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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 SEPTEMBER 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 November 14, 2003 was
13,351,358 shares of common stock, $0.01 par value per share.
Total No. of Pages 26
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ACCESS PHARMACEUTICALS, INC.
INDEX
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Page No.
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RISK FACTORS 2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 2003
and December 31, 2002 22
Condensed Consolidated Statements of Operations and Comprehensive
Loss for the three and nine months ended September 30, 2003 and
September 30, 2002 23
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2003 and September 30, 2002 24
Notes to Unaudited Condensed Consolidated Financial Statements 25
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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 Form 10-Q,
the Annual Report on Form 10-K as of December 31, 2002,
documents incorporated by reference, and other documents and
reports that we file periodically with the Securities and
Exchange Commission. Forward-looking statements contained in
this Form 10-Q include, but are not limited to our plan to
commence full scale production of Aphthasol(R) in the fourth
quarter of 2003 and our ability to achieve compliance with American
Stock Exchange continued listing requirements.
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 $51.6 million
through September 30, 2003. Losses for the first nine months
of 2003 were $4.3 million and for the years ended
2002, 2001 and 2000 were $9.4, $6.0 and $5.4 million,
respectively. 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. Our net cash burn rate for the first nine months of
2003 was $471,000 per month. We project our net cash burn rate
for the next twelve months to be approximately $500,000 per
month. Capital expenditures are forecasted to be minor for the
next twelve months since most of our new equipment is leased
and the lease expense is included in the calculation of the
net cash burn rate.
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
will need to raise substantial additional capital during that
period to support our ongoing operations because our actual
cash requirements may vary materially from those now planned
and will
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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.
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
o Strakan Ltd. - United Kingdom and Ireland manufacturing and marketing rights
o Zambon Group - France, Germany, Holland, Belgium, Luxembourg, Switzerland,
Brazil, Colombia and Italy manufacturing and marketing rights
o Laboratories Dr. Esteve SA - Spain, Portugal and Greece manufacturing
and marketing rights
o Meda, AB for Scandinavia, the Baltic states and Iceland marketing rights
o Mipharm SpA for Italy manufacturing and marketing rights
o Paladin Labs, Inc. for Canada manufacturing and marketing rights
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* Zindaclin(R) and Residerm(R)
o Strakan Ltd. - worldwide manufacturing and marketing rights
o Fujisawa GmbH - sublicensed continental Europe marketing rights
o Taro - sublicensed Israel marketing rights
o 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.
Furthermore, our strategy with respect to our polymer platinate
program is to enter into a licensing agreement with a pharmaceutical
company pursuant to which the further costs of developing a product
would be shared with with our licensing partner. Although we have
had discussions with potential licensing partners with respect to
our polymer platinate program, to date we have not entered into
any licensing arrangement. We may be unable to execute our licensing
strategy for polymer platinate.
We may be unable to successfully manufacture our products and
our product candidates in clinical quantities or for
commercial purposes without the assistance of contract
manufacturers, which may be difficult for us to obtain and maintain.
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We have 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 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).
Block Drug Company had 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. At such time we entered into a Supply Agreement
whereby Block Drug Company was to produce Aphthasol(R) for us
for a defined period of time at its Puerto Rico facility. We
were subsequently advised by Block Drug Company that it is
unable to comply with the terms of the Supply Agreement and
that it would not be able to produce Aphthasol(R) for us. Due
to Block Drug Company's production failure, we had sufficient
product to supply wholesalers only through June 2003. We do
not anticipate
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further sales of the product until the first quarter
of 2004. We acquired the rights to amlexanox 5% paste from Block
Drug Company on July 22, 2002. We have selected Contract
Pharmaceuticals Ltd. Canada as our new manufacturer of
amlexanox 5% paste and it has produced initial qualifying
batches of the product. Full scale production is planned to
commence in the first quarter of 2004.
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
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. 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. The status of our
principal products is 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.
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* 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.
Government regulation also affects the manufacturing and
marketing of pharmaceutical products. Government regulations
may delay marketing of our potential drugs for a considerable
or indefinite period of time, impose costly procedural
requirements upon our activities and furnish a competitive
advantage to larger companies or companies more experienced in
regulatory affairs. Delays in obtaining governmental
regulatory approval could adversely affect our marketing as
well as our ability to generate significant revenues from
commercial sales. Our drug candidates may not receive FDA or
other regulatory approvals on a timely basis or at all.
Moreover, if regulatory approval of a drug candidate is
granted, such approval may impose limitations on the indicated
use for which such drug may be marketed. Even if we obtain
initial regulatory approvals for our drug candidates, we, and
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
7
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, 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.
The following products may compete with polymer platinum
(AP5280) and DACH platinum (AP5346):
* Cisplatin, marketed by Bristol-Myers-Squibb, the originator of
the drug, and several generic manufacturers;
* Carboplatin, marketed exclusively by Bristol-Myers-Squibb; and
* Oxaliplatin, marketed exclusively by Sanofi-Synthelabo.
The following companies are working on therapies and
formulations that may be competitive with our polymer platinum
(AP5280) and DACH platinum (AP5346):
* Antigenics is developing liposomal formulations; and
* Cell Therapeutics, Daiichi, Enzon, Inhale and Pharmacia are
developing alternate drugs in combination with polymers.
The following products may compete with our Residerm(R)
products:
* Benzamycin, marketed by a subsidiary of Aventis;
* Cleocin-T and a generic topical clindamycin, marketed by
Pharmacia;
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* Benzac, marketed by a subsidiary of L'Oreal; and
* Triaz, marketed by Medicis Pharmaceutical Corp.
Technology and prescription steroids such as Kenalog in
OraBase, developed by Bristol-Myers Squibb, may compete with
our commercialized Aphthasol(R) product. OTC products including
Orajel - Del Laboratories and Anbesol - Wyeth Consumer Healthcare
also compete in the aphthous ulcer market.
Companies working on therapies and formulations that may be
competitive with our vitamin mediated drug delivery system are
Bristol-Myers-Squibb, Centocor (acquired by Johnson &
Johnson), GlaxoSmithKline, Imclone and Xoma who are developing
targeted monoclonal antibody therapy.
RxKinetics, Human Genome Sciences, Endo Pharmaceuticals and Amgen are
developing products to treat mucositis that may compete with the
mucoadhesive liquid technology.
Emisphere Technologies, Inc., Biovail Corporation, CMA Labs and Flamel
Technologies are developing products which
compete with our oral drug delivery system.
Many of these competitors have and employ greater financial
and other resources, including larger research and development
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 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.
9
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, the 5% amlexanox paste product 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 in the
first quarter of 2004. The product has been approved in the UK and
Canada but has not been launched 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 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
technology to 23 U.S. patents and to 18 U.S. patent
applications now pending, and 6 European and 15 European
patent applications, we cannot
10
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 in the years
and during the date ranges indicated below:
* 5% amlexanox paste in 2011
* Zindaclin(R) and Residerm(R) between 2007 and 2011
* OraDisc(TM) in 2020
* AP5280 in 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, 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.
11
Ownership of our shares is concentrated, to some extent, in
the hands of a few investors which could limit the ability of
our other stockholders to influence the direction of the company.
- -----------------------------------------------------------------
Heartland Advisors, Inc. and Larry N. Feinberg (Oracle
Partners LP, Oracle Institutional Partners LP and Oracle
Investment Management Inc.) each currently beneficially own
approximately 13.9% of our common stock as of November 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.
- ---------------------------------------------------------------
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 13,351,358 shares of our common stock that
are outstanding as of November 14, 2003 are unrestricted and
freely tradable or tradable pursuant to a resale registration
statement or under Rule 144 of the Securities Act.
We are not currently in compliance with AMEX continued listing
requirements and may not be able to maintain our AMEX listing.
- --------------------------------------------------------------
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 September 30, 2003.
However, we have until November 2004 to become compliant with
such equity standard. If we are unable to remedy any listing
standard noncompliance with AMEX under its regulations, or
otherwise regain compliance, 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.
12
ITEM 1 FINANCIAL STATEMENTS
The response to this Item is submitted as a separate section
of this report.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain statements
that are forward-looking within the meaning of Section 27a of
the Securities Act of 1933 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 Form 10-Q,
the Annual Report on Form 10-K as of December 31, 2002 and
documents incorporated by reference and other documents and
other documents and reports that we file periodically with the
Securities and Exchange Commission. Forward-looking statements
contained in this Form 10-Q include, but are not limited to
our plan to commence full scale production of Aphthasol(R) in
the first quarter of 2004.
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 Aphthasol(R) in the United States,
which is 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 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
13
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
September 30, 2003, our accumulated deficit was $51,593,000,
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 had purchased certain assets relating to amlexanox
and Aphthasol(R) from Block, and we were relieved from certain
future obligations under the Asset Sale Agreement. We have
selected Contract Pharmaceuticals Ltd. Canada as an
alternative supplier for Aphthasol(R) and it has produced
initial qualifying batches of the product. Full scale
production is planned to commence in the first quarter of
2004 but there has been an interruption of supply to our
wholesaler until Contract Pharmaceuticals Ltd. Canada is able
to commercially produce the product and FDA approval is received
for this alternate manufacturing site. Until these 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 September 30, 2003 our cash and cash
equivalents were $4,361,000 and our working capital was
$3,406,000. Our working capital at September 30, 2003
represented a decrease of $4,188,000 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 nine months ended September 30, 2003 offset
by the miscellaneous income received in 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 September 30, 2003 of $51,593,000.
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:
14
* 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,
2007. 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.
THIRD QUARTER 2003 COMPARED TO THIRD QUARTER 2002
Our licensing revenue in the third quarter of 2003 was $4,000,
as compared to licensing revenue of $2,000 in same quarter of
2002, an increase of $2,000. 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).
As a result of the supply situation discussed above, there
were no product sales of Aphthasol(R) in the third quarter of 2003.
In the third quarter of 2002 we had a research and development
agreement which provided $89,000 in revenue. The agreement
expired in 2002.
Royalty income in the third quarter of 2003 was $7,000. No
royalty income was recorded in 2002 until the fourth quarter.
Total research spending for the third quarter of 2003 was
$1,254,000, as compared to $2,181,000 for the same period in
2002, a decrease of $927,000. The decrease in expenses was
primarily the result of:
* lower product development costs ($511,000) for products made
for our clinical trials and
15
product testing; and
* lower clinical costs ($580,000) for our amlexanox
OraDisc(TM) clinical trial that was completed in the first
quarter of 2003.
The decrease in expenses was partially offset by:
* higher scientific salary costs ($26,000) due to the hiring
of additional employees;
* higher expenses for our Australia laboratory ($85,000) due
to increased activity and moving laboratories;
* higher clinical costs ($22,000) for the AP5280 and AP5346
polymer platinate clinical trials; and
* other net increases ($31,000).
Our cost of product sales was $30,000 in the third 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 $512,000 for
the third quarter of 2003, an increase of $63,000 as compared
to the same period in 2002. The increase in spending was due
primarily to the following:
* higher professional fees ($33,000);
* higher salaries and related expenses ($9,000); and
* other net increases ($21,000).
Depreciation and amortization was $158,000 for the second
quarter of 2003 as compared to $136,000 for the same period in
2002 reflecting an increase of $22,000. 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 third quarter of 2003 were
$1,954,000 as compared to total operating expenses of
$2,766,000 for the same period in 2002.
Loss from operations in the third quarter of 2003 was
$1,943,000 as compared to a loss from operations of $2,675,000
for the same period in 2002.
Interest and miscellaneous income was $54,000 for the third
quarter of 2003 as compared to $132,000 for the same period in
2002, a decrease $78,000. The decrease in interest income is
due to lower cash balances and lower interest rates in 2003 as
compared with 2002.
Interest expense was $317,000 for the third quarter of 2003 as
compared to $315,000 for the same period in 2002, an increase
of $2,000.
Net loss in the third quarter of 2003 was $2,206,000, or a
$0.17 basic and diluted income per common share, compared with
a net loss of $2,858,000, or a $0.22 basic and diluted loss
per common share for the same period in 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2002
Our licensing revenue in the first nine months of 2003 was
$537,000, as compared to $381,000 in
16
the same period of 2002 an increase of $156,000. 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).
In the first nine months of 2002 we had a research and
development agreement which provided $89,000 in revenue. The
agreement expired in 2002.
Product sales of Aphthasol(R) totaled $532,000 in the first
nine months of 2003. Our first sales of Aphthasol(R) were
recorded in December 2002.
Royalty income for the first nine months of 2003 was $18,000.
No royalty income was recorded in 2002 until the fourth
quarter.
Total research spending for the first nine months of 2003 was
$4,548,000, as compared to $5,215,000 for the same period in
2002, a decrease of $667,000. The decrease in expenses was the
result of:
* lower product development costs ($1,024,000) for products
made for our clinical trials and product testing; and
* lower clinical costs ($260,000) for our OraDisc(TM) clinical
trial completed in 2003 and ($41,000) for our amlexanox gel
clinical trial that was completed in the first quarter of 2002.
The decrease in expenses was partially offset by:
* higher development costs for our polymer platinate programs ($172,000);
* higher scientific salary costs ($208,000) principally due to
the hiring of additional employees;
* higher expenses associated with our Australian laboratory
which we acquired in February 2002 ($239,000);
* higher lab costs ($25,000) for a new stability lab; and
* other net increases ($14,000).
Our cost of product sales was $243,000 for the first nine
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 $1,679,000 for
the first nine months of 2003, an increase of $160,000 as
compared to the same period in 2002. The increase in general
and administrative expenses was due primarily to the
following:
* higher patent expenses ($106,000);
* higher rent ($29,000);
* higher professional fees ($24,000) and
* other net increases ($25,000).
These general and administrative expense increases were
partially offset by lower taxes and licenses ($24,000).
Depreciation and amortization was $448,000 for the first nine
months of 2003 as compared to
17
$292,000 for the same period in
2002 reflecting an increase of $156,000. 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 nine months of 2003 were
$6,918,000 as compared to total operating expenses of
$7,026,000 for the same period in 2002.
Loss from operations in the first nine months of 2003 was
$5,831,000 as compared to a loss of $6,556,000 for the same
period in 2002.
Interest and miscellaneous income was $2,486,000 for the first
nine months of 2003 as compared to $473,000 for the same
period in 2002, an increase of $2,013,000. 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 had
purchased from Block certain 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 $956,000 for the first nine months of
2003 as compared to $949,000 for the same period in 2002, an
increase of $7,000.
Net loss in the first nine months of 2003 was $4,301,000, or
a $0.32 basic and diluted loss per common share, compared with
a loss of $7,032,000, or a $0.54 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 $23,000. The estimated effect assumes
no changes in our short-term investments at September 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.
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 September
30, 2003, the Chief Executive
18
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 September 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
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
19
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
Reports on Form 8-K:
On August 8, 2003, under Item 9, Regulation FD Disclosure, mentioning
financial performance for the quarter ended June 30, 2003.
On August 14, 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: November 14, 2003 By:/s/ Kerry P. Gray
-----------------------
Kerry P. Gray
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 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
September 30, 2003 December 31, 2002
ASSETS -------------- --------------
(unaudited)
Current assets
Cash and cash equivalents $ 446,000 $ 1,444,000
Short term investments, at cost 3,915,000 8,332,000
Accounts receivable 565,000 1,184,000
Accrued interest receivable 77,000 89,000
Inventory 345,000 461,000
Prepaid expenses and other
current assets 600,000 852,000
------------- -------------
Total current assets 5,948,000 12,362,000
Property and equipment, net 941,000 742,000
Debt issuance costs, net 358,000 496,000
Patents, net 2,737,000 2,991,000
Licenses, net 388,000 449,000
Goodwill 1,868,000 1,868,000
Other assets 494,000 579,000
------------- -------------
Total assets $ 13,029,000 $ 19,487,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses $ 1,209,000 $ 2,469,000
Accrued interest payable 51,000 311,000
Deferred revenues 988,000 1,199,000
Current portion of note payable and
other future obligations 294,000 789,000
------------- -------------
Total current liabilities 2,542,000 4,768,000
Long-term obligations for
purchased patents 201,000 346,000
Note payable, net of current portion 264,000 354,000
Convertible notes 13,530,000 13,530,000
------------- -------------
Total liabilities 16,537,000 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, 13,298,606 at September
30, 2003 and 13,159,119 at
December 31, 2002 133,000 132,000
Additional paid-in capital 49,347,000 48,989,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted
stock grants (318,000) (277,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Accumulated other comprehensive loss (28,000) (14,000)
Accumulated deficit (51,593,000) (47,292,000)
------------- -------------
Total stockholders' equity (deficit) (3,508,000) 489,000
------------- -------------
Total liabilities and stockholders'
equity (deficit) $13,029,000 $19,487,000
============= =============
The accompanying notes are an integral part of these statements.
22
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Licensing revenues $ 4,000 $ 2,000 $ 537,000 $ 381,000
Product sales - - 532,000 -
Research and development - 89,000 - 89,000
Royalty income 7,000 - 18,000 -
----------- ------------ ------------ ------------
Total revenues 11,000 91,000 1,087,000 470,000
Expenses
Research and development 1,254,000 2,181,000 4,548,000 5,215,000
Cost of product sales 30,000 - 243,000 -
General and administrative 512,000 449,000 1,679,000 1,519,000
Depreciation and amortization 158,000 136,000 448,000 292,000
----------- ------------ ------------ ------------
Total expenses 1,954,000 2,766,000 6,918,000 7,026,000
----------- ------------ ------------ ------------
Loss from operations (1,943,000) (2,675,000) (5,831,000) (6,556,000)
Other income (expense)
Interest and miscellaneous
income 54,000 132,000 2,486,000 473,000
Interest expense (317,000) (315,000) (956,000) (949,000)
------------ ------------ ------------ ------------
(263,000) (183,000) 1,530,000 (476,000)
------------ ------------ ------------ ------------
Net loss $(2,206,000) $(2,858,000) $(4,301,000) $(7,032,000)
============ ============ ============ ============
Basic and diluted loss per
common share $(0.17) $(0.22) $(0.32) $(0.54)
============ ============ ============ ============
Weighted average basic and
diluted common shares
outstanding 13,287,563 13,160,043 13,235,725 13,085,505
============ ============ ============ ============
Net loss $(2,206,000) $(2,858,000) $(4,301,000) $(7,032,000)
Other comprehensive loss
Foreign currency translation
adjustment (17,000) (18,000) (14,000) (18,000)
------------ ------------ ------------ ------------
Comprehensive loss $(2,223,000) $(2,876,000) $(4,315,000) $(7,050,000)
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
23
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months ended September 30,
------------------------------
2003 2002
-------------- --------------
Cash flows from operating activities:
Net loss $ (4,301,000) $ (7,032,000)
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 69,000 46,000
Depreciation and amortization 448,000 292,000
Amortization of debt costs 138,000 137,000
Other long-term obligations - 29,000
Change in operating assets and liabilities:
Accounts receivable 619,000 (53,000)
Accrued interest receivable 12,000 20,000
Inventory 116,000 -
Prepaid expenses and other current assets 252,000 (171,000)
Other assets 85,000 103,000
Accounts payable and accrued expenses (1,260,000) 169,000
Accrued interest payable (260,000) (261,000)
Deferred revenue (211,000) (32,000)
------------- --------------
Net cash used in operating activities (4,263,000) (6,716,000)
------------- --------------
Cash flows from investing activities:
Capital expenditures (332,000) (387,000)
Redemptions of short term investments and
certificates of deposit 4,122,000 2,900,000
Purchase of assets - (1,312,000)
------------- --------------
Net cash provided by investing activities 3,790,000 1,201,000
------------- --------------
Cash flows from financing activities:
Payments of notes payable and long-term
obligations (730,000) (80,000)
Proceeds from stock issuances 219,000 32,000
------------- -------------
Net cash used in financing activities (511,000) (48,000)
------------- -------------
Net decreases in cash and cash equivalents (984,000) (5,563,000)
Effect of exchange rate changes on cash (14,000) (18,000)
Cash and cash equivalents at beginning of period 1,444,000 7,426,000
------------- -------------
Cash and cash equivalents at end of period $ 446,000 $ 1,845,000
============= =============
Supplemental disclosure of noncash transactions
Assets acquired as result of settlement $ 244,000 $ -
The accompanying notes are an integral part of these statements.
24
Access Pharmaceuticals, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2003 and 2002
(unaudited)
(1) Interim Financial Statements
The consolidated balance sheet as of September 30, 2003 and
the consolidated statements of operations and cash flows for
the three and nine months ended September 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 of America have
been condensed or omitted. It is suggested that these interim financial
statements be read in conjunction with the financial
statements and notes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2002. The results of
operations for the period ended September 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 142, "Goodwill and Other
Intangible Assets." Under SFAS 142, 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,
are amortized 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):
September 30, 2003 December 31, 2002
------------------------- -------------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
------------ ------------ ------------ ------------
Amortizable intangible assets
Patents $ 3,178 $ 441 $ 3,178 $ 187
Licenses 830 442 830 381
---------- ---------- ----------- ----------
Total $ 4,008 $ 883 $ 4,008 $ 568
========== ========== =========== ==========
We tested goodwill for impairment based on estimates of fair value. It is at
least reasonably possible that the estimates used by us will be materially
different from actual amounts. These
25
differences could result in the impairment of all or a portion of our
goodwill, which could have a materially adverse effect on our results
of operations.
Amortization expense related to intangible assets totaled
$104,000 and $92,000 for the three months ended September 30,
2003 and 2002, respectively and totaled $315,000 and $188,000
for the nine months ended September 30, 2003 and 2002,
respectively. The aggregate estimated amortization expense for
intangible assets remaining as of September 30, 2003 is as
follows (in thousands):
2003 $ 105
2004 421
2005 421
2006 421
2007 396
Thereafter 1,361
-------
Total $3,125
=======
(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 and directors. All of
our options have been issued with an exercise price equal to
our stock's market price. The following table illustrates the
effect on net loss and loss per share if we had applied the
fair value recognition provisions of FASB Statement 123,
Accounting for Stock-Based Compensation, using assumptions
described in Form 10-K, Note 10, to our stock-
based employee plans.
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss
As reported $(2,206,000) $(2,858,000) $(4,301,000) $(7,032,000)
Deduct: Stock-based employee
compensation expense determined
under fair value based method - (28,000) (365,000) (1,068,000)
------------ ------------ ------------ ------------
Pro forma $(2,206,000) $(2,886,000) $(4,666,000) $(8,100,000)
============ ============ ============ ============
Basic and diluted loss
per share:
As reported $(0.17) $(0.22) $(0.32) $(0.54)
Pro forma (0.17) (0.22) (0.35) (0.62)
26