Document/ExhibitDescriptionPagesSize 1: 10KSB Annual Report -- Small Business HTML 824K
2: EX-10.16 Amedned Asset Sale Agreement HTML 28K
3: EX-10.19 Note and Warrant Purchase Agreement 02-16-06 HTML 244K
4: EX-10.24 Note and Warrant Purchase Agreement 10-24-06 HTML 232K
5: EX-10.25 Security Agreement HTML 29K
6: EX-10.26 Form of Convertible Note HTML 107K
7: EX-10.27 Form of Warrant HTML 112K
8: EX-10.28 Investor Rights Agreement HTML 117K
9: EX-10.29 Note and Warrant Purchase Agreement 12-6-06 HTML 236K
10: EX-10.30 Security Agreement HTML 32K
11: EX-10.31 Form of Convertible Note HTML 108K
12: EX-10.32 Form of Warrant HTML 112K
13: EX-10.33 Investor Rights Agreement HTML 117K
14: EX-21 Subsidiaries HTML 9K
15: EX-23.1 Consent Whitley Penn LLP HTML 12K
16: EX-23.2 Consent Grant Thornton LLP HTML 12K
17: EX-31.1 CEO Certification HTML 19K
18: EX-31.2 CFO Certification HTML 12K
19: EX-32 Ceo-CFO Certification HTML 12K
(Exact
name of small business issuer as specified in its charter)
Delaware
83-0221517
(State
of Incorporation)
(I.R.S.
Employer I.D. No.)
2600
Stemmons Freeway, Suite 176, Dallas, TX
75207
(Address of Principal Executive Offices)
(Zip
Code)
Issuer's
telephone number, including area code: (214) 905-5100
Securities
registered pursuant to Section 12(b) of the Act:
None
None
(Title
of Class)
(Name
of each exchange on which
registered)
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, One Cent ($0.01) Par Value Per Share
Check
whether the issuer is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
o
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) , and (2) has
been
subject to such filing requirements for the past 90 days. Yes P
No
____
Check
if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B contained herein, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes__No
P
State
issuer’s revenues for the fiscal year ended December 31, 2006 was
$0.00.
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act). $19,742,000 as of March30,2007.
As
of
March 30, 2007 there were 3,535,358 shares of Access Pharmaceuticals, Inc.
Common Stock issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of Registrant's Definitive Proxy Statement to be filed with the Commission
pursuant to Regulation 14A in connection with the 2007 Annual Meeting are
incorporated herein by reference into Part III of this report.
This
Form
10-KSB (including the information incorporated by reference) contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934,
as amended, that involve risks and uncertainties 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 sales projections, and the sales projections of our licensing
partners, our ability to achieve licensing milestones and other risks described
below as well as those discussed elsewhere in this 10-KSB, documents
incorporated by reference and other documents and reports that we file
periodically with the Securities and Exchange Commission. These statements
include, without limitation, statements relating to our ability to continue
as a
going concern, anticipated payments to be received from Uluru, anticipated
product approvals and timing thereof, product opportunities, clinical trials
and
U.S. Food and Drug Administration (“FDA”) applications, as well as our drug
development strategy, our clinical development organization, expectations
regarding our rate of technological developments and competition, our plan
not
to establish an internal marketing organization, our expectations regarding
minimizing development risk and developing and introducing technology, the
size
of our targeted markets, the terms of future licensing arrangements, our ability
to secure additional financing for our operations and our expected cash burn
rate. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as “may,”“will,”“should,”“expects,”“plans,”“could,”“anticipates,”“believes,”“estimates,”“predicts,”“potential” or “continue” or
the negative of such terms or other comparable terminology. These statements
are
only predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under “Risk Factors,” that may cause our
or our industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by such
forward-looking statements.
Although
we believe that the expectations reflected in the forward-looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We are under no duty to update any of the forward-looking
statements after the date of filing this Form 10-KSB to conform such statements
to actual results.
Business
Access
Pharmaceuticals, Inc. (“Access” or the “Company”) is a Delaware corporation. We
are an emerging biopharmaceutical company developing products for use in the
treatment of cancer, the supportive care of cancer, and other disease states.
Our product for the management of oral mucositis, MuGard™, has received
marketing clearance by the FDA as a device. Our lead clinical development
program for the drug candidate ProLindac™ (formerly known as AP5346) is in Phase
II clinical testing. Access also has advanced drug delivery technologies
including Cobalamin™-mediated oral drug delivery and targeted
delivery.
Together
with our subsidiaries, we have proprietary patents or rights to
one technology approved for marketing and three drug delivery technology
platforms:
• MuGard™
(mucoadhesive liquid technology),
•
synthetic polymer targeted delivery,
•
Cobalamin-mediated oral delivery,
•
Cobalamin-mediated targeted delivery.
Products
We
have
used our drug delivery technologies to develop the following products and
product candidates:
(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
a 1%
royalty and milestone payments on sales.
(3)
Clinical studies being conducted in Europe and US.
Approved
Products
MuGard™
- Mucoadhesive Liquid Technology (MLT)
Mucositis
is a debilitating condition involving extensive inflammation of mouth tissue
that annually affects an estimated 400,000 cancer patients in the United States
undergoing chemotherapy and radiation treatment. Any treatment that would
accelerate healing and/or diminish the rate of appearance of mucositis would
have a significant beneficial impact on the quality of life of these patients
and may allow for more aggressive chemotherapy. We believe the potential
addressable market for a mucositis product could be over $1 billion
world-wide.
Access’
MuGard™ is a viscous polymer solution which provides a coating for the oral
cavity. MuGard™ is dispensed in a ready to use form. A multi-site, randomized
clinical study was performed in the United States testing MuGard™ and MuGard™
containing an anti-inflammatory drug to determine the effect of these products
on the prevention and treatment of mucositis. The data from this trial indicated
that the patients using MuGard™ displayed a lower incidence of mucositis than is
typically seen in the studied population with no additional benefit from the
drug.
The
data
were retrospectively compared with two historical patient databases to evaluate
the potential advantages MuGard™ 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.
These
data confirmed that fact that MuGard™ could represent an important advancement
in the management and prevention of mucositis. On September 20, 2006, we
announced that we had submitted a Premarket Notification 510(k) application
to
the United States Food and Drug Administration (FDA) announcing the Company’s
intent to market MuGard™. On December 13, 2006, we announced that we had
received marketing clearance for MuGard™
Chemotherapy,
surgery and radiation are the major components in the clinical management of
cancer patients. Chemotherapy serves as the primary therapy for some solid
tumors and metastases and is increasingly used as an adjunct to radiation and
surgery to improve their effectiveness. 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 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.
Oxaliplatin,
a formulation of DACH platinum, is a chemotherapeutic which was initially
approved in France and in Europe in 1999 for the treatment of colorectal cancer.
It is now also being marketed in the United States and is generating worldwide
sales in excess of $2 billion annually. Carboplatin and Cisplatin, two other
approved platinum chemotherapy drugs, are not indicated for the treatment of
metastatic colorectal cancer. Oxaliplatin, in combination with 5-flurouracil
and
folinic acid (known as the FOLFOX regime) 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 940,000 reported
new cases annually worldwide, increasing at a rate of approximately three
percent per year, and 500,000 deaths.
Currently,
platinum compounds are one of the largest selling categories of chemotherapeutic
agents, with annual sales in excess of $3.0
billion. As is the case with all chemotherapeutic drugs, the use of such
compounds is associated with serious systemic side effects. The drug development
goal therefore is to enhance delivery of the active drug to the tumor and
minimize the amount of active drug affecting normal organs in the
body.
Utilizing
a biocompatible water-soluble polymer HPMA as a drug carrier, Access’ drug
candidate ProLindac™, links DACH platinum to a polymer in a manner which permits
the selective release of active drug to the tumor by several mechanisms,
including taking advantage of the differential pH in tumor tissue compared
to
healthy tissue. The polymer also 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
of
ProLindac™ to inhibit tumor growth has been evaluated in more than ten
preclinical models. Compared with the marketed product oxaliplatin, ProLindac™
showed either marked superiority or superiority in most 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, ProLindac™
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
ProLindac™delivers
approximately 14 times more platinum to tumor DNA than oxaliplatin. Results
from
preclinical efficacy studies conducted in the B16 and other tumor models have
also shown that ProLindac™ is superior to oxaliplatin in inhibiting the growth
of tumors. An extensive preclinical package has been developed supporting the
development of ProLindac™.
In
2005
we completed a Phase I multi-center clinical study conducted in Europe,
which enrolled 26 patients. The study was reported at the AACR-NCI-EORTC
conference in Philadelphia in November 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 anti-tumor activity of ProLindacTM.
The
open-label, non-randomized, dose-escalation Phase I study was performed at
two
European centers. ProLindacTM
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 obtained 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, 1 experienced a partial
response based on a biomarker 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. The patient who experienced a partial response
based on a biomarker was an ovarian cancer patient for whom CA-125 levels
returned to normal. 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
have
commenced a European Phase II ProLindac™ trial in ovarian cancer patients who
have relapsed after first line platinum therapy. The primary aim of the study
is
to the determine the response rate of ProLindacTM
monotherapy in this patient population. The response rates for other platinum
compounds in this indication are well known, and will be used for comparison.
We
have
provided ProLindacTM
to the
Moores Cancer Center at the University of California, San Diego to conduct
a
Phase II clinical study in patients with head and neck cancer under a
physician-sponsored IND. The primary aim of the study is to demonstrate the
ability of the tumor-targeting polymer system to deliver more platinum to tumors
than can be attained with oxaliplatin, the approved DACH platinum compound.
The
company has submitted an IND application to the US Food and Drug Administration,
and has received clearance from the agency to proceed with a Phase I clinical
study of ProLindac in combination with fluorouracil and leucovorin. The study
is
designed to evaluate the safety of the ProLindac in combination with two
standard drugs used to treat colorectal cancer and to establish a safe dose
for
Phase II clinical studies of this combination in colorectal cancer. The company
is currently evaluating whether clinical development of ProLindac in this
indication might proceed more rapidly by utilizing an alternative clinical
strategy and/or conducting studies in the US and/or elsewhere in the
world.
Research
Projects, Products and Products in Development
Drug
Development Strategy
A
part of
our integrated drug development strategy is to form alliances with centers
of
excellence in order to obtain alternative lead compounds while minimizing the
overall cost of research. The Company does not spend significant resources
on
fundamental biological research but rather focuses on its chemistry expertise
and clinical development. For example, certain of our polymer platinate
technology has resulted in part from a research collaboration with The School
of
Pharmacy, University of London.
Our
strategy is to focus on our polymer therapeutic program for the treatment of
cancer while continuing to develop technologies such as MuGard™ and
Cobalamin-mediated oral drug delivery which could provide us with a revenue
stream in the short term through commercialization or outlicensing to fund
our
longer-term polymer development program. 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 co-develop with or to outlicense to marketing partners
our therapeutic product candidates. By forming strategic alliances with
pharmaceutical and/or biotech companies, we believe that our technology can
be
more rapidly developed and successfully introduced into the
marketplace.
We
will
continue to evaluate the most cost-effective methods to advance our programs.
We
will contract certain research and development, manufacturing and manufacturing
scaleup, certain preclinical testing and product production to research
organizations, contract manufacturers and strategic partners. As appropriate
to
achieve cost
savings
and accelerate our development programs, we will expand our internal core
capabilities and infrastructure in the areas of chemistry, formulation,
analytical methods development, clinical development, biology and project
management to maximize product opportunities in a timely manner.
Process
We
begin
the product development effort by screening and formulating potential product
candidates, selecting an optimal active component, developing a formulation,
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 limited core
internal development capability with significant experience in developing these
formulations, but also depend upon the skills and expertise of our
contractors.
Once
the
product candidate has been successfully screened in pilot testing, our
scientists, together with external consultants, assist in designing and
performing the necessary preclinical efficacy, pharmacokinetic and toxicology
studies required for IND submission. External investigators and scaleup
manufacturing facilities are selected in conjunction with our consultants.
The
initial Phase I and Phase II studies are conducted by institutions and
investigators supervised and monitored by our employees and contract research
organizations. We do not plan to have an extensive clinical development
organization as we plan to have the advance phases of this process conducted
by
a development partner. Should we conduct Phase III clinical studies we expect
to
engage a contract research organization to perform this work.
We
contract with third party contract research organizations to complete our large
clinical trials and for data management of all of our clinical trials.
Generally, we manage the smaller Phase I and II trials ourselves. Currently,
we
have one Phase II trial in process and two Phase II trials planned for this
year
subject to preliminary findings in other trials and our ability to fund such
trials.
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 $2,053,000, $2,783,000 and $2,335,000 on research and
development during the years 2006, 2005 and 2004, respectively.
Scientific
Background
The
ultimate criteria for effective drug delivery is to control and optimize the
localized release of the drug at the target site and rapidly clear the
non-targeted fraction. Conventional drug delivery systems such as controlled
release, sustained release, transdermal systems and others are designed for
delivering active product into the systemic circulation over time with the
objective of improving patient compliance. These systems do not address the
biologically relevant issues such as site targeting, localized release and
clearance of drug. The major factors that impact the achievement of this
ultimate drug delivery goal are the physical characteristics of the drug and
the
biological characteristics of the disease target sites. The physical
characteristics of the drug affect solubility in biological systems, its
biodistribution throughout the body, and its interactions with the intended
pharmacological target sites and undesired areas of toxicity. The biological
characteristics of the diseased area impact the ability of the drug to
selectively interact with the intended target site to allow the drug to express
the desired pharmacological activity.
We
believe our drug delivery technologies are differentiated from conventional
drug
delivery systems in that they seek to apply a disease-specific approach to
improve the drug delivery process with formulations to significantly enhance
the
therapeutic efficacy and reduce toxicity of a broad spectrum of
products.
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. This technology is employed in our lead clinical
program, ProLindac™. 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. Utilizing
the principles of prodrugs, the drug is essentially inert while attached to
the
polymer, but is released inside the tumor mass while polymer/drug not delivered
to tumors is renally cleared from the body. For example, ProLindac is attached
to a pH-sensitive linker which releases the platinum cytotoxic agent much faster
in the low pH environments found typically outside of tumor cells and within
specific compartments inside of tumor cells. 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.
Cobalamin-Mediated
Oral Delivery Technology
Oral
delivery is the preferred method of administration of drugs where either
long-term or daily use (or both) is required. However many therapeutics,
including peptide and protein drugs, are poorly absorbed when given orally.
With
more and more peptide and protein based biopharmaceuticals entering the market,
there is an increasing need to develop an effective oral delivery system for
them, as well as for long-standing injected drugs such as insulin.
The
difficulty in administering proteins orally is their susceptibility to
degradation by digestive enzymes, their inability to cross the intestinal wall
and their rapid excretion by the body. Over the years, many different
methodologies for making protein drugs available orally have been attempted.
Most of the oral protein delivery technologies involve protecting the protein
degradation in the intestine. More recently, strategies have been developed
that
involve attaching the protein or peptide to a molecule that transports the
protein across the gut wall. However, the field of oral drug delivery of
proteins and peptides has yet to achieve successful commercialization of a
product (although positive results have been achieved in early clinical trials
for some products under development).
Many
pharmaceutically active compounds such as proteins, peptides and cytotoxic
agents cannot be administered orally due to their instability in the
gastrointestinal tract or their inability to be absorbed and transferred to
the
bloodstream. A technology that would allow many of these actives to be taken
orally would greatly enhance their acceptance and value. Several technologies
for the protection of sensitive actives in the gastro-intestinal tract and/or
enhancement of gastro-intestinal absorption have been explored and many have
failed.
Our
proprietary technology for oral drug delivery utilizes the body’s natural
vitamin B12 (VB12) transport system in the gut. The absorption of VB12 in the
intestine occurs by way of a receptor-mediated endocytosis. Initially, VB12
binds
to
intrinsic factor (IF) in the small intestine, and the VB12-IF complex then
binds
to the IF receptor on the surface of the intestine. Receptor-mediated
endocytosis then allows the transport of VB12 across the gut wall. After binding
to another VB12-binding protein, transcobalamin II (TcII), VB12 is transferred
to the bloodstream.
Our
scientists discovered that Cobalamin (analogs of VB12) will still be transported
by this process even when drugs, macromolecules, or nanoparticles are coupled
to
the Cobalamin. Thus Cobalamin 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 Cobalamin. If the
capacity of the Cobalamin 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 Cobalamin 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
Cobalamin. 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 nanoparticle volume compared with the size of the
drug.
Our
proprietary position in this technology involves the conjugation of Cobalamin
and/or folic acid and/or biotin (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 Cobalamin-drug
conjugates.
Cobalamin-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
Cobalamin-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 a vitamin analog, the analog
serves as a carrier to increase the amount of drug at the disease site relative
to its normal distribution.
One
application of this technology is in tumor targeting. The use of cytotoxic
drugs
is one of the most common methods for treating a variety of malignancies
including solid and non-solid tumors. The drawbacks of chemotherapeutic
treatments, which include tumor resistance, cancer relapse and toxicity from
severe damage to healthy tissues, has fuelled a scientific quest for novel
treatments that are specifically targeted to malignant cells thus reducing
damage to collateral tissues.
The
design of targeted therapies involves exploitation of the difference between
the
structure and function of normal cells compared with malignant cells.
Differences include the increased levels of surface molecules on cancer cells,
which makes them more sensitive to treatment regimes that target surface
molecules and differences in blood supply within and around tumor cells compared
with normal cells.
Two
basic
types of targeting approaches are utilized, passive tumor targeting and active
tumor targeting.
•
passive
tumor targeting involves transporting anti-cancer agents through
the
bloodstream to tumor cells using a “carrier” molecule. Many different
carrier molecules, which can take a variety of forms (micelles,
nanoparticles, liposomes and polymers), are being investigated as
each
provides advantages such as specificity and protection of the anti-cancer
drug from degradation due to their structure, size (molecular weights)
and
particular interactions with tumor cells. Our polymer platinate program
is
a passive tumor targeting
technology.
•
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 Cobalamin compounds (analogs
of vitamin B12), but we have also used and have certain intellectual property
protection for the use of folate and biotin which may 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.
Other
Key Developments
On
March 30, 2007, Access Pharmaceuticals, Inc. ("Access")
and SCO Capital Partners LLC and affiliates ("SCO") agreed to extend the
maturity date of an aggregate of $6,000,000 of 7.5% convertible notes to April27, 2007 from March 31, 2007.
On
February 21, 2007 we announced we had entered into a non-binding letter of
intent to acquire Somanta Pharmaceuticals, Inc. Pursuant to the terms of the
non-binding letter of intent, upon consummation of the acquisition, Somanta’s
preferred and common shareholders would receive an aggregate of 1.5 million
shares of Access’ common shares which would represent approximately 13% of the
combined company assuming the conversion of Access’ existing convertible debt
under existing terms of conversion. The closing of the transaction is subject
to
numerous conditions including the execution of a definitive Merger Agreement,
receipt of necessary approvals as well as completion of our due diligence
investigation. There can be no assurance that the transaction will be
consummated or if consummated, that it will be on the terms described
herein.
We
have
upcoming maturity dates on our convertible notes. The $6
million of Senior Convertible notes are due March 31, 2007 plus accrued
interest; and the approximately $4.0
million of convertible notes which are due April 28, 2007 including interest;
and capitalized interest of $880,000. We are currently negotiating with the
debt
holders to convert their debt to equity or to extend the terms of their due
dates.
All
shares and per share information reflect a one for five reverse stock split
effected June 5, 2006.
On
December 8, 2006 we amended our 2005 Asset Sale Agreement with Uluru, Inc.
Access received from Uluru an upfront payment of $4.9 million, will receive
an
additional $350,000 on April 8, 2007 and in the future could receive potential
milestones of up to $4.8 million based on Uluru sales. The amendment agreement
included the anniversary payment due October 12, 2006, the early payment of
the
two year anniversary payment, and a payment in satisfaction of certain future
milestones. Access also transferred to Uluru certain patent applications that
Access had previously licensed to Uluru under the 2005 License Agreement. Under
a new agreement, Access has acquired a license from Uluru to utilize the
nanoparticle aggregate technology contained in the transferred patent
applications for subcutaneous, intramuscular, intra-peritoneal and intra-tumoral
drug delivery. Additionally, one future milestone was increased by
$125,000.
On
December 6, 2006, we entered into a note and warrant purchase agreement pursuant
to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes
due April 27, 2007 and warrants to purchase 386,364 shares of common stock
of
Access. Net proceeds to Access were $450,000. The notes and warrants were sold
in a private placement to a group of accredited investors led by SCO Capital
Partners LLC (“SCO”) and affiliates.
On
October 24, 2006, we entered into a note and warrant purchase agreement pursuant
to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes
due April 27, 2007 and warrants to purchase 386,364 shares of common stock
of
Access. Net proceeds to Access were $450,000. The notes and warrants were sold
in a private placement to a group of accredited investors led by SCO and
affiliates.
On
February 16, 2006, we entered into a note and warrant purchase agreement
pursuant to which we sold and issued an aggregate of $5,000,000 of 7.5%
convertible notes due April 27, 2007 and warrants to purchase an aggregate
of
3,863,634 shares of common stock of Access. Net proceeds to Access were $4.5
million. The notes and warrants were sold in a private placement to a group
of
accredited investors led by SCO and affiliates.
All
the
secured notes mature on March 31, 2007, are convertible into Access common
stock
at a fixed conversion rate of $1.10 per share, bear interest of 7.5% per annum
and are secured by substantially all of the assets of Access.
Each
note
may be converted at the option of the noteholder or Access under certain
circumstances as set forth in the notes.
Each
noteholder received a warrant to purchase a number of shares of common stock
of
Access equal to 75% of the total number shares of Access common stock into
which
such holder’s note is convertible. Each warrant has an exercise price of
$1.32 per share and is exercisable at any time prior to February 16, 2012 or
October 24, 2012 or December 6, 2012, as the case may be. In the event SCO
and its affiliates were to convert all of their notes and exercise all of their
warrants, they would own approximately 74.1% of the voting securities of Access.
Access may be required to pay in cash, up to 2% per month, as defined, as
liquidated damages for failure to file a registration statement timely as
required by an investor rights agreement.
In
connection with the sale and issuance of notes and warrants, Access entered
into
an investors rights agreement whereby it granted SCO the right to designate
two
individuals to serve on the Board of Directors of Access while the notes are
outstanding, and also granted registration rights with respect to the shares
of
common stock of Access underlying the notes and warrants. SCO designated Jeffrey
B. Davis and Mark J. Alvino to the Board of Directors, and on March 13, 2006
Messrs, Davis and Alvino were appointed to the Board of Directors.
On
October 12, 2005, we sold our oral/topical care business unit to Uluru, Inc,
a
private Delaware corporation, for up to $18.8 million to focus on our
technologies in oncology and oral drug delivery. The products and technologies
sold to Uluru included amlexanox 5% paste (marketed under the trade names
Aphthasol® and Aptheal®), OraDiscTM,
Zindaclin® and Residerm® and all of our assets related to these products. In
addition, we sold 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. We received a license from Uluru for
certain applications of the technology. The CEO of Uluru is Kerry P. Gray,
the
former CEO of the Company. In conjunction with the sale transaction, we received
a fairness opinion from a nationally recognized investment banking
firm.
At
the
closing of the agreement we received $8.7 million. In addition, due to the
Amended Asset Sale Agreement in December 2006, we received $4.9 million and
an
obligation to receive from Uluru $350,000 on April 8, 2007 for the first and
second anniversary payments and settlement of certain milestones. We recorded
$550,000 less $173,000 tax expense as revenue from the discontinued
operations in 2006.
We
were
incorporated in Wyoming in 1974 as Chemex Corporation, and in 1983 we changed
our name to Chemex Pharmaceuticals, Inc. We changed our state of incorporation
from Wyoming to Delaware on June 30, 1989. In 1996 we merged with Access
Pharmaceuticals, Inc., a private Texas corporation, and changed our name to
Access Pharmaceuticals, Inc. Our principal executive office is located at 2600
Stemmons Freeway, Suite 176, Dallas, Texas75207; our telephone number is (214)
905-5100.
Patents
We
believe that the value of technology both to us and to our potential corporate
partners is established and enhanced by our broad intellectual property
positions. Consequently, we have already been issued and seek to obtain
additional U.S. and foreign patent protection for products under development
and
for new discoveries. Patent applications are filed with the U.S. Patent and
Trademark Office and, when appropriate, with the Paris Convention's Patent
Cooperation Treaty (PCT) Countries (most major countries in Western Europe
and
the Far East) for our inventions and prospective products.
One
U.S.
patent has issued and one U.S. patent application and two European patent
applications are under review 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.
Three
U.S. patents and two European patents have issued and one U.S. patent and two
European patent applications are pending for polymer platinum compounds. The
two
patents and patent applications are the result in part of our collaboration
with
The School of Pharmacy, University of London, from which the technology has
been
licensed and include a synthetic polymer, hydroxypropylmethacrylamide
incorporating platinates, that can be used to exploit enhanced permeability
and
retention in tumors and control drug release. The patents and patent
applications include a pharmaceutical composition for use in tumor treatment
comprising a polymer-platinum compound through linkages that are designed to
be
cleaved under selected conditions to yield a platinum which is selectively
released at
a
tumor
site. The patents and patent applications also include methods for improving
the
pharmaceutical properties of platinum compounds.
We
have
three
patented Cobalamin-mediated targeted therapeutic technologies:
-
folate
conjugates of polymer therapeutics, to enhance tumor delivery by
targeting
folate receptors, which are upregulated in certain tumor types with
two
U.S. and two European patent
applications;
-
the
use of vitamin B12 to target the transcobalamin II receptor which
is
upregulated in numerous diseases including cancer, rheumatoid arthritis,
certain neurological and autoimmune disorders with two U.S. patents
and
three U.S. and four European patent applications;
and
-
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.
Our
patents for the following technologies expire in the years and during the date
ranges indicated below:
·
Mucoadhesive
technology in 2021,
·
ProLindac™
in 2021,
·
Cobalamin
mediated technology between 2007 and
2019
In
addition to issued patents, we have a number of pending patent applications.
If
issued, the patents underlying theses applications could extend the patent
life
of our technologies beyond the dates listed above.
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 New
Drug
Application (“NDA”) prior to commercial sale.
Preclinical
tests are conducted in the laboratory, usually involving animals, to evaluate
the safety and efficacy of the potential product. The results of preclinical
tests are submitted as part of the IND application and are fully reviewed by
the
FDA prior to granting the sponsor permission to commence clinical trials in
humans. All trials are conducted under International Conference on
Harmonization, or ICH, good clinical practice guidelines. All investigator
sites
and sponsor facilities are subject to FDA inspection to insure compliance.
Clinical trials typically involve a three-phase process. Phase I, the initial
clinical evaluations, consists of administering the drug and testing for safety
and
tolerated dosages and in some indications such as cancer and HIV, as preliminary
evidence of efficacy in humans. Phase II involves a study to evaluate the
effectiveness of the drug for a particular indication and to determine optimal
dosage and dose interval and to identify possible adverse side effects and
risks
in a larger patient group. When a product is found safe, an initial efficacy
is
established in Phase II, it is then evaluated in Phase III clinical trials.
Phase III trials consist of expanded multi-location testing for efficacy
and
safety to evaluate the overall benefit to risk index of the investigational
drug
in relationship to the disease treated. The results of preclinical and human
clinical testing are submitted to the FDA in the form of an NDA for approval
to
commence commercial sales.
The
process of forming the requisite testing, data collection, analysis and
compilation of an IND and an NDA is labor intensive and costly and may take
a
protracted time period. In some cases, tests may have to be redone or new tests
instituted to comply with FDA requests. Review by the FDA may also take
considerable time and there is no guarantee that an NDA will be approved.
Therefore, we cannot estimate with any certainty the length of the approval
cycle.
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.
Our
principal competitors in the polymer area are Cell Therapeutics, Daiichi, Enzon,
Polytherics Ltd, and Inhale which are developing alternate drugs in combination
with polymers. We believe we are the only company conducting clinical studies
in
the polymer drug delivery of platinum compounds. We believe that the principal
current competitors to our polymer targeting technology fall into two
categories: monoclonal antibodies and liposomes. We believe that our technology
potentially represents a significant advance over these older technologies
because our technology provides a system with a favorable pharmacokinetic
profile.
A
number
of companies are developing or may in the future engage in the development
of
products competitive with the Access polymer delivery system. Several companies
are working on targeted monoclonal antibody therapy including Bristol-Myers
Squibb, Centocor (acquired by Johnson & Johnson), GlaxoSmithKline, Imclone
and Xoma. Currently, liposomal formulations being developed by Gilead Sciences
and Alza Corporation (acquired by Johnson & Johnson), are the major
competing intravenous drug delivery formulations that deliver similar drug
substances.
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
March 30, 2007, we had nine full time employees, four 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-KSB 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 (the “SEC”). These documents are also available through the SEC’s
website at www.sec.gov
certain
of our corporate governance policies, including the charters for the Board
of
Directors’ 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, TX75207 attn: Investor Relations.
RISK
FACTORS
Without
obtaining adequate capital funding, we may not be able to continue as a going
concern.
The
report of our independent registered public accounting firm for the fiscal
year
ended December 31, 2006 contained a fourth explanatory paragraph to reflect
its
significant doubt about our ability to continue a going concern as a result
of
our history of losses and our liquidity position, as discussed herein and in
this Form 10-KSB. If we are unable to obtain adequate capital funding in the
future, we may not be able to continue as a going concern, which would have
an
adverse effect on our business and operations, and investors’ investment in us
may decline.
We
have experienced a history of losses, we expect to incur future losses and
we
may be unable to obtain necessary additional capital to fund operations in
the
future.
We
have
recorded minimal revenue to date and we have incurred a cumulative operating
loss of approximately $77.7 million through December 31, 2006. Net losses for
the years ended 2006, 2005 and 2004 were $12,874,000, $1,700,000 and
$10,238,000, 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. Our net cash burn rate for the
twelve months of 2006 was approximately $550,000 per month. We project our
net
cash burn rate for the next seven months to be approximately $750,000 per month.
Capital expenditures are forecasted to be minor for the next seven months.
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 and capital requirements for seven months (other than debt
and interest obligations including the approximately $6
million of Senior Convertible notes due April 27, 2007 plus accrued interest;
and approximately $4.0
million of convertible notes which are required to
be
repaid
April 28, 2007 plus accrued interest; and capitalized interest of $880,000
due
September 13, 2007). 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 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. As a result
of
our history of losses and our liquidity position, our auditors have issued
an
audit report expressing significant doubt about our ability to remain a going
concern.
We
do not have 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 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.
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 $6 million of Senior Convertible notes due
April 27, 2007, and approximately $4.0 million of our Convertible Subordinated
Notes due April 28, 2007 and $5.5 million is due in September 2010. We also
have
capitalized interest of $880,000 plus interest due the Company otherwise it
will
be due September 13, 2007.
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 March 2007, 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 substantially 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 because:
some
or all of our drug candidates may be found to be unsafe or ineffective
or
otherwise fail to meet applicable regulatory standards or receive
necessary regulatory clearances;
·
our
drug candidates, if safe and effective, may be too difficult to develop
into commercially viable drugs;
·
it
may be difficult to manufacture or market our drug candidates on
a large
scale;
·
proprietary
rights of third parties may preclude us from marketing our drug
candidates; and
·
third
parties may market superior or equivalent
drugs.
The
success of our research and development activities, upon which we primarily
focus, is uncertain.
Our
primary focus is on our research and development activities and the
commercialization of compounds covered by proprietary biopharmaceutical patents
and patent applications. Research and development activities, by their nature,
preclude definitive statements as to the time required and costs involved in
reaching certain objectives. Actual research and development costs, therefore,
could exceed budgeted amounts and estimated time frames may 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 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.
Our
ability to successfully commercialize, and market our product candidates could
be limited if a number of these existing relationships were
terminated.
Furthermore,
our strategy with respect to our polymer platinate program is to enter into
a
licensing agreement with a pharmaceutical company pursuant to which the further
costs of developing a product would be shared with our licensing partner.
Although we have had discussions with potential licensing partners with respect
to our polymer platinate program, to date we have not entered into any licensing
arrangement. We may be unable to execute our licensing strategy for polymer
platinate.
We
may be unable to successfully manufacture our products and our product
candidates in clinical quantities or for commercial purposes without the
assistance of contract manufacturers, which may be difficult for us to obtain
and maintain.
We
have
limited experience in the manufacture of pharmaceutical products in clinical
quantities or for commercial purposes and we may not be able to manufacture
any
new pharmaceutical products that we may develop. As a result, we have
established, and in the future intend to establish arrangements with contract
manufacturers to supply sufficient quantities of products to conduct clinical
trials and for the manufacture, packaging, labeling and distribution of finished
pharmaceutical products if any of our potential products are approved for
commercialization. If we are unable to contract for a sufficient supply of
our
potential pharmaceutical products on acceptable terms, our preclinical and
human
clinical testing schedule may be delayed, resulting in the delay of our clinical
programs and submission of product candidates for regulatory approval, which
could cause our business to suffer. Our business could suffer if there are
delays or difficulties in establishing relationships with manufacturers to
produce, package, label and distribute our finished pharmaceutical or other
medical products, if any, market introduction and subsequent sales of such
products. Moreover, contract manufacturers that we may use must adhere to
current Good Manufacturing Practices, as required by the FDA. In this regard,
the FDA will not issue a pre-market approval or product and establishment
licenses, where applicable, to a manufacturing facility for the products until
the
manufacturing
facility passes a pre-approval plant inspection. If we are unable to obtain
or
retain third party manufacturing on commercially acceptable terms, we may not
be
able to commercialize our products as planned. Our potential dependence upon
third parties for the manufacture of our products may adversely affect our
ability to generate profits or acceptable profit margins and our ability to
develop and deliver such products on a timely and competitive basis.
ProLindac™
is manufactured by third parties for our Phase I/II clinical trials.
Manufacturing is ongoing for the current clinical trials. Certain manufacturing
steps are conducted by the Company to enable significant cost savings to be
realized.
We
are subject to extensive governmental regulation which increases our cost of
doing business and may affect our ability to commercialize any new products
that
we may develop.
The
FDA
and comparable agencies in foreign countries impose substantial requirements
upon the introduction of pharmaceutical products through lengthy and detailed
laboratory, preclinical and clinical testing procedures and other costly and
time-consuming procedures to establish their safety and efficacy. All of our
drugs and drug candidates require receipt and maintenance of governmental
approvals for commercialization. Preclinical and clinical trials and
manufacturing of our drug candidates will be subject to the rigorous testing
and
approval processes of the FDA and corresponding foreign regulatory authorities.
Satisfaction of these requirements typically takes a significant number of
years
and can vary substantially based upon the type, complexity and novelty of the
product. The status of our principal products is as follows:
·
A
mucoadhesive liquid technology product, MuGard™, has received marketing
approval by the FDA.
·
ProLindac™
is
currently in a Phase II trial in Europe and a Phase II trial in the
US.
·
ProLindac™
has
been approved for an additional Phase I trial in the US by the
FDA.
·
Cobalamin™
mediated delivery technology is currently in the pre-clinical
phase.
We
also
have other products in the preclinical phase.
Due
to
the time consuming and uncertain nature of the drug candidate development
process and the governmental approval process described above, we cannot assure
you when we, independently or with our collaborative partners, might submit
a
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, Access, our drugs and our manufacturing facilities would
be
subject to continual review and periodic inspection, and later discovery of
previously unknown problems with a drug, manufacturer or facility may result
in
restrictions on the marketing or manufacture of such drug, including withdrawal
of the drug from the market. The FDA and other regulatory authorities
stringently apply regulatory standards and failure to comply with regulatory
standards can, among other things, result in fines, denial or withdrawal of
regulatory approvals, product recalls or seizures, operating restrictions and
criminal prosecution.
The
uncertainty associated with preclinical and clinical testing may affect our
ability to successfully commercialize new products.
Before
we
can obtain regulatory approvals for the commercial sale of any of our potential
drugs, the drug candidates will be subject to extensive preclinical and clinical
trials to demonstrate their safety and efficacy in humans. Preclinical or
clinical trials of any of our future drug candidates may not demonstrate the
safety and efficacy of such drug candidates at all or to the extent necessary
to
obtain regulatory approvals. In this regard, for example, adverse side effects
can occur during the clinical testing of a new drug on humans which may delay
ultimate FDA approval or even lead us to terminate our efforts to develop the
drug for commercial use. Companies in the biotechnology industry have suffered
significant setbacks in advanced clinical trials, even after demonstrating
promising results in
earlier
trials. In particular, polymer platinate has taken longer to progress through
clinical trials than originally planned. This extra time has not been related
to
concerns of the formulations but rather due to the lengthy regulatory process.
The failure to adequately demonstrate the safety and efficacy of a drug
candidate under development could delay or prevent regulatory approval of the
drug candidate. A delay or failure to receive regulatory approval for any of
our
drug candidates could prevent us from successfully commercializing such
candidates and we could incur substantial additional expenses in our attempts
to
further develop such candidates and obtain future regulatory approval.
We
may incur substantial product liability expenses due to the use or misuse of
our
products for which we may be unable to obtain insurance
coverage.
Our
business exposes us to potential liability risks that are inherent in the
testing, manufacturing and marketing of pharmaceutical products. These risks
will expand with respect to our drug candidates, if any, that receive regulatory
approval for commercial sale and we may face substantial liability for damages
in the event of adverse side effects or product defects identified with any
of
our products that are used in clinical tests or marketed to the public. We
generally procure product liability insurance for drug candidates that are
undergoing human clinical trials. Product liability insurance for the
biotechnology industry is generally expensive, if available at all, and as
a
result, we may be unable to obtain insurance coverage at acceptable costs or
in
a sufficient amount in the future, if at all. We may be unable to satisfy any
claims for which we may be held liable as a result of the use or misuse of
products which we have developed, manufactured or sold and any such product
liability claim could adversely affect our business, operating results or
financial condition.
We
may incur significant liabilities if we fail to comply with stringent
environmental regulations or if we did not comply with these regulations in
the
past.
Our
research and development processes involve the controlled use of hazardous
materials. We are subject to a variety of federal, state and local governmental
laws and regulations related to the use, manufacture, storage, handling and
disposal of such material and certain waste products. Although we believe that
our activities and our safety procedures for storing, using, handling and
disposing of such materials comply with the standards prescribed by such laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such accident, we
could be held liable for any damages that result and any such liability could
exceed our resources.
Intense
competition may limit our ability to successfully develop and market commercial
products.
The
biotechnology and pharmaceutical industries are intensely competitive and
subject to rapid and significant technological change. Our competitors in the
United States and elsewhere are numerous and include, among others, major
multinational pharmaceutical and chemical companies, specialized biotechnology
firms and universities and other research institutions.
The
following products may compete with polymer platinate:
•
Cisplatin,
marketed by Bristol-Myers Squibb, the originator of the drug, and
several
generic manufacturers;
•
Carboplatin,
marketed by Bristol-Myers Squibb in the US;
and
•
Oxaliplatin,
marketed exclusively by
Sanofi-Aventis.
The
following companies are working on therapies and formulations that may be
competitive with our polymer platinate:
•
Antigenics
and Regulon are developing liposomal platinum
formulations;
•
Spectrum
Pharmaceuticals and GPC Biotech is developing oral platinum
formulations;
•
Poniard
Pharmaceuticals is developing both iv and oral platinum
formulations;
•
Nanocarrier
and Debio are developing micellar nanoparticle platinum formulations;
and
•
American
Pharmaceutical Partners, Cell Therapeutics, Daiichi, and Enzon 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 are Bristol-Myers Squibb, Centocor (acquired
by
Johnson & Johnson), Endocyte, GlaxoSmithKline, Imclone and Xoma which are
developing targeted monoclonal antibody therapy.
Amgen,
Carrington Laboratories, CuraGen Corporation, Cytogen Corporation, Endo
Pharmaceuticals, , MGI Pharma, Nuvelo, Inc. and OSI Pharmaceuticals are
developing products to treat mucositis that may compete with our mucoadhesive
liquid technology.
BioDelivery
Sciences International, Biovail Corporation, Cellgate, CIMA Labs, Inc., Cytogen
Corporation, Depomed Inc., Emisphere Technologies, Inc., Eurand, Flamel
Technologies, Nobex and Xenoport are developing products which compete with
our
oral drug delivery system.
Many
of
these competitors have and employ greater financial and other resources,
including larger research and development, marketing and manufacturing
organizations. As a result, our competitors may successfully develop
technologies and drugs that are more effective or less costly than any that
we
are developing or which would render our technology and future products obsolete
and noncompetitive.
In
addition, some of our competitors have greater experience than we do in
conducting preclinical and clinical trials and obtaining FDA and other
regulatory approvals. Accordingly, our competitors may succeed in obtaining
FDA
or other regulatory approvals for drug candidates more rapidly than we do.
Companies that complete clinical trials, obtain required regulatory agency
approvals and commence commercial sale of their drugs before their competitors
may achieve a significant competitive advantage. Drugs resulting from our
research and development efforts or from our joint efforts with collaborative
partners therefore may not be commercially competitive with our competitors'
existing products or products under development.
Our
ability to successfully develop and commercialize our drug candidates will
substantially depend upon the availability of reimbursement funds for the costs
of the resulting drugs and related treatments.
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. Limited reimbursement for the cost of any drugs that we develop may reduce
the demand for, or price of such drugs, which would hamper our ability to obtain
collaborative partners to commercialize our drugs, or to obtain a sufficient
financial return on our own manufacture and commercialization of any future
drugs.
The
market may not accept any pharmaceutical products that we successfully
develop.
The
drugs
that we are attempting to develop may compete with a number of well-established
drugs manufactured and marketed by major pharmaceutical companies. The degree
of
market acceptance of any drugs developed by us will depend on a number of
factors, including the establishment and demonstration of the clinical efficacy
and safety of our drug candidates, the potential advantage of our drug
candidates over existing therapies and the reimbursement policies of government
and third-party payers. Physicians, patients or the medical community in general
may not accept or use any drugs that we may develop independently or with our
collaborative partners and if they do not, our business could
suffer.
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 13 U.S. patents and to 9
U.S.
patent applications now pending, and 4 European patents and 12 European patent
applications, we cannot assure you that any additional patents will issue from
any of the patent applications owned by, or licensed to, us. Furthermore, any
rights that we may have under issued patents may not provide us with significant
protection against competitive products or otherwise be commercially viable.
Our
patents for the following technologies expire in the years and during the date
ranges indicated below:
·
Mucoadhesive
technology in 2021,
·
ProLindac™
in 2021,
·
Cobalamin
mediated technology between 2007 and
2019
In
addition to issued patents, we have a number of pending patent applications.
If
issued, the patents underlying theses applications could extend the patent
life
of our technologies beyond the dates listed above.
Patents
may have been granted to third parties or may be granted covering products
or
processes that are necessary or useful to the development of our drug
candidates. If our drug candidates or processes are found to infringe upon
the
patents or otherwise impermissibly utilize the intellectual property of others,
our development, manufacture and sale of such drug candidates could be severely
restricted or prohibited. In such event, we may be required to obtain licenses
from third parties to utilize the patents or proprietary rights of others.
We
cannot assure you that we will be able to obtain such licenses on acceptable
terms, if at all. If we become involved in litigation regarding our intellectual
property rights or the intellectual property rights of others, the potential
cost of such litigation, regardless of the strength of our legal position,
and
the potential damages that we could be required to pay could be
substantial.
Our
business could suffer if we lose the services of, or fail to attract, key
personnel.
We
are
highly dependent upon the efforts of our senior management and scientific team,
including our President and Chief Executive Officer, Stephen R. Seiler. The
loss
of the services of one or more of these individuals could delay or prevent
the
achievement of our research, development, marketing, or product
commercialization objectives. While we have employment agreements with Stephen
R. Seiler, David P. Nowotnik, PhD our Senior Vice President Research and
Development, and Stephen B. Thompson, our Vice President and Chief Financial
Officer, their employment may be terminated by them or us at any time. Mr.
Seiler’s, Dr. Nowotnik's and Mr. Thompson’s agreements expire within one year
and are extendable each year on the anniversary date. We do not have employment
contracts with our other key personnel. We do not maintain any "key-man"
insurance policies on any of our key employees and we do not intend to obtain
such insurance. In addition, due to the specialized scientific nature of our
business, we are highly dependent upon our ability to attract and retain
qualified scientific and technical personnel. In view of the stage of our
development and our research and development programs, we have restricted our
hiring to research scientists and a small administrative staff and we have
made
only limited investments in manufacturing, production, sales or regulatory
compliance resources. There is intense competition among major pharmaceutical
and chemical companies, specialized biotechnology firms and universities and
other research institutions for qualified personnel in the areas of our
activities, however, and we may be unsuccessful in attracting and retaining
these personnel.
An
investment in our common stock may be less attractive because it is not traded
on a recognized public market.
Our
common stock has traded on the OTC Bulletin Board, or OTCBB since June 5, 2006.
From February 1, 2006 until June 5, 2006 we traded on the “Pink Sheets” after
our common stock was de-listed from trading on AMEX. The OTCBB and Pink Sheets
are viewed by most investors as a less desirable, and less liquid, marketplace.
As a result, an investor may find it more difficult to purchase, dispose of
or
obtain accurate quotations as to the value of our common stock.
Our
common stock is subject to Rules 15g-1 through 15g-9 under the Exchange Act,
which imposes certain sales practice requirements on broker-dealers who sell
our
common stock to persons other than established customers and "accredited
investors" (as defined in Rule 501(c) of the Securities Act). For transactions
covered by this rule, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to the sale. This rule adversely affects the
ability of broker-dealers to sell our common stock and purchasers of our common
stock to sell their shares of our common stock.
Additionally,
our common stock is subject to SEC regulations applicable to "penny stock."
Penny stock includes any non-NASDAQ equity security that has a market price
of
less than $5.00 per share, subject to certain exceptions. The regulations
require that prior to any non-exempt buy/sell transaction in a penny stock,
a
disclosure schedule proscribed by the SEC relating to the penny stock market
must be delivered by a broker-dealer to the purchaser of such penny stock.
This
disclosure must include the amount of commissions payable to both the
broker-dealer and the registered representative and current price quotations
for
our common stock. The regulations also require that monthly statements be sent
to holders of penny stock that disclose recent price information for the penny
stock and information of the limited market for penny stocks. These requirements
adversely affect the market liquidity of our common stock.
Ownership
of our shares is concentrated in the hands of a few investors which could limit
the ability of our other stockholders to influence the direction of the
company.
SCO
Capital Partners LLC, Larry N. Feinberg (Oracle Partners LP, Oracle
Institutional Partners LP and Oracle Investment Management Inc.), and Jeffrey
B.
Davis each beneficially owned approximately 74.1%, 26.4%, and 14.9%,
respectively, of our common stock as of December 31, 2006. 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.
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.
All of
the 3,535,358 shares of
our
common stock that are outstanding as of March 30, 2007, are unrestricted and
freely tradable or tradable pursuant to a resale registration statement or
under
Rule 144 of the Securities Act or are covered by a registration rights
agreement.
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.
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.
We
maintain one facility of approximately 9,000 square feet for administrative
offices and laboratories in Dallas, Texas. We have a lease agreement for the
facility, which terminates in December 2007. Adjacent space may be available
for
expansion which we believe would accommodate growth for the foreseeable
future.
We
believe that our existing properties are suitable for the conduct of our
business and adequate to meet our present needs.
Mr.
Stephen R. Seiler, 50, has been our President and Chief Executive Officer since
January 1, 2007. Until recently, Mr. Seiler had been Acting Chief Executive
Officer of Effective Pharmaceuticals, inc. and advising other companies in
the
healthcare field. From 2001 until 2004 he was Chief Executive Officer of
Hybridon, Inc. (now named Idera Pharmaceuticals, Inc.). Mr. Seiler was Executive
Vice President, Planning, Investment & Development at Elan Corporation plc
from 1995 until 2001. He also worked as an investment banker at Paribas Capital
Markets in both London and New York from 1991 to 1995 where he was founder
and
head of Paribas’ pharmaceutical investment banking group.
David
P.
Nowotnik, Ph.D., 58, has been Senior Vice President Research and Development
since January 2003 and had been Vice President Research and Development from
1998. From 1994 until 1998, Dr. Nowotnik had been with Guilford Pharmaceuticals,
Inc. in the position of Senior Director, Product Development and was responsible
for a team of scientists developing polymeric controlled-release drug delivery
systems. From 1988 to 1994 he was with Bristol-Myers Squibb researching and
developing technetium radiopharmaceuticals and MRI contrast agents. From 1977
to
1988 he was with Amersham International leading the project which resulted
in
the discovery and development of Ceretec.
Mr.
Phillip S. Wise, 49, has been our Vice President Business Development since
June1, 2006. Mr. Wise was Vice President of Commercial and Business Development
for
Enhance Pharmaceuticals, Inc. and Ardent
Pharmaceuticals,
Inc. from 2000 until 2006. Prior to that time he was with Glaxo Wellcome, from
1990 to 2000 in various capacities.
Mr.
Stephen B. Thompson, 53, has been Vice President since 2000 and our Chief
Financial Officer since 1996. From 1990 to 1996, he was Controller and
Administration Manager of Access Pharmaceuticals, Inc., a private Texas
corporation. Previously, from 1989 to 1990, Mr. Thompson was Controller of
Robert E. Woolley, Inc. a hotel real estate company where he was responsible
for
accounting, finances and investor relations. From 1985 to 1989, he was
Controller of OKC Limited Partnership, an oil and gas company where he was
responsible for accounting, finances and SEC reporting. Between 1975 and 1985
he
held various accounting and finance positions with Santa Fe International
Corporation.
Our
common stock has traded on the OTC Bulletin Board, or OTCBB, under the trading
symbol ACCP since June 5, 2006. From February 1, 2006 until June 5, 2006 we
traded on the “Pink Sheets” under the trading symbol AKCA. From March 30, 2000
until January 31, 2006 we traded on the American Stock Exchange, or AMEX, under
the trading symbol AKC.
The
following table sets forth, for the periods indicated, the high and low closing
prices as reported by OTCBB, the Pink Sheets and AMEX for our common stock
for
fiscal years 2006 and 2005. The OTCBB and Pink Sheet quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not
represent actual transactions.
All
per
share information reflect a one for five reverse stock split effected June5,2006.
We
have
never declared or paid any cash dividends on our preferred stock or common
stock
and we do not anticipate paying any cash dividends in the foreseeable future.
The payment of dividends, if any, in the future is within the discretion of
our
Board of Directors and will depend on our earnings, capital requirements and
financial
condition
and other relevant facts. We currently intend to retain all future earnings,
if
any, to finance the development and growth of our business.
The
number of record holders of Access common stock at March 30, 2007 was
approximately 3,000. On March 30, 2007, the closing price for the common stock
as quoted on the OTCBB was $6.45. There were 3,535,358 shares of common stock
outstanding at March 30, 2007.
Recent
Sales of Unregistered Securities
None
Equity
Compensation Plan Information
The
following table sets forth information as of December 31, 2006 about shares
of
Common Stock outstanding and available for issuance under our existing equity
compensation plans.
Plan
Category
Number
of
securities
to be issued
upon
exerciseof
outstanding
options
warrants
and rights
Weighted-average
exercise price of outstanding options
warrants and rights
Number
of securities remaining available for future issuance under equity
compensation plans excluding securities
reflected in column (a))
Equity
compensation plans
approved
by security
holders
2005
Equity Incentive Plan
802,672
$
1.04
197,328
1995
Stock Awards Plan
360,917
18.03
-
2001
Restricted Stock Plan
-
-
52,818
Equity
compensation plans
not
approved by security
holders
2000
Special Stock Option Plan
100,000
12.50
-
Total
1,263,589
$
6.80
250,146
The
2000 Special Stock Option Plan
The
2000
Special Stock Option Plan (the "Special Plan") was adopted by the Board in
October 2000. The Special Plan is a non-stockholder approved plan (as permitted
under NASD rules and regulations applicable at the time of adoption by the
Board). The Supplemental Plan is intended to be a broadly based plan within
the
meaning of NASD rules and regulations applicable at the time of adoption by
the
Board. The Special Plan is not intended to be an incentive stock option plan
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the “Code”). The Special Plan allows for the issuance of up to 100,000
options to acquire the Company’s stock all of which have been issued. The
purpose of the Special Plan is to encourage ownership of Common Stock by
employees, consultants, advisors and directors of the Company and its affiliates
and to provide additional incentive for them to promote the success of the
Company’s business. The Special Plan provides for the grant of non-qualified
stock options to employees (including officers, directors, advisors and
consultants). The Special Plan will expire in October 2010, unless earlier
terminated by the Board. The options that have been granted expire June 30,2007.
SELECTED
FINANCIAL DATA (In Thousands, Except for Net Loss Per Share)
(1)
The
following data has been derived from our audited consolidated financial
statements and notes thereto appearing elsewhere in this Form 10-KSB and prior
audited consolidated financial statements of Access and notes thereto. The
data
should be read in conjunction with the “Selected
Financial Data” and Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Form
10-KSB.
This
data has been adjusted for discontinued operations and sales of assets.
The discontinued operations relate to the sale of our oral care and
dermatology business to Uluru, Inc. and the closing and sale of the
our
Australian laboratory described more fully in “Item 6. Management’s
Discussion and Analysis or Plan of
Operations.”
(2)
All
shares and per share information reflect a one for five reverse stock
split effected June 5, 2006.
The
following discussion should be read in conjunction with our consolidated
financial statements and related notes included in this Form
10-KSB.
Overview
We
are an
emerging biopharmaceutical company developing products for use in the treatment
of cancer, the supportive care of cancer, and other disease states. Our product
for the management of oral mucositis, MuGard™, has received marketing clearance
by the FDA as a device. Our lead clinical development program for the drug
candidate ProLindac™ (formerly known as AP5346) is in Phase II clinical testing.
Access also has other advanced drug delivery technologies including
Cobalamin™-mediated oral drug delivery and targeted delivery.
Together
with our subsidiaries, we have proprietary patents or rights to one approved
technology for marketing and three drug delivery technology
platforms:
•
MuGard™ (mucoadhesive liquid technology),
•
synthetic polymer targeted delivery,
•
Cobalamin-mediated oral delivery, and
•
Cobalamin-mediated targeted delivery.
All
shares and per share information reflect a one for five reverse stock split
effected June 5, 2006.
Since
our
inception, we have devoted our resources primarily to fund our research and
development programs. We have been unprofitable since inception and to date
have
received limited revenues from the sale of products. We cannot assure you that
we will be able to generate sufficient product revenues to attain profitability
on a sustained basis or at all. We expect to incur losses for the next several
years as we continue to invest in product research and development, preclinical
studies, clinical trials and regulatory compliance. As of December 31, 2006,
our
accumulated deficit was $77,672,000.
On
March 30, 2007, Access Pharmaceuticals, Inc. ("Access")
and SCO Capital Partners LLC and affiliates ("SCO") agreed to extend the
maturity date of an aggregate of $6,000,000 of 7.5% convertible notes to April27, 2007 from March 31, 2007.
On
February 21, 2007 we announced we had entered into a non-binding letter of
intent to acquire Somanta Pharmaceuticals, Inc. Pursuant to the terms of the
non-binding letter of intent, upon consummation of the acquisition, Somanta’s
preferred and common shareholders would receive an aggregate of 1.5 million
shares of Access’ common shares which would represent approximately 13% of the
combined company assuming the conversion of Access’ existing convertible debt
under existing terms of conversion. The closing of the transaction is subject
to
numerous conditions including the execution of a definitive Merger Agreement,
receipt of necessary approvals as well as completion of our due diligence
investigation. There can be no assurance that the transaction will be
consummated or if consummated that it will be on the terms described
herein.
On
December 8, 2006 we amended our 2005 Asset Sale Agreement with Uluru, Inc.
Access received from Uluru an upfront payment of $4.9 million, will receive
an
additional $350,000 on April 8, 2007 and in the future could receive potential
milestones of up to $4.8 million based on Uluru sales. The amendment agreement
included the anniversary payment due October 12, 2006, the early payment of
the
two year anniversary payment, and a payment in satisfaction of certain future
milestones. Access also transferred to Uluru certain patent applications that
Access had previously licensed to Uluru under the 2005 License Agreement. Under
a new agreement, Access has acquired a license from Uluru to utilize the
nanoparticle aggregate technology contained in the transferred patent
applications for subcutaneous, intramuscular, intra-peritoneal and intra-tumoral
drug delivery. Additionally, one future milestone was increased by
$125,000.
On
December 6, 2006, we entered into a note and warrant purchase agreement pursuant
to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes
due March 31, 2007 and warrants to purchase 386,364 shares of common stock
of
Access. Net proceeds to Access were $450,000. The notes and warrants were sold
in a private placement to a group of accredited investors led by SCO Capital
Partners LLC (“SCO”) and affiliates.
On
October 24, 2006, we entered into a note and warrant purchase agreement pursuant
to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes
due March 31, 2007 and warrants to purchase 386,364 shares of
common
stock of Access. Net proceeds to Access were $450,000. The notes and warrants
were sold in a private placement to a group of accredited investors led by
SCO
and affiliates.
On
February 16, 2006, we entered into a note and warrant purchase agreement
pursuant to which we sold and issued an aggregate of $5,000,000 of 7.5%
convertible notes due March 31, 2007 and warrants to purchase an aggregate
of
3,863,634 shares of common stock of Access. Net proceeds to Access were $4.5
million. The notes and warrants were sold in a private placement to a group
of
accredited investors led by SCO (see further discussion under “Liquidity and
Capital Resources”).
On
October 12, 2005, we sold our oral/topical care business unit to Uluru, Inc,
a
private Delaware corporation, for up to $18.8 million to focus on our
technologies in oncology and oral drug delivery. The products and technologies
sold to Uluru included amlexanox 5% paste (marketed under the trade names
Aphthasol® and Aptheal®), OraDiscTM,
Zindaclin® and Residerm® and all of our assets related to these products. In
addition, we sold 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. We received a license from Uluru for
certain applications of the technology. The CEO of Uluru is Kerry P. Gray,
the
former CEO of the Company. In conjunction with the sale transaction, we received
a fairness opinion from a nationally recognized investment banking firm (see
further discussion under “Liquidity and Capital Resources”).
Our
product MuGard™, for the management of mucositis, was approved for marketing by
the FDA under a 510(k) allowance in December 2006. Our focus will be
developing
unique polymer linked cytotoxics for use in the treatment of cancer and other
diseases states. Our lead development product ProLindac™ is in Phase II clinical
testing. The Company also has other advanced drug delivery technologies
including Cobalamin-mediated targeted delivery and oral care drug delivery.
We
do not have any agreements which provide for near term revenues. Our expenses
for salaries and rent are reduced from prior years. Our clinical development
expenses may be higher than previous years.
Our
total
research spending for continuing operations for the year ended December 31,2006
was $2,053,000, as compared to $2,783,000 in 2005, a decrease of $730,000.
The
decrease in expenses was the result of Phase II clinical trial start-up costs,
including manufacturing costs for ProLindac™ in 2005 whereas 2006 costs were
primarily clinical trial costs.
Our
total
general and administrative expenses were $2,813,000 for 2006, a decrease of
$1,825,000 over 2005 expenses of $4,638,000, due to lower:
·
Salary
expenses due to the separation agreement in 2005 with our former
CEO
($909,000);
·
Professional
fees for investment strategies and fairness opinions in 2005
($397,000);
·
Legal
fees ($313,000);
·
Patent
and license fees ($194,000);
·
Rent
($113,000);
·
Compensation
paid to Chairman in 2005 ($140,000)
and
·
Other
net decreases ($41,000).
The
decrease in general and administrative expenses is offset partially by
higher:
·
Salary
related costs due to the expensing of stock options ($180,000);
and
·
Investor/public
relations fees ($102,000).
Depreciation
and amortization was $309,000 in 2006 as compared to $333,000 in 2005, a
decrease of $24,000 due to the lower depreciation expense.
In
2005
we wrote off our goodwill of $1,868,000 following an impairment
analysis.
Our
loss
from operations in 2006 was $5,175,000 as compared to a loss of $9,622,000
in
2005.
Interest
and miscellaneous income was $294,000 for 2006 as compared to $100,000 for
2005,
an increase of $194,000, relating to interest recognized on the Uluru receivable
and higher cash balances in 2006 as compared with 2005.
Interest
and other expense was $7,436,000 for 2006 as compared to $2,100,000 for the
same
period in 2005, an increase of $5,336,000. The increase was due to amortization
of the discount of the Secured Convertible Notes and to amortization of the
discount on the extension of a convertible note.
We
had
$550,000 less $173,000 tax expense in 2006 in milestone revenues from our
oral care assets that we sold to Uluru, Inc. due to the amended 2005 Asset
Sale
Agreement. We had no milestone revenues in 2005.
The
Secured Convertible Notes include warrants and a conversion feature. Until
September 30, 2006 we accounted for the warrants and conversion feature as
liabilities and recorded at fair value. From the date of issuance to September30, 2006, the fair value of these instruments increased resulting in a net
unrealized loss of $1.1 million. On October 1, 2006, we adopted the
provisions of Financial Accounting Standards Board Staff Position EITF No.
00-19-2, “Accounting
for Registration Payment Arrangements”(EITF
00-19-2), which requires that contingent obligations to make future payments
under a registration payment arrangement be recognized and measured separately
in accordance with SFAS No. 5, “Accounting
for Contingencies.”
Under
previous guidance, the fair value of the warrant was recorded as a current
liability in our balance sheet, due to a potential cash payment feature in
the
warrant. The current liability was marked-to-market at each quarter end, using
the Black-Scholes option-pricing model, with the change being recorded to
general and administrative expenses. Under the new guidance in EITF 00-19-2,
as
we believe the likelihood of such a cash payment to not be probable, have not
recognized a liability for such obligations. Accordingly, a cumulative-effect
adjustment of $1.4 million was made as of October 1, 2006 to accumulated
deficit, representing the difference between the initial value of this warrant
and its fair value as of this date and recorded to equity.
Net
loss
for 2006 was $12,874,000, or $3.65 basic and diluted loss per common share
compared with a loss of $1,700,000, or a $0.53 basic and diluted loss per common
share, for 2005.
Our
total
research spending for continuing operations for the year ended December 31,2005
was $2,783,000, as compared to $2,335,000 in 2004, an increase of $448,000.
The
increase in expenses was the result of Phase II start-up costs including
manufacturing and clinical costs for ProLindac™ clinical trials ($674,000) and
other net costs ($20,000) offset by lower salary costs due to cutbacks in
scientific staff ($246,000).
Our
total
general and administrative expenses were $4,638,000 for 2005, an increase of
$1,439,000 over 2004 expenses of $3,199,000, due to:
·
Expenses
due to the separation agreement with our former CEO
($909,000);
·
Professional
fees for investment banking and financing decisions
($397,000);
·
Higher
legal fees due to changes in our convertible debt and legal fees
associated with merger candidates ($161,000);
and
·
Royalty
license fee ($150,000).
The
increases in general and administrative expenses is offset by:
Depreciation
and amortization was $333,000 in 2005 as compared to $469,000 in 2004, a
decrease of $136,000 due to the impairment of a license which is no longer
effective ($109,000) plus lower depreciation.
In
addition we wrote off our goodwill in 2005 of $1,868,000 following an impairment
analysis.
Our
loss
from continuing operations in 2005 was $9,622,000 as compared to a loss of
$6,003,000 in 2004.
Interest
and miscellaneous income was $100,000 for 2005 as compared to $226,000 for
2004,
a decrease of $126,000, relating to interest income due to lower cash balances
in 2005 as compared with 2004.
Interest
and miscellaneous expense was $2,100,000 for 2005 as compared to $1,385,000
for
the same period in 2004, an increase of $715,000. The increase was due to
repayment of the secured convertible notes and contractually accelerated
interest and penalty and due to amortization of the discount on the extension
on
of the convertible note.
Net
loss
for 2005 was $1,700,000, or a $0.53 basic and diluted loss per common share
compared with a loss of $10,238,000, or a $3.38 basic and diluted loss per
common share, for 2004.
Discontinued
Operations
In
October 2005 we sold our oral/topical care business to Uluru, Inc. for a gain
of
$12,891,000 less $4,067,000 tax expense and we closed down our Australian
operations. The loss from our discontinued operations of our oral/topical care
business and our Australian operation was $2,969,000.
Liquidity
and Capital Resources
We
have
funded our operations primarily through private sales of common stock and
convertible notes and our principal source of liquidity is cash and cash
equivalents. Contract research payments, licensing fees and milestone payments
from corporate alliances and mergers have also provided funding for operations.
As
of
December 31, 2006 our cash and cash equivalents and short-term investments
were
$4,389,000 and our working capital deficit was $5,782,000. Our working capital
at December 31, 2006 represented a decrease of $7,127,000 as compared to our
working capital as of December 31, 2005 of $1,345,000. Our working capital
is
negative reflecting $11.0 million of debt that becomes due prior to December31,2007 and $0.6 million of accrued interest payments due by September 13,2007.
On
December 6, 2006, we entered into a note and warrant purchase agreement pursuant
to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes
due March 31, 2007 and warrants to purchase 386,364 shares of common stock
of
Access. Net proceeds to Access were $450,000. The notes and warrants were sold
in a private placement to a group of accredited investors led by SCO Capital
Partners LLC (“SCO”) and affiliates.
On
October 24, 2006, we entered into a note and warrant purchase agreement pursuant
to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes
due March 31, 2007 and warrants to purchase 386,364 shares of common stock
of
Access. Net proceeds to Access were $450,000. The notes and warrants were sold
in a private placement to a group of accredited investors led by SCO and
affiliates.
On
February 16, 2006, we entered into a note and warrant purchase agreement
pursuant to which we sold and issued an aggregate of $5,000,000 of 7.5%
convertible notes due March 31, 2007 and warrants to purchase an aggregate
of
3,863,634 shares of common stock of Access. Net proceeds to Access were $4.5
million after offering costs of approximately $500,000, which are being
amortized to interest expense over the term of the debt. The notes and warrants
were sold in a private placement to a group of accredited investors led by
SCO
and its affiliates.
All
the
secured notes mature on March 31, 2007, are convertible into Access common
stock
at a fixed conversion rate of $1.10 per share, bear interest of 7.5% per annum
and are secured by the assets of Access. Each note may be converted at the
option of the noteholder or Access under certain circumstances as set forth
in
the notes.
Each
noteholder received a warrant to purchase a number of shares of common stock
of
Access equal to 75% of the total number shares of Access common stock into
which
such holder's note is convertible. Each warrant has an exercise price of $1.32
per share and is exercisable at any time prior to February 16, 2012, October24,2012 and December 6, 2012. In the event SCO and its affiliates were to convert
all of their notes and exercise all of their warrants, it would own
approximately 74.1% of the voting securities of Access. Access may be required
to pay in cash, up to 2% per month, as defined, as liquidated damages for
failure to file a registration statement timely as required by an investor
rights agreement.
In
connection with the sale and issuance of notes and warrants, Access entered
into
an investors rights agreement whereby it granted SCO the right to designate
two
individuals to serve on the Board of Directors of Access while the notes are
outstanding, and also granted registration rights with respect to the shares
of
common stock of Access underlying the notes and warrants. SCO designated Jeffrey
B. Davis and Mark J. Alvino to the Board of Directors, and on March 13, 2006
Messrs, Davis and Alvino were appointed to the Board of Directors.
Uluru,
Inc. - Sale of Oral/Topical Care Assets
On
December 8, 2006 we amended our 2005 Asset Sale Agreement with Uluru, Inc.
Access received from Uluru an upfront payment of $4.9 million, will receive
an
additional $350,000 on April 8, 2007 and in the future could receive potential
milestones of up to $4.8 million based on Uluru sales. The amendment agreement
included the anniversary payment due October 12, 2006, the early payment of
the
two year anniversary payment, and a payment in satisfaction of certain future
milestones. Access also transferred to Uluru certain patent applications that
Access had previously licensed to Uluru under the 2005 License Agreement. Under
a new agreement, Access has acquired a license from Uluru to utilize the
nanoparticle aggregate technology contained in the transferred patent
applications for subcutaneous, intramuscular, intra-peritoneal and intra-tumoral
drug delivery. Additionally, one future milestone was increased by
$125,000.
On
October 12, 2005, we sold our oral/topical care business unit to Uluru, Inc,
a
private Delaware corporation, for up to $18.6 million to focus on our
technologies in oncology and vitamin targeted drug delivery. The products and
technologies sold to Uluru include amlexanox 5% paste (marketed under the trade
names Aphthasol® and Aptheal®), OraDiscTM,
Zindaclin® and Residerm® and all of our assets related to these products. In
addition, we sold 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. We received a license from Uluru for
certain applications of the technology. The CEO of Uluru is Kerry P. Gray,
the
former CEO of the Company. In conjunction with the sale transaction, we received
a fairness opinion from a nationally recognized investment banking
firm.
Uluru
assumed eight employees of the Company, and five employees remained with Access
after the sale transaction. Throughout a transition period agreed to by the
parties, Uluru leased space from the Company at its Dallas, TX
headquarters.
At
the
closing of this agreement we received $8.7 million. Any contingent liabilities
arise in the future relating to our former business could reduce further
receipts.
The
upfront payment of this transaction allowed Access to immediately retire our
$2.6 million of Secured Convertible Notes held by Cornell Capital Partners
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
reduced our burn rate.
Restructuring
Convertible Notes
On
November 9, 2005 we announced the restructuring and partial repayment of our
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 $27.50 per share to $5.00 per share.
In
addition, the Company may cause a mandatory conversion of the notes into common
stock if the common 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 of the
Company.
This modification resulted in us recording additional debt discount of $2.1
million, which will be accreted to interest expense to the revised maturity
date.
Access
was unable to reach a conversion agreement with the second holder of $4 million
worth of notes (Philip D. Kaltenbacher), so settled his claim by paying him
this
amount plus expenses and interest as outlined in the terms of the
note.
The
third
noteholder, holding $5.5 million worth of convertible notes agreed to amend
its
notes to a new maturity date, September 13, 2010 and elected to have the 2005
and 2006 interest of $880,000 to be paid on September 13, 2007 or earlier if
the
Company receives $5.0 million of new funds. The delayed interest will earn
interest at a rate of 10.0%.
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. A failure to restructure our existing
convertible notes or obtain necessary additional capital in the future could
jeopardize our operations.
Cornell
Capital Partners Standby Equity Distribution Agreement and Securities Purchase
Agreement
On
March30, 2005the Company executed a Standby Equity Distribution Agreement (SEDA)
with Cornell Capital Partners. Under the SEDA, the Company could 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 was 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
agreed to pay Cornell Capital Partners 3.5% of the proceeds that we receive
under the Equity Line of Credit. The amount of each draw down was subject to
a
maximum amount of $1,000,000. The terms of the SEDA did 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
our 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.
The
shares issued were valued at $500,000 and recorded as Debt issuance costs and
such costs are amortized as the SEDA is accessed. As of December 31, 2006 we
had
accessed $600,000 of the SEDA and $20,000 of the debt issuance costs were
charged to additional paid-in capital and $384,000 of the issuance costs have
been charged to interest expense. The SEDA expired March 30, 2007.
In
addition, on 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
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 had 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 $20.00. 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 issued 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
have
generally incurred negative cash flows from operations since inception, and
have
expended, and expect to continue to expend in the future, substantial funds
to
complete our planned product development efforts. Since
inception, our expenses have significantly exceeded revenues, resulting in
an
accumulated deficit as of December 31, 2006 of $77,672,000. We
expect
that our capital resources as of March 31, 2007, together with receivables
will
be adequate to fund our current level of operations for seven months, excluding
any obligation to repay the convertible notes and the debt service on the
convertible notes, which at this time we do not have the ability to
pay.We
cannot
assure youthat
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 debt
obligations due in March, April and September 2007. Either through conversion
of
our debt to equity or our financing plan through the 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
successful development and commercialization of ProLindac™, MuGard™ and
our other product candidates;
·
the
ability to convert, repay or restructure our outstanding convertible
notes
and debentures;
·
the
ability to merge with Somanta Pharmaceuticals, Inc. and integrate
their
assets and programs with ours;
·
the
ability to establish and maintain collaborative arrangements with
corporate partners for the research, development and commercialization
of
products;
·
continued
scientific progress in our research and development
programs;
·
the
magnitude, scope and results of preclinical testing and clinical
trials;
·
the
costs involved in filing, prosecuting and enforcing patent
claims;
·
the
costs involved in conducting clinical
trials;
·
competing
technological developments;
·
the
cost of manufacturing and scale-up;
·
the
ability to establish and maintain effective commercialization arrangements
and activities; and
·
successful
regulatory filings.
We
have
devoted substantially all of our efforts and resources to research and
development conducted on our own behalf. The following table summarizes research
and development spending by project category (in thousands), which spending
includes, but is not limited to, payroll and personnel expense, lab supplies,
preclinical expense, development cost, clinical trial expense, outside
manufacturing expense and consulting expense:
The
following projects are among the ones included in this line item:
Vitamin
Mediated Targeted Delivery, carbohydrate targeting, amlexanox cream
and
gel and other related projects.
Due
to
uncertainties and certain of the risk factors described above, including those
relating to our ability to successfully commercialize our drug candidates,
our
ability to obtain necessary additional capital to fund operations in the future,
our ability to successfully manufacture our products and our product candidates
in clinical quantities or for commercial purposes, government regulation to
which we are subject, the uncertainty associated with preclinical and clinical
testing, intense competition that we face, market acceptance of our products
and
protection of our intellectual property, it is not possible to reliably predict
future spending or time to completion by project or product category or the
period in which material net cash inflows from significant projects are expected
to commence. If we are unable to timely complete a particular project, our
research and development efforts could be delayed or reduced, our business
could
suffer depending on the significance of the project and we might need to raise
additional capital to fund operations, as discussed in the risk factors above,
including without limitation those relating to the uncertainty of the success
of
our research and development activities and our ability to obtain necessary
additional capital to fund operations in the future. As discussed in such risk
factors, delays in our research and development efforts and any inability to
raise additional funds could cause us to eliminate one or more of our research
and development programs.
We
plan
to continue our policy of investing any available funds in certificates of
deposit, money market funds, government securities and investment-grade
interest-bearing securities. We do not invest in derivative financial
instruments.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United State of America requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amount of revenues and expenses during
the reported period. In applying our accounting principles, we must often make
individual estimates and assumptions regarding expected outcomes or
uncertainties. As you might expect, the actual results or outcomes are often
different than the estimated or assumed amounts. These differences are usually
minor and are included in our consolidated financial statements as soon as
they
are known. Our estimates, judgments and assumptions are continually evaluated
based on available information and experience. Because of the use of estimates
inherent in the financial reporting process, actual results could differ from
those estimates.
Asset
Impairment
On
January 1, 2002, we adopted SFAS 142, “Goodwill
and Other Intangible Assets.”Upon
adoption, we performed a transitional impairment test on our recorded intangible
assets that consisted primarily of acquisition related goodwill and license
intangibles. We also performed an annual impairment test in the fourth quarter
of 2005. The analysis compared the Company’s market capitalization with net
asset value resulting in an impairment charge in 2005 of $1,868,000.
Our
intangible assets at December 31, 2006 consist primarily of patents
acquired in acquisitions and licenses which were recorded at fair value on
the
acquisition date. We perform an impairment test on at least an annual basis
or
when indications of impairment exist. At December 31, 2006, Management believes
no impairment of our intangible assets exists.
Based
on
an assessment of our accounting policies and underlying judgments and
uncertainties affecting the application of those policies, we believe that
our
consolidated financial statements provide a meaningful and fair perspective
of
us. We do not suggest that other general factors, such as those discussed
elsewhere in this report, could not adversely impact our consolidated financial
position, results of operations or cash flows. The impairment test involves
judgment on the part of management as to the value of goodwill, licenses and
intangibles.
Stock
Based Compensation Expense
On
January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based
Payment,”
(“SFAS
123(R)”), which requires the measurement and recognition of all share-based
payment awards made to employees and directors including stock options based
on
estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting
under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees”
(“APB
25”), for periods beginning in fiscal year 2006. In March 2005, the Securities
and Exchange
Commission
issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
123(R). We applied the provisions of SAB 107 in its adoption of SFAS 123(R).
We
adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006,
the first day of the Company’s 2006 fiscal year. Our consolidated financial
statements for the year ended December 31, 2006, reflect the impact of SFAS
123(R). In accordance with the modified prospective transition method, our
consolidated financial statements for prior periods have not been restated
to
include the impact of SFAS 123(R). Stock-based compensation expense recognized
under SFAS 123(R) for the year ended December 31, 2006 was approximately
$248,000. Stock-based compensation expense which would have been recognized
under the fair value based method would have been approximately $750,000 during
the year ended December 31, 2005.
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service period in the company’s Statement of
Operations. Prior to the adoption of SFAS 123(R), we accounted for stock-based
awards to employees and directors using the intrinsic value method in accordance
with APB No. 25 as allowed under SFAS No. 123, “Accounting
for Stock-Based Compensation”
(“SFAS
123”). Under the intrinsic value method, no stock-based compensation expense for
stock option grants was recognized because the exercise price of our stock
options granted to employees and directors equaled the fair market value of
the
underlying stock at the date of grant. In 2005, we did recognize stock
compensation expense for restricted stock awards based on the fair value of
the
underlying stock on date of grant and this expense was amortized over the
requisite service period. There were no restricted stock awards granted in
2006
and therefore no stock compensation expense is recognized in 2006 for these
awards.
Stock-based
compensation expense recognized in our Statement of Operations for the first
year ended December 31, 2006 includes compensation expense for share-based
payment awards granted prior to, but not yet vested as of December 31,2005, based on the grant date fair value estimated in accordance with the pro
forma provisions of SFAS 123 and compensation expense for the share-based
payment awards granted subsequent to December 31, 2005, based on the grant
date
fair value estimated in accordance with the provisions of SFAS 123(R).
Stock-based compensation expense recognized in the Company’s Statement of
Operations for the year ended December 31, 2006 is based on awards ultimately
expected to vest and has been reduced for estimated forfeitures, which currently
is nil. SFAS 123(R) requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Company’s pro forma information required under SFAS
123 for periods prior to fiscal year 2006, forfeitures have been accounted
for
as they occurred.
We
use
the Black-Scholes option-pricing model (“Black-Scholes”) as its method of
valuation under SFAS 123(R) in fiscal year 2006 and a single option award
approach. This fair value is then amortized on a straight-line basis over the
requisite service periods of the awards, which is generally the vesting period.
Black-Scholes was also previously used for our pro forma information required
under SFAS 123 for periods prior to fiscal year 2006. The fair value of
share-based payment awards on the date of grant as determined by the
Black-Scholes model is affected by our stock price as well as other assumptions.
These assumptions include, but are not limited to the expected stock price
volatility over the term of the awards, and actual and projected employee stock
option exercise behaviors.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair
Value Measurements”
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157
is effective for fiscal years beginning after November 15, 2007. We are
evaluating the potential impact of the implementation of SFAS 157 on our
financial position and results of operations.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting
for Income Tax Uncertainties”
(FIN 48). FIN 48 defines the threshold for recognizing the benefits of
tax return positions in the financial statements as “more-likely-than-not” to be
sustained by the taxing authority. The recently issued literature also provides
guidance on the derecognition, measurement and classification of income tax
uncertainties, along with any related interest and penalties. FIN 48 also
includes guidance concerning accounting for income tax uncertainties in interim
periods and increases the level of disclosures associated with any recorded
income tax uncertainties. FIN 48 is effective for
Access
as
of January 1, 2007. Any differences between the amounts recognized in the
balance sheets prior to the adoption of FIN 48 and the amounts reported
after adoption will be accounted for as a cumulative-effect adjustment recorded
to the beginning balance of retained earnings. We are evaluating the potential
impact of the implementation of FIN 48 on our financial position and
results of operations.
Off-Balance
Sheet Transactions
None
Contractual
Obligations
The
Company’s contractual obligations as of December 31, 2006 are set forth
below.
Payment
Due by Period
Total
Less
Than 1 Year
1-4
Years
Long-Term
Debt
Obligations
$
16,395,000
$
10,895,000
$
5,500,000
Interest
2,422,000
1,151,000
1,271,000
Lease
Obligations
135,000
92,000
43,000
Total
$
18,952,000
$
12,138,000
$
6,814,000
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
invest
any excess cash 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 2007 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
$2,000. The estimated effect assumes no changes in our short-term investments
from December 31, 2006. We do not believe that we are exposed to any market
risks, as defined. We are not exposed to risks for changes in commodity prices,
or any other market risks.
Financial
statements required by this Item are incorporated in this Form 10-KSB on pages
F-1 through F-23. Reference is made to Item 15 of this Form
-10-KSB.
Grant
Thornton LLP ("Grant Thornton") was previously the principal accounts for the
Company. On September 15, 2006, Grant Thornton resigned as our independent
registered public accounting firm.
In
connection with the audits of fiscal years ended December 31, 2005 and 2004
and
the subsequent interim period through September 15, 2006, (i) there have been
no
disagreements with Grant Thornton on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement(s), if not resolved to Grant Thornton's satisfaction, would have
caused Grant Thornton to make reference to the subject matter of the
disagreement(s) in connection with its reports for such year, and (ii) there
were no "reportable events" as such term is defined in Item 304(a)(1)(v) of
Regulation S-K. However, as reported in the Company's Form 10-K for the year
ended December 31, 2005, Grant Thornton has communicated to the Company's audit
committee the existence
of
material weaknesses in our system of internal control over financial reporting
related to the inadequacy of staffing and a lack of segregation of
duties.
Grant
Thornton's reports did not contain an adverse opinion or disclaimer of opinion,
but the 2005 report was modified to include an explanatory paragraph related
to
uncertainties about the Company's ability to continue as a going
concern.
Effective
September 20, 2006, the Audit Committee of the Board of Directors of Access
Pharmaceuticals, Inc. (the “Company”) approved the engagement of Whitley Penn
LLP (“Whitley Penn”) as its independent registered public accounting firm to
audit the Company’s financial statements for the year ended December 31, 2006.
On October 2, 2006, Whitley Penn formally advised the Company that it was
accepting the position as the Company’s independent registered public accounting
firm for the year ending December 31, 2006.
During
the years ended December 31, 2005 and 2004, and the interim period through
October 2, 2006, Whitley Penn has not been engaged as an independent registered
public accounting firm to audit either the financial statements of the Company
or any of its subsidiaries, nor has the Company or anyone acting on its behalf
consulted with Whitley Penn regarding: (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the
type
of audit opinion that might be rendered on the Company’s financial statements;
or (ii) any matter that was the subject of a disagreement or reportable event
as
set forth in Item 304(a)(2)(ii) of Regulation S-K.
(a)
Evaluation of disclosure controls and procedures.
Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms. An evaluation was performed under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in
Rule 13a — 15(e) under the Securities Exchange Act of 1934) as of the
end of the period covered by this annual report. Based on this evaluation,
our
management, including our Chief Executive Officer and our Chief Financial
Officer, concluded that, as of December 31, 2006, our disclosure controls
and procedures were effective to ensure that information required to be
disclosed by us in the reports we file or submit under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms.
(b)
Management's annual report on internal control over financial reporting.
Not
applicable.
(c)
Attestation report of the Independent Registered Public Accounting
Firm.
Not
applicable
(d)
Changes
in Internal Control over Financial Reporting
For
the quarter ended December 31, 2006, there have been no changes in our
internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934) that have materially affected, or
are
reasonably likely to materially affect, our internal control over financial
reporting.
CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE
EXCGANGE
ACT
Directors
and Reports of Beneficial Ownership.
The
information required by this item with respect to directors (including with
respect to the audit committee of our Board of Directors) and reports of
beneficial ownership will be contained in our definitive Proxy Statement ("Proxy
Statement") for our 2007 Annual Meeting of Stockholders to be held on May 17,2007 and is incorporated herein by reference. We will file the Proxy Statement
with the Securities and Exchange Commission not later than May 1, 2007 (or
will
file an amendment to this Form 10-KSB to include such information). Information
relating to our executive officers is contained in Part I of this
report.
Code
of Ethics.
We have
adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all
of our employees (including executive officers) and directors. The Code is
available on our website at www.accesspharma.com
under
the heading “Investor Information”. We intend to satisfy the disclosure
requirement regarding any waiver of a provision of the Code applicable to any
executive officer or director, by posting such information on such website.
Access shall provide to any person without charge, upon request, a copy of
the
Code. Any such request must be made in writing to Access, c/o Investor
Relations, 2600 Stemmons Freeway, Suite 176, Dallas, TX75207.
Our
corporate governance guidelines and the charters of the audit committee,
compensation committee and nominating and corporate governance committee of
the
Board of Directors are available on our website at www.accesspharma.com
under
the heading “Investor Information”. Access shall provide to any person without
charge, upon request, a copy of any of the foregoing materials. Any such request
must be made in writing to Access, c/o Investor Relations, 2600 Stemmons
Freeway, Suite 176, Dallas, TX75207.
Platinate
HPMA Copolymer Royalty Agreement between The School of Pharmacy,
University of London and the Company dated November 19, 1996 (Incorporated
by reference to Exhibit 10.19 of our Form 10-Q for the quarter ended
September 30, 1996)
*
10.5
Employment
Agreement of David P. Nowotnik, PhD (Incorporated
by reference to Exhibit 10.19 of our Form 10-K for the year ended
December31, 1999)
10.6
401(k)
Plan (Incorporated
by reference to Exhibit 10.20 of our Form 10K for the year ended
December31, 1999)
*
10.7
2000
Special Stock Option Plan and Agreement (Incorporated
by reference to Exhibit 10.24 of our Form 10-Q for the quarter ended
September 30, 2000)
10.8
Form
of Convertible Note (Incorporated
by reference to Exhibit 10.24 of our Form 10-Q for the quarter ended
September 30, 2000)
10.9
Rights
Agreement, dated as of October 31, 2001 between the us and American
Stock
Transfer & Trust Company, as Rights Agent (incorporated by reference
to Exhibit 99.1 of our Current Report on Form 8-K dated October19,2001)
10.10
Amendment
to Rights Agreement, dated as of February 16, 2006 between us and
American
Stock Transfer & Trust Company, as Rights Agent
(2)
Agreement,
dated as of May 10, 2005 by and between us and Kerry P. Gray
(1)
*
10.14
Employment
Agreement, dated as of June 1, 2005 by and between us and Stephen
B.
Thompson (1)
10.15
AssetSale
Agreement, dated as of October 12, 2005, between us and Uluru,
Inc.
(1)
10.16
Amendment to
Asset Sale Agreement, dated as December 8, 2006,
between us and Uluru,
Inc.
10.17
License Agreement,
dated as of October 12, 2005, between us and Uluru, Inc.
(1)
10.18
Amendment
to 7% (Subject to Adjustment) Convertible Promissory Notes Due September13, 2005, dated as of November 3, 2005, between us and Oracle Partners
LP,
Oracle Institutional Holders LP, SAM Oracle Investments Inc. and
Oracle
Offshore Ltd. (1)
10.19
Noteand
Warrant Purchase Agreement, dated February 16, 2006 between us
and certain
Secured Parties
10.20
Security
Agreement, dated February 16, 2006, between us and certain Secured
Parties
(2)
10.21
Form
of 7.5% Secured Convertible Promissory Note, dated February 16, 2006,
issued by us and to certain Purchasers
(2)
10.22
Form
of Warrant, dated February 16, 2006, issued by us to certain Purchasers
(2)
Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2
Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32
Chief
Executive Officer Certification Chief Financial Officer Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
*
Management
contract or compensatory plan required to be filed as an Exhibit
to this
Form pursuant to Item 15(c) of the
report.
(1)
Incorporated
by reference to our Form 10-K for the year ended December 31,2005
(2)
Incorporated
by reference to our Form 10-Q for the quarter ended March 31,2006
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has
been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders of Access Pharmaceuticals, Inc. and
Subsidiaries
We
have
audited the accompanying consolidated balance sheet of Access Pharmaceuticals,
Inc. and Subsidiaries, as of December 31, 2006, and the related consolidated
statements of operations, changes in stockholders’ deficit, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Access
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2006, and the
consolidated results of their operations and their cash flows for the year
then
ended in conformity with accounting principles generally accepted in the United
States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has had recurring losses from
operations and a net working capital deficiency and accumulated deficit that
raises substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 2.
These conditions raise substantial doubt about the Company’s ability to continue
as a going concern. These consolidated financial statements do not include
any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
As
discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment”, effective January 1, 2006. As discussed in Note 7 to
the consolidated financial statements the Company adopted Financial Accounting
Standards Board Staff Position No. EITF 00-19-2, “Accounting for
Registration Payment Arrangements”, effective October 1, 2006.
Report
of Independent Registered Public Accounting Firm
Board
of Directors and
Shareholders
of Access
Pharmaceuticals, Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of Access Pharmaceuticals,
Inc. (the “Company”), as of December 31, 2005, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity (deficit),
and cash flows for each of the two years in the period ended December 31,2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Access
Pharmaceuticals, Inc., as of December 31, 2005, and the results of their
consolidated operations and their consolidated cash flows for each of the two
years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements the Company has incurred significant losses
in
each of the two years in the period ended December 31, 2005 in the amounts
of
$1.7 million and $10.2 million, respectively; the Company’s total liabilities
exceeded its assets by $4.2 million at December 31, 2005; and its operating
cash
flows were negative $7.3 million and negative $9.1 million for the years ended
December 31, 2005 and 2004, respectively. These matters, among others described
in Note 2, raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE
1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Operations
Access
Pharmaceuticals, Inc. is an emerging pharmaceutical company engaged in the
development of novel therapeutics for the treatment of cancer and supportive
care of cancer patients. This development work is based primarily on the
adaptation of existing therapeutic agents using the Company’s proprietary drug
delivery technology. Our efforts have been principally devoted to research
and
development, resulting in significant losses since inception on February 24,
1988.
A
summary
of the significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows.
Principles
of Consolidation
The
consolidated financial statements include the financial statements of Access
Pharmaceuticals, Inc. and our wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Use
of
Estimates
In
preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, the disclosure of contingent assets and liabilities
at
the date of the financial statements, and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ from those
estimates.
We
tested
intangible assets for impairment based on estimates of fair value. It is at
least reasonably possible that the estimates used by us will be materially
different from actual amounts. These differences could result in the impairment
of all or a portion of our intangible assets, which could have a materially
adverse effect on our results of operations.
Cash
and Cash Equivalents
We
consider all highly liquid instruments purchased with a maturity of three months
or less to be cash equivalents for purposes of the statements of cash flows.
Cash and cash equivalents consist primarily of cash in banks, money market
funds
and short-term corporate securities. We invest any excess cash in government
and
corporate securities. All other investments are reported as short-term
investments.
Short-term
Investments
Short-term
investments consist of certificates of deposit. All short term investments
are
classified as held to maturity. The cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. The cost of securities sold is
based on the specific identification method.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation is provided using the
straight-line method over estimated useful lives ranging from three to seven
years. Expenditures for major renewals and betterments that extend the useful
lives are capitalized. Expenditures for normal maintenance and repairs are
expensed as incurred. The cost of assets sold or abandoned and the related
accumulated depreciation are eliminated from the accounts and any gains or
losses are recognized in the accompanying consolidated statements of operations
of the respective period.
NOTE
1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Research
and Development Expenses
Pursuant
to SFAS No. 2, “Accounting
for Research and Development Costs,”
our
research and development costs are expensed as incurred. Research and
development expenses include, but are not limited to, payroll and personnel
expense, lab supplies, preclinical, development cost, clinical trial expense,
outside manufacturing and consulting. The cost of materials and equipment or
facilities that are acquired for research and development activities and that
have alternative future uses are capitalized when acquired.
Fair
Value of Financial Instruments
The
carrying value of cash, cash equivalents, short-term investments and accounts
payable approximates fair value due to the short maturity of these items. It
is
not practical to estimate the fair value of the Company’s long-term debt because
quoted market prices do not exist and there were no available securities with
similar terms to use as a basis to value our debt.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
A
valuation allowance is provided for deferred tax assets to the extent their
realization is in doubt.
Loss
Per Share
We
have
presented basic loss per share, computed on the basis of the weighted average
number of common shares outstanding during the year, and diluted loss per share,
computed on the basis of the weighted average number of common shares and all
dilutive potential common shares outstanding during the year. Potential common
shares result from stock options, vesting of restricted stock grants,
convertible notes and warrants. However, for all years presented, all
outstanding stock options, restricted stock grants, convertible notes and
warrants are anti-dilutive due to the losses for the periods. Anti-dilutive
common stock equivalents of 12,548,342; 1,730,135; and 1,114,122 were excluded
from the loss per share computation for 2006, 2005 and 2004,
respectively.
Restricted
Cash
Restricted
cash is cash that is or may be committed for a particular purpose. We had
restricted cash in 2005 as collateral for a note payable of $103,000. The note
was paid in full in 2006 and there is no restricted cash in 2006.
Intangible
Assets
We
expense internal patent and application costs as incurred because, even though
we believe the patents and underlying processes have continuing value, the
amount of future benefits to be derived therefrom are uncertain. Purchased
patents are capitalized and amortized over the life of the patent. We recognize
the purchase cost of licenses and amortize them over their estimated useful
lives.
The
Company operates in a single segment. In 2005, the Company wrote off its
goodwill as determined by comparing the Company’s market capitalization with its
net asset value resulting in an impairment charge of $1,868,000. In 2005, the
Company sold one of its patents for $974,000 and the Company believes the fair
value of the remaining patents based on discounted cash flow analysis exceeds
the carry value.
Amortization
expense related to intangible assets totaled $218,000, $345,000 and $421,000
for
the years ended December 31, 2006, 2005 and 2004, respectively. The aggregate
estimated amortization expense for intangible assets remaining as of December31, 2006 is as follows (in thousands):
2007
$
193
2008
168
2009
168
2010
168
2011
168
Thereafter
38
Total
$
903
Stock-Based
Compensation
On
January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based
Payment,”
(“SFAS
123(R)”), which requires the measurement and recognition of all share-based
payment awards made to employees and directors including stock options based
on
estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting
under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees”
(“APB
25”), for periods beginning in fiscal year 2006. In March 2005, the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB
107”) relating to SFAS 123(R). We applied the provisions of SAB 107 in its
adoption of SFAS 123(R).
We
adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006,
the first day of the Company’s 2006 fiscal year. Our consolidated financial
statements for the year ended December 31, 2006, reflect the impact of SFAS
123(R). In accordance with the modified prospective transition method, our
consolidated financial statements for prior periods have not been restated
to
include the impact of SFAS 123(R). Stock-based compensation expense recognized
under SFAS 123(R) for the year ended December 31, 2006 was approximately
$248,000. Stock-based compensation expense which would have been recognized
under the fair value based method would have been approximately $750,000 during
the year ended December 31, 2005.
NOTE
1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service period in the company’s Statement of
Operations. Prior to the adoption of SFAS 123(R), we accounted for stock-based
awards to employees and directors using the intrinsic value method in accordance
with APB No. 25 as allowed under SFAS No. 123, “Accounting
for Stock-Based Compensation”
(“SFAS
123”). Under the intrinsic value method, no stock-based compensation expense for
stock option grants was recognized because the exercise price of our stock
options granted to employees and directors equaled the fair market value of
the
underlying stock at the date of grant. In 2005, we did recognize stock
compensation expense for restricted stock awards based on the fair value of
the
underlying stock on date of grant and this expense was amortized over the
requisite service period. There were no restricted stock awards granted in
2006
and therefore no stock compensation expense is recognized in 2006.
Stock-based
compensation expense recognized in our Statement of Operations for the first
year ended December 31, 2006 includes compensation expense for share-based
payment awards granted prior to, but not yet vested as of December 31,2005, based on the grant date fair value estimated in accordance with the pro
forma provisions of SFAS 123 and compensation expense for the share-based
payment awards granted subsequent to December 31, 2005, based on the grant
date
fair value estimated in accordance with the provisions of SFAS 123(R).
Stock-based compensation expense recognized in the Company’s Statement of
Operations for the year ended December 31, 2006 is based on awards ultimately
expected to vest and has been reduced for estimated forfeitures, which currently
is nil. SFAS 123(R) requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Company’s pro forma information required under SFAS
123 for periods prior to fiscal year 2006, forfeitures have been accounted
for
as they occurred.
We
use
the Black-Scholes option-pricing model (“Black-Scholes”) as its method of
valuation under SFAS 123(R) in fiscal year 2006 and a single option award
approach. This fair value is then amortized on a straight-line basis over the
requisite service periods of the awards, which is generally the vesting period.
Black-Scholes was also previously used for our pro forma information required
under SFAS 123 for periods prior to fiscal year 2006. The fair value of
share-based payment awards on the date of grant as determined by the
Black-Scholes model is affected by our stock price as well as other assumptions.
These assumptions include, but are not limited to the expected stock price
volatility over the term of the awards, and actual and projected employee stock
option exercise behaviors.
During
2006, 753,872 stock options were granted and 50,000 stock options were granted
during 2005 under the 2005 Equity Incentive Plan. In addition, 49,700 stock
options were granted during 2005 under the 1995 Stock Award Program. Assumptions
for 2006 are:
·
127%
- the expected volatility assumption was based upon a combination
of
historical stock price volatility measured on a twice a month basis
and is
a reasonable indicator of expected volatility.
·
4.85%
(average) - the risk-free interest rate assumption is based upon
U.S.
Treasury bond interest rates appropriate for the term of the Company’s
employee stock options.
·
None
- the dividend yield assumption is based on our history and expectation
of
dividend payments.
·
1.6
years - the estimated expected term (average of 1.6 years) is based
on
employee exercise behavior.
At
December 31, 2006, the balance of unearned stock-based compensation to be
expensed in future periods related to unvested share-based awards, as adjusted
for expected forfeitures, is approximately $360,000. The period over which
the
unearned stock-based compensation is expected to be recognized is approximately
three years. We anticipate that we will grant additional share-based awards
to
employees in the future, which will increase our stock-based compensation
expense by the additional unearned compensation resulting from these grants.
The
fair value of these grants is not included in the amount above, because the
impact of these grants cannot be predicted at this time due to the dependence
on
the number of share-based payments granted. In addition, if factors change
and
different assumptions are used in the
NOTE
1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
application
of SFAS 123(R) in future periods, stock-based compensation expense recorded
under SFAS 123(R) may differ significantly from what has been recorded in
the current period.
Our
Employee Stock Option
Plans
have been deemed compensatory in accordance with SFAS 123(R). Stock-based
compensation relating to this plan was computed using the Black-Scholes model
option-pricing formula with interest rates, volatility and dividend assumptions
as of the respective grant dates of the purchase rights provided to employees
under the plan. The weighted-average fair value of options existing under all
plans during 2006 was $5.00.
The
following table summarizes stock-based compensation in accordance with SFAS
123(R) for the year ended December 31, 2006, which was allocated as follows
(in thousands):
Stock-based
compensation expense included in operating expenses
248
Total
stock-based compensation expense
248
Tax
benefit
—
Stock-based
compensation expense, net of tax
$
248
The
following table reflects net income and diluted earnings per share for the
year
ended December 31, 2006, compared with proforma information for the year
ended December 31, 2005, had compensation cost been determined in
accordance with the fair value-based method prescribed by SFAS 123(R).
Net
loss, as reported under APB 25 for the prior period (1)
$
N/A
$
(1,700
)
Add
back stock based employee compensation expense in
reported
net loss, net of related tax effects
-
-
Subtract
total stock-based compensation expense determined
under
fair value-based method for all awards, net of related tax
effects(2)
(248
)
(750
)
Net
loss including the effect of stock-based compensation expense(3)
$
(12,874
)
$
(2,450
)
Loss
per share:
Basic
and diluted, as reported for the prior period(1)
$
(3.65
)
$
(0.53
)
Basic
and diluted, including the effect of stock-based
compensation
expense(3)
$
(3.65
)
$
(0.76
)
(1)
Net
loss and loss per share for periods prior to year 2006 does not include
stock-based compensation expense under SFAS 123 because the Company
did
not adopt the recognition provisions of SFAS 123.
(2)
Stock-based
compensation expense for periods prior to year 2006 was calculated
based
on the pro forma application of SFAS 123.
(3)
Net
loss and loss per share for periods prior to year 2006 represent
pro forma
information based on SFAS 123.
Stock
compensation expense for options granted to nonemployees has been determined
in
accordance with SFAS 123 and EITF 96-18, “Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services,”as
the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured.
Recent
Accounting Pronouncement
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair
Value Measurements”
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157
is effective for fiscal years beginning after November 15, 2007. We are
evaluating the potential impact of the implementation of SFAS 157 on our
financial position and results of operations.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting
for Income Tax Uncertainties”
(FIN 48). FIN 48 defines the threshold for recognizing the benefits of
tax return positions in the financial statements as “more-likely-than-not” to be
sustained by the taxing authority. The recently issued literature also provides
guidance on the derecognition, measurement and classification of income tax
uncertainties, along with any related interest and penalties. FIN 48 also
includes guidance concerning accounting for income tax uncertainties in interim
periods and increases the level of disclosures associated with any recorded
income tax uncertainties. FIN 48 is effective for Access as of
January 1, 2007. Any differences between the amounts recognized in the
balance sheets prior to the adoption of FIN 48 and the amounts reported
after adoption will be accounted for as a cumulative-effect adjustment recorded
to the beginning balance of retained earnings. We are evaluating the potential
impact of the implementation of FIN 48 on our financial position and
results of operations.
The
Company incurred significant losses from continuing operations of $13.4 million
for the year ended December 31, 2006 and $7.6 million for the year ended
December 31, 2005. Additionally, at December 31, 2006, we had negative working
capital of $5.8 million. As of December 31, 2006, we did
not have
sufficient funds to repay our convertible notes at their maturity and support
our working capital and operating requirements.
We
do not
have funds to pay our debt obligations which are due in March, April and
September 2007 and will have to raise more funds or attempt to restructure
the
convertible notes.
SCO
Capital Partners LLC Note and Warrant Purchase Agreement
On
December 6, 2006, we entered into a note and warrant purchase agreement pursuant
to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes
due March 31, 2007 and warrants to purchase 386,364 shares of common stock
of
Access. Net proceeds to Access were $450,000. The notes and warrants were sold
in a private placement to a group of accredited investors led by SCO Capital
Partners LLC (“SCO”) and affiliates.
On
October 24, 2006, we entered into a note and warrant purchase agreement pursuant
to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes
due March 31, 2007 and warrants to purchase 386,364 shares of common stock
of
Access. Net proceeds to Access were $450,000. The notes and warrants were sold
in a private placement to a group of accredited investors led by SCO and
affiliates.
On
February 16, 2006, we entered into a note and warrant purchase agreement
pursuant to which we sold and issued an aggregate of $5,000,000 of 7.5%
convertible notes due March 31, 2007 and warrants to purchase an aggregate
of
3,863,634 shares of common stock of Access. Net proceeds to Access were $4.5
million. The notes and warrants were sold in a private placement to a group
of
accredited investors led by SCO and affiliates.
All
of
the notes mature on March 31, 2007, are convertible into Access common stock
at
a fixed conversion rate of $1.10 per share, bear interest of 7.5% per annum
and
are secured by certain assets of Access. Each note may be converted at the
option of the noteholder or Access under certain circumstances as set forth
in
the notes.
Each
noteholder received a warrant to purchase a number of shares of common stock
of
Access equal to 75% of the total number shares of Access common stock into
which
such holder's note is convertible. Each warrant has an exercise price of $1.32
per share and is exercisable at any time prior to February 16, 2012, October24,2012 and December 6, 2012. In the event SCO and its affiliates were to convert
all of their notes and exercise all of their warrants, they would own
approximately 74.1% of the voting securities of Access.
In
connection with its sale and issuance of notes and warrants, Access entered
into
an investors rights agreement whereby it granted SCO the right to designate
two
individuals to serve on the Board of Directors of Access while the notes are
outstanding, and also granted registration rights with respect to the shares
of
common stock of Access underlying the notes and warrants.
The
Company believes that based on the funds available the Company will have the
ability to pay its projected net cash burn rate of $750,000 per month for seven
months. We will have to raise more funds to cover future months net cash burn
rate and to pay our debt service or attempt to restructure the convertible
notes.
Stephen
B. Howell, M.D., a Director, receives payments for consulting services and
reimbursement of direct expenses and has also received warrants for his
consulting services. Dr. Howell’s payments for consulting services, expense
reimbursements and warrants are as follows:
Year
Consulting
Fees
Expense
Reimbursement
2006
$
69,000
$
5,000
2005
79,000
5,000
2004
58,000
9,000
In
the
event SCO Capital Partners LLC (“SCO”) and its affiliates were to convert all of
their notes and exercise all of their warrants, they would own approximately
74.1% of the voting securities of Access. During 2006 SCO and affiliates were
paid $415,000 in fees for the convertible notes that Access issued and were
paid
$131,000 in investor relations fees.
See
Note
9 for a discussion of our Restricted Stock Purchase Program.
Depreciation
and amortization on property and equipment was $91,000, $225,000, and $244,000
for the years ended December 31, 2006, 2005 and 2004, respectively.
NOTE
5 - 401(k) PLAN
We
have a
tax-qualified employee savings and retirement plan (the “401(k) Plan”) covering
all our employees. Pursuant to the 401(k) Plan, employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit
($15,000 in 2006; $14,000 in 2005; and $13,000 in 2004) and to have the amount
of such reduction contributed to the 401(k) Plan. We have a 401(k) matching
program whereby we contribute for each dollar a participant contributes a like
amount, with a maximum contribution of 2% of a participant’s earnings. The
401(k) Plan is intended to qualify under Section 401 of the Internal Revenue
Code so that contributions by employees or by us to the 401(k) Plan, and income
earned on 401(k) Plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by us, if any, will
be
deductible by us when made. At the direction of each participant, we invest
the
assets of the 401(k) Plan in any of 23 investment options. Company contributions
under the 401(k) Plan were approximately $11,000 in 2006; $31,000 in 2005;
and
$46,000 in 2004.
In
October 2005 we sold our oral/topical care business to Uluru, Inc. for up to
$18.6 million. At the closing of this agreement we received $8.7 million. In
addition, due to the Amended Asset Sale Agreement in December 2006, we received
$4.9 million and an obligation to receive from Uluru $350,000 on April 8, 2007
for the first and second anniversary payments and settlement of certain
milestones. We recorded $550,000 as revenue for the discontinued operations
in
2006. Any contingent liabilities arise in the future relating to our former
business could reduce future receipts. Additional payments of up to $4.8
million, as amended by the Amended Asset Sale Agreement may be made upon the
achievement of certain additional sales milestones.
In
September 2005 we closed our Australian laboratory and office, keeping the
vitamin B12 technology.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” operating
results for assets sold or held for sale are presented as discontinued
operations for current and all prior years presented. In accordance with SFAS
No. 144 the operating results of these assets, along with the gain on sale,
have
been presented in discontinued operations for all periods
presented.
2006
2005
2004
Revenues
$
550,000
$
781,000
$
549,000
Expenses
Cost
of
product sales
(1,012,000
)
(239,000
)
Research
and
development
(2,501,000
)
(3,082,000
)
Depreciation
(237,000
)
(304,000
)
Total
expenses
-
(3,750,000
)
(3,625,000
)
Income/loss
from discontinued operations
550,000
(2,969,000
)
(3,076,000
)
Gain
on sale of assets
-
12,891,000
-
Tax expense
(173,000
)
(4,067,000
)
-
Discontinued operations
$
377,000
$
5,855,000
$
(3,076,000
)
We
previously had licenses for the oral/topical assets. These licenses were sold
to
Uluru, Inc. in October 2005. In the Asset Sale Agreement between us and Uluru
certain refunds and receipts were incurred before the date of sale and were
assigned to either us or to Uluru. We have $173,000 recorded as a deferred
gain
on the sale until such time as approvals are received.
On
September 20, 2000, we completed a $13.5 million convertible note offering.
The
offering was placed with three investors. One investor was repaid in 2005,
$4,015,000. Our other convertible notes are due in two parts. The notes bear
interest at 7.7% per annum with $733,000 of interest due annually on September
13th.
$4,015,000
due on April 28, 2007.
This
investor’s notes have a fixed conversion price of $5.00 per share of common
stock and may be converted by the note holder or us under certain circumstances
as defined in the note. Upon a change of control, this investor is not required
to automatically convert the note unless the amount payable to the investor
upon
change of control, issuable upon conversion of the note equals or exceeds $7.50.
If the notes are not converted we will have to repay the notes on the due dates.
The investor’s notes were amended November 3, 2005 extending the term and
adjusting the conversion price from $27.50 to $5.00 per common share. The
amendment and modification resulted in us recording additional debt discount
of
$2.1 million, which will be accreted to interest expense to the revised maturity
date. The interest due at December 31, 2006 was $92,000.
$5,500,000
due on September 13, 2010.
This
investor delayed his interest payment which was due in 2005 and 2006 until
September 13, 2007 or earlier if the Company raises more than $5.0 million
in
funds. The capitalized interest was $880,000 and interest on the capitalized
interest was $26,000 at December 31, 2006. The interest due on the convertible
note was $126,000 at December 31, 2006. This note has a fixed conversion price
of $27.50 per share of common stock and may be converted by the note holder
or
us under certain circumstances as defined in the note. If the notes are not
converted we will have to repay the notes on the due dates.
$6,000,000
due on March 31, 2007.
The
notes were sold in February 2006 in a private placement to a group of accredited
investors led by SCO Capital Partners LLC and affiliates. We entered into a
note
and purchase agreement to which we sold and issued an aggregate of $5 million
of
7.5% convertible notes due March 31, 2007 and warrants to purchase 3,863,634
shares of common stock of Access. Net proceeds to Access were $4.5
million.
On
October 24, 2006, we entered into a note and warrant purchase agreement pursuant
to which we sold and issued an aggregate of $500,000 of 7.5% convertible notes
due March 31, 2007 and warrants to purchase 386,364 shares of common stock
of
Access. Net proceeds to Access were $450,000. On December 6, 2006, we entered
into a note and warrant purchase agreement pursuant to which we sold and issued
an aggregate of $500,000 of 7.5% convertible notes due March 31, 2007 and
warrants to purchase 386,364 shares of common stock of Access. Net proceeds
to
Access were $450,000. Interest due at December 31, 2006 on all notes with SCO
and affiliates was $336,000.
All
these
notes with SCO and affiliates have a fixed conversion price of $1.10 per share
of common stock and may be converted by the note holder or us under certain
circumstances as defined in the note. If the notes are not converted we will
have to repay the notes on the due dates.
The
Secured Convertible Notes include warrants and a conversion feature. Until
September 30, 2006 we accounted for the warrants and conversion feature as
liabilities and recorded at fair value. From the date of issuance to September30, 2006, the fair value of these instruments increased resulting in a net
unrealized loss of $1.1 million. On October 1, 2006, we adopted the
provisions of EITF 00-19-2, “Accounting
for Registration Payment Arrangements”(EITF
00-19-2), which requires that contingent obligations to make future payments
under a registration payment arrangement be recognized and measured separately
in accordance with SFAS No. 5, “Accounting
for Contingencies.”
Under
previous guidance, the fair value of the warrant was recorded as a current
liability in our balance sheet, due to a potential cash payment feature in
the
warrant. Access may be required to pay in cash, up to 2% per month, as defined,
as liquidated damages for failure to file a registration statement timely as
required by an investor rights agreement. The current liability was
marked-to-market at each quarter end, using the Black-Scholes option-pricing
model, with the change being recorded to general and administrative expenses.
Under the new guidance in EITF 00-19-2, as we believe the likelihood of such
a
cash payment to
not
be
probable, have not recognized a liability for such obligations. Accordingly,
a
cumulative-effect adjustment of $1.4 million was made as of October 1, 2006
to accumulated deficit, representing the difference between the initial value
of
this warrant and its fair value as of this date and recorded to equity.
Subsequent
to the adoption of EITF 00-19-2 on October 1, 2006, the Company has accounted
for the $6,000,000 notes under EITF Issue No. 00-27, Application
of Issue No. 98-5 to Certain Instruments.
The
value of the warrants was valued using a Black-Scholes option-pricing model
with
the following assumptions with a weighted average volatility of
120%,
expected
life of 6 years, expected yield of 0% and risk free rate of 5.0%. At December31, 2006, approximately $1.6M of
debt
discount related to the warrants and embedded conversion feature had not been
amortized to interest expense. This will be amortized over the remaining life
of
the debt through March 31, 2007.
On
September 20, 2001, we completed a $600,000 installment loan with a bank. The
note was paid in full in 2006.
NOTE
8 - COMMITMENTS AND CONTINGENCIES
Future
maturities of the note payable and other obligations are as
follows:
Future
Maturities
Debt
2007
10,895,000
2010
5,500,000
The
debt
of $4,015,000 is discounted and at December 31, 2006 is on the balance sheet
as
$3,559,000.
The
debt
of $6,000,000 is discounted and at December 31, 2006 is on the balance sheet
as
$4,394,000.
Operating
Leases
At
December 31, 2006, we have commitments under noncancelable operating leases
for
office and research and development facilities until December 31, 2007 totaling
$75,000. Rent expense for the years ended December 31, 2006, 2005 and 2004
was
$94,000, $168,000 and $166,000, respectively. We also have two other
noncancelable operating leases - one lease for a fire alarm system totaling
$12,000 ending in 2008 (expensing $7,000 in 2007 and $5,000 in 2008) and
one lease for a copier totaling $48,000 ending in 2011 (with $9,600
expensed each year).
Legal
The
Company is not currently subject to any material pending legal
proceedings.
NOTE
9 - STOCKHOLDERS' EQUITY
Restricted
Stock Purchase Program
On
October 12, 2000, the Board of Directors authorized a Restricted Stock Purchase
Program. Under the Program, the Company’s executive officers and corporate
secretary were given the opportunity to purchase shares of common stock in
an
individually designated amount per participant determined by the Compensation
Committee of the Board of Directors. A total of 38,000 shares were purchased
under the Program byfour
eligible participants at $27.50 per share, the fair market value of the common
stock on October 12, 2000, for an aggregate consideration of $1,045,000. The
purchase price was paid through the participants’ delivery of a 50%-recourse
promissory note payable to the Company for three
executive
officer participants and a full-recourse promissory note payable to the Company
for one participant. Each note bears interest at 5.87% compounded semi-annually
and has a maximum term of ten years. The notes are secured by a pledge of the
purchased shares to the Company. The Company recorded the notes receivable
from
participants in this Program of $1,045,000 as a reduction of equity in the
Consolidated Balance Sheet. Interest on the notes is neither being collected
nor
accrued. The stock granted under the Program is fully vested at December 31,2006.
Warrants
There
were warrants to purchase a total of 4,826,517 shares of common stock
outstanding at December 31, 2006. All warrants were exercisable at December31,2006. The warrants had various prices and terms as follows:
Summary
of Warrants
Outstanding
Exercise
Price
Expiration
Date
2006
convertible note (a)
3,863,634
$
1.32
2/16/12
2006
convertible note (a)
386,364
1.32
10/24/12
2006
convertible note (a)
386,364
1.32
12/06/12
2006
investor relations advisor (b)
50,000
2.70
12/27/11
2004
offering (c)
89,461
35.50
2/24/09
2004
offering (c)
31,295
27.00
2/24/09
2003
financial advisor (d)
14,399
19.50
10/30/08
2002
scientific consultant (e)
2,000
24.80
2/01/09
2001
scientific consultant (f)
3,000
15.00
1/1/08
Total
4,826,517
a)
In
connection with the convertible note offerings in 2006, warrants
to
purchase a total of 4,636,362 shares of common stock were issued.
All of
the warrants are exercisable immediately and expire six years from
date of
issue.
b)
During
2006, an investor relations advisor received warrants to purchase
50,000
shares of common stock at an exercise price of $2.70 per share at
any time
from December 27, 2006 until December 27, 2011, for investor relations
consulting services to be rendered in 2007. All of the warrants were
exercisable at December 31, 2006. The fair value of the warrants
was $2.00
per share on the date of the grant using the Black-Scholes pricing
model
with the following assumptions: expected dividend yield 0.0%, risk-free
interest rate 4.58%, expected volatility 138% and a term of 2.5 years.
c)
In
connection with offering of common stock in 2004, warrants to purchase
a
total of 120,756 shares of common stock were issued. All of the warrants
are exercisable and expire five years from date of
issuance.
d)
During
2003, financial advisors received warrants to purchase 14,399 shares
of
common stock at any time until October 30, 2008, for financial consulting
services rendered in 2003 and 2004. All the warrants are exercisable.
The
fair value of the warrants was $14.10 per share on the date of the
grant
using the Black-Scholes pricing model with the following assumptions:
expected dividend yield 0.0%, risk-free interest rate 2.9%, expected
volatility 92% and a term of 5 years.
During
2002, a director who is also a scientific advisor received warrants
to
purchase 2,000 shares of common stock at an exercise price of $24.55
per
share at any time until February 1, 2009, for scientific consulting
services rendered in 2002. The fair value of the warrants was $18.50
per
share on the date of the grant using the Black-Scholes pricing model
with
the following assumptions: expected dividend yield 0.0%, risk-free
interest rate 3.90%, expected volatility 81% and a term of 7 years.
f)
During
2001, a director who is also a scientific advisor received warrants
to
purchase 3,000 shares of common stock at an exercise price of $15.00
per
share at any time until January 1, 2008, for scientific consulting
services rendered in 2001. The fair value of the warrants was $13.70
per
share on the date of the grant using the Black-Scholes pricing model
with
the following assumptions: expected dividend yield 0.0%, risk-free
interest rate 5.03%, expected volatility 118% and a term of 7 years.
2001
Restricted Stock Plan
We
have a
restricted stock plan, the 2001 Restricted Stock Plan, as amended, under which
80,000 shares of our authorized but unissued common stock were reserved for
issuance to certain employees, directors, consultants and advisors. The
restricted stock granted under the plan generally vests, 25% two years after
the
grant date with additional 25% vesting every anniversary date. All stock is
vested after five years. At December 31, 2006 there were 27,182 shares issued
and 52,818 shares available for grant under the 2001 Restricted Stock
Plan.
NOTE
10 - STOCK OPTION PLANS
We
have
various stock-based employee compensation plans described below:
2005
Equity Incentive Plan
We
have a
stock awards plan, (the “2005 Equity Incentive Plan”), under which 1,000,000
shares of our authorized but unissued common stock were reserved for issuance
to
employees of, or consultants to, one or more of the Company and its affiliates,
or to non-employee members of the Board or of any board of directors (or similar
governing authority) of any affiliate of the Company. The 2005 Equity Incentive
Plan replaced the previously approved stock option plan (the 1995 Stock Awards
Plan").
For
the
2005 Equity Incentive Plan, the fair value of options was estimated at the
date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in fiscal 2006: dividend yield
of
0%; volatility of 127%; risk-free interest rate of 4.85%; and expected lives
of
1.6 years. The weighted average fair value of options granted was $0.36 per
share during 2006. The assumptions for grants in fiscal 2005 were: dividend
yield of 0%; volatility of 113%; risk-free interest rate of 4.71%; and expected
lives of four years. The weighted average fair value of options granted was
$8.50 per share during 2005.
The
intrinsic value of options under this plan related to the outstanding and
exercisable options were $1,554,000 and $281,000, respectively, at December31,2006.
Further
information regarding options outstanding under the 2005 Equity Incentive Plan
at December 31, 2006 is summarized below:
Number
of
Weighted
average
Number
of
Weighted
aververage
options
Remaining
Exercise
options
Remaining
Exercise
Range
of excercise prices
outstanding
life
in years
price
exerciseable
life
in years
price
$0.63
- 0.85
717,000
9.6
$0.63
129,250
9.6
$0.63
$3.15
- 5.45
85,672
8.9
4.49
75,468
8.9
4.36
802,672
204,718
2000
Special Stock Option Plan
On
February 11, 2000 we adopted the 2000 Special Stock Option Plan and Agreement
(the “Plan”). The Plan provides for the award of options to purchase 100,000
shares of the authorized but unissued shares of common stock of the Company.
At
December 31, 2006, there were no additional shares available for grant under
the
Plan.
Under
the
2000 Special Stock Option Plan, 100,000 options were issued in 2000 and are
outstanding at December 31, 2006. All of the options in the 2000 Special Stock
Option Plan were exercisable at December 31, 2006, 2005 and 2004. All of the
options expire on June 30, 2007 and have an exercise price of $12.50 per
share.
1995
Stock Awards Plan
Under
the
1995 Stock Awards Plan, as amended, 500,000 shares of our authorized but
unissued common stock were reserved for issuance to optionees including
officers, employees, and other individuals performing services for us. At
December 31, 2006, there were no additional shares available for grant under
the
1995 Stock Awards Plan. A total of 360,917 options were outstanding under this
plan at December 31, 2006.
Options
granted under all the plans generally vest ratably over a four to five year
period and are generally exercisable over a ten-year period from the date of
grant. Stock options were generally granted with an exercise price equal to
the
market value at the date of grant.
Under
the
1995 Stock Awards Plan, the fair value of options was estimated at the date
of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in fiscal 2005 and 2004, respectively:
dividend yield of 0% for both periods; volatility of 104% and 41%; risk-free
interest rates of 4.15% and 3.61%, respectively, and expected lives of four
years for all periods. The weighted average fair values of options granted
were
$6.45 and $10.90 per share during 2005 and 2004, respectively.
Income
tax expense differs from the statutory amounts as follows:
2006
2005
2004
Income
taxes at U.S. statutory rate
$
(4,378,000
)
$
(438,000
)
$
(3,442,000
)
Change
in valuation allowance
3,972,000
(2,051,000
)
895,000
Change
in miscellaneous items
(130,000)
397,000
598,000
Benefit
of foreign losses not recognized
58,000
304,000
-
Expenses
not deductible
240,000
738,000
7,000
Expiration
of net operating loss and general
business
credit carryforwards, net of revisions
238,000
1,050,000
1,942,000
Total
tax expense
$
-
$
-
$
-
Deferred
taxes are provided for the temporary differences between the financial reporting
bases and the tax bases of our assets and liabilities. The temporary differences
that give rise to deferred tax assets were as follows:
At
December 31, 2006, we had approximately $66,569,000 of net operating loss
carryforwards and approximately $2,402,000 of general business credit
carryforwards. These carryforwards expire as follows:
Net
operating
loss
carryforwards
General
business
credit
carryforwards
2007
$
994,000
$
26,000
2008
4,004,000
138,000
2009
1,661,000
185,000
2010
2,171,000
140,000
2011
4,488,000
13,000
Thereafter
53,251,000
1,900,000
$
66,569,000
$
2,402,000
As
a
result of a merger on January 25, 1996, a change in control occurred for federal
income tax purposes which limits the utilization of pre-merger net operating
loss carryforwards of approximately $3,100,000 to approximately $530,000 per
year.
Our
results of operations by quarter for the years ended December 31, 2006 and
2005
were as follows (in thousands, except per share amounts):
2006
Quarter Ended
March
31
June
30
September
30
December
31
Loss
from operations
$
(4,856
)
$
(3,331
)
$
(2,015
)
$
(3,222
)
Discontinued
operations
-
-
-
550
Net
loss
$
(4,856
)
$
(3,331
)
$
(2,015
)
$
(2,672
)
Basic
and diluted income/loss per common share
$
(1.38
)
$
(0.94
)
$
(0.57
)
$
(0.76
)
2005
Quarter Ended
March
31
June
30
September30
December31
Loss
from operations
$
(1,616
)
$
(2,988
)
$
(1,612
)
$
(1,339
)
Discontinued
operations
(806
)
(798
)
(451
)
7,910
Net
loss/income
$
(2,422
)
$
(3,786
)
$
(2,063
)
$
6,571
Basic
and diluted loss per
common
share
$
(0.78
)
$
(1.21
)
$
(0.65
)
$
2.11
NOTE
13 - SUBSEQUENT EVENTS (UNAUDITED)
On
March 30, 2007, Access Pharmaceuticals, Inc. ("Access")
and SCO Capital Partners LLC and affiliates ("SCO") agreed to extend the
maturity date of an aggregate of $6,000,000 of 7.5% convertible notes to April27, 2007 from March 31, 2007.
On
February 21, 2007 we announced we had entered into a non-binding letter of
intent to acquire Somanta Pharmaceuticals, Inc. Pursuant to the terms of the
non-binding letter of intent, upon consummation of the acquisition, Somanta’s
preferred and common shareholders would receive an aggregate of 1.5 million
shares of Access’ common shares which would represent approximately 13% of the
combined company assuming the conversion of Access’ existing convertible debt
under existing terms of conversion. The closing of the transaction is subject
to
numerous conditions including the execution of a definitive Merger Agreement,
receipt of necessary approvals as well as completion of our due diligence
investigation. There can be no assurance that the transaction will be
consummated or if consummated, that it will be on the terms described
herein.
F-23
Dates Referenced Herein and Documents Incorporated by Reference