.
Amlexanox Gel
Development work on formulating a mucoadhesive gel is currently
ongoing. The objective of this project is to develop an aqueous based
mucoadhesive gel. Alcohol based products cause local irritation and
stinging which is undesirable for the indication being evaluated. A pilot
formulation has been developed and we anticipate that this work will be
concluded in the second quarter 2000.
During the first half of 2000, manufacture of clinical trials material and
the filing of an IND are expected to be completed. We plan to evaluate
this formulation for the treatment of oral lichen planus, a chronic
condition afflicting up to 2% of the population. The clinical study is
planned to commence in the second half of 2000.
Residerm RTM A (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.
The first zinc drug that we are developing, in conjunction with Strakan,
our licensing partner, is Zinc Clindamycin for the treatment of acne.
This drug is currently in a pivotal Phase III study in Europe. Topical
acne drugs constitute an approximately $700 million per year market and
Clindamycin is a widely prescribed drug for the treatment of acne. We
believe that the addition of zinc potentially could increase the
effectiveness of Clindamycin through the reservoir effect of zinc, the
activity of zinc and Clindamycin, the improved stability of the product
and the potential for zinc to overcome certain bacterial resistance.
The Phase III study of Residerm RTM A is designed to determine whether
Residerm RTM A is superior to treatment with the market leading
Clindamycin containing product. A sub-group of the study will be
evaluated to determine if Residerm RTM A is effective in overcoming
bacterial resistance to standard Clindamycin therapy, and whether this
factor contributes to a favorable clinical outcome. In the Phase II study
of Residerm RTM A, the drug was significantly superior to standard
Clindamycin therapy with respect to the development of oily skin, a
benefit which will be further examined in Phase III.
We anticipate that the European Phase III clinical trial program will be
completed in 2000. The successful completion of the Phase III trial will
be the basis for a Product License Application to be filed with a
European Regulatory Authority. This filing is scheduled to occur within
12 months, which may result in a product approval in 2001.
We believe that our zinc technology could provide a broad development
platform for improved delivery of many topically applied products. We
are currently evaluating zinc complexed with vitamin D and retanoids.
We have entered into a license agreement with Strakan relating to our
zinc technology. Strakan has agreed to fund the development costs of
Zinc clindamycin and any additional compounds developed utilizing the
zinc patent, and 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.
4
Bioerodeable Hydrogel Technology
We have submitted a patent application for our bioerodeable hydrogel
technology, which will be our internal development focus once Polymer
Platinate AP5280 has entered clinical development. A number of
possible drug delivery systems can be developed using the Access
bioerodible hydrogel technology, ranging from nanoparticles for
intravenous administration, to larger devices which may be taken orally
or implanted.
Viral Disease Technology
We acquired our viral disease technology through our acquisition of
Virologix. This technology is targeted for the prevention and treatment
of viral diseases, including HIV. These compounds target a critical
enzyme involved in viral infection and replication. Analogous to reverse
transcriptase and protease inhibitors that have shown effectiveness
against HIV. A Phase I/II study will be designed to study this product
candidate in HIV patients. Positive clinical data would provide important
validation for this new class of HIV therapeutics. We also have
development programs in HTLV type I and II infection, and other
applications of the proprietary technology being used in the HIV
therapeutic program. We acquired a part of this technology through a
licensing agreement with the National Institutes of Health.
Other Technology
We own additional patented advanced polymer technologies designed to
deliver drug in response to specific diseases or take advantage of
biological mechanisms. These technologies are designed to provide our
next advanced drug delivery product development candidates.
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 The University of Kentucky for the formulation
of an amlexanox gel, Strakan for the delivery of topical therapeutic
agents which exploit our zinc patent and Atrix Laboratories for
mucoadhesive polymer formulations of amlexanox. Additionally, our
polymer platinate technology has 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 and plan to outlicense to, or
co-develop with, marketing partners our current product candidates to
finance the later clinical development phases.
We will continue to expand our internal core capabilities of chemistry,
formulation, analytical methods development, initial process scale up and
project management to maximize product opportunities in a timely
manner. We will, however, contract the manufacturing scaleup,
preclinical testing and product production to research organizations,
contract manufacturers and strategic partners. 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 criterion of effective drug delivery is to control and
optimize the localized release of 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
based on a physical erosion process for delivering active product into the
systemic circulation over time with the objective of improving patient
compliance. These systems
5
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
polymer carrier formulations to significantly enhance the therapeutic
efficacy and reduce toxicity of a broad spectrum of products. This is
achieved by utilizing Bio Responsive TM Polymers as novel drug delivery
solutions to match the specific physical properties of each drug with the
biological characteristics of each disease and targeting sites of disease
activity. We believe that the ability to achieve physiological triggering
of drug release at the desired site of action could enable our
Bio~Responsive TM Polymers to potentially have broad therapeutic
applications in the site specific delivery of chemotherapeutic agents in
cancer, infection, inflammation, drugs for other autoimmune diseases,
proteins, peptides and gene therapy.
Bio~Responsive TM Polymers mimic the natural transport mechanisms
in the body which are involved in the localized delivery of biological
mediators and cellular trafficking. We use a multi-faceted approach
through the use of both natural carbohydrates and synthetic polymers.
Access' central focus is to use Bio~Responsive TM Polymer systems
that can respond to normal biochemical or disease-induced signals to
localize drug carrier and release drug in a highly selective fashion. These
polymeric drug carriers can be applied to a wide range of drug
molecules including proteins and nucleotides and can be engineered to
control pharmacokinetics and body distribution, site-selectivity, site-
release of drug and drug clearance from non-target sites.
Core Drug Delivery Technology Platforms
Our current drug delivery technology platforms take advantage of the
following biological mechanisms to improve drug delivery:
* disease specific carbohydrate recognition by vascular endothelial cells
and underlying tissue; and
* enhanced permeability and retention in tumors.
Carbohydrate Polymer Drug Delivery Technology
Our carbohydrate polymer drug delivery technology exploits specific
changes in the vascular endothelium that occur during disease processes.
These carriers mimic disease-specific, carbohydrate recognition by
vascular endothelium cells and underlying tissue. It has been well
established that white blood cells can recognize, target and permeate
disease sites by means of surface carbohydrates which bind to cytokine-
induced endothelium plus underlying tissue and cells. A number of
receptors on the endothelium and on underlying tissue are known to bind
sulfated glycosaminoglycans, such as heparin and dermatan sulfate. We
have developed glycosaminoglycan carriers to selectively image and treat
diseases involving the neovascular endothelium. We believe that our
glycosaminoglycan technology has broad potential in a number of
therapeutic applications including cancer, inflammation and infection.
Synthetic Soluble Polymer Drug Delivery Technology
In collaboration with The School of Pharmacy, University of London,
we have developed a synthetic polymer, hydroxypropylmethacrylamide,
designed to be used to exploit enhanced permeability and retention, or
EPR, in tumor cells and control drug release. Many solid tumor cells
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 per gram 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
6
polymer/drug not trapped in 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, cisplatin.
Topical Delivery Technology
We have granted a license to Strakan for the development of compounds
that utilize our zinc technology. The use of zinc ions 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 which 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;
* 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.
Bioerodeable Hydrogels
Our scientists have developed a novel series of bioerodeable hydrogels
which have the potential to be utilized 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 bioerodeable, therefore
they deliver their payload of drug by diffusion of these molecules
through the interconnecting chambers of the hydrogel. Once all 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, the Access hydrogels possess bioerodeable 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 gel.
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 can be made using the
Access bioerodible hydrogel technology, ranging from nanoparticles for
intravenous administration, to larger devices which may be taken orally
or implanted. We have filed a U.S. patent application relating to this
technology.
7
Research Projects, Products and Products in Development
ACCESS DRUG PORTFOLIO
Clinical
Compound Originator Indication FDA Filing Stage (1)
- -------- ---------- ---------- ----------- -----------
Cancer
- ------
Polymer Platinate (AP5280)(9) Access Anti-tumor Development Pre-Clinical
OraRinse TM Amlexanox (2) Takeda Mucositis IND Phase II
Topical Delivery
- ----------------
Amlexanox (3)(CHX-3673) Takeda Oral ulcers FDA Approved Completed
OraDisc TM Amlexanox (6)
Biodegradable Polymer Disc Takeda Oral Ulcers CTX (5) Phase II/III
Residerm RTM A
Zinc Compound (4) Access Enhancing drug CTX (5) Phase III
penetration
and retention
in the skin
(acne)
Amlexanox Cream (6) Takeda Atopic Development Pre-Clinical
Dermatitis
Amlexanox Gel (6) Takeda Oral Lichen Development Pre-Clinical
Planus
Antiviral
- ---------
Anti viral compound (7)(8) NIH HIV Development Pre-Clinical
Anti viral compound (8) Access HTLV type I Development Pre-Clinical
and II
infection
(1) For more information, see "Government Regulation" for description
of clinical stages.
(2) Licensed from Block subject to milestone payments.
(3) Sold to Block. Subject to a Royalty Agreement. International rights
(except Japan and Israel) licensed from Block subject to royalty and
milestone payments.
(4) Licensed to Strakan.
(5) United Kingdom equivalent of an IND.
(6) Licensed from Block subject to royalty and milestone payments.
(7) Licensed from NIH subject to royalty and milestone payments.
(8) Licensed from The Rockefeller University
(9) Licensed from the London School of Pharmacy, The University of London
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 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. We do not plan to have an
extensive clinical development organization as we plan to have this
process conducted by a development partner.
8
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.
We expended approximately $1,608,000, $1,756,000 and $2,433,000 on
research and development during the years 1999, 1998 and 1997,
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.
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. These
patents 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. These
patents also relate to topical treatment methods including such reservoir
effect enhancers and to pharmaceutical compositions containing them.
We acquired in 1998 the license to one U.S. and one European patent
application for polymer platinum compounds through our acquisition of
Tacora. This patent and application are the result of a collaboration with
The School of Pharmacy, University of London, from which the
technology has been licensed. This patent and application includes a
synthetic polymer, hydroxypropylmethacrylamide, that can be used to
exploit enhanced permeability and retention in tumors and control drug
release. This patent and application include a pharmaceutical composition
for use in tumor treatment comprising a polymer-platinum compound
through linkages which are designed to be cleaved under selected
conditions to yield a platinum which accumulates at a tumor site. This
patent and application also include methods for improving the
pharmaceutical properties of platinum compounds. Recently a provisional
patent application has been filed to cover additional discoveries related
to the linking of polymers to platinum compounds.
We hold U.S. and European patents with broad composition of matter
claims encompassing glycosaminoglycan, acidic saccharide, carbohydrate
and other endothelial binding and targeting carriers in combination with
drugs and diagnostic agents formulated by both physical and chemical
covalent means. Nine patents have issued commencing in 1990, eight
U.S. and one European, and an additional four patent applications are
pending, one U.S. and three European. These patents and applications
relate to the in vivo medical uses of drugs and diagnostic carrier
formulations which bind and cross endothelial and epithelial barriers at
sites of disease, including but not limited to treatment and medical
imaging of tumor, infarct, infection and inflammation. They further
disclose the body's induction of endothelial, epithelial, tissue and blood
adhesins, selectins, integrins, chemotaxins and cytotaxins at sites of
disease as a mechanism for selective targeting, and they claim
recognized usable carrier substances which selectively bind to these
induced target determinants.
We have filed one U.S. patent application for our bioerodeable hydrogel
technology. A number of possible drug delivery systems can be made
using the Access bioerodeable hydrogel technology, ranging from
nanoparticles for intravenous administration, to larger devices which may
be taken orally or implanted.
Through our Virologix subsidiary, we have two patents licensed from the
National Institute of Health, or NIH, and four additional U.S. patent
applications licensed from the Rockefellar University for our viral
disease technology for the prevention and treatment of viral diseases
including HIV. The licensed patents' compounds target a critical enzyme
involved in viral infection and replication. The other patents include
vaccines in HTLV type I and II infection, and other applications of the
proprietary technology being used in the HIV therapeutic program.
Under our various license agreements with Block, we have the
worldwide rights for the use of amlexanox for the treatment of mucositis
in patients undergoing chemotherapy and radiation treatment for cancer,
and the worldwide
9
rights excluding Japan, the United States and Israel for the use of
amlexanox for oral and dermatological use. Block has the rights to market
any product developed for oral or dermatological use in the U.S.
We have a strategy of maintaining an ongoing line of 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 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, 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. 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 as well 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 effective 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 or 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 doing 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 a considerable time period and there is no
guarantee that an NDA will be approved. Therefore, we cannot estimate
with any certainty the length of the approval cycle.
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,
10
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.
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 which has
been shown to effectively bind and cross neovascular barriers and to
penetrate the major classes of deep tissue and organ disease, which
remain partially inaccessible to other technologies.
A number of companies are developing or may in the future engage in
the development of products competitive with the Access delivery
system. Currently, liposomal formulations being developed by Nexstar,
The Liposome Company and Sequus Pharmaceuticals, a subsidiary of
Alza Corporation, are the major competing intravenous drug delivery
formulations which deliver similar drug substances. 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.
Products developed from the 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.
Residerm A, which is the first product being developed utilizing the
Residerm RTM technology, would compete with products including
Benzamycin, marketed by a subsidiary of Rhone-Poulenc Rorer; Cleocin-
T and a generic topical clindamycin, marketed by Pharmacia & Upjohn;
Benzac, marketed by a subsidiary of L'Oreal; and Triaz, marketed by
Medicis Pharmaceutical Corp.
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, 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 28, 2000, we had 13 full time employees, five of whom
have advanced scientific degrees. We believe 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 regulatory affairs,
toxicology, process scale-up and preclinical testing.
11
Risk Factors
With the exception of the historical information contained herein, the
discussions herein contain forward-looking statements within the meaning
of Section 27a of the Securities Act of 1933, as amended, that involve
risks and uncertainties. Our actual results could differ from those
discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, risks discussed below as well
as those discussed elsewhere herein and in documents incorporated
herein by reference.
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 $26.5 million through
December 31, 1999. Our losses have resulted principally from costs
incurred in research and development activities related to our efforts to
develop target candidates and from the associated administrative costs.
We expect to incur significant additional operating losses over the next
several years. We also expect cumulative losses to increase substantially
due to expanded research and development efforts and preclinical and
clinical trials.
We do not have significant operating revenue and we may never
attain profitability.
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 our
amlexanox products to date and we may not receive 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, market and obtain required regulatory approvals for
any additional products. Moreover, even if we do identify, develop,
commercialize, patent, manufacture, market and obtain required
regulatory approvals for additional products, we may not receive
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 any amounts that we receive under strategic partnerships and research
or drug development collaborations that we may establish and we cannot
assure you that we will be able to establish any such relationships on
terms acceptable to us. We cannot assure you that we will achieve or
maintain profitability in the future and our failure to receive significant
revenues or to achieve profitable operations would impair our ability to
sustain operations.
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.
These risks include the possibilities that some or all of our drug
candidates will be found to be unsafe or ineffective or otherwise fail to
meet applicable regulatory standards or receive necessary regulatory
clearances; that these drug candidates, if safe and effective will be
difficult to develop into commercially viable drugs or to manufacture on
a large scale or will be uneconomical to market; that proprietary rights
of third parties will preclude us from marketing such drugs; or that third
parties will market superior or equivalent drugs. Our failure to develop
safe, commercially viable drugs would have a material adverse effect on
our business, operating results and financial condition.
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. 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 require extension. Cost overruns, unanticipated regulatory
delays or demands, unexpected adverse side effects or insufficient
therapeutic efficacy will prevent or substantially slow the 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.
12
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. Although we believe that our
existing capital resources, interest income and revenue from possible
licensing agreements and collaborative agreements will be sufficient to
fund our currently expected operating expenses and capital requirements
for up to three years, we may need to raise substantial additional capital
during that period because our actual cash requirements may vary
materially from those now planned and will depend upon numerous
factors, including the results of our research and development and
collaboration programs, the timing and results of preclinical trials, our
ability to maintain existing and establish new collaborative agreements
with other companies to provide funding to us, the technological
advances and activities of competitors and other factors. We intend to
seek additional funding through additional equity offerings or
collaborative or other arrangements with corporate partners. We cannot
assure you, however, that any such equity offerings will occur, or that
additional financing will be available from any of these sources or, if
available, will be available on acceptable or affordable terms. If we do
raise additional funds by issuing equity securities, further dilution to
existing stockholders may result and future investors may be granted
rights superior to those of existing stockholders. Alternatively, we may
seek to raise additional funds through borrowing. As a non-revenue
producing company, however, we are unable to obtain standard credit
arrangements, and it is therefore likely that if we were to raise additional
funds through borrowing, we would be forced to accept unfavorable
terms. Furthermore, there can be no assurance that any credit
arrangement would be available at all. If adequate funds are not available
to us through additional equity offerings or borrowing, 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.
The success of our business may depend, in part, upon relationships
with other companies.
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, if we successfully develop any commercially
marketable pharmaceutical products, we may seek to enter joint venture,
sublicense or 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 additional collaborative arrangements or license
agreements as we may deem necessary to develop and commercialize our
potential pharmaceutical products on acceptable terms, and our
collaborative arrangements or license agreements may be unsuccessful.
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.
We may depend upon contract manufacturers to assist us with the
commercialization of any new products that we may develop.
We have no 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,
so we 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 submission of products for regulatory approval and
initiation of new development programs, which could cause our business
to suffer. 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 could cause our business to suffer.
Moreover, contract manufacturers that we may use must adhere to
current Good Manufacturing Practices, as required by the U.S. Food and
Drug Administration, or 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 after 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.
13
Our potential dependence upon third parties for the manufacture of our
products may adversely affect our profit margins and our ability to develop
and deliver such products on a timely and competitive basis.
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 drug candidates will require
governmental approvals for commercialization, none of which have been
obtained. 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. We cannot assure 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. We cannot assure you that the FDA or
other regulatory approvals for any drug candidates will be granted 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 initial
regulatory approvals for our drug candidates are obtained, we, or 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 regulatory standards are
applied stringently by the FDA and other regulatory authorities and
failure to comply can, among other things, result in fines, denial or
withdrawal of regulatory approvals, product recalls or seizures,
operating restrictions and criminal prosecution.
Our ability to successfully commercialize new products will be
subject to the uncertainty associated with preclinical and clinical
testing.
Before obtaining 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. We cannot assure you that preclinical or clinical trials of any
future drug candidates will 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 or animals 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.
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 and could cause our business, operating results and
financial condition to suffer. For more information, see "Business-
Government Regulation."
We may incur substantial product liability expenses due to the use
or misuse of our products for which we may be unable to obtain
complete 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 have product liability insurance for drug
candidates that are undergoing human clinical trials. Product liability
insurance for the biotechnology industry is generally expensive,
however, if available at all, and we cannot assure you that in the future
we will be able to obtain insurance coverage at acceptable costs or in a
sufficient amount, 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
14
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. In addition, although we believe that we are in compliance
in all material respects with applicable environmental laws and
regulations and currently do not expect to make material capital
expenditures for environmental control facilities in the near-term, we
cannot assure you that we will not be required to incur significant costs
to comply with environmental laws and regulations in the future, or that
our operations, business or assets will not be materially adversely
affected by current or future environmental laws or regulations.
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, major multinational pharmaceutical and chemical
companies, specialized biotechnology firms and universities and other
research institutions. Many of these competitors have and employ
greater financial and other resources, including larger research and
development staffs and more effective marketing and manufacturing
organizations, than us or our collaborative partners. We cannot assure
you that our competitors will not succeed in developing technologies and
drugs that are more effective or less costly than any which are being
developed by us or which would render our technology and future
products obsolete and noncompetitive.
In addition, some of our competitors have greater experience than us 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 us. 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. We cannot assure you that drugs resulting from our research
and development efforts or from our joint efforts with collaborative
partners will be able to compete successfully 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.
The successful commercialization of, and the interest of potential
collaborative partners to invest in, the development of our drug
candidates will depend substantially on 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. We cannot assure
you that reimbursement in the United States or elsewhere will be
available for any drugs that we may develop or, if available, will not be
decreased in the future, or that reimbursement amounts will not reduce
the demand for, or the price of, our drugs, thereby adversely affecting
our business. If reimbursement is not available or is available only to
limited levels, we cannot assure you that we will be able to obtain
collaborative partners to commercialize our drugs, or be able to obtain
a sufficient financial return on our own manufacture and
commercialization of any future drugs.
Any pharmaceutical products that we successfully develop may not
be accepted by the market.
The drugs that we are attempting to develop will 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
15
accept or use any drugs that we may develop independently or with our
collaborative partners and if they do not, our business could suffer.
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 health care 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.
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. Although Access is either the owner or licensee
of technology to 13 U.S. patents and to 7 U.S. patent applications now
pending, we cannot assure you that any additional patents will issue from
any of the patent applications owned by, or licensed to, us.
Furthermore, we cannot assure you that any rights we may have under
issued patents will provide us with significant protection against
competitive products or otherwise be commercially viable. 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. 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. The
loss of the services of one or more of these individuals could seriously
impede our success. 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 no investment in manufacturing,
production, marketing, product sales or regulatory compliance resources.
If we develop pharmaceutical products that we commercialize ourselves,
however, we will need to hire additional personnel skilled in the clinical
testing and regulatory compliance process and in marketing and product
sales. 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.
16
Ownership of our shares is concentrated, to some extent, in the
hands of a few individual investors.
Howard P. Milstein and Richard Stone currently beneficially own
approximately 5.7% and 6.5% respectively, of our issued and
outstanding common stock. Mr. Milstein and Mr. Stone have signed
lock-up agreements for 71,922 and 81,877 shares, respectively, and have
agreed not to sell any of these shares of our common stock until July 20,
2000. The remainder of their shares are subject to Rule 144. For more
information, see "Certain Relationships and Related Transactions."
Provisions of our charter documents could discourage an acquisition of
our company that would benefit our stockholders.
Provisions of our Certificate of Incorporation and By-laws may make it
more difficult for a third party to acquire control of our company, even
if a change of 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.
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. Currently, a
significant percentage of the outstanding shares of our common stock are
unrestricted and freely tradable or tradable under Rule 144.
Shareholders holding approximately 650,000 shares of our common stock
will become eligible to sell such shares on January 11, 2001 and
additional shareholders holding approximately 533,000 shares of our
common stock will become eligible to sell such shares on July 20, 2000.
Special Note Regarding Forward-Looking Statements
This Form 10-K contains forward-looking statements that involve risks
and uncertainties. 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," "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 this
confidential private placement memorandum to conform such statements
to actual results.
17
ITEM 2. PROPERTIES
We maintain one facility of approximately 9,100 square feet for
administrative offices and laboratories in Dallas, Texas. We have a
lease agreement for the facility, which terminates in November 2002.
However, we have an option for early termination. Adjacent space is
available for expansion which we believe would accommodate growth for
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
Price Range of Common Stock and Dividend Policy
On March 28, 2000, our application for listing on the American Stock
Exchange, or AMEX was approved and we began trading on AMEX on
March 30, 2000 under the symbol AKC. From February 1, 1996
through March 29, 2000, our common stock traded on the OTC Bulletin
Board under the trading symbol AXCS. The following table sets forth,
for the periods indicated, the high and low closing prices for our
common stock as reported by the OTC Bulletin Board for our past two
fiscal years. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions.
Common Stock
-----------------
High Low
------- -------
Fiscal Year Ended December 31, 1999
- -----------------------------------
First quarter $ 3-5/8 $ 2-17/64
Second quarter 4-1/16 1-7/8
Third quarter 2-5/16 1-7/16
Fourth quarter 2-3/8 1-1/8
Fiscal Year Ended December 31, 1998
- -----------------------------------
First quarter $14-1/16 $ 5-0/0
Second quarter 5-5/8 3-1/16
Third quarter 3-25/64 1-11/64
Fourth quarter 3-37/64 1-5/8
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 24,
2000 was approximately 4,800. On March 28, 2000, the closing price
for the Common Stock as quoted on the OTC Bulletin Board was $7.25.
There were 10,946,433 shares of Common Stock outstanding at March
28, 2000.
Recent Sales of Unregistered Securities
On March 1, 2000, with the assistance of an investment bank, we
completed the closing of a private offering to individual accredited
investors, receiving gross proceeds of $12.0 million, less issuance costs
of approximately $89,500, at a per share price of $2.50, from the
private placement of 4,800,000 shares of common stock. The placement
agent for the offering received warrants to purchase 459,806 shares of
common stock at $2.50 per share, in accordance with the offering terms
and elected to receive approximately 520,000 shares of common stock
in lieu of certain sales commissions and expenses. The shares issued in
the Private Placement have not been registered; however, a registration
statement for the resale of such shares is required to be filed within 90
days after the final closing of the Private Placement. The Company
relied on Section 4(2) and/or 3(b) of the 1933 Securities Act of 1933 and
the provisions of Regulation D as exemptions from the registration
thereunder. The proceeds of the offering will be used to fund
19
research and development, working capital, acquisitions of complementary
companies or technologies and general corporate purposes.
ITEM 6. SELECTED FINANCIAL DATA
(Thousands, Except for Net Loss Per Share) (1,2)
The following data, insofar as it relates to each of the years in the five
year period ended December 31, 1999, has been derived from the
audited consolidated financial statements of Access and notes thereto
appearing elsewhere herein. The data should be read in conjunction with
the Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Form 10K.
For the Year Ended December 31,
-------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Consolidated Statement of Operations Data:
Total revenues $ 15 $ - $ 435 $ 167 $ 690
Operating loss (3,364) (3,433) (4,524) (11,613) (1,046)
Other income 53 58 119 196 5
Interest expense 12 22 36 45 58
Net loss (3,308) (3,397) (4,441) (11,462) (1,099)
Common Stock Data:
Net loss per basic and diluted
common share $ (0.72) $ (1.28) $ (2.80) $ (7.68) $ (1.86)
Weighted average basic and
diluted common shares
outstanding 4,611 2,650 1,584 1,492 592
December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Total assets $ 4,600 $ 2,351 $ 1,447 $ 4,928 $ 424
Deferred revenue 155 - - 110 110
Total liabilities 986 556 848 868 773
Stockholders' equity (deficit) 3,614 1,795 599 4,060 (349)
(1) Reflects Company data for 1999, 1998, 1997 and 1996 and API data
for the year 1995. The 1995 Net Loss Per Basic and Diluted Common
Share and Weighted Average Basic and Diluted Common Shares
Outstanding are adjusted by the conversion factor 3.824251 used for the
merger of API with the Company.
(2) All share and per share amounts have been adjusted to reflect the
one for twenty reverse stock split in June 1998.
On July 20, 1999, our wholly-owned subsidiary Access Holdings, Inc.
merged with and into Virologix Corporation, a Delaware corporation
("Virologix"). As a result, Virologix became a wholly-owned subsidiary
and each outstanding share of Virologix' common stock was converted
into 0.231047 shares of our common stock, representing 999,963 shares
of common stock. The transaction has been accounted for as a purchase.
We assumed total assets of $107,000 and trade and accrued payables of
$469,000. The aggregate purchase price has been allocated to the net
assets acquired based on management's estimates of the fair values of
assets acquired and liabilities assumed. The excess purchase price over
the fair value of Virologix' net identifiable liabilities of $2,464,000 was
recorded as goodwill and is being amortized over ten years. Operations
have been included in our consolidated financial statements since the date
of acquisition.
On December 9, 1997, a wholly-owned subsidiary of the Company
merged with Tacora Corporation ("Tacora"), a privately-held
pharmaceutical company based in Seattle, Washington; Tacora became
a wholly-owned subsidiary of the Company. The Company used the
purchase method of accounting for the purchase of Tacora. The
aggregate purchase price was $739,000, payable $124,000 in cash,
$192,000 in stock (representing 20,900 shares of Company common
stock) and assumption of $239,000 in trade and accrued payables and
$184,000 of Tacora's capital lease
20
obligations, plus up to 55,910 shares
in additional Common Stock if certain milestones are met. The share
price to be used will range between $50.00 and $130.00 per share (range
of value of shares is $2,796,000 to $7,268,000), depending on when the
milestones are met. All milestone conditions expire in June 2000. The
aggregate purchase price has been allocated to the net assets acquired
based on management's estimates of the fair values of assets acquired
and liabilities assumed. The excess purchase price over the fair value of
Tacora's net identifiable assets of $579,544 was recorded and written off
in the fourth quarter of 1997 due to an impairment of the excess
purchase price based on estimated future cash flows.
On January 25, 1996, the Company shareholders, at a Special Meeting,
approved the merger with Access Pharmaceuticals, Inc. ("API"), a Texas
corporation. Under the terms of the agreement, API was merged into the
Company, Chemex Pharmaceuticals, Inc. ("Chemex") with Chemex as
the surviving entity. Chemex changed its name to Access
Pharmaceuticals, Inc. and the operations of the consolidated company are
now based in Dallas, Texas. Shareholders of both companies approved
the merger.
As a result of the merger, and at time of the merger, the former API
stockholders owned approximately 60% of the issued and outstanding
shares of the Company. Generally accepted accounting principles require
that a company whose stockholders retain the controlling interest in a
combined business be treated as the acquiror for accounting purposes.
As a consequence, the merger was accounted for as a "reverse
acquisition" for financial reporting purposes and API was deemed
to have acquired an approximate 60% interest in Chemex. Despite the
financial reporting requirement to account for the acquisition as a
"reverse acquisition", the Company remains the continuing legal entity
and registrant for Securities and Exchange Commission reporting
purposes.
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 were incorporated in
Wyoming in 1974 as Chemex Corporation, and in 1983 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. and changed our name to
Access Pharmaceuticals, Inc. We have proprietary patents or rights to
five technology platforms: synthetic polymers, bioerodible hydrogels,
Residerm TM, carbohydrate targeting technology and agents for the
prevention and treatment of viral disease, including HIV. In addition,
our partner Block Drug Company, or Block, is marketing in the United
States a product named Aphthasol TM, the first FDA approved product
for the treatment of canker sores. New formulations and delivery forms
are being developed to evaluate this product in additional clinical
indications. We have licensed the rights for amlexanox from Block for
additional indications including mucositis and oral diseases.
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,
1999, our accumulated deficit was $26,453,000, of which $8,894,000
was the result of the write-off of purchased research.
Recent Developments
On March 28, 2000, our application for listing on the American Stock
Exchange, or AMEX was approved and we began trading on AMEX on
March 30, 2000 under the symbol AKC.
On March 1, 2000, with the assistance of an investment bank, we
completed the closing of an offering, receiving gross proceeds of $12.0
million, less issuance costs of $89,500, at a per share price of $2.50,
from the private
21
placement of 4,800,000 shares of common stock. The
placement agent for the offering received warrants to purchase 459,806
shares of common stock at $2.50 per share, in accordance with the
offering terms and elected to receive 520,000 shares of common stock
in lieu of certain sales commissions and expenses.
On February 25, 2000 we signed licensing agreements granting Mipharm
S.p.A. marketing and manufacturing rights for amlexanox for numerous
indications including the prevention and treatment of canker sores and
mucositis, oral lichen planus and atopic dermatitis. These agreements
cover Italy, Switzerland, Turkey and Lebanon.
The licensing agreements include the 5% paste formulation, approved in
the United States for the treatment of canker sores, which is in the
regulatory process in Europe; the OraDisc TM formulation which is in
Phase III clinical development for the prevention and treatment of canker
sores; OraRinse TM which has commenced Phase II clinical evaluation for
the prevention and treatment of mucositis; the 5% amlexanox cream
formulation which is scheduled to commence Phase II studies for the
treatment for atopic dermatitis mid year; and a 5% amlexanox gel for the
treatment of oral lichen planus, which is planned to commence Phase II
clinical studies in the second half of this year. Additionally, we granted
manufacturing rights for Europe to Mipharm for the products covered by
the agreements.
Under the terms of the agreements, Mipharm will make an equity
investment in Access, pay upfront licensing fees, make milestone
payments and Access will receive a percentage of the product sales made
in the territory. Mipharm has the option to license other Access product
developments in the fields of Dermatology and Gynecology in the
territory.
Other Developments
On July 20, 1999 and October 18, 1999, respectively, with the assistance
of an investment bank, we completed the first and second closing of an
offering, receiving gross proceeds of $3.1 million, less issuance costs of
$271,000, at a per share price of $2.00, from the private placement of
1,551,000 shares of common stock. The placement agent for the offering
received warrants to purchase 165,721 shares of common stock at $2.00
per share, in accordance with the offering terms and elected to receive
106,217 shares of common stock in lieu of certain sales commissions and
expenses.
On July 20, 1999, our wholly-owned subsidiary Access Holdings, Inc.
merged with and into Virologix Corporation, a Delaware corporation
("Virologix"). As a result, Virologix became a wholly-owned subsidiary
and each outstanding share of Virologix' common stock was converted
into 0.231047 shares of our common stock, representing 999,963 shares
of common stock. The transaction has been accounted for as a purchase.
We assumed total assets of $107,000 and trade and accrued payables of
$469,000. The aggregate purchase price has been allocated to the net
assets acquired based on management's estimates of the fair values of
assets acquired and liabilities assumed. The excess purchase price over
the fair value of Virologix' net identifiable liabilities of $2,464,000 was
recorded as goodwill and amortized over ten years. Operations have been
included in our consolidated financial statements since the date of
acquisition.
On June 18, 1998, in connection with the first closing of a private equity
placement, we effected a recapitalization through a one-for-twenty
reverse stock split of our common stock, $0.04 par value per share,
which decreased the number of authorized shares of common stock from
60.0 million, at $0.04 par value per share, to 20.0 million shares, $0.01
par value per share, and decreased the authorized shares of our preferred
stock from 10.0 million to 2.0 million. This recapitalization decreased
the number of outstanding shares of our common stock from
approximately 41.5 million to 2.1 million. All share numbers and
prices referenced herein have been adjusted to reflect the June 18, 1998
recapitalization.
In 1998, assisted by an investment bank, we raised an aggregate of
$1,200,000 from the sale of units consisting of 399,984 shares of
common stock and warrants to purchase 399,984 shares of common
stock at an exercise price of $3.00 per share. The placement agent
received warrants to purchase 44,527 shares of common stock at $3.00
per share, in accordance with the offering terms and elected to receive
45,277 shares of common stock in lieu of certain sales commissions and
expenses.
On June 18, 1998, assisted by the same investment bank, we raised an
aggregate of $2.9 million from the first closing of a private placement
of 953,573 shares of common stock at $3.00 per share. The placement
agent for such
22
offering received warrants to purchase 101,653 shares of
common stock at $3.00 per share, in accordance with the offering terms
and elected to receive 62,949 shares of common stock in lieu of certain
sales commissions and expenses.
On July 30, 1998, again assisted by the same investment bank, we raised
an aggregate of $900,000 from the second closing of a private placement
of 300,000 shares of common stock at $3.00 per share. The placement
agent for such offering received warrants to purchase 33,445 shares of
common stock at $3.00 per share, in accordance with the offering terms
and elected to receive 34,450 shares of common stock in lieu of certain
sales commissions and expenses.
Issuance costs for the above placements totaled $405,000. The proceeds
of the offerings were used to fund research and development, working
capital and general corporate purposes.
In December 1998 we signed a license agreement with Block for the
rights to develop amlexanox for use in chemotherapy and radiation
induced mucositis. Mucositis is a debilitating condition involving
extensive inflammation of mouth tissue that affects an estimated 400,000
cancer patients in the United States undergoing chemotherapy and
radiation therapy.
On June 8, 1998, we entered into an agreement to license from Block
Drug Company the rights to "Amlexanox oral paste 5%" for certain
international markets. We jointly developed Amlexanox with Block
Drug Company, and Amlexanox was subsequently purchased by Block
Drug Company with us receiving an up front fee and future royalty
payments. Amlexanox is currently marketed in the United States by
Block Drug under the trademark Aphthasol TM. Aphthasol TM was
launched to the dental market in December 1997, and was launched to
the general practice physician market in June 1998.
We have announced agreements or letters of intent with the following
international partners to market Amlexanox oral 5% paste:
* We signed a license agreement in July 1999 with Laboratoios Dr.
Esteve, for licensing rights in Spain, Portugal and Greece. Esteve made
an up-front license payment and will pay milestone payments and royalty
on sales.
* We signed a license agreement in January 1999 with Meda AB of
Sweden for licensing rights in Sweden, Finland, Norway, Denmark,
Latvia, Estonia, Lithuania and Iceland. Under the terms of the
agreement, Meda made an up-front license payment and will pay
milestone payments and a royalty on sales.
* On August 20, 1998 we signed a Letter of Intent with Paladin Labs,
Inc. for marketing rights for amlexanox in Canada. Paladin will bear all
costs associated with gaining regulatory approval in Canada, and will
pay milestones based on cumulative sales revenue and a royalty on sales.
Paladin is a subsidiary of PharmaScience, Inc.
* On August 18, 1998, we signed an agreement with Strakan Limited
for marketing rights for the UK and Ireland. Under the terms of the
agreement, Strakan will bear all costs associated with the regulatory
process in the UK and the European community, and will pay milestones
based on cumulative sales and a royalty on sales.
We signed an agreement on August 25, 1998 with Atrix Laboratories,
Inc. to incorporate amlexanox in the proprietary mucoadhesive
technologies being developed by Atrix. Atrix is developing an innovative
bioerodiable mucoadhesive, BEMA, delivery system, which is a thin
film that adheres to the oral mucosa and erodes over time delivering the
drug into the tissue. A product from this collaboration has entered
clinical testing. We intend to fund the Atrix project development
activities; however, Block Drug Company will share in the development
costs through a reduction in the royalty we will pay Block for
international sales. The international rights to any product resulting from
the collaboration with Atrix will be out-licensed to our amlexanox
licensing partners.
23
Liquidity and Capital Resources
As of March 28, 2000 our principal source of liquidity is $13,405,000
of cash and cash equivalents. Working capital as of December 31, 1999
was $238,000, representing a decrease in working capital of $771,000
as compared to the working capital as of December 31, 1998 of
$1,009,000. The decrease in working capital at December 31, 1999 was
due to losses from operations of 1999 offset by the money raised in the
1999 offering.
Since inception, our expenses have significantly exceeded revenues,
resulting in an accumulated deficit of $26,453,000 as of December 31,
1999. We have funded our operations primarily through private sales of
equity securities, contract research payments from corporate alliances
and the 1996 merger of Access Pharmaceuticals, Inc. and Chemex
Pharmaceuticals, Inc.
We have incurred negative cash flows from operations since inception,
and have expended, and we expect to continue to expend in the future,
substantial funds to complete our planned product development efforts.
We expect that our existing capital resources will be adequate to fund
our current level of operations through the Year 2002. We are
dependent on raising additional capital to fund the development of our
technology and to implement our business plan. Such dependence will
continue at least until we begin marketing products resulting from our
technologies.
We will require substantial funds to conduct research and development
programs, preclinical studies and clinical trials of potential products,
including research and development with respect to the newly acquired
technology from the acquisition of Virologix. Our future capital
requirements and adequacy of available funds will depend on many
factors, including:
* the successful commercialization of amlexanox;
* the ability to establish and maintain collaborative arrangements for
research, development and commercialization of products with corporate
partners;
* 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;
* competing technological developments;
* the cost of manufacturing and scale-up; and
* the ability to establish and maintain effective commercialization
arrangements and activities.
Results of Operations
Comparison of Years Ended December 31, 1999 and 1998
Revenues. We had $15,000 in revenues for 1999 as compared to no
revenues in 1998. 1999 revenues were for a twelve month option
payment on our carbohydrate polymer drug technology as applied to the
field of selectively replicating viruses.
Research Spending. Total research spending for 1999 was $1,608,000
as compared to $1,756,000 for the same period in 1998, a decrease of
$148,000. The decrease in expenses was due to:
* $354,000 less external development costs due to the completion of
university research contracts in 1998.
This decrease was partially offset by:
* $94,000 more scientific consulting costs;
* $64,000 more salary and related costs;
* $40,000 more clinical development costs, and
* other net increases totaling $8,000.
24
We expect increases in research spending in 2000 due to expenses
associated with hiring additional staff, product development and clinical
trials.
General and administrative expenses. General and administrative
expenses were $1,471,000 for 1999, an increase of $7,000 as compared
to the same period in 1998. The increase was primarily due to the
following:
* $249,000 increased business consulting expense due to the issuance
of warrants issued in connection with consulting agreements;
* $41,000 more shareholder expenses due primarily to increased
investor relation expenses; and
* other net increases totaling $17,000.
These increases were partially offset by:
* $119,000 less patent expenses due to the filing of four patents and
the prosecution of European patents in 1998 compared with one patent
filing in 1999;
* $81,000 less salary and related expenses due primarily to our Vice
President of Business Development leaving in the third quarter of 1998
and not being replaced;
* $69,000 less other professional costs; and
* $31,000 less travel and entertainment expenses.
Depreciation and amortization. Depreciation and amortization for 1999
was $285,000 as compared to $213,000 for the same period in 1998, an
increase of $72,000. The increase in amortization is due to amortization
of goodwill of $103,000 recorded as a result of the purchase of
Virologix Corporation offset by lower depreciation reflecting that some
major assets have been fully depreciated.
Interest income. Decreased to $53,000 in 1999 from $58,000 in 1998
due to lower average cash balances in 1999. Interest expense decreased
to $12,000 in 1999 from $22,000 in 1998 due to lower average
obligations under capital leases during 1999.
Accordingly, these expenses resulted in a loss for the twelve months
ended December 31, 1999 of $3,308,000, or a $0.72 basic and diluted
loss per common share compared with a loss of $3,397,000, or a $1.28
basic and diluted loss per common share for the twelve months ended
December 31, 1998.
Comparison of Years Ended December 31, 1998 and 1997
Revenues. Net revenues for 1997 were $435,000 as compared to no
revenues in 1998. 1997 revenues were comprised of licensing income
from an ongoing agreement with an emerging pharmaceutical company
which made certain milestone payments and will make royalty payments
in the future if a product is developed from the technology. In addition,
$110,000 of option income was recorded in 1997 from an agreement
with a pharmaceutical company. This agreement is no longer in effect.
Research spending. Total research and development spending for 1998
was $1,756,000 as compared to $2,433,000 for the same period in 1997,
a decrease of $677,000. The decrease in expenses was due to:
* $427,000 less external contract research costs; associated with The
School of Pharmacy, University of London and Duke University.
* $149,000 less salary and related costs;
* $94,000 less equipment rent;
* $47,000 less travel expenses; and
* other net decreases totaling $116,000.
These decreases were partially offset by costs incurred in 1998 of
$145,000 to scale-up the manufacture of our polymer platinate product
for testing.
25
General and administrative expenses. General and administrative
expenses were $1,464,000 for 1998, a decrease of $320,000 as
compared to the same period in 1997. The decrease was primarily due
to the following:
* $331,000 less general business consulting fees and expenses;
* $56,000 less director and officer insurance costs due to a lower
policy premium; and
* other net decreases totaling $18,000.
These decreases were partially offset by $29,000 higher patent expenses
and $56,000 higher shareholder expenses relating to an additional
shareholder meeting and administrative costs relating to the reverse stock
split.
Depreciation and amortization. For 1998 was $213,000 as compared to
$162,000 for the same period in 1997 reflecting additional depreciation
for assets acquired in the Tacora merger and a full year of amortization
of licenses.
Other income/expense. Interest and miscellaneous income was $58,000
for 1998 as compared to $119,000 for the same period in 1997, a
decrease of $61,000. The decrease was due to lower cash balances in
1998.
Interest expense was $22,000 for 1998 as compared to $36,000 for the
same period in 1997, a decrease of $14,000. The decrease was due to
the pay down of equipment leases.
Accordingly, these expenses resulted in a loss for the twelve months
ended December 31, 1998 of $3,397,000, or a $1.28 basic and diluted
loss per common share compared with a loss of $4,441,000, or a $2.80
basic and diluted loss per common share for the twelve months ended
December 31, 1997.
New Accounting Standards Not Adopted
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities", which was amended by FAS 137 which is effective for financial
statements prepared for fiscal years beginning after June 15, 2000, and which
will apply to us beginning January 1, 2001. SFAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
We do not believe that the new standard will have any significant effect on
our future results of operations.
Year 2000 Issue
As of March 28, 2000 we have experienced no Y2K problems. Total
Y2K related expenditures were approximately $6,000. We do not expect
to incur any further Y2K related expenses.
ITEM 7(a). MARKET RISK
The Company does not believe that it is exposed to any market risks, as
defined.
ITEM 8. FINANCIAL AND SUPPLEMENTARY DATA
Financial statements are included at Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
KPMG LLP was previously the principal accountants for Access
Pharmaceuticals, Inc. On October 22, 1998, that firm resigned.
In connection with the audit of fiscal year ended December 31, 1997,
and the subsequent interim period through October 22, 1998, there were
no disagreements with KPMG LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement.
26
KPMG LLP's independent auditors' report on the consolidated financial
statements of Access Pharmaceuticals, Inc. and subsidiary as of and for
the year ended December 31, 1997, contained a separate paragraph
stating that "the Company has suffered recurring losses from operations
and has a net capital deficiency, that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard
to these matters are also described in the footnotes to the 1997 financial
statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty."
Effective December 15, 1998, the Company engaged Grant Thornton
LLP, independent certified public accountants, as its principal
accountants. During the prior two fiscal years, the Company did not
consult with Grant Thornton LLP regarding any of the matters or events
set forth in Item 304 (a) (2) (i) and (ii) of Regulation S-K.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information requested by this item will be contained in the
Company's definitive Proxy Statement ("Proxy Statement") for its 2000
Annual Meeting of Stockholders to be held on June 26, 2000 and is
incorporated by reference. Such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days subsequent
to December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information requested by this item will be contained in the
Company's definitive Proxy Statement and is incorporated by reference.
Such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days subsequent to December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information requested by this item will be contained in the
Company's definitive Proxy Statement and is incorporated by reference.
Such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days subsequent to December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information requested by this item will be contained in the
Company's definitive Proxy Statement and is incorporated by reference.
Such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days subsequent to December 31, 1999.
PART IV
ITEM 14. 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:
Report of Grant Thornton LLP ..................................... F-1
Report of KPMG LLP ............................................... F-2
Report of Smith Anglin and Company ............................... F-3
Consolidated Balance Sheets at December 31, 1999 and 1998 ........ F-4
Consolidated Statements of Operations for 1999, 1998 and
1997 and the period from February 24, 1988 (Inception)
to December 31, 1999 ........................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the period from February 24, 1988 (Inception) to
December 31, 1999 .............................................. F-6
Consolidated Statements of Cash Flows for 1999, 1998 and
1997 and the period from February 24, 1988 (Inception)
to December 31, 1999 ........................................... F-8
Notes to Consolidated Financial Statements ....................... F-9
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.
28
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)
2.2 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)
2.3 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)
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)
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)
*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 Stockholder's Agreement dated October 1995 between us and Dr.
David F. Ranney (Incorporated by reference to Exhibit A of our
Registration Statement on Form S-4 dated December 21, 1995,
Commission File No. 33-64031).
10.5 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)
10.6 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)
10.7 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)
10.8 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)
10.9 License Agreement between The Dow Chemical Company and us
dated June 30, 1997. (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 September 30, 1997)
10.10 License Agreement between Strakan 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 10Q
for the quarter ended March 31, 1998)
29
3.0 Exhibits (continued)
Exhibit Number
10.11 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 10Q for the quarter ended June
30, 1998)
10.12 Sales Agency Agreement. (Incorporated by reference to Exhibit
10.14 of our Form 10Q for the quarter ended June 30, 1998)
10.13 Registration Rights Agreement. (Incorporated by reference to
Exhibit 10.15 of our Form 10Q for the quarter ended June 30, 1998)
*10.14 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)
10.15 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)
10.16 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)
10.17 Sales Agency Agreement (Incorporated by reference to Exhibit
10.18 of our Form 10Q for the quarter ended September 30, 1999)
10.18 Registration Rights Agreement (Incorporated by reference to
Exhibit 10.18 of our Form 10Q for the quarter ended September 30,
1999)
*10.19 Employment Agreement of David P. Nowotnik, Ph.D
*10.20 401(k) Plan
21. Subsidiaries of the registrant
23.0 Consent of Experts and Counsel
23.1 Consent of Grant Thornton LLP
23.2 Consent of KPMG LLP
23.3 Consent of Smith, Anglin & Co.
27.1 Financial Data Schedule
* Management contract or compensatory plan required to be filed as
an Exhibit to this Form pursuant to Item 14(c) of the report
(b) Reports on Form 8-K
None
30
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 28, 1999 By: /s/ Kerry P. Gray
-------------------------------
Kerry P. Gray
President and Chief Executive
Officer, Treasurer
Date March 28, 1999 By: /s/ Stephen B. Thompson
------------------------------
Stephen B. Thompson
Chief Financial Officer
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 28, 1999 By: /s/ Kerry P. Gray
------------------------------
Kerry P. Gray
President and Chief Executive
Officer, Treasurer, Director
Date March 28, 1999 By: /s/ J. Michael Flinn
-----------------------------
J. Michael Flinn, Director
Date March 28, 1999 By: /s/ Stephen B. Howell
-----------------------------
Stephen B. Howell, Director
Date March 28, 1999 By: /s/ Max Link
-----------------------------
Max Link, Director
Date March 28, 1999 By: /s/ Herbert H. McDade, Jr.
-----------------------------
Herbert H. McDade, Jr., Director
Date March 28, 1999 By: /s/ Howard P. Milstein
-----------------------------
Howard P. Milstein, Director
Date March 28, 1999 By: /s/ Richard B. Stone
-----------------------------
Richard B. Stone, Director
Date March 28, 1999 By: /s/ Preston Tsao
-----------------------------
Preston Tsao, Director
31
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Access Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of
Access Pharmaceuticals, Inc. and Subsidiaries (a development stage
company) as of December 31, 1999 and 1998, the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows
for the years then ended and the consolidated statements of operations
and cash flows for the period February 24, 1988 (inception) to
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audit. The cumulative statements of operations, and cash flows for
the period February 24, 1988 (inception) to December 31, 1999 include
amounts for the period from February 24, 1988 to December 31, 1988
and for each of the nine years in the period ended December 31, 1997,
which were audited by other auditors whose reports have been furnished
to us and are included herein. Our opinion, insofar as it relates to the
amounts included for the period February 24, 1988 through December
31, 1997, is based solely on the reports of the other auditors.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, based on our audits and the reports of the other auditors
included herein, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Access
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their
consolidated cash flows for the years then ended and for the period
February 24, 1988 to December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Grant Thornton LLP
- ------------------------
GRANT THORNTON LLP
Dallas, Texas
March 3, 2000
F-1
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Access Pharmaceuticals, Inc.
We have audited the accompanying consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year
ended December 31, 1997 and for the period February 24, 1988
(inception) to December 31, 1997 of Access Pharmaceuticals, Inc. and
Subsidiaries (a development stage company). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The cumulative statements of operations,
stockholders' equity (deficit), and cash flows for the period February 24,
1988 (inception) to December 31, 1997 include amounts for the period
from February 24, 1988 (inception) to December 31, 1988 and for each
of the years in the six-year period ending December 31, 1994, which
were audited by other auditors whose report has been furnished to us and
is included herein, and our opinion, insofar as it relates to the amounts
included for the period February 24, 1988 (inception) through December
31, 1994, is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, based on our audits and report of the other auditors
included herein, the 1997 consolidated financial statements referred to
above present fairly, in all material respects, the results of operations
and cash flows of Access Pharmaceuticals, Inc. and Subsidiaries (a
development stage company) for the year ended December 31, 1997 and for
the period February 24, 1988 (inception) to December 31, 1997, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in the notes to the 1997 consolidated financial statements, the
Company has suffered recurring losses from operations and has a net
capital deficiency that raise substantial doubt about its ability to continue
as a going concern. Management's plan's in regard to these matters are
also described in the notes to the 1997 consilidated financial statements.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ KPMG LLP
- ------------------
KPMG LLP
Dallas, Texas
March 24, 1998
F-2
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Access Pharmaceuticals, Inc.
We have audited the accompanying statements of operations,
stockholders' equity and cash flows of Access Pharmaceuticals, Inc. (a
development stage company) for the period February 24, 1988
(inception) through December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the period February 24, 1988 (inception) through
December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ Smith, Anglin & Co.
- ------------------------------
Smith, Anglin & Co.
Dallas, Texas
September 21, 1995
F-3
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1999 1998
----------- -----------
Current assets
Cash and cash equivalents $ 869,000 $1,487,000
Accounts receivable 88,000 -
Prepaid expenses and other current assets 117,000 54,000
----------- -----------
Total current assets 1,074,000 1,541,000
Property and equipment, net (Note 5) 108,000 227,000
Licenses, net (Note 1) 899,000 425,000
Investments 150,000 150,000
Goodwill, net (Note 1) 2,361,000 -
Other assets (Note 1) 8,000 8,000
----------- -----------
Total assets $4,600,000 $2,351,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 728,000 $ 395,000
Accrued insurance premiums 77,000 38,000
Deferred revenues 155,000 -
Current portion of obligations under
capital leases (Note 7) 26,000 99,000
----------- -----------
Total current liabilities 986,000 532,000
Obligations under capital leases,
net of current portion (Note 7) - 24,000
----------- -----------
Total liabilities 986,000 556,000
Commitments and contingencies
(Notes 7 and 11) - -
Stockholders' equity (Note 8)
Preferred stock - $.01 par value;
authorized 2,000,000 shares;
none issued or outstanding - -
Common stock - $.01 par value;
authorized 20,000,000 shares;
issued and outstanding, 6,089,763
at December 31, 1999 and
3,429,402 at December 31,1998 61,000 34,000
Additional paid-in capital 30,006,000 24,906,000
Deficit accumulated during the
development stage (26,453,000) (23,145,000)
----------- -----------
Total stockholders' equity 3,614,000 1,795,000
----------- -----------
Total liabilities and
stockholders' equity $4,600,000 $2,351,000
=========== ===========
The accompanying notes are an integral part of this statement.
F-4
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
February 24, 1988
Year ended December 31, (inception) to
---------------------------------- December 31,
1999 1998 1997 1999
---------- ---------- ---------- ------------
Revenues
Research and development $ - $ - $ - $ 2,711,000
Option income 15,000 - 110,000 2,164,000
Licensing revenues - - 325,000 325,000
---------- ---------- ---------- ------------
Total revenues 15,000 - 435,000 5,200,000
Expenses
Research and development 1,608,000 1,756,000 2,433,000 11,973,000
General and administrative 1,471,000 1,464,000 1,784,000 9,798,000
Depreciation and amortization 285,000 213,000 162,000 1,554,000
Write-off of excess purchase price - - 580,000 8,894,000
---------- ---------- ---------- ------------
Total expenses 3,364,000 3,433,000 4,959,000 32,219,000
---------- ---------- ---------- ------------
Loss from operations (3,349,000) (3,433,000) (4,524,000) (27,019,000)
Other income (expense)
Interest and miscellaneous income 53,000 58,000 119,000 885,000
Interest expense (12,000) (22,000) (36,000) (192,000)
---------- ---------- ---------- ------------
41,000 36,000 83,000 693,000
Loss before income taxes (3,308,000) (3,397,000) (4,441,000) (26,326,000)
---------- ---------- ---------- ------------
Provision for income taxes - - - 127,000
---------- ---------- ---------- ------------
Net loss $(3,308,000) $(3,397,000)$(4,441,000) $(26,453,000)
========== ========== ========== ============
Basic and diluted loss per common share $(0.72) $(1.28) $(2.80)
Weighted average basic and diluted
common shares outstanding 4,611,315 2,650,168 1,583,785
========= ========= =========
The accompanying notes are an integral part of this statement.
F-5
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
accumulated
Common stock Additional during the
-------------------- paid-in development
Shares Amount capital stage
--------- --------- ----------- -----------
Balance, February 24, 1988 - $ - $ - $ -
Common stock issued, $6.60 per share 15,000 - 97,000 -
Common stock issued, $1.60 per share 8,000 - 12,000 -
Net loss for the period February 24,
1988 to December 31, 1988 - - - (30,000)
--------- --------- ----------- -----------
Balance, December 31, 1988 23,000 - 109,000 (30,000)
Common stock issued, $6.60 per share 4,000 - 29,000 -
Common stock issued, $33.00 per share 4,000 - 124,000 -
Common stock issued, $0.20 per share 97,000 1,000 8,000 -
Net loss for the year - - - (191,000)
--------- --------- ----------- -----------
Balance, December 31, 1989 128,000 1,000 270,000 (221,000)
Common stock issued, $60.00 per share 4,000 - 218,000 -
Common stock issued, $156.40 per share 14,000 - 2,225,000 -
Net loss for the year - - - (219,000)
--------- --------- ----------- -----------
Balance, December 31, 1990 146,000 1,000 2,713,000 (440,000)
Common stock issued, $60.00 per share - - 6,000 -
Contribution of equipment by shareholder - - 468,000 -
Net income for the year - - - 413,000
--------- --------- ---------- -----------
Balance, December 31, 1991 146,000 1,000 3,187,000 (27,000)
Contribution of equipment by shareholder - - 89,000 -
Net loss for the year - - - (859,000)
--------- --------- ----------- -----------
Balance, December 31, 1992 146,000 1,000 3,276,000 (886,000)
Net loss for the year - - - (1,384,000)
--------- --------- ----------- -----------
Balance, December 31, 1993 146,000 1,000 3,276,000 (2,270,000)
Net loss for the year - - - (476,000)
--------- --------- ----------- -----------
Balance, December 31, 1994 146,000 1,000 3,276,000 (2,746,000)
F-6
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
Deficit
accumulated
Common stock Additional during the
-------------------- paid-in development
Shares Amount capital stage
--------- --------- ----------- ------------
Common stock issued, $40.00 per share 1,000 $ - $ 50,000 $ -
Exercise of stock options between
$5.00 and $25.00 per share 31,000 1,000 168,000 -
Common stock grants 4,000 - - -
Net loss for the year - - - (1,099,000)
--------- --------- ----------- ------------
Balance, December 31, 1995 182,000 2,000 3,494,000 (3,845,000)
Merger 951,000 10,000 9,991,000 -
Common stock issued, $14.00 share 429,000 4,000 5,499,000 -
Exercise of stock options/SAR's between
$0.00 and $17.60 per share 8,000 - 23,000 -
Warrants issued at $20.00 per share for
consulting services - - 344,000 -
Net loss for the year - - - (11,462,000)
--------- --------- ----------- ------------
Balance, December 31, 1996 1,570,000 16,000 19,351,000 (15,307,000)
Common stock issued, $15.00 share 40,000 - 600,000 -
Common stock issued, $9.20 share 20,000 192,000 - -
Warrants issued at $12.00 and $18.00 per
share for financial consulting services - - 188,000 -
Net loss for the year - - - (4,441,000)
--------- --------- ----------- ------------
Balance, December 31, 1997 1,630,000 16,000 20,331,000 (19,748,000)
Common stock issued, $3.00 per share,
net of costs of $405,000 1,795,000 18,000 4,538,000 -
Common stock issued, $3.50 per share 4,000 - - -
Warrants issued at $4.00 per share
for financial consulting services - - 37,000 -
Net loss for the year - - - (3,397,000)
--------- --------- ----------- ------------
Balance, December 31, 1998 3,429,000 34,000 24,906,000 (23,145,000)
Common stock issued, $2.00 per share,
net of costs of $271,000 1,658,000 17,000 2,814,000 -
Common stock issued, Virologix
Corporation merger, $2.00 per share 1,000,000 10,000 1,990,000 -
Common stock issued, $3.50 per share 3,000 - - -
Warrants issued at $3.00 and $2.93 per
share for financial consulting services - - 296,000 -
Net loss for the year - - - (3,308,000)
--------- --------- ----------- ------------
Balance, December 31, 1999 6,090,000 $ 61,000 $30,006,000 $(26,453,000)
========= ========= =========== ============
The accompanying notes are an integral part of this statement.
F-7
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
February 24, 1988
Year ended December 31, (inception) to
---------------------------------------- December 31,
1999 1998 1997 1999
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $(3,308,000) $(3,397,000) $(4,441,000) $(26,453,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Write off of excess purchase price - - 580,000 8,894,000
Warrants issued in payment of
consulting expenses 296,000 37,000 188,000 865,000
Research expenses related to
common stock granted - - 100,000 100,000
Depreciation and amortization 285,000 213,000 162,000 1,554,000
Deferred revenue 155,000 - (110,000) 45,000
Licenses (425,000) - - (425,000)
Change in operating assets
and liabilities:
Accounts receivable (88,000) 1,000 (1,000) (89,000)
Prepaid expenses and other
current assets (63,000) (3,000) 139,000 (118,000)
Other assets - 2,000 (1,000) (6,000)
Accounts payable and accrued expenses (97,000) (92,000) (244,000) 43,000
------------ ------------ ------------ -------------
Net cash used in operating activities (3,245,000) (3,239,000) (3,628,000) (15,590,000)
Cash flows from investing activities:
Capital expenditures (5,000) (4,000) (16,000) (1,173,000)
Sales of capital equipment - 9,000 6,000 15,000
Purchase of Virologix (102,000) - - (102,000)
Purchase of Tacora, net of cash acquired - - (124,000) (124,000)
Other investing activities - (100,000) (50,000) (150,000)
------------ ------------ ------------ -------------
Net cash used in investing activities (107,000) (95,000) (184,000) (1,534,000)
Cash flows from financing activities:
Proceeds from notes payable - - - 721,000
Payments of principal on obligations
under capital leases (97,000) (173,000) (178,000) (724,000)
Cash acquired in merger with Chemex - - - 1,587,000
Proceeds from stock issuances, net 2,831,000 4,556,000 - 16,409,000
------------ ------------ ------------ -------------
Net cash provided by (used in)
financing activities 2,734,000 4,383,000 (178,000) 17,993,000
------------ ------------ ------------ -------------
Net increase (decrease) in cash
and cash equivalents (618,000) 1,049,000 (3,990,000) 869,000
Cash and cash equivalents at
beginning of period 1,487,000 438,000 4,428,000 -
------------ ------------ ------------ -------------
Cash and cash equivalents at
end of period $ 869,000 $ 1,487,000 $ 438,000 $ 869,000
============ ============ ============ =============
Cash paid for interest $ 12,000 $ 22,000 $ 34,000 $ 189,000
Cash paid for income taxes - - - 127,000
Supplemental disclosure of
noncash transactions
Payable accrued for fixed asset purchase $ - $ - $ - $ 47,000
Elimination of note payable to Chemex
Pharmaceuticals due to merger - - - 100,000
Stock issued for license on patents - - 500,000 500,000
Equipment purchases financed
through capital leases - - 82,000 82,000
Net liabilities assumed in
acquisition of Tacora Corporation - - 455,000 455,000
Acquisition of Virologix Corporation
Assets acquired including goodwill 2,571,000 - - 2,571,000
Liabilities assumed (469,000) - - (469,000)
Stock issued (2,000,000) - - (2,000,000)
The accompanying notes are an integral part of this statement.
F-8
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three years ended December 31, 1999
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. We operate in a single industry
segment. We are in the development stage and its efforts have been
principally devoted to research and development, resulting in significant
losses since inception on February 24, 1988.
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 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. Cash and cash equivalents consist primarily of
cash in banks and money market funds.
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. Assets acquired pursuant to capital lease
arrangements are amortized over the shorter of the estimated useful lives
or the lease terms.
Patents and Applications
We expense 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.
Licenses
We recognize the purchase cost of licenses and amortize them over their
estimated useful lives.
* In 1997, we acquired a license to certain patents for $500,000 by
issuing 40,000 shares of our common stock. The license is amortized
over ten years.
* In 1999, we acquired a license from the National Institutes of Health
for $330,000. The license is amortized over ten years.
* In 1999, we also acquired the rights to develop amlexanox for other
indications for $200,000 and future milestone payments and royalties.
The amortization of this license will commence in 2000.
F-9
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Investments
In 1997, we signed an agreement with CepTor Corporation ("CepTor"),
a privately held biotechnology company. Under the terms of the
agreement, which is now terminated, we purchased an aggregate of
25,000 shares of common stock for $150,000.
Revenue Recognition
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 unearned revenue
until the related research activities are performed. Option revenues are
recognized when the earnings process is completed pursuant to the terms
of the respective contract.
Research and Development Expenses
Research and development costs are expensed as incurred.
Income Taxes
Tax credits related to research and development and to investments in
equipment and improvements are reported as a reduction of income tax
expense in the year realized. 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.
Loss Per Share
In accordance with the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings 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. Dilutive potential common
shares result from stock options and warrants. However, for all years
presented, stock options and warrants are anti-dilutive.
Use of Estimates
We have made a number of estimates and assumptions relative to the
reporting of assets, liabilities, revenues and expenses and the disclosure
of contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-10
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Stock Option Plans
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. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. On
January 1, 1996, we 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.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of, requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments
The carrying value of current assets and current liabilities approximates
fair value due to the short maturity of these items.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101). The bulletin draws on existing accounting rules
and provides specific guidance on how those accounting rules should be
applied, and specifically addresses revenue recognition for non-
refundable technology access fees in the biotechnology industry. SAB
101 is effective for fiscal years beginning after December 15, 1999. We
are evaluating SAB 101 and the effect it may have on our financial
statements. At this time, we believe that SAB 101 will not have a
material impact on our financial position or results of operations.
F-11
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 2 - ACQUISITIONS
On July 20, 1999, our wholly-owned subsidiary Access Holdings, Inc.
merged with and into Virologix Corporation, a Delaware corporation
("Virologix"). As a result, Virologix became a wholly-owned subsidiary
and each outstanding share of Virologix' common stock was converted
into 0.231047 shares of our common stock, representing 999,963 shares
of common stock. The transaction has been accounted for as a purchase.
The aggregate purchase price has been allocated to the net assets
acquired based on management's estimates of the fair values of assets
acquired and liabilities assumed. The excess purchase price over the fair
value of Virologix' net identifiable liabilities of $2,464,000 was recorded
as goodwill and is being amortized over ten years. Operations have been
included in our consolidated financial statements since the date of
acquisition.
Pro forma disclosure relating to the Virologix acquisition reflects our
operating results combined with the operating results of Virologix:
* for the year ended December 31, 1999 as if the Virologix acquisition
occurred on January 1, 1999, and
* for the year ended December 31, 1998 as if the Virologix acquisition
occurred on January 1, 1998.
This pro forma information does not purport to be indicative of what
would have occurred had the acquisition been made as of those dates, or
of results which may occur in the future.
For the year ended December 31,
1999 1998
------------ ------------
Total revenue $ - $ -
Net loss $(3,565,000) $(4,175,000)
Net loss per common share $ (0.59) $ (0.79)
On December 9, 1997, our wholly-owned subsidiary merged with Tacora
Corporation ("Tacora"), a privately-held pharmaceutical company based
in Seattle, Washington; Tacora became a wholly-owned subsidiary. We
used the purchase method of accounting for the purchase of Tacora. The
aggregate purchase price was $739,000, payable $124,000 in cash,
$192,000 in stock (representing 20,900 shares of our common stock) and
assumption of $239,000 in trade and accrued payables and $184,000 of
Tacora's capital lease obligations, plus up to an additional 55,910 shares
of our additional common stock if certain milestones are met. The share
price to be used will range between $50.00 and $130.00 per share (range
of value of shares is $2,796,000 to $7,268,000), depending on when the
milestones are met. All milestone conditions expire in June 2000. The
aggregate purchase price has been allocated to the net assets acquired
based on management's estimates of the fair values of assets acquired
and liabilities assumed. The excess purchase price over the fair value of
Tacora's net identifiable assets of $579,544 was recorded and written off
in the fourth quarter of 1997 due to an impairment of the excess
purchase price based on estimated future cash flows. Operations have
been included in our consolidated financial statements since the date of
acquisition.
F-12
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 3 - RELATED PARTY TRANSACTIONS
Under a consulting agreement between Thoma Corporation ("Thoma")
and us, Thoma receives payments for consulting services and
reimbursement of direct expenses. Herbert H. McDade, Jr., our
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
- -------- ------------ ------------
1999 $72,000 $ 9,000
1998 72,000 11,000
1997 72,000 6,000
Stephen B. Howell, M.D., our Director, receives payments for
consulting services and reimbursement of direct expenses. Dr. Howell
received payments for consulting services and was also reimbursed for
expenses as follows:
Consulting Expense
Year Fees Reimbursement
- -------- ------------ ------------
1999 $62,000 $18,000
1998 8,000 4,000
1997 2,000 1,000
Richard B. Stone, our Director, is a managing director of Sunrise
Securities Corp., which acted as a placement agent in the private
placements of our common stock. Mr. Stone received the following
shares and warrants:
Exercise
Year Shares Warrants Price
- -------- -------- -------- --------
1999 101,225 86,499 $2.00
1998 109,904 98,474 $3.00
Preston Tsao, our Director, is Managing Director for Corporate Finance
of Sunrise Securities Corp., which acted as a placement agent in the
private placements of our common stock. Mr. Tsao received the
following warrants:
Exercise
Year Warrants Price
- -------- -------- --------
1999 15,310 $2.00
1998 11,015 $3.00
Until August 1, 2001, Sunrise has the right to designate one individual
for election to our board of directors and, if Sunrise exercises their right,
we are required to use our best efforts to cause their nominee to be
elected. In addition, if Sunrise does not exercise their right, we shall
permit a representative of Sunrise to attend and observe all board of
directors meetings.
We have a "Patent Purchase Agreement" dated April 5, 1994, as
amended on January 23, 1996, with Dr. David F. Ranney, a major
shareholder. Under terms of the agreement, Dr. Ranney was entitled to
yearly cash royalty payments as consideration for the assignment of
patents to us. As of May 31, 1998, Dr. Ranney signed an agreement
whereby all rights, title and interest in and to all inventions and
confidential information became our sole and exclusive property.
F-13
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 4 - RESEARCH AND DEVELOPMENT AGREEMENTS
On August 1, 1997, we entered into an agreement with The Dow
Chemical Company ("Dow Chemical") for the development of products
incorporating Dow Chemical's chelation technology and Access'
Bio Responsive TM polymer systems. The collaboration will focus on the
development of MRI contrast agents and radiopharmaceutical diagnostics
and therapeutics. The advancement of the Access developments in these
areas are dependent on securing chelation technology, which
encapsulates metals to avoid adverse effects in the body.
We entered into a technology evaluation option agreement with a
pharmaceutical company. We recognized revenue under the agreement
as certain milestones were achieved and amounted to $110,000 in 1997.
This agreement has been terminated.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
---------------------------
1999 1998
------------ ------------
Laboratory equipment $ 808,000 $ 808,000
Laboratory and building improvements 31,000 27,000
Furniture and equipment 177,000 172,000
------------ ------------
1,016,000 1,007,000
Less accumulated depreciation
and amortization 908,000 780,000
------------ ------------
Net property and equipment $ 108,000 $ 227,000
============ ============
Depreciation and amortization on property and equipment was $121,000,
$161,000, and $137,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
NOTE 6 - 401(k) PLAN
We have implemented a tax-qualified employee savings and retirement
plan (the "401(k) Plan") on January 1, 1999 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 ($10,000
in 1999) and to have the amount of such reduction contributed to the
401(k) Plan. Effective May 1, 1999, we implemented a 401(k) matching
program whereby we contribute for each dollar a participant contributes,
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 $13,000 in 1999.
F-14
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 7 - COMMITMENTS
At December 31, 1999, future minimum lease payments under capital
lease obligations and commitments under noncancelable operating leases
were as follows:
Capital Operating
leases leases
---------- ----------
2000 $ 27,000 $ 89,000
2001 - 94,000
2002 - 86,000
---------- ----------
Total future minimum lease payments 27,000 $269,000
Less amount representing interest 1,000
Present value of minimum capital
lease payments 26,000
Less current portion 26,000
----------
Obligations under capital leases,
excluding current portion $ -
==========
We lease certain office and research and development facilities under an
operating lease. Rent expense for the years ended December 31, 1999,
1998 and 1997 was $81,000, $77,000 and $74,000, respectively.
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
On July 20, 1999 and October 18, 1999, respectively, with the assistance
of an investment bank, we completed the first and second closing of an
offering of common stock at a per share price of $2.00, receiving gross
proceeds of $3.1 million in this closing, less issuance costs of $271,000,
from the private placement of 1,551,000 shares of common stock. The
placement agent for the offering received warrants to purchase 165,721
shares of common stock at $2.00 per share, in accordance with the
offering terms and elected to receive 106,217 shares of common stock
in lieu of certain sales commissions and expenses.
On July 20, 1999, and simultaneously with the first closing of the
offering, our wholly-owned subsidiary Access Holdings, Inc. merged
with and into Virologix Corporation, a Delaware corporation. As a
result, Virologix became our wholly-owned subsidiary and each
outstanding share of Virologix' common stock was converted into
0.231047 shares of our common stock, representing 999,963 shares of
common stock. The transaction has been accounted for as a purchase.
On June 18, 1998, in connection with the first closing of a private equity
placement, we effected a recapitalization through a one-for-twenty
reverse stock split of our common stock, $0.04 par value per share,
which decreased the number of authorized shares of common stock from
60.0 million, at $0.04 par value per share, to 20.0 million shares, $0.01
par value per share, and decreased the authorized shares of our preferred
stock from 10.0 million to 2.0 million. This recapitalization decreased
the number of outstanding shares of our common stock from
approximately 41.5 million to 2.1 million. All share numbers and
prices referenced in this registration statement have been adjusted to
reflect the June 18, 1998 recapitalization.
F-15
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) - Continued
In 1998, assisted by an investment bank, we raised an aggregate of
$1,200,000 from the sale of 399,984 shares of common stock and
warrants to purchase 399,984 shares of common stock at an exercise
price of $3.00 per share. The placement agent received warrants to
purchase 44,527 shares of common stock at $3.00 per share, in
accordance with the offering terms and elected to receive 45,277 shares
of common stock in lieu of certain sales commissions and expenses.
On June 18, 1998, assisted by the same investment bank, we raised an
aggregate of $2.9 million from the first closing of a private placement
of 953,573 shares of common stock at $3.00 per share. The placement
agent for such offering received warrants to purchase 101,653 shares of
common stock at $3.00 per share, in accordance with the offering terms
and elected to receive 62,949 shares of common stock in lieu of certain
sales commissions and expenses.
On July 30, 1998, again assisted by the same investment bank, we raised
an aggregate of $900,000 from the second closing of a private placement
of 300,000 shares of common stock at $3.00 per share. The placement
agent for such offering received warrants to purchase 33,445 shares of
common stock at $3.00 per share, in accordance with the offering terms
and elected to receive 34,450 shares of common stock in lieu of certain
sales commissions and expenses.
For 1998, issuance costs for all placements totaled $1,466,000,
consisting of $405,000 cash payments for offering and legal expenses
and the issuance of 142,676 shares of Common Stock valued at $385,000
and 179,625 warrants. The proceeds of the offerings were used to fund
research and development, working capital and general corporate
purposes.
Warrants
There were warrants to purchase a total of 991,689 shares of common
stock outstanding at December 31, 1999. All the warrants were
exercisable at December 31, 1999. The warrants had various prices and
terms as follows:
In connection with the aforementioned offerings of common stock in
1999, warrants to purchase a total of 165,622 shares of common stock
were issued. All of the warrants are exercisable immediately at $2.00
per share and expire five years from date of issuance.
In connection with the aforementioned merger with Virologix, we
assumed warrants to purchase 27,145 shares of common stock. Virologix
warrants were converted into 0.231047 Access warrants. All of the
warrants are exercisable immediately at $12.98 per share and expire
between March 24, 2002 and November 1, 2002.
During 1999, a financial advisor received warrants to purchase 100,000
shares of common stock at an exercise price of $2.93 per share at any
time from March 26, 1999 until March 26, 2004, for financial consulting
services rendered in 1999. The fair value of the warrants was $2.48 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 5.42%, expected volatility 122% and an expected life of 5
years. Total fair value of the warrants relating to the consulting services
($249,000) has been recorded as general and administrative expense and
an increase to additional paid-in capital.
F-16
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) - Continued
During 1999, 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, 1999 until January 1, 2003, for scientific
consulting services rendered in 1999. The fair value of the warrants was
$1.56 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 5.38%, expected volatility 122% and an expected
life of 4 years. Total fair value of the warrants relating to the consulting
services ($47,000) has been recorded as consulting expense and an
increase to additional paid-in capital.
In connection with the aforementioned offerings of units and common
stock in 1998, warrants to purchase a total of 579,627 shares of common
stock were issued. All of the warrants are exercisable immediately at
$3.00 per share and expire five years from date of issuance.
During 1998, a financial advisor received warrants to purchase 15,000
shares of common stock at an exercise price of $4.00 per share at any
time from December 1, 1998 until December 1, 2003, for financial
consulting services rendered in 1998. The fair value of the warrants was
$2.48 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 4.85%, expected volatility 122% and an expected
life of 5 years. Total fair value of the warrants relating to the consulting
services ($37,000) has been recorded as general and administrative
expense and an increase to additional paid-in capital.
During 1997, a financial advisor received warrants to purchase 37,500
shares of common stock, one-half (18,750 shares) at an exercise price
of $12.00 per share, and one-half (18,750 shares) at an exercise price of
$18.00 per share any time from January 1, 1998 until June 30, 2002, for
financial consulting services rendered in 1997. The fair value of the
warrants was $5.00 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 5.6%, expected volatility 129% and
an expected life of 5 years. Total fair value of the warrants relating to
the consulting services ($188,000) has been recorded as general and
administrative expense and an increase to additional paid-in capital.
We also have warrants outstanding to purchase 6,795 shares of common
stock at $3.00 per share. These warrants expire in September 2001.
During 1996, a shareholder received warrants to purchase 30,000 shares
of common stock at an exercise price of $20.00 per share. These
warrants expired on March 4, 2000.
F-17
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 9 - STOCK OPTION PLANS
We have a stock option plan, as amended, (the "1995 Stock Awards
Plan"), under which 1,034,719 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") and API's stock option plan ("API
Stock Option Plan"). Options granted under 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, 1999, there were 401,719 additional shares available
for grant under the 1995 Stock Awards Plan.
We apply APB Opinion No. 25 in accounting for our 1995 Stock
Awards Plan. Accordingly, no compensation expense has been
recognized in the accompanying Consolidated Statements of Operations
for employee stock options because the quoted market price of the
underlying common stock did not exceed the exercise price of the option
at the date of grant. Had we determined compensation cost based on the
fair value at the grant date for its stock options issued after 1994 under
SFAS No. 123, our net loss and loss per share would have been reduced
to the pro forma amounts indicated below:
December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Net loss
As reported $(3,308,000) $(3,397,000) $(4,441,000)
Pro forma (3,603,000) (3,583,000) (4,614,000)
Basic and diluted loss per share
As reported ($.72) ($1.28) ($2.80)
Pro forma ($.78) ($1.35) ($2.91)
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 1999, 1998 and 1997, respectively:
dividend yield of 0% for all periods; volatility of 91%, 122%, and
129%; risk-free interest rates of 6.62%, 4.84% and 5.6% and expected
lives of four years for all periods. The weighted average fair values of
options granted were $1.37, $2.40 and $13.00 per share during 1999,
1998 and 1997, respectively.
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 9 - STOCK OPTION PLANS - Continued
Summarized information for the 1995 Stock Awards Plan is as follows:
Weighted-
average
exercise
Shares price
------------ ----------
Outstanding options at January 1, 1997 31,499 $ 26.20
Granted 8,217 13.00
Forfeited (7,566) (27.60)
---------
Outstanding options at December 31, 1997 32,150 20.40
Granted 306,500 3.00
Forfeited (32,150) (20.40)
---------
Outstanding options at December 31, 1998 306,500 3.00
Granted 333,000 1.99
Forfeited (6,500) (1.46)
---------
Outstanding options at December 31, 1999 633,000 2.47
=========
Exercisable at December 31, 1997 8,950 25.60
Exercisable at December 31, 1998 142,500 3.00
Exercisable at December 31, 1999 300,875 2.66
Further information regarding options outstanding at December 31, 1999
is summarized below:
Weighted average
Number of Number of --------------------
shares shares Remaining Exercise
Range of exercise prices granted exercisable life price
- ------------------------ --------- --------- -------- ---------
$1.56-1.81 8,000 0 10.0 $1.66
$2.00 325,000 100,000 10.0 2.00
$2.08-2.94 4,500 1,570 9.0 2.75
$3.00 295,500 199,305 9.0 3.00
------- -------
633,000 300,875
======= =======
F-19
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 9 - STOCK OPTION PLANS - Continued
All issued options and stock appreciation rights ("SAR's") under the
1987 Stock Awards Plan are vested and exercisable. No further grants
can be made. Summarized information for the 1987 Stock Awards Plan
is as follows:
1987 Non- Weighted-
Incentive Employee Average
Stock Director Exercise
Options SAR's Plan Price
-------- -------- -------- --------
Outstanding awards at January 1, 1997 39,864 10,197 8,910 $40.80
Forfeited (1,125) - (3,660) 72.40
-------- -------- --------
Outstanding awards at December 31, 1997 38,739 10,197 5,250 38.00
Forfeited (6,153) (2,500) (2,750) (47.75)
-------- -------- --------
Outstanding awards at December 31, 1998 32,586 7,697 2,500 35.49
Forfeited (5,081) - - (41.77)
-------- -------- --------
Outstanding awards at December 31, 1999 27,502 7,697 2,500 34.66
======== ======== ========
All options outstanding were exercisable at each year end.
Further information regarding options outstanding and exercisable at
December 31, 1999 is summarized below:
Weighted average
-------------------
Number of Remaining Exercise
Range of exercise prices of shares life price
- ------------------------ -------- -------- --------
$0.0 7,697 3.7 $ 0.00
$17.50 - $24.00 14,128 4.4 18.77
$30.00 - $64.40 9,000 3.4 40.32
$78.80 - $102.60 6,874 3.0 98.71
-------
37,699
=======
F-20
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 10 - INCOME TAXES
Income tax expense differs from the statutory amounts as follows:
1999 1998 1997
------------ ------------ ------------
Income taxes at U.S. statutory rate $(1,124,000) $(1,155,000) $(1,510,000)
Change in valuation allowance 15,000 1,142,000 1,185,000
Items not deductible for tax 101,000 13,000 325,000
Expiration of net operating loss
and general business credit
carryforwards 1,008,000 - -
------------ ------------ ------------
Total tax expense $ - $ - $ -
============ ============ ============
Deferred taxes are provided for the temporary differences between the
financial reporting bases and the tax bases of our assets. The temporary
differences that give rise to deferred tax assets were as follows:
December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Deferred tax assets
Net operating loss carryforwards $18,438,000 $17,101,000 $14,266,000
General business credit carryforwards 456,000 443,000 434,000
Property and equipment 42,000 24,000 -
------------ ------------ ------------
Gross deferred tax assets 18,936,000 17,568,000 14,700,000
Valuation allowance (18,936,000) (17,568,000) (14,700,000)
------------ ------------ ------------
Net deferred taxes $ - $ - $ -
============ ============ ============
During 1999, our gross deferred tax asset increased by $1,368,000 due
to losses and a revision of prior years' net operating loss carryforwards
of approximately $345,000. The valuation allowance was increased by
a corresponding amount. Gross net operating loss and general business
credit carryforwards of approximately $2,965,000 expired during 1999.
At December 31, 1999, we had approximately $54,230,000 of net
operating loss carryforwards and approximately $1,340,000 of general
business credit carryforwards. These carryforwards expire as follows:
2000 $2,991,000
2001 3,190,000
2002 5,690,000
2003 7,171,000
2004 5,751,000
Thereafter 30,777,000
------------
$ 55,570,000
============
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-21
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1999
NOTE 11 - CONTINGENCIES
Our products will require clinical trials, U.S. Food and Drug
Administration approval, or approval of similar authorities
internationally and acceptance in the marketplace after
commercialization. Although we believe our patents and patent
applications are valid, the invalidation of its major patents would have
a material adverse effect upon its business. We compete with specialized
biotechnology companies and major pharmaceutical companies. Many
of these competitors have substantially greater resources than us.
We are not currently a party to any material legal proceedings.
NOTE 12 - SUBSEQUENT EVENT
On March 1, 2000, with the assistance of an investment bank, we
completed the closing of a private offering, receiving gross proceeds of
$12.0 million, less issuance costs of approximately $89,500, at a per
share price of $2.50, from the private placement of 4,800,000 shares of
common stock. The placement agent for the offering received warrants
to purchase 459,806 shares of common stock at $2.50 per share, in
accordance with the offering terms and elected to receive approximately
520,000 shares of common stock in lieu of certain sales commissions and
expenses.
F-22