UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
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 Frwy, Suite 176, Dallas, TX 75207
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(Address of principal executive offices)
Telephone Number (214) 905-5100
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
requirement for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchanges Act)
Yes No X
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The number of shares outstanding of the issuer's common stock,
as of November 14, 2005, was 17,630,040 shares, $0.01 par value
per share.
Total No. of Pages 43
ACCESS PHARMACEUTICALS, INC.
INDEX
Page No.
BUSINESS 2
RISK FACTORS 16
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at
September 30,2005 and December 31, 2004 39
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three and nine months
ended September 30, 2005 and September 30, 2004 40
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2005 and September 30, 2005 41
Notes to Unaudited Condensed Consolidated Financial Statements 42
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35
PART II - OTHER INFORMATION
Item 1.Legal Proceedings 36
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 37
Item 4.Submission of Matters to a Vote of Security Holders 37
Item 5.Other Information 37
Item 6. Exhibits 37
SIGNATURES 38
PART I -- FINANCIAL INFORMATION
Business
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Access Pharmaceuticals, Inc. (Access) is a Delaware
corporation. We are an emerging pharmaceutical company
developing unique polymer linked cytotoxics for use in the
treatment of cancer. Our lead product AP5346 is in Phase II
clinical testing. The Company also has other advanced drug
delivery technologies including vitamin-mediated targeted
delivery and oral care drug delivery.
Together with our subsidiaries, we have proprietary patents or
rights to several drug delivery technology platforms,
including:
* synthetic polymer targeted delivery,
* vitamin mediated targeted delivery
* vitamin mediated oral delivery, and
* mucoadhesive liquid technology.
Recent Developments
- -------------------
We began an asset sale process in the third quarter of 2005 as
a way to properly maximize the potential of all the
technologies in our patent portfolio. Following the receipt of
offers, a decision was made to sell our oral care business to
Uluru, Inc., a private Delaware company, for up to $20.6
million. This transaction closed on October 12, 2005. This
includes our interest in Aphthasol(R), all OraDisc(TM)
products, all Residerm(R) products, and all of our assets
related to these products. In addition, we have licensed to
Uluru our nanoparticle hydrogel aggregate technology which
could be used for applications such as local drug delivery and
tissue filler in dental and soft tissue applications. The CEO
of Uluru is Kerry P. Gray, the former CEO of Access
Pharmaceuticals, Inc. In conjunction with the sale transaction,
we received a fairness opinion from a nationally recognized
investment banking firm.
Uluru assumed eight employees from the Company and six
employees remained with Access. Throughout the transition
period until Uluru relocates to a new space, leasing
arrangements will be cost shared.
At the closing of this agreement we received $8.7 million. In
addition, at the one year anniversary of the agreement we may
receive up to $3.7 million, and we will receive an additional
$1 million within 24 months after closing or earlier upon the
achievement of a milestone. Additional payments of up to $7.2
million may be made upon the achievement of certain additional
milestones.
The upfront payment of this transaction allowed Access to
immediately retire our $2.6 million of Secured Convertible
Notes held by Cornell Capital and its affiliate and the various
agreements relating to these notes. Such notes were secured by
all of our assets. In addition, the elimination of the
manufacturing and regulatory costs associated with the oral
care business, as well as required employees for these marketed
products and product candidates will allow us to reduce our
burn rate substantially.
On Nov. 9, 2005 we announced the restructuring and repayment of
our 7.0% convertible promissory notes due September 13, 2005.
2
One holder of $4 million worth of convertible notes (Oracle
Partners LP and related funds) agreed to amend their notes to
a new maturity date, April 28, 2007, with the conversion price
being reduced from $5.50 per share to $1.00 per share. In
addition, the Company may cause a mandatory conversion of the
notes into common stock if the Company's stock trades at a
price of at least 1.5 times the conversion price for a minimum
number of trading days. There is also a provision to allow for
a minimum price for conversion in the event of a change of
control.
The Company was unable to reach a conversion agreement with the
second holder of $4 million worth of notes (Philip D.
Kaltenbacher), and has instead settled his claim by paying him
this amount plus expenses and interest as outlined in the terms
of the note.
While these transactions place the Company in a stronger
financial position, the board of directors and senior
management are continuing to explore strategic options for the
Company to support the continuation of our oncology programs.
Options still under consideration include equity financing,
out-licensing of technologies and development programs, a joint
venture or other strategic alternatives. We have engaged an
investment bank to assist us in the exploration of these
options.
We remain listed on AMEX but we will need to meet the
continuing listing requirements of AMEX by December 31, 2005.
Other Key Developments
- ----------------------
On May 11, 2005, we announced that Kerry P. Gray resigned as
our President and Chief Executive Officer, effective as of May
10, 2005. Mr. Gray resigned from our Board of Directors and
from all other positions held with us, effective as of May 10,
2005. We entered into a Separation Agreement with Mr. Gray
dated as of May 10, 2005. Pursuant to the terms of the
Separation Agreement, Mr. Gray agreed to provide us with
certain post-termination assistance. He also agreed to maintain
the confidentiality of our proprietary information and to a
customary mutual release of claims with us. The Separation
Agreement provides for an immediate cash payment to Mr. Gray of
$225,000 and payments of $33,333.33 each month for a period of
18 months, which payments are secured by a lien on our assets.
We are required to issue 3,500 shares of our common stock to
Mr. Gray each month for a period of 18 months following May 10,
2005. The Separation Agreement also provides that all of Mr.
Gray's outstanding stock options and shares of restricted stock
immediately and fully vested and options remain exercisable for
a period of two years.
On May 11, 2005, we announced that Rosemary Mazanet, M.D.,
Ph.D, had been named by the Board of Directors as our Acting
Chief Executive Officer, effective as of May 11, 2005. The
agreement is memorialized in a Letter Agreement with us, dated
May 10, 2005. Dr. Mazanet's title will be Acting Chief
Executive Officer and she will report directly to, and be
subject to the direction of, our Board of Directors.
As of March 30, 2005 the Company executed a Standby Equity
Distribution Agreement (SEDA) with Cornell Capital Partners.
Under the SEDA, the Company may issue and sell to Cornell
Capital Partners common stock for a total purchase price of up
to $15,000,000. The purchase price for the shares is equal to
their market price, which is defined in the SEDA as 98% of the
lowest volume weighted average price of the common stock during
a specified period of trading
3
days following the date notice is given by the Company that it
desires to access the SEDA. Further, we have agreed to pay
Cornell Capital Partners, L.P. 3.5% of the proceeds that we
receive under the Equity Line of Credit. The amount of each
draw down is subject to a maximum amount of $1,000,000. The
terms of the SEDA do not allow us to make draw downs if the
draw down would cause Cornell Capital to own in excess of 9.9%
of our outstanding shares of common stock. Upon closing of the
transaction, Cornell Capital Partners received a one-time
commitment fee of 146,500 shares of the Company's common stock.
On the same date, the Company entered into a Placement Agent
Agreement with Newbridge Securities Corporation, a registered
broker-dealer. Pursuant to the Placement Agent Agreement, upon
closing of the transaction the Company paid a one-time
placement agent fee of 3,500 shares of common stock. As of
September 30, 2005 we have accessed $600,000 of the SEDA. At
this time the Company will not be able to access the SEDA until
a post-effective amendment to our registration statement is
filed with, and declared effective by, the SEC.
In addition, as of March 30, 2005, the Company executed a
Securities Purchase Agreement with Cornell Capital Partners and
Highgate House Funds. Under the Securities Purchase Agreement,
upon closing Cornell Capital Partners and Highgate House Funds
purchased an aggregate of $2,633,000 principal amount of
Secured Convertible Debentures from the Company (net proceeds
to the Company of $2,360,000). The Secured Convertible
Debentures accrue interest at a rate of 7% per year and were to
mature 12 months from the issuance date with scheduled monthly
repayment commencing on November 1, 2005 to the extent that the
Secured Convertible Debenture has not been converted to common
stock. The Secured Convertible Debenture was convertible into
the Company's common stock at the holder's option any time up
to maturity at a conversion price equal to $4.00. The Secured
Convertible Debentures were secured by all of the assets of the
Company. The Company had the right to redeem the Secured
Convertible Debentures upon 3 business days notice for 110% of
the amount redeemed. Pursuant to the Securities Purchase
Agreement, the Company had required to issue to the holders an
aggregate of 50,000 shares of common stock of the Company. The
Secured Convertible Notes were paid in full on October 12, 2005
in conjunction with the sale of our oral care assets.
We were founded in Wyoming in 1974 as Chemex Corporation, and
in 1983 we changed our name to Chemex Pharmaceuticals, Inc. We
changed our state of incorporation from Wyoming to Delaware on
June 30, 1989. In 1996 we merged with Access Pharmaceuticals,
Inc., a private Texas corporation, and changed our name to
Access Pharmaceuticals, Inc. Our principal executive office is
located at 2600 Stemmons Freeway, Suite 176, Dallas, Texas
75207; our telephone number is (214) 905-5100.
Products
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We have used our drug delivery technology platforms to develop
the following product candidates:
Products in Development Status
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Polymer Platinate
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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
4
and surgery to improve their effectiveness and serves as the
primary therapy for some solid tumors and metastases. For
chemotherapeutic agents to be effective in treating cancer
patients, however, the agent must reach the target cells in
effective quantities with minimal toxicity in normal tissues.
The current optimal strategy for chemotherapy involves exposing
patients to the most intensive cytotoxic regimens that they can
tolerate and clinicians attempt to design a combination of
chemotherapeutic drugs, a dosing schedule and a method of
administration to increase the probability that cancerous cells
will be destroyed while minimizing the harm to healthy cells.
Notwithstanding clinicians' efforts, most current
chemotherapeutic drugs have significant shortcomings that limit
the efficacy of chemotherapy. For example, certain cancers are
inherently unresponsive to chemotherapeutic agents.
Alternatively, other cancers may initially respond, but
subgroups of cancer cells acquire resistance to the drug during
the course of therapy and the resistant cells may survive and
cause a relapse. Serious toxicity, including bone marrow
suppression, renal toxicity, neuropathy, or irreversible
cardiotoxicity, are some of the limitations of current
anti-cancer drugs that can prevent their administration in
curative doses.
Currently, platinum compounds are one of the largest selling
categories of chemotherapeutic agents, with annual sales in
excess of $2.0 billion. As is the case with all
chemotherapeutic drugs, the use of such compounds is associated
with serious systemic side effects. The drug delivery goal
therefore is to enhance delivery of the drug to the tumor and
minimize the amount of drug affecting normal organs in the
body.
Polymer Platinate (AP 5346) DACH Platinum
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The extensive experience we have gained developing AP5280 has
been applied to extend our platinum developments to include the
DACH form of platinum.
Oxaliplatin, another form of DACH platinum, which was initially
approved in France and in Europe in 1999 for the treatment of
colorectal cancer is now also being marketed in the United
States and is generating worldwide sales in excess of $1.5
billion annually. Carboplatin and Cisplatin, two approved
platinum chemotherapy drugs, are not indicated for the
treatment of metastatic colorectal cancer. Oxaliplatin, in
combination with 5-flurouracil and folinic acid is indicated
for the first-line treatment of metastatic colorectal cancer in
Europe and the U.S. The colorectal cancer market is a
significant opportunity as there are over 500,000 reported new
cases annually in the developed world, increasing at a rate of
approximately three percent per year.
Utilizing the biocompatible water-soluble polymer HPMA as a
drug carrier, AP5346 links DACH platinum to the polymer in a
manner which permits the selective release of platinum in
tumors. The polymer capitalizes on the biological differences
in the permeability of blood vessels at tumor sites versus
normal tissue. In this way, tumor selective delivery and
platinum release is achieved. The ability to inhibit tumor
growth has been evaluated in more than ten preclinical models.
Compared with the marketed product Oxaliplatin, AP5346 showed
superiority in a number of these models. Preclinical studies of
the delivery of platinum to tumors in an animal model have
shown that, compared with oxaliplatin at equitoxic doses,
AP5346 delivers in excess of 16 times more platinum to the
tumor. An analysis of tumor DNA, which is the main target for
anti-cancer platinum agents, has shown that AP5346 delivers
approximately 14 times more platinum to tumor DNA. Results from
preclinical efficacy studies conducted in the B16 and other
tumor models have also shown that AP5346 is superior to
oxaliplatin in inhibiting the growth of
5
tumors. An extensive preclinical package has been developed
supporting the development of AP5346.
In the first quarter of 2005, we completed a Phase I clinical
study in a multi-center study conducted in Europe, enrolling
approximately 26 patients. The reporting of this study is
expected to be completed in the fourth quarter of 2005. The
European trial was designed to identify the maximum tolerated
dose, dose limiting toxicities, the pharmacokinetics of the
platinum in plasma and the possible antitumor activity of
AP5346. The open-label, non-randomized, dose-escalation Phase
I study was performed at two European centers. AP5346 was
administered as an intravenous infusion over one hour, once a
week on days 1, 8 and 15 of each 28-day cycle to patients with
solid progressive tumors. We have obtained preliminary reports
on results in 26 patients with a broad cross-section of tumor
types, with doses ranging from 80-1,280 mg Pt/m2.
Of the 26 patients, 10 were not evaluable for tumor response,
principally due to withdrawal from the study prior to
completing the required cycle. Of the 16 evaluable patients, 2
demonstrated a partial response and 4 experienced stable
disease. One of the patients who attained a partial response
had a melanoma with lung metastasis; a CT scan revealed a tumor
decrease of greater than 50%. The other patient who responded
had ovarian cancer; she had a reduction in lymph node
metastasis and remission of a liver metastasis. Also of note,
a patient with cisplatin resistant cervical cancer showed a
short lasting significant reduction in lung metastasis after 3
doses. However, due to toxicity, the patient could not be
retreated to determine whether the partial response could be
maintained.
We will be presenting data from this completed Phase I trial of
our lead oncology product AP5346 at the AACR-NCI-EORTC
international conference on Molecular Targets and Cancer
Therapeutics, held in Philadelphia on Nov 16, 2005.
In the current quarter, we plan to begin a European phase II
trial in ovarian cancer patients who have relapsed after first
line platinum therapy.
We received clearance in January 2005 from the US Food and Drug
Administration for our Investigational New Drug Application
(IND) for AP5346 allowing us to proceed with a Phase I clinical
trial for this drug candidate in the US. Although we
ultimately plan to study AP5346 in combination with
fluorouracil and leucovorin, we are choosing to pursue a
monotherapy evaluatoion first. Upon a successful completion of
the phase II ovarian study, we plan to initiate a Phase II
study to determine the efficacy of AP5346 in combination with
fluorouracil and leucovorin in colorectal cancer patients
compared with the oxaliplatin/fluorouracil/leucovorin
combination, which is used extensively to treat colorectal
cancer.
Due to the superior pre-clinical and clinical results achieved
relative to AP5280, AP5346 is now our lead clinical candidate.
Additionally, since oxaliplatin has now been shown to have
activity in solid tumors, in addition to colorectal cancer, we
believe that the opportunity for AP5346 has been further
expanded. Consequently, further development of AP5280 has been
deferred pending the clinical results achieved with AP5346.
The same polymer backbone platform that we use in AP5346 can be
used with other anticancer agents, and we have some exciting
preclinical data demonstrating the enhancement of efficacy by
using the polymer delivery approach. We will be evaluating
which of these programs will continue to preclinical candidate
formal testing.
6
Nanoparticle drug delivery system
- ---------------------------------
We also plan to continue to explore collaborations for our
proprietary nanoparticle drug delivery system for targeting
therapeutics in diseases such as cancer and possibly also
rheumatoid arthritis. This nanoparticle drug delivery
technology allows for systemic delivery and is different from
the aggregate hydrogel that has been licensed to Uluru. There
has been increased interest in the use of nanoparticles for
delivering drugs to tumors following the approval earlier this
year of a taxol nanoparticle formulation. Access' proprietary
vitamin-targeting technology is another mechanism to provide
enhanced delivery of nanoparticle formulations to the sites of
disease. Our vitamin B12 oral drug delivery technology also
offers great promise to provide oral dosage forms for active
ingredients such as proteins and peptides which currently can
only be administered by injection. Access already has three
ongoing collaborations in this area, and is currently in
discussion with additional potential partners. The level of
activity for this program will depend on raising additional
financing or executing an outlicensing strategy.
Mucoadhesive Liquid Technology (MLT)
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Mucositis is a debilitating condition involving extensive
inflammation of mouth tissue that affects an estimated 550,000
cancer patients in the United States undergoing chemotherapy
and radiation treatment. Any treatment that would accelerate
healing and/or diminish the rate of appearance would have a
significant beneficial impact on the quality of life of these
patients and may allow for more aggressive chemotherapy.
We filed an IND with the FDA in December 1999 and developed a
Phase II protocol to investigate a mouthwash formulation for
the prevention and treatment of mucositis in head and neck
cancer patients treated with radiation with or without
chemotherapy. Over 90% of head and neck cancer patients treated
with radiation and chemotherapy experience mucositis. This
study commenced in the first quarter of 2000. We enrolled 58
patients in the initial study which was performed at multiple
sites throughout the United States.
In July 2001, we announced results from our Phase II randomized
clinical study of the prevention and treatment of mucositis.
The data developed confirmed that our mucoadhesive liquid
technology (MLT) could represent an important advancement in
the management and prevention of mucositis.
The data were retrospectively compared with two historical
patient databases to evaluate the potential advantages that
this technology may represent in the prevention, treatment and
management of mucositis. The patient evaluation was conducted
using the oral mucositis assessment scale, which qualifies the
disease severity on a scale of 0-5. Key highlights of the
comparison with the historical patient databases are as
follows:
* the average severity of the disease was reduced by
approximately 40%;
* the maximum intensity of the mucositis was approximately 35%
lower; and
* the median peak intensity was approximately 50% lower.
Given the results achieved with our MLT, and the fact that in
the study an amlexanox rinse showed no additional benefit, we
do not plan to conduct additional clinical studies evaluating
amlexanox as a preventative product candidate for mucositis.
Following the completion of the
7
Phase II study we conducted additional formulation development
work to optimize the MLT technology prior to advancing clinical
development. The topical application of the MLT was tested for
its ability to attenuate the course of radiation-induced oral
mucositis in an established hamster model. The study results
clearly indicate the ability to prevent the onset of ulcerative
mucositis, or delay the onset and reduce the severity of
mucositis. Further clinical development of this program has
been placed on hold to focus our resources on our high
potential cancer therapeutics. Further development will be
dependent on securing a strategic partner.
Drug Development Strategy
- -------------------------
Our strategy is to initially focus on utilizing our technology
in combination with approved drug substances to develop novel
patentable formulations of existing therapeutic and diagnostic
products. We believe that this will expedite product
development, both preclinical and clinical, and ultimately
product approval. To reduce financial risk and equity financing
requirements, we are directing our resources to the preclinical
and early clinical phases of development. Where the size of the
necessary clinical studies and cost associated with the later
clinical development phases are significant, we plan to
outlicense to, or co-develop with, marketing partners our
current product candidates. In order to fully complete our
planned clinical study programs we will need to raise
additional financing or execute an outlicensing program.
We plan to continue to utilize our internal core capabilities
of chemistry, formulation, analytical methods development,
clinical development, biology and project management to
maximize product opportunities in a timely manner. We plan,
however, to contract the manufacturing scaleup, certain
preclinical testing and product production to research
organizations, contract manufacturers and strategic partners.
We will evaluate those instances and may do the work ourselves
in order to achieve cost savings. Given the current cost
containment and managed care environment both in the United
States and overseas and the difficulty for a small company to
effectively market its products, we do not currently plan to
become a fully integrated pharmaceutical company.
Consequently, we expect to form strategic alliances for product
development and to outlicense the commercial rights to
development partners. By forming strategic alliances with major
pharmaceutical and diagnostic companies, we believe that our
technology can be more rapidly developed and successfully
introduced into the marketplace.
Core Drug Delivery Technology Platforms
- ---------------------------------------
Our current drug delivery technology platforms for use in
cancer chemotherapy, dermatology and oral disease are:
* Synthetic Polymer Targeted Drug Delivery Technology;
* Vitamin Mediated Targeted Delivery Technology;
* Vitamin Mediated Oral Delivery Technology;
* Bioerodible Cross-Linker Technology;
Each of these platforms is discussed below:
8
Synthetic Polymer Targeted Drug Delivery Technology
- ---------------------------------------------------
In collaboration with The School of Pharmacy, University of
London, we have developed a synthetic polymer technology, which
utilizes hydroxypropylmethacrylamide with platinum, designed to
exploit enhanced permeability and retention, or EPR, at tumor
sites to selectively accumulate drug and control drug release.
Many solid tumors possess vasculature that is hyperpermeable,
or leaky, to macromolecules. In addition to this enhanced
permeability, tumors usually lack effective lymphatic and/or
capillary drainage. Consequently, tumors selectively accumulate
circulating macromolecules, including, for example, up to 10%
of an intravenous dose in mice. This effect has been termed
EPR, and is thought to constitute the mechanism of action of
styrene-maleic/anhydride-neocarzinostatin, or SMANCS, which is
in regular clinical use in Japan for the treatment of hepatoma.
These polymers take advantage of endothelial permeability as
the drug carrying polymers are trapped in tumors and then taken
up by tumor cells. Linkages between the polymer and drug can be
designed to be cleaved extracellularly or intracellularly. The
drug is released inside the tumor mass while polymer/drug not
delivered to tumors is renally cleared from the body. Data
generated in animal studies have shown that the polymer/drug
complexes are far less toxic than free drug alone and that
greater efficacy can be achieved. Thus, these polymer complexes
have demonstrated significant improvement in the therapeutic
index of anti-cancer drugs, including, for example, platinum.
Vitamin Mediated Targeted Delivery Technology
- ---------------------------------------------
Most drugs are effective only when they reach a certain minimum
concentration in the region of disease, yet are well
distributed throughout the body contributing to undesirable
side effects. It is therefore advantageous to alter the natural
biodistribution of a drug to have it more localized where it is
needed. Our vitamin mediated targeted delivery technology
utilizes the fact that in many diseases where there is rapid
growth and/or cell division, the demand for certain vitamins
increases. By coupling the drug to an appropriate vitamin, the
vitamin serves as a carrier to increase the amount of drug at
the disease site relative to its normal distribution.
One application of this technology is in tumor targeting. The
use of cytotoxic drugs is one of the most common methods for
treating a variety of malignancies including solid and non-
solid tumors. The drawbacks of chemotherapeutic treatments,
which include tumor resistance, cancer relapse and toxicity
from severe damage to healthy tissues, has fuelled a scientific
quest for novel treatments that are specifically targeted to
malignant cells thus reducing damage to collateral tissues.
The design of targeted therapies involves exploitation of the
difference between the structure and function of normal cells
compared with malignant cells. Differences include the
increased levels of surface molecules on cancer cells, which
makes them more sensitive to treatment regimes that target
surface molecules and differences in blood supply within and
around tumor cells compared with normal cells.
Two basic types of targeting approaches are utilized, passive
tumor targeting and active tumor targeting.
* passive tumor targeting involves transporting anti-cancer
agents through the bloodstream to tumor cells using a "carrier"
molecule. Many different carrier molecules, which can
9
take a variety of forms (micelles, nanoparticles, liposomes and
polymers), are being investigated as each provides advantages
such as specificity and protection of the anti-cancer drug from
degradation due to their structure, size (molecular weights)
and particular interactions with tumor cells. Our polymer
platinate program is a passive tumor targeting technology.
* active tumor targeting involves attaching an additional
fragment to the anticancer drug and the carrier molecule to
create a new "targeted" agent that will actively seek a
complementary surface molecule to which it binds
(preferentially located on the exterior of the tumor cells).
The theory is that the targeting of the anti-cancer agent
through active means to the affected cells should allow more of
the anti-cancer drug to enter the tumor cell, thus amplifying
the response to the treatment and reducing the toxic effect on
bystander, normal tissue.
Examples of active targeting fragments include antibodies,
growth factors and vitamins. Our scientists have specifically
focused on using vitamin B12 and folate to more effectively
target anti-cancer drugs to solid tumors.
It has been known for some time that vitamin B12 and folic acid
are essential for tumor growth and, as a result, receptors for
these vitamins are up-regulated in certain tumors. Vitamin B12
receptor over-expression occurs in breast, lung, leukemic
cells, lymphoma cells, bone, thyroid, colon, prostate and brain
cancers and some other tumor lines, while folate receptor over-
expression occurs in breast, lung, ovarian, endometrial, renal,
colon, brain and cancers of myeloid hemotopoietic cells and
methotrexate-sensitive tumors.
Vitamin Mediated Oral Delivery Technology
Oral delivery is the preferred method of administration of
drugs where either long-term or daily use (or both) is
required. However many therapeutics, including peptide and
protein drugs, are poorly absorbed when given orally. With more
and more peptide and protein based biopharmaceuticals entering
the market, there is an increasing need to develop an effective
oral delivery system for them, as well as for long-standing
injected drugs such as insulin.
The difficulty in administering proteins orally is their
susceptibility to degradation by digestive enzymes, their
inability to cross the intestinal wall and their rapid
excretion by the body. Over the years, many different
methodologies for making protein drugs available orally have
been attempted. Most of the oral protein delivery technologies
involve protecting the protein degradation in the intestine.
More recently, strategies have been developed that involve
attaching the protein or peptide to a molecule that transports
the protein across the gut wall. However, the field of oral
drug delivery of proteins and peptides has yet to achieve
successful commercialization of a product (although positive
results have been achieved in early clinical trials for some
products under development).
Many pharmaceutically active compounds such as proteins,
peptides and cytotoxic agents cannot be administered orally due
to their instability in the gastrointestinal tract or their
inability to be absorbed and transferred to the bloodstream. A
technology that would allow many of these actives to be taken
orally would greatly enhance their acceptance and value.
Several technologies for the protection of sensitive actives in
the gastro-intestinal tract and/or enhancement of gastro-
intestinal absorption have been explored and many have failed.
10
Our proprietary technology for oral drug delivery utilizes the
body's natural vitamin B12 (VB12) transport system in the gut.
The absorption of VB12 in the intestine occurs by way of a
receptor-mediated endocytosis. Initially, VB12 binds to
intrinsic factor (IF) in the small intestine, and the VB12-IF
complex then binds to the IF receptor on the surface of the
intestine. Receptor-mediated endocytosis then allows the
transport of VB12 across the gut wall. After binding to another
VB12-binding protein, transcobalamin II (TcII), VB12 is
transferred to the bloodstream.
Our scientists discovered that VB12 will still be transported
by this process even when drugs, macromolecules, or
nanoparticles are coupled to VB12. Thus VB12 serves as a
carrier to transfer these materials from the intestinal lumen
to the bloodstream. For drugs and macromolecules that are
stable in the gastro-intestinal tract, the drug or
macromolecule can be coupled directly (or via a linker) to
VB12. If the capacity of the VB12 transport system is
inadequate to provide an effective blood concentration of the
active, transport can be amplified by attaching many molecules
of the drug to a polymer, to that VB12 is also attached. A
further option, especially for drugs and macromolecules that
are unstable in the intestine, is to formulate the drug in a
nanoparticle which is then coated with VB12. Once in the
bloodstream, the active is released by diffusion and/or erosion
of the nanoparticle. Utilization of nanoparticles also serves
to "amplify" delivery by transporting many molecules at one
time due to the inherently large surface area.
Our proprietary position in this technology involves the
conjugation of vitamin B12 and/or folic acid (or their analogs)
to a polymer to which is also attached the drug to be
delivered, or attached to a nanoparticle in which the drug is
incorporated. Since many molecules of the drug are attached to
a single polymer strand, or are incorporated in a single
nanoparticle, disease targeting is amplified compared to
simpler conjugates involving one molecule of the vitamin with
one drug molecule. However, in situations when such a simple
conjugate might be preferred, our patents also encompass these
VB12-drug conjugates.
Bioerodible Cross-Linker Delivery Technology
- --------------------------------------------
Our scientists have developed a novel series of bioerodible
cross-linkers that have the potential to be utilized with
hydrogels in a number of drug delivery applications as well as
several non-pharmaceutical applications. Hydrogels are very
large molecules with complex three-dimensional structures
capable of storing either small molecule drugs or much larger
peptide and protein therapeutics. These molecules are stored
within the matrix of the hydrogel. Most hydrogels are not
bioerodible, therefore they deliver their payload of drug by
diffusion of these molecules through the interconnecting
chambers of the hydrogel. Once all of the drug has been
delivered, non-bioerodible hydrogels remain in the body (unless
surgically removed) as they cannot be broken down and
eliminated. By comparison, our hydrogels possess bioerodible
linking groups with well-defined rates of degradation in
biological systems, and so release their payload of drugs by
both diffusion and erosion of the hydrogel matrix. By selecting
linkers with appropriate degradation rates, much greater
control of drug release rates can be achieved. Once the drug
has been released, erosion of the hydrogel continues until no
solid hydrogel remains, eliminating the need to use an
additional procedure to remove the drug delivery device. The
hydrogel erodes to form much smaller water-soluble fractions
which are readily eliminated from the body.
A number of possible drug delivery systems may be able to be
developed using our bioerodible cross-linker technology,
ranging from nanoparticles for intravenous administration, to
larger devices which may be implanted, wound packaging
materials, medicated and non-medicated for
11
decubitus and vascular ulcers, medicated films and gels for
topical applications, burn dressing and dressing for skin donor
sites.
Research Projects, Products and Products in Development
- -------------------------------------------------------
ACCESS DRUG PORTFOLIO
Licensing Clinical
Compound Originator Partner Indication FDA Filing Stage (1)
- ----------------- ---------- --------- ---------- ------------ ----------
Cancer
- ------
Polymer Platinate
(AP5346) (2) Access - - Ovarian, Clinical Phase I/II
U London Colorectal Development
(3)
Vitamin Medicated Delivery
- ---------------------------
Oral Delivery Access -(4) Various Research Pre-Clinical
System
Vitamin Targeted Access - Anti-tumor Research Pre-Clinical
Therapeutics
(1) For more information, see "Government Regulation" for
description of clinical stages.
(2) Licensed from the School of Pharmacy, The University of
London. Subject to royalty and milestone payments.
(3) Clinical studies being conducted in Europe and US.
(4) Research collaboration agreement with Celltech Group plc.
We begin the product development effort by screening and
formulating potential product candidates, selecting an optimal
active and formulation approach and developing the processes
and analytical methods. Pilot stability, toxicity and efficacy
testing are conducted prior to advancing the product candidate
into formal preclinical development. Specialized skills are
required to produce these product candidates utilizing our
technology. We have a core internal development capability with
significant experience in developing these formulations.
Once the product candidate has been successfully screened in
pilot testing, our scientists, together with external
consultants, assist in designing and performing the necessary
preclinical efficacy, pharmacokinetic and toxicology studies
required for IND submission. External investigators and scaleup
manufacturing facilities are selected in conjunction with our
consultants. The initial Phase I and Phase II studies are
conducted by institutions and investigators supervised and
monitored by our employees and contract research organizations.
We do not plan to have an extensive clinical development
organization as we plan to have the advance phases of this
process conducted by a development partner. Should we conduct
Phase III clinical studies we expect to engage a contract
research organization to perform this work.
We contract with third party contract research organizations to
complete our large clinical trials and for data management of
all of our clinical trials. Generally, we manage the smaller
Phase I
12
and II trials ourselves. Currently, we have one Phase I trials
in process, one planned Phase I trials and two Phase II trials
planned for this year, subject to financing.
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 $5,417,000, $6,096,000 and $7,024,000
on research and development during the years 2004, 2003 and
2002, respectively.
Patents
- -------
We believe that the value of technology both to us and to our
potential corporate partners is established and enhanced by our
broad intellectual property positions. Consequently, we have
already been issued and seek to obtain additional U.S. and
foreign patent protection for products under development and
for new discoveries. Patent applications are filed with the
U.S. Patent and Trademark Office and, when appropriate, with
the Paris Convention's Patent Cooperation Treaty (PCT)
Countries (most major countries in Western Europe and the Far
East) for our inventions and prospective products.
Two U.S. patents and two European patents have issued and two
U.S. patent and two European patent applications are pending
for polymer platinum compounds. The two patents and patent
applications are the result in part of our collaboration with
The School of Pharmacy, University of London, from which the
technology has been licensed and include a synthetic polymer,
hydroxypropylmethacrylamide incorporating platinates, that can
be used to exploit enhanced permeability and retention in
tumors and control drug release. The patents and patent
applications include a pharmaceutical composition for use in
tumor treatment comprising a polymer-platinum compound through
linkages that are designed to be cleaved under selected
conditions to yield a platinum which is selectively released at
a tumor site. The patents and patent applications also include
methods for improving the pharmaceutical properties of platinum
compounds.
We have one U.S. patent and one European patent is pending for
our bioerodible cross-linker technology. A number of possible
drug delivery systems can be developed using our bioerodible
cross-linker technology, ranging from nanoparticles for
intravenous administration, to larger devices which may be
implanted, wound packaging materials, medicated and non-
medicated for decubitus and vascular ulcers, medicated films
and gels for topical applications, burn dressing and dressing
for skin donor sites.
We have filed two U.S. patent applications and two European
patent applications for our mucoadhesive liquid technology. Our
patent applications cover a range of products utilizing our
mucoadhesive liquid technology for the management of the
various phases of mucositis.
We have three patented targeted therapeutic technologies:
- - folate conjugates of polymer therapeutics, to enhance tumor
delivery by targeting folate receptors, which are upregulated
in certain tumor types with two U.S. and two European patent
applications;
13
- - the use of vitamin B12 to target the transcobalamin II
receptor which is upregulated in numerous diseases including
cancer, rheumatoid arthritis, certain neurological and
autoimmune disorders with two U.S. patents and three U.S. and
four European patent applications; and
- - oral delivery of a wide variety of molecules which cannot
otherwise be orally administered, utilizing the active
transport mechanism which transports vitamin B12 into the
systemic circulation with six U.S. patents and two European
patents and one U.S. and one European patent application.
We have a strategy of maintaining an ongoing line of patent
continuation applications for each major category of patentable
carrier and delivery technology. By this approach, we are
extending the intellectual property protection of our basic
targeting technology and initial agents to cover additional
specific carriers and agents, some of which are anticipated to
carry the priority dates of the original applications.
Government Regulation
- ---------------------
We are subject to extensive regulation by the federal
government, principally by the FDA, and, to a lesser extent, by
other federal and state agencies as well as comparable agencies
in foreign countries where registration of products will be
pursued. Although a number of our formulations incorporate
extensively tested drug substances, because the resulting
formulations make claims of enhanced efficacy and/or improved
side effect profiles, they are expected to be classified as new
drugs by the FDA.
The Federal Food, Drug and Cosmetic Act and other federal,
state and foreign statutes and regulations govern the testing,
manufacturing, safety, labeling, storage, shipping and record
keeping of our products. The FDA has the authority to approve
or not approve new drug applications and inspect research,
clinical and manufacturing records and facilities.
Among the requirements for drug approval and testing is that
the prospective manufacturer's facilities and methods conform
to the FDA's Code of Good Manufacturing Practices regulations,
which establish the minimum requirements for methods to be used
in, and the facilities or controls to be used during, the
production process. Such facilities are subject to ongoing FDA
inspection to insure compliance.
The steps required before a pharmaceutical product may be
produced and marketed in the U.S. include preclinical tests,
the filing of an IND with the FDA, which must become effective
pursuant to FDA regulations before human clinical trials may
commence, numerous phases of clinical testing and the FDA
approval of a NDA prior to commercial sale.
Preclinical tests are conducted in the laboratory, usually
involving animals, to evaluate the safety and efficacy of the
potential product. The results of preclinical tests are
submitted as part of the IND application and are fully reviewed
by the FDA prior to granting the sponsor permission to commence
clinical trials in humans. All trials are conducted under
International Conference on Harmonization, or ICH, good
clinical practice guidelines. All investigator sites and
sponsor facilities are subject to FDA inspection to insure
compliance. Clinical trials typically involve a three-phase
process. Phase I, the initial clinical evaluations, consists of
administering the drug and testing for safety and tolerated
dosages and in some indications such as cancer and HIV, as
14
preliminary evidence of efficacy in humans. Phase II involves
a study to evaluate the effectiveness of the drug for a
particular indication and to determine optimal dosage and dose
interval and to identify possible adverse side effects and
risks in a larger patient group. When a product is found safe,
an initial efficacy is established in Phase II, it is then
evaluated in Phase III clinical trials. Phase III trials
consist of expanded multi-location testing for efficacy and
safety to evaluate the overall benefit to risk index of the
investigational drug in relationship to the disease treated.
The results of preclinical and human clinical testing are
submitted to the FDA in the form of an NDA for approval to
commence commercial sales.
The process of forming the requisite testing, data collection,
analysis and compilation of an IND and an NDA is labor
intensive and costly and may take a protracted time period. In
some cases, tests may have to be redone or new tests instituted
to comply with FDA requests. Review by the FDA may also take
considerable time and there is no guarantee that an NDA will be
approved. Therefore, we cannot estimate with any certainty the
length of the approval cycle.
We are also governed by other federal, state and local laws of
general applicability, such as laws regulating working
conditions, employment practices, as well as environmental
protection.
Competition
- -----------
The pharmaceutical and biotechnology industry is characterized
by intense competition, rapid product development and
technological change. Competition is intense among
manufacturers of prescription pharmaceuticals and other product
areas where we may develop and market products in the future.
Most of our potential competitors are large, well established
pharmaceutical, chemical or healthcare companies with
considerably greater financial, marketing, sales and technical
resources than are available to us. Additionally, many of our
potential competitors have research and development
capabilities that may allow such competitors to develop new or
improved products that may compete with our product lines. Our
potential products could be rendered obsolete or made
uneconomical by the development of new products to treat the
conditions to be addressed by our developments, technological
advances affecting the cost of production, or marketing or
pricing actions by one or more of our potential competitors.
Our business, financial condition and results of operation
could be materially adversely affected by any one or more of
such developments. We cannot assure you that we will be able to
compete successfully against current or future competitors or
that competition will not have a material adverse effect on our
business, financial condition and results of operations.
Academic institutions, governmental agencies and other public
and private research organizations are also conducting research
activities and seeking patent protection and may commercialize
products on their own or with the assistance of major health
care companies in areas where we are developing product
candidates. We are aware of certain development projects for
products to treat or prevent certain diseases targeted by us,
the existence of these potential products or other products or
treatments of which we are not aware, or products or treatments
that may be developed in the future, may adversely affect the
marketability of products developed by us.
The principal competitors in the polymer area are Cell
Therapeutics, Daiichi, Enzon and Inhale which are developing
alternate drugs in combination with polymers. We believe we are
the only company conducting clinical studies in the polymer
drug delivery of platinum compounds. We believe that the
principal current competitors to our polymer targeting
technology fall into two categories: monoclonal antibodies and
liposomes. We believe that our technology potentially
represents a significant advance over these older technologies
because our technology provides a
15
system with a favorable pharmacokinetic profile.
A number of companies are developing or may in the future
engage in the development of products competitive with our
polymer delivery system. Several companies are working on
targeted monoclonal antibody therapy including Bristol-Myers
Squibb, Centocor (acquired by Johnson & Johnson),
GlaxoSmithKline, Imclone and Xoma. Currently, liposomal
formulations being developed by Gilead Sciences and Alza
Corporation (acquired by Johnson & Johnson), are the major
competing intravenous drug delivery formulations that deliver
similar drug substances.
In the area of advanced drug delivery, which is the focus of
our early stage research and development activities, a number
of companies are developing or evaluating enhanced drug
delivery systems. We expect that technological developments
will occur at a rapid rate and that competition is likely to
intensify as various alternative delivery system technologies
achieve similar if not identical advantages.
Even if our products are fully developed and receive required
regulatory approval, of which there can be no assurance, we
believe that our products can only compete successfully if
marketed by a company having expertise and a strong presence in
the therapeutic area. Consequently, we do not currently plan to
establish an internal marketing organization. By forming
strategic alliances with major and regional pharmaceutical
companies, 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 November 14, 2005, we had five full time employees, three
of whom have advanced scientific degrees. We have never
experienced employment-related work stoppages and consider that
we maintain good relations with our personnel. In addition, to
complement our internal expertise, we have contracts with
scientific consultants, contract research organizations and
university research laboratories that specialize in various
aspects of drug development including clinical development,
regulatory affairs, toxicology, process scale-up and
preclinical testing.
Web Availability
- ----------------
We make available free of charge through our web site,
www.accesspharma.com, our annual reports on Form 10-K and other
reports required under the Securities and Exchange Act of 1934,
as amended, as soon as reasonably practicable after such
reports are filed with, or furnished to, the Securities and
Exchange Commission as well as certain of our corporate
governance policies, including the charters for the Board of
Director's audit, compensation and nominating and corporate
governance committees and our code of ethics, corporate
governance guidelines and whistleblower policy. We will provide
to any person without charge, upon request, a copy of any of
the foregoing materials. Any such request must be made in
writing to Access Pharmaceuticals, Inc., 2600 Stemmons Freeway,
Suite 176, Dallas, TX 75207 attn: Investor Relations.
Risk Factors
- ------------
This Quarterly Report on Form 10-Q contains certain statements
that are forward-looking within the meaning of Section 27a of
the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, and that
involve risks and uncertainties, including, but not limited to
the uncertainties associated with research and development
16
activities, clinical trials, our ability to raise capital, our
ability to repay our outstanding debt obligations, the timing
of and our ability to achieve regulatory approvals, dependence
on others to market our licensed products, collaborations,
future cash flow, the timing and receipt of licensing and
milestone revenues, the future success of our marketed products
and products in development, our ability to achieve licensing
milestones and other risks described below as well as those
discussed elsewhere in this Form 10-Q, documents incorporated
by reference and other documents and reports that we file
periodically with the Securities and Exchange Commission.
Forward-looking statements contained in this Form 10-Q include,
but are not limited to those relating to anticipated product
approvals and timing thereof, the terms of future licensing
arrangements, our ability to secure additional financing for
our operations, our ability to repay our outstanding debt
obligations, our ability to fund our operations through January
31, 2006 with our current cash reserves and without accessing
our SEDA, and our expected capital expenditures.
A failure to obtain necessary additional capital in the future
could jeopardize our operations.
- --------------------------------------------------------------
We currently have liquid assets to allow us to continue
operations through January 31, 2006, assuming no receipt of
funds from any financing transactions, including selling equity
securities in connection with our Standby Equity Distribution
Agreement (the "SEDA") with Cornell Capital. We anticipate that
we will be able to raise additional funds by selling equity
securities in connection with our SEDA with Cornell Capital,
subject to the terms of the SEDA, our ability to adhere to the
terms of the SEDA and our ability to file and utilize an
updated registration statement necessary for such sales. We
also anticipate raising capital from other sources. By selling
equity, the relative equity ownership of our existing investors
would be diluted and the new investors could obtain terms more
favorable than previous investors.
We have limited liquid assets.
- -------------------------------
We currently have liquid assets sufficient to fund our
operations only through January 31, 2006 without accessing our
SEDA or raising other equity capital. We do plan on accessing
the SEDA and/or raising other equity capital. If we are unable
to access the SEDA or raise other financing prior to the
exhaustion of our liquid assets we may be required to cease or
curtail our operations.
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 $72.8 million
through September 30, 2005. Losses for the years ended 2004,
2003 and 2002 were $10,238,000, $6,935,000 and $9,384,000,
respectively. Our losses have resulted principally from costs
incurred in research and development activities related to our
efforts to develop clinical drug candidates and from the
associated administrative costs. We expect to incur additional
operating losses over the next several years. We also expect
cumulative losses to increase if we expand research and
development efforts and preclinical and clinical trials.
We do not have significant operating revenue and we may never
attain profitability.
- -------------------------------------------------------------
To date, we have funded our operations primarily through
private sales of common stock and convertible notes. Contract
research payments and licensing fees from corporate alliances
and mergers have also provided funding for our operations. Our
ability to achieve significant revenue
17
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 sold our only revenue producing assets to Uluru, Inc.
in October 2005. We are not expecting any revenues in the
short-term from our other assets. Furthermore, we may not be
able to ever successfully identify, develop, commercialize,
patent, manufacture, obtain required regulatory approvals and
market any additional products. Moreover, even if we do
identify, develop, commercialize, patent, manufacture, and
obtain required regulatory approvals to market additional
products, we may not generate revenues or royalties from
commercial sales of these products for a significant number of
years, if at all. Therefore, our proposed operations are
subject to all the risks inherent in the establishment of a new
business enterprise. In the next few years, our revenues may
be limited to minimal product sales and royalties, any amounts
that we receive under strategic partnerships and research or
drug development collaborations that we may establish and, as
a result, we may be unable to achieve or maintain profitability
in the future or to achieve significant revenues in order to
fund our operations.
AMEX listing requirements.
- --------------------------
Our common stock is presently listed on the American Stock
Exchange under the symbol "AKC". All companies listed on AMEX
are required to comply with certain continued listing
standards, including corporate governance requirements,
maintaining stockholders' equity at required levels, obtaining
shareholder approvals for certain transactions, share price
requirements and other rules and regulations of AMEX, some of
which requirements we are not currently in compliance with.
AMEX listing requirements allow us to issue a maximum aggregate
of 3,089,422 shares of our Common Stock in connection with SEDA
without receipt of shareholder approval. Any issuances above
such amount would require shareholder approval or would be a
violation of AMEX regulations. We are not in compliance with
the AMEX stockholders' equity standard as of September 30,
2005. However, we have until December 31, 2005 to become
compliant with such equity standard. If we are unable to remedy
any listing standard noncompliance with AMEX under its
regulations, or otherwise regain compliance, and within the
required time frames for such remediation, or otherwise regain
compliance, or if we default on our debt obligations we cannot
assure investors that our common stock will continue to remain
eligible for listing on AMEX. In the event that our common
stock is delisted from AMEX its market value and liquidity
could be materially adversely affected.
Our Standby Equity Distribution Agreement may have a dilutive
impact on our stockholders.
- -------------------------------------------------------------
We are dependent on external financing to
fund our operations. Our financial needs may be partially
provided from the SEDA. The issuance of shares of our common
stock under the SEDA will have a dilutive impact on our other
stockholders and the issuance or even potential issuance of
such shares could have a negative effect on the market price of
our common stock. In addition, if we access the SEDA, we will
issue shares of our common stock to Cornell Capital Partners at
a discount to the lowest daily volume weighted average of our
common stock during a specified period of trading days after we
access the SEDA. Issuing shares at a discount will further
dilute the interests of other stockholders and may negatively
affect the market price of our Common Stock.
18
To the extent that Cornell sells shares of our common stock
issued under SEDA to third parties, our stock price may
decrease due to the additional selling pressure in the market.
The perceived risk of dilution from sales of stock to or by
Cornell may cause holders of our common stock to sell their
shares, or it may encourage short sales of our common stock or
other similar transactions. This could contribute to a decline
in the stock price of our common stock.
At this time we are not be able to draw funds from the SEDA
until an amendment to our registration statement relating to the
SEDA is filed and declared effective by the SEC.
We may not be able to pay our debt and other obligations and
our assets may be seized as a result.
- ------------------------------------------------------------
We may not generate the cash flow required to pay our
liabilities as they become due. Our outstanding debt includes
approximately $9.515 million of our Convertible Subordinated
Notes $4.015 million due in April 2007 and $5.5 million due in
September 2010.
If our cash flow is inadequate to meet these obligations, we
will default on the notes. Any default on the notes could allow
our note holders to foreclose upon our assets, force us into
bankruptcy or our secured note holders could foreclose on the
escrow and pledge of our shares and sell the shares on the open
market, which is likely to cause a significant drop in the
price of our stock.
We may be unable to repay or repurchase or restructure the
convertible subordinated notes due in April 2007 and September
2010 and be forced into bankruptcy. In the event of a default,
the holders of our secured convertible notes have the right to
foreclose on all of our assets, which could force us to curtail
or cease our business operations.
The holders of our Convertible Notes may require us to
repurchase or prepay all of the outstanding Convertible Notes
under certain circumstances. We may not have sufficient cash
reserves to repurchase the Convertible Notes at such time,
which would cause an event of default under the Convertible
Notes and may force us to declare bankruptcy.
We may not successfully commercialize our drug candidates.
- ----------------------------------------------------------
Our drug candidates are subject to the risks of failure
inherent in the development of pharmaceutical products based on
new technologies and our failure to develop safe, commercially
viable drugs would severely limit our ability to become
profitable or to achieve significant revenues. We may be unable
to successfully commercialize our drug candidates for a number
of reasons, including:
* some or all of our drug candidates may be found to be unsafe
or ineffective or otherwise fail to meet applicable regulatory
standards or receive necessary regulatory clearances;
* our drug candidates, if safe and effective, may be too
difficult to develop into commercially viable drugs;
* it may be difficult to manufacture or market our drug
candidates on a large scale;
* proprietary rights of third parties may preclude us from
marketing our drug candidates; and
* third parties may market superior or equivalent drugs.
19
The success of our research and development activities, upon
which we primarily focus, is uncertain.
- ------------------------------------------------------------
Our primary focus is on our research and development activities
and the commercialization of compounds covered by proprietary
biopharmaceutical patents and patent applications. Research and
development activities, by their nature, preclude definitive
statements as to the time required and costs involved in
reaching certain objectives. Actual research and development
costs, therefore, could exceed budgeted amounts and estimated
time frames may require extension. Cost overruns, unanticipated
regulatory delays or demands, unexpected adverse side effects
or insufficient therapeutic efficacy will prevent or
substantially slow our research and development effort and our
business could ultimately suffer. We anticipate that we will
remain principally engaged in research and development
activities for an indeterminate period of time.
We may be unable to obtain necessary additional capital to fund
operations in the future.
- ----------------------------------------------------------------
We require substantial capital for our development programs and
operating expenses to pursue regulatory clearances and to
prosecute and defend our intellectual property rights. We
believe that our existing capital resources and interest income
will be sufficient to fund our currently expected operating
expenses through January 31, 2006. We plan to access our SEDA
and/or completing additional financings. We will need to raise
substantial additional capital to support our ongoing
operations and debt obligations.
If we do raise additional funds by issuing equity securities,
further dilution to existing stockholders would result and
future investors may be granted rights superior to those of our
existing stockholders. If adequate funds are not available to
us through additional equity offerings, we may be required to
delay, reduce the scope of or eliminate one or more of our
research and development programs or to obtain funds by
entering into arrangements with collaborative partners or
others that require us to issue additional equity securities or
to relinquish rights to certain technologies or drug candidates
that we would not otherwise issue or relinquish in order to
continue independent operations.
We may be unable to successfully develop, market, or
commercialize our products or our product candidates without
establishing new relationships and maintaining current
relationships.
- ------------------------------------------------------------
Our strategy for the research, development and
commercialization of our potential pharmaceutical products may
require us to enter into various arrangements with corporate
and academic collaborators, licensors, licensees and others, in
addition to our existing relationships with other parties.
Specifically, we may seek to joint venture, sublicense or enter
other marketing arrangements with parties that have an
established marketing capability or we may choose to pursue the
commercialization of such products on our own. We may, however,
be unable to establish such additional collaborative
arrangements, license agreements, or marketing agreements as we
may deem necessary to develop, commercialize and market our
potential pharmaceutical products on acceptable terms.
Furthermore, if we maintain and establish arrangements or
relationships with third parties, our business may depend upon
the successful performance by these third parties of their
responsibilities under those arrangements and relationships.
20
Our ability to successfully commercialize, and market our
products and product candidates could be limited if a number of
these existing relationships were terminated.
Furthermore, our strategy with respect to our polymer platinate
program is to enter into a licensing agreement with a
pharmaceutical company pursuant to which the further costs of
developing a product would be shared with our licensing
partner. Although we have had discussions with potential
licensing partners with respect to our polymer platinate
program, to date we have not entered into any licensing
arrangement. We may be unable to execute our licensing strategy
for polymer platinate.
We may be unable to successfully manufacture our products and
our product candidates in clinical quantities or for commercial
purposes without the assistance of contract manufacturers,
which may be difficult for us to obtain and maintain.
- ----------------------------------------------------------------
We have limited experience in the manufacture of pharmaceutical
products in clinical quantities or for commercial purposes and
we may not be able to manufacture any new pharmaceutical
products that we may develop. As a result, we have established,
and in the future intend to establish arrangements with
contract manufacturers to supply sufficient quantities of
products to conduct clinical trials and for the manufacture,
packaging, labeling and distribution of finished pharmaceutical
products if any of our potential products are approved for
commercialization. If we are unable to contract for a
sufficient supply of our potential pharmaceutical products on
acceptable terms, our preclinical and human clinical testing
schedule may be delayed, resulting in the delay of our clinical
programs and submission of product candidates for regulatory
approval, which could cause our business to suffer. Our
business could suffer if there are delays or difficulties in
establishing relationships with manufacturers to produce,
package, label and distribute our finished pharmaceutical or
other medical products, if any, market introduction or
subsequent sales of such products. Moreover, contract
manufacturers that we may use must adhere to current Good
Manufacturing Practices, as required by the FDA. In this
regard, the FDA will not issue a pre-market approval or product
and establishment licenses, where applicable, to a
manufacturing facility for the products until the manufacturing
facility passes a pre-approval plant inspection. If we are
unable to obtain or retain third party manufacturing on
commercially acceptable terms, we may not be able to
commercialize our products as planned. Our potential dependence
upon third parties for the manufacture of our products may
adversely affect our ability to generate profits or acceptable
profit margins and our ability to develop and deliver such
products on a timely and competitive basis.
AP5346 is manufactured by third parties for our Phase I/II
clinical trials. Manufacturing is ongoing for the current
clinical trials. Certain manufacturing steps are conducted by
the Company to enable significant cost savings to be realized.
We are subject to extensive governmental regulation which
increases our cost of doing business and may affect our ability
to commercialize any new products that we may develop.
- ---------------------------------------------------------------
The FDA and comparable agencies in foreign countries impose
substantial requirements upon the introduction of
pharmaceutical products through lengthy and detailed
laboratory, preclinical and clinical testing procedures and
other costly and time-consuming procedures to establish their
safety and efficacy. All of our drugs and drug candidates
require receipt and maintenance of governmental approvals for
commercialization. Preclinical and clinical trials and
manufacturing
21
of our drug candidates are subject to the rigorous testing and
approval processes of the FDA and corresponding foreign
regulatory authorities. Satisfaction of these requirements
typically takes a significant number of years and can vary
substantially based upon the type, complexity and novelty of
the product. The status of our principal products is as
follows:
* AP5346 has completed a Phase I clinical trial in Europe and
has been approved for the commencement of a Phase I trial in
the US by the FDA.
* Mucoadhesive liquid technology patient recruitment in the
clinical trial is on hold pending commercial developments.
* Vitamin mediated delivery technology is currently in the
pre-clinical phase.
* We also have other products in the preclinical phase.
Due to the time consuming and uncertain nature of the drug
candidate development process and the governmental approval
process described above, we cannot assure investors when we,
independently or with our collaborative partners, might submit
a New Drug Application, or "NDA", for FDA or other regulatory
review.
Government regulation also affects the manufacturing and
marketing of pharmaceutical products. Government regulations
may delay marketing of our potential drugs for a considerable
or indefinite period of time, impose costly procedural
requirements upon our activities and furnish a competitive
advantage to larger companies or companies more experienced in
regulatory affairs. Delays in obtaining governmental regulatory
approval could adversely affect our marketing as well as our
ability to generate significant revenues from commercial sales.
Our drug candidates may not receive FDA or other regulatory
approvals on a timely basis or at all. Moreover, if regulatory
approval of a drug candidate is granted, such approval may
impose limitations on the indicated use for which such drug may
be marketed. Even if we obtain initial regulatory approvals for
our drug candidates, our drugs and our manufacturing facilities
would be subject to continual review and periodic inspection,
and later discovery of previously unknown problems with a drug,
manufacturer or facility may result in restrictions on the
marketing or manufacture of such drug, including withdrawal of
the drug from the market. The FDA and other regulatory
authorities stringently apply regulatory standards and failure
to comply with regulatory standards can, among other things,
result in fines, denial or withdrawal of regulatory approvals,
product recalls or seizures, operating restrictions and
criminal prosecution.
The uncertainty associated with preclinical and clinical
testing may affect our ability to successfully commercialize
new products.
- -------------------------------------------------------------
Before we can obtain regulatory approvals for the commercial
sale of any of our potential drugs, the drug candidates will be
subject to extensive preclinical and clinical trials to
demonstrate their safety and efficacy in humans. Preclinical
or clinical trials of any of our future drug candidates may not
demonstrate the safety and efficacy of such drug candidates at
all or to the extent necessary to obtain regulatory approvals.
In this regard, for example, adverse side effects can occur
during the clinical testing of a new drug on humans which may
delay ultimate FDA approval or even lead us to terminate our
efforts to develop the drug for commercial use. Like other
companies in the biotechnology industry, we have suffered
significant setbacks in advanced clinical trials, even after
demonstrating promising results in earlier trials. In
particular, and polymer platinate has taken longer to progress
through clinical trials than originally planned. The failure to
adequately demonstrate the safety and efficacy of a drug
candidate under development could delay or prevent regulatory
approval of the drug candidate. A delay or failure to receive
22
regulatory approval for any of our drug candidates could
prevent us from successfully commercializing such candidates
and we could incur substantial additional expenses in our
attempts to further develop such candidates and obtain future
regulatory approval.
We may incur substantial product liability expenses due to the
use or misuse of our products for which we may be unable to
obtain insurance coverage.
- --------------------------------------------------------------
Our business exposes us to potential liability risks that are
inherent in the testing, manufacturing and marketing of
pharmaceutical products. These risks will expand with respect
to our drug candidates, if any, that receive regulatory
approval for commercial sale and we may face substantial
liability for damages in the event of adverse side effects or
product defects identified with any of our products that are
used in clinical tests or marketed to the public. We generally
procure product liability insurance for drug candidates that
are undergoing human clinical trials. Product liability
insurance for the biotechnology industry is generally
expensive, if available at all, and as a result, we may be
unable to obtain insurance coverage at acceptable costs or in
a sufficient amount in the future, if at all. We may be unable
to satisfy any claims for which we may be held liable as a
result of the use or misuse of products which we have
developed, manufactured or sold and any such product liability
claim could adversely affect our business, operating results or
financial condition.
We may incur significant liabilities if we fail to comply with
stringent environmental regulations or if we did not comply
with these regulations in the past.
- ---------------------------------------------------------------
Our research and development processes involve the controlled
use of hazardous materials. We are subject to a variety of
federal, state and local governmental laws and regulations
related to the use, manufacture, storage, handling and disposal
of such material and certain waste products. Although we
believe that our activities and our safety procedures for
storing, using, handling and disposing of such materials comply
with the standards prescribed by such laws and regulations, the
risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such accident,
we could be held liable for any damages that result and any
such liability could exceed our resources.
Intense competition may limit our ability to successfully
develop and market commercial products.
- ---------------------------------------------------------
The biotechnology and pharmaceutical industries are intensely
competitive and subject to rapid and significant technological
change. Our competitors in the United States and elsewhere are
numerous and include, among others, major multinational
pharmaceutical and chemical companies, specialized
biotechnology firms and universities and other research
institutions.
The following products may compete with polymer platinate:
* Cisplatin, marketed by Bristol-Myers-Squibb, the originator
of the drug, and several generic manufacturers;
* Carboplatin, marketed by Bristol-Myers-Squibb, the
originator of the drug and several generic manufacturers; and
* Oxaliplatin, marketed exclusively by Sanofi-Synthelabo.
The following companies are working on therapies and
formulations that may be competitive
23
with our polymer platinate:
* Antigenics and Regulon are developing liposomal
formulations; and
* American Pharmaceutical Partners, Cell Therapeutics,
Daiichi, Enzon and DebioPharm are developing alternate drugs in
combination with polymers and other drug delivery systems.
Companies working on therapies and formulations that may be
competitive with our vitamin mediated drug delivery system
include Bristol-Myers-Squibb, Centocor (acquired by Johnson &
Johnson), GlaxoSmithKline, Imclone and Xoma which are
developing targeted monoclonal antibody therapy.
Amgen, CuraGen, McNeil, MGI Pharma and OSI Pharmaceuticals are
developing products to treat mucositis that may compete with
our mucoadhesive liquid technology.
Many of these competitors have and employ greater financial and
other resources, including larger research and development,
marketing and manufacturing organizations. As a result, our
competitors may successfully develop technologies and drugs
that are more effective or less costly than any that we are
developing or which would render our technology and future
products obsolete and noncompetitive.
In addition, some of our competitors have greater experience
than we do in conducting preclinical and clinical trials and
obtaining FDA and other regulatory approvals. Accordingly, our
competitors may succeed in obtaining FDA or other regulatory
approvals for drug candidates more rapidly than we do.
Companies that complete clinical trials, obtain required
regulatory agency approvals and commence commercial sale of
their drugs before their competitors may achieve a significant
competitive advantage. Drugs resulting from our research and
development efforts or from our joint efforts with
collaborative partners therefore may not be commercially
competitive with our competitors' existing products or
products under development.
Our ability to successfully develop and commercialize our drug
candidates will substantially depend upon the availability of
reimbursement funds for the costs of the resulting drugs and
related treatments.
- --------------------------------------------------------------
The successful commercialization of, and the interest of
potential collaborative partners to invest in the development
of our drug candidates, may depend substantially upon
reimbursement of the costs of the resulting drugs and related
treatments at acceptable levels from government authorities,
private health insurers and other organizations, including
health maintenance organizations, or HMOs. The amount of such
reimbursement in the United States or elsewhere may be
decreased in the future or may be unavailable for any drugs
that we may develop in the future. Limited reimbursement for
the cost of any drugs that we develop may reduce the demand
for, or the price of such drugs, which would hamper our ability
to obtain collaborative partners to commercialize our drugs, or
to obtain a sufficient financial return on our own manufacture
and commercialization of any future drugs.
The market may not accept any pharmaceutical products that we
successfully develop.
- -------------------------------------------------------------
The drugs that we are attempting to develop may compete with a
number of well-established drugs manufactured and marketed by
major pharmaceutical companies. The degree of market acceptance
of any drugs developed by us will depend on a number of
factors, including the
24
establishment and demonstration of the clinical efficacy and
safety of our drug candidates, the potential advantage of our
drug candidates over existing therapies and the reimbursement
policies of government and third-party payers. Physicians,
patients or the medical community in general may not accept or
use any drugs that we may develop independently or with our
collaborative partners and if they do not, our business could
suffer.
Trends toward managed health care and downward price pressures
on medical products and services may limit our ability to
profitably sell any drugs that we may develop.
- ---------------------------------------------------------------
Lower prices for pharmaceutical products may result from:
* third-party payers' increasing challenges to the prices
charged for medical products and services;
* the trend toward managed health care in the United States
and the concurrent growth of HMOs and similar organizations
that can control or significantly influence the purchase of
healthcare services and products; and
* legislative proposals to reform healthcare or reduce
government insurance programs.
The cost containment measures that healthcare providers are
instituting, including practice protocols and guidelines and
clinical pathways, and the effect of any healthcare reform,
could limit our ability to profitably sell any drugs that we
may successfully develop. Moreover, any future legislation or
regulation, if any, relating to the healthcare industry or
third-party coverage and reimbursement, may cause our business
to suffer.
We may not be successful in protecting our intellectual
property and proprietary rights.
- --------------------------------------------------------
Our success depends, in part, on our ability to obtain U.S. and
foreign patent protection for our drug candidates and
processes, preserve our trade secrets and operate our business
without infringing the proprietary rights of third parties.
Legal standards relating to the validity of patents covering
pharmaceutical and biotechnological inventions and the scope of
claims made under such patents are still developing and there
is no consistent policy regarding the breadth of claims allowed
in biotechnology patents. The patent position of a
biotechnology firm is highly uncertain and involves complex
legal and factual questions. We cannot assure you that any
existing or future patents issued to, or licensed by, us will
not subsequently be challenged, infringed upon, invalidated or
circumvented by others. As a result, although we, together with
our subsidiaries, are either the owner or licensee to 11 U.S.
patents and to 13 U.S. patent applications now pending, and 4
European patents and 13 European patent applications, we cannot
assure investors that any additional patents will issue from
any of the patent applications owned by, or licensed to, us.
Furthermore, any rights that we may have under issued patents
may not provide us with significant protection against
competitive products or otherwise be commercially viable.
Our patents for the following technologies expire in the years
and during the date ranges indicated below:
* AP5280 in 2021
* AP5346 in 2021
* Mucoadhesive technology, patents are pending
25
* Vitamin mediated technology between 2006 and 2019
In addition, patents may have been granted to third parties or
may be granted covering products or processes that are
necessary or useful to the development of our drug candidates.
If our drug candidates or processes are found to infringe upon
the patents or otherwise impermissibly utilize the intellectual
property of others, our development, manufacture and sale of
such drug candidates could be severely restricted or
prohibited. In such event, we may be required to obtain
licenses from third parties to utilize the patents or
proprietary rights of others. We cannot assure investors 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.
- -------------------------------------------------------------
Due to the specialized scientific nature of our business, we
are highly dependent upon our ability to attract and retain
qualified management, scientific and technical personnel. In
view of the stage of our development and our research and
development programs, we have restricted our hiring to research
scientists and a small administrative staff and we have made
only limited investments in manufacturing, production, sales or
regulatory compliance resources. There is intense competition
among major pharmaceutical and chemical companies, specialized
biotechnology firms and universities and other research
institutions for qualified personnel in the areas of our
activities, however, and we may be unsuccessful in attracting
and retaining these personnel.
Ownership of our shares is concentrated, to some extent, in the
hands of a few investors which could limit the ability of our
other stockholders to influence the direction of the company.
- ---------------------------------------------------------------
Larry N. Feinberg (Oracle Partners LP, Oracle Institutional
Partners LP and Oracle Investment Management Inc.) beneficially
owned approximately 26.4% of our common stock as of September
30, 2005. Accordingly, he may have the ability to significantly
influence or determine the election of all of our directors or
the outcome of most corporate actions requiring stockholder
approval. He may exercise this ability in a manner that
advances his best interests and not necessarily those of our
other stockholders.
Provisions of our charter documents could discourage an
acquisition of our company that would benefit our stockholders
and may have the effect of entrenching, and making it difficult
to remove, management.
- ---------------------------------------------------------------
Provisions of our Certificate of Incorporation, By-laws and
Stockholders Rights Plan may make it more difficult for a third
party to acquire control of the company, even if a change in
control would benefit our stockholders. In particular, shares
of our preferred stock may be issued in the future without
further stockholder approval and upon such terms and
conditions, and having such rights, privileges and preferences,
as our Board of Directors may determine, including, for
example, rights to convert into our common stock. The rights of
the holders of our common stock will be subject to, and may be
adversely affected by, the rights of the holders of any of our
preferred stock that may be issued in the future. The issuance
of our preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate
26
purposes, could have the effect of making it more difficult for
a third party to acquire control of us. This could limit the
price that certain investors might be willing to pay in the
future for shares of our common stock and discourage these
investors from acquiring a majority of our common stock.
Further, the existence of these corporate governance provisions
could have the effect of entrenching management and making it
more difficult to change our management.
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 or
shares that we may issue or be obligated to issue in the
future, including in connection with the SEDA. Substantially,
all of the 17,630,040 shares of our common stock that are
outstanding as of November 14, 2005, are unrestricted and
freely tradable or tradable pursuant to a resale registration
statement or under Rule 144 of the Securities Act.
Failure to achieve and maintain effective internal controls
could have a material adverse effect on our business.
- ------------------------------------------------------------
Effective internal controls are necessary for us to provide
reliable financial reports. If we cannot provide reliable
financial reports, our operating results could be harmed. All
internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
While we continue to evaluate and improve our internal
controls, we cannot be certain that these measures will ensure
that we implement and maintain adequate controls over our
financial processes and reporting in the future. Any failure to
implement required new or improved controls, or difficulties
encountered in their implementation, could harm our operating
results or cause us to fail to meet our reporting obligations.
For the year ended December 31, 2004, our management determined
that our internal control systems over financial reporting was
effective to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Our auditors
identified two material weaknesses in our internal controls and
procedures during the course of their evaluation for the year
ended December 31, 2004. If we fail to maintain the adequacy of
our internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able
to ensure that we can conclude on an ongoing basis that we have
an effective internal control system environment over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley
Act. Failure to achieve and maintain an effective internal
control environment could cause investors to lose confidence in
our reported financial information, which could have a material
adverse effect on our stock price.
ITEM 1 FINANCIAL STATEMENTS
- ----------------------------
The response to this Item is submitted as a separate section of
this report.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------
27
This Quarterly Report on Form 10-Q contains certain statements
that are forward-looking within the meaning of Section 27a of
the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, and that
involve risks and uncertainties, including, but not limited to
the uncertainties associated with research and development
activities, clinical trials, our ability to raise capital, our
ability to repay our outstanding debt obligations, the
timing of and our ability to achieve regulatory approvals,
dependence on others to market our licensed products,
collaborations, future cash flow, the timing and receipt of
licensing and milestone revenues, the future success of our
marketed products and products in development, our ability to
achieve licensing milestones and other risks described below as
well as those discussed elsewhere in this Form 10-Q, documents
incorporated by reference and other documents and reports that
we file periodically with the Securities and Exchange
Commission. Forward-looking statements contained in this Form
10-Q include, but are not limited to those relating to
anticipated product approvals and timing thereof, the terms of
future licensing arrangements, our ability to secure additional
financing for our operations, our ability to repay our
outstanding debt obligations, our ability to fund our
operations through January 31, 2006 with our current cash
reserves and without accessing our SEDA, and our expected
capital expenditures.
OVERVIEW
- --------
We are an emerging pharmaceutical company developing unique
polymer linked cytotoxics for the use in the treatment of
cancer. The lead product AP5346 is in Phase II clinical
testing. The Company also has other advanced drug delivery
technologies including vitamin-mediated targeted delivery and
oral care drug delivery.
Together with our subsidiaries, we have proprietary patents or
rights to several drug delivery technology platforms,
including:
* synthetic polymer targeted delivery,
* vitamin mediated targeted delivery,
* vitamin mediated oral delivery, and
* mucoadhesive liquid technology.
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 investors
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
September 30, 2005, our accumulated deficit was $72,756,000.
We sold our oral care business to Uluru, Inc., a private
Delaware company, for up to $20.6 million. This transaction
closed on October 12, 2005. This includes our interest in
Aphthasol(R), all OraDisc(TM) products, all Residerm(R)
products, and all of our assets related to these products. In
addition, we have licensed to Uluru our nanoparticle hydrogel
aggregate technology which could be used for applications such
as local drug delivery and tissue filler in dental and soft
tissue applications. The CEO of Uluru is Kerry P. Gray, the
former CEO of Access Pharmaceuticals, Inc. In conjunction with
the sale transaction, we received a fairness opinion from a
nationally recognized investment banking firm.
At the closing of this agreement we received $8.7 million. In
addition, at the one year anniversary
28
of the agreement we may receive up to $3.7 million, and we will
receive an additional $1 million within 24 months after closing
or earlier upon the achievement of a milestone. Additional
payments of up to $7.2 million may be made upon the achievement
of certain additional milestones.
We closed our laboratory in Australia. The development work
completed in Australia will be completed in the Dallas laboratory
while the animal work completed in Australia will be completed
in contract facilities.
The upfront payment of this transaction allowed Access to
immediately retire our $2.6 million of Secured Convertible
Notes held by Cornell Capital and its affiliate and the various
agreements relating to these notes. Such notes were secured by
all of our assets. In addition, the elimination of the
manufacturing and regulatory costs associated with the oral
care business, as well as required employees for these marketed
products and product candidates will allow us to reduce our
burn rate substantially.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through private sales
of common stock and convertible notes and our principal source
of liquidity is cash and cash equivalents. Contract research
payments, licensing fees and milestone payments from corporate
alliances and mergers have also provided funding for
operations. As of September 30, 2005 our cash and cash
equivalents and short-term investments were $470,000 and our
working capital was $(9,474,000). Our working capital at
September 30, 2005 represented a decrease of $1,686,000 as
compared to our working capital as of December 31, 2004 of
$(7,788,000). The decrease in working capital was due mainly to
the loss from operations for the nine months ended September 30,
2005 offset by additional capital and Secured Convertible Notes
incurred by the Company and the reclassification from short term
to long term of a portion of the convertible notes.
As of September 30, 2005, the Company had a working capital
deficit of approximately $9,474,000. As of that date, the
Company did not have enough capital to achieve its near, medium
or long-term goals. As of November 14, 2005 the Company had
cash and cash equivalents of approximately $1,024,000. Such
liquid assets are expected to be able to fund operations
through January 31, 2006 assuming no access to the SEDA or
additional financings. We plan to access the SEDA and/or have
additional financings.
We sold our oral care business to Uluru, Inc., a private
Delaware company, for up to $20.6 million. This transaction
closed on October 12, 2005. At the closing of this agreement,
we received $8.7 million. In addition, at the one year
anniversary of the agreement we may receive up to $3.7 million,
and we will receive an additional $1 million within 24 months
after closing or earlier upon the achievement of a milestone.
Additional payments of up to $7.2 million will be made upon the
achievement of certain additional milestones.
As of March 30, 2005 the Company executed a Standby Equity
Distribution Agreement (SEDA) with Cornell Capital Partners.
Under the SEDA, the Company may issue and sell to Cornell
Capital Partners common stock for a total purchase price of up
to $15,000,000. The purchase price for the shares is equal to
their market price, which is defined in the SEDA as 98% of the
lowest volume weighted average price of the common stock during
a specified period of trading days following the date notice is
given by the Company that it desires to access the SEDA.
Further, we have agreed to pay Cornell Capital Partners, L.P.
3.5% of the proceeds that we
29
receive under the Equity Line of Credit. The amount of each
draw down is subject to a maximum amount of $1,000,000. The
terms of the SEDA do not allow us to make draw downs if the
draw down would cause Cornell Capital to own in excess of 9.9%
of our outstanding shares of common stock. Upon closing of the
transaction, Cornell Capital Partners received a one-time
commitment fee of 146,500 shares of the Company's common stock.
On the same date, the Company entered into a Placement Agent
Agreement with Newbridge Securities Corporation, a registered
broker-dealer. Pursuant to the Placement Agent Agreement, upon
closing of the transaction the Company paid a one-time
placement agent fee of 3,500 shares of common stock. As of
September 30, 2005 we have accessed $600,000 of the SEDA. At
this time the Company will not be able to access the SEDA until
a post-effective amendment to our registration statement is
filed with, and declared effective by, the SEC.
In addition, as of March 30, 2005, the Company executed a
Securities Purchase Agreement with Cornell Capital Partners and
Highgate House Funds. Under the Securities Purchase Agreement,
upon closing Cornell Capital Partners and Highgate House Funds
purchased an aggregate of $2,633,000 principal amount of
Secured Convertible Debentures from the Company (net proceeds
to the Company of $2,360,000). The Secured Convertible
Debentures accrue interest at a rate of 7% per year and were to
mature 12 months from the issuance date with scheduled monthly
repayment commencing on November 1, 2005 to the extent that the
Secured Convertible Debenture has not been converted to common
stock. The Secured Convertible Debenture was convertible into
the Company's common stock at the holder's option any time up
to maturity at a conversion price equal to $4.00. The Secured
Convertible Debentures were secured by all of the assets of the
Company. The Company had the right to redeem the Secured
Convertible Debentures upon 3 business days notice for 110% of
the amount redeemed. Pursuant to the Securities Purchase
Agreement, the Company had required to issue to the holders an
aggregate of 50,000 shares of common stock of the Company. The
Secured Convertible Notes were paid in full on October 12, 2005
in conjunction with the sale of our oral care assets.
On February 24, 2004 we closed a private placement sale of our
common stock pursuant to which we sold 1,789,371 shares of our
common stock at a per share price of $5.40. We received gross
proceeds of $9,663,000 from this sale and had expenses of
$647,000. The investors also received 5 year warrants at an
exercise price of $7.10 per share to purchase 447,344 shares of
our common stock and the placement agents received warrants in
the offering at an exercise price of $5.40 per share to
purchase 156,481 shares of our common stock.
We have also issued an aggregate of $13,530,000 of convertible
notes, which were due in two parts -$8,030,000 is due on
September 13, 2005 and $5,500,000 was due on September 13, 2008.
The notes which bear interest at a rate of 7.7% per annum with
$1,042,000 of interest due annually on each September 13th.
On Nov. 9, 2005 we announced the restructuring and repayment of
the 7.0% convertible promissory notes due September 13, 2005.
One holder of $4 million worth of convertible notes (Oracle
Partners LP and related funds) agreed to amend their notes to
a new maturity date, April 28, 2007, with the conversion price
being reduced from $5.50 per share to $1.00 per share. In
addition, the Company may cause a mandatory conversion of the
notes into common stock if the Company's stock trades at a
price of at least 1.5 times the conversion price for a minimum
number of trading days. There is also a provision to allow for
a minimum price for conversion in the event of a change of
control.
30
The Company was unable to reach a conversion agreement with the
second holder of $4 million worth of notes (Philip D.
Kaltenbacher), and has instead settled his claim by paying him
this amount plus expenses and interest as outlined in the terms
of the note.
In October, at the closing of the asset sale to Uluru, Inc.,
the Company retired its $2.6 million senior secured convertible
notes. In addition to the amended convertible notes held by
Oracle Partners and its affiliates, the Company has $5.5
million of 7% convertible notes due Sept 13, 2010.
Status of Convertible Notes
- ---------------------------
Amount due at Amount due at
Noteholder 7/01/05 11/14/05 Status
- ---------------------------- ------------- -------------- -----------------
$13.5 Million Convertible Notes
- -------------------------------
Oracle Partners & Affiliates $4,015,000 $4,015,000 New maturity date
of 4/28/07; $1.00
conversion price;
plus other terms
Philip D. Kaltenbacher $4,015,000 $-0- Paid note 11/9/05
Noteholder (name not disclosed) $5,500,000 $5,500,000 New maturity date
of 9/13/10
$2.6 Million Secured Convertible Notes
- --------------------------------------
Cornell Capital Partners and
Highgate House Funds $2,633,000 $-0- Paid note and
interest due on
10/12/05
We have generally incurred negative cash flows from operations
since inception, and have expended, and expect to continue to
expend in the future, substantial funds to complete our planned
product development efforts. Since inception, our expenses have
significantly exceeded revenues, resulting in an accumulated
deficit as of September 30, 2005 of $72,756,000. We expect that
our existing capital resources will be adequate to fund our
current level of operations through January 31, 2006 assuming
no access to the SEDA or additional financings. We plan to
access the SEDA and/or have additional financings. We cannot
assure investors that we will be able to access the SEDA or
that we will ever be able to generate significant product
revenue or achieve or sustain profitability.
We plan to expend substantial funds to conduct research and
development programs, preclinical studies and clinical trials
of potential products, including research and development with
respect to our acquired and developed technology. Our future
capital requirements and adequacy of available funds will
depend on many factors, including:
* our ability to raise financing in order to continue our
operations;
* the ability to establish and maintain collaborative
arrangements with corporate partners for the research,
development and commercialization of products;
* continued scientific progress in our research and
development programs;
* the magnitude, scope and results of preclinical testing and
clinical trials;
31
* the costs involved in filing, prosecuting and enforcing
patent claims;
* the costs involved in conducting clinical trials;
* competing technological developments;
* the cost of manufacturing and scale-up;
* the ability to establish and maintain effective
commercialization arrangements and activities; and
* successful regulatory filings
* the ability to convert, repay or restructure our outstanding
convertible notes.
THIRD QUARTER 2005 COMPARED TO THIRD QUARTER 2004
Our licensing revenue in the third quarter of 2005 and 2004 was
$49,000. We recognize licensing revenue over the period of the
performance obligation under our licensing agreements.
Licensing revenue recognized in both 2005 and 2004 was from
several agreements, including agreements related to various
amlexanox projects and Residerm(R). On October 12, 2005 these
products and associated agreements were sold and no further
licensing revenues are from such products, although milestone
payments may be received.
There were $163,000 in product sales of Aphthasol(R) in the
third quarter of 2005, as compared to $106,000 in sales in the
third quarter of 2004 an increase of $57,000. Aphthasol(R) was
sold on October 12, 2005 and no additional product sales will
be made by the Company.
Royalty income in the third quarter of 2005 was $25,000, as
compared to $30,000 in the third quarter of 2004, a decrease of
$5,000. The patents, the licensing agreements and the
associated royalty income were sold in October 2005 and no
further royalties are expected, although milestone payments may
be made in connection with the sale of assets.
Total research spending for the third quarter of 2005 was
$893,000, as compared to $1,406,000 for the same period in
2004, a decrease of $513,000. The decrease in expenses was
primarily due to:
* lower salary and related expenses ($188,000) principally due
to the reduction in staff;
* lower expenses associated with our Australian laboratory
($119,000) which was closed;
* lower production and testing costs for Aphthasol(R) and
start-up production costs for OraDisc(TM) A ($98,000); and
* lower production costs for AP5346 ($83,000); and
* other net decreases ($25,000).
Our cost of product sales was $123,000 in the third quarter of
2005, as compared to $40,000 in the third quarter of 2004, an
increase of $83,000. Aphthasol(R) was sold on October 12, 2005.
Total general and administrative expenses were $693,000 for the
third quarter of 2005, a decrease of $106,000 as compared to
the same period in 2004. The decrease in spending was due
primarily to the following:
32
* lower property and franchise taxes ($42,000);
* lower patent expenses ($39,000);
* lower shareholder expenses ($23,000);
* lower salary and related expenses ($22,000); and
* lower other net decreases ($4,000).
The decreases are offset by higher legal fees ($24,000).
Depreciation and amortization was $164,000 for the third
quarter of 2005 as compared to $169,000 for the same period in
2004 reflecting a decrease of $5,000.
Total operating expenses in the third quarter of 2005 were
$1,873,000 as compared to total operating expenses of
$2,414,000 for the same period in 2004, a decrease of $541,000.
Loss from operations in the third quarter of 2005 was
$1,636,000 as compared to a loss of $2,229,000 for the same
period in 2004, a decreased loss of $593,000.
Interest and miscellaneous income was $4,000 for the third
quarter of 2005 as compared to $133,000 for the same period in
2004, a decrease of $129,000. The decrease in miscellaneous
income of $97,000 was due to foreign exchange gains on a Euro
denominated receivable. This decrease was in addition to a
decrease in interest income due to lower cash balances in 2005
as compared with 2004.
Interest and other expense was $431,000 for the third quarter
of 2005 as compared to $332,000 for the same period in 2004, an
increase of $99,000 due principally to the addition in
interest and amortization associated with the Secured
Convertible Notes.
Net loss in the third quarter of 2005 was $2,063,000, or a
$0.13 basic and diluted loss per common share, compared with
net loss of $2,428,000, or a $0.16 basic and diluted loss per
common share for the same period in 2004, a decreased loss of
$365,000.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2004
Our licensing revenue in the first nine months of 2005 was
$84,000, as compared to licensing revenue of $97,000 in the
same period of 2004, a decrease of $13,000. We recognize
licensing revenue over the period of the performance obligation
under our licensing agreements. Licensing revenue recognized in
both 2005 and 2004 was from several agreements including
agreements related to various amlexanox projects and
ResiDerm(R). On October 12, 2005 these products and associated
agreements were sold and no further licensing revenues are
expected from such products, although milestone payments may be
received.
There were $481,000 in product sales of Aphthasol(R) in the first
nine months of 2005, as compared to $106,000 in sales in the
same period of 2004, an increase of $375,000. There was a
supply interruption for Aphthasol(R) and there was no Aphthasol
sales in 2004 until late September, while there were sales for
each of the nine months in 2005. Aphthasol(R) was sold on
October 12, 2005 and no additional product sales will be made
by the Company.
33
Royalty income for the first nine months of 2005 was $76,000,
as compared to $70,000 in the same period of 2004, an increase
of $6,000 due to the sales of Zindaclin(R) in additional
countries. The patents, the licensing agreements and the
associated royalty income were sold in October 2005 and no
further royalties are expected, although milestone payments may
be made in connection with the sale of assets.
Total research spending for the first nine months of 2005 was
$3,652,000, as compared to $3,831,000 for the same period in
2004, a decrease of $179,000. The decrease in expenses was the
result of:
* lower salary and related expenses ($166,000) principally due
to the reduction in staff;
* lower expenses associated with our Australian laboratory
($86,000) which was closed;
* lower production and testing costs for Aphthasol(R) and
start-up production costs for OraDisc(TM) A ($21,000); and
* other net decreases ($11,000).
The decrease in expenses was partially offset by higher
production costs for AP5346 ($105,000) in preparation of the
start-up of the Phase II clinical trials.
Our cost of product sales was $403,000 for the first nine
months of 2005, as compared to $97,000 in the same period of
2004, an increase of $306,000. Aphthasol(R) was sold on October
12, 2005.
Total general and administrative expenses were $3,198,000 for
the first nine months of 2005, an increase of $873,000 as
compared to the same period in 2004. The increase in general
and administrative expenses was due primarily to the following:
* expenses due to the separation agreement with our former CEO
($839,000);
* royalty license expenses ($150,000);
* higher legal expenses ($118,000); and
* other net increases ($22,000).
The increases in general and administrative expenses is offset
by:
* lower patent expenses ($137,000);
* lower salaries and related expenses ($83,000); and
* lower shareholder and investor communications expenses ($36,000).
Depreciation and amortization was $494,000 for the first nine
months of 2005 as compared to $489,000 for the same period in
2004 reflecting an increase of $5,000.
Total operating expenses in the first nine months of 2005 were
$7,747,000 as compared to total operating expenses of
$6,742,000 for the same period in 2004, an increase of
$1,005,000.
Loss from operations in the first nine months of 2005 was
$7,106,000 as compared to a loss of $6,469,000 for the same
period in 2004, an increased loss of $637,000.
Interest and miscellaneous income was $26,000 for the first
nine months of 2005 as compared to $201,000 for the same period
in 2004, a decrease of $175,000. The decrease in miscellaneous
34
income of $97,000 was due to foreign exchange gains on a Euro
denominated receivable. This decrease was in addition to a
decrease in interest income due to lower cash balances in 2005
as compared with 2004.
Interest and other expense was $1,191,000 for the first nine
months of 2005 as compared to $1,064,000 for the same period in
2004, an increase of $127,000 due principally to the addition
in interest and amortization associated with the Secured
Convertible Notes.
Net loss in the first nine months of 2005 was $8,271,000, or a
$0.53 basic and diluted loss per common share, compared with a
loss of $7,332,000, or a $0.49 basic and diluted loss per
common share for the same period in 2004, an increased loss of
$939,000.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We invest our excess cash and short-term investments in
certificates of deposit, corporate securities with high quality
ratings, and U.S. government securities. These investments are
not held for trading or other speculative purposes. These
financial investment securities all mature in 2005 and 2006 and
their estimated fair value approximates cost. Changes in
interest rates affect the investment income we earn on our
investments and, therefore, impact our cash flows and results
of operations. A hypothetical 50 basis point decrease in
interest rates would result in a decrease in annual interest
income and a corresponding increase in net loss of
approximately $3,000. This estimated effect assumes no changes
in our short-term investments at September 30, 2005. We do not
believe that we are exposed to any other market risks, as
defined under applicable SEC regulations. We are not exposed to
risks for changes in commodity prices, or any other market
risks.
ITEM 4 CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our
chief executive officer and our chief financial officer, after
evaluating the effectiveness of our "disclosure controls and
procedures" (as defined in Rules 13a-15(e) and 15d-(e) of the
Securities and Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this quarterly
report, concluded that the Company's disclosure controls and
procedures were (1) designed to ensure that material
information relating to the Company, including its consolidated
subsidiaries, is made known to the Company's chief executive
officer and chief financial officer by others within those
entities, particularly during the period in which this report
was being prepared, and (2) effective, in that they provide
reasonable assurance that information required to be disclosed
by the Company in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules
and forms.
Changes in internal controls. Except as set forth below,
there were no changes in our internal controls over financial
reporting during the quarter ended September 30, 2005 that have
materially affected, or are reasonably likely to material
affect, our internal controls over financial reporting.
As previously reported in our Annual Report on Form 10-K
for the fiscal year ended
35
December 31, 2004 (the "Form 10-K"), our management concluded
that our internal control over financial reporting was
effective as of December 31, 2004. However, as disclosed in
the Form 10-K, our independent auditors concluded that we have
two material weaknesses in the areas of segregation of duties
and as a result of an aggregation of three separate significant
deficiencies where the effectiveness of the controls are
dependent on segregation of duties, as set forth in their
attestation report in the Form 10-K. Their conclusion also
points out that "these material weaknesses did not result in
any adjustments to the annual or interim consolidated financial
statements ..." and that "this report does not affect (their)
report dated March 31, 2005" reflecting their opinion on the
financial statements.
Based on the criteria set forth in their attestation
report in the Form 10-K, our independent auditors determined
that proper segregation of duties do not exist within our
accounting and finance area. While management believes that
sufficient controls are in place, and that there is adequate
segregation of duties within the business, it recognizes that
this is a perceived material weakness and is taking the steps
it believes are necessary to mitigate this risk. In particular,
management and the Audit Committee have considered the need for
ongoing monitoring of internal controls under the Sarbanes-Oxley
Act of 2002, as well as strengthening the internal controls of the
business by the engagement of an outside accounting/finance
consulting firm to perform quarterly procedures designed to
assist in the maintaining and monitoring of an effective
control environment and to mitigate the risk related to a lack
of segregation of duties between senior accounting/finance
personnel. The consulting firm is expected to report and take
instructions directly from the Audit Committee although
management will be involved in assisting in determining the
scope of the quarterly and annual procedures. Terms and
conditions of this engagement are still under consideration.
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On or about September 27, 2005, Philip Kaltenbacher
("Kaltenbacher") filed an action against Access in the United
States District Court for the Southern District of New York,
which was subsequently transferred to the United States
District Court for the Northern District of Texas (the "Texas
Action"). Kaltenbacher claimed that in 2000 he had invested
$4,015,000 in Access and that Access had, in exchange, executed
and issued to Kaltenbacher a 7.0% Convertible Subordinated
Note, due September 13, 2005 (the "Note"). Kaltenbacher
alleged, in his complaint, that Access was obligated to pay him
$4,015,000 because the due date, September 13, 2005, had
passed. The time for Access to submit a formal answer in the
Texas Action had not yet come due, but in communications with
Kaltenbacher, Access conceded the amount of the Note and the
due date, but required Kaltenbacher to present the original of
the Note for payment, as was required in the Note.
Kaltenbacher was unable or unwilling to do so.
Access and Kaltenbacher have now resolved the dispute, and
executed a formal Settlement Agreement and Release dated
November 8, 2005 (the "Agreement"). As part of the Agreement,
Kaltenbacher also executed a separate Affidavit and
Indemnification concerning the missing original Note. In
exchange, Access paid Kaltenbacher for his monetary claims,
including payment of $4,015,000 that was due on the Note.
Access and Kaltenbacher are in the process of
36
arranging for the dismissal with prejudice of the Texas Action.
ITEM 2 SALES OF UNREGISTERED EQUITY SECURITIES AND USE OF
PROCEEDS
On September 13, 2005, the Company issued 951,244 shares of
its common stock as payment of interest to the holders of its
7% convertible promissory notes. Such issuances were made in
reliance upon the exemption from registration requirements of
the Securities Act of 1933, as amended, provided by Section
4(2) thereof.
During the third quarter the Company sold 955,245 shares under
its SEDA pursuant to an effective registration on Form S-1.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS
Exhibits:
31.1 Certification of Chief Executive Officer of Access
Pharmaceuticals, Inc. pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer of Access
Pharmaceuticals, Inc. pursuant to Rule 13a-14(a)/15d-14(a)
32.1* Certification of Chief Executive Officer of Access
Pharmaceuticals, Inc. pursuant to 18 U.S.C. Section 1350
32.2* Certification of Chief Financial Officer of Access
Pharmaceuticals, Inc. pursuant to 18 U.S.C. Section 1350
______________
* This exhibit shall not be deemed "filed" for purposes of
Section 18 of the Securities Exchange Act of 1934 or otherwise
subject to the liabilities of that Section, nor shall it be
deemed incorporated by reference in any filings under the
Securities Act of 1933 or the Securities and Exchange Act of
1934, whether made before or after the date hereof and
irrespective of any general incorporation language in any
filings.
37
SIGNATURES
Pursuant to the requirements 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: November 14, 2005 By: /s/ Rosemary Mazanet
----------------- ---------------------
Rosemary Mazanet
Acting Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2005 By: /s/ Stephen B. Thompson
----------------- ------------------------
Stephen B. Thompson
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
38
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 2005
(unaudited) December 31, 2004
ASSETS -------------- --------------
Current assets
Cash and cash equivalents $ 378,000 $ 1,775,000
Short term investments, at cost 92,000 486,000
Accounts and other receivables 765,000 791,000
Inventory 44,000 125,000
Prepaid expenses and other current assets 645,000 1,093,000
-------------- --------------
Total current assets 1,924,00 4,270,000
-------------- --------------
Property and equipment, net 864,000 1,040,000
Debt issuance costs, net 648,000 130,000
Patents, net 2,062,000 2,315,000
Licenses, net 88,000 125,000
Goodwill, net 1,868,000 1,868,000
Restricted cash and other assets 357,000 1,342,000
-------------- --------------
Total assets $ 7,811,000 $11,090,000
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 2,113,000 $ 2,131,000
Accrued interest payable 567,000 311,000
Deferred revenues 1,880,000 1,119,000
Current portion of notes payable and
other future obligations 6,838,000 8,417,000
-------------- --------------
Total current liabilities 11,398,000 12,058,000
Note payable, net of current portion 37,000 193,000
Convertible note 9,515,000 5,500,000
-------------- --------------
Total liabilities 20,950,000 17,751,000
-------------- --------------
Commitments and contingencies
Stockholders' deficit
Preferred stock - $.01 par value;
authorized 2,000,000 shares;
none issued or outstanding - -
Common stock - $.01 par value;
authorized 50,000,000 shares;
issued, 17,630,040 at September 30, 2005
and 15,524,734 at December 31, 2004 176,000 155,000
Additional paid-in capital 60,649,000 59,010,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted stock grants (159,000) (309,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Accumulated other comprehensive loss (20,000) (3,000)
Accumulated deficit (72,736,000) (64,465,000)
-------------- --------------
Total stockholders' deficit (13,139,000) (6,661,000)
-------------- --------------
Total liabilities and stockholders' deficit $ 7,811,000 $ 11,090,000
============== ==============
The accompanying notes are an integral part of these statements.
39
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues
Licensing revenues $ 49,000 $ 49,000 $ 84,000 $ 97,000
Product sales 163,000 106,000 481,000 106,000
Royalty income 25,000 30,000 76,000 70,000
------------ ------------ ------------ ------------
Total revenues 237,000 185,000 641,000 273,000
Expenses
Research and development 893,000 1,406,000 3,652,000 3,831,000
Cost of product sales 123,000 40,000 403,000 97,000
General and administrative 693,000 799,000 3,198,000 2,325,000
Depreciation and amortization 164,000 169,000 494,000 489,000
------------ ------------ ------------ ------------
Total expenses 1,873,000 2,414,000 7,747,000 6,742,000
------------ ------------ ------------ ------------
Loss from operations (1,636,000) (2,229,000) (7,106,000) (6,469,000)
Other income (expense)
Interest and miscellaneous income 4,000 133,000 26,000 201,000
Interest and other expense (431,000) (332,000) (1,191,000) (1,064,000)
------------ ------------ ------------ ------------
(427,000) (199,000) (1,165,000) (863,000)
------------ ------------ ------------ ------------
Net loss $(2,063,000) $(2,428,000) $(8,271,000) $(7,332,000)
============ ============ ============ ============
Basic and diluted loss per
common share $(0.13) $(0.16) $(0.53) $(0.49)
============ ============ ============ ============
Weighted average basic and diluted
common shares outstanding 15,845,091 15,469,071 15,700,084 15,041,216
============ ============ ============ ============
Net loss $(2,063,000) $(2,428,000) $(8,271,000) $(7,332,000)
Other comprehensive loss
Foreign currency translation
adjustment (1,000) (6,000) (17,000) (21,000)
------------ ------------ ------------ ------------
Comprehensive loss $(2,064,000) $(2,434,000) $(8,288,000) $(7,353,000)
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
40
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months ended September 30,
-------------------------------
2005 2004
-------------- --------------
Cash flows from operating activities:
Net loss $ (8,271,000) $ (7,332,000)
Adjustments to reconcile net loss to cash used
in operating activities:
Warrants issued in payment of consulting expenses - 42,000
Amortization of restricted stock grants 150,000 91,000
Stock issued for interest 609,000 -
Depreciation and amortization 494,000 489,000
Amortization of debt costs 297,000 138,000
Change in operating assets and liabilities:
Accounts receivable 26,000 330,000
Inventory 81,000 (45,000)
Prepaid expenses and other current assets 448,000 198,000
Restricted cash and other assets 650,000 (266,000)
Accounts payable and accrued expenses (24,000) (346,000)
Accrued interest payable 256,000 472,000
Deferred revenues 681,000 (11,000)
-------------- --------------
Net cash used in operating activities (4,603,000) (6,240,000)
-------------- --------------
Cash flows from investing activities:
Capital expenditures (28,000) (260,000)
Redemptions of short term investments and
certificates of deposit 394,000 1,325,000
-------------- --------------
Net cash provided by investing activities 366,000 1,065,000
-------------- --------------
Cash flows from financing activities:
Payments of notes payable (353,000) (289,000)
Proceeds from secured notes payable 2,633,000 -
Proceeds from SEDA, net of costs of $23,000 577,000 -
Proceeds from stock issuances, net of costs
of $647,000 - 9,249,000
-------------- --------------
Net cash provided by financing activities 2,857,000 8,960,000
-------------- --------------
Net increase (decrease) in cash and
cash equivalents (1,380,000) 3,785,000
Effect of exchange rate changes on cash (17,000) (21,000)
Cash and cash equivalents at beginning of period 1,775,000 727,000
-------------- --------------
Cash and cash equivalents at end of period $ 378,000 $ 4,491,000
============== ==============
Cash paid for interest $12,000 $334,000
Supplemental disclosure of non-cash transactions
200,000 shares of common stock issued pursuant
to the SEDA and Secured Convertible Notes $500,000 $-
Value of restricted stock grants - 136,000
Issued common stock for interest on convertible notes 609,000 -
The accompanying notes are an integral part of these statements.
41
Access Pharmaceuticals, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2005 and 2004
(unaudited)
(1) Interim Financial Statements
-------------------------------
The consolidated balance sheet as of September 30, 2005 and the
consolidated statements of operations for the three and nine
months ended September 30, 2005 and 2004 and the consolidated
statements of cash flows for the nine months ended September
30, 2005 were prepared by management without audit. In the
opinion of management, all adjustments, consisting only of
normal recurring adjustments, except as otherwise disclosed,
necessary for the fair presentation of the financial position,
results of operations, and changes in financial position for
such periods, have been made.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been condensed or omitted. It is suggested that these
interim financial statements be read in conjunction with the
financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2004. The
results of operations for the period ended September 30, 2005
are not necessarily indicative of the operating results which
may be expected for a full year. The consolidated balance sheet
as of December 31, 2004 contains financial information taken
from the audited financial statements as of that date.
In preparing consolidated financial statements in conformity
with accounting principles generally accepted in the United
States of America, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(2) Intangible Assets
-------------------
Intangible assets consist of the following (in thousands):
September 30, 2005 December 31, 2004
------------------------- -------------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
------------ ------------ ------------ ------------
Amortizable intangible assets
Patents $3,179 $1,117 $3,179 $864
Licenses 500 412 500 375
------- ------- ------- -------
Total $3,678 $1,528 $3,678 $1,238
======= ======= ======= =======
Amortization expense related to intangible assets totaled
$96,000 and $105,000 for each of the three months ended
September 30, 2005 and 2004, respectively and totaled $290,000
and $315,000 for the nine months ended September 30, 2005 and
2004, respectively. The aggregate estimated amortization
expense for intangible assets remaining as of September 30 is
as follows (in thousands):
42
2005 $ 97
2006 388
2007 363
2008 338
2009 338
Thereafter 626
--------
Total $2,150
========
(3) Stock-Based Compensation
The following table illustrates the effect on net loss and loss
per share if we had applied the fair value recognition
provisions of FASB Statement 123, Accounting for Stock-Based
Compensation, using assumptions described in Form 10-K, Note 1,
to our stock-based employee plans.
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss as reported $(2,063,000) $(2,428,000) $(8,271,000) $(7,332,000)
Deduct: Stock-based
employee compensation
expense determined
under fair value based
method (164,000) (185,000) (809,000) (583,000)
------------ ------------ ------------ ------------
Pro forma $(2,227,000) $(2,613,000) $(9,080,000) $(7,915,000)
============ ============ ============ ============
Basic and diluted loss per share:
As reported $(0.13) $(0.16) $(0.53) $(0.49)
Pro forma (0.14) (0.17) (0.58) (0.60)
The effect of our outstanding options and warrants are anti-
dilutive when we have a net loss. The fully diluted shares are:
Three months ended Nine months ended
September 30, September 30,
---------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Fully diluted shares 22,091,915 21,424,687 21,946,908 20,996,832
(4) Sale of Assets
----------------
We sold our oral care business to Uluru, Inc., a private Delaware
company, for up to $20.6 million. This transaction closed on October 12,
2005. This includes our interest in Aphthasol(R), all OraDisc(TM)
products, all Residerm(R) products, and all of our assets related
to these products. In addition, we have licensed to Uluru our
nanoparticle hydrogel aggregate technology which could be used
for application such as drug delivery and tissue filler in dental and
soft tissue applications. Beginning with the fourth quarter of 2005,
the oral care operations will be presented as discontinued operation.
The approximate total estimated net assets sold to Uluru is $1,296,000.
(5) Shareholder's Equity
----------------------
On September 13, 2005, the Company issued 951,244 shares of its common stock
as payment of interest to the holders of its 7% convertible promisorry
notes. SUch issuances were made in relianceupon the exemption from
registration requirements of the Securities Act of 1933, as amended,
provided by Section 4(2) thereof.
During the third quarter the Company sold 955,245 shares under its SEDA
pursuant to an effective registration on Form S-1.
43