UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
Commission File Number 0-9314
ACCESS PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 83-0221517
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(State of Incorporation) (I.R.S. Employer I.D. No.)
2600 Stemmons Frwy, Suite 176, Dallas, TX 75207
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(Address of principal executive offices)
Telephone Number (214) 905-5100
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
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The number of shares outstanding of the issuer's common stock,
as of August 9, 2005, was 15,722,552 shares, $0.01 par value
per share.
Total No. of Pages 31
ACCESS PHARMACEUTICALS, INC.
INDEX
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Page No.
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RISK FACTORS 2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at
June 30, 2005 and December 31, 2004 27
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three and six months ended
June 30, 2005 and June 30, 2004 28
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2005 and June 30, 2004 29
Notes to Unaudited Condensed Consolidated Financial Statements 30
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 2 Changes in Securities 24
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
PART I -- FINANCIAL INFORMATION
Risk Factors
This Quarterly Report on Form 10-Q contains certain statements
that are forward-looking within the meaning of Section 27a of
the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, and that
involve risks and uncertainties, including, but not limited to
the uncertainties associated with research and development
activities, clinical trials, our ability to raise capital, our
ability to repay or restructure our outstanding debt
obligations, the timing of and our ability to achieve
regulatory approvals, dependence on others to market our
licensed products, collaborations, future cash flow, the timing
and receipt of licensing and milestone revenues, the future
success of our marketed products and products in development,
our ability to manufacture amlexanox products in commercial
quantities, our sales projections, and the sales projections of
our licensing partners, our ability to achieve licensing
milestones and other risks described below as well as those
discussed elsewhere in this Form 10-Q, documents incorporated
by reference and other documents and reports that we file
periodically with the Securities and Exchange Commission.
Forward-looking statements contained in this Form 10-Q include,
but are not limited to those relating to anticipated product
approvals and timing thereof, the terms of future licensing
arrangements, our ability to secure additional financing for
our operations, our ability to repay our outstanding debt obligations,
our ability to fund our operations through August 31, 2005,
and our expected capital expenditures.
A failure to obtain necessary additional capital in the future
could jeopardize our operations.
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We currently have liquid assets to allow us to continue
operations through August 31, 2005, assuming the receipt of
accounts receivable currently due and assuming no receipt of
funds from any financing transactions, including selling equity securities
in connection with our Standby Equity Distribution Agreement (the
"SEDA") with Cornell Capital. We anticipate that we will be able
to raise additional funds by selling equity securities in connection
with our SEDA with Cornell Capital, subject to the terms of the SEDA
and our ability to adhere to the terms of the SEDA. By selling equity,
the relative equity ownership of our exisiting investors would be
diluted and the new investors could obtain terms more favorable than
previous investors. Further, we have issued an aggregate of $13,530,000
of convertible subordinated notes, which are due in two parts --
$8,030,000 is due on September 13, 2005 and $5,500,000 is due on
September 13, 2008. The notes may convert to common stock at a
conversion price of $5.50 and we can redeem the notes for the principal
amount of the notes plus interest if our common stock trades above a
price of $8.25 for any period of ten consecutive trading days prior to our
notice of redemption. In addition, we have issued $2,633,000 of
Secured Convertible Notes due March 31, 2006 with initial
partial repayment commencing in November 2005. Such Secured
Convertible Notes convert at $4.00 per share. We do not have
sufficient funds to repay our convertible notes at their
maturity. We may not be able to restructure the convertible
notes or obtain additional financing to repay them on terms
acceptable to us, if at all. A failure to
restructure our convertible notes or obtain additional funding
to repay the convertible notes and support our working capital
and operating requirements, would cause us to be in default of
our convertible notes, prevent us from making expenditures that
are needed to allow us to maintain our operations and would
allow our convertible noteholders to exercise their remedies
under the note instruments.
2
We are in negotiations to sell certain assets to provide additional
liquidity. We are also in negotiations with holders of our
convertible notes due September 2005 to restructure such notes.
There can be no assurance that we will be successful in our efforts
to sell assets or that we will be able to successfully restructrure
such notes.
At this time we would not be able to draw funds from timely from the
SEDA, due to the terms of the SEDA, in an amount sufficient to repay
our outstanding debt obligations when they come due.
We may not be able to pay our debt and other obligations and
our assets may be seized as a result.
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We may not generate the cash flow required to pay our
liabilities as they become due. Our outstanding debt includes
approximately $8.03 million of our Convertible Subordinated
Notes due in September 2005 (plus interest due on such date of
$1,042,000), $5.5 million of our Convertible Subordinated Notes
due in September 2008 and $2,633,000 of our Secured Convertible
Notes due in March 2006 with initial partial repayment
commencing in November 2005.
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
Secured Convertible Notes due in March 2006 and convertible
subordinated notes due in September 2005 and September 2008 and
be forced into bankruptcy. A default on our convertible notes
due September 13, 2005 would cause a cross-default on our
convertible notes due March 2006 and September 2008. In the
event of a default, the holders of our secured convertible
notes have the right to foreclose on all of our assets, which
could force us to curtail or cease our business operations.
The holders of our Convertible Notes may require us to
repurchase or prepay all of the outstanding Convertible Notes
under certain circumstances. We may not have sufficient cash
reserves to repurchase the Convertible Notes at such time,
which would cause an event of default under the Convertible
Notes and may force us to declare bankruptcy.
Our obligations under the secured convertible notes are secured
by all of our assets
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Our obligations under the $2,633,000 Secured Convertible Notes
are secured by all of our assets. As a result, if a cross-
default is caused by our default on the convertible notes due
September 13, 2005 or if we default under the terms of the
Secured Convertible Notes or related agreements, including our
failure to issue shares of common stock upon conversion by the
holder, our failure to maintain the effectiveness of a
registration statement, breach of any covenant, representation
or warranty in the Securities Purchase Agreement or related
Secured Convertible Notes or the commencement of a bankruptcy,
insolvency, reorganization or liquidation proceeding against
the Company could require the early repayment of the Secured
Convertible Notes, if the default is not cured with the
specified grace period. In addition we could be required to
issue and the holders would have the ability to sell up to
2,891,723 shares of our Common Stock and/or the holders could
foreclose their security interest and liquidate some or all of
the assets of the
3
Company and we could cease to operate. Any such issuance of shares
could cause a significant drop in the price of our stock and significant
dilution to our stockholders.
We have limited liquid assets.
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We currently have liquid assets sufficient to fund our
operations only through August 31, 2005, assuming the receipt
of account receivable currently due. If we are unable to secure
financing prior to the exhaustion of our liquid assets we may
be required to cease or curtail our operations.
We have experienced a history of losses and we expect to incur
future losses.
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We have recorded minimal revenue to date and we have incurred a
cumulative operating loss of approximately $70.7 million through June 30,
2005. Losses for the years ended 2004, 2003 and 2002 were $10,238,000,
$6,935,000 and $9,384,000, respectively. Our losses have resulted
principally from costs incurred in research and development activities
related to our efforts to develop clinical drug candidates and from the
associated administrative costs. We expect to incur additional operating
losses over the next several years. We also expect cumulative losses to
increase if we expand research and development efforts and preclinical and
clinical trials.
We do not have significant operating revenue and we may never attain
profitability.
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To date, we have funded our operations primarily through private sales of
common stock and convertible notes. Contract research payments and
licensing fees from corporate alliances and mergers have also provided
funding for our operations. Our ability to achieve significant revenue or
profitability depends upon our ability to successfully complete the
development of drug candidates, to develop and obtain patent protection and
regulatory approvals for our drug candidates and to manufacture and
commercialize the resulting drugs. We have not received significant
royalties for sales of amlexanox, Zindaclin(R) or OraDisc(TM) products to
date and we may not generate significant revenues or profits from the sale
of these products in the future. Furthermore, we may not be able to ever
successfully identify, develop, commercialize, patent, manufacture, obtain
required regulatory approvals and market any additional products.
Moreover, 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.
Our financial condition and the restrictive covenants contained in our
outstanding convertible notes may limit our ability to borrow additional
funds or to raise additional equity as may be required to fund our future
operations.
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We incurred significant losses from operations of $6.2 million for the six
month period ended June 30, 2005, $4.9 million for the six month period
ended June 30, 2004, $9.1 million for the year ended December 31, 2004
and $8.2 million for the year ended December 31, 2003.
4
Moreover, the terms of our outstanding Convertible Notes may limit
our ability to, among other things:
- - incur additional debt;
- - retire, exchange or amend the terms of outstanding debt;
- - pay cash dividends, redeem, retire or repurchase our stock or change
our capital structure;
- - enter into certain transactions with affiliates;
- - create additional liens on our assets;
- - issue certain types of preferred stock or issue common stock at
below market prices; or
- - merge, consolidate or sell assets to other entities
- - create additional liens on our assets.
Our ability to borrow additional funds or raise additional equity may be
limited by our financial condition, in addition to the terms of our
outstanding debt. Additionally, events such as our inability to continue to
reduce our loss from continuing operations, could adversely affect our
liquidity and our ability to attract additional funding as required.
AMEX listing requirements.
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Our common stock is presently listed on the American Stock Exchange
under the symbol "AKC". All companies listed on AMEX are required to
comply with certain continued listing standards, including corporate
governance requirements, maintaining stockholders' equity at required
levels, obtaining shareholder approvals for certain transactions, share price
requirements and other rules and regulations of AMEX. AMEX listing
requirements allow us to issue a maximum aggregate of 3,089,422 shares
of our Common Stock in connection with our Secured Convertible Notes
and the SEDA without receipt of shareholder approval. Any issuances
above such amount would require shareholder approval or would be a
violation of AMEX regulations. We are not in compliance with the AMEX
stockholders' equity standard as of June 30, 2005. However, we have until
December 31, 2005 to become compliant with such equity standard. If we
are unable to remedy any listing standard noncompliance with AMEX under
its regulations, or otherwise regain compliance, and within the required
time frames for such remediation, or otherwise regain compliance, or if we
default on our debt obligations we cannot assure investors that our common
stock will continue to remain eligible for listing on AMEX. In the event
that our common stock is delisted from AMEX its market value and
liquidity could be materially adversely affected.
Our Standby Equity Distribution Agreement may have a dilutive impact on
our stockholders.
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We are to a great extent dependent on external financing to fund our
operations. Our financial needs may be partially provided from the SEDA.
The issuance of shares of our common stock under the SEDA will have a
dilutive impact on our other stockholders and the issuance or even potential
issuance of such shares could have a negative effect on the market price of
our common stock. In addition, if we access the SEDA, we will issue
shares of our common stock to Cornell Capital Partners at a discount of 2%
of the lowest daily volume weighted average of our common stock during
a specified period of trading days after we access the SEDA. Issuing shares
at a
5
discount will further dilute the interests of other stockholders and may
negatively affect the market price of our Common Stock.
To the extent that Cornell sells shares of our common stock issued under
SEDA to third parties, our stock price may decrease due to the additional
selling pressure in the market. The perceived risk of dilution from sales of
stock to or by Cornell may cause holders of our common stock to sell their
shares, or it may encourage short sales of our common stock or other
similar transactions. This could contribute to a decline in the stock price of
our common stock.
At this time we would not be able to draw funds from the SEDA in an
amount sufficient to repay our outstanding debt obligations when they come
due.
We may not successfully commercialize our drug candidates.
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Our drug candidates are subject to the risks of failure inherent in the
development of pharmaceutical products based on new technologies and our
failure to develop safe, commercially viable drugs would severely limit our
ability to become profitable or to achieve significant revenues. We may be
unable to successfully commercialize our drug candidates for a number of
reasons, including:
- - some or all of our drug candidates may be found to be unsafe or
ineffective or otherwise fail to meet applicable regulatory standards or
receive necessary regulatory clearances;
- - our drug candidates, if safe and effective, may be too difficult to develop
into commercially viable drugs;
- - it may be difficult to manufacture or market our drug candidates on a
large scale;
- - proprietary rights of third parties may preclude us from marketing our
drug candidates; and
- - third parties may market superior or equivalent drugs.
The success of our research and development activities, upon which we
primarily focus, is uncertain.
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Our primary focus is on our research and development activities and the
commercialization of compounds covered by proprietary biopharmaceutical
patents and patent applications. Research and development activities, by
their nature, preclude definitive statements as to the time required and costs
involved in reaching certain objectives. Actual research and development
costs, therefore, could exceed budgeted amounts and estimated time frames
may require extension. Cost overruns, unanticipated regulatory delays or
demands, unexpected adverse side effects or insufficient therapeutic efficacy
will prevent or substantially slow our research and development effort and
our business could ultimately suffer. We anticipate that we will remain
principally engaged in research and development activities for an
indeterminate period of time.
We may be unable to obtain necessary additional capital to fund operations
in the future.
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We require substantial capital for our development programs and operating
expenses, to pursue regulatory clearances and to prosecute and defend our
intellectual property rights. We believe that our existing capital resources,
interest income, product sales, royalties and revenue from possible licensing
agreements and collaborative agreements will be sufficient to fund our
currently expected operating expenses (other than debt obligations including
the $8,030,000 of
6
principal and $1,042,000 interest on convertible notes which are
required to be repaid in September 2005 and $2,633,000 of Secured
Convertible Notes due in March 2006) through August 31, 2005 assuming
the receipt of accounts receivable currently due. Even if our
convertible notes convert to common stock prior to their maturity
or are restructured, we will need to raise substantial additional
capital to support our ongoing operations and debt obligations.
If we do raise additional funds by issuing equity securities, further dilution
to existing stockholders would result and future investors may be granted
rights superior to those of our existing stockholders. If adequate funds are
not available to us through additional equity offerings, we may be required
to delay, reduce the scope of or eliminate one or more of our research and
development programs or to obtain funds by entering into arrangements
with collaborative partners or others that require us to issue additional
equity securities or to relinquish rights to certain technologies or drug
candidates that we would not otherwise issue or relinquish in order to
continue independent operations.
We may be unable to successfully develop, market, or commercialize our
products or our product candidates without establishing new relationships
and maintaining current relationships.
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Our strategy for the research, development and commercialization of our
potential pharmaceutical products may require us to enter into various
arrangements with corporate and academic collaborators, licensors,
licensees and others, in addition to our existing relationships with other
parties. Specifically, we may seek to joint venture, sublicense or enter other
marketing arrangements with parties that have an established marketing
capability or we may choose to pursue the commercialization of such
products on our own. We may, however, be unable to establish such
additional collaborative arrangements, license agreements, or marketing
agreements as we may deem necessary to develop, commercialize and
market our potential pharmaceutical products on acceptable terms.
Furthermore, if we maintain and establish arrangements or relationships
with third parties, our business may depend upon the successful
performance by these third parties of their responsibilities under those
arrangements and relationships. For our commercialized products we
currently rely upon the following relationships in the following marketing
territories for sales, manufacturing or regulatory approval efforts:
* amlexanox 5% paste and OraDisc(R) A
- Discuss Dental, Inc. - United States marketing rights
- ProStrakan Ltd. - United Kingdom and Ireland manufacturing, marketing
rights and regulatory approval
- Zambon Group - France, Germany, Holland, Belgium, Luxembourg,
Switzerland, Brazil, Colombia and Italy manufacturing and marketing rights
- Laboratories Dr. Esteve SA - Spain, Portugal and Greece manufacturing
and marketing rights
- Meda, AB for Scandinavia, the Baltic states and Iceland marketing rights
- Paladin Labs, Inc. for Canada manufacturing and marketing rights
- EpiTan, Ltd. for Australia and New Zealand for marketing rights
- Orient Europharma, Co., Ltd. for Taiwan, Hong-Kong, Malaysia,
Philippines, Thailand and Singapore for marketing rights
7
* Zindaclin(R) and Residerm(R)
- ProStrakan Ltd. - worldwide manufacturing, marketing and regulatory
approval rights
- Fujisawa GmbH - sublicensed continental Europe marketing rights
- EpiTan, Ltd. - sublicensed Australia and New Zealand marketing rights
- Hyundai - sublicensed Korea marketing rights
- Taro - sublicensed Israel marketing rights
- Biosintetica - sublicensed Brazil marketing rights
- Pliva dd Hrvatska d.o.o. - sublicensed Czech, Estonia, Hungary, Latvia,
Poland, Slovak and Slovenia marketing rights
- Five companies for five other smaller countries - sublicensed marketing
rights
For one of our OraDisc(TM) products in development, on January 6, 2004,
we entered into an exclusive license and supply agreement with Wyeth
Consumer Healthcare for sales of the product in North America. If this
product is marketed, we will be dependent upon Wyeth Consumer
Healthcare for sales of such product in this territory.
Our ability to successfully commercialize, and market our products and
product candidates could be limited if a number of these existing
relationships were terminated.
Furthermore, our strategy with respect to our polymer platinate program is
to enter into a licensing agreement with a pharmaceutical company pursuant
to which the further costs of developing a product would be shared with our
licensing partner. Although we have had discussions with potential licensing
partners with respect to our polymer platinate program, to date we have not
entered into any licensing arrangement. We may be unable to execute our
licensing strategy for polymer platinate.
We may be unable to successfully manufacture our products and our
product candidates in clinical quantities or for commercial purposes without
the assistance of contract manufacturers, which may be difficult for us to
obtain and maintain.
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We have limited experience in the manufacture of pharmaceutical products
in clinical quantities or for commercial purposes and we may not be able
to manufacture any new pharmaceutical products that we may develop. As
a result, we have established, and in the future intend to establish
arrangements with contract manufacturers to supply sufficient quantities of
products to conduct clinical trials and for the manufacture, packaging,
labeling and distribution of finished pharmaceutical products if any of our
potential products are approved for commercialization. If we are unable to
contract for a sufficient supply of our potential pharmaceutical products on
acceptable terms, our preclinical and human clinical testing schedule may
be delayed, resulting in the delay of our clinical programs and submission
of product candidates for regulatory approval, which could cause our
business to suffer. Our business could suffer if there are delays or
difficulties in establishing relationships with manufacturers to produce,
package, label and distribute our finished pharmaceutical or other medical
products, if any, market introduction or subsequent sales of such products.
Moreover, contract manufacturers that we may use must adhere to current
Good Manufacturing Practices, as required by the FDA. In this regard, the
FDA will not issue a pre-market approval or product and establishment
licenses, where applicable, to a manufacturing facility for the products until
the manufacturing facility passes a pre-approval
8
plant inspection. If we are
unable to obtain or retain third party manufacturing on commercially
acceptable terms, we may not be able to commercialize our products as
planned. Our potential dependence upon third parties for the manufacture
of our products may adversely affect our ability to generate profits or
acceptable profit margins and our ability to develop and deliver such
products on a timely and competitive basis.
Our amlexanox 5% paste is marketed in the US as Aphthasol(R). We selected
Contract Pharmaceuticals Ltd. Canada as our new manufacturer of
amlexanox 5% paste and they manufacture product for the US market and
initial qualifying batches of the product for Europe. We re-launched
Aphthasol(R) in the US market in September 2004 and recorded sales in the
third and fourth quarters of 2004 and in the quarters ended March 31, 2005
and June 30, 2005.
Amlexanox 5% paste was approved by regulatory authorities for sale in the
UK. Approval to market was granted in Austria, Germany, Greece,
Finland, Ireland, Luxembourg, The Netherlands, Norway, Portugal, and
Sweden. We did not receive approvals for France, Italy and Belgium. We
licensed manufacturing rights to ProStrakan, Zambon, Esteve and Mipharm
for specific countries in Europe. Contract Pharmaceuticals Ltd. Canada has
also been selected as our European supplier of amlexanox 5% paste and this
facility has been approved for European supply.
We licensed our patents for worldwide manufacturing and marketing for
Zindaclin(R) and our ResiDerm(R) technology to ProStrakan Ltd. for the
period of the patents. We receive a share of the licensing revenues and
royalty on the sales of the product. ProStrakan has a contract manufacturer
for Zindaclin(R) which is a European Union approved facility. Zindaclin(R)
is approved in the UK and throughout Europe in most European Union
countries including new member states and several non-European markets.
Zindaclin(R) is marketed in the UK, France, Germany, Ireland, Belgium,
Cyprus, Israel and Korea. Zindaclin(R) is under regulatory review in other
markets including Australia, New Zealand, Brazil and others.
We received regulatory approval from the FDA to manufacture and sell
OraDisc(TM) A in September 2004 and are proceeding with our
manufacturing and marketing plans for 2006.
AP5346 is manufactured by third parties for our Phase I/II clinical trials.
Manufacturing is ongoing for the current clinical trials. Certain
manufacturing steps are conducted by the Company to enable significant
cost savings to be realized.
We are subject to extensive governmental regulation which increases our
cost of doing business and may affect our ability to commercialize any new
products that we may develop.
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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 are subject to
the rigorous testing and approval processes of the FDA and corresponding
foreign regulatory authorities. Satisfaction of these requirements typically
takes a significant number of years and can vary substantially based upon
the type, complexity and novelty of the product. The status of our principal
products is as follows:
9
- - 5% amlexanox paste is an approved product for sale in the US
(Aphthasol(R)); approved in the UK and Canada but not yet sold; approved
in ten EU countries but not yet sold;
- - Zindaclin(R) is an approved product for sale in the UK and extensively
throughout European Union countries; and is in the approval process in
other markets.
- - OraDisc(TM) A is an approved product for sale in the US as of
September 2004; we are completing steps for manufacturing and sale of the
product in 2006.
- - Our other OraDisc(TM) products are currently in the pre-clinical phase.
- - AP5346 has completed a Phase I clinical trial in Europe and has been
approved for the commencement of a Phase I trial in the US by the FDA.
- - Mucoadhesive liquid technology patient recruitment in the clinical trial is
on hold pending commercial developments.
- - Vitamin mediated delivery technology is currently in the pre-clinical
phase.
- - We also have other products in the preclinical phase.
Due to the time consuming and uncertain nature of the drug candidate
development process and the governmental approval process described
above, we cannot assure investors when we, independently or with our
collaborative partners, might submit a New Drug Application, or "NDA",
for FDA or other regulatory review.
Government regulation also affects the manufacturing and marketing of
pharmaceutical products. Government regulations may delay marketing of
our potential drugs for a considerable or indefinite period of time, impose
costly procedural requirements upon our activities and furnish a competitive
advantage to larger companies or companies more experienced in regulatory
affairs. Delays in obtaining governmental regulatory approval could
adversely affect our marketing as well as our ability to generate significant
revenues from commercial sales. Our drug candidates may not receive FDA
or other regulatory approvals on a timely basis or at all. Moreover, if
regulatory approval of a drug candidate is granted, such approval may
impose limitations on the indicated use for which such drug may be
marketed. Even if we obtain initial regulatory approvals for our drug
candidates, our drugs and our manufacturing facilities would be subject to
continual review and periodic inspection, and later discovery of previously
unknown problems with a drug, manufacturer or facility may result in
restrictions on the marketing or manufacture of such drug, including
withdrawal of the drug from the market. The FDA and other regulatory
authorities stringently apply regulatory standards and failure to comply with
regulatory standards can, among other things, result in fines, denial or
withdrawal of regulatory approvals, product recalls or seizures, operating
restrictions and criminal prosecution.
The uncertainty associated with preclinical and clinical testing may affect
our ability to successfully commercialize new products.
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Before we can obtain regulatory approvals for the commercial sale of any
of our potential drugs, the drug candidates will be subject to extensive
preclinical and clinical trials to demonstrate their safety and efficacy in
humans. Preclinical or clinical trials of any of our future drug candidates
may not demonstrate the safety and efficacy of such drug candidates at all
or to the extent necessary to obtain regulatory approvals. In this regard, for
example, adverse side effects can occur during the clinical testing of a new
drug on humans which may delay ultimate FDA approval or even lead us
to terminate our efforts to develop the drug for commercial use. Like other
companies in the biotechnology industry, we have suffered significant
setbacks in advanced
10
clinical trials, even after demonstrating promising
results in earlier trials. In particular, OraDisc(TM) and polymer platinate
have taken longer to progress through clinical trials than originally planned.
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.
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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.
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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;
11
- - Carboplatin, marketed by Bristol-Myers-Squibb, the originator of the drug
and several generic manufacturers; and
- - Oxaliplatin, marketed exclusively by Sanofi-Synthelabo.
The following companies are working on therapies and formulations that
may be competitive with our polymer platinate:
- - Antigenics and Regulon are developing liposomal formulations; and
- - American Pharmaceutical Partners, Cell Therapeutics, Daiichi, Enzon and
DebioPharm are developing alternate drugs in combination with polymers
and other drug delivery systems.
The following products may compete with Residerm(R) products:
- - Benzamycin, marketed by a subsidiary of Aventis;
Cleocin-T and a generic topical clindamycin, marketed by Pfizer;
- - Benzac, marketed by Galderma; and
- - Triaz, marketed by Medicis Pharmaceutical Corp.
Technology and prescription steroids such as Kenalog in OraBase,
developed by Bristol-Myers Squibb, may compete with our commercialized
Aphthasol(R) product. Over-the-counter ("OTC") products including Orajel
- - Del Laboratories and Anbesol - Wyeth Consumer Healthcare also
compete in the aphthous ulcer market.
Companies working on therapies and formulations that may be competitive
with our vitamin mediated drug delivery system include Bristol-Myers-
Squibb, Centocor (acquired by Johnson & Johnson), GlaxoSmithKline,
Imclone and Xoma which are developing targeted monoclonal antibody therapy.
Amgen, CuraGen, McNeil, MGI Pharma and OSI Pharmaceuticals are
developing products to treat mucositis that may compete with our
mucoadhesive liquid technology.
BioDelivery, Biovail Corporation, Cellgate, CIMA Labs, Inc., Depomed
Inc., Emisphere Technologies, Inc., Eurand, Flamel Technologies, Nobex
and Xenoport are developing products which compete with our oral drug
delivery system.
Many of these competitors have and employ greater financial and other
resources, including larger research and development, marketing and
manufacturing organizations. As a result, our competitors may successfully
develop technologies and drugs that are more effective or less costly than
any that we are developing or which would render our technology and
future products obsolete and noncompetitive.
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.
12
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.
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The successful commercialization of, and the interest of potential
collaborative partners to invest in the development of our drug candidates,
may depend substantially upon reimbursement of the costs of the resulting
drugs and related treatments at acceptable levels from government
authorities, private health insurers and other organizations, including health
maintenance organizations, or HMOs. To date, the costs of our marketed
products Aphthasol(R) and Zindaclin(R) generally have been reimbursed at
acceptable levels; however, the amount of such reimbursement in the
United States or elsewhere may be decreased in the future or may be
unavailable for any drugs that we may develop in the future. Limited
reimbursement for the cost of any drugs that we develop may reduce the
demand for, or the price of such drugs, which would hamper our ability to
obtain collaborative partners to commercialize our drugs, or to obtain a
sufficient financial return on our own manufacture and commercialization
of any future drugs.
The market may not accept any pharmaceutical products that we
successfully develop.
- -------------------------------------------------------------
The drugs that we are attempting to develop may compete with a number
of well-established drugs manufactured and marketed by major
pharmaceutical companies. The degree of market acceptance of any drugs
developed by us will depend on a number of factors, including the
establishment and demonstration of the clinical efficacy and safety of our
drug candidates, the potential advantage of our drug candidates over
existing therapies and the reimbursement policies of government and third-
party payers. Physicians, patients or the medical community in general may
not accept or use any drugs that we may develop independently or with our
collaborative partners and if they do not, our business could suffer.
In 1996, the 5% amlexanox paste product was approved for sale in the
United States. To date, the product sales have not been significant. On July
22, 2002, we acquired the rights to it from Block Drug Company. The
product has been approved in the UK and Canada but has not been launched
in any markets other than the United States. We re-launched Aphthasol(R) in
the US market in September 2004 and recorded sales in the third and fourth
quarters of 2004 as well as the quarters ended March 31, 2005 and June 30,
2005.
We received regulatory approval from the FDA to manufacture and sell
OraDisc(TM) A in September 2004 and are proceeding with our
manufacturing and marketing plans for 2006.
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
13
- - legislative proposals to reform healthcare or reduce government insurance
programs.
The cost containment measures that healthcare providers are instituting,
including practice protocols and guidelines and clinical pathways, and the
effect of any healthcare reform, could limit our ability to profitably sell any
drugs that we may successfully develop. Moreover, any future legislation
or regulation, if any, relating to the healthcare industry or third-party
coverage and reimbursement, may cause our business to suffer.
We may not be successful in protecting our intellectual property and
proprietary rights.
- ---------------------------------------------------------------------
Our success depends, in part, on our ability to obtain U.S. and foreign
patent protection for our drug candidates and processes, preserve our trade
secrets and operate our business without infringing the proprietary rights of
third parties. Legal standards relating to the validity of patents covering
pharmaceutical and biotechnological inventions and the scope of claims
made under such patents are still developing and there is no consistent
policy regarding the breadth of claims allowed in biotechnology patents.
The patent position of a biotechnology firm is highly uncertain and involves
complex legal and factual questions. We cannot assure you that any existing
or future patents issued to, or licensed by, us will not subsequently be
challenged, infringed upon, invalidated or circumvented by others. As a
result, although we, together with our subsidiaries, are either the owner or
licensee to 24 U.S. patents and to 19 U.S. patent applications now pending,
and 8 European patents and 15 European patent applications, we cannot
assure investors that any additional patents will issue from any of the patent
applications owned by, or licensed to, us. Furthermore, any rights that we
may have under issued patents may not provide us with significant
protection against competitive products or otherwise be commercially
viable.
Our patents for the following technologies expire in the years and during
the date ranges indicated below:
- - 5% amlexanox paste in 2011
- - Zindaclin(R) and Residerm(R) between 2007 and 2011
- - OraDisc(TM) in 2020
- - AP5280 in 2021
- - AP5346 in 2021
- - Mucoadhesive technology, patents are pending
- - Vitamin mediated technology between 2006 and 2019
In addition, patents may have been granted to third parties or may be
granted covering products or processes that are necessary or useful to the
development of our drug candidates. If our drug candidates or processes are
found to infringe upon the patents or otherwise impermissibly utilize the
intellectual property of others, our development, manufacture and sale of
such drug candidates could be severely restricted or prohibited. In such
event, we may be required to obtain licenses from third parties to utilize the
patents or proprietary rights of others. We cannot assure investors that we
will be able to obtain such licenses on acceptable terms, if at all. If we
become involved in litigation regarding our intellectual property rights or
the intellectual property rights of others, the potential cost of such
litigation, regardless of the strength of our legal position, and the
potential damages that we could be required to pay could be substantial.
Our business could suffer if we lose the services of, or fail to attract, key
personnel.
- ------------------------------------------------------------------------------
14
Due to the specialized scientific nature of our business, we are highly
dependent upon our ability to attract and retain qualified management,
scientific and technical personnel. In view of the stage of our development
and our research and development programs, we have restricted our hiring
to research scientists and a small administrative staff and we have made
only limited investments in manufacturing, production, sales or regulatory
compliance resources. There is intense competition among major
pharmaceutical and chemical companies, specialized biotechnology firms
and universities and other research institutions for qualified personnel in the
areas of our activities, however, and we may be unsuccessful in attracting
and retaining these personnel.
Ownership of our shares is concentrated, to some extent, in the hands of a
few investors which could limit the ability of our other stockholders to
influence the direction of the company.
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Larry N. Feinberg (Oracle Partners LP, Oracle Institutional Partners LP
and Oracle Investment Management Inc.) and Heartland Advisors, Inc.
beneficially owned approximately 11.9% and 10.9%, respectively, of our
common stock as of June 30, 2005. Accordingly, they collectively may
have the ability to significantly influence or determine the election of all of
our directors or the outcome of most corporate actions requiring stockholder
approval. They may exercise this ability in a manner that advances their
best interests and not necessarily those of our other stockholders.
Provisions of our charter documents could discourage an acquisition of our
company that would benefit our stockholders and may have the effect of
entrenching, and making it difficult to remove, management.
- --------------------------------------------------------------------------
Provisions of our Certificate of Incorporation, By-laws and Stockholders
Rights Plan may make it more difficult for a third party to acquire control
of the company, even if a change in control would benefit our stockholders.
In particular, shares of our preferred stock may be issued in the future
without further stockholder approval and upon such terms and conditions,
and having such rights, privileges and preferences, as our Board of
Directors may determine, including, for example, rights to convert into our
common stock. The rights of the holders of our common stock will be
subject to, and may be adversely affected by, the rights of the holders of
any of our preferred stock that may be issued in the future. The issuance
of our preferred stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the
effect of making it more difficult for a third party to acquire control of us.
This could limit the price that certain investors might be willing to pay in
the future for shares of our common stock and discourage these investors
from acquiring a majority of our common stock. Further, the existence of
these corporate governance provisions could have the effect of entrenching
management and making it more difficult to change our management.
Substantial sales of our common stock could lower our stock price.
- ------------------------------------------------------------------
The market price for our common stock could drop as a result of sales of
a large number of our presently outstanding shares or shares that we may
issue or be obligated to issue in the future, including in connection with the
SEDA. Substantially, all of the 15,722,552 shares of our common stock
that are outstanding as of August 8, 2005, are unrestricted and freely
tradable or tradable pursuant to a resale registration statement or under Rule
144 of the Securities Act.
15
Failure to achieve and maintain effective internal controls could have a
material adverse effect on our business.
- ------------------------------------------------------------------------
Effective internal controls are necessary for us to provide reliable financial
reports. If we cannot provide reliable financial reports, our operating results
could be harmed. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
While we continue to evaluate and improve our internal controls, we cannot
be certain that these measures will ensure that we implement and maintain
adequate controls over our financial processes and reporting in the future.
Any failure to implement required new or improved controls, or difficulties
encountered in their implementation, could harm our operating results or
cause us to fail to meet our reporting obligations.
For the year ended December 31, 2004, our management determined that
our internal control systems over financial reporting was effective to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Our auditors identified two
material weaknesses in our internal controls and procedures during the
course of their evaluation for the year ended December 31, 2004. If we fail
to maintain the adequacy of our internal controls, as such standards are
modified, supplemented or amended from time to time, we may not be able
to ensure that we can conclude on an ongoing basis that we have an effective
internal control system environment over financial reporting in accordance
with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain
an effective internal control environment could cause investors to lose
confidence in our reported financial information, which could have a
material adverse effect on our stock price.
ITEM 1 FINANCIAL STATEMENTS
The response to this Item is submitted as a separate section of this report.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain statements that are
forward-looking within the meaning of Section 27a of the Securities Act of
1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended, and that involve risks and uncertainties, including, but
not limited to the uncertainties associated with research and development
activities, clinical trials, our ability to raise capital, the timing of and our
ability to achieve regulatory approvals, dependence on others to market our
licensed products, collaborations, future cash flow, the timing and receipt
of licensing and milestone revenues, the future success of our marketed
products and products in development, our ability to manufacture
amlexanox products in commercial quantities, our sales projections, and the
sales projections of our licensing partners, our ability to achieve licensing
milestones and other risks described below as well as those discussed
elsewhere in this Form 10-Q, documents incorporated by reference and
other documents and reports that we file periodically with the Securities and
Exchange Commission. Forward-looking statements contained in this Form
10-Q include, but are not limited to those relating to anticipated product
approvals and timing thereof, the terms of future
16
licensing arrangements, our ability to secure additional financing for our
operations, our ability to repay our outstanding debt obligations, our
ability to fund our operations through August 31, 2005, and our expected
capital expenditures.
At this time, as a result of current uncertainty with respect to our
liquidity position and our inability to currently reapy our debt obligations
pursuant to our outstanding convertible notes, we are unable to make
any projections of our expected revenues in the short and long term.
OVERVIEW
We are an emerging pharmaceutical company focused on developing both
novel low development risk product candidates and technologies with
longer-term major product opportunities. We are a Delaware corporation.
Together with our subsidiaries, we have proprietary patents or rights to
several drug delivery technology platforms, including:
- - synthetic polymer targeted delivery,
- - vitamin mediated targeted delivery,
- - vitamin mediated oral delivery,
- - bioerodible cross-linker technology,
- - mucoadhesive disc technology,
- - hydrogel particle aggregate technology, and
- - Residerm(R) topical delivery.
In addition, we are marketing in the United States - Aphthasol(R), the first
FDA approved product for the treatment of canker sores. We are
developing new formulations and delivery forms of amlexanox including
mucoadhesive disc delivery and mucoadhesive liquid delivery.
Our amlexanox 5% paste is marketed in the US as Aphthasol(R). We selected
Contract Pharmaceuticals Ltd. Canada as our manufacturer of amlexanox
5% paste and it completed full scale production in September 2004. We re-
launched Aphthasol(R) in the US market in September 2004 and recorded
sales in the third and fourth quarters of 2004 as well as the quarters ended
March 31, 2005 and June 30, 2005.
Since our inception, we have devoted our resources primarily to fund our
research and development programs. We have been unprofitable since
inception and to date have received limited revenues from the sale of
products. We cannot assure investors that we will be able to generate
sufficient product revenues to attain profitability on a sustained basis or at
all. We expect to incur losses for the next several years as we continue to
invest in product research and development, preclinical studies, clinical
trials and regulatory compliance. As of June 30, 2005, our accumulated
deficit was $70,673,000.
On March 30, 2005, the Company finalized an agreement with Cornell
Capital Partners and Highgate House Funds providing funding in the form
of Secured Convertible Note for net proceeds of approximately $2,360,000,
and an Equity Distribution Agreement under which, subject to terms of the
Agreement, including without limitation limitations relating to timing and
amounts of draws and certain AMEX stockholder approval limitations, the
Company can draw
17
up to $15,000,000 in working capital over a 2-year period
(see further discussion under Risk Factors and Liquidity and Capital Resources).
On February 24, 2004 we closed a private placement sale of our common
stock pursuant to which we sold 1,789,371 shares of our common stock at
a per share price of $5.40. We received gross proceeds of $9,663,000 from
this sale and had expenses of $647,000. The investors also received 5 year
warrants at an exercise price of $7.10 per share to purchase 447,344 shares
of our common stock and the placement agents received warrants in the
offering at an exercise price of $5.40 per share to purchase 156,481 shares
of our common stock.
On April 18, 2005 we announced that we executed an exclusive License
Agreement granting Discuss Dental, Inc. the US marketing rights for
amlexanox. The rights granted are for amlexanox 5% paste, currently
marketed in the United States for the treatment of canker sores and
OraDisc(R) A, which was approved by the FDA in September 2004 for the
same indication. In addition, we granted Discuss Dental the rights to any
future product improvements for amlexanox in oral disease. Under the
terms of the agreement, Discuss Dental paid an upfront royalty payment of
$500,000 and will pay us a licensing fee make future milestone payments.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through private sales of common
stock and convertible notes and our principal source of liquidity is cash and
cash equivalents. Contract research payments, licensing fees and milestone
payments from corporate alliances and mergers have also provided funding
for operations. As of June 30, 2005 our cash and cash equivalents and
short-term investments were $1,288,000 and our working capital was
$(12,914,000). Our working capital at June 30, 2005 represented a decrease
of $5,126,000 as compared to our working capital as of December 31, 2004
of $(7,788,000). The decrease in working capital was due mainly to the loss
from operations for the six months ended June 30, 2005.
As of June 30, 2005, the Company had a working capital deficit of
approximately $12,914,000. As of that date, the Company did not have
enough capital to achieve its near, medium or long-term goals. The
Company currently has liquid assets to fund operations through
August 31, 2005, assuming the receipt of accounts receivable currently due.
As of March 30, 2005 the Company executed a Standby Equity Distribution
Agreement (SEDA) with Cornell Capital Partners. Under the SEDA,
subject to terms of the SEDA, including without limitation limitations
relating to timing and amounts of draws and certain AMEX shareholder
approval requirements, the Company may issue and sell to Cornell Capital
Partners common stock for a total purchase price of up to a maximum of
$15,000,000. The purchase price for the shares is equal to their market
price, which is defined in the SEDA as 98% of the lowest volume weighted
average price of the common stock during a specified period of trading days
following the date notice is given by the Company that it desires to access
the SEDA. Further, we have agreed to pay Cornell Capital Partners, L.P.
3.5% of the proceeds that we receive under the SEDA. The amount of each
draw down is subject to a maximum amount of $1,000,000. The terms of
the SEDA do not allow us to make any draw downs if the draw down
would cause Cornell Capital to own in excess of 9.9% of our outstanding
shares of common stock. Based on the number of shares of our common
stock currently outstanding, at volume weighted average price of $1.55, we
could sell to Cornell Capital approximately $2,700,000 of our common
stock subject to the 9.9% limitation. Thus, in order for the Company to
receive all the funding available
18
under the SEDA and have the financial
resources it needs for operations and debt service, Cornell Capital must sell
through to the market a significant portion of the shares it purchases under
the arrangement. Upon closing of the transaction, Cornell Capital Partners
received a one-time commitment fee of 146,500 shares of the Company's
common stock. As of the same date, the Company entered into a Placement
Agent Agreement with Newbridge Securities Corporation, a registered
broker-dealer. Pursuant to the Placement Agent Agreement, the Company
paid a one-time placement agent fee of 3,500 shares of common stock. If
the Company is unable to adhere to the terms of the SEDA, it will not be
able to make any draws upon the SEDA.
In addition, as of March 30, 2005, the Company executed a Securities
Purchase Agreement with Cornell Capital Partners and Highgate House
Funds. Under the Securities Purchase Agreement, Cornell Capital Partners
and Highgate House Funds purchased an aggregate of $2,633,000 principal
amount of Secured Convertible Notes from the Company (net proceeds to
the Company of $2,300,000). The Secured Convertible Notes accrue
interest at a rate of 7% per year and mature 12 months from the issuance
date with scheduled monthly repayment commencing on November 1, 2005,
to the extent that the Secured Convertible Note has not been converted to
common stock. The Secured Convertible Note is convertible into the
Company's common stock at the holder's option any time up to maturity at
a conversion price equal to $4.00. The Secured Convertible Notes are
secured by all of the assets of the Company. The Company has the right to
redeem the Secured Convertible Notes upon 3 business days notice for
110% of the amount redeemed. Pursuant to the Securities Purchase
Agreement, the Company issued to the holders an aggregate of 50,000
shares of common stock of the Company.
On February 24, 2004 we closed a private placement sale of our common
stock pursuant to which we sold 1,789,371 shares of our common stock at
a per share price of $5.40. We received gross proceeds of $9,663,000 from
this sale and had expenses of $647,000. The investors also received 5 year
warrants at an exercise price of $7.10 per share to purchase 447,344 shares
of our common stock and the placement agents received warrants in the
offering at an exercise price of $5.40 per share to purchase 156,481 shares
of our common stock.
We have also issued an aggregate of $13,530,000 of convertible notes,
which are due in two parts -$8,030,000 is due on September 13, 2005 and
$5,500,000 is due on September 13, 2008. The notes which bear interest
at a rate of 7.7% per annum with $1,042,000 of interest due annually on
each September 13, may convert to common stock at a conversion price of
$5.50 per share. Should the holders of the notes not elect to convert them
to common stock, or if we are not able to force the conversion of the notes
by their terms, we must repay the amounts on the due dates. A failure to
restructure our existing convertible notes or obtain necessary additional
capital in the future could jeopardize our operations. We do not have
sufficient funds to repay our convertible notes at their maturity. We may
not be able to restructure the convertible notes or obtain additional
financing to repay them on terms acceptable to us, if at all. If we raise
additional funds by selling equity securities, the relative equity ownership
of our existing investors would be diluted and the new investors could
obtain terms more favorable than previous investors. A failure to restructure
our convertible notes or obtain additional funding to repay the convertible
notes and support our working capital and operating requirements, could
cause us to be in default of our convertible notes, prevent us from making
expenditures that are needed to allow us to maintain our operations and
allow our secured note holders to foreclose on our assets or force us into
bankruptcy.
We have generally incurred negative cash flows from operations since
inception, and have
19
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 June 30, 2005 of $70,673,000. We
expect that our existing capital resources together with anticipated licensing
revenues and royalties will be adequate to fund our current level of
operations through August 31, 2005 assuming the receipt of accounts
receivable currently due excluding any obligation to repay the
convertible notes, the debt service on the convertible notes and the secured
convertible notes. We cannot assure investors that we will ever be able to
generate significant product revenue or achieve or sustain profitability. We
currently do not have the cash resources to repay our Convertible Notes due
in September 2005 or our Secured Convertible Notes in March 2006.
We plan to expend substantial funds to conduct research and development
programs, preclinical studies and clinical trials of potential products,
including research and development with respect to our acquired and
developed technology. Our future capital requirements and adequacy of
available funds will depend on many factors, including:
- - the ability to convert, repay or restructure our outstanding convertible
notes and secured convertible notes;
- - our ability to raise financing in order to continue our operations;
- - the successful commercialization of amlexanox and
Zindaclin (R);
- - the ability to establish and maintain
collaborative arrangements with corporate partners
for the research, development and commercialization
of products;
- - continued scientific progress in our research and
development programs;
- - the magnitude, scope and results of preclinical
testing and clinical trials;
- - the costs involved in filing, prosecuting and
enforcing patent claims;
- - the costs involved in conducting clinical trials;
- - competing technological developments;
- - the cost of manufacturing and scale-up;
- - the ability to establish and maintain effective
commercialization arrangements and activities; and
- - successful regulatory filings.
SECOND QUARTER 2005 COMPARED TO SECOND QUARTER 2004
Our licensing revenue in the second quarter of 2005
was $24,000, as compared to licensing revenue of
$44,000 in same quarter of 2004, a decrease of
$20,000. We recognize licensing revenue over the
period of the performance obligation under our
licensing agreements. Licensing revenue recognized
in both 2005 and 2004 was from several agreements,
including agreements related to various amlexanox
projects and Residerm(R).
There were $201,000 in product sales of Aphthasol(R)
in the second quarter of 2005, as compared to no
sales in the second quarter of 2004 due to a supply
interruption in such period. Aphthasol(R) product
sales recommenced in September 2004.
Royalty income in the second quarter of 2005 was
$24,000, as compared to $24,000 in the
20
second quarter of 2004.
Total research spending for the second quarter of
2005 was $1,440,000, as compared to $1,281,000 for
the same period in 2004, an increase of $159,000.
The increase in expenses was primarily the result of:
- - higher costs ($132,000) for pre-production of OraDisc(TM) A; and
- - higher costs for product and clinical trials for AP5346 ($86,000).
The increase in expenses was partially offset by
- - lower salary and related costs due to a reduction in staff ($52,000).
- - lower costs for other projects ($7,000).
Our cost of product sales was $178,000 in the second
quarter of 2005, as compared to $31,000 in the
second quarter of 2004, an increase of $147,000.
The increase in cost of product sales was due to
increased product sales and fees associated with
sales in 2005 versus no sales in 2004 .
Total general and administrative expenses were
$1,816,000 for the second quarter of 2005, an
increase of $1,044,000 as compared to the same
period in 2004. The increase in spending was due
primarily to the following:
- - expenses due to the separation agreement with our
former CEO ($839,000);
- - royalty license expenses ($150,000);
- - higher patent expenses ($22,000); and
- - other net increases ($33,000).
Depreciation and amortization was $166,000 for the
second quarter of 2005 as compared to $160,000 for
the same period in 2004 reflecting an increase of
$6,000. The increase in depreciation and
amortization was due to increased depreciation
resulting from the acquisition of additional capital assets.
Total operating expenses in the second quarter of
2005 were $3,600,000 as compared to total operating
expenses of $2,244,000 for the same period in 2004,
an increase of $1,356,000.
Loss from operations in the second quarter of 2005
was $3,351,000 as compared to a loss of $2,176,000
for the same period in 2004, an increase of $1,175,000.
Interest and miscellaneous income was $12,000 for
the second quarter of 2005 as compared to $35,000
for the same period in 2004, a decrease of $23,000.
The decrease in interest income was due to lower
cash balances and lower interest rates in 2005 as
compared with 2004.
Interest expense was $447,000 for the second quarter
of 2005 as compared to $412,000 for the same period
in 2004, an increase of $35,000. The increase in
expense is due to the addition of the Secured
Convertible Notes.
Net loss in the second quarter of 2005 was
$3,786,000, or a $0.24 basic and diluted loss per
common share, compared with a loss of $2,553,000, or
a $0.17 basic and diluted loss per common share for
the same period in 2004, an increased loss of
$1,233,000 in 2005.
21
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX
MONTHS ENDED JUNE 30, 2004
Our licensing revenue in the first six months of
2005 was $35,000, as compared to licensing revenue
of $48,000 in the same period of 2004, a decrease of
$13,000. We recognize licensing revenue over the
period of the performance obligation under our
licensing agreements. Licensing revenue recognized
in both 2005 and 2004 was from several agreements,
including agreements related to various amlexanox
projects and ResiDerm(R).
There were $318,000 in product sales of Aphthasol(R)
in the first six months of 2005, as compared to no
sales in the same period of 2004, due to a supply
interruption in such period. Aphthasol(R) product
sales recommenced in September 2004.
Royalty income for the first six months of 2005 was
$51,000, as compared to $40,000 in the same period
of 2004, an increase of $11,000.
Total research spending for the first six months of
2005 was $2,759,000, as compared to $2,425,000 for
the same period in 2004, an increase of $334,000.
The increase in expenses was the result of:
- - higher costs for product and clinical trials for
AP5346 ($192,000);
- - higher costs ($113,000) for pre-production of
OraDisc(TM) A; and
- - higher costs for other projects ($29,000).
Our cost of product sales was $280,000 for the first
six months of 2005, as compared to $57,000 in the
same period of 2004, an increase of $223,000. The
increase in cost of product sales was due to
increased product sales and fees associated with
sales in 2005 versus no sales in 2004 .
Total general and administrative expenses were
$2,505,000 for the first six months of 2005, an
increase of $979,000 as compared to the same period
in 2004. The increase in general and administrative
expenses was due primarily to the following:
- - expenses due to the separation agreement with our
former CEO ($839,000); and
- - royalty license expenses ($150,000).
The increase in general and administrative expenses
is partially offset by other net decreases ($10,000).
Depreciation and amortization was $330,000 for the
first six months of 2005 as compared to $320,000 for
the same period in 2004 reflecting an increase of
$10,000. The increase in depreciation and
amortization was due to increased depreciation
resulting from the acquisition of additional capital assets.
Total operating expenses in the first six months of
2005 were $5,874,000 as compared to total operating
expenses of $4,328,000 for the same period in 2004,
an increase of $1,546,000.
Loss from operations in the first six months of 2005
was $5,470,000 as compared to a loss of $4,240,000
for the same period in 2004, an increase of $1,230,000.
Interest and miscellaneous income was $22,000 for
the first six months of 2005 as compared to
22
$68,000 for the same period in 2004, a decrease of $46,000.
The decrease in interest income was due to lower
cash balances and lower interest rates in 2005 as
compared with 2004.
Interest and other expense was $760,000 for the
first six months of 2005 as compared to $732,000 for
the same period in 2004, an increase of $28,000. The
increase in expense is due to the addition of the
Secured Convertible Notes.
Net loss in the first six months of 2005 was
$6,208,000, or a $0.40 basic and diluted loss per
common share, compared with a loss of $4,904,000, or
a $0.33 basic and diluted loss per common share for
the same period in 2004, an increase of $1,304,000.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash and short-term investments
in certificates of deposit, corporate securities
with high quality ratings, and U.S. government
securities. These investments are not held for
trading or other speculative purposes. These
financial investment securities all mature in 2005
and 2006 and their estimated fair value approximates
cost. Changes in interest rates affect the
investment income we earn on our investments and,
therefore, impact our cash flows and results of
operations. A hypothetical 50 basis point decrease
in interest rates would result in a decrease in
annual interest income and a corresponding increase
in net loss of approximately $3,000. This estimated
effect assumes no changes in our short-term
investments at June 30, 2005. We do not believe that
we are exposed to any other market risks, as defined
under applicable SEC regulations. We are not exposed
to risks for changes in commodity prices, or any
other market risks.
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and
procedures. Our chief executive officer and our
chief financial officer, after evaluating the
effectiveness of our "disclosure controls and
procedures" (as defined in Rules 13a-15(e) and 15d-
(e) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the
period covered by this quarterly report, concluded
that the Company's disclosure controls and
procedures were (1) designed to ensure that material
information relating to the Company, including its
consolidated subsidiaries, is made known to the
Company's chief executive officer and chief
financial officer by others within those entities,
particularly during the period in which this report
was being prepared, and (2) effective, in that they
provide reasonable assurance that information
required to be disclosed by the Company in the
reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules
and forms.
(b) Changes in internal controls. Except as set
forth below, there were no changes in our internal
controls over financial reporting during the quarter
ended June 30, 2005 that have materially affected,
or are reasonably likely to material affect, our
internal controls over financial reporting.
(c) As previously reported in our Annual Report on
Form 10-K for the fiscal year ended December 31,
2004 (the "Form 10-K"), our management concluded
that our internal
23
control over financial reporting
was effective as of December 31, 2004. However, as
disclosed in the Form 10-K, our independent auditors
concluded that we have two material weaknesses in
the areas of segregation of duties and as a result
of an aggregation of three separate significant
deficiencies where the effectiveness of the controls
are dependent on segregation of duties, as set forth
in their attestation report in the Form 10-K. Their
conclusion also points out that "these material
weaknesses did not result in any adjustments to the
annual or interim consolidated financial statements"
and that "this report does not affect (their) report
dated March 31, 2005" reflecting their opinion on
the financial statements.
(d) Based on the criteria set forth in their
attestation report in the Form 10-K, our independent
auditors determined that proper segregation of
duties do not exist within our accounting and
finance area. While management believes that
sufficient controls are in place, and that there is
adequate segregation of duties within the business,
it recognizes that this is a perceived material
weakness and is taking the steps it believes are
necessary to mitigate this risk. Management and the
Audit Committee has considered the need for ongoing
monitoring of internal controls under the Sarbanes-
Oxley Act of 2002, as well as strengthening the
internal controls of the business by the engagement
of an outside accounting/finance consulting firm to
perform quarterly procedures designed to assist in
the maintaining and monitoring of an effective
control environment and to mitigate the risk related
to a lack of segregation of duties between senior
accounting/finance personnel. The consulting firm is
expected to report and take instructions directly
from the Audit Committee although management will be
involved in assisting in determining the scope of
the quarterly and annual procedures. Terms and
conditions of this engagement are still under
consideration.
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 SALES OF UNREGISTERED EQUITY SECURITIES AND
USE OF PROCEEDS
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May
12, 2005 in New York, NY. At that meeting the
following matters were submitted to a vote of the
stockholders of record. The proposals were approved
by the stockholders, as follows:
- - Three directors were re-elected for three year
terms with the following votes:
24
Max Link; 11,803,589- For; and 1,631,783- Withheld Authority
John J. Meakem, Jr.; 13,313,423- For; and 121,949- Withheld Authority
- - The terms of office as a director of Access of each of J. Michael
Flinn, Stuart M. Duty, Stephen B.Howell and Herbert H. McDade, Jr.
continued after the meeting.
- - A proposal to establish the Access Pharmaceuticals, Inc.
2005 Equity Incentive Plan, pursuant to which an aggregate of
700,000 shares of our common stock may be granted pursuant to the
terms of such plan was approved with 2,623,530- For;
475,635- Against; and 24,538- Abstain.
- - A proposal to amend our Restricted Stock Plan to
increase the total number of shares of our common
stock authorized for issuance under that plan from
200,000 to 400,000 shares was approved with 2,554,310-
For; 548,645- Against; and 20,748- Abstain.
- - A proposal to ratify the appointment of Grant
Thornton LLP as independent certified public
accountants for the Company for the fiscal year
ending December 31, 2005 was approved with 13,367,411-
For; 37,510- Against; and 30,451- Abstain.
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS
Exhibits:
31.1 Certification of Chief Executive Officer of
Access Pharmaceuticals, Inc. pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer of
Access Pharmaceuticals, Inc. pursuant to Rule 13a-14(a)/15d-14(a)
32.1* Certification of Chief Executive Officer of
Access Pharmaceuticals, Inc. pursuant to 18 U.S.C. Section 1350
32.2* Certification of Chief Financial Officer of
Access Pharmaceuticals, Inc. pursuant to 18 U.S.C. Section 1350
______________
* This exhibit shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange
Act of 1934 or otherwise subject to the liabilities
of that Section, nor shall it be deemed incorporated
by reference in any filings under the Securities Act
of 1933 or the Securities and Exchange Act of 1934,
whether made before or after the date hereof and
irrespective of any general incorporation language
in any filings.
25
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACCESS PHARMACEUTICALS, INC.
Date: August 9, 2005 By:/s/ Rosemary Mazanet
-------------- ---------------------------
Rosemary Mazanet
Acting Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2005 By:/s/ Stephen B. Thompson
-------------- ---------------------------
Stephen B. Thompson
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
26
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2005 December 31, 2004
ASSETS -------------- --------------
(unaudited)
Current assets
Cash and cash equivalents $ 784,000 $ 1,775,000
Short term investments, at cost 504,000 486,000
Accounts and other receivables 810,000 791,000
Inventory 61,000 125,000
Prepaid expenses and other current assets 827,000 1,093,000
-------------- --------------
Total current assets 2,986,000 4,270,000
Property and equipment, net 930,000 1,040,000
Debt issuance costs, net 790,000 130,000
Patents, net 2,146,000 2,315,000
Licenses, net 100,000 125,000
Goodwill, net 1,868,000 1,868,000
Restricted cash and other assets 408,000 1,342,000
-------------- --------------
Total assets $ 9,228,000 $ 11,090,000
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 2,255,000 $ 2,131,000
Accrued interest payable 878,000 311,000
Deferred revenues 1,904,000 1,199,000
Current portion of notes payable and
other future obligations 10,863,000 8,417,000
-------------- --------------
Total current liabilities 15,900,000 12,058,000
Note payable, net of current portion 113,000 193,000
Convertible note 5,500,000 5,500,000
-------------- --------------
Total liabilities 21,513,000 17,751,000
-------------- --------------
Commitments and contingencies
Stockholders' deficit
Preferred stock - $.01 par value;
authorized 2,000,000 shares; none
issued or outstanding - -
Common stock - $.01 par value;
authorized 50,000,000 shares;
issued, 15,722,552 at June 30, 2005
and 15,524,734 at December 31, 2004 157,000 155,000
Additional paid-in capital 59,508,000 59,010,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted stock
grants (209,000) (309,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Accumulated other comprehensive loss (19,000) (3,000)
Accumulated deficit (70,673,000) (64,465,000)
------------- -------------
Total stockholders' deficit (12,285,000) (6,661,000)
------------- -------------
Total liabilities and stockholders'
deficit $ 9,228,000 $ 11,090,000
============= =============
The accompanying notes are an integral part of these statements.
27
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues
Licensing revenues $ 24,000 $ 44,000 $ 35,000 $ 48,000
Product sales 201,000 - 318,000 -
Royalty income 24,000 24,000 51,000 40,000
----------- ------------- ------------ ------------
Total revenues 249,000 68,000 404,000 88,000
Expenses
Research and development 1,440,000 1,281,000 2,759,000 2,425,000
Cost of product sales 178,000 31,000 280,000 57,000
General and administrative 1,816,000 772,000 2,505,000 1,526,000
Depreciation and amortization 166,000 160,000 330,000 320,000
------------ ------------ ------------ ------------
Total expenses 3,600,000 2,244,000 5,874,000 4,328,000
------------ ------------ ------------ ------------
Loss from operations (3,351,000) (2,176,000) (5,470,000) (4,240,000)
Other income (expense)
Interest and miscellaneous
income 12,000 35,000 22,000 68,000
Interest and other expense (447,000) (412,000) (760,000) (732,000)
------------ ------------ ------------ ------------
(435,000) (377,000) (738,000) (664,000)
------------ ------------ ------------ ------------
Net loss $(3,786,000) $(2,553,000) $(6,208,000) $(4,904,000)
============ ============ ============ ============
Basic and diluted loss
per common share $(0.24) $(0.17) $(0.40) $(0.33)
============ ============ ============ ============
Weighted average basic and
diluted common shares
outstanding 15,724,710 15,449,603 15,626,379 14,824,938
============ ============ ============ ============
Net loss $(3,786,000) $(2,553,000) $(6,208,000) $(4,904,000)
Other comprehensive loss
Foreign currency translation
adjustment (8,000) (25,000) (16,000) (15,000)
------------ ------------ ------------ ------------
Comprehensive loss $(3,794,000) $(2,578,000) $(6,224,000) $(4,919,000)
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
28
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months ended June 30,
------------------------------
2005 2004
-------------- --------------
Cash flows from operating activities:
Net loss $(6,208,000) $(4,904,000)
Adjustments to reconcile net loss to cash used
in operating activities:
Warrants issued in payment of consulting
expenses - 42,000
Amortization of restricted stock grants 100,000 60,000
Depreciation and amortization 330,000 320,000
Amortization of debt costs 175,000 92,000
Change in operating assets and liabilities:
Accounts receivable (19,000) 21,000
Inventory 64,000 -
Prepaid expenses and other current assets 266,000 37,000
Restricted cash and other assets 581,000 158,000
Accounts payable and accrued expenses 124,000 (586,000)
Accrued interest payable 567,000 521,000
Deferred revenues 705,000 (7,000)
-------------- --------------
Net cash used in operating activities (3,315,000) (4,246,000)
-------------- --------------
Cash flows from investing activities:
Capital expenditures (26,000) (87,000)
Redemptions of short term investments and
certificates of deposit - 891,000
-------------- --------------
Net cash provided by (used in) investing activities (26,000) 804,000
-------------- --------------
Cash flows from financing activities:
Payments of notes payable (267,000) (249,000)
Proceeds from secured notes payable 2,633,000 -
Proceeds from stock issuances, net of
costs of $647,000 - 9,130,000
-------------- --------------
Net cash provided by financing activities 2,366,000 8,881,000
-------------- --------------
Net increase (decrease) in cash and
cash equivalents (975,000) 5,439,000
Effect of exchange rate changes on cash (16,000) (18,000)
Cash and cash equivalents at beginning of period 1,775,000 727,000
-------------- --------------
Cash and cash equivalents at end of period $784,000 $6,148,000
============== ==============
Cash paid for interest $10,000 $15,000
Supplemental disclosure of non-cash transactions
200,000 shares of common stock issued pursuant to
the SEDA and Secured Convertible Notes $500,000 $-
Value of restricted stock grants - 136,000
The accompanying notes are an integral part of these statements.
29
Access Pharmaceuticals, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2005 and 2004
(unaudited)
(1) Interim Financial Statements
The consolidated balance sheet as of June 30, 2005
and the consolidated statements of operations for
the three and six months ended June 30, 2005 and
2004 and the consolidated statements of cash flows
for the six months ended June 30, 2005 were prepared
by management without audit. In the opinion of
management, all adjustments, consisting only of
normal recurring adjustments, except as otherwise
disclosed, necessary for the fair presentation of
the financial position, results of operations, and
changes in financial position for such periods, have
been made.
Certain information and footnote disclosures
normally included in financial statements prepared
in accordance with accounting principles generally
accepted in the United States of America have been
condensed or omitted. It is suggested that these
interim financial statements be read in conjunction
with the financial statements and notes thereto
included in our Annual Report on Form 10-K for the
year ended December 31, 2004. The results of
operations for the period ended June 30, 2005 are
not necessarily indicative of the operating results
which may be expected for a full year. The
consolidated balance sheet as of December 31, 2004
contains financial information taken from the
audited financial statements as of that date.
In preparing consolidated financial statements in
conformity with accounting principles generally
accepted in the United States of America, management
is required to make estimates and assumptions that
affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
(2) Intangible Assets
Intangible assets consist of the following (in thousands):
June 30, 2005 December 31, 2004
----------------------- -------------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
----------- ----------- ------------ ------------
Amortizable intangible assets
Patents $3,179 $1,033 $3,179 $ 864
Licenses 500 400 500 375
----------- ----------- ------------ -----------
Total $3,679 $1,433 $3,679 $1,239
=========== =========== ============ ===========
Amortization expense related to intangible assets
totaled $96,000 and $105,000 for each of the three
months ended June 30, 2005 and 2004, respectively
and totaled $194,000 and $210,000 for the six months
ended June 30, 2005 and 2004, respectively. The
aggregate estimated amortization expense for
intangible assets remaining as of June 30 is as
follows (in thousands):
30
2005 $ 193
2006 388
2007 363
2008 338
2009 338
Thereafter 626
--------
Total $2,246
========
(3) Stock-Based Compensation
The following table illustrates the effect on net
loss and loss per share if we had applied the fair
value recognition provisions of FASB Statement 123,
Accounting for Stock-Based Compensation, using
assumptions described in Form 10-K, Note 1, to our
stock-based employee plans.
Three months ended June 30, Six months ended June 30,
------------------------- -------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss as reported $(3,786,000) $(2,553,000) $(6,208,000) $(4,904,000)
Deduct: Stock-based
employee compensation
expense determined
under fair value based
method (490,000) (185,000) (645,000) (397,000)
------------ ------------ ------------ ------------
Pro forma $(4,276,000) $(2,738,000) $(6,853,000) $(5,301,000)
============ ============ ============ ============
Basic and diluted loss per share:
As reported $(0.24) $(0.17) $(0.40) $(0.33)
Pro forma (0.27) (0.18) (0.44) (0.36)
The effect of our outstanding options and warrants
are anti-dilutive when we have a net loss. The fully
diluted shares are:
Three months ended June 30, Six months ended June 30,
------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------- ------------
Fully diluted shares 24,718,707 21,499,919 24,620,376 20,875,274
31