Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
Commission File Number 0-9314
ACCESS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 83-0221517
- ------------------------ --------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
2600 Stemmons Frwy, Suite 176, Dallas, TX 75207
-----------------------------------------------
(Address of principal executive offices)
Telephone Number (214) 905-5100
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
The number of shares outstanding of the issuer's common stock,
as of May 14, 2004, was 15,465,215 shares, $0.01 par value per share.
Total No. of Pages 25
ACCESS PHARMACEUTICALS, INC.
INDEX
-----
Page No.
--------
RISK FACTORS 2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at
March 31, 2004 and December 31, 2003 21
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three months ended
March 31, 2004 and March 31, 2003 22
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and March 31, 2003 23
Notes to Unaudited Condensed Consolidated Financial Statements 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Changes in Securities 18
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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, 2003, 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 complete full
scale production of Aphthasol(R) in the second quarter of 2004,
re-start sales of Aphthasol(R) in the second quarter of 2004,
mucoadhesive liquid technology planned start of a Phase III
trial in the US in the third quarter of 2004, and net cash burn
rate for the next twelve months to be approximately $400,000
per month.
We have experienced a history of losses and we expect to incur
future losses.
- --------------------------------------------------------------
We have recorded minimal revenue to date and we have incurred
a cumulative operating loss of approximately $56.6 million
through March 31, 2004. Losses for the years ended 2003, 2002
and 2001 were $6,935,000, $9,384,000 and $6,027,000,
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 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 three months of 2004 was $849,000 per month.
We project our net cash burn rate for the next twelve months to
be approximately $400,000 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.
- -------------------------------------------------------------
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 generate 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
2
do identify, develop, commercialize, patent, manufacture, and
obtain required regulatory approvals to market additional
products, we may not generate 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 product sales and
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.
- ----------------------------------------------------------
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 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.
- ------------------------------------------------------------
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.
- ----------------------------------------------------------------
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 2005, we may 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 depend upon
3
numerous factors, including :
* the sales levels of our currently marketed products;
* 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.
- -------------------------------------------------------------
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 joint
venture, sublicense or enter 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 such 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
4
o Paladin Labs, Inc. for Canada manufacturing and marketing rights
* 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 Pliva dd Hrvatska - sublicensed Crotia marketing rights
o Various companies for other smaller countries - sublicensed
marketing rights
Our ability to successfully commercialize, and market our
products and product candidates could be limited if a number 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 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.
- ----------------------------------------------------------------
We have limited 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 Puerto
Rico facility certified by the FDA for Good Manufacturing
Practices. At such time when
5
we acquired the US rights to Aphthasol(R) 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 was 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
further sales of the product until the second 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 approved for manufacture in the US and
Europe. Full scale production commenced 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. Contract Pharmaceuticals Ltd. Canada has also been
selected as our European supplier of amlexanox 5% paste and a
UK filing has been made to approve this facility for European supply.
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 share
of the licensing revenues and 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) was 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 finalized with a
third party a contract for manufacturing our product if our
product gains regulatory approval.
AP5280 and AP5346 are manufactured by a third parties for our
Phase I/II clinical trials. Manufacturing is ongoing for the
current clinical trials. Certain manufacturing steps are
conducted by the Company to enable significant cost savings to
be realized.
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.
- ---------------------------------------------------------------
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 require
governmental approvals for commercialization. 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:
6
* 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 other markets.
* OraDisc(TM) has completed a Phase III clinical trial in the
US and we filed an NDA.
* AP5280 has completed Phase I of its Phase I/II trial in
Europe and we are analyzing the results to start the Phase II
part of the trial.
* 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 the third quarter of 2004.
* 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, Access 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.
- -----------------------------------------------------------
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 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
7
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.
- --------------------------------------------------------------
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 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.
- --------------------------------------------------------------
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.
- ---------------------------------------------------------
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;
8
* Carboplatin, marketed exclusively by Bristol-Myers-Squibb in
the US; 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 and Inhale 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;
* 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 which are developing targeted
monoclonal antibody therapy.
Amgen, CuraGen, Sinclair and RxKinetics are developing products
to treat mucositis that may compete with our mucoadhesive
liquid technology.
Emisphere Technologies, Inc., Biovail Corporation, CIMA Labs,
Inc., Depomed Inc. 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.
9
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.
- -------------------------------------------------------------
The successful commercialization of, and the interest of
potential collaborative partners to invest in the development
of our drug candidates, may 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.
- --------------------------------------------------------------
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
second 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.
- --------------------------------------------------------------
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 healthcare reform, could
10
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.
- -------------------------------------------------------
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 26 U.S. patents and to 16 U.S. patent
applications now pending, and 7 European patents and 17
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 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 2021
* AP5346 in 2021
* Mucoadhesive technology, patents are pending
* Vitamin mediated technology between 2004 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.
- -------------------------------------------------------------
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,
11
development, marketing, or product commercialization objectives.
While we have employment agreements with Mr. Gray and David Nowotnik,
PhD 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 investors which could limit the ability of our
other stockholders to influence the direction of the company.
- --------------------------------------------------------------
Larry N. Feinberg (Oracle Partners LP, Oracle Institutional
Partners LP and Oracle Investment Management Inc.) and
Heartland Advisors, Inc. each beneficially owned approximately
12.1% and 11.7%, respectively, of our common stock as of May
14, 2004. 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.
12
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 15,465,215 shares of our common stock that are
outstanding as of May 14, 2004, are unrestricted and freely
tradable or tradable pursuant to a resale registration
statement or under Rule 144 of the Securities Act.
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 timing of and our
ability to achieve regulatory approvals, dependence on others
to market our 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, our Annual Report
on Form 10-K as of December 31, 2003 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
complete full scale production of Aphthasol(R) in the second
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
13
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 throughout the European Union.
Since our inception, we have devoted our resources primarily to fund our
research and development programs. We have been unprofitable since
inception and to date have received limited revenues from the sale of
products. We cannot assure you that we will be able to generate sufficient
product revenues to attain profitability on a sustained basis or at all. We
expect to incur losses for the next several years as we continue to invest in
product research and development, preclinical studies, clinical trials and
regulatory compliance. As of March 31, 2004, our accumulated deficit was
$56,581,000, of which $8,894,000 was the result of the write-off of excess
purchase price.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through private sales of common
stock and convertible notes and our principal source of liquidity is cash and
cash equivalents. Contract research payments, licensing fees and milestone
payments from corporate alliances and mergers have also provided funding
for operations. As of March 31, 2004 our cash and cash equivalents were
$9,295,000 and our working capital was $8,022,000. Our working capital
at March 31, 2004 represented an increase of $6,816,000 as compared to
our working capital as of December 31, 2003 of $1,206,000. The increase
in working capital was due to a private placement of common stock and
warrants raising $9.1 million of net proceeds offset by the loss from
operations for the three months ended March 31, 2004.
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 March 31, 2004 of $56,581,000.
We expect that our existing capital resources will be adequate to fund our
current level of operations through the end of 2005 excluding debt service.
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:
* 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;
14
* 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
which bear interest at a rate of 7.7% per annum with
$1,041,000 of interest due annually on each
September 13, may convert to common stock at a
conversion price of $5.50 per share. Should the
holders of the notes not elect to convert them to
common stock, or we are not able to force the
conversion of the notes by their terms, we must
repay the amounts on the dates described herein. We
currently do not have the funds available to repay
the convertible notes. We may need to restructure
the terms of the notes as we near the due date for
repayment. Any such restructuring could have a
significant impact on our capital structure and liquidity.
FIRST QUARTER 2004 COMPARED TO FIRST QUARTER 2003
Our licensing revenue in the first quarter of 2004
was $4,000, as compared to licensing revenue of
$86,000 in same quarter of 2003, a decrease of
$82,000. We recognize licensing revenue over the
period of the performance obligation under our
licensing agreements. Licensing revenue recognized
in both 2004 and 2003 was from several agreements,
including agreements related to various amlexanox
projects and Residerm(R).
There were no product sales of Aphthasol(R) in the
first quarter of 2004 due to a supply interruption,
as compared to $303,000 in sales in the first
quarter of 2003. Currently, new supplies are in the
manufacturing process.
Royalty income in the first quarter of 2004 was
$16,000, as compared to $4,000 in the first quarter
of 2003.
Total research spending for the first quarter of
2004 was $1,144,000, as compared to $1,797,000 for
the same period in 2003, a decrease of $653,000. The
decrease in expenses was primarily the result of:
* lower clinical costs ($417,000) for our
OraDisc(TM) clinical trial which was completed in
2003 and is currently under FDA review and
($314,000) for the AP5280 and AP5346 polymer
platinate clinical trials of which the AP5280 trial
was competed in 2003 and the AP5346 trial is still
ongoing; and
* other net decreases ($66,000).
The decrease in expenses was partially offset by:
* higher production and testing costs for
Aphthasol(R) which is currently in production
($77,000); and
15
* higher expenses at our Australian laboratory ($67,000).
Our cost of product sales was $26,000 in the first
quarter of 2004, as compared to $109,000 in the
first quarter of 2003, a decrease of $83,000. The
decrease in cost of product sales was due to the
amlexanox supply interruption.
Total general and administrative expenses were
$754,000 for the first quarter of 2004, an increase
of $217,000 as compared to the same period in 2003.
The increase in spending was due primarily to the
following:
* higher investor relations expenses ($72,000);
* higher patent expenses ($62,000), due to new
patent expenses;
* higher legal expenses ($56,000) primarily due to
increased legal fees associated with compliance with
the Sarbanes-Oxley Act, new contracts and legal proceedings.
* higher salary and related costs ($29,000); and
* offset by other net decreases ($2,000).
Depreciation and amortization was $160,000 for the
first quarter of 2004 as compared to $144,000 for
the same period in 2003 reflecting an increase of
$16,000. The increase in depreciation and
amortization was due to increased depreciation
resulting from the acquisition of additional capital assets.
Total operating expenses in the first quarter of
2004 were $2,084,000 as compared to total operating
expenses of $2,587,000 for the same period in 2003,
a decrease of $503,000.
Loss from operations in the first quarter of 2004
was $2,064,000 as compared to a loss of $2,194,000
for the same period in 2003, a decrease of $130,000.
Interest and miscellaneous income was $33,000 for
the first quarter of 2004 as compared to $98,000 for
the same period in 2003, a decrease of $65,000. The
decrease in interest income was due to lower cash
balances and lower interest rates in 2004 as
compared with 2003.
Interest expense was $320,000 for the first quarter
of 2004 as compared to $315,000 for the same period
in 2004, an increase of $5,000.
Net loss in the first quarter of 2004 was
$2,351,000, or a $0.15 basic and diluted loss per
common share, compared with a loss of $2,411,000, or
a $0.18 basic and diluted loss per common share for
the same period in 2003, a decrease of $60,000.
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 2004
and 2005 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
16
$23,000. The estimated effect assumes no changes in our short-term
investments at March 31, 2004. 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 March 31, 2004, our 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 March 31, 2004 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.
Although the claims in Hall's complaint are not
clearly delineated, he appears to bring claims for
fraud, conspiracy, and theft against all defendants,
and a claim for breach of contract against Access.
Each of the allegations relates to an allegedly
unfulfilled contractual obligation to deliver to
Hall 45,000 warrants to purchase our stock. Hall
alleges in his complaint and in a subsequent letter
that the warrants, had they been delivered, could
have been worth as much as $540,000. He seeks as
damages this amount, his attorney's fees, and an
unstated amount of punitive damages.
We answered Hall's complaint on March 3, 2003, and
brought counterclaims against him relating to
certain alleged misrepresentations, his failure to
perform certain obligations to Access,
17
and his interference with the our right to enjoy certain
contractual benefits. Discovery, substantive fact
investigation, and legal analysis have not been
completed. We intend to be vigorous in both our
defense of Hall's claims and in the pursuit of our
counterclaims.
Mipharm S.p.A. ("Mipharm") filed an arbitration
against Access in the International Court of
Arbitration of the International Chamber of Commerce
(the "ICC") on or about October 23, 2003. Mipharm
claims that we breached certain license agreements
that existed between Mipharm and Access by failing
to (1) make commercially reasonable efforts to
obtain European Union regulatory approval for
certain pharmaceutical products and (2) inform
Mipharm of all significant news and actions relating
to the approval process. Mipharm seeks damages of
approximately $350,000, and an order compelling us
to perform pursuant to the license agreements.
We have answered Mipharm's arbitration demand, and
simultaneously asserted counterclaims against
Mipharm. In the counterclaims, we allege, inter
alia, that Mipharm has itself breached the license
agreements and that Mipharm is pursuing claims that
it had previously agreed to release in exchange for
valuable consideration. We seek approximately $2.2
million in damages. We believe that the claims in
Mipharm's complaint are without merit and intend to
be vigorous in both our defense of Mipharm's claims
and in the pursuit of our counterclaims.
On January 16, 2004, Mipharm commenced a related
lawsuit in Texas Federal Court, in which it alleges
that one of Access's counterclaims should have been
brought before a different arbitral body. That Texas
Court dismissed that action on April 20, 2004. On or
about May 4, 2004, Mipharm filed a motion seeking
reconsideration of the Court's decision or,
alternatively, for leave to file an amended
complaint. We are opposing that motion.
Del Pharmaceuticals, Inc. ("Del"), filed a complaint
against Access on or about March 12, 2004, in the
Court of Chancery in New Castle County, Delaware.
The complaint purports to state claims for specific
performance, breach of contract, unjust enrichment,
promissory estoppel, breach of a duty of good faith,
and misappropriation of trade secrets. Each of the
allegations relates to allegedly unfulfilled or
breached contractual obligations that Del claims
arose from two confidentiality agreements and from
negotiations related to a proposed license and
supply agreement. The complaint seeks equitable
relief and money damages.
The complaint has only recently been served, and we
have filed a motion to dismiss all counts on several
grounds. That motion to dismiss is currently
pending. Discovery, substantive fact investigation,
and detailed legal analysis have only just begun. We
believe that the allegations in the complaint are
without merit and intend to be vigorous in both our
defense of Del's claims and in the pursuit of
contemplated counterclaims.
ITEM 2 CHANGES IN SECURITIES
On February 24, 2004, we completed the closing of a
private offering to individual accredited investors,
at a per share price of $5.40, receiving gross
proceeds of $9.7 million from the private placement
of 1,789,371 shares of common stock. The investors
also received five year warrants at an exercise
price of $7.10 per share to purchase 447,344 shares
of our common stock and the placement agents
received warrants in the offering at an exercise
price of $5.40 per share to purchase 156,481 shares
of our common stock. The shares and common stock
underlying the warrants issued in this private
placement were registered for resale on March 24,
2004. We relied on Section 4(2) and/or 3(b) of the
1933 Securities Act and the provisions of Regulation D as
18
>
exemptions from the registration thereunder.
The proceeds of the offering will be used
principally for general corporate purposes and to
fund the development of our portfolio of product
candidates.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.26 License and Supply Agreement between Wyeth,
acting through its Wyeth Consumer Healthcare
Division and us dated January 6, 2004. (Confidential
Treatment requested)
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 Chief Executive Officer of
Access Pharmaceuticals, Inc. pursuant to 18 U.S.C.
Section 1350
32.2* Certification of Chief Financial Officer of
Access Pharmaceuticals, Inc. pursuant to 18 U.S.C.
Section 1350
_____________
* This exhibit shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange
Act of 1934 or otherwise subject to the liabilities
of that Section, nor shall it be deemed incorporated
by reference in any filings under the Securities Act
of 1933 or the Securities and Exchange Act of 1934,
whether made before or after the date hereof and
irrespective of any general incorporation language
in any filings.
Reports on Form 8-K:
On March 25, 2004, we filed a Current Report on Form
8-K (Items 7 and 12) furnishing a press release
announcing our financial results for the fourth
quarter and the year ended December 31, 2003.
19
SIGNATURES
----------
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACCESS PHARMACEUTICALS, INC.
Date: May 17, 2004 By: /s/ Kerry P. Gray
------------ -------------------
Kerry P. Gray
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 2004 By: /s/ Stephen B. Thompson
------------ ------------------------
Stephen B. Thompson
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
20
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2004 December 31, 2003
-------------- --------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 8,356,000 $ 727,000
Short term investments, at cost 939,000 1,860,000
Accounts receivable 1,189,000 1,149,000
Inventory 108,000 108,000
Prepaid expenses and other current assets 1,088,000 975,000
-------------- --------------
Total current assets 11,680,000 4,819,000
Property and equipment, net 1,009,000 1,004,000
Debt issuance costs, net 267,000 313,000
Patents, net 2,568,000 2,652,000
Licenses, net 346,000 367,000
Goodwill, net 1,868,000 1,868,000
Other assets 758,000 788,000
-------------- --------------
Total assets $ 18,496,000 $ 11,811,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses $ 1,655,000 $ 1,780,000
Accrued interest payable 572,000 311,000
Deferred revenues 1,180,000 1,184,000
Current portion of note payable and
other future obligations 251,000 338,000
-------------- --------------
Total current liabilities 3,658,000 3,613,000
Long-term obligations for purchased patents - 158,000
Note payable, net of current portion 355,000 335,000
Convertible notes 13,530,000 13,530,000
-------------- --------------
Total liabilities 17,543,000 17,636,000
-------------- --------------
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, 15,382,918 at March 31, 2004
and 13,397,034 at December 31, 2003 154,000 134,000
Additional paid-in capital 58,806,000 49,597,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted stock grants (401,000) (294,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Accumulated other comprehensive loss 24,000 14,000
Accumulated deficit (56,581,000) (54,227,000)
-------------- --------------
Total stockholders' equity (deficit) 953,000 (5,825,000)
-------------- --------------
Total liabilities and stockholders'
equity (deficit) $18,496,000 $11,811,000
============== ==============
The accompanying notes are an integral part of these statements.
21
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
Three Months ended March 31,
------------------------------
2004 2003
-------------- --------------
Revenues
Licensing revenues $ 4,000 $ 86,000
Product sales - 303,000
Royalty income 16,000 4,000
-------------- --------------
Total revenues 20,000 393,000
Expenses
Research and development 1,144,000 1,797,000
Costs of product sales 26,000 109,000
General and administrative 754,000 537,000
Depreciation and amortization 160,000 144,000
-------------- --------------
Total expenses 2,084,000 2,587,000
-------------- --------------
Loss from operations (2,064,000) (2,194,000)
Other income (expense)
Interest and miscellaneous income 33,000 98,000
Interest and debt expense (320,000) (315,000)
-------------- --------------
(287,000) (217,000)
Net loss $ (2,351,000) $ (2,411,000)
============== ==============
Basic and diluted loss per common share $(0.17) $(0.18)
============== ==============
Weighted average basic and diluted
common shares outstanding 14,200,273 13,199,900
============== ==============
Net loss $ (2,351,000) $ (2,411,000)
Other comprehensive income (loss)
Foreign currency translation adjustment 10,000 (5,000)
-------------- --------------
Comprehensive loss $ (2,341,000) $ (2,416,000)
============== ==============
The accompanying notes are an integral part of these statements.
22
Access Pharmaceuticals, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months ended March 31,
------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities:
Net loss $ (2,351,000) $ (2,411,000)
Adjustments to reconcile net loss to cash used
in operating activities:
Warrants issued in payment of consulting expenses 42,000 30,000
Amortization of restricted stock grants 29,000 21,000
Depreciation and amortization 160,000 144,000
Amortization of debt costs 46,000 46,000
Other long-term obligations - -
Change in operating assets and liabilities:
Accounts receivable (40,000) (236,000)
Inventory - 223,000
Prepaid expenses and other current assets (113,000) 234,000
Other assets 30,000 28,000
Accounts payable and accrued expenses (125,000) 15,000
Accrued interest payable 261,000 260,000
Deferred revenues (4,000) (203,000)
-------------- --------------
Net cash used in operating activities (2,065,000) (1,849,000)
-------------- --------------
Cash flows from investing activities:
Capital expenditures (60,000) (95,000)
Redemptions of short term investments and
certificates of deposit 921,000 4,179,000
-------------- --------------
Net cash provided by investing activities 861,000 4,084,000
-------------- --------------
Cash flows from financing activities:
Payments of notes payable and
long-term obligations (225,000) (451,000)
Proceeds from stock issuances,
net of costs of $647,000 9,035,000 -
-------------- --------------
Net cash provided by (used in) financing
activities 8,810,000 (451,000)
-------------- --------------
Net increase in cash and cash equivalents 7,606,000 1,784,000
Effect of exchange rate changes on cash 23,000 (5,000)
Cash and cash equivalents at beginning of period 727,000 1,444,000
-------------- --------------
Cash and cash equivalents at end of period $ 8,356,000 $ 3,223,000
============== ==============
Cash paid for interest $6,000 $6,000
The accompanying notes are an integral part of these statements.
23
Access Pharmaceuticals, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003
(unaudited)
(1) Interim Financial Statements
The consolidated balance sheet as of March 31, 2004
and the consolidated statements of operations and
cash flows for the three months ended March 31, 2004
and 2003 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, 2003. The results of
operations for the period ended March 31, 2004 are
not necessarily indicative of the operating results
which may be expected for a full year. The
consolidated balance sheet as of December 31, 2003
contains financial information taken from the
audited financial statements as of that date.
(2) Intangible Assets
Intangible assets consist of the following (in
thousands):
March 31, 2004 December 31, 2003
------------------------ ------------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
----------- ------------ ----------- ------------
Amortizable intangible assets
Patents $ 3,178 $ 610 $ 3,178 $ 526
Licenses 830 484 830 463
----------- ------------ ----------- ------------
Total $ 4,008 $ 1,094 $ 4,008 $ 989
=========== ============ =========== ============
24
Amortization expense related to intangible assets
totaled $105,000 for each of the three months ended
March 31, 2004 and 2003. The aggregate estimated
amortization expense for intangible assets remaining
as of March 31 is as follows (in thousands):
2004 $ 316
2005 421
2006 421
2007 395
2008 370
Thereafter 991
-------
Total $2,914
=======
(3) Stock-Based Compensation
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 1, to our
stock-based employee plans.
Three months ended March 31,
--------------------------
2004 2003
------------ ------------
Net loss
As reported $(2,351,000) $(2,411,000)
Deduct: Stock-based employee
compensation expense determined
under fair value based method (170,000) (294,000)
------------ ------------
Pro forma $(2,521,000) $(2,705,000)
============ ============
Basic and diluted loss
per share:
As reported $(0.17) $(0.18)
Pro forma (0.18) (0.20)
The effect of our outstanding options and warrants
are anti-dilutive because we have a net loss.
(4) Sales of Securities
On February 24, 2004, we completed the closing of a
private offering to individual accredited investors,
at a per share price of $5.40, receiving gross
proceeds of $9.7 million from the private placement
of 1,789,371 shares of common stock. The investors
also received five year warrants at an exercise
price of $7.10 per share to purchase 447,344 shares
of our common stock and the placement agents
received warrants in the offering at an exercise
price of $5.40 per share to purchase 156,481 shares
of our common stock. The shares and common stock
underlying the warrants issued in this private
placement were registered for resale on March 24,
2004. We relied on Section 4(2) and/or 3(b) of the
1933 Securities Act and the provisions of Regulation
D as exemptions from the registration thereunder.
The proceeds of the offering will be used
principally for general corporate purposes and to
fund the development of our portfolio of product
candidates.
25