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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 MARCH 31, 2003
Commission File Number 0-9314
ACCESS PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 83-0221517
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(State of Incorporation) (I.R.S. Employer I.D. No.)
2600 Stemmons Frwy, Suite 176, Dallas, TX 75207
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(Address of principal executive offices)
Telephone Number (214) 905-5100
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
--- ---
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 May 14, 2003 was 13,213,899
shares of common stock, $0.01 par value per share.
Total No. of Pages 25
PART I -- FINANCIAL INFORMATION
Risk Factors
This Quarterly Report on Form 10-Q contains certain statements
that are forward-looking within the meaning of Section 27a of
the Securities Act of 1933 and that involve risks and
uncertainties, including, but not limited to the uncertainties
associated with research and development activities, clinical
trials, our ability to raise capital, the integration of
acquired companies and technologies, the timing of and our
ability to achieve regulatory approvals, dependence on others
to market our licensed products, collaborations, future cash
flow, the timing and receipt of licensing and milestone
revenues, the future success of our marketed products and
products in development, our ability to manufacture amlexanox
products in commercial quantities, our sales projections, and
the sales projections of our licensing partners, our ability
to achieve licensing milestones and other risks described
below as well as those discussed elsewhere in this 10-Q, the
Annual Report on Form 10-K as of December 31, 2002 and
documents incorporated by reference.
We have experienced a history of losses and we expect to incur
future losses.
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We have recorded minimal revenue to date and we have incurred
a cumulative operating loss of approximately $49.7 million
through March 31, 2003. Our losses have resulted principally
from costs incurred in research and development activities
related to our efforts to develop clinical candidates and from
the associated administrative costs. We expect to incur
significant additional operating losses over the next several
years. We also expect cumulative losses to increase due to
expanded research and development efforts and preclinical and
clinical trials.
We do not have significant operating revenue and we may never
attain profitability.
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To date, we have funded our operations primarily through
private sales of common stock and convertible notes. Contract
research payments and licensing fees from corporate alliances
and mergers have also provided funding for our operations. Our
ability to achieve significant revenue or profitability
depends upon our ability to successfully complete the
development of drug candidates, to develop and obtain patent
protection and regulatory approvals for our drug candidates
and to manufacture and commercialize the resulting drugs. We
have not received significant royalties for sales of amlexanox
or Zindaclin(R) products to date and we may not receive
significant revenues or profits from the sale of these
products in the future. Furthermore, we may not be able to
ever successfully identify, develop, commercialize, patent,
manufacture, obtain required regulatory approvals and market
any additional products. Moreover, even if we do identify,
develop, commercialize, patent, manufacture, and obtain
required regulatory approvals to market additional products,
we may not receive revenues or royalties from commercial sales
of these products for a significant number of years, if at
all. Therefore, our proposed operations are subject to all the
risks inherent in the establishment of a new business
enterprise. In the next few years, our revenues may be limited
to minimal royalties any amounts that we receive under
strategic partnerships and research or drug development
collaborations that
we may establish and, as a result, we may be unable to achieve
or maintain profitability in the future or to achieve
significant revenues in order to fund our operations.
We may not successfully commercialize our drug candidates.
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Our drug candidates are subject to the risks of failure
inherent in the development of pharmaceutical products based
on new technologies and our failure to develop safe,
commercially viable drugs would severely limit our ability to
become profitable or to achieve significant revenues. We may
be unable to successfully commercialize our drug candidates
because:
* some or all of our drug candidates may be found to be
unsafe or ineffective or otherwise fail to meet applicable
regulatory standards or receive necessary regulatory
clearances;
* our drug candidates, if safe and effective, may be too
difficult to develop into commercially viable drugs;
* it will be difficult to manufacture or market our drug
candidates on a large scale;
* proprietary rights of third parties may preclude us from
marketing our drug candidates; and
* third parties may market superior or equivalent drugs.
The success of our research and development activities, upon
which we primarily focus, is uncertain.
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Our primary focus is on our research and development
activities and the commercialization of compounds covered by
proprietary biopharmaceutical patents and patent applications.
Research and development activities, by their nature, preclude
definitive statements as to the time required and costs
involved in reaching certain objectives. Actual research and
development costs, therefore, could exceed budgeted amounts
and estimated time frames may require extension. Cost
overruns, unanticipated regulatory delays or demands,
unexpected adverse side effects or insufficient therapeutic
efficacy will prevent or substantially slow our research and
development effort and our business could ultimately suffer.
We anticipate that we will remain principally engaged in
research and development activities for an indeterminate, but
substantial, period of time.
We may be unable to obtain necessary additional capital to
fund operations in the future.
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We require substantial capital for our development programs
and operating expenses, to pursue regulatory clearances and to
prosecute and defend our intellectual property rights.
Although we believe that our existing capital resources,
interest income, product sales, royalties and revenue from
possible licensing agreements and collaborative agreements
will be sufficient to fund our currently expected operating
expenses and capital requirements through September 2004, we
may need to raise substantial additional capital during that
period because our actual cash requirements may vary
materially from those now planned and will depend upon
numerous factors, including :
* the results of our research and development programs;
* the timing and results of preclinical and clinical trials;
* our ability to maintain existing and establish new
collaborative agreements with other companies to provide
funding to us;
* technological advances; and
* activities of competitors and other factors.
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If we do raise additional funds by issuing equity securities,
further dilution to existing stockholders would result and
future investors may be granted rights superior to those of
existing stockholders. If adequate funds are not available to
us through additional equity offerings, we may be required to
delay, reduce the scope of or eliminate one or more of our
research and development programs or to obtain funds by
entering into arrangements with collaborative partners or
others that require us to issue additional equity securities
or to relinquish rights to certain technologies or drug
candidates that we would not otherwise issue or relinquish in
order to continue independent operations.
We may be unable to successfully develop, market, or
commercialize our products or our product candidates without
establishing new relationships and maintaining current relationships.
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Our strategy for the research, development and
commercialization of our potential pharmaceutical products may
require us to enter into various arrangements with corporate
and academic collaborators, licensors, licensees and others,
in addition to our existing relationships with other parties.
Specifically, if we successfully develop any commercially
marketable pharmaceutical products, we may seek to enter joint
venture, sublicense or other marketing arrangements with
parties that have an established marketing capability or we
may choose to pursue the commercialization of such products on
our own. We may, however, be unable to establish additional
collaborative arrangements, license agreements, or marketing
agreements as we may deem necessary to develop, commercialize
and market our potential pharmaceutical products on acceptable
terms. Furthermore, if we maintain and establish arrangements
or relationships with third parties, our business may depend
upon the successful performance by these third parties of
their responsibilities under those arrangements and
relationships. For our commercialized products we currently
rely upon the following relationships in the following
marketing territories:
* amlexanox 5% paste
- Strakan Ltd. - United Kingdom and Ireland manufacturing
and marketing rights
- Zambon Group - France, Germany, Holland, Belgium,
Luxembourg, Switzerland, Brazil, Columbia and Italy
manufacturing and marketing rights
- Laboratories Dr. Esteve SA - Spain, Portugal and Greece
manufacturing and marketing rights
- Meda, AB for Scandinavia, the Baltic states and Iceland
marketing rights
- Mipharm SpA for Italy manufacturing and marketing rights
- Paladin Labs, Inc. for Canada manufacturing and marketing rights
* Zindaclin(R) and Residerm(R)
- Strakan Ltd. - worldwide manufacturing and marketing rights
- Fujisawa GmbH - sublicensed continental Europe marketing rights
- Taro - sublicensed Israel marketing rights
- Various companies for other smaller countries - sublicensed
marketing rights
Our ability to commercialize, and market our products and product
candidates could be limited if any of these existing relationships were
terminated.
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We may be unable to successfully manufacture our products and our
product candidates in clinical quantities or for commercial purposes
without the assistance of contract manufacturers, which may be difficult
for us to obtain and maintain.
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We have no experience in the manufacture of pharmaceutical products in
clinical quantities or for commercial purposes and we may not be able to
manufacture any new pharmaceutical products that we may develop, so we
intend to establish arrangements with contract manufacturers to supply
sufficient quantities of products to conduct clinical trials and for the
manufacture, packaging, labeling and distribution of finished
pharmaceutical products if any of our potential products are approved for
commercialization. If we are unable to contract for a sufficient supply of
our potential pharmaceutical products on acceptable terms, our preclinical
and human clinical testing schedule may be delayed, resulting in the delay
of our submission of products for regulatory approval and initiation of
new development programs, which could cause our business to suffer.
Delays or difficulties in establishing relationships with manufacturers to
produce, package, label and distribute our finished pharmaceutical or other
medical products, if any, market introduction and subsequent sales of such
products could cause our business to suffer. Moreover, contract
manufacturers that we may use must adhere to current Good
Manufacturing Practices, as required by the FDA. In this regard, the FDA
will not issue a pre-market approval or product and establishment licenses,
where applicable, to a manufacturing facility for the products until after
the manufacturing facility passes a pre-approval plant inspection. If we are
unable to obtain or retain third party manufacturing on commercially
acceptable terms, we may not be able to commercialize our products as
planned. Our potential dependence upon third parties for the manufacture
of our products may adversely affect our profit margins and our ability to
develop and deliver such products on a timely and competitive basis.
Our amlexanox 5% paste is marketed in the US as Aphthasol(R) by
Access. GSK has manufactured the 5% amlexanox paste since the product
was approved by the FDA in 1996 in a facility that is certified by the
FDA for Good Manufacturing Practices. We acquired the rights to
amlexanox 5% paste from GSK on July 22, 2002. We have evaluated
various manufacturers and selected a manufacturer of our product.
Production is planned to start in June 2003.
Access and Block Drug Company entered into a Supply Agreement
whereas Block Drug Company was to produce Aphthasol(R) for Access
for a defined period of time at its Puerto Rico facility. Access has been
advised by Block Drug Company that is unable to comply with the terms
of the Supply Agreement and will not be able to produce Aphthasol(R) for
Access. Access has notified Block Drug Company that it is in breach of
the Supply Agreement and is conducting discussions with Block Drug
Company to resolve this issue. Based on the current sales volumes of
Aphthasol(R), Access believes that it has sufficient product to supply
wholesalers through June 2003. An alternative supplier has been identified
and Access is in the process of negotiating a contract for the supply of
Aphthasol(R). In the event that Block Drug Company remains in breach
of the Supply Agreement (which Access anticipates) and does not supply
Aphthasol(R) to Access, there will be an interruption of supply to the
wholesaler until an alternate manufacturer of Aphthasol(R) is able to
produce the product. Wholesaler inventories may enable a continuing
supply of the product to the consumer, although there is no guarantee that
such inventory will be sufficient. Until the product supply issues are
resolved our planned marketing relaunch of Aphthasol(R) will be delayed.
Amlexanox 5% paste was approved in the UK and is currently in the
approval process in the remaining EU countries. We licensed
manufacturing to Strakan, Zambon, Esteve and Mipharm for specific
countries in Europe. Esteve is currently preparing to manufacture the
product and is
5
obtaining the necessary European and FDA approvals. Esteve has
experience in the manufacture of other commercial pharmaceutical
products.
We licensed our patents for worldwide manufacturing and marketing for
Zindaclin(R) and the ResiDerm(R) technology to Strakan Ltd. for the
period of the patents. We receive a royalty on the sales of the product.
Strakan has a contract manufacturer for Zindaclin(R) in a European Union
approved facility. Zindaclin(R) was approved in the UK and seven
additional European Union countries and is currently under review for
approval in the remaining EU countries.
OraDisc(TM) is manufactured by a third party for our Phase III clinical
trials. Enough product was manufactured to cover the needs of the
clinical trials and testing. We are currently negotiating with a third party
for manufacturing if the product is approved.
AP5280 and AP5346 are manufactured by a third party for our Phase I
clinical trials. Manufacturing is ongoing for the current clinical trials.
Some manufacturing may be completed by the Company if significant cost
savings can be achieved.
Our mucoadhesive technology is manufactured by a third party for our
clinical trials.
We are subject to extensive governmental regulation which increases our
cost of doing business and may affect our ability to commercialize any
new products that we may develop.
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The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of pharmaceutical products through
lengthy and detailed laboratory, preclinical and clinical testing procedures
and other costly and time-consuming procedures to establish their safety
and efficacy. All of our drug candidates will require governmental
approvals for commercialization, none of which have been obtained.
Preclinical and clinical trials and manufacturing of our drug candidates
will be subject to the rigorous testing and approval processes of the FDA
and corresponding foreign regulatory authorities. Satisfaction of these
requirements typically takes a significant number of years and can vary
substantially based upon the type, complexity and novelty of the product.
For example the status of our principal products are as follows:
* 5% amlexanox paste is an approved product for sale in the US
(Aphthasol(R)); approved in the UK and Canada but not yet sold; and, in
the approval process in the EU.
* Zindaclin(R) is an approved product for sale in the UK and seven
additional European Union countries; in the approval process in the
remaining EU countries; and waiting for finalized plans and approval to
start a Phase III trial in the US.
* OraDisc(TM) has completed a Phase III clinical trial in the US.
* AP5280 is currently in a Phase I/II trial in Europe.
* AP5346 is currently in a Phase I trial in Europe.
* Mucoadhesive liquid technology is planned to start a Phase III trial in
the US in 2003.
* Vitamin mediated delivery technology is currently in the pre-clinical
phase.
* We also have other products in the preclinical phase.
Due to the time consuming and uncertain nature of the drug candidate
development process and the governmental approval process described
above, we cannot assure you when we, independently or with our
collaborative partners, might submit a New Drug Application, or NDA,
for FDA or other regulatory review.
6
Government regulation also affects the manufacturing and marketing of
pharmaceutical products. Government regulations may delay marketing of
our potential drugs for a considerable or indefinite period of time, impose
costly procedural requirements upon our activities and furnish a
competitive advantage to larger companies or companies more experienced
in regulatory affairs. Delays in obtaining governmental regulatory
approval could adversely affect our marketing as well as our ability to
generate significant revenues from commercial sales. Our drug candidates
may not receive the FDA or other regulatory approvals on a timely basis
or at all. Moreover, if regulatory approval of a drug candidate is granted,
such approval may impose limitations on the indicated use for which such
drug may be marketed. Even if we obtain initial regulatory approvals for
our drug candidates, we, or our drugs and our manufacturing facilities
would be subject to continual review and periodic inspection, and later
discovery of previously unknown problems with a drug, manufacturer or
facility may result in restrictions on the marketing or manufacture of such
drug, including withdrawal of the drug from the market. The FDA and
other regulatory authorities stringently apply regulatory standards and
failure to comply with regulatory standards can, among other things,
result in fines, denial or withdrawal of regulatory approvals, product
recalls or seizures, operating restrictions and criminal prosecution.
The uncertainty associated with preclinical and clinical testing may affect
our ability to successfully commercialize new products.
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Before we can obtain regulatory approvals for the commercial sale of any
of our potential drugs, the drug candidates will be subject to extensive
preclinical and clinical trials to demonstrate their safety and efficacy in
humans. Preclinical or clinical trials of any of our future drug candidates
may not demonstrate the safety and efficacy of such drug candidates at all
or to the extent necessary to obtain regulatory approvals. In this regard,
for example, adverse side effects can occur during the clinical testing of
a new drug on humans or animals which may delay ultimate FDA
approval or even lead us to terminate our efforts to develop the drug for
commercial use. Companies in the biotechnology industry have suffered
significant setbacks in advanced clinical trials, even after demonstrating
promising results in earlier trials. In particular, OraDisc(TM) and
AP5280 have taken longer to progress through clinical trials than
originally planned. This extra time has not been related to concerns of the
formulations but rather due to the lengthy regulatory process. The failure
to adequately demonstrate the safety and efficacy of a drug candidate
under development could delay or prevent regulatory approval of the drug
candidate. A delay or failure to receive regulatory approval for any of
our drug candidates could prevent us from successfully commercializing
such candidates and we could incur substantial additional expenses in our
attempts to further develop such candidates and obtain future regulatory
approval.
We may incur substantial product liability expenses due to the use or
misuse of our products for which we may be unable to obtain complete
insurance coverage.
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Our business exposes us to potential liability risks that are inherent in the
testing, manufacturing and marketing of pharmaceutical products. These
risks will expand with respect to our drug candidates, if any, that receive
regulatory approval for commercial sale and we may face substantial
liability for damages in the event of adverse side effects or product defects
identified with any of our products that are used in clinical tests or
marketed to the public. We generally procure product liability insurance
for drug candidates that are undergoing human clinical trials. Product
liability insurance for the biotechnology industry is generally expensive,
if available at all, and as a result, we may be unable able to obtain
insurance coverage at acceptable costs or in a sufficient amount in the
future, if at all. We may be unable to satisfy any claims for which we
may be held liable as a result of the use or misuse of products which we
have developed, manufactured or sold and any such product liability claim
could adversely affect our business,
7
operating results or financial condition.
We may incur significant liabilities if we fail to comply with stringent
environmental regulations or if we did not comply with these regulations
in the past.
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Our research and development processes involve the controlled use of
hazardous materials. We are subject to a variety of federal, state and local
governmental laws and regulations related to the use, manufacture,
storage, handling and disposal of such material and certain waste products.
Although we believe that our activities and our safety procedures for
storing, using, handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely
eliminated. In the event of such accident, we could be held liable for any
damages that result and any such liability could exceed our resources.
Intense competition may limit our ability to successfully develop and
market commercial products.
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The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Our competitors
in the United States and elsewhere are numerous and include, among
others, major multinational pharmaceutical and chemical companies,
specialized biotechnology firms and universities and other research
institutions. Cisplatin is marketed by Bristol-Myers-Squibb the originator
of the drug and by several generic manufacturers. Carboplatin is marketed
exclusively by Bristol-Myers-Squibb and Oxaliplatin by Sanofi-Synthelabo.
Our principal competitors in the polymer area are Cell Therapeutics,
Daiichi, Enzon, Inhale and Pharmacia, which are developing alternate
drugs in combination with polymers. Several companies are working on
therapies and formulations that may be competitive with our drug delivery
system, including Bristol-Myers-Squibb, Centocor (acquired by Johnson
& Johnson), GlaxoSmithKline, Imclone and Xoma, which are developing
targeted monoclonal antibody therapy, and Nexstar (acquired by Gilead
Sciences), The Liposome Company (acquired by Elan Corporation) and
Sequus Pharmaceuticals (acquired by Alza Corporation), which are
developing liposomal formulations. In addition, RxKinetics, Human
Genome Sciences and Amgen are developing competitive products to treat
mucositis. Furthermore, Benzamycin, marketed by a subsidiary of
Aventis; Cleocin-T and a generic topical clindamycin, marketed by
Pharmacia; Benzac, marketed by a subsidiary of L'Oreal; and Triaz,
marketed by Medicis Pharmaceutical Corp. are competitive with
Residerm(R) products and technology and prescription steroids such as
Kenalog in OraBase developed by Bristol-Myers Squibb are competitive
with our commercialized Aphthasol(R) product.
Many of these competitors have and employ greater financial and other
resources, including larger research and development staffs and more
effective marketing and manufacturing organizations, than us or our
collaborative partners. As a result, our competitors may successfully
develop technologies and drugs that are more effective or less costly than
any that we are developing or which would render our technology and
future products obsolete and noncompetitive.
In addition, some of our competitors have greater experience than we do
in conducting preclinical and clinical trials and obtaining FDA and other
regulatory approvals. Accordingly, our competitors may succeed in
obtaining FDA or other regulatory approvals for drug candidates more
rapidly than we do. Companies that complete clinical trials, obtain
required regulatory agency approvals and commence commercial sale of
their drugs before their competitors may achieve a significant competitive
advantage. Drugs resulting from our research and development
8
efforts or from our joint efforts with collaborative partners therefore may
not be commercially competitive with our competitors' existing products
or products under development.
Our ability to successfully develop and commercialize our drug
candidates will substantially depend upon the availability of
reimbursement funds for the costs of the resulting drugs and related
treatments.
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The successful commercialization of, and the interest of potential
collaborative partners to invest in, the development of our drug candidates
will depend substantially upon reimbursement of the costs of the resulting
drugs and related treatments at acceptable levels from government
authorities, private health insurers and other organizations, including
health maintenance organizations, or HMOs. To date, the costs of our
marketed products Aphthasol(R) and Zindaclin(R) generally have been
reimbursed at acceptable levels, however, the amount of such
reimbursement in the United States or elsewhere may be decreased in the
future or may be unavailable for any drugs that we may develop in the
future. Limited reimbursement for the cost of any drugs that we develop
may reduce the demand for, or price of such drugs, which would hamper
our ability to obtain collaborative partners to commercialize our drugs, or
to obtain a sufficient financial return on our own manufacture and
commercialization of any future drugs.
The market may not accept any pharmaceutical products that we
successfully develop.
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The drugs that we are attempting to develop may compete with a number
of well-established drugs manufactured and marketed by major
pharmaceutical companies. The degree of market acceptance of any drugs
developed by us will depend on a number of factors, including the
establishment and demonstration of the clinical efficacy and safety of our
drug candidates, the potential advantage of our drug candidates over
existing therapies and the reimbursement policies of government and third-
party payers. Physicians, patients or the medical community in general
may not accept or use any drugs that we may develop independently or
with our collaborative partners and if they do not, our business could
suffer.
Trends toward managed health care and downward price pressures on
medical products and services may limit our ability to profitably sell
any drugs that we may develop.
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Lower prices for pharmaceutical products may result from:
* third-party payers' increasing challenges to the prices charged for
medical products and services;
* the trend toward managed health care in the United States and the
concurrent growth of HMOs and similar organizations that can control or
significantly influence the purchase of healthcare services and products;
and
* legislative proposals to reform healthcare or reduce government
insurance programs.
The cost containment measures that healthcare providers are instituting,
including practice protocols and guidelines and clinical pathways, and the
effect of any health care reform, could limit our ability to profitably sell
any drugs that we may successfully develop. Moreover, any future
legislation or regulation, if any, relating to the healthcare industry or
third-party coverage and reimbursement, may cause our business to suffer.
9
We may not be successful in protecting our intellectual property and
proprietary rights.
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Our success depends, in part, on our ability to obtain U.S. and foreign
patent protection for our drug candidates and processes, preserve our trade
secrets and operate our business without infringing the proprietary rights
of third parties. Legal standards relating to the validity of patents covering
pharmaceutical and biotechnological inventions and the scope of claims
made under such patents are still developing and there is no consistent
policy regarding the breadth of claims allowed in biotechnology patents.
The patent position of a biotechnology firm is highly uncertain and
involves complex legal and factual questions. We cannot assure you that
any existing or future patents issued to, or licensed by, us will not
subsequently be challenged, infringed upon, invalidated or circumvented
by others. As a result, although we, together with our subsidiaries, are
either the owner or licensee of technology to 23 U.S. patents and to 17
U.S. patent applications now pending, and 6 European and 15 European
patent applications, we cannot assure you that any additional patents will
issue from any of the patent applications owned by, or licensed to, us.
Furthermore, any rights that we may have under issued patents may not
provide us with significant protection against competitive products or
otherwise be commercially viable. Our patents expire on average for the
following technologies:
* 5% amlexanox paste approximately in 2011
* Zindaclin(R) and Residerm(R) approximately in 2008
* OraDisc(TM) approximately in 2017
* AP5280 approximately in 2018
* AP5346 approximately in 2021
* Mucoadhesive technology approximately in 2021
* Vitamin mediated technology approximately in 2013
In addition, patents may have been granted to third parties or may be
granted covering products or processes that are necessary or useful to the
development of our drug candidates. If our drug candidates or processes
are found to infringe upon the patents or otherwise impermissibly utilize
the intellectual property of others, our development, manufacture and sale
of such drug candidates could be severely restricted or prohibited. In such
event, we may be required to obtain licenses from third parties to utilize
the patents or proprietary rights of others. We cannot assure you that we
will be able to obtain such licenses on acceptable terms, if at all. If we
become involved in litigation regarding our intellectual property rights or
the intellectual property rights of others, the potential cost of such
litigation, regardless of the strength of our legal position, and the potential
damages that we could be required to pay could be substantial.
Our business could suffer if we lose the services of, or fail to attract,
key personnel.
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We are highly dependent upon the efforts of our senior management and
scientific team, including our President and Chief Executive Officer,
Kerry Gray. The loss of the services of one or more of these individuals
could delay or prevent the achievement of our research, development,
marketing, or product commercialization objectives. While we have
employment agreements with Mr. Gray and David Nowotnik our Senior
Vice President Research and Development, their employment may be
terminated by them or us at any time. In addition, Mr. Gray's and Dr.
Nowotnik's agreements expire within one year and are extendable each
year on the anniversary date. We do not have employment contracts with
our other key personnel. We do not maintain any "key-man" insurance
policies on any of our key employees and we do not intend to obtain such
insurance. In addition, due to the specialized scientific nature of our
business, we are highly dependent upon our ability to attract and retain
qualified scientific and technical personnel. In view of the stage of our
development and our research and development
10
programs, we have restricted our hiring to research scientists and a small
administrative staff and we have made no investment in manufacturing,
production, marketing, product sales or regulatory compliance resources.
If we develop pharmaceutical products that we will commercialize
ourselves, however, we will need to hire additional personnel skilled in
the clinical testing and regulatory compliance process and in marketing
and product sales. There is intense competition among major
pharmaceutical and chemical companies, specialized biotechnology firms
and universities and other research institutions for qualified personnel in
the areas of our activities, however, and we may be unsuccessful in
attracting and retaining these personnel.
Ownership of our shares is concentrated, to some extent, in the hands
of a few individual investors which could limit the ability of our other
stockholders to influence the direction of the company.
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Heartland Advisors, Inc. and Larry N. Feinberg (Oracle Partners LP,
Oracle Institutional Partners LP and Oracle Investment Management Inc.)
currently beneficially own approximately 14.0% and 14.0% respectively,
of our issued and outstanding common stock as of May 14, 2003.
Accordingly, they collectively may have the ability to significantly
influence or determine the election of all of our directors or the outcome
of most corporate actions requiring stockholder approval. They may
exercise this ability in a manner that advances their best interests and not
necessarily those of our other stockholders.
Provisions of our charter documents could discourage an acquisition
of our company that would benefit our stockholders.
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Provisions of our Certificate of Incorporation, By-laws and Stockholders
Rights Plan may make it more difficult for a third party to acquire control
of our company, even if a change in control would benefit our
stockholders. In particular, shares of our preferred stock may be issued
in the future without further stockholder approval and upon such terms
and conditions, and having such rights, privileges and preferences, as our
Board of Directors may determine, including, for example, rights to
convert into our common stock. The rights of the holders of our common
stock will be subject to, and may be adversely affected by, the rights of
the holders of any of our preferred stock that may be issued in the future.
The issuance of our preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes,
could have the effect of making it more difficult for a third party to
acquire control of us. This could limit the price that certain investors
might be willing to pay in the future for shares of our common stock and
discourage these investors from acquiring a majority of our common
stock. Further, the existence of these corporate governance provisions
could have the effect of entrenching management and making it more
difficult to change our management.
Substantial sales of our common stock could lower our stock price.
- ------------------------------------------------------------------
The market price for our common stock could drop as a result of sales of
a large number of our presently outstanding shares. All of the 13,213,899
shares of our common stock that are outstanding as of May 14, 2003 are
unrestricted and freely tradable or tradable pursuant to a resale registration
statement or under Rule 144 of the Securities Act.
AMEX listing requirements.
- --------------------------
Our common stock is presently listed on the American Stock Exchange
under the symbol "AKC". All companies listed on AMEX are required to
comply with certain continued listing
11
standards, including maintaining stockholders' equity at required levels.
We are not in compliance with this stockholders' equity standard as of
March 31, 2003. If we are unable to remedy any listing standard
noncompliance with AMEX under its regulations, or otherwise regain
compliance, we cannot assure you that our common stock will continue
to remain eligible for listing on AMEX. In the event that our common
stock is delisted from AMEX its market value and liquidity could be
materially adversely affected.
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.
Together with our subsidiaries, we have proprietary patents or rights to
eight drug delivery technology platforms:
* synthetic polymer targeted delivery,
* vitamin mediated targeted delivery,
* vitamin mediated oral delivery,
* bioerodible hydrogel technology,
* nanoparticles and nanoparticle networks,
* hydrogel particle aggregate technology,
* Residerm(R) topical delivery and
* carbohydrate targeting technology.
In addition, we are marketing in the United States - Aphthasol(R), the first
FDA approved product for the treatment of canker sores. We are
developing new formulations and delivery forms to evaluate amlexanox in
additional clinical indications, including mucoadhesive disc delivery.
Also, Strakan Limited, our United Kingdom partner, has used our
patented Residerm(R) technology to develop zinc clindamycin for the
treatment of acne. Strakan began marketing zinc clindamycin in the
United Kingdom under the trade name Zindaclin(R) in March 2002. The
process to achieve marketing authorization for Zindaclin(R) throughout
Europe has been initiated, with approvals in eight European Union
countries to date and activities ongoing to expand approval throughout the
European Union.
Since our inception, we have devoted our resources primarily to fund our
research and development programs. We have been unprofitable since
inception and to date have received limited revenues from the sale of
products. We cannot assure you that we will be able to generate sufficient
product revenues to attain profitability on a sustained basis or at all. We
expect to incur losses for the next several years as we continue to invest
in product research and development, preclinical studies, clinical trials and
regulatory compliance. As of March 31, 2003, our accumulated deficit
was $49,703,000, of which $8,894,000 was the result of the write-off of
excess purchase price.
12
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through private sales of common
stock and convertible notes and our principal source of liquidity is cash
and cash equivalents. Contract research payments, licensing fees and
milestone payments from corporate alliances and mergers have also
provided funding for operations. As of March 31, 2003 our cash and cash
equivalents were $7,376,000 and our working capital was $5,149,000.
Our working capital at March 31, 2003 represented a decrease of
$2,445,000 as compared to our working capital as of December 31, 2002
of $7,594,000. The decrease in working capital was due to the loss from
operations for the first quarter of 2003.
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.
Since inception, our expenses have significantly exceeded revenues,
resulting in an accumulated deficit as of March 31, 2003 of $49,703,000.
We expect that our existing capital resources will be adequate to fund our
current level of operations through September 2004. We cannot assure you
that we will ever be able to generate significant product revenue or
achieve or sustain profitability.
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
and developed technology. Our future capital requirements and adequacy
of available funds will depend on many factors, including:
* the successful commercialization of amlexanox and Zindaclin(R);
* the ability to establish and maintain collaborative arrangements with
corporate partners for the research, development and commercialization
of products;
* continued scientific progress in our research and development programs;
* the magnitude, scope and results of preclinical testing and clinical
trials;
* the costs involved in filing, prosecuting and enforcing patent claims;
* competing technological developments;
* the cost of manufacturing and scale-up;
* the ability to establish and maintain effective commercialization
arrangements and activities; and
* successful regulatory filings.
We have issued an aggregate of $13,500,000 of convertible notes, which
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 a
rate of 7.7% per annum with $1,041,000 of interest due annually on each
September 13 and, under certain circumstances, convert to Common Stock
at a conversion price of $5.50 per share. Should the holders of the notes
not elect to convert them to common stock, or we are not able to force the
conversion of the notes by their terms, we must repay the amounts on the
dates described herein. We currently do not have the funds available to
repay the convertible notes. We may need to restructure the terms of the
notes as we near the due date for repayment. Any such restructuring could
have a significant impact on our capital structure and liquidity.
13
FIRST QUARTER 2003 COMPARED TO FIRST QUARTER 2002
Our licensing revenue in the first quarter of 2003 was $86,000, as
compared to licensing revenue of $116,000 in same quarter of 2002, a
decrease of $30,000. We recognize licensing revenue over the period of
the performance obligation under our licensing agreements. Licensing
revenue recognized in both 2003 and 2002 was from several agreements,
including agreements related to various amlexanox projects and
Residerm(R).
Product sales of Aphthasol(R) totaled $303,000 in the first quarter of
2003. Our first sales of Aphthasol(R) were recorded in December 2002.
Royalty income in the first quarter of 2003 was $4,000. No royalty was
recorded in 2002 until the fourth quarter.
Total research spending for the first quarter of 2003 was $1,797,000, as
compared to $1,323,000 for the same period in 2002, an increase of
$474,000. The increase in expenses was primarily the result of:
* higher clinical costs ($311,000) for our OraDisc(TM) clinical trials and
($93,000) for the AP5280 and AP5346 polymer platinate clinical trials;
* higher scientific salary costs ($127,000) due to additional employees;
* higher expenses due to our Australia laboratory costs ($81,000) which
was acquired in the first quarter of 2002; and
* other net increases ($34,000).
The increase in expenses was partially offset by:
* lower product development costs ($131,000) for products made for our
clinical trials; and
* lower clinical costs ($41,000) for our amlexanox gel clinical trial that
was completed in the first quarter of 2002.
We expect research spending to increase in future quarters and remain
higher than in prior quarters as we intend to hire additional scientific and
clinical staff, commence additional clinical trials and accelerate preclinical
development activities as we continue to develop our product candidates.
Our cost of product sales was $109,000 in the first quarter of 2003. There
were no costs in the same period of 2002 due to the commencement of our
Aphthasol(R) sales in the fourth quarter of 2002.
Total general and administrative expenses were $537,000 for the first
quarter of 2003, an increase of $38,000 as compared to the same period
in 2002. The increase in spending was due primarily to the following:
* higher patent expenses ($51,000), due to new patent expenses; and
* higher rent and utilities expenses ($12,000) due to the expansion of our
facilities.
The above increases in spending are partially offset by lower salary
expenses ($7,000) and other net decreases ($18,000).
Depreciation and amortization was $144,000 for the first quarter of 2003
as compared to $57,000 for the same period in 2002 reflecting an increase
of $87,000. The increase in depreciation and amortization is due to
increased depreciation resulting from the acquisition of additional capital
14
assets and increased amortization due to patents acquired in the Biotech
Australia Pty. Limited transaction and patents acquired from
GlaxoSmithKline.
Total operating expenses in the first quarter of 2003 were $2,587,000 as
compared to total operating expenses of $1,879,000 for the same period
in 2002.
Loss from operations in the first quarter of 2003 was $2,194,000 as
compared to a loss of $1,763,000 for the same period in 2002.
Interest and miscellaneous income was $98,000 for the first quarter of
2003 as compared to $214,000 for the same period in 2002, a decrease
$116,000. The decrease in interest income was due to lower cash balances
and lower interest rates in 2003 as compared with 2002.
Interest expense was $315,000 for the first quarter of 2003 as compared
to $317,000 for the same period in 2002, a decrease of $2,000.
Net loss in the first quarter of 2003 was $2,411,000, or a $0.18 basic and
diluted loss per common share, compared with a loss of $1,866,000, or
a $0.14 basic and diluted loss per common share for the same period in
2002.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash and short-term investments in certificates of
deposit, corporate securities with high quality ratings, and U.S.
government securities. These investments are not held for trading or other
speculative purposes. These financial investment securities all mature in
2003 and 2004 and their estimated fair value approximates cost. Changes
in interest rates affect the investment income we earn on our investments
and, therefore, impact our cash flows and results of operations. A
hypothetical 50 basis point decrease in interest rates would result in a
decrease in annual interest income and a corresponding increase in net loss
of approximately $42,000. The estimated effect assumes no changes in our
short-term investments at March 31, 2003. We do not believe that we are
exposed to any market risks, as defined. We are not exposed to risks for
changes in commodity prices, or any other market risks.
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 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 included in our periodic Securities and
Exchange Commission filings.
Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is
15
based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
control may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
(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
William Hall ("Hall") filed suit against Access, and certain officers of
Access, in Dallas County, Texas, District Court, on or about February 7,
2003. Although the claims in Hall's complaint are not clearly delineated,
he appears to bring claims for fraud, conspiracy, and theft against all
defendants, and a claim for breach of contract against Access. Each of
the allegations relates to an allegedly unfulfilled contractual obligation to
deliver to Hall 45,000 warrants to purchase our stock. Hall alleges in his
complaint and in a subsequent letter that the warrants, had they been
delivered, could have been worth as much as $540,000. He seeks as
damages this amount, his attorney's fees, and an unstated amount of
punitive damages.
We answered Hall's complaint on March 3, 2003, and brought
counterclaims against him relating to certain alleged misrepresentations,
his failure to perform certain obligations to Access, and his interference
with the our right to enjoy certain contractual benefits. Discovery,
substantive fact investigation, and legal analysis have only recently begun.
Access intends to be vigorous in both defense of Hall's claims and its
pursuit of our counterclaims.
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
16
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
99.1 Certification of Financial Statements by Chief Executive Officer of
Access Pharmaceuticals, Inc. pursuant to 18 U.S.C. Section 1350
99.2 Certification of Financial Statements by Chief Financial Officer of
Access Pharmaceuticals, Inc. pursuant to 18 U.S.C. Section 1350
Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACCESS PHARMACEUTICALS, INC.
Date: May 14, 2003 By: /s/ Kerry P. Gray
-------------------------
Kerry P. Gray
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 2003 By: /s/ Stephen B. Thompson
-------------------------
Stephen B. Thompson
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
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 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 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 weaknesses 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: May 14, 2003
/s/ Kerry P. Gray
- -----------------
Kerry P. Gray
President and Chief Executive Officer
18
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 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 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 weaknesses 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: May 14, 2003
/s/ Stephen B. Thompson
- -----------------------
Stephen B. Thompson
Chief Financial Officer
19
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2003 December 31, 2002
-------------- --------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 3,223,000 $ 1,444,000
Short term investments, at cost 4,153,000 8,332,000
Accounts receivable 1,420,000 1,184,000
Accrued interest receivable 77,000 89,000
Inventory 238,000 461,000
Prepaid expenses and other current assets 630,000 852,000
-------------- --------------
Total current assets 9,741,000 12,362,000
Property and equipment, net 798,000 742,000
Debt issuance costs, net 450,000 496,000
Patents, net 2,906,000 2,991,000
Licenses, net 429,000 449,000
Goodwill, net 1,868,000 1,868,000
Other assets 551,000 579,000
-------------- --------------
Total assets $ 16,743,000 $ 19,487,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses $ 2,484,000 $ 2,469,000
Accrued interest payable 571,000 311,000
Deferred revenues 996,000 1,199,000
Current portion of note payable and
other future obligations 541,000 789,000
-------------- --------------
Total current liabilities 4,592,000 4,768,000
Long-term obligations for
purchased patents 173,000 346,000
Note payable, net of current portion 324,000 354,000
Convertible notes 13,530,000 13,530,000
-------------- --------------
Total liabilities 18,619,000 18,998,000
-------------- --------------
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, 13,213,899 at March 31, 2003
and 13,159,119 at December 31, 2002 132,000 132,000
Additional paid-in capital 49,129,000 48,989,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted
stock grants (366,000) (277,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Accumulated other comprehensive loss (19,000) (14,000)
Accumulated deficit (49,703,000) (47,292,000)
-------------- --------------
Total stockholders' equity (deficit) (1,876,000) 489,000
-------------- --------------
Total liabilities and stockholders'
equity (deficit) $ 16,743,000 $ 19,487,000
============== ==============
The accompanying notes are an integral part of these statements.
20
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
Three Months ended March 31,
------------------------------
2003 2002
-------------- --------------
Revenues
Licensing revenues $ 86,000 $ 116,000
Product sales 303,000 -
Royalty income 4,000 -
------------- --------------
Total revenues 393,000 116,000
Expenses
Research and development 1,797,000 1,323,000
Costs of product sales 109,000 -
General and administrative 537,000 499,000
Depreciation and amortization 144,000 57,000
------------- --------------
Total expenses 2,587,000 1,879,000
------------- --------------
Loss from operations (2,194,000) (1,763,000)
Other income (expense)
Interest and miscellaneous income 98,000 214,000
Interest expense (315,000) (317,000)
------------- --------------
(217,000) (103,000)
------------- --------------
Net loss $(2,411,000) $(1,866,000)
============= ==============
Basic and diluted loss per common share $(0.18) $(0.14)
============= ==============
Weighted average basic and diluted
common shares outstanding 13,199,900 12,934,263
============= ==============
The accompanying notes are an integral part of these statements.
21
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months ended March 31,
----------------------------
2003 2002
-------------- --------------
Cash flows from operating activities:
Net loss $ (2,411,000) $ (1,866,000)
Adjustments to reconcile net loss to cash
used in operating activities:
Warrants issued in payment of
consulting expenses 30,000 37,000
Amortization of restricted stock grants 21,000 9,000
Depreciation and amortization 144,000 57,000
Amortization of debt costs 46,000 46,000
Change in deferred revenue (203,000) (10,000)
Change in operating assets and liabilities:
Accounts receivable (236,000) (304,000)
Accrued interest receivable 12,000 9,000
Inventory 223,000 -
Prepaid expenses and other current assets 222,000 (223,000)
Other assets 28,000 52,000
Accounts payable and accrued expenses 15,000 (53,000)
Accrued interest payable 260,000 260,000
-------------- --------------
Net cash used in operating activities (1,849,000) (1,986,000)
-------------- --------------
Cash flows from investing activities:
Capital expenditures (95,000) (146,000)
Redemptions of short term investments and
certificates of deposit, net 4,179,000 7,900,000
Purchase of business and assets,
net of cash acquired - (526,000)
-------------- --------------
Net cash provided by investing activities 4,084,000 7,228,000
-------------- --------------
Cash flows from financing activities:
Effect of exchange rate changes on cash (5,000) -
Payments of notes payable and long-term
obligations (451,000) (27,000)
Proceeds from stock issuances, net - 32,000
--------------- -------------
Net cash provided by (used in)
financing activities (456,000) 5,000
--------------- -------------
Net increase in cash and cash equivalents 1,779,000 5,247,000
Cash and cash equivalents at beginning of period 1,444,000 7,426,000
--------------- -------------
Cash and cash equivalents at end of period $ 3,223,000 $ 12,673,000
============== =============
The accompanying notes are an integral part of these statements.
22
Access Pharmaceuticals, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2003 and 2002
(unaudited)
(1) Interim Financial Statements
The consolidated balance sheet as of March 31, 2003 and the consolidated
statements of operations and cash flows for the three months ended March
31, 2003 and 2002 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 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, 2002. The results of
operations for the period ended March 31, 2003 are not necessarily
indicative of the operating results which may be expected for a full year.
The consolidated balance sheet as of December 31, 2002 contains financial
information taken from the audited financial statements as of that date.
(2) Acquisition-Related Intangible Assets and Change In Accounting Principles
Effective January 1, 2002, we adopted SFAS 141, "Business
Combinations" and SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and also specifies the
criteria for the recognition of intangible assets separately from goodwill.
Under the new rules, goodwill is no longer amortized but is subject to an
impairment test at least annually or more frequently if impairment
indicators arise. Separately identified and recognized intangible assets
resulting from business combinations completed before July 1, 2001 that
did not meet the new criteria for separate recognition of intangible assets
were subsumed in goodwill upon adoption. Intangible assets with defined
lives, namely licenses and acquired patents, did not meet the separate
recognition criteria of SFAS 141. We continue to amortize intangible
assets that meet the new criteria over their useful lives. In accordance with
SFAS 142, we performed a transitional impairment test of goodwill as of
January 1, 2002, and an annual test in the fourth quarter of 2002, which
did not result in an impairment of goodwill.
23
Intangible assets consist of the following (in thousands):
March 31, 2003 December 31, 2002
------------------------- -------------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
------------ ------------ ------------ ------------
Amortizable intangible assets
Patents $ 3,178 $ 272 $ 3,178 $ 187
Licenses 830 401 830 381
------------ ------------ ------------ ------------
Total $ 4,008 $ 673 $ 4,008 $ 568
============ ============ ============ ============
Intangible assets not subject to
amortization
Goodwill $ 2,464 $ 596 $ 2,464 $ 596
============ ============ ============ ============
Amortization expense related to intangible assets totaled $105,000 and
$74,000 for the three months ended March 31, 2003 and 2002,
respectively. The aggregate estimated amortization expense for intangible
assets remaining as of March 31, 2003 is as follows (in thousands):
2003 $ 315
2004 427
2005 427
2006 427
2007 427
Thereafter 1,312
--------
Total $ 3,335
========
3) Stock-Based Compensation
We have a stock-based compensation plan, which is described more fully
in our Annual Report on Form 10-K for the year ended December 31,
2002, Form 10-K, in Notes to Consolidated Financial Statements in Note
1. We apply APB Opinion 25, Accounting for Stock Issued to Employees,
and related Interpretations in accounting for our plans. All our options are
issued with an exercise price at our stock's market price. The following
table illustrates the effect on net income and earnings per share if we had
applied the fair value recognition provisions of FASB Statement 123,
Accounting for Stock-Based Compensation, using assumptions described
in Form 10-K, Note 10, to our stock-based employee plans.
24
Quarter ended March 31,
------------------------------
2003 2002
-------------- --------------
Net loss
As reported $(2,411,000) $(1,866,000)
Deduct: Stock-based employee
compensation expense determined under
fair value based method for awards
granted, modified, or settled, net
of related tax effects (224,000) (1,040,000)
-------------- --------------
Pro forma (2,635,000) (2,906,000)
Basic and diluted loss per share:
As reported $(0.18) $(0.14)
Pro forma (0.20) (0.22)
25