Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Commission File Number 0-9314
ACCESS PHARMACEUTICALS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 83-0221517
- ------------------------ --------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
2600 Stemmons Frwy, Suite 176, Dallas, TX 75207
-----------------------------------------------
(Address of principal executive offices)
Telephone Number (214) 905-5100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirement for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
The number of shares outstanding of each of the issuer's classes of
common stock, as of November 14, 2002 was 13,160,043 shares of common
stock, $0.01 par value per share.
Total No. of Pages 18
------
PART I -- FINANCIAL INFORMATION
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
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 in the
development stage.
Together with our subsidiaries, we have proprietary patents or rights to
six drug delivery technology platforms: synthetic polymer targeted delivery,
vitamin mediated targeted delivery (including oral), bioerodible hydrogel
technology, nanoparticles and nanoparticle networks, Residerm(R) A topical
delivery technology and carbohydrate targeting technology. In addition we
hold patents relating to the use of amlexanox for the treatment of mucosal
and skin disorders.
We use our proprietary technology to develop products and product candidates.
Our patents protect our marketed products, amlexanox 5% paste (marketed under
the trade name Aphthasol(R)) and Zindaclin(R), and our products that are
currently in the development phase, polymer platinate (AP 5280), DACH
platinum (AP 5346), OraDisc(TM) and our mucositis technology.
On July 22, 2002, we acquired from GlaxoSmithKline the patents, trademarks
and technology covering the use of amlexanox for the treatment of mucosal and
skin disorders. The two major components of the acquisition are the US
marketing rights to amlexanox 5% paste which is currently marketed for the
treatment of canker sores under the trademark Aphthasol(R), and the remaining
worldwide marketing rights for this indication which were the subject of a
prior licensing agreement between the companies. Under the terms of the
agreement, we made an initial upfront payment of $750,000, and we will make
additional payments of $250,000 on January 22, 2003, $250,000 on July 22, 2002
and future possible milestone payments based on the commercial success of
amlexanox. The commercial terms of our prior mucositis agreement between
the companies, which granted us worldwide rights for this indication,
will remain in place.
We contract with third party contract research organizations to complete our
large clinical trials and for data management of all of our clinical trials.
Generally, we manage the smaller Phase I and II trials ourselves. Currently,
we have one Phase I and one Phase III trial in process and a Phase I and
Phase III trial planned for early next year.
2
Except for the historical information contained herein, the following
discussions and certain statements in this Form 10-Q are forward-looking
statements that involve risks and uncertainties. In addition to the risks
and uncertainties set forth in this Form 10-Q, other factors could cause
actual results to differ materially, including but not limited to
uncertainties associated with research and development activities,
clinical trials, our ability to raise capital, the integration of acquired
companies and technologies, the timing of regulatory approvals, dependence
on others, collaborations, future cash flow, the timing and receipt of
licensing revenues, the future success of our marketed products, amlexanox
5% paste and Zindaclin(R) and product candidates including the polymer
platinates, and other risks detailed in our reports filed under
the Securities Exchange Act of 1934, as amended, including but not limited
to our Annual Report on Form 10-K for the year ended December 31, 2001.
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 may
incur losses for the next several years as we continue to invest in product
research and development, preclinical studies, clinical trials and regulatory
compliance. As of September 30, 2002, our accumulated deficit was $44,958,000,
of which $8,894,000 was the result of the write-off of excess
purchase price.
OTHER DEVELOPMENTS
Our recently created wholly-owned subsidiary, Access Pharmaceuticals Australia
Pty. Limited acquired the targeted therapeutic technology business of Biotech
Australia Pty. Ltd under an Asset Sale Agreement dated February 26, 2002. Under
the terms of the Asset Sale Agreement, Access Pharmaceuticals Australia Pty.
Limited acquired the patents to three targeted therapeutics technologies and
retained the scientific group that has developed this technology. The total
consideration payable by us will be paid in a combination of cash and stock
over a three-year period and is dependent on the achievement of certain
technology milestones. We paid $500,000 at closing and an additional total
of up to $525,000 will be paid over a three-year period. Additionally, up to
$350,000 may be payable by us if events occur that result in certain new
agreements. We also issued as consideration 172,584 shares of our common
stock and warrants to purchase 25,000 shares of our common stock at an
exercise price of $5.00 per share. The stock issued is subject to
restriction and cannot be sold until February 27, 2003.
The three patented targeted therapeutic technologies acquired in this
transaction are:
* folate conjugates of polymer therapeutics to enhance tumor delivery
by targeting folate receptors which are upregulated in certain tumor types;
* the use of vitamin B12 to target the transcobalamin II receptor which is
upregulated in numerous diseases including cancer, rheumatoid arthritis and
certain neurological and autoimmune disorders; and
* oral delivery of a wide variety of molecules, which cannot otherwise be
orally administered, using the active transport mechanism which transports
vitamin B12 into the systemic circulation.
3
In addition, we acquired through the acquisition an internal capability
to perform biological studies which we previously out-sourced. We expect
that this capability will enhance our ability to identify lead compounds
more rapidly and develop the necessary preclinical data for regulatory
filings.
Research Projects, Products and Products in Development
ACCESS DRUG PORTFOLIO
Licensing Clinical
Compound Originator Partner Indication FDA Filing Stage(1)
- ------------------------ ---------- ----------- --------------- ------------- ---------
Cancer
- ------
Polymer Platinate Access- - Anti-tumor Development(7) Phase I
(AP5280) (2) U London
Polymer Platinate Access- - Colorectal Development Pre-Clinical
(AP5346) (2) U London cancer
Mucositis technology Access - Mucositis IND Phase III
Topical Delivery
- ----------------
Amlexanox (3) Takeda Strakan, Aphthous NDA Approved
Esteve, Meda ulcers
Mipharm
Pharmascience
OraDisc(TM) Access Strakan, Aphthous IND Phase III
Amlexanox (3) Esteve, Meda ulcers
Biodegradable Mipharm
Polymer Disc Pharmascience
Residerm (R) A Access Strakan, Acne PLA(8) Approved(9)
Zinc Clindamycin(4) Fujisawa
Vitamin Mediated Delivery
- -------------------------
Oral Delivery System Access - Various Research Pre-Clinical
Folate Targeted Access - Anti-tumor Research Pre-Clinical
Therapeutics
Vitamin B12 Targeted Access - Anti-tumor Research Pre-Clinical
Therapeutics
Antiviral
- ---------
Anti viral compound(5)(6) NIH - HIV Development Pre-Clinical
Anti viral compound (6) Rockefeller - HTLV type I Development Pre-Clinical
and II
(1) For more information, see "Government Regulation" in our Annual Report
on Form 10-K for the year ended December 31, 2001.
(2) Licensed from the School of Pharmacy, The University of London. Subject
to royalty and milestone payments.
(3) Acquired from GlaxoSmithKline. Amlexanox licensing agreements have
been executed with the following parties for the prevention and treatment
of aphthous ulcers:
4
* Strakan Limited for UK and Ireland manufacturing and marketing rights.
* Laboratories Dr. Esteve SA for Spain, Portugal and Greece manufacturing and
marketing rights.
* Mipharm SpA for Italy, Switzerland, Turkey and Lebanon manufacturing and
marketing rights.
* Meda, AB for Scandinavia, the Baltic states and Iceland marketing rights.
* Pharmascience Inc. for Canada manufacturing and marketing rights.
(4) Licensed worldwide manufacturing and marketing rights to Strakan who
sublicensed to Fujisawa GmbH for continental Europe marketing rights.
(5) Licensed from NIH subject to royalty and milestone payments.
(6) Licensed from The Rockefeller University subject to royalty and milestone
payments.
(7) Clinical studies being conducted in Europe prior to an FDA filing.
(8) United Kingdom equivalent of an NDA.
(9) Marketing approval received from the Medicines Control Agency in the U.K.
and product launched in March 2002.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of September 30, 2002 was $9,657,000 representing a decrease
in working capital of $8,862,000 as compared to working capital as of December
31, 2001 of $18,519,000. The decrease in working capital was due to the loss
from operations for the first three quarters of 2002 and payments for the
acquisition of the drug delivery assets of Biotech Australia Pty. Limited and
the purchase of patents, licenses, technology and marketing rights to
Aphthasol(R), amlexanox 5% paste, from GlaxoSmithKline.
Since inception, our expenses have significantly exceeded revenues, resulting
in an accumulated deficit as of September 30, 2002 of $44,958,000. 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 operations.
We have 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. We expect that our existing
capital resources and payments expected to be received under executed license
agreements will be adequate to fund our current level of operations through
June 2004.
Our convertible notes are due in two parts, $8,050,000 is due on September 13,
2005 and $5,500,000 is due on September 13, 2006. The notes bear interest at
7.7% per annum with $1,041,000 of interest due annually on September 13th.
The notes have a fixed conversion price of $5.50 per share of common stock
and may be converted by the note holder or us under certain circumstances
as defined in the note. If the notes are not converted we will ha e to repay
the notes on the due dates.
We will 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 newly acquired technology and
those technologies we have developed. Our success, future capital
requirements and adequacy of available funds will depend on many factors,
including:
5
* 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;
* the successful integration of our newly created subsidiary, Access
Pharmaceuticals Australia Pty. Limited;
* 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;
* 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.
THIRD QUARTER 2002 COMPARED TO THIRD QUARTER 2001
Revenue in the third quarter of 2002 was $91,000, as compared to $11,000 in
the same period of 2001. We recognized revenue in both of the third quarters
from several licensing agreements that we are a party to for various
amlexanox projects. We also recognized $89,000 of revenue from a research
and development agreement. A comparable amount of expenses was also recorded.
Total research spending for the third quarter of 2002 was $2,181,000, as
compared to $1,295,000 for the corresponding period in 2001, an increase
of $886,000. The increase in expenses was the result of increases in the
following costs:
* higher development costs of our OraDisc(TM) project ($700,000);
* costs associated with our Australian subsidiary which we established in
February 2002 ($145,000);
* development costs associated with our bioerodible hydrogel and nanoparticles
and nanoparticle networks technologies ($136,000); and
* other net increases ($77,000).
The increase in expenses was partially offset by lower development costs
($172,000) for other amlexanox projects that were completed in 2001.
Research and development expenses included in the above projects reflected
increases in the following areas:
* clinical development expenses ($481,000);
* our Australian subsidiary ($145,000);
* salaries ($137,000);
* external development costs ($108,000); and
6
* other net increases ($15,000).
We expect research spending to remain higher than it has been in prior
quarters as we intend to hire additional scientific and staff, commence
additional clinical trials and accelerate preclinical development activities
as we continue to develop our product candidates.
Total general and administrative expenses were $449,000 for the third quarter
of 2002, a decrease of $8,000 as compared to the corresponding period in 2001.
The decrease in general and administrative expenses was due primarily to:
* lower hiring expenses ($30,000);
* lower shareholder expenses ($15,000); and
* other net decreases ($23,000).
These decreases in general and administrative expenses were partially offset
by $60,000 in higher patent costs, due to new patent filings and the costs
associated with the acquired patents.
Depreciation and amortization was $136,000 for the third quarter of 2002 as
compared to $103,000 for the corresponding period in 2001 reflecting an
increase of $33,000 in overall expenses for the period. The increase in
depreciation and amortization is due to increased depreciation resulting
from additional capital assets and increased amortization due to patents
acquired in the Biotech Australia Pty. Limited transaction and patents
acquired from GlaxoSmithKline, offset by $61,500 in goodwill not being
amortized in 2002.
We adopted Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets", in January 2002. Annual and quarterly goodwill
amortization of $246,000 and $61,500, respectively, will no longer be
recognized. In June 2002, we completed a transitional fair value based
impairment test of goodwill and no impairment losses resulted from the
impairment test. We will continue to test goodwill annually and when any
event occurs that may warrant a new test.
Total operating expenses in the third quarter of 2002 were $2,766,000 as
compared to total operating expenses of $1,855,000 for the corresponding
period in 2001.
Loss from operations in the third quarter of 2002 was $2,675,000 as compared
to a loss of $1,844,000 for the corresponding period in 2001.
Interest and miscellaneous income was $132,000 for the third quarter of 2002
as compared to $386,000 for the corresponding period in 2001, a decrease
$254,000. The decrease in interest income was due to lower cash balances
and lower interest rates in 2002 as compared to 2001.
Interest expense was $315,000 for the third quarter of 2002 as compared to
$286,000 for the corresponding period in 2001, an increase of $29,000. The
increase in interest expense was due to higher interest accrued on the $13.5
million convertible notes and the note payable ($495,000) we entered into in
September 2001.
Net loss in the third quarter of 2002 was $2,858,000, or a $0.22 basic and
diluted loss per common share, compared with a loss of $1,744,000, or a $0.13
basic and diluted loss per common share for
7
the corresponding period in 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2001
Revenue in the first nine months of 2002 was $470,000, as compared to $232,000
in the corresponding period of 2001. We recognized upfront licensing fees for
the exclusive marketing rights for Zindaclin(R) for continental Europe which
was granted in May 2002. Also, we recognized revenue in each of the first
nine month periods from several licensing agreements that we are a party to
for various amlexanox projects. We also recognized $89,000 revenue from a
research and development agreement. A comparable amount of expenses was also
recorded during this period.
Total research spending for the first nine months of 2002 was $5,215,000, as
compared to $3,330,000 for the corresponding period in 2001, an increase of
$1,885,000. The increase in expenses was the result of increases in the
following costs:
* higher development costs for our OraDisc(TM) ($1,369,000) program and our
polymer platinate programs ($689,000);
* costs associated with our Australian subsidiary which we established in
February 2002 ($234,000); and
* other net increases ($8,000).
The increase in expenses was partially offset by lower net development costs
for other amlexanox projects ($415,000) that were completed in 2001.
Research and development expenses included in the above projects reflected
increases in the following areas:
* external development costs ($846,000);
* clinical development expenses ($460,000);
* salaries ($443,000);
* our Australian subsidiary ($234,000); and
* other net increases ($75,000).
These expenses were partially offset by lower scientific consulting expenses
in the nine months ended September 30, 2002 ($173,000).
Total general and administrative expenses were $1,519,000 for the first nine
months of 2002, an increase of $163,000 as compared to the corresponding
period in 2001. The increase in general and administrative expenses was due
primarily to the following:
* higher compensation expenses ($128,000) principally due to the hiring of
additional staff;
* higher rent ($69,000);
* higher professional fees ($27,000);
* higher equipment rental ($21,000); and
* other net increases ($27,000).
8
These general and administrative expense increases were partially offset by:
* lower other employee costs ($59,000); and
* lower royalties ($50,000).
Depreciation and amortization was $292,000 for the first nine months of 2002
as compared to $304,000 for the corresponding period in 2001. The decrease in
amortization was due to goodwill not being amortized in 2002 ($185,000),
partially offset by an increase in depreciation due to additional capital
assets and amortization of patents acquired in the Biotech Australia Pty.
Limited transaction and from GlaxoSmithKline.
Total operating expenses in the first nine months of 2002 were $7,026,000 as
compared to total operating expenses of $4,990,000 for the corresponding
period in 2001.
Loss from operations in the first nine months of 2002 was $6,556,000 as
compared to a loss of $4,758,000 for the corresponding period in 2001.
Interest and miscellaneous income was $473,000 for the first nine months of
2002 as compared to $1,178,000 for the corresponding period in 2001, a
decrease of $705,000. The decrease in interest income was due to lower cash
balances and lower interest rates in 2002 as compared with 2001.
Interest expense was $949,000 for the first nine months of 2002 as compared
to $852,000 for the corresponding period in 2001, an increase of $97,000. The
increase in interest expense was due to higher interest accrued on the $13.5
million convertible notes and the note payable ($495,000) we entered into in
September 2001.
Net loss in the first nine months of 2002 was $7,032,000, or a $0.54 basic and
diluted loss per common share, compared with a loss of $4,432,000, or a $0.34
basic and diluted loss per common share for the corresponding period in 2001.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks at September 30, 2002, have not changed significantly from
those discussed in Item 7(a) of our Form 10-K for the year ended December 31,
2001, on file with the Securities and Exchange Commission.
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation Of Disclosure Controls And Procedures: Within the 90 days
prior to the date of this report, we carried out an evaluation, under the
supervision and with the participation of the our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and procedures are effective in timely alerting them to material information
relating to us (including our subsidiaries) required to be
9
included in our periodic Securities and Exchange Commission filings.
(b) Changes In Internal Controls: There were no significant changes in our
internal controls or to our knowledge, in other factors that could
significantly affect such internal controls subsequent to the date of their
evaluation.
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2 CHANGES IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: 10.27 Asset Sale Agreement between Block Drug Company, Inc. and
us dated July 22, 2002. (Confidential Treatment Requested)
Reports on Form 8-K: None
10
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACCESS PHARMACEUTICALS, INC.
Date: November 14, 2002 By: /s/ Kerry P. Gray
-------------------------
Kerry P. Gray
President and Chief Executive Officer
Date: November 14, 2002 By: /s/ Stephen B. Thompson
-------------------------
Stephen B. Thompson
Vice President and Chief Financial Officer
11
CERTIFICATIONS
I, Kerry P. Gray, the President and Chief Executive Officer of Access
Pharmaceuticals, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Access Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report on does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and audit
committee of the registrant's board of directors (or persons performing
the equivalent function);
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for
the registrant's auditors any material weakness in internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Kerry P. Gray
- -----------------
Kerry P. Gray
President and Chief Executive Officer
12
CERTIFICATIONS
I, Stephen B. Thompson, the Chief Financial Officer of Access Pharmaceuticals,
Inc. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Access
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 14d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is
being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
/s/ Stephen B. Thompson
- -----------------------
Stephen B. Thompson
Chief Financial Officer
13
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Balance Sheets
ASSETS September 30, 2002 December 31, 2001
-------------- --------------
(unaudited)
Current assets
Cash and cash equivalents $ 1,845,000 $ 7,426,000
Short term investments, at cost 9,800,000 12,700,000
Accounts receivable 136,000 83,000
Accrued interest receivable 90,000 110,000
Prepaid expenses and other current assets 782,000 611,000
-------------- --------------
12,653,000 20,930,000
Property and equipment, net 763,000 477,000
Debt issuance costs, net 542,000 679,000
Patents, net 2,859,000 -
Licenses, net 690,000 774,000
Goodwill, net 1,868,000 1,868,000
Other assets 656,000 759,000
-------------- --------------
Total assets $ 20,031,000 $ 25,487,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,655,000 $ 1,486,000
Accrued interest payable 49,000 310,000
Deferred revenues 476,000 508,000
Current portion of note payable and
future obligations 816,000 107,000
-------------- --------------
Total current liabilities 2,996,000 2,411,000
Long-term obligations for
purchased patents 303,000 -
Note payable, net of current portion 383,000 468,000
Convertible notes 13,530,000 13,530,000
-------------- --------------
Total liabilities 17,212,000 16,409,000
-------------- --------------
Commitments and contingencies - -
Stockholders' equity
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, 13,160,043 at September 30, 2002
and 12,909,344 at December 31, 2001 132,000 132,000
Additional paid-in capital 48,992,000 48,057,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted stock
grants (298,000) (154,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Other comprehensive loss (18,000) -
Deficit accumulated during the
development stage (44,940,000) (37,908,000)
-------------- --------------
Total stockholders' equity 2,819,000 9,078,000
-------------- --------------
Total liabilities and
stockholders' equity $ 20,031,000 $ 25,487,000
============== =============
The accompanying notes are an integral part of these statements.
14
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Statements of Operations
(unaudited)
February 24,
Three months ended Nine months ended 1988
September 30, September 30, (inception) to
-------------------------- --------------------------
2002 2001 2002 2001 September 30, 2002
------------ ------------ ------------ ------------ -------------
Revenues
Research and development $ 89,000 $ - $ 89,000 $ - $ 2,800,000
Option income - - - - 2,164,000
Licensing revenues 2,000 11,000 381,000 232,000 1,056,000
------------ ------------ ------------ ------------ -------------
Total revenues 91,000 11,000 470,000 232,000 6,020,000
Expenses
Research and development 2,181,000 1,295,000 5,215,000 3,330,000 25,369,000
General and administrative 449,000 457,000 1,519,000 1,356,000 15,139,000
Depreciation and amortization 136,000 103,000 292,000 304,000 2,686,000
Write-off of excess purchase price - - - - 8,894,000
------------ ------------ ------------ ------------ -------------
Total expenses 2,766,000 1,855,000 7,026,000 4,990,000 52,088,000
------------ ------------ ------------ ------------ -------------
Loss from operations (2,675,000) (1,844,000) (6,556,000) (4,758,000) (46,068,000)
Other income (expense)
Interest and miscellaneous income 132,000 386,000 473,000 1,178,000 3,781,000
Interest and debt expense (315,000) (286,000) (949,000) (852,000) (2,653,000)
------------ ------------ ------------ ------------ -------------
(183,000) 100,000 (476,000) 326,000 1,128,000
------------ ------------ ------------ ------------ -------------
Net loss $(2,858,000) $(1,744,000) $(7,032,000) $(4,432,000) $(44,940,000)
============ ============ ============ ============ =============
Basic and diluted loss per
common share $(0.22) $(0.13) $(0.54) $(0.34)
============ ============ ============ ============
Weighted average basic and diluted
common shares outstanding 13,160,043 12,860,114 13,085,505 12,854,170
============ ============ ============ ============
Net loss $(2,858,000) $(1,744,000) $(7,032,000) $(4,432,000)
Other comprehensive loss
Foreign currency translation
adjustment (18,000) - (18,000) -
------------ ------------ ------------ ------------
Comprehensive loss $(2,876,000) $(1,744,000) $(7,050,000) $(4,432,000)
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
15
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(unaudited)
February 24,
Nine months ended September 30, 1988
---------------------------- (inception) to
2002 2001 September 30, 2002
------------ ------------ --------------
Cash flows form operating activities:
Net loss $(7,032,000) $(4,432,000) $(44,940,000)
Adjustments to reconcile net loss to
cash used in operating activities:
Write-off of excess purchase price - - 8,894,000
Warrants issued in payment of
consulting expenses 37,000 41,000 1,007,000
Research expenses related to
common stock granted - - 100,000
Amortization of restricted
stock grants 46,000 - 73,000
Depreciation and amortization 292,000 304,000 2,686,000
Amortization of debt costs 137,000 137,000 373,000
Deferred revenue (32,000) (32,000) 366,000
Other long-term obligations 29,000 - 29,000
Change in operating assets and
liabilities:
Accounts receivable (53,000) 55,000 (137,000)
Accrued interest receivable 20,000 65,000 (90,000)
Prepaid expenses and
other current assets (171,000) 44,000 (783,000)
Licenses - - (525,000)
Other assets 103,000 (1,000) 96,000
Accounts payable and
accrued expenses 169,000 (47,000) 893,000
Accrued interest payable (261,000) (234,000) 49,000
------------ ------------ -------------
Net cash used in operating activities (6,716,000) (4,100,000) (31,909,000)
------------ ------------ -------------
Cash flows from investing activities:
Capital expenditures (387,000) (317,000) (2,051,000)
Sales of capital equipment - - 15,000
Purchases (redemptions) of short term
investments and certificates
of deposit, net 2,900,000 4,094,000 (10,400,000)
Purchase of businesses, net of
cash acquired (1,312,000) - (1,538,000)
Other investing activities (18,000) - (168,000)
------------ ------------ -------------
Net cash provided by (used in)
investing activities 1,183,000 3,777,000 (14,142,000)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from notes payable
and obligations - 600,000 1,321,000
Payments of notes payable (80,000) - (855,000)
Purchase of treasury stock - - (754,000)
Cash acquired in merger with Chemex - - 1,587,000
Notes receivable from shareholders - - (1,045,000)
Proceeds from convertible note, net - - 12,615,000
Proceeds from stock issuances, net 32,000 31,000 35,027,000
------------ ------------ -------------
Net cash provided by (used in)
financing activities (48,000) 631,000 47,896,000
------------ ------------ -------------
Net increase (decrease) in cash
and cash equivalents (5,581,000) 308,000 1,845,000
Cash and cash equivalents at
beginning of period 7,426,000 8,415,000 -
------------ ------------ -------------
Cash and cash equivalents at
end of period $1,845,000 $8,723,000 $1,845,000
============ ============ =============
The accompanying notes are an integral part of these statements.
16
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2002 and 2001
(unaudited)
(1) Interim Financial Statements
The condensed consolidated balance sheets as of September 30, 2002, the
condensed consolidated statements of operations for the three and nine months
ended September 30, 2002 and 2001, and the condensed consolidated statements
of cash flows for the nine months ended September 30, 2002 and 2001 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 amounts have been reclassified to conform with current period
classification.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
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, 2001. The results of operations for the period ended September
30, 2002 are not necessarily indicative of the operating results which may be
expected for a full year. The consolidated balance sheet as of December 31,
2001 contains financial information taken from the audited financial
statements as of that date.
(2) Acquisitions
Our recently created wholly-owned subsidiary, Access Pharmaceuticals
Australia Pty. Limited acquired the targeted therapeutic technology business
of Biotech Australia Pty. Ltd under an Asset Sale Agreement dated February
26, 2002. Under the terms of the Asset Sale Agreement, Access Pharmaceuticals
Australia Pty. Limited acquired the patents to three targeted therapeutics
technologies and retained the scientific group that has developed this
technology. The total consideration payable by us will be paid in a
combination of cash and stock over a three-year period and is dependent on
the achievement of certain technology milestones. We paid $500,000 at closing
and an additional total of up to $525,000 will be paid over a three-year
period. Additionally up to $350,000 may be payable if events occur that
result in certain new agreements. We also issued as consideration 172,584
shares of our common stock (valued at $633,000) and warrants to purchase
25,000 shares of our common stock at an exercise price of $5.00 per share
(valued at $43,000 using Black-Scholes option pricing model). The stock
issued is subject to restriction and cannot be sold until February 27, 2003.
The three patented targeted therapeutic technologies acquired in this
transaction are:
17
2) Acquisition - continued
* folate conjugates of polymer therapeutics to enhance tumor delivery
by targeting folate receptors which are upregulated in certain tumor types;
* the use of vitamin B12 to target the transcobalamin II receptor which
is upregulated in numerous diseases including cancer, rheumatoid
arthritis and certain neurological and autoimmune disorders; and
* oral delivery of a wide variety of molecules, which cannot otherwise
be orally administered, using the active transport mechanism which
transports vitamin B12 into the systemic circulation.
The cost of the acquisition has been assigned to patents and will be
amortized over the useful life of the patents.
On July 22, 2002, we acquired from GlaxoSmithKline the patents,
trademarks and technology covering the use of amlexanox for the treatment of
mucosal and skin disorders. The two major components of the acquisition are
the US marketing rights to amlexanox 5% paste which is currently marketed for
the treatment of canker sores under the trademark Aphthasol(R), and the
remaining worldwide marketing rights for this indication which were the
subject of a prior licensing agreement between the companies. Under the terms
of the agreement, we made an initial upfront payment of $750,000, and
we will make additional payments of $250,000 on January 22, 2003 and
$250,000 on July 22, 2003 and future possible milestone payments based on
the commercial success of amlexanox. The commercial terms of our prior
mucositis agreement between the companies, which granted us worldwide rights
for this indication, will remain in place.
(3) New Accounting Pronouncements
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, SFAS No. 142, Goodwill and
Intangible Assets, and SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets.
SFAS No. 141 and SFAS No. 142
- -----------------------------
Major provisions of these statements and their effective dates are as follows:
* intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights and are separable from the acquired entity and can be sold
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability;
* effective January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject to
amortization;
18
(3) New Accounting Pronouncements - continued
* effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually or whenever there is an
impairment indicator; and
* all acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
We amortized goodwill assets acquired prior to July 1, 2001 until December
31, 2001. Beginning January 1, 2002, quarterly and annual goodwill
amortization is no longer recognized. In June 2002, we completed a
transitional fair value based impairment test of goodwill and no impairment
losses resulted from the impairment test. We will continue to test annually
and when any event occurs that may warrant a new test.
Intangible assets consist of the following (in thousands):
September 30, 2002 December 31, 2001
----------------------- -----------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
----------- ----------- ----------- -----------
Amortizable intangible assets
Patents $ 2,966 107 $ - -
Licenses 1,130 440 1,130 356
----------- ----------- ----------- -----------
Total $ 4,096 547 1,130 356
=========== =========== =========== ===========
Intangible assets not subject to
amortization
Goodwill $ 2,464 596 $ 2,464 596
----------- ----------- ----------- -----------
Total intangible assets not
subject to amortization 2,464 596 $ 2,464 596
=========== =========== =========== ===========
19
(3) New Accounting Pronouncements - continued
Amortization expense related to intangible assets totaled $52,000 and
$90,000 during the three months ended and $109,000 and $270,000 during the
nine months ended September 30, 2002 and 2001, respectively. The aggregate
estimated amortization expense for intangible assets remaining as of
September 30, 2002 is as follows (in thousands):
Remainder of 2002 $ 103
2003 412
2004 412
2005 412
2006 412
Thereafter 1,798
Total $ 3,549
Net loss and loss per share for the three and nine months ended September
30, 2002 and 2001, adjusted to exclude amortization expense, is as follows:
Three months Three months
ended September 30, ended September 30,
------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net loss
Reported net loss allocable
to common stockholders $ (2,876) $ (1,744) $ (7,050) $ (4,432)
Goodwill amortization - 62 - 185
------------ ------------ ------------ ------------
Adjusted net loss allocable
to common stockholders $ (2,876) $ (1,682) $ (7,050) $ (4,247)
============ ============ ============ ============
Basic and diluted loss per share
Reported basic and diluted
loss per share $ (.22) $ (.13) $ (.54) $ (.34)
Goodwill amortization - - - .01
------------ ------------ ------------ ------------
Adjusted basic and diluted
loss per share $ (.22) $ (.13) $ (.54) $ (.33)
============ ============ ============ ============
SFAS No. 144
SFAS No. 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The implementation of this standard did not
have an effect on our financial position, results of operations, or cash
flows.