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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 JUNE 30, 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
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Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
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The number of shares outstanding of each of the issuer's
classes of common stock, as of August 14, 2003 was 13,279,486
shares of common stock, $0.01 par value per share.
Total No. of Pages 26
PART I -- FINANCIAL INFORMATION
Risk Factors
This Quarterly Report on Form 10-Q contains certain
statements that are forward-looking within the meaning of
Section 27a of the Securities Act of 1933 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 $49.4 million
through June 30, 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, even if safe and effective, may be
too difficult to develop into commercially viable drugs;
* it may be difficult to manufacture or market our drug
candidates on a large scale;
* proprietary rights of third parties may preclude us from
marketing our drug candidates; and
* third parties may market superior or equivalent drugs.
The success of our research and development activities, upon
which we primarily focus, is uncertain.
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Our primary focus is on our research and development
activities and the commercialization of compounds covered by
proprietary biopharmaceutical patents and patent
applications. Research and development activities, by their
nature, preclude definitive statements as to the time
required and costs involved in reaching certain objectives.
Actual research and development costs, therefore, could
exceed budgeted amounts and estimated time frames may require
extension. Cost overruns, unanticipated regulatory delays or
demands, unexpected adverse side effects or insufficient
therapeutic efficacy will prevent or substantially slow our
research and development effort and our business could
ultimately suffer. We anticipate that we will remain
principally engaged in research and development activities
for an indeterminate, 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
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* activities of competitors and other factors.
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.
As a result, we have established, and in the future intend to continue 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 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). Block
Drug Company manufactured the 5% amlexanox paste since the product
was approved by the FDA in 1996 in a facility certified by the FDA for
Good Manufacturing Practices. We acquired the rights to amlexanox 5%
paste from Block Drug Company on July 22, 2002. We have evaluated
various manufacturers and selected a new manufacturer of amlexanox
5% paste. Production is planned to start in August 2003.
On July 22, 2003 we entered into a Supply Agreement whereby Block
Drug Company was required to produce Aphthasol(R) for us for a
defined period of time at its Puerto Rico facility. Subsequently we were
advised by Block Drug Company that it was unable to comply with the
terms of the Supply Agreement and would not be able to produce
Aphthasol(R) for us. In May 2003, we reached a settlement with Block
Drug Company relating to this matter whereby Block made a one-time
cash payment to us and Block was relieved of certain of its obligations
under the Supply Agreement and we were relieved from certain future
obligations under the Asset Sale Agreement pursuant to which we
purchased the assets relating to amlexanox from Block. An alternative
supplier for Aphthasol(R) has been identified and we are in the process
of qualifying this supplier. Initial production steps have been completed
but there will be an interruption of supply to our wholesaler until the
alternate manufacturer of Aphthasol(R) is able to commercially produce
the product. Until the product supply issues are resolved
our planned marketing relaunch of Aphthasol(R) will be delayed.
Amlexanox 5% paste was approved by regulatory authorities for sale in
the UK and is currently in the approval process in the remaining EU
countries. We licensed manufacturing rights to
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Strakan, Zambon, Esteve and Mipharm for specific countries in Europe.
Esteve is currently preparing to manufacture the product and is obtaining
the necessary European 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 gains regulatory approval.
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 except for Aphthasol(R) and Zindaclin(R) in certain markets.
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
6
NDA, for FDA or other regulatory review.
Government regulation also affects the manufacturing and marketing of
pharmaceutical products. Government regulations may delay marketing
of our potential drugs for a considerable or indefinite period of time,
impose costly procedural requirements upon our activities and furnish a
competitive advantage to larger companies or companies more
experienced in regulatory affairs. Delays in obtaining governmental
regulatory approval could adversely affect our marketing as well as our
ability to generate significant revenues from commercial sales. Our drug
candidates may not receive 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 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
7
may be held liable as a result of the use or misuse of products which we
have developed, manufactured or sold and any such product liability
claim could adversely affect our business, operating results or financial
condition.
We may incur significant liabilities if we fail to comply with stringent
environmental regulations or if we did not comply with these regulations
in the past.
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Our research and development processes involve the controlled use of
hazardous materials. We are subject to a variety of federal, state and
local governmental laws and regulations related to the use, manufacture,
storage, handling and disposal of such material and certain waste
products. Although we believe that our activities and our safety
procedures for storing, using, handling and disposing of such materials
comply with the standards prescribed by such laws and regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such accident, we could be held
liable for any damages that result and any such liability could exceed our
resources.
Intense competition may limit our ability to successfully develop and
market commercial products.
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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
8
agency approvals and commence commercial sale of their drugs before
their competitors may achieve a significant competitive advantage. Drugs
resulting from our research and development efforts or from our joint
efforts with collaborative partners therefore may not be commercially
competitive with our competitors' existing products or products under
development.
Our ability to successfully develop and commercialize our drug
candidates will substantially depend upon the availability of
reimbursement funds for the costs of the resulting drugs and related
treatments.
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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.
In 1996, 5% amlexanox paste was approved for sale in the United
States. To date, the product is not widely accepted in the marketplace
and its sales have not been significant. On July 22, 2002, we acquired
the rights to it from Block Drug Company and we intend to re-launch it
by the end of 2003. The product has been approved in the UK and
Canada but has not been sold in commercial quantities in any markets
other than the United States.
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
9
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.
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 technologies
covered by 23 U.S. patents and 18 U.S. patent applications now
pending, and 6 European patents 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 for the following technologies expire during the date ranges
indicated below:
* 5% amlexanox paste in 2011
* Zindaclin(R) and Residerm(R) between 2007 and 2011
* OraDisc(TM) in 2020
* AP5280 in 2016
* AP5346 in 2016
* Mucoadhesive technology, patents are pending
* Vitamin mediated technology between 2003 and 2019
In addition, patents may have been granted to third parties or may be
granted covering products or processes that are necessary or useful to the
development of our drug candidates. If our drug candidates or processes
are found to infringe upon the patents or otherwise impermissibly utilize
the intellectual property of others, our development, manufacture and
sale of such drug candidates could be severely restricted or prohibited.
In such event, we may be required to obtain licenses from third parties
to utilize the patents or proprietary rights of others. We cannot assure
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,
10
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. 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 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 August
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 and may have the
effect of entrenching, and making it difficult to remove, management.
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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.
11
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
13,279,486 shares of our common stock that are outstanding as of
August 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 standards, including maintaining
stockholders' equity at required levels. We are not in compliance with
this stockholders' equity standard as of June 30, 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,
* erodible mucoadhesive oral film technology,
* 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 of amlexanox,
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
12
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 June 30, 2003,
our accumulated deficit was $49,387,000, of which $8,894,000 was the
result of the write-off of excess purchase price.
On July 22, 2002 we entered into a Supply Agreement whereby Block Drug
Company ("Block") was required to produce Aphthasol(R) for us for a defined
period of time at its Puerto Rico facility. Subsequently we were advised
by Block that it was unable to produce Aphthasol(R) for us pursuant to
the Supply Agreement. In May 2003, we reached a settlement with Block
relating to this matter whereby Block made a one-time cash payment to
us and Block was relieved of its obligations under the Supply
Agreement and the Asset Sale Agreement, pursuant to which we purchased
certain assets relating to amlexanox and Aphthasol(R) from Block, and
we were relieved from certain future obligations under
the Asset Sale Agreement. An alternative supplier for Aphthasol(R)
has been identified and we are in the process of qualifying this supplier.
Initial production steps have been completed but there will be an
interruption of supply to our wholesaler until the alternate manufacturer
of Aphthasol(R) is able to commercially produce the product. Until the
product supply issues are resolved our planned marketing relaunch of
Aphthasol(R) will be delayed.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through private sales of
common stock and convertible notes and our principal source of liquidity
is cash and cash equivalents. Contract research payments, licensing fees
and milestone payments from corporate alliances and mergers have also
provided funding for operations. As of June 30, 2003 our cash and cash
equivalents were $7,471,000 and our working capital was $5,678,000.
Our working capital at June 30, 2003 represented a decrease of
$1,916,000 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 offset slightly by the income from
operations for the second quarter of 2003.
We have generally incurred negative cash flows from operations since
inception, and have expended, and expect to continue to expend in the
future, substantial funds to complete our planned product development
efforts. Since inception, our expenses have significantly exceeded
revenues, resulting in an accumulated deficit as of June 30, 2003 of
$49,387,000. 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 acquired and
developed technology. Our future capital requirements and adequacy of
available funds will depend on many factors, including:
13
* the successful commercialization of amlexanox and Zindaclin(R);
* the ability to establish and maintain collaborative arrangements with
corporate partners for the research, development and commercialization
of products;
* continued scientific progress in our research and development
programs;
* the magnitude, scope and results of preclinical testing and clinical
trials;
* the costs involved in filing, prosecuting and enforcing patent claims;
* the costs involved in conducting clinical trials;
* competing technological developments;
* the cost of manufacturing and scale-up;
* the ability to establish and maintain effective commercialization
arrangements and activities; and
* successful regulatory filings.
We have issued an aggregate of $13,530,000 of convertible notes, which
are due in two parts, $8,030,000 is due on September 13, 2005 and
$5,500,000 is due on September 13, 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 if 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
seek to restructure the terms of the notes as we near the due date for
repayment. There can be no assurance that the holders of the notes will
agree to any restructuring. Any such restructuring could have a
significant impact on our capital structure and liquidity and could cause
significant dilution to holders of our common stock.
SECOND QUARTER 2003 COMPARED TO SECOND QUARTER 2002
Our licensing revenue in the second quarter of 2003 was $447,000, as
compared to licensing revenue of $263,000 in same quarter of 2002, an
increase of $184,000. 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 $229,000 in the second quarter of
2003. Our first sales of Aphthasol(R) were recorded in December 2002.
Royalty income in the second quarter of 2003 was $7,000. No royalty
income was recorded in 2002 until the fourth quarter.
Total research spending for the second quarter of 2003 was $1,497,000,
as compared to $1,711,000 for the same period in 2002, a decrease of
$214,000. The decrease in expenses was primarily the result of:
* lower product development costs ($469,000) for products made for
our clinical trials and product testing; and
* lower clinical costs ($57,000) for our amlexanox OraDisc(TM)
clinical trial that was completed in the first quarter of 2003.
14
The decrease in expenses was partially offset by:
* higher scientific salary costs ($74,000) due to the hiring of additional
employees;
* higher expenses for our Australia laboratory ($73,000) due to
increased activity and moving laboratories;
* higher clinical costs ($70,000) for the AP5280 and AP5346 polymer
platinate clinical trials;
* higher lab costs ($68,000) for a new testing and stability lab and
personnel; and
* other net increases ($27,000).
Our cost of product sales was $104,000 in the second 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 $630,000 for the second
quarter of 2003, an increase of $59,000 as compared to the same period
in 2002. The increase in spending was due primarily to the following:
* higher patent expenses ($86,000), due to new patent applications; and
* higher professional fees ($21,000).
The above increases in spending are partially offset by:
* lower franchise taxes and licenses expenses ($35,000); and
* other net decreases ($13,000).
Depreciation and amortization was $146,000 for the second quarter of
2003 as compared to $99,000 for the same period in 2002 reflecting an
increase of $47,000. The increase in depreciation and amortization is due
to increased depreciation resulting from the acquisition of additional
capital assets and increased amortization due to patents acquired in the
Biotech Australia Pty. Limited transaction and patents acquired from
Block Drug Company.
Total operating expenses in the second quarter of 2003 were $2,377,000
as compared to total operating expenses of $2,381,000 for the same
period in 2002.
Loss from operations in the second quarter of 2003 was $1,694,000 as
compared to a loss from operations of $2,118,000 for the same period
in 2002.
Interest and miscellaneous income was $2,334,000 for the second quarter
of 2003 as compared to $127,000 for the same period in 2002, an
increase $2,207,000. The increase in miscellaneous income was due to
a one time settlement agreement with Block Drug Company relating to
Block's contractual obligation to supply Aphthasol(R) to us. Pursuant to
the settlement, Block made a onetime cash payment to us and we were
also relieved of certain future payment obligations to Block under the
Asset Sale Agreement pursuant to which we purchased from Block the
assets relating to amlexanox. Under the settlement agreement, Block was
relieved of its obligation to supply amlexanox to us. The increase in
interest and miscellaneous income was partially offset by a decrease in
interest income due to lower cash balances and lower interest rates in
2003 as compared with 2002.
Interest expense was $324,000 for the second quarter of 2003 as
compared to $317,000 for the
15
same period in 2002, an increase of $7,000.
Net income in the second quarter of 2003 was $316,000, or a $0.02
basic and diluted income per common share, compared with a net loss
of $2,308,000, or a $0.18 basic and diluted loss per common share for
the same period in 2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Our licensing revenue in the first six months of 2003 was $533,000, as
compared to $379,000 in the same period of 2002. 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 $532,000 in the first six months
of 2003. Our first sales of Aphthasol(R) were recorded in December
2002.
Royalty income for the first six months of 2003 was $11,000. No royalty
was recorded in 2002 until the fourth quarter.
Total research spending for the first six months of 2003 was $3,294,000,
as compared to $3,034,000 for the same period in 2002, an increase of
$260,000. The increase in expenses was the result of:
* higher development costs for our OraDisc(TM) ($354,000) program
and polymer platinate programs ($175,000);
* higher scientific salary costs ($201,000) principally due to the hiring
of additional employees;
* higher expenses associated with our Australian laboratory which we
acquired in February 2002 ($154,000);
* higher lab costs ($118,000) for a new stability lab and personnel and
* other net increases ($11,000).
The increase in expenses was partially offset by:
* lower product development costs ($663,000) for products made for
our clinical trials and product testing; and
* lower clinical costs ($90,000) for our amlexanox gel clinical trial that
was completed in the first quarter of 2002.
Our cost of product sales was $213,000 for the first six months 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 $1,167,000 for the first
six months of 2003, an increase of $97,000 as compared to the same
period in 2002. The increase in general and administrative expenses was
due primarily to the following:
* higher patent expenses ($137,000);
* higher rent ($15,000); and
* other net increases ($4,000).
16
These general and administrative expense increases were partially offset
by:
* lower taxes and licenses ($39,000);
* lower salaries ($10,000); and
* lower professional fees ($10,000).
Depreciation and amortization was $290,000 for the first six months of
2003 as compared to $156,000 for the same period in 2002 reflecting an
increase of $134,000. The increase in depreciation and amortization is
due to increased depreciation resulting from the acquisition of additional
capital assets and increased amortization due to patents acquired in the
Biotech Australia Pty. Limited transaction and patents acquired from
Block Drug Company.
Total operating expenses in the first six months of 2003 were $4,964,000
as compared to total operating expenses of $4,260,000 for the same
period in 2002.
Loss from operations in the first six months of 2003 was $3,888,000 as
compared to a loss of $3,881,000 for the same period in 2002.
Interest and miscellaneous income was $2,432,000 for the first six
months of 2003 as compared to $341,000 for the same period in 2002,
an increase of $2,091,000. The increase in miscellaneous income was
due to a one-time settlement agreement with Block Drug Company
relating to Block's contractual obligation to supply Aphthasol(R) to us.
Pursuant to the settlement, Block made a one-time cash payment to us
and we were also relieved of certain future payment obligations to Block
under the Asset Sale Agreement pursuant to which we purchased from
Block the assets relating to amlexanox. Under the settlement agreement,
Block was relieved of its obligation to supply amlexanox to us. The
increase in interest and miscellaneous income was partially offset by a
decrease in interest income due to lower cash balances and lower interest
rates in 2003 as compared with 2002.
Interest expense was $639,000 for the first six months of 2003 as
compared to $634,000 for the same period in 2002, an increase of
$5,000.
Net loss in the first six months of 2003 was $2,095,000, or a $0.16
basic and diluted loss per common share, compared with a loss of
$4,174,000, or a $0.32 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 June 30, 2003. We
do not believe that we are exposed to any other market risks, as defined.
We are not exposed to risks for changes in commodity prices, or any
other market risks.
17
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation Of Disclosure Controls And Procedures: We maintain
disclosure controls and procedures designed to ensure that we are able
to collect the information that we are required to disclose in the reports
we file with the Securities and Exchange Commission, or the SEC, and
to process, summarize and disclose this information within the time
periods specified in the rules of the SEC. Based on their evaluation of
our disclosure controls and procedures (defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of June 30, 2003, the Chief Executive and
Chief Financial Officers have concluded that such disclosure controls and
procedures are effective to ensure that information required to be
disclosed in our periodic reports filed under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and regulations.
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 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: No changes in our internal controls
over financial reporting occurred during the quarter ended June 30, 2003
that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
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. Hall brings 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 promise to deliver to
Hall 45,000 warrants to purchase Access stock. Hall alleges in his
complaint and in a subsequent letter that the warrants, had they been
delivered, would have been worth $490,000. He seeks as damages this
amount, his attorney's fees, and an unstated amount of punitive
damages. Access has asserted counterclaims against Hall relating to
alleged misrepresentations and his interference with Access' right to
enjoy certain contractual benefits. Discovery, substantive fact
investigation, and legal analysis are in their initial stages. Access intends
to be vigorous in both defense of Hall's claims and its pursuit of its
counterclaims.
ITEM 2 CHANGES IN SECURITIES
None
18
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 19, 2003 in New
York, NY. At that meeting the following matters were submitted to a
vote of the stockholders of record. The proposals were approved by the
stockholders, as follows:
* Three directors were re-elected for three year terms with the
following votes:
Stuart M Duty; 9,216,132 - For; and 142,970 - Withheld Authority
Stephen B, Howell; 9,216,091 - For; and 143,010 - Withheld Authority
* The terms of office as a director of Access of each of J. Michael
Flinn, Kerry P. Gray, Max Link, Herbert H. McDade, Jr. and John J.
Meakem, Jr. continued after the meeting.
* A proposal to amend our 1995 Stock Option Plan to increase the total
number of shares of our common stock authorized for issuance under
that plan to 2,500,000 shares was approved with 7,458,718 - For;
1,873,506 - Against; and 26,877 - Abstain.
* A proposal to ratify the appointment of Grant Thornton LLP as
independent certified public accountants for the Company for the fiscal
year ending December 31, 2003 was approved with 9,323,066 - For;
13,833 - Against; and 22,202 - Abstain.
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
31.1 Certification of Chief Executive Officer of Access
Pharmaceuticals, Inc. pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer of Access Pharmaceuticals,
Inc. pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Financial Statements by Chief Executive Officer
of Access Pharmaceuticals, Inc. pursuant to 18 U.S.C. Section 1350
32.2 Certification of Financial Statements by Chief Financial Officer of
Access Pharmaceuticals, Inc. pursuant to 18 U.S.C. Section 1350
19
Reports on Form 8-K:
* On April 1, 2003, under Item 5, Other Events, announcing results for
the year end results for the year ended December 31, 2002.
* On May 16, 2003, under Item 5, Other Events, announcing financial
results for quarter ended March 31, 2003.
* On August 8, 2003, under Item 9, Regulation FD Disclosure,
mentioning financial performance for the quarter ended June 30, 2003.
* On August 12, 2003, under Item 9, Regulation FD Disclosure,
summarizing financial results for the quarter ended June 30, 2003.
20
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACCESS PHARMACEUTICALS, INC.
Date: August 14, 2003 By: /s/ Kerry P. Gray
-----------------------------
Kerry P. Gray
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2003 By: /s/ Stephen B. Thompson
-----------------------------
Stephen B. Thompson
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
21
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2003 December 31, 2002
-------------- --------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 3,290,000 $ 1,444,000
Short term investments, at cost 4,181,000 8,332,000
Accounts receivable 1,004,000 1,184,000
Accrued interest receivable 77,000 89,000
Inventory 205,000 461,000
Prepaid expenses and other
current assets 591,000 852,000
-------------- --------------
Total current assets 9,348,000 12,362,000
-------------- --------------
Property and equipment, net 968,000 742,000
Debt issuance costs, net 404,000 496,000
Patents, net 2,821,000 2,991,000
Licenses, net 408,000 449,000
Goodwill, net 1,868,000 1,868,000
Other assets 523,000 579,000
-------------- --------------
Total assets $ 16,340,000 $ 19,487,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses $ 1,553,000 $ 2,469,000
Accrued interest payable 832,000 311 000
Deferred revenues 992,000 1,199,000
Current portion of note payable and
other future obligations 293,000 789,000
-------------- --------------
Total current liabilities 3,670,000 4,768,000
Long-term obligations for purchased
patents 185,000 346,000
Note payable, net of current portion 294,000 354,000
Convertible notes 13,530,000 13,530,000
-------------- --------------
Total liabilities 17,679,000 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, 13,276,924 at June 30, 2003
and 13,159,119 at December 31, 2002 133,000 132,000
Additional paid-in capital 49,317,000 48,989,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted stock grants (342,000) (277,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Accumulated other comprehensive loss (11,000) (14,000)
Accumulated deficit (49,387,000) (47,292,000)
-------------- --------------
Total stockholders' equity (deficit) (1,339,000) 489,000
-------------- --------------
Total liabilities and stockholders'
equity (deficit) $ 16,340,000 $ 19,487,000
============== ==============
The accompanying notes are an integral part of these statements.
23
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Licensing revenues $ 447,000 $ 263,000 $ 533,000 $ 379,000
Product sales 229,000 - 532,000 -
Royalty income 7,000 - 11,000 -
------------ ------------ ------------ ------------
Total revenues 683,000 263,000 1,076,000 379,000
Expenses
Research and development 1,497,000 1,711,000 3,294,000 3,034,000
Cost of product sales 104,000 - 213,000 -
General and administrative 630,000 571,000 1,167,000 1,070,000
Depreciation and amortization 146,000 99,000 290,000 156,000
------------ ------------ ------------ ------------
Total expenses 2,377,000 2,381,000 4,964,000 4,260,000
------------ ------------ ------------ ------------
Loss from operations (1,694,000) (2,118,000) (3,888,000) (3,881,000)
Other income (expense)
Interest and miscellaneous
income 2,334,000 127,000 2,432,000 341,000
Interest and expense (324,000) (317,000) (639,000) (634,000)
------------ ------------ ------------ ------------
2,010,000 (190,000) 1,793,000 (293,000)
------------ ------------ ------------ ------------
Net income (loss) $ 316,000 $(2,308,000) $(2,095,000) $(4,174,000)
============ ============ ============ ============
Basic and diluted income
(loss) per common share $0.02 $(0.18) $(0.16) $(0.32)
============ ============ ============ ============
Weighted average basic
common shares outstanding 13,218,747 13,159,728 13,209,375 13,047,618
============ ============ ============ ============
Weighted average diluted
common shares outstanding 18,965,077 13,159,728 13,209,375 13,047,618
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
24
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months ended June 30,
--------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss $(2,095,000) $(4,174,000)
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 45,000 27,000
Depreciation and amortization 291,000 159,000
Amortization of debt costs 92,000 92,000
Change in operating assets and liabilities:
Accounts receivable 180,000 (494,000)
Accrued interest receivable 12,000 18,000
Inventory 256,000 -
Prepaid expenses and other current assets 261,000 30,000
Other assets 56,000 78,000
Accounts payable and accrued expenses (916,000) (128,000)
Accrued interest payable 521,000 521,000
Deferred revenue (207,000) (21,000)
------------ ------------
Net cash used in operating activities (1,474,000) (3,855,000)
------------ ------------
Cash flows from investing activities:
Capital expenditures (306,000) (316,000)
Redemptions of short term investments and
certificates of deposit 4,151,000 2,900,000
Purchase of business and assets,
net of cash acquired - (526,000)
------------ ------------
Net cash provided by investing activities 3,845,000 2,058,000
------------ ------------
Cash flows from financing activities:
Payments of notes payable and
long-term obligations (717,000) (53,000)
Proceeds from stock issuances 189,000 32,000
------------ ------------
Net cash provided by (used in)
financing activities (528,000) (21,000)
------------ ------------
Net increase (decreases) in cash and
cash equivalents 1,843,000 (1,818,000)
Effect of exchange rate changes on cash 3,000 -
Cash and cash equivalents at
beginning of period 1,444,000 7,426,000
------------ -----------
Cash and cash equivalents at end of period $3,290,000 $5,608,000
============ ===========
Supplemental disclosure of noncash transactions
Assets acquired 244,000 -
The accompanying notes are an integral part of these statements.
25
Access Pharmaceuticals, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2003 and 2002
(unaudited)
(1) Interim Financial Statements
The consolidated balance sheet as of June 30, 2003 and the consolidated
statements of operations and cash flows for the three and six months
ended June 30, 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 June 30, 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 rules, goodwill is no longer amortized but is subject
to an impairment test at least annually or more frequently if impairment
indicators arise. Intangible assets with defined lives, namely licenses and
acquired patents, we continue to amortize 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.
Intangible assets consist of the following (in thousands):
June 30, 2003 December 31, 2002
------------------------- -------------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
------------ ------------ ------------ ------------
Amortizable intangible assets
Patents $ 3,178 $ 357 $ 3,178 $ 187
Licenses 830 422 830 381
------------ ------------ ------------ ------------
Total $ 4,008 $ 779 $ 4,008 $ 568
============ ============ ============ ============
26
Amortization expense related to intangible assets totaled $106,000 and
$28,000 for the three months ended June 30, 2003 and 2002,
respectively and totaled $211,000 and $96,000 for the six months ended
June 30, 2003 and 2002, respectively. The aggregate estimated
amortization expense for intangible assets remaining as of June 30, 2003
is as follows (in thousands):
2003 $ 210
2004 421
2005 421
2006 421
2007 396
Thereafter 1,360
-------
Total $3,229
=======
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. We apply APB Opinion 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for our grants to
employees, directors and consultants. All our options have been issued
with an exercise price equal to our stock's market price. The following
table illustrates the effect on net income (loss) and earnings (loss) per
share if we had applied the fair value recognition provisions of FASB
Statement 123, Accounting for Stock-Based Compensation, using
assumptions described in Form 10-K, Note 10, to our stock-based
employee plans.
Three months ended June 30, Six months ended June 30,
------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss)
As reported $ 316,000 $(2,308,000) $(2,095,000) $(4,174,000)
Deduct: Stock-based employee
compensation expense
determined under fair value
based method, net
of related tax effects (203,000) (54,000) (365,000) (1,040,000)
------------ ------------ ------------ ------------
Pro forma $ 113,000 $(2,362,000) $(2,460,000) $(5,268,000)
============ ============ ============ ============
Basic and diluted earnings (loss)
per share:
As reported $0.02 $(0.18) $(0.16) $(0.32)
Pro forma 0.01 (0.18) (0.19) (0.40)
27
Exhibit 31.1
CERTIFICATION
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-15(e) and 15d-15(e)) for the
registrant and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision
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. [Omitted pursuant to SEC Final Rule Release 33-8238]
c. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this quarterly report based on such evaluation;
and
d. Disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant's internal control
over financial reporting .
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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; 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.
Date: August 14, 2003
/s/ Kerry P. Gray
- -----------------
Kerry P. Gray
President and Chief Executive Officer
Exhibit 31.1
CERTIFICATION
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-15(e) and 15d-15(e)) for the
registrant and we have:
a. Designed such disclosure controls and procedures , or caused such
disclosure controls and procedures to be designed under our supervision,
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. [Omitted pursuant to SEC Final Rule Release 33-8238]
c. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this quarterly report based on such evaluation;
and
d.Disclosed in this quarterly report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2003
/s/ Stephen B. Thompson
- -----------------------
Stephen B. Thompson
Chief Financial Officer
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
The certification set forth below is hereby made solely for the purpose
of satisfying the requirements of Section 906 of the Sarbanes-Oxley Act
of 2002 and may not be relied upon or used for any other purposes.
In connection with the Quarterly Report of Access Pharmaceuticals, Inc.
(the "Company") on Form 10-Q for the period ended June 30, 2003, as
filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Kerry P. Gray, President and Chief Executive Officer
certify pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes Oxley Act of 2002, that to my knowledge (1) the Report
fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and (2) the information contained in the
Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
A signed original of this written statement required by Section 906 or
other document authenticating, acknowledging or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Signed at the City of Dallas, in the State of Texas, this 14th day of
August, 2003.
/s/ Kerry P. Gray
- ------------------
Kerry P. Gray
President and Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
The certification set forth below is hereby made solely for the purpose
of satisfying the requirements of Section 906 of the Sarbanes-Oxley Act
of 2002 and may not be relied upon or used for any other purposes.
In connection with the Quarterly Report of Access Pharmaceuticals, Inc.
(the "Company") on Form 10-Q for the period ended June 30, 2003, as
filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Stephen B. Thompson, Chief Financial Officer certify
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002, that to my knowledge (1) the Report fully
complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and (2) the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
A signed original of this written statement required by Section 906 or
other document authenticating, acknowledging or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Signed at the City of Dallas, in the State of Texas, this 14th day of
August, 2003.
/s/ Stephen B. Thompson
- -----------------------
Stephen B. Thompson
Chief Financial Officer