ABEONA THERAPEUTICS INC. - Quarter Report: 2010 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
One)
|
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended September 30,
2010
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Transition Period from to
Commission
file number 0-9314
ACCESS PHARMACEUTICALS,
INC.
(Exact
name of registrant as specified in its charter)
| Delaware | 83-0221517 | |
| (State or other jurisdiction of | (I.R.S. Employer I.D. No.) | |
| incorporation or organization) |
2600 Stemmons Frwy, Suite 176, Dallas, TX
75207
(Address
of principal executive offices)
(214) 905-5100
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company þ
|
|||
|
(Do
not check if a smaller reporting
company)
|
||||||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
As of
November 9, 2010, there were 15,998,265 shares of Access Pharmaceuticals, Inc.
common stock outstanding. Also, as of November 9, 2010, there were 2,985.3617
shares of Series A Convertible Preferred Stock outstanding, and such shares were
convertible into 9,951,198 shares of common stock.
| ACCESS PHARMACEUTICALS, INC. | |||||||||||
| INDEX | |||||||||||
|
Page No.
|
|||||||||||
|
PART
I - FINANCIAL INFORMATION
|
|||||||||||
|
Item
1.
|
Financial
Statements:
|
||||||||||
|
Condensed
Consolidated Balance Sheets at September 30, 2010
|
|||||||||||
|
(unaudited)
and December 31, 2009
|
15
|
||||||||||
|
Condensed
Consolidated Statements of Operations (unaudited) for the
|
|||||||||||
|
three
and nine months ended September 30, 2010 and September 30,
2009
|
16
|
||||||||||
|
Condensed
Consolidated Statement of Stockholders’ Deficit
(unaudited)
|
|||||||||||
|
for
the three and nine months ended September 30, 2010
|
17
|
||||||||||
|
Condensed
Consolidated Statements of Cash Flows (unaudited) for the
|
|||||||||||
|
nine
months ended September 30, 2010 and September 30, 2009
|
18
|
||||||||||
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
19
|
||||||||||
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and
|
||||||||||
|
Results
of Operations
|
2
|
||||||||||
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
10
|
|||||||||
|
Item
4.
|
Controls
and Procedures
|
10
|
|||||||||
|
PART
II - OTHER INFORMATION
|
|||||||||||
|
Item
1.
|
Legal
Proceedings
|
11
|
|||||||||
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
11
|
|||||||||
|
Item
3.
|
Defaults
Under Senior Securities
|
12
|
|||||||||
|
Item
4.
|
Removed
and Reserved
|
12
|
|||||||||
|
Item
5.
|
Other
Information
|
12
|
|||||||||
|
Item
6.
|
Exhibits
|
12
|
|||||||||
|
SIGNATURES
|
14
|
||||||||||
|
CERTIFICATIONS
|
|||||||||||
1
PART
I –FINANCIAL INFORMATION
This
Quarterly Report (including the information incorporated by reference) contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties including, but not limited to
the uncertainties associated with research and development activities, clinical
trials, our ability to raise capital, the timing of and our ability to achieve
regulatory approvals, dependence on others to market our licensed products,
collaborations, future cash flow, the timing and receipt of licensing and
milestone revenues, the future success of our marketed products and products in
development, our sales projections, and the sales projections of our licensing
partners, our ability to achieve licensing milestones and other risks described
below as well as those discussed elsewhere in this Quarterly Report, documents
incorporated by reference and other documents and reports that we file
periodically with the Securities and Exchange Commission. These statements
include, without limitation, statements relating to our ability to continue as a
going concern, anticipated product approvals and timing thereof, product
opportunities, clinical trials and U.S. Food and Drug Administration (“FDA”)
applications, as well as our drug development strategy, our clinical development
organization, expectations regarding our rate of technological developments and
competition, our expectations regarding minimizing development risk and
developing and introducing technology, the size of our targeted markets, the
terms of future licensing arrangements, our plans to hire additional accounting
staff and implement appropriate procedures, the adequacy of our capital
resources, and our ability to secure additional financing for our operations.
These statements relate to future events or our future financial performance. In
some cases, you can identify forward-looking statements by terminology such as
“may,” “will,” “should,” “expects,” “plans,” “could,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential” or “continue” or the negative of such terms
or other comparable terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors that may cause
our or our industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by such
forward-looking statements.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We are under no duty to update any of the forward-looking
statements after the date of filing this Quarterly Report to conform such
statements to actual results.
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
|
OVERVIEW
Access
Pharmaceuticals, Inc. (together with our subsidiaries, “We”, “Access” or the
“Company”) is a Delaware corporation. We are a biopharmaceutical company
leveraging our proprietary drug delivery platforms to develop treatments in
areas of oncology, cancer supportive care and diabetes. We currently have one
approved product, two products at Phase 2 of clinical development and several
products in pre-clinical development. Low priority clinical and pre-clinical
programs will be dependent on our ability to enter into collaborative
arrangements. Certain of our development programs are dependent upon our ability
to secure approved funding for such projects. Our description of our business,
including our list of products and patents, takes into consideration our
acquisition of MacroChem Corporation which closed February 25,
2009.
2
|
·
|
MuGard™
is our approved product for the management of oral mucositis, a frequent
side-effect of cancer therapy for which there is no established treatment.
The market for mucositis treatment is estimated to be in excess of $1
billion world-wide. MuGard, a proprietary nanopolymer formulation, has
received marketing allowance in the U.S. from the Food & Drug
Administration (FDA). MuGard has been launched in Germany, Italy, UK,
Greece and the Nordic countries by our European commercial partner,
SpePharm. We launched MuGard in the United States during the third quarter
of 2010. We are working with our partners in Korea and China for
registration and marketing.
|
|
·
|
Our
lead development candidate for the treatment of cancer is ProLindac™, a
nanopolymer DACH-platinum prodrug. We recently completed a Phase 2
clinical trial on ProLindac in the EU in patients with recurrent ovarian
cancer. The clinical study had positive safety and efficacy results. We
expect to initiate a study of ProLindac combined with Paclitaxel in second
line treatment of platinum pretreated advanced ovarian cancer patients in
the fourth quarter of 2010. This multi-center study of up to 25 evaluable
patients will be conducted in Europe. We are also currently planning a
number of combination trials, looking at combining ProLindac with other
cancer agents in solid tumor indications including colorectal and ovarian
cancer. The DACH-platinum incorporated in ProLindac is the same active
moiety as that in oxaliplatin (Eloxatin; Sanofi-Aventis), which has sales
in excess of $2.0 billion.
|
|
·
|
Thiarabine,
or 4-thio Ara-C, is a next generation nucleoside analog licensed from
Southern Research Institute. Previously named SR9025 and OSI-7836, the
compound has been in two Phase 1/2 solid tumor human clinical trials and
was shown to have anti-tumor activity. We are working with leukemia and
lymphoma specialists at MD Anderson Cancer Center in Houston and have
initiated additional Phase 2 clinical trials in adult AML, ALL and other
indications.
|
|
·
|
CobOral™
is our proprietary preclinical nanopolymer oral drug delivery technology
based on the natural vitamin B12 oral uptake mechanism. We are currently
developing a product for the oral delivery of insulin, and have conducted
sponsored development of a product for oral delivery of human growth
hormone. We have signed or are in discussion with several companies
regarding the sponsored development of CobOral™ oral drug delivery
formulations of proprietary and non-proprietary
actives.
|
|
·
|
CobaCyte-mediated
cancer targeted delivery is a preclinical technology which makes use of
the fact that cell surface receptors for vitamins such as B12 are often
overexpressed by cancer cells. This technology uses nanopolymer constructs
to deliver more anti-cancer drug to tumors while protecting normal
tissues.
|
Products
We use
our drug delivery technologies to develop the following products and product
candidates:
3
Access
Drug Portfolio
|
Compound
|
Originator
|
Technology
|
Indication
|
Clinical
Stage (1)
|
||||
|
MuGard™
|
Access
|
Mucoadhesive
liquid
|
Mucositis
|
(510k)
Marketing clearance received
|
||||
|
ProLindacTM
(Polymer
Platinate,
AP5346) (2)
|
Access
/
Univ
of
London
|
Synthetic
polymer
|
Cancer
|
Phase
2
|
||||
|
Thiarabine
(4-thio Ara-C) (3)
|
Southern
Research
Institute
|
Small
molecule
|
Cancer
|
Phase
1/2
|
||||
|
Oral
Insulin
|
Access
|
Cobalamin
|
Diabetes
|
Pre-clinical
|
||||
|
CobOral™
Delivery System
|
Access
|
Cobalamin
|
Various
|
Pre-clinical
|
||||
|
CobaCyte™-Targeted
Therapeutics
|
Access
|
Cobalamin
|
Anti-tumor
|
Pre-clinical
|
|
(1)
|
For
more information, see “Government Regulation” for description of clinical
stages.
|
|
(2)
|
Licensed
from the School of Pharmacy, The University of
London.
|
|
(3)
|
Licensed
from Southern Research Institute of Birmingham,
Alabama.
|
RECENT
EVENTS
On
November 3, 2010, we announced that we have commenced a Phase 2 combination
trial for our second generation DACH-platinum cancer drug, ProLindac, in
platinum-sensitive ovarian-cancer patients. This trial is an open-label, Phase 2
study of ProLindac given intravenously with paclitaxel. The combination trial
will be conducted in up to eight European participating centers.
On
November 1, 2010, we announced that we have been awarded $1.5 million in
government grants. Under the recently enacted Patient Protection and Affordable
Care Act, cash grants were awarded to Qualifying Therapeutic Discovery Projects
that showed significant potential in producing new and cost-saving therapies,
support job growth and increase U.S. competitiveness. Grants were awarded
through a competitive application process, and seven out of eight of our
applications were awarded.
On
October 27, 2010, we announced that we have entered into a pre-licensing
feasibility agreement with a biopharmaceutical company to develop an oral
formulation of an undisclosed prostate cancer compound utilizing its proprietary
vitamin B-12-based CobOral™ Drug Delivery Technology. We will develop CobOral
formulations for testing by the biopharma company. Though the terms of the
agreement have not been disclosed, we have indicated that any successful
formulation developed will be jointly owned by the parties and subject to a
subsequent full licensing agreement.
On
October 20, 2010, we announced that we have submitted additional patent
applications, covering our Cobalamin-mediated oral drug delivery technology
formulations of many global top-100 injectable drugs, as a result of the growing
interest surrounding our proprietary oral delivery technology. The patents cover
oral formulations of leading injectables, like bevacizumab (Avastin®),
trastuzumab (Herceptin®), adalimumab (Humira®),
etanercept (Enbrel®), insulin glargine (Lantus®), and many others. In addition,
we rebranded our Cobalamin-mediated oral drug delivery technology as CobOral™
delivery technology.
4
On
September 29, 2010, we announced that we have made significant progress with our
proprietary Cobalamin-targeted drug-delivery program for siRNA therapies. As a
result of the continued advancements made with our Cobalamin program, we
rebranded the targeted-drug delivery technology as CobaCyte™ and submitted
additional patent applications for its improved CobaCyte formulations, including
siRNA compositions.
On
September 21, 2010, we announced we signed a supply agreement for MuGard with
RHEI Pharmaceuticals, Inc. (“RHEI”), a specialty pharmaceutical company focused
on bringing proprietary medicines to the China market. Under the agreement we
are required to ensure manufacturing capacity of up to a minimum of $30 million
of product in the licensed territories. Coinciding with the signing of the above
agreement, we also approved a sub-license agreement between RHEI Pharmaceuticals
and Jian An Pharmaceuticals (“Jian An”) Limited in Shenzhen, China in an effort
to leverage Jian An’s extensive sales, marketing and regulatory infrastructure
for the launch of MuGard in China and Taiwan.
On August
2, 2010, we announced we initiated a Phase 1/2 dose-escalating study of our
proprietary, anti-cancer drug, Thiarabine, a nucleoside analogue for patients
with hematologic malignancies (cancers of the blood). The primary objective of
the study is to determine the maximum tolerated dose (MTD) in two different
dosing schedules with various leukemias and lymphomas and recommended Phase II
dose. The program is being led by Hagop Kantarjian, M.D., Chair of the
Department of Leukemia at The University of Texas MD Anderson Cancer Center in
Houston, Texas.
On July
27, 2010, we announced our e-marketing partner, iMedicor, commenced the initial
phase of a multi-channel marketing program for MuGard. iMedicor’s two-pronged
marketing approach involves leveraging its direct sales channel through Direct
Medical Solutions and its online Pharma marketing portal to further support our
ongoing commercial launch efforts for MuGard.
On July
20, 2010, we announced we had signed an exclusive specialty distribution
agreement with BioScrip, Inc. for MuGard. The agreement aligns us with
comprehensive access to BioScrip’s nationwide distribution platform and the
ability to leverage their extensive physician relationships, 110 BioScrip
specialty pharmacies, mail distribution capability and diversified payor
network.
On July
15, 2010, we announced that we had entered into a pre-licensing feasibility
agreement with a leading biotechnology company to develop an oral formulation of
its currently-marketed, proprietary injectable drugs. We will utilize our
proprietary CobOral Drug Delivery Technology to develop oral formulation of the
drug for pre-clinical testing.
On April
13, 2010, we announced that we had completed our first commercial scale
production run of MuGard in North America at Accupac, Inc. manufacturing
facilities.
On March
30, 2010, we announced that we signed a collaborative development agreement with
bioRASI, LLC to facilitate clinical development for our CobOral based oral
insulin and CobaCyte based products.
On March
25, 2010, we announced that our Korean partner JCOM co., Ltd. received approval
from the Korean Food and Drug Administration of its Registration Dossier for
MuGard.
On March
11, 2010, we announced that we had received reports of significant
bioavailability of orally delivered insulin in two independently-conducted
animal studies with our CobaCyte Drug Delivery Technology.
5
On
January 22, 2010, we announced the sale of approximately 2.10 million shares of
our common stock and warrants to purchase approximately 1.05 million shares of
our common stock for gross proceeds of approximately $6.3 million. We sold these
shares and warrants as a combined unit for $3.00 per unit (each unit consisting
of one share and a warrant to purchase 0.5 shares of common stock). The exercise
price of the warrants is $3.00 per share.
On
January 7, 2010, we announced that we completed enrollment and evaluation of the
last additional cohort of patients in the ongoing clinical study of ProLindac as
a monotherapy in ovarian cancer patients who received at least two prior
platinum based treatment regimens. The additional cohort of 8 patients received
the ProLindac batch made by an improved scalable process, which will be used on
a larger scale for future clinical and commercial supplies. None of the 8
patients experienced any acute significant adverse events, while treatment had
the same beneficial pharmacodynamic effect seen in the first 26 patients treated
with the former ProLindac production batch; clinically relevant sustained
biomarker decrease (responses by Rustin's criteria) and disease stabilization
were seen in several patients. The overall results of our Phase 1/2 exploratory
single agent ProLindac study have helped define multiple safe dosing regimens,
while the level of patient cohort accrued in the study antitumor activity was as
expected in this very heavily pretreated patient cohort.
LIQUIDITY
AND CAPITAL RESOURCES
We have
funded our operations primarily through private sales of common stock, preferred
stock, convertible notes and through licensing agreements. Our principal source
of liquidity is cash and cash equivalents. Royalty revenues provided limited
funding for operations during the nine months ended September 30, 2010. As of
September 30, 2010, our cash and cash equivalents were $1,496,000 and our net
cash burn rate for the nine months ended September 30, 2010, was approximately
$500,000 per month, which included non-recurring manufacturing expenses. As of
September 30, 2010, our working capital deficit was $12,918,000. Our working
capital deficit at September 30, 2010 represented an increase of $4,969,000 as
compared to our working capital deficit as of December 31, 2009 of $7,949,000.
The increase in the working capital deficit at September 30, 2010 reflects the
reclassification of long-term debt of $5,500,000 to current liabilities and
first nine months operating costs offset by net receipts from our January 2010
offering of $5,848,000. As of September 30, 2010, we had one convertible note
outstanding in the principal amount of $5.5 million which is due September 13,
2011.
On
November 1, 2010, we announced that we have been awarded $1.5 million in
government grants. Under the recently enacted Patient Protection and Affordable
Care Act, cash grants were awarded to Qualifying Therapeutic Discovery Projects
that showed significant potential in producing new and cost-saving therapies,
support job growth and increase U.S. competitiveness.
As of
November 15, 2010, we did not have enough capital to achieve our long-term
goals. If we raise additional funds by selling equity securities, the relative
equity ownership of our existing investors will be diluted and the new investors
could obtain terms more favorable than previous investors. A failure to obtain
necessary additional capital in the future could jeopardize our operations and
our ability to continue as a going concern.
6
We have
generally incurred negative cash flows from operations since inception, and have
expended, and expect to continue to expend in the future, substantial funds to
complete our planned product development efforts. Since inception, our expenses
have significantly exceeded revenues, resulting in an accumulated deficit as of
September 30, 2010 of $252,987,000. We expect that our capital resources will be
adequate to fund our current level of operations into the first quarter of 2011.
However, our ability to fund operations over this time could change
significantly depending upon changes to future operational funding obligations
or capital expenditures. As a result, we are required to seek additional
financing sources within the next twelve months. We cannot assure you that we
will ever be able to generate significant product revenue or achieve or sustain
profitability.
Since our
inception, we have devoted our resources primarily to fund our research and
development programs. We have been unprofitable since inception and to date have
received limited revenues from the sale of products. We cannot assure you that
we will be able to generate sufficient product revenues to attain profitability
on a sustained basis or at all. We expect to incur losses for the next several
years as we continue to invest in product research and development, preclinical
studies, clinical trials and regulatory compliance.
THIRD
QUARTER 2010 COMPARED TO THIRD QUARTER 2009
Our
licensing revenue for the third quarter of 2010 was $107,000 as compared to
$124,000 for 2009, a decrease of $17,000. We recognize licensing revenue over
the period of the performance obligation under our licensing
agreements.
We
received royalties of $20,000 in the third quarter of 2010 and 2009. Royalties
for MuGard were first recorded in the third quarter of 2009.
Total
research and development spending for the third quarter of 2010 was $1,199,000,
as compared to $561,000 for 2009, an increase of $638,000. The increase in
expenses was primarily due to:
|
·
|
increased
salary and related costs due to existing employees paid at full salary in
the third quarter of 2010 while employees were paid at a reduced salary in
the third quarter of 2009 plus an additional new employee
($220,000);
|
|
·
|
increased
development costs ($118,000);
|
|
·
|
increase
lab costs due to lab activity for CobaCyte, CobOral and MuGard
($112,000);
|
|
·
|
increased
stock compensation expense due to additional option grants for research
and development employees
($80,000);
|
|
·
|
increased
clinical development with the planned starts in trials for MuGard,
ProLindac and Thiarabine ($71,000);
and
|
|
·
|
other
net increases in research spending
($37,000).
|
Total
general and administrative expenses were $1,165,000 for the third quarter of
2010, a decrease of $2,293,000 compared to 2009 expenses of $3,458,000 for the
same quarter. The decrease in expenses was due primarily to the
following:
|
·
|
lower
general business consulting expenses due to reduction in use of outside
consultants ($2,037,000);
|
|
·
|
lower
potential liquidated damages under an investor rights agreement with
certain investors ($161,000);
|
|
·
|
lower
stock compensation expense due to fewer option grants for general and
administrative employees ($81,000);
|
|
·
|
lower
patent and license fees ($73,000);
and
|
|
·
|
offset
by other net increases in other general and administrative expenses
($59,000).
|
7
Depreciation
and amortization was $59,000 for the third quarter of 2010, as compared to
$65,000 for 2009, a decrease of $6,000. The decrease in expenses was primarily
due to assets becoming fully depreciated.
Total
operating expenses for the third quarter of 2010, were $2,423,000 as compared to
total operating expenses of $4,084,000 for same period in 2009, a decrease of
$1,661,000 for the reasons listed above.
Interest
and miscellaneous income was $38,000 for the third quarter of 2010, as compared
to $2,000 for the same period in 2009, an increase of $36,000. Miscellaneous
income is $35,000 higher in 2010 as compared to the same period in 2009 due to
cash received for one time other items. Interest income is $1,000 higher in
2010 as compared to the same period in 2009.
Interest
and other expense was $152,000 for the third quarter of 2010, as compared to
$133,000 in 2009, an increase of $19,000. The increase in interest and other
expense was due to the interest due on the unpaid portion of the long-term notes
and dividends.
We
recorded a derivative gain related to warrants classified as liabilities of
$146,000 for the third quarter of 2010. A derivative for warrants was recorded
in the fourth quarter of 2009 when the fair value of the warrants, that were
issued with our Series A Convertible Preferred Stock, were reclassified from
equity to a liability per the requirements of new accounting guidance. Although
we were required, per the guidance, to adopt this guidance effective January 1,
2009, there was no derivative liability recorded in the third quarter of 2009.
If a derivative for warrants was recorded in the third quarter of 2009 there
would have been a derivative loss of $1,929,000.
We
recorded a derivative loss for the liability related to preferred stock of
$10,455,000 for the third quarter of 2010. The derivative was recorded per the
requirements of accounting guidance due to the possibility of repricing our
Series A Convertible Preferred Stock if we sold our common stock at a price
below $3.00 per share.
Preferred
stock dividends of $452,000 were accrued for the third quarter of 2010 and
$471,000 for 2009, a decrease of $19,000. The decrease is due to preferred
shareholders converting their ownership to common stock. Dividends are paid
semi-annually in either cash or common stock.
Net loss
allocable to common stockholders for the third quarter of 2010, was $13,171,000,
or a $0.83 basic and diluted loss per common share, compared with a loss of
$4,542,000, or a $0.37 basic and diluted loss per common share for the same
period in 2009, an increased loss of $8,629,000.
NINE
MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2009
Our
licensing revenue for the first nine months of 2010 was $281,000 as compared to
$228,000 for the same period of 2009, an increase of $53,000. We recognize
licensing revenue over the period of the performance obligation under our
licensing agreements.
We
received royalties of $53,000 for the first nine months of 2010 as compared to
$20,000 royalties for the same period in 2009. Royalties for MuGard were first
recorded in the third quarter of 2009.
8
Total
research and development spending for the first nine months of 2010 was
$2,718,000, as compared to $1,830,000 for the same period in 2009, an increase
of $888,000. The increase in expenses was primarily due to:
|
·
|
increased
stock compensation expense due to additional option grants for research
and development employees
($325,000);
|
|
·
|
increased
salary and related costs due to existing employees paid at full salary in
2010 while employees were paid at a reduced salary during a portion of
2009 plus an additional new employee
($286,000);
|
|
·
|
increased
lab costs due to lab activity for CobaCyte, CobOral and MuGard
($207,000);
|
|
·
|
increased
clinical development with the planned starts in trials for MuGard,
ProLindac and Thiarabine
($115,000);
|
|
·
|
other
net increases in research spending ($43,000);
and
|
|
·
|
offset
by lower scientific consulting expenses
($88,000).
|
Total
general and administrative expenses were $3,316,000 for the first nine months of
2010, a decrease of $2,896,000 over 2009 expenses of $6,212,000. The decrease in
spending was due primarily to the following:
|
·
|
lower
general business consulting expenses due to reduction in use of outside
consultants ($2,047,000);
|
|
·
|
lower
accrual of potential liquidated damages under an investor rights agreement
with certain investors ($478,000);
|
|
·
|
lower
patent and license fees ($283,000);
|
|
·
|
lower
stock compensation expense due to fewer option grants for general and
administrative employees ($80,000);
|
|
·
|
other
net decreases in general and administrative expenses ($193,000);
and
|
|
·
|
offset
by increased salary and related costs due to existing employees paid at
full salary in 2010 while employees were paid at a reduced salary during a
portion of 2009 plus an additional new employee
($185,000).
|
Depreciation
and amortization was $179,000 for the first nine months of 2010 as compared to
$197,000 for the same period in 2009 reflecting a decrease of $18,000. The
decrease in depreciation and amortization was due to assets becoming fully
depreciated.
Total
operating expenses for the first nine months of 2010 were $6,213,000 as compared
to total operating expenses of $8,239,000 for same period in 2009, a decrease of
$2,026,000 for the reasons listed above.
Interest
and miscellaneous income was $554,000 for the first nine months of 2010 as
compared to $18,000 for the same period of 2009, an increase of $536,000.
Miscellaneous income is $533,000 higher in 2010 as compared to the same period
in 2009 due to negotiated payables, write-off of other accounts
payable and cash received for one time items. Interest income is $3,000 higher
in 2010 as compared to the same period in 2009.
9
Interest
and other expense was $444,000 for the first nine months of 2010 as compared to
$395,000 in 2009, an increase of $49,000.
We
recorded a derivative gain related to warrants classified as
liabilities of $6,384,000 for the first nine months of 2010. A derivative was
recorded in the fourth quarter of 2009 when the fair value of the warrants, that
were issued with our Series A Convertible Preferred Stock, were reclassified
from equity to a liability per the requirements of new accounting guidance.
Although we were required, per the guidance, to adopt this guidance effective
January 1, 2009, there was no derivative liability recorded in the first nine
months of 2009. If a derivative was recorded in the first nine months of 2009
there would have been a derivative loss of $6,069,000.
We
recorded a derivative loss for the liability related to preferred stock of
$10,455,000 for the third quarter of 2010. The derivative was recorded per the
requirements of accounting guidance due to the possibility of repricing our
Series A Convertible Preferred Stock if we sold our common stock at a price
below $3.00 per share.
Preferred
stock dividends of $1,340,000 were accrued for the first nine months of 2010 and
$1,434,000 for 2009, a decrease of $94,000. The decrease is due to preferred
shareholders converting their ownership to common stock. Dividends are paid
semi-annually in either cash or common stock.
Net loss
allocable to common stockholders for the first nine months of 2010 was
$11,180,000, or a $0.73 basic and diluted loss per common share, compared with a
loss of $9,802,000, or a $0.86 basic and diluted loss per common share for the
same period in 2009, an increased loss of $1,378,000.
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
applicable.
ITEM
4. CONTROLS AND
PROCEDURES
Under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the “Act”)) as of March 31, 2010. Based on this
evaluation, our CEO and CFO concluded that, as of September 30, 2010, our
disclosure controls and procedures were not effective. This conclusion was based
on the existence of the material weaknesses in our internal control over
financial reporting previously disclosed and discussed below.
Our
management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control
system was designed 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. Because
of inherent limitations, a system of internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate due to change in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
10
Our
management, including our principal executive officer and principal accounting
officer, conducted an evaluation of the effectiveness of our internal control
over financial reporting using the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework. Based on its evaluation, our management concluded
in our Annual Report on Form 10-K for the year ended December 31, 2009 that
there is a material weakness in our internal control over financial
reporting. As of the date of this report on Form 10-Q, we have not
remediated such material weakness and as a result, our Chief Executive Officer
and Chief Financial Officer have concluded that a material weakness
continues to exist as of the end of the period covered by this Quarterly Report
on Form 10-Q and our disclosure controls and procedures were not effective. The
material weakness identified did not result in the restatement of any previously
reported financial statements or any related financial disclosure, nor does
management believe that it had any effect on the accuracy of the Company’s
financial statements for the current reporting period. A material weakness is a
deficiency, or a combination of control deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material
misstatement of the Company’s annual or interim financial statements will not be
prevented or detected on a timely basis.
The
material weakness relates to the monitoring and review of work performed by our
Chief Financial Officer in the preparation of financial statements, footnotes
and financial data provided to the Company’s registered public accounting firm
in connection with the annual audit. All of our financial reporting is carried
out by our Chief Financial Officer. This lack of accounting staff results in a
lack of segregation of duties and accounting technical expertise necessary for
an effective system of internal control.
In order
to mitigate this material weakness to the fullest extent possible, all financial
statements are reviewed by the Chief Executive Officer as well as the Chairman
of the Audit Committee for reasonableness. All unexpected results are
investigated. At any time, if it appears that any control can be implemented to
continue to mitigate such weaknesses, it is immediately implemented. As soon as
our finances allow, we plan to hire sufficient accounting staff and implement
appropriate procedures for monitoring and review of work performed by our Chief
Financial Officer.
Changes In Internal Control
Over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended September 30, 2010 that have materially affected, or
are reasonable likely to materially affect, our internal control over financial
reporting.
PART
II -- OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
None.
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
In
September 2010, we issued 51,543 shares of our common stock to several
consultants as payment for their consulting expenses. The issuance of shares of
our common stock in settlement of these accounts was made pursuant to Section
4(2) and Rule 506 of the Securities Act of 1933, as amended.
11
In August
2010, we issued 60,500 shares of our common stock to several consultants as
payment for their consulting expenses. The issuance of shares of our common
stock in settlement of these accounts was made pursuant to Section 4(2) and Rule
506 of the Securities Act of 1933, as amended.
In July
2010, we issued 5,000 shares of our common stock to a consultant as payment for
their consulting expenses. The issuance of shares of our common stock in
settlement of these accounts was made pursuant to Section 4(2) and Rule 506 of
the Securities Act of 1933, as amended.
ITEM
3.
DEFAULTS UPON SENIOR SECURITIES
Pursuant
to the terms of the Certificate of Designations, Rights and Preferences of our
Series A Cumulative Convertible Preferred Stock, we are required to pay
dividends in cash or shares of our common stock, semi-annually, at the rate of
6% per annum. If funds are not currently available to pay cash dividends or if a
cash payment of dividends would be impermissible under Delaware law, we may in
certain circumstances pay such dividends in shares of the Company’s common
stock. In order to pay such dividends in shares of the Company’s common stock,
there must either be an effective registration statement covering the resale of
the dividend shares, the resale must be permissible subject to an exemption from
registration, or the respective holders of Series A Preferred Stock must agree
to accept restricted common stock as payment of such dividends. In the event
none of these three circumstances are met, and the dividends have not been paid
in cash or shares of the Company’s common stock, the dividends shall continue to
accrue until they are paid in cash or shares of the Company’s common stock. The
Company has accrued as of September 30, 2010, dividends payable in the aggregate
amount of $3,950,000.
Pursuant
to the terms of an Investor Rights Agreement with the purchasers of Series A
Preferred Stock, the Company is required to maintain an effective registration
statement with respect to certain shares issuable upon conversion of our
outstanding preferred stock. As of September 30, 2010, the Securities and
Exchange Commission had not yet declared a registration statement effective with
respect to all of the shares covered by the Investor Rights Agreement, and as a
result, we have accrued as of September 30, 2010, $857,000 in liquidated
damages. A registration statement filed by us relating to a portion of such
securities was declared effective on November 13, 2008.
ITEM
4. REMOVED
AND RESERVED
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)
|
12
|
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.
†Management
contract or compensatory plan required to be filed as an Exhibit to this Form
pursuant to Item 6 of the report.
13
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ACCESS PHARMACEUTICALS,
INC.
|
Date:
|
November 10, 2010
|
By:
|
/s/ Jeffrey B. Davis
|
|
Jeffrey
B. Davis
|
|||
|
Chief
Executive Officer
|
|||
|
(Principal
Executive Officer)
|
|||
|
Date:
|
November 10, 2009
|
By:
|
/s/ Stephen B. Thompson
|
|
Stephen
B. Thompson
|
|||
|
Vice
President and Chief Financial Officer
|
|||
|
(Principal
Financial and Accounting Officer
|
|||
14
Access
Pharmaceuticals, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
|
ASSETS
|
September 30,
2010
(unaudited)
|
December 31,
2009
|
|
|
Current assets
Cash and cash
equivalents
Receivables
Prepaid
expenses and other current assets
|
$ 1,496,000
40,000
29,000
|
$ 607,000
36,000
42,000
|
|
| Total current assets |
1,565,000
|
685,000
|
|
|
Property
and equipment, net
|
38,000
|
50,000
|
|
|
Patents,
net
|
627,000
|
787,000
|
|
|
Other
assets
|
49,000
|
61,000
|
|
|
Total
assets
|
$ 2,279,000
|
$ 1,583,000
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|||
|
Current
liabilities
Accounts
payable
Accrued
expenses
Dividends
payable
Accrued
interest payable
Short-term debt
Current
portion of deferred revenue
|
$ 3,383,000
857,000
3,950,000
446,000
5,500,000
347,000
|
$ 4,094,000
857,000
2,773,000
563,000
-
347,000
|
|
| Total current liabilities |
14,483,000
|
8,634,000
|
|
|
Derivative
liability warrants
Derivative
liability preferred stock
Long-term
deferred revenue
Long-term
debt
|
3,324,000
10,455,000
4,470,000
-
|
9,708,000
-
4,730,000
5,500,000
|
|
|
Total
liabilities
|
32,732,000
|
28,572,000
|
|
|
Commitments
and contingencies
|
|||
|
Stockholders'
deficit
Convertible
Series A preferred stock - $.01 par value; authorized
2,000,000
shares; 2,985.3617 shares issued at September 30,
2010 and 2,992.3617 shares
issued at December 31, 2009
Common
stock - $.01 par value; authorized 100,000,000 shares;
issued,
15,899,227 at September 30, 2010 and 13,171,545 at
December
31, 2009
Additional
paid-in capital
Notes
receivable from stockholders
Treasury
stock, at cost – 163 shares
Accumulated
deficit
|
-
159,000
223,424,000
(1,045,000)
(4,000)
(252,987,000)
|
-
132,000
215,735,000
(1,045,000)
(4,000)
(241,807,000)
|
|
| Total stockholders' deficit |
(30,453,000)
|
(26,989,000)
|
|
|
Total
liabilities and stockholders' deficit
|
$ 2,279,000
|
$ 1,583,000
|
The
accompanying notes are an integral part of these consolidated
statements.
15
Access
Pharmaceuticals, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
(unaudited)
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Revenues
|
||||||||||||||||
|
License revenues
|
$ | 107,000 | $ | 124,000 | $ | 281,000 | $ | 228,000 | ||||||||
|
Royalties
|
20,000 | 20,000 | 53,000 | 20,000 | ||||||||||||
|
Total revenues
|
127,000 | 144,000 | 334,000 | 248,000 | ||||||||||||
|
Expenses
|
||||||||||||||||
|
Research
and development
|
1,199,000 | 561,000 | 2,718,000 | 1,830,000 | ||||||||||||
|
General
and administrative
|
1,165,000 | 3,458,000 | 3,316,000 | 6,212,000 | ||||||||||||
|
Depreciation
and amortization
|
59,000 | 65,000 | 179,000 | 197,000 | ||||||||||||
|
Total expenses
|
2,423,000 | 4,084,000 | 6,213,000 | 8,239,000 | ||||||||||||
|
Loss
from operations
|
(2,296,000 | ) | (3,940,000 | ) | (5,879,000 | ) | (7,991,000 | ) | ||||||||
|
Interest and miscellaneous income
|
38,000 | 2,000 | 554,000 | 18,000 | ||||||||||||
|
Interest and other expense
|
(152,000 | ) | (133,000 | ) | (444,000 | ) | (395,000 | ) | ||||||||
|
Gain on change in fair value of
derivative warrants
|
146,000 | - | 6,384,000 | - | ||||||||||||
| Loss on change in fair value of
derivative preferred stock
|
(10,455,000 | ) | - | (10,455,000 | ) | - | ||||||||||
| (10,423,000 | ) | (131,000 | ) | (3,961,000 | ) | (377,000 | ) | |||||||||
|
Net
loss
|
(12,719,000 | ) | (4,071,000 | ) | (9,840,000 | ) | (8,368,000 | ) | ||||||||
|
Less
preferred stock dividends
|
452,000 | 471,000 | 1,340,000 | 1,434,000 | ||||||||||||
|
Net
loss allocable to common stockholders
|
$ | (13,171,000 | ) | $ | (4,542,000 | ) | $ | (11,180,000 | ) | $ | (9,802,000 | ) | ||||
|
Basic/diluted
net loss per common share
|
||||||||||||||||
|
Net
loss allocable to common stockholders
|
$ | (0.83 | ) | $ | (0.37 | ) | $ | (0.73 | ) | $ | (0.86 | ) | ||||
|
Weighted
average basic and diluted
|
15,774,273 | 12,204,696 | 15,337,453 | 11,375,793 | ||||||||||||
| common shares outstanding | ||||||||||||||||
The
accompanying notes are an integral part of these consolidated
statements.
16
Access
Pharmaceuticals, Inc. and Subsidiaries
Condensed
Consolidated Statements of Stockholders' Deficit
(unaudited)
|
Common Stock
|
Preferred Stock
|
Additional
paid-in
capital
|
Notes
receivable from stockholders
|
Treasury
stock
|
Accumulated
deficit
|
|||
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||
|
Balance
December
31, 2009
|
13,172,000 | $ | 132,000 | 2,992.3617 | $ | - | $ | 215,735,000 | $ | (1,045,000 | ) | $ | (4,000 | ) | $ | (241,807,000 | ) | |||||||||||||||
|
Restricted
common
stock issued for services
|
73,000 | 1,000 | - | - | 17,000 | - | - | - | ||||||||||||||||||||||||
|
Warrants
issued for
services
|
- | - | - | - | 19,000 | - | - | - | ||||||||||||||||||||||||
|
Preferred
stock converted into common stock
|
23,000 | - | (7.0000 | ) | - | - | - | - | - | |||||||||||||||||||||||
|
Stock
option
compensation
expense
|
- | - | - | - | 114,000 | - | - | - | ||||||||||||||||||||||||
|
Common
stock issued
for
cash exercise of
options
|
10,000 | - | - | - | 14,000 | - | - | - | ||||||||||||||||||||||||
|
Common
stock issued
for
cashless warrant
exercise
|
20,000 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Common
stock issued
$3.00
share, net of costs
|
2,083,000 | 21,000 | - | - | 5,827,000 | - | - | - | ||||||||||||||||||||||||
|
Preferred
dividends
|
- | - | - | - | - | - | - | (442,000 | ) | |||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | - | - | 1,089,000 | ||||||||||||||||||||||||
|
Balance
at
March 31, 2010
|
15,381,000 | 154,000 | 2,985.3617 | - | 221,726,000 | (1,045,000 | ) | (4,000 | ) | (241,160,000 | ) | |||||||||||||||||||||
|
Restricted
common
stock
issued for services
|
106,000 | 1,000 | - | - | 248,000 | - | - | - | ||||||||||||||||||||||||
|
Stock
option
compensation
expense
|
- | - | - | - | 440,000 | - | - | - | ||||||||||||||||||||||||
|
Common
stock issued
for
cash exercise of
options
|
105,000 | 1,000 | - | - | 125,000 | - | - | - | ||||||||||||||||||||||||
|
Common
stock issued
for
preferred dividends
|
80,000 | 1,000 | - | - | 190,000 | - | - | - | ||||||||||||||||||||||||
|
Preferred
dividends
|
- | - | - | - | - | - | - | (446,000 | ) | |||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | - | - | 1,790,000 | ||||||||||||||||||||||||
|
Balance
at
June 30, 2010
|
15,672,000 | 157,000 | 2,985.3617 | - | 222,729,000 | (1,045,000 | ) | (4,000 | ) | (239,816,000 | ) | |||||||||||||||||||||
|
Restricted
common
stock
issued for services
|
133,000 | 1,000 | - | - | 269,000 | - | - | - | ||||||||||||||||||||||||
|
Stock
option
compensation
expense
|
- | - | - | - | 284,000 | - | - | - | ||||||||||||||||||||||||
|
Common
stock issued
for
cash exercise of
options
|
38,000 | - | - | - | 52,000 | - | - | - | ||||||||||||||||||||||||
|
Common
stock issued
for
preferred dividends
|
56,000 | 1,000 | 90,000 | - | - | - | ||||||||||||||||||||||||||
|
Preferred
dividends
|
- | - | - | - | - | - | - | (452,000 | ) | |||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | - | (12,719,000 | ) | |||||||||||||||||||||||
|
Balance
at
September 30, 2010
|
15,899,000 | $ | 159,000 | 2985.3617 | $ | - | $ | 223,424,000 | $ | (1,045,000 | ) | $ | (4,000 | ) | $ | (252,987,000 | ) |
The
accompanying notes are an integral part of these consolidated
statements.
17
Access
Pharmaceuticals, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(unaudited)
|
Nine
Months ended September 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (9,840,000 | ) | $ | (8,368,000 | ) | ||
|
Adjustments to
reconcile net loss to cash used
in
operating activities:
|
||||||||
|
Gain on change in fair value of
derivative warrants
|
(6,384,000 | ) | - | |||||
|
Loss on change in fair value of
derivative preferred stock
|
10,455,000 | - | ||||||
|
Gain on negotiated accounts
payable
|
(509,000 | ) | - | |||||
|
Depreciation and
amortization
|
179,000 | 197,000 | ||||||
|
Stock option compensation
expense
|
838,000 | 593,000 | ||||||
|
Stock and warrants issued for
services
|
556,000 | 2,852,000 | ||||||
|
Change in operating assets and
liabilities:
|
||||||||
|
Receivables
|
(4,000 | ) | 124,000 | |||||
|
Prepaid
expenses and other current assets
|
13,000 | 130,000 | ||||||
|
Other assets
|
12,000 | 12,000 | ||||||
|
Accounts payable and accrued
expenses
|
(202,000 | ) | 318,000 | |||||
|
Dividends
payable
|
119,000 | (109,000 | ) | |||||
|
Accrued interest
payable
|
(117,000 | ) | 334,000 | |||||
|
Deferred
revenue
|
(260,000 | ) | 2,755,000 | |||||
|
Net cash used in operating
activities
|
(5,144,000 | ) | (1,162,000 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Capital
expenditures
|
(7,000 | ) | (2,000 | ) | ||||
|
Proceeds from sale of
asset
|
- | 1,000 | ||||||
|
Net cash used in investing
activities
|
(7,000 | ) | (1,000 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds from exercise of
stock options
|
192,000 | 158,000 | ||||||
|
Proceeds
from common stock issuances, net of costs
|
5,848,000 | - | ||||||
|
Net cash provided by financing
activities
|
6,040,000 | 158,000 | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
889,000 | (1,005,000 | ) | |||||
|
Cash
and cash equivalents at beginning of period
|
607,000 | 2,677,000 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 1,496,000 | $ | 1,672,000 | ||||
|
Supplemental
cash flow information:
|
||||||||
|
Cash
paid for interest
|
$ | 440,000 | $ | - | ||||
|
Supplemental
disclosure of noncash transactions:
|
||||||||
|
Shares issued for payables,
notes payable and accrued interest
|
- | 859,000 | ||||||
|
Shares issued for dividends on
preferred stock
|
282,000 | 927,000 | ||||||
|
Preferred
stock dividends in dividends payable
|
1,340,000 | 1,434,000 | ||||||
The
accompanying notes are an integral part of these consolidated
statements.
18
Access Pharmaceuticals, Inc. and
Subsidiaries
Notes to
Condensed Consolidated Financial Statements
Three and
Nine Months Ended Septemebr 30, 2010 and 2009
(unaudited)
|
(1)
|
Interim
Financial Statements
|
The
consolidated balance sheet as of September 30, 2010, the consolidated statements
of operations for the three and nine months ended September 30, 2010 and 2009,
the consolidated statements of stockholders deficit for the three and nine
months ended September 30, 2010, and the consolidated statements of cash flows
for the nine months ended September 30, 2010 and 2009, 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 consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2009. The results of operations for the
period ended September 30, 2010 are not necessarily indicative of the operating
results which may be expected for a full year. The consolidated balance sheet as
of December 31, 2009 contains financial information taken from the audited
Access financial statements as of that date.
The
report of our independent registered public accounting firm for the fiscal year
ended December 31, 2009, contained a fourth explanatory paragraph to reflect its
significant doubt about our ability to continue as a going concern as a result
of our history of losses and our liquidity position, as discussed herein and in
this Form 10-Q. We expect that our capital resources and expected receipts due
under our license agreements will be adequate to fund our current level of
operations into the first quarter of 2011. If we are unable to obtain adequate
capital funding in the future or enter into future license agreements for our
products, we may not be able to continue as a going concern, which would have an
adverse effect on our business and operations, and investors’ investment in us
may decline.
On
February 25, 2009, we closed our acquisition of MacroChem Corporation through
the issuance of an aggregate of approximately 2.5 million shares of our common
stock. Prior to our acquisition of MacroChem, SCO, an investment company, held a
majority of Access’ and MacroChem’s voting stock. Specifically, SCO
owned 53% of the voting stock of Access and 63% of the voting stock of
MacroChem. A non-controlling interest of 37% existed at the merger date of
MacroChem. In addition, certain members of SCO’s management serve on the board
of directors of both Access and MacroChem. Based on these facts, Access and
MacroChem were deemed under the common control of SCO. As the entities were
deemed under common control, the acquisition was recorded similar to the
pooling-of-interest method and the financial information for all periods
presented reflects the financial statements of the combined companies in
accordance with Financial Accounting Standards Board standards on business
combinations for entities under common control.
19
|
(2)
|
Intangible
Assets
|
Intangible
assets consist of the following (in thousands):
|
September
30, 2010
|
December
31, 2009
|
|||
|
Gross
carrying
value
|
Accumulated
amortization
|
Gross
carrying
value
|
Accumulated
Amortization
|
|
|
Amortizable
intangible assets
Patents
|
$ 2,624
|
$ 1,997
|
$ 2,624
|
$ 1,837
|
Amortization
expense related to intangible assets totaled $53,000 and $159,000 for each of
the three and nine months ended September 30, 2010 and totaled $53,000 and
$159,000 for each of the three and nine months ended September 30, 2009. The
aggregate estimated amortization expense for intangible assets remaining as of
September 30, 2010 is as follows (in thousands):
| 2010 | $ 53 | |
| 2011 | 212 | |
| 2012 | 82 | |
| 2013 | 44 | |
| 2014 | 44 | |
| over 5 years | 192 | |
|
Total
|
$
627
|
(3) Liquidity
The Company generated net loss allocable to common
stockholders of $11,180,000 for the nine months ended September 30, 2010 and a
loss of $19,226,000 for the year ended December 31, 2009. At September 30, 2010,
our working capital deficit was $12,918,000.We expect that our capital
resources and receipts due under our license agreements will be adequate to fund
our current level of operations into the first quarter of 2011. However, our
ability to fund operations over this time could change significantly depending
upon changes to future operational funding obligations or capital expenditures.
As a result we will be required to seek additional financing sources and enter
into future licensing agreements for our products. If we are unable to obtain
adequate capital funding in the future or enter into future license agreements
for our products, we may not be able to continue as a going concern, which would
have an adverse effect on our business and operations, and investors’ investment
in us may decline.
(4) Fair
Value of Financial Instruments
The
carrying value of cash, cash equivalents, receivables, accounts payable and
accruals approximate fair value due to the short maturity of these items. The
carrying value of the convertible long-term debt is at book value which
approximates the fair value as the interest rate is at market
value.
20
Effective
January 1, 2008, we adopted fair value measurement guidance issued by the FASB
related to financial assets and liabilities which define fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the
measurement date. This guidance establishes a three-level fair value hierarchy
that prioritizes the inputs used to measure fair value. The hierarchy requires
entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair value are
as follows:
|
·
|
Level
1 – Quoted prices in active markets for identical assets or
liabilities.
|
|
·
|
Level
2 – Observable inputs other than quoted prices included in Level 1, such
as quoted prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in markets
that are not active; or other inputs that are observable or can be
corroborated by observable market
data.
|
|
·
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets and liabilities.
This includes certain pricing models, discounted cash flow methodologies
and similar valuation techniques that use significant unobservable
inputs.
|
We have
no Level 3 financial assets or liabilities. The guidance requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
We have
segregated all financial assets and liabilities that are measured at fair value
on a recurring basis (at least annually) into the most appropriate level within
the fair value hierarchy based on the inputs used to determine the fair value at
the measurement date in the table below.
Financial
assets and liabilities measured at fair value on a recurring basis as of
September 30, 2010 and December 31, 2009 are summarized below:
|
(in
thousands)
|
September
30, 2010
|
December
31, 2009
|
||||
|
Level
1
|
Level
2
|
Total
|
Level
1
|
Level
2
|
Total
|
|
|
Assets:
|
||||||||||||||||||||||||
|
Cash
|
$ | 1,496 | $ | - | $ | 1,496 | $ | 607 | $ | - | $ | 607 | ||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Derivative
liability
warrants
|
$ | - | $ | 3,324 | $ | 3,324 | $ | - | $ | 9,708 | $ | 9,708 | ||||||||||||
|
Derivative
liability
preferred
stock
|
$ | - | $ | 10,455 | $ | 10,455 | $ | - | $ | - | $ | - | ||||||||||||
The
adoption of this guidance related to financial assets and liabilities on January
1, 2008 and non-financial assets and liabilities on January 1, 2009 did not have
a material impact on our consolidated financial statements.
(5) Stock
Based Compensation
For the
three and nine months ended September 30, 2010, we recognized stock-based
compensation expense of $284,000 and $838,000. For the three and nine months
ended September 30, 2009 we recognized stock-based compensation expense of
$285,000 and $593,000.
21
The
following table summarizes stock-based compensation for the three and nine
months ended September 30, 2010:
|
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
||||||
|
2010
|
2009
|
2010
|
2009
|
||||
|
Research
and development
|
$ 210,000
|
$ 130,000
|
$ 575,000
|
$ 250,000
|
|||
|
General
and administrative
|
74,000
|
155,000
|
263,000
|
343,000
|
|||
|
Stock-based
compensation expense
included
in operating expense
|
$ 284,000
|
$ 285,000
|
$ 838,000
|
$ 593,000
|
|||
For the
three months ended September 30, 2010 and 2009 no options were granted. For the
nine months ended September 30, 2010 we granted 640,000 stock options. For the
nine months ended September 30, 2009 we granted 475,000 stock options. MacroChem
options were cancelled upon acquisition by Access and are no longer
outstanding.
Our
weighted average Black-Scholes fair value assumptions used to value the 2010 and
2009 first nine months grants are as follows:
| 9/30/10 | 9/30/09 | ||||||
|
Expected
life(b)
|
5.7
yrs
|
5.5
yrs
|
|||||
|
Risk
free interest rate
|
2.3
|
%
|
2.4
|
%
|
|||
|
Expected
volatility(a)
|
123
|
%
|
114
|
%
|
|||
|
Expected
dividend yield
|
0.0
|
%
|
0.0
|
%
|
|||
|
(a)
|
Reflects
movements in our stock price over the most recent historical period
equivalent to the expected life.
|
|
(b)
|
Based
on the simplified method.
|
(6) Stockholders’
Deficit
On
January 26, 2010, we completed the sale of approximately 2.10 million shares of
our common stock and warrants to purchase approximately 1.05 million shares of
our common stock at an exercise price of $3.00 per share for an aggregate
purchase price of $6.3 million. Proceeds, net of cash issuance costs from the
sale, were $5.8 million.
In
connection with the sale we issued warrants for placement agent fees to purchase
a total of 125,109 shares of our common stock at an exercise price of $3.75 per
share. All of the warrants are exercisable immediately and expire five years
from the date of issue. The fair value of the warrants was $2.19 per share on
the date of grant using the Black-Scholes pricing model with the following
assumptions: expected yield 0.0%, risk-free interest rate 2.38%, expected
volatility 119% and an expected term of 5 years.
22
(7) Deriviatave Liability Preferred
Stock
On
November 7, 2007, and February 4, 2008, we entered into securities purchase
agreements (the Purchase Agreements) with accredited investors to sell shares of
a newly created series of our preferred stock, designated “Series A Cumulative
Convertible Preferred Stock”, par value $0.01 per share, for an issue price of
$10,000 per share, (the Series A Preferred Stock) and agreed to issue warrants
to purchase shares of our common stock at an exercise price of $3.50 per share.
The shares of Series A Preferred Stock are convertible into common stock at the
initial conversion price of $3.00 per share.
The
issued and outstanding shares of Series A Preferred Stock grants the holders of
such preferred stock anti-dilution, dividend and liquidations rights that are
superior to those held by the holders of our common stock. Under these
terms, should we issue additional shares of common stock, in certain
circumstances, for a price below $3.00 per share, the conversion price of the
Series A Preferred Stock will be lowered to the lowest subsequent issue price
below $3.00 per share until the shares are converted or redeemed. This will have
the effect of diluting the holders of our common stock.
November 7, 2007 Preferred
Stock
On
November 7, 2007, we entered into the Purchase Agreements with accredited
investors whereby we agreed to sell 954.0001 shares of a newly created series of
our Series A Preferred Stock and agreed to issue warrants to purchase 1,589,999
shares of our common stock at an exercise price of $3.50 per share, for an
aggregate purchase price for the Series A Preferred Stock and Warrants of
$9,540,001. The shares of Series A Preferred Stock are convertible into common
stock at the initial conversion price of $3.00 per share.
February 4, 2008 Preferred
Stock
On
February 4, 2008, we entered into Purchase Agreements with accredited investors
whereby we agreed to sell 272.50 shares of our Series A Preferred Stock and
agreed to issue warrants to purchase 454,167 shares of our common stock at an
exercise price of $3.50 per share, for an aggregate purchase price for the
Series A Preferred Stock and Warrants of $2,725,000. Proceeds, net of cash
issuance costs from the sale were $2,444,000. The shares of Series A Preferred
Stock are convertible into common stock at the initial conversion price of $3.00
per share.
On
September 30, 2010 our preferred stock outstanding was 2,985.3617 shares
convertible into 9,951,198 shares of the Company's common stock.
Change In Accounting
Principle
Effective
January 1, 2009, we adopted the provisions of FASB ASC 815, “Derivatives and Hedging”
(FASB ASC 815) (previously EITF 07-5, “Determining Whether an Instrument
(or an Embeded Feature) is Indexed to an Entity’s Own
Stock”).
23
We
determined that the anti-dilution provision built into the preferred shares
issued should be considered for derivative accounting. FASB ASC 815
requires freestanding contracts that are settled in a company’s own stock to be
designated as an equity instrument, assets or liability. Under the provisions of
FASB ASC 815, a contract designated as an asset or liability must be initially
recorded and carried at fair value until the contract meets the requirements for
classification as equity, until the contract is exercised or until the contract
expires. We determined that the anti-dilution provision associated with the
November 2007 and February 2008 preferred shares no longer met the criteria for
equity accounting through the revised criteria in FASB ASC 815. FASB ASC 815
provides for transition guidance whereby a cumulative effect of a change in
accounting principle should be recognized as an adjustment to retained earnings
and other impacted balance sheet items as of January 1, 2009. The
cumulative-effect adjustment is the difference between the amounts recognized
prior to adoption and amounts recognized at adoption assuming this guidance had
been applied from the issuance date of the preferred stock.
Accordingly,
at January 1, 2009, we determined that the preferred stock conversion feature
should be accounted for as derivative liabilities. The preferred stock
conversion feature was determined to have no fair market value at both issuance
dates as well as each reporting period since management asserted that the
likelihood of issuing any new equity at a price that would trigger the
anti-dilution effect to be nil.
During
the third quarter of 2010 we were actively raising capital. With our stock price
below $3.00 a share there was a possibility that we would sell shares below the
$3.00 price. This would require an adjustment to our convertible preferred
stock. Accordingly as of September 30, 2010 the resulting accounting leads to a
derivative liability preferred stock of $10,455,000. We recorded derivative
expense of $10,455,000 for the quarter ended September 30, 2010.
The
derivative preferred stock liability will continue to be reviewed quarterly in
accordance with FASB ASC 815.
The
derivative warrants liability will also continue to be marked to market in
accordance with FASB ASC 815 as discussed in the Form 10K for December 31,
2009.
24