UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
Commission File Number 0-9314
ACCESS PHARMACEUTICALS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 83-0221517
- ------------------------ ---------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
2600 Stemmons Frwy, Suite 176, Dallas, TX 75207
-----------------------------------------------
(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
----- -----
The number of shares outstanding of the issuer's common stock,
as of May 9, 2005, was 15,724,734 shares, $0.01 par value per share.
Total No. of Pages 31
ACCESS PHARMACEUTICALS, INC.
INDEX
-----
Page No.
--------
RISK FACTORS 2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at
March 31, 2005 and December 31, 2004 27
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three months ended March 31, 2005
and March 31, 2004 28
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 and March 31, 2004 29
Notes to Unaudited Condensed Consolidated Financial Statements 30
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
Item 4. Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in Securities 23
Item 3 Defaults Upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 26
PART I -- FINANCIAL INFORMATION
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
activities, clinical trials, our ability to raise capital, the
timing of and our ability to achieve regulatory approvals,
dependence on others to market our licensed products,
collaborations, future cash flow, the timing and receipt of
licensing and milestone revenues, the future success of our
marketed products and products in development, our ability to
manufacture amlexanox products in commercial quantities, our
sales projections, and the sales projections of our licensing
partners, our ability to achieve licensing milestones and other
risks described below as well as those discussed elsewhere in
this 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
belief that our net cash burn rate for the next twelve months
to be approximately $600,000 per month, our ability to repay
our outstanding debt obligations, our ability to fund our
operations (other than debt repayment) through March 2006, and
our expected capital expenditures.
We have experienced a history of losses and we expect to incur
future losses.
- --------------------------------------------------------------
We have recorded minimal revenue to date and we have incurred
a cumulative operating loss of approximately $66.9 million
through March 31, 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 due to expanded research and
development efforts and preclinical and clinical trials. Our
net cash burn rate for the past twelve months was approximately
$750,000 per month. We project our net cash burn rate for the
next twelve months to be approximately $600,000 per month.
Capital expenditures are forecasted to be minor for the next
twelve months since most of our new equipment is leased and the
lease expense is included in the calculation of the net cash
burn rate.
We do not have significant operating revenue and we may never
attain profitability.
- --------------------------------------------------------------
To date, we have funded our operations primarily through
private sales of common stock and convertible notes. Contract
research payments and licensing fees from corporate alliances
and mergers have also provided funding for our operations. Our
ability to achieve significant revenue or profitability depends
upon our ability to successfully complete the development of
drug candidates, to develop and obtain patent protection and
regulatory approvals for our drug candidates and to manufacture
and commercialize the resulting drugs. We have not received
significant royalties for sales of amlexanox, Zindaclin(R) or
OraDisc(TM) products to date and we may not generate
significant revenues or profits from the sale of these products
in the future. Furthermore, we may not be able to ever
successfully identify, develop, commercialize, patent,
manufacture, obtain required regulatory approvals and market
any additional products. Moreover,
2
even if we do identify, develop, commercialize, patent,
manufacture, and obtain required regulatory approvals to market
additional products, we may not generate revenues or royalties
from commercial sales of these products for a significant
number of years, if at all. Therefore, our proposed operations
are subject to all the risks inherent in the establishment of
a new business enterprise. In the next few years, our revenues
may be limited to minimal product sales and royalties, any
amounts that we receive under strategic partnerships and
research or drug development collaborations that we may
establish and, as a result, we may be unable to achieve or
maintain profitability in the future or to achieve significant
revenues in order to fund our operations.
A failure to obtain necessary additional capital in the future
could jeopardize our operations.
- --------------------------------------------------------------
We have issued an aggregate of $13,530,000 of convertible
notes, which are due in two parts -- $8,030,000 is due on
September 13, 2005 and $5,500,000 is due on September 13, 2008.
The notes may convert to common stock at a conversion price of
$5.50 and we can redeem the notes for the principal amount of
the notes plus interest if our common stock trades above a
price of $8.25 for any period of ten consecutive trading days
prior to our notice of redemption. In addition, we have issued
$2,633,000 of Secured Convertible Notes due March 31, 2006.
Such Secured Convertible Notes convert at $4.00 per share. We
do not have sufficient funds to repay our convertible notes at
their maturity. We may not be able to restructure the
convertible notes or obtain additional financing to repay them
on terms acceptable to us, if at all. If we raise additional
funds by selling equity securities including in connection with
our Standby Equity Distribution Agreement (the "SEDA") with
Cornell Capital, the relative equity ownership of our existing
investors would be diluted and the new investors could obtain
terms more favorable than previous investors. A failure to
restructure our convertible notes or obtain additional funding
to repay the convertible notes and support our working capital
and operating requirements, could cause us to be in default of
our convertible notes and prevent us from making expenditures
that are needed to allow us to maintain our operations.
Our financial condition and the restrictive covenants contained
in our outstanding convertible notes may limit our ability to
borrow additional funds or to raise additional equity as may be
required to fund our future operations.
- ---------------------------------------------------------------
We incurred significant losses from operations of $2.4 million
for the quarterly period ended March 31, 2005, $2.4 million for
the quarterly period ended March 31, 2004, $9.1 million for the
year ended December 31, 2004 and $8.2 million for the year
ended December 31, 2003. Moreover, the terms of our outstanding
Convertible Notes may limit our ability to, among other things:
- - incur additional debt;
- - retire, exchange or amend the terms of outstanding debt;
- - pay cash dividends, redeem, retire or repurchase our stock or
change our capital structure;
- - enter into certain transactions with affiliates;
- - create additional liens on our assets;
- - issue certain types of preferred stock or issue common stock
at below market prices; or
- - merge or consolidate with other entities.
3
Our ability to borrow additional funds or raise additional
equity may be limited by our financial condition, in addition
to the terms of our outstanding debt. Additionally, events such
as our inability to continue to reduce our loss from continuing
operations, could adversely affect our liquidity and our
ability to attract additional funding as required.
We may not be able to pay our debt and other obligations and
our assets may be seized as a result.
- ------------------------------------------------------------
We may not generate the cash flow required to pay our
liabilities as they become due. Our outstanding debt includes
approximately $8.03 million of our Convertible Subordinated
Notes due in September 2005, $5.5 million of our Convertible
Subordinated Notes due in September 2008 and $2,633,000 of our
Secured Convertible Notes due in March 2006.
We may be unable to repay or repurchase the Secured Convertible
Notes due in March 2006 and convertible subordinated notes due
in September 2005 and September 2008 upon a repurchase event
and be forced into bankruptcy.
The holders of our Convertible Notes may require us to
repurchase or prepay all of the outstanding Convertible Notes
under certain circumstances. We may not have sufficient cash
reserves to repurchase the Convertible Notes at such time,
which would cause an event of default under the Convertible
Notes and may force us to declare bankruptcy.
Our obligations under the secured convertible notes are secured
by all of our assets
- ---------------------------------------------------------------
Our obligations under the $2,633,000 Secured Convertible Notes
are secured by all of our assets. As a result, if we default
under the terms of the Secured Convertible Notes or related
agreements, including our failure to issue shares of common
stock upon conversion by the holder, our failure to timely file
a registration statement or have such registration statement
declared effective, breach of any covenant, representation or
warranty in the Securities Purchase Agreement or related
Secured Convertible Notes or the commencement of a bankruptcy,
insolvency, reorganization or liquidation proceeding against
the Company could require the early repayment of the Secured
Convertible Notes, if the default is not cured with the
specified grace period. In addition we could be required to
issue and the holders would have the ability to sell up to
2,891,723 shares of our Common Stock and/or the holders could
foreclose their security interest and liquidate some or all of
the assets of the Company and we could cease to operate. Any
such issuance of shares could cause a significant drop in the
price of our stock and significant dilution to our
stockholders.
Our Standby Equity Distribution Agreement may have a dilutive
impact on our stockholders.
- -------------------------------------------------------------
We are to a great extent dependent on external financing to
fund our operations. Our financial needs may be partially
provided from the SEDA. The issuance of shares of our common
stock under 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 of 2% of the lowest daily volume weighted average of
our common stock during a specified period of trading days
after we access the SEDA. Issuing shares at a
4
discount will further dilute the interests of other
stockholders and may negatively affect the market price of our
Common Stock.
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.
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.
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, but substantial, period of
time.
We may be unable to obtain necessary additional capital to fund
operations in the future.
- ----------------------------------------------------------------
We require substantial capital for our development programs and
operating expenses, to pursue regulatory clearances and to
prosecute and defend our intellectual property rights. We
believe that our existing capital resources, interest income,
product sales, royalties and revenue from possible licensing
agreements and collaborative agreements will be sufficient to
fund our currently expected operating expenses (other than debt
obligations including the $8,030,000 of convertible notes which
are required to be repaid in September 2005 and $2,633,000 of
Secured Convertible Notes due in March 2006) and capital
requirements through March 2006. However,
5
unless our convertible notes convert to common stock prior to
their maturity or are restructured, we will need to raise
substantial additional capital to support our ongoing
operations and debt obligations because our convertible notes
will mature and/or our actual cash requirements may vary
materially from those now planned and will depend upon numerous
factors, including :
* the sales levels of our marketed products;
* the results of our research and development programs;
* the timing and results of preclinical and clinical trials;
* our ability to maintain existing and establish new
collaborative agreements with other companies to provide
funding to us;
* technological advances; and
* activities of competitors and other factors.
If we do raise additional funds by issuing equity securities,
further dilution to existing stockholders would result and
future investors may be granted rights superior to those of
existing our stockholders. If adequate funds are not available
to us through additional equity offerings, we may be required
to delay, reduce the scope of or eliminate one or more of our
research and development programs or to obtain funds by
entering into arrangements with collaborative partners or
others that require us to issue additional equity securities or
to relinquish rights to certain technologies or drug candidates
that we would not otherwise issue or relinquish in order to
continue independent operations.
We may be unable to successfully develop, market, or
commercialize our products or our product candidates without
establishing new relationships and maintaining current relationships.
- ---------------------------------------------------------------------
Our strategy for the research, development and
commercialization of our potential pharmaceutical products may
require us to enter into various arrangements with corporate
and academic collaborators, licensors, licensees and others, in
addition to our existing relationships with other parties.
Specifically, we may seek to joint venture, sublicense or enter
other marketing arrangements with parties that have an
established marketing capability or we may choose to pursue the
commercialization of such products on our own. We may, however,
be unable to establish such additional collaborative
arrangements, license agreements, or marketing agreements as we
may deem necessary to develop, commercialize and market our
potential pharmaceutical products on acceptable terms.
Furthermore, if we maintain and establish arrangements or
relationships with third parties, our business may depend upon
the successful performance by these third parties of their
responsibilities under those arrangements and relationships.
For our commercialized products we currently rely upon the
following relationships in the following marketing territories
for sales, manufacturing or regulatory approval efforts:
* amlexanox 5% paste and OraDisc(TM) A
o Discuss Dental, Inc. - United States marketing rights
o ProStrakan Ltd. - United Kingdom and Ireland manufacturing,
marketing rights and regulatory approval
o Zambon Group - France, Germany, Holland, Belgium, Luxembourg,
Switzerland, Brazil, Colombia and Italy manufacturing and
marketing rights
6
o Laboratories Dr. Esteve SA - Spain, Portugal and Greece
manufacturing and marketing rights
o Meda, AB for Scandinavia, the Baltic states and Iceland
marketing rights
o Mipharm SpA for Italy manufacturing and marketing rights
o Paladin Labs, Inc. for Canada manufacturing and marketing
rights
o EpiTan, Ltd. for Australia and New Zealand for marketing
rights
o Orient Europharma, Co., Ltd. for Taiwan, Hong-Kong, Malaysia,
Philippines, Thailand and Singapore for marketing rights
* Zindaclin(R) and Residerm(R)
o ProStrakan Ltd. - worldwide manufacturing, marketing and
regulatory approval rights
o Fujisawa GmbH - sublicensed continental Europe marketing
rights
o EpiTan, Ltd. - sublicensed Australia and New Zealand
marketing rights
o Hyundai - sublicensed Korea marketing rights
o Taro - sublicensed Israel marketing rights
o Biosintetica - sublicensed Brazil marketing rights
o Pliva dd Hrvatska d.o.o. - sublicensed Czech, Estonia,
Hungary, Latvia, Poland, Slovak and Slovenia marketing rights
o Five companies for five other smaller countries - sublicensed
marketing rights
For one of our OraDisc(TM) products in development, on January
6, 2004, we entered into an exclusive license and supply
agreement with Wyeth Consumer Healthcare for sales of the
product in North America. If this product is marketed, we will
be dependent upon Wyeth Consumer Healthcare for sales of such
product in this territory.
Our ability to successfully commercialize, and market our
products and product candidates could be limited if a number of
these existing relationships were terminated.
Furthermore, our strategy with respect to our polymer platinate
program is to enter into a licensing agreement with a
pharmaceutical company pursuant to which the further costs of
developing a product would be shared with our licensing
partner. Although we have had discussions with potential
licensing partners with respect to our polymer platinate
program, to date we have not entered into any licensing
arrangement. We may be unable to execute our licensing strategy
for polymer platinate.
We may be unable to successfully manufacture our products and
our product candidates in clinical quantities or for commercial
purposes without the assistance of contract manufacturers,
which may be difficult for us to obtain and maintain.
- ---------------------------------------------------------------
We have limited experience in the manufacture of pharmaceutical
products in clinical quantities or for commercial purposes and
we may not be able to manufacture any new pharmaceutical
products that we may develop. As a result, we have established,
and in the future intend to establish arrangements with
contract manufacturers to supply sufficient quantities of
products to conduct clinical trials and for the manufacture,
packaging, labeling and distribution of finished pharmaceutical
products if any of our potential products are approved for
commercialization. If we are unable to contract for a
sufficient supply of our potential pharmaceutical products on
acceptable terms, our preclinical and human clinical testing
schedule may be delayed, resulting in
7
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.
Our amlexanox 5% paste is marketed in the US as Aphthasol(R).
We selected Contract Pharmaceuticals Ltd. Canada as our new
manufacturer of amlexanox 5% paste and they manufacture product
for the US market and initial qualifying batches of the product
for Europe. We re-launched Aphthasol(R) in the US market in
September 2004 and recorded sales in the third and fourth
quarters of 2004 and in the quarter ended March 31, 2005.
Amlexanox 5% paste was approved by regulatory authorities for
sale in the UK. Approval to market was granted in Austria,
Germany, Greece, Finland, Ireland, Luxembourg, The Netherlands,
Norway, Portugal, and Sweden. We did not receive approvals for
France, Italy and Belgium. We licensed manufacturing rights to
ProStrakan, Zambon, Esteve and Mipharm for specific countries
in Europe. Contract Pharmaceuticals Ltd. Canada has also been
selected as our European supplier of amlexanox 5% paste and
this facility has been approved for European supply.
We licensed our patents for worldwide manufacturing and
marketing for Zindaclin(R) and our ResiDerm(R) technology to
ProStrakan Ltd. for the period of the patents. We receive a
share of the licensing revenues and royalty on the sales of the
product. ProStrakan has a contract manufacturer for
Zindaclin(R) which is a European Union approved facility.
Zindaclin(R) is approved in the UK and throughout Europe in
most European Union countries including new member states and
several non-European markets. Zindaclin(R) is marketed in the
UK, France, Germany, Ireland, Belgium, Cyprus, Israel and
Korea. Zindaclin(R) is under regulatory review in other markets
including Australia, New Zealand, Brazil and others.
We received regulatory approval from the FDA to manufacture and
sell OraDisc(TM) A in September 2004 and are proceeding with
our manufacturing and marketing plans for 2005.
AP5346 is manufactured by third parties for our Phase I/II
clinical trials. Manufacturing is ongoing for the current
clinical trials. Certain manufacturing steps are conducted by
the Company to enable significant cost savings to be realized.
We are subject to extensive governmental regulation which
increases our cost of doing business and may affect our ability
to commercialize any new products that we may develop.
- ---------------------------------------------------------------
The FDA and comparable agencies in foreign countries impose
substantial requirements upon the
8
introduction of pharmaceutical products through lengthy and
detailed laboratory, preclinical and clinical testing
procedures and other costly and time-consuming procedures to
establish their safety and efficacy. All of our drugs and drug
candidates require receipt and maintenance of governmental
approvals for commercialization. Preclinical and clinical
trials and manufacturing of our drug candidates 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:
* 5% amlexanox paste is an approved product for sale in the US
(Aphthasol(R)); approved in the UK and Canada but not yet sold;
approved in ten EU countries but not yet sold;
* Zindaclin(R) is an approved product for sale in the UK and
extensively throughout European Union countries; and is in the
approval process in other markets.
* OraDisc(TM) A is an approved product for sale in the US as of
September 2004; we are completing steps for manufacturing and
sale of the product in 2005.
* Our other OraDisc(TM) products are currently in the pre-
clinical phase.
* AP5346 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.
- ------------------------------------------------------------
9
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, OraDisc(TM) and polymer platinate have taken longer
to progress through clinical trials than originally planned.
This extra time has not been related to concerns of the
formulations but rather due to the lengthy regulatory process.
The failure to adequately demonstrate the safety and efficacy
of a drug candidate under development could delay or prevent
regulatory approval of the drug candidate. A delay or failure
to receive regulatory approval for any of our drug candidates
could prevent us from successfully commercializing such
candidates and we could incur substantial additional expenses
in our attempts to further develop such candidates and obtain
future regulatory approval.
We may incur substantial product liability expenses due to the
use or misuse of our products for which we may be unable to
obtain insurance coverage.
- --------------------------------------------------------------
Our business exposes us to potential liability risks that are
inherent in the testing, manufacturing and marketing of
pharmaceutical products. These risks will expand with respect
to our drug candidates, if any, that receive regulatory
approval for commercial sale and we may face substantial
liability for damages in the event of adverse side effects or
product defects identified with any of our products that are
used in clinical tests or marketed to the public. We generally
procure product liability insurance for drug candidates that
are undergoing human clinical trials. Product liability
insurance for the biotechnology industry is generally
expensive, if available at all, and as a result, we may be
unable to obtain insurance coverage at acceptable costs or in
a sufficient amount in the future, if at all. We may be unable
to satisfy any claims for which we may be held liable as a
result of the use or misuse of products which we have
developed, manufactured or sold and any such product liability
claim could adversely affect our business, operating results or
financial condition.
We may incur significant liabilities if we fail to comply with
stringent environmental regulations or if we did not comply
with these regulations in the past.
- --------------------------------------------------------------
Our research and development processes involve the controlled
use of hazardous materials. We are subject to a variety of
federal, state and local governmental laws and regulations
related to the use, manufacture, storage, handling and disposal
of such material and certain waste products. Although we
believe that our activities and our safety procedures for
storing, using, handling and disposing of such materials comply
with the standards prescribed by such laws and regulations, the
risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such accident,
we could be held liable for any damages that result and any
such liability could exceed our resources.
Intense competition may limit our ability to successfully
develop and market commercial products.
- ---------------------------------------------------------
10
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 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.
The following products may compete with Residerm(R) products:
* Benzamycin, marketed by a subsidiary of Aventis;
* Cleocin-T and a generic topical clindamycin, marketed by Pfizer;
* Benzac, marketed by Galderma; and
* Triaz, marketed by Medicis Pharmaceutical Corp.
Technology and prescription steroids such as Kenalog in
OraBase, developed by Bristol-Myers Squibb, may compete with
our commercialized Aphthasol(R) product. Over-the-counter
("OTC") products including Orajel - Del Laboratories and
Anbesol - Wyeth Consumer Healthcare also compete in the
aphthous ulcer market.
Companies working on therapies and formulations that may be
competitive with our vitamin mediated drug delivery system
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.
BioDelivery, Biovail Corporation, Cellgate, CIMA Labs, Inc.,
Depomed Inc., Emisphere Technologies, Inc., Eurand, Flamel
Technologies, Nobex and Xenoport are developing products which
compete with our oral drug delivery system.
Many of these competitors have and employ greater financial and
other resources, including larger research and development,
marketing and manufacturing organizations. As a result, our
competitors may successfully develop technologies and drugs
that are more effective or less costly than any that we are
developing or which would render our technology and future
products obsolete and noncompetitive.
11
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. To date, the costs
of our marketed products Aphthasol(R) and Zindaclin(R) generally
have been reimbursed at acceptable levels; however, the amount
of such reimbursement in the United States or elsewhere may be
decreased in the future or may be unavailable for any drugs
that we may develop in the future. Limited reimbursement for
the cost of any drugs that we develop may reduce the demand
for, or 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 establishment and demonstration of the
clinical efficacy and safety of our drug candidates, the
potential advantage of our drug candidates over existing
therapies and the reimbursement policies of government and
third-party payers. Physicians, patients or the medical
community in general may not accept or use any drugs that we
may develop independently or with our collaborative partners
and if they do not, our business could suffer.
In 1996, the 5% amlexanox paste product was approved for sale
in the United States. To date, the product sales have not been
significant. On July 22, 2002, we acquired the rights to it
from Block Drug Company. The product has been approved in the
UK and Canada but has not been launched in any markets other
than the United States. We re-launched Aphthasol(R) in the US
market in September 2004 and recorded sales in the third and
fourth quarters of 2004 as well as the quarter ended March 31, 2005.
We received regulatory approval from the FDA to manufacture and
sell OraDisc(TM) A in September 2004 and are proceeding with
our manufacturing and marketing plans for 2005.
Trends toward managed health care and downward price pressures
on medical products and services may limit our ability to
profitably sell any drugs that we may develop.
- ---------------------------------------------------------------
12
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 24 U.S.
patents and to 19 U.S. patent applications now pending, and 8
European patents and 15 European patent applications, we cannot
assure 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:
* 5% amlexanox paste in 2011
* Zindaclin(R) and Residerm(R) between 2007 and 2011
* OraDisc(TM) in 2020
* AP5280 in 2021
* AP5346 in 2021
* Mucoadhesive technology, patents are pending
* Vitamin mediated technology between 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
13
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.) and
Heartland Advisors, Inc. beneficially owned approximately 11.9%
and 10.9%, respectively, of our common stock as of March 31,
2005. Accordingly, they collectively may have the ability to
significantly influence or determine the election of all of our
directors or the outcome of most corporate actions requiring
stockholder approval. They may exercise this ability in a
manner that advances their best interests and not necessarily
those of our other stockholders.
Provisions of our charter documents could discourage an
acquisition of our company that would benefit our stockholders
and may have the effect of entrenching, and making it difficult
to remove, management.
- ---------------------------------------------------------------
Provisions of our Certificate of Incorporation, By-laws and
Stockholders Rights Plan may make it more difficult for a third
party to acquire control of 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
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.
14
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. AMEX
listing requirements allow us to issue a maximum aggregate of
3,089,422 shares of our Common Stock in connection with our
Secured Convertible Notes and the 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 this stockholders'
equity standard as of March 31, 2005. If we are unable to
remedy any listing standard noncompliance with AMEX under its
regulations and within the required time frames for such
remediation, or otherwise regain compliance, 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.
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. Substantially, all of the 15,724,734 shares of our
common stock that are outstanding as of May 9, 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 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
effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act. Failure
to achieve
15
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
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, the
timing of and our ability to achieve regulatory approvals,
dependence on others to market our licensed products,
collaborations, future cash flow, the timing and receipt of
licensing and milestone revenues, the future success of our
marketed products and products in development, our ability to
manufacture amlexanox products in commercial quantities, our
sales projections, and the sales projections of our licensing
partners, our ability to achieve licensing milestones and other
risks described below as well as those discussed elsewhere in
this 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
belief that our net cash burn rate for the next twelve months
to be approximately $600,000 per month, our ability to repay
our outstanding debt obligations, our ability to fund our
operations (other than debt repayment) through March 2006, and
our expected capital expenditures.
OVERVIEW
We are an emerging pharmaceutical company focused on developing
both novel low development risk product candidates and
technologies with longer-term major product opportunities. We
are a Delaware corporation.
Together with our subsidiaries, we have proprietary patents or
rights to several drug delivery technology platforms,
including:
* synthetic polymer targeted delivery,
* vitamin mediated targeted delivery,
* vitamin mediated oral delivery,
* bioerodible cross-linker technology,
* mucoadhesive disc technology,
* hydrogel particle aggregate technology, and
* Residerm(R) topical delivery.
In addition, we are marketing in the United States -
Aphthasol(R), the first FDA approved product for the treatment
of canker sores. We are developing new formulations and
delivery forms of
16
amlexanox including mucoadhesive disc delivery and mucoadhesive
liquid delivery.
Our amlexanox 5% paste is marketed in the US as Aphthasol(R).
We selected Contract Pharmaceuticals Ltd. Canada as our
manufacturer of amlexanox 5% paste and it completed full scale
production in September 2004. We re-launched Aphthasol(R) in
the US market in September 2004 and recorded sales in the third
and fourth quarters of 2004 as well as the quarter ended March
31, 2005.
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 March
31, 2005, our accumulated deficit was $66,887,000.
On March 30, 2005, the Company finalized an agreement with
Cornell Capital Partners and Highgate House Funds providing
funding in the form of Secured Convertible Note for net
proceeds of approximately $2,360,000, and a Equity Distribution
Agreement under which, subject to terms of the Agreement, the
Company can draw up to $15,000,000 in working capital over a 2-
year period (see further discussion under Liquidity and Capital
Resources).
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.
On April 18, 2005 we announced that we executed an exclusive
License Agreement granting Discuss Dental, Inc. the US
marketing rights for amlexanox. The rights granted are for
amlexanox 5% paste, currently marketed in the United States for
the treatment of canker sores and OraDisc(TM) A, which was
approved by the FDA in September 2004 for the same indication.
In addition, we granted Discuss Dental the rights to any future
product improvements for amlexanox in oral disease. Under the
terms of the agreement, Discuss Dental will pay us a licensing
fee and will make milestone payments.
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 March 31, 2005 our cash and cash equivalents
and short-term investments were $2,888,000 and our working
capital was $(9,474,000). Our working capital at March 31, 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 three months ended March 31, 2005.
As of March 31, 2005, the Company had a working capital deficit
of approximately $9,474,000.
17
As of that date, the Company did not have enough capital to
achieve its near, medium or long-term goals. On March 30, 2005,
the Company reached an agreement which management believes will
provide sufficient capital to achieve its short-term goals, and
depending upon results may provide sufficient capital to meet
its long-term goals.
As of March 30, 2005 the Company executed a Standby Equity
Distribution Agreement (SEDA) with Cornell Capital Partners.
Under the SEDA, subject to terms of the SEDA, the Company may
issue and sell to Cornell Capital Partners common stock for a
total purchase price of up to a maximum of $15,000,000. The
purchase price for the shares is equal to their market price,
which is defined in the SEDA as 98% of the lowest volume
weighted average price of the common stock during a specified
period of trading days following the date notice is given by
the Company that it desires to access the SEDA. Further, we
have agreed to pay Cornell Capital Partners, L.P. 3.5% of the
proceeds that we receive under the SEDA. The amount of each
draw down is subject to a maximum amount of $1,000,000. The
terms of the SEDA do not allow us to make any draw downs if the
draw down would cause Cornell Capital to own in excess of 9.9%
of our outstanding shares of common stock. Based on the number
of shares of our common stock currently outstanding, at volume
weighted average price of $2.50, we could sell to Cornell
Capital approximately $3,900,000 of our common stock subject to
the 9.9% limitation. Thus, in order for the Company to receive
all the funding available under the SEDA and have the financial
resources it needs for operations and debt service, Cornell
Capital must sell through to the market a significant portion
of the shares it purchases under the arrangement. The Company
believes that because the shares sold to Cornell Capital will
be covered by an effective registration statement and Cornell
Capital has a history of not holding significant positions in
companies in which it invests, the shares purchased by Cornell
Capital will be sold to the marketplace to maintain ownership
below 9.9%. Provided that continuing sales to the marketplace
are possible, the Company believes Cornell Capital will not
accumulate 9.9% of the outstanding common stock of the Company;
and, accordingly, the Company will be able to fully utilize the
$15,000,000 made available through the SEDA. Upon closing of
the transaction, Cornell Capital Partners received a one-time
commitment fee of 146,500 shares of the Company's common stock.
As of 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, the
Company paid a one-time placement agent fee of 3,500 shares of
common stock.
In addition, as of March 30, 2005, the Company executed a
Securities Purchase Agreement with Cornell Capital Partners and
Highgate House Funds. Under the Securities Purchase Agreement,
Cornell Capital Partners and Highgate House Funds purchased an
aggregate of $2,633,000 principal amount of Secured Convertible
Notes from the Company (net proceeds to the Company of
$2,300,000). The Secured Convertible Notes accrue interest at
a rate of 7% per year and mature 12 months from the issuance
date with scheduled monthly repayment commencing on November 1,
2005, to the extent that the Secured Convertible Note has not
been converted to common stock. The Secured Convertible Note is
convertible into the Company's common stock at the holder's
option any time up to maturity at a conversion price equal to
$4.00. The Secured Convertible Notes are secured by all of the
assets of the Company. The Company has the right to redeem the
Secured Convertible Notes upon 3 business days notice for 110%
of the amount redeemed. Pursuant to the Securities Purchase
Agreement, the Company issued to the holders an aggregate of
50,000 shares of common stock of the Company.
Each of the SEDA, Security Purchase Agreement and related
agreements were held in escrow
18
pending our filing of the Form 10-K and the issuance of shares
of common stock required to be issued under the Agreement. On
April 1, 2005 we received the funds.
On February 24, 2004 we closed a private placement sale of our
common stock pursuant to which we sold 1,789,371 shares of our
common stock at a per share price of $5.40. We received gross
proceeds of $9,663,000 from this sale and had expenses of
$647,000. The investors also received 5 year warrants at an
exercise price of $7.10 per share to purchase 447,344 shares of
our common stock and the placement agents received warrants in
the offering at an exercise price of $5.40 per share to
purchase 156,481 shares of our common stock.
We have also issued an aggregate of $13,530,000 of convertible
notes, which are due in two parts -$8,030,000 is due on
September 13, 2005 and $5,500,000 is due on September 13, 2008.
The notes which bear interest at a rate of 7.7% per annum with
$1,042,000 of interest due annually on each September 13, may
convert to common stock at a conversion price of $5.50 per
share. Should the holders of the notes not elect to convert
them to common stock, or if we are not able to force the
conversion of the notes by their terms, we must repay the
amounts on the due dates. A failure to restructure our existing
convertible notes or obtain necessary additional capital in the
future could jeopardize our operations. We do not have
sufficient funds to repay our convertible notes at their
maturity. We may not be able to restructure the convertible
notes or obtain additional financing to repay them on terms
acceptable to us, if at all. If we raise additional funds by
selling equity securities, the relative equity ownership of our
existing investors would be diluted and the new investors could
obtain terms more favorable than previous investors. A failure
to restructure our convertible notes or obtain additional
funding to repay the convertible notes and support our working
capital and operating requirements, could cause us to be in
default of our convertible notes and prevent us from making
expenditures that are needed to allow us to maintain our
operations.
We have generally incurred negative cash flows from operations
since inception, and have expended, and expect to continue to
expend in the future, substantial funds to complete our planned
product development efforts. Since inception, our expenses have
significantly exceeded revenues, resulting in an accumulated
deficit as of March 31, 2005 of $66,891,000. We expect that our
existing capital resources together with anticipated licensing
revenues and royalties will be adequate to fund our current
level of operations through March 2006 excluding any obligation
to repay the convertible notes, the debt service on the
convertible notes and the secured convertible notes. We cannot
assure investors that we will ever be able to generate
significant product revenue or achieve or sustain
profitability. We currently do not have the cash resources to
repay our Convertible Notes due in September 2005 or our
Secured Convertible Notes in March 2006. Our financing plan
through the use of the SEDA or other sales of equity are
expected to provide the resources to repay such notes.
We plan to expend substantial funds to conduct research and
development programs, preclinical studies and clinical trials
of potential products, including research and development with
respect to our acquired and developed technology. Our future
capital requirements and adequacy of available funds will
depend on many factors, including:
* the ability to convert, repay or restructure our outstanding
convertible notes and secured convertible notes;
* the successful commercialization of amlexanox and
Zindaclin(R);
* the ability to establish and maintain collaborative
arrangements with corporate
19
partners for the research, development and
commercialization of products;
* continued scientific progress in our research and
development programs;
* the magnitude, scope and results of preclinical
testing and clinical trials;
* the costs involved in filing, prosecuting and
enforcing patent claims;
* the costs involved in conducting clinical trials;
* competing technological developments;
* the cost of manufacturing and scale-up;
* the ability to establish and maintain effective
commercialization arrangements and activities; and
* successful regulatory filings.
FIRST QUARTER 2005 COMPARED TO FIRST QUARTER 2004
Our licensing revenue in the first quarter of 2005
was $11,000, as compared to licensing revenue of
$4,000 in same quarter of 2004, an increase of
$7,000. 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).
There were $117,000 in product sales of Aphthasol(R)
in the first quarter of 2005, as compared to no
sales in the first quarter of 2004 due to a supply
interruption in such period. Aphthasol(R) product
sales recommenced in September 2004.
Royalty income in the first quarter of 2005 was
$27,000, as compared to $16,000 in the first quarter
of 2004. Increased sales of Zindaclin(R) resulted in
$11,000 higher royalty income.
Total research spending for the first quarter of
2005 was $1,319,000, as compared to $1,144,000 for
the same period in 2004, an increase of $175,000.
The increase in expenses was primarily the result of:
* higher costs ($82,000) for pre-production of OraDisc(TM) A;
* higher costs for product and clinical trials for
AP5346 ($71,000); and
* higher salary and related costs due to additional
employees ($74,000).
The increase in expenses was partially offset by
lower costs for other projects ($52,000).
Our cost of product sales was $102,000 in the first
quarter of 2005, as compared to $26,000 in the first
quarter of 2004, an increase of $76,000. The
increase in cost of product sales was due to
increased product sales and fees associated with
sales in 2005 versus no sales and fees in 2004 .
Total general and administrative expenses were
$689,000 for the first quarter of 2005, a decrease
of $65,000 as compared to the same period in 2004.
The decrease in spending was due primarily to the
following:
* lower patent expenses ($119,000), due to new
patent expenses and PCT filings in 2004;
20
* lower salary and related costs ($16,000);
* lower investor relations expenses ($10,000);
The decrease in general and administrative expenses
is partially offset by:
* higher license fees ($39,000);
* higher professional fees ($15,000);
* higher general business consulting fees ($15,000); and
* by other net increases ($11,000).
Depreciation and amortization was $164,000 for the
first quarter of 2005 as compared to $160,000 for
the same period in 2004 reflecting an increase of
$4,000. The increase in depreciation and
amortization was due to increased depreciation
resulting from the acquisition of additional capital assets.
Total operating expenses in the first quarter of
2005 were $2,274,000 as compared to total operating
expenses of $2,084,000 for the same period in 2004,
an increase of $190,000.
Loss from operations in the first quarter of 2005
was $2,119,000 as compared to a loss of $2,064,000
for the same period in 2004, an increase of $55,000.
Interest and miscellaneous income was $10,000 for
the first quarter of 2005 as compared to $33,000 for
the same period in 2004, a decrease of $23,000. The
decrease in interest income was due to lower cash
balances and lower interest rates in 2005 as
compared with 2004.
Interest expense was $313,000 for the first quarter
of 2005 as compared to $320,000 for the same period
in 2004, a decrease of $7,000.
Net loss in the first quarter of 2005 was
$2,422,000, or a $0.16 basic and diluted loss per
common share, compared with a loss of $2,351,000, or
a $0.17 basic and diluted loss per common share for
the same period in 2004, an increased loss of
$71,000 in 2005.
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 March 31, 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.
21
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and
procedures. Our chief executive officer and our
chief financial officer, after evaluating the
effectiveness of our "disclosure controls and
procedures" (as defined in Rules 13a-15(e) and 15d-
(e) of the Securities and Exchange Act of 1934, as
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.
(b) Changes in internal controls. Except as set
forth below, there were no changes in our internal
controls over financial reporting during the quarter
ended March 31, 2005 that have materially affected,
or are reasonably likely to material affect, our
internal controls over financial reporting.
(c) As previously reported in our Annual Report on
Form 10-K for the fiscal year ended 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.
(d) 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. Management and the
Audit Committee has 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.
22
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 SALES OF UNREGISTERED EQUITY SECURITIES AND
USE OF PROCEEDS
On March 31, 2005, we executed a Standby Equity
Distribution Agreement (SEDA) with Cornell Capital
Partners and a Securities Purchase Agreement with
Cornell Capital Partners and Highgate House Funds
(see Part II - Item 5 - Other Information). Upon
closing of the transaction, Cornell Capital Partners
received a one-time commitment fee of 146,500 shares
of the Company's common stock. As of 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, the Company paid a one-time placement
agent fee of 3,500 shares of common stock. The
shares and common stock issued have not been
registered. We relied on Section 4(2) and/or 3(b) of
the 1933 Securities Act and the provisions of
Regulation D as exemptions from the registration
thereunder. The proceeds of the offering will be
used principally for general corporate purposes and
to fund the development of our portfolio of product
candidates.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
As of March 30, 2005 the Company executed a Standby
Equity Distribution Agreement (SEDA) with Cornell
Capital Partners. Under the SEDA, subject to terms
of the SEDA, the Company may issue and sell to
Cornell Capital Partners common stock for a total
purchase price of up to a maximum of $15,000,000.
The purchase price for the shares is equal to their
market price, which is defined in the SEDA as 98% of
the lowest volume weighted average price of the
common stock during a specified period of trading
days following the date notice is given by the
Company that it desires to access the SEDA. Further,
we have agreed to pay Cornell Capital Partners, L.P.
3.5% of the proceeds that we receive under the SEDA.
The amount of each draw down is subject to a
maximum amount of $1,000,000. The terms of the SEDA
do not allow us to make any draw downs if the draw
down would cause Cornell Capital to own in excess of
9.9% of our outstanding shares of common stock.
Based on the number of shares of our common stock
currently outstanding, at volume weighted average
price of $2.50, we could sell to Cornell Capital
approximately $3,900,000 of our common stock subject
to the 9.9% limitation. Thus, in order for the
Company to receive all the funding available under
the SEDA and have the financial resources it needs
for operations and debt service, Cornell Capital
must sell through to the market a significant
portion of the shares it purchases under the
arrangement. The Company believes that because the
shares sold to Cornell Capital will be covered by an
effective registration statement and Cornell Capital
has a history of not holding significant positions
in companies in which it invests, the shares
purchased by Cornell Capital will be sold to the
marketplace to maintain ownership below 9.9%.
Provided that continuing sales to the marketplace
are possible, the Company believes Cornell Capital
will not accumulate 9.9% of the outstanding common
stock of the Company; and, accordingly, the Company
will be able to fully
23
utilize the $15,000,000 made available through the
SEDA. Upon closing of the transaction, Cornell
Capital Partners received a one-time commitment fee
of 146,500 shares of the Company's common stock. As
of 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, the Company paid a
one-time placement agent fee of 3,500 shares of
common stock.
In addition, as of March 30, 2005, the Company
executed a Securities Purchase Agreement with
Cornell Capital Partners and Highgate House Funds.
Under the Securities Purchase Agreement, Cornell
Capital Partners and Highgate House Funds purchased
an aggregate of $2,633,000 principal amount of
Secured Convertible Notes from the Company (net
proceeds to the Company of $2,300,000). The Secured
Convertible Notes accrue interest at a rate of 7%
per year and mature 12 months from the issuance date
with scheduled monthly repayment commencing on
November 1, 2005 to the extent that the Secured
Convertible Note has not been converted to common
stock. The Secured Convertible Note is convertible
into the Company's common stock at the holder's
option any time up to maturity at a conversion price
equal to $4.00. The Secured Convertible Notes are
secured by all of the assets of the Company. The
Company has the right to redeem the Secured
Convertible Notes upon 3 business days notice for
110% of the amount redeemed. Pursuant to the
Securities Purchase Agreement, the Company issued to
the holders an aggregate of 50,000 shares of common
stock of the Company.
Each of the SEDA, Security Purchase Agreement and
related agreements were held in escrow pending our
filing of the Form 10-K and the issuance of shares
of common stock required to be issued under the
Agreement. On April 1, 2005 we received the funds.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.27 Standby Equity Distribution Agreement dated
March 30, 2005 between Cornell Capital Partners, LP
and us
10.28 Securities Purchase Agreement dated March 30,
2005 between Buyers and us
10.29 Secured Convertible Notes dated March 30, 2005
10.30 Investor Rights Agreement dated March 30, 2005
10.31 Security Agreement dated March 30, 2005
10.32 Pledge and Escrow Agreement dated March 30, 2005
10.33 Escrow Agreement dated March 30, 2005
10.34 Registration Rights Agreement dated March 30, 2005
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
24
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.
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: May 10, 2005 By: /s/ Kerry P. Gray
------------ ----------------------
Kerry P. Gray
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 2005 By: /s/ Stephen B. Thompson
------------ -------------------------
Stephen B. Thompson
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
26
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2005 December 31, 2004
ASSETS -------------- --------------
(unaudited)
Current assets
Cash and cash equivalents $ 2,888,000 $ 1,775,000
Short term investments, at cost 472,000 486,000
Accounts and other receivables 764,000 791,000
Inventory 113,000 125,000
Prepaid expenses and other current assets 957,000 1,093,000
------------- -------------
Total current assets 5,194,000 4,270,000
------------- -------------
Property and equipment, net 982,000 1,040,000
Debt issuance costs, net 917,000 130,000
Patents, net 2,231,000 2,315,000
Licenses, net 113,000 125,000
Goodwill, net 1,868,000 1,868,000
Restricted cash and other assets 456,000 1,342,000
------------- -------------
Total assets $ 11,761,000 $ 11,090,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 1,800,000 $ 2,131,000
Accrued interest payable 572,000 311,000
Deferred revenues 1,428,000 1,199,000
Current portion of notes payable and
other future obligations 10,868,000 8,417,000
------------- -------------
Total current liabilities 14,668,000 12,058,000
Note payable, net of current portion 152,000 193,000
Convertible note 5,500,000 5,500,000
------------- -------------
Total liabilities 20,320,000 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, 15,724,734 at March 31, 2005
and 15,524,734 at December 31, 2004 157,000 155,000
Additional paid-in capital 59,508,000 59,010,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted stock
grants (277,000) (309,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Accumulated other comprehensive loss (11,000) (3,000)
Accumulated deficit (66,887,000) (64,465,000)
------------ -------------
Total stockholders' deficit (8,559,000) (6,661,000)
------------ -------------
Total liabilities and stockholders' deficit $11,761,000 $11,090,000
============ =============
The accompanying notes are an integral part of these statements.
27
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
Three Months ended March 31,
------------------------------
2005 2004
-------------- --------------
Revenues
Licensing revenues $ 11,000 $ 4,000
Product sales 117,000 -
Royalty income 27,000 16,000
------------- --------------
Total revenues 155,000 20,000
Expenses
Research and development 1,319,000 1,144,000
Costs of product sales 102,000 26,000
General and administrative 689,000 754,000
Depreciation and amortization 164,000 160,000
------------- --------------
Total expenses 2,274,000 2,084,000
------------- --------------
Loss from operations (2,119,000) (2,064,000)
Other income (expense)
Interest and miscellaneous income 10,000 33,000
Interest and other expense (313,000) (320,000)
------------- -------------
(303,000) (287,000)
Net loss $ (2,422,000) $ (2,351,000)
============= ==============
Basic and diluted loss per common share $(0.16) $(0.17)
============= ==============
Weighted average basic and diluted
common shares outstanding 15,524,734 14,200,273
============= ==============
Net loss $ (2,422,000) $ (2,351,000)
Other comprehensive income (loss)
Foreign currency translation adjustment (8,000) 10,000
------------- -------------
Comprehensive loss $ (2,430,000) $ (2,341,000)
============= =============
The accompanying notes are an integral part of these statements.
28
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months ended March 31,
------------------------------
2005 2004
-------------- --------------
Cash flows from operating activities:
Net loss $ (2,422,000) $ (2,351,000)
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 32,000 29,000
Depreciation and amortization 164,000 160,000
Amortization of debt costs 46,000 46,000
Change in operating assets and liabilities:
Accounts receivable 27,000 (40,000)
Inventory 12,000 -
Prepaid expenses and other current assets 136,000 (113,000)
Restricted cash and other assets 553,000 30,000
Accounts payable and accrued expenses (331,000) (125,000)
Accrued interest payable 261,000 261,000
Deferred revenues 229,000 (4,000)
------------ -------------
Net cash used in operating activities (1,293,000) (2,065,000)
------------ -------------
Cash flows from investing activities:
Capital expenditures (10,000) (60,000)
Redemptions of short term investments and
certificates of deposit 14,000 921,000
------------ -------------
Net cash provided by investing activities 4,000 861,000
------------ -------------
Cash flows from financing activities:
Payments of notes payable (223,000) (225,000)
Proceeds from secured notes payable 2,633,000 -
Proceeds from stock issuances, net of
costs of $647,000 - 9,035,000
------------ -------------
Net cash provided by financing activities 2,410,000 8,810,000
------------ -------------
Net increase in cash and cash equivalents 1,121,000 7,606,000
Effect of exchange rate changes on cash (8,000) 23,000
Cash and cash equivalents at beginning of period 1,775,000 727,000
------------ -------------
Cash and cash equivalents at end of period $ 2,888,000 $ 8,356,000
============ =============
Cash paid for interest $7,000 $6,000
Supplemental disclosure of non-cash transactions
200,000 shares of common stock issued pursuant
to the SEDA and Secured Convertible Notes $500,000 -
The accompanying notes are an integral part of these statements.
29
Access Pharmaceuticals, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2005 and 2004
(unaudited)
(1) Interim Financial Statements
The consolidated balance sheet as of March 31, 2005
and the consolidated statements of operations and
cash flows for the three months ended March 31, 2005
and 2004 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 March 31, 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.
(2) Cash and Cash Equivalents
Cash and cash equivalents includes $2,360,000, kept
in an overnight escrow account, pursuant to the
Securities Purchase Agreement with Cornell Capital
Partners and Highgate House funds, executed on March
30, 2005.
(3) Intangible Assets
Intangible assets consist of the following (in thousands):
March 31, 2005 December 31, 2004
------------------------- -------------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
------------ ------------ ------------ ------------
Amortizable intangible assets
Patents $ 3,179 $ 948 $ 3,179 $ 864
Licenses 500 387 500 375
------------ ------------ ------------ ------------
Total $ 3,679 $ 1,335 $ 3,679 $ 1,239
============ ============ ============ ============
Amortization expense related to intangible assets
totaled $96,000 and $105,000 for each of the three
months ended March 31, 2005 and 2004, respectively.
The aggregate estimated amortization expense for
intangible assets remaining as of March 31 is as
follows (in thousands):
30
2005 $ 291
2006 388
2007 363
2008 338
2009 338
Thereafter 626
---------
Total $ 2,344
=========
(4) 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 the 2004 Form 10-K, Note 1,
to our stock-based employee plans.
Three months ended March 31,
--------------------------
2005 2004
------------ ------------
Net loss
As reported $(2,422,000) $(2,351,000)
Deduct: Stock-based employee
compensation expense determined
under fair value based method (155,000) (212,000)
------------ ------------
Pro forma $(2,577,000) $(2,563,000)
============ ============
Basic and diluted loss per share:
As reported $(0.16) $(0.17)
Pro forma (0.17) (0.18)
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 March 31,
-------------------------
2005 2004
------------ ------------
Fully diluted shares 21,444,800 20,313,562