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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/x/ Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998
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 Freeway, Suite 176, Dallas, TX 75207
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (214) 905-5100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, One Cent ($0.01) Par Value
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(Title of Class)
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 requirements for the past 90 days. Yes /x/ No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /x/
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The aggregate market value of the outstanding voting stock held by non-
affiliates of the registrant as of March 25, 1999 was approximately
$7,242,000.
As of March 25, 1999 there were 3,429,402 shares of Access
Pharmaceuticals, Inc. Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of
Registrant's Definitive Proxy Statement filed with the Commission pursuant
to Regulation 14A in connection with the 1999 Annual Meeting are
incorporated herein by reference into Part III of this report. Other
references incorporated are listed in the exhibit list in Part IV of this
report.
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PART I - FINANCIAL INFORMATION
ITEM 1. BUSINESS
Overview of Current Operations
Access Pharmaceuticals, Inc. (together with its subsidiary, "Access" or the
"Company") was founded in 1974 as Chemex Corporation, a Wyoming
corporation, and in 1983 changed its name to Chemex Pharmaceuticals, Inc.
("Chemex"). Chemex changed its state of incorporation from Wyoming to
Delaware on June 30, 1989. In connection with the merger of Access
Pharmaceuticals, Inc., a Texas corporation ("API"), with and into the
Company on January 25, 1996 (the "Merger"), the name of the Company
was changed to Access Pharmaceuticals, Inc.
Access' principal executive office is at 2600 Stemmons Freeway, Suite 176,
Dallas, Texas 75207; its telephone number is (214) 905-5100.
Recent Developments
On March 1, 1999, the Company and a wholly owned subsidiary of the
Company entered into a merger agreement with Virologix Corporation
("Virologix"), whereby Virologix will become a wholly owned subsidiary
of the Company. The closing of the merger is subject to certain conditions,
including the condition that the Company raise at least $3.0 million in
equity financing.
Virologix is a privately held company focused on the development of
product candidates for the prevention and treatment of viral diseases,
including HIV. Under the terms of the agreement, the Virologix
shareholders will receive 1,000,000 shares of common stock of the
Company. It is anticipated that the closing of the acquisition will take place
during the second quarter of 1999.
Business
Access is a drug delivery company using advanced polymer technology for
application in cancer treatment, dermatology and medical imaging. In
addition, the Company has developed a drug to treat canker sores that was
sold to Block Drug Company ("Block") and is currently being marketed in
the United States by Block, subject to a royalty agreement with the
Company. The Company's lead compounds are as follows:
Amlexanox - This is currently the only compound approved by the Food
and Drug Administration ("FDA") for the treatment of canker sores.
Independent market research sponsored by the Company indicates that more
than 7 million patients visit doctors or dentists per year in the United States
with complaints of canker sores. Current estimates indicate that
approximately 20% of the U.S. adult population suffers from canker sores,
of which 15 million patients claim that their canker sores recur.
In 1995, Access sold its rights to amlexanox to Block subject to a retained
royalty. On June 8, 1998, the Company entered into an agreement to
license back from Block these rights to amlexanox for certain international
markets. Pursuant to the new agreement, the Company announced on
August 18, 1998 that it signed a License Agreement for the United
Kingdom and Ireland with Strakan Limited ("Strakan") to license amlexanox
for the treatment of canker sores. Under the terms of this agreement,
Strakan will be responsible for and will bear all costs associated with the
regulatory approval process in the United Kingdom and European Union,
will pay milestones based on cumulative sales revenue and will pay a
royalty on sales. The Company also announced that Strakan had filed the
product license application for amlexanox 5% paste with UK regulatory
authorities. It is anticipated that the product will be registered throughout
Europe in 1999. An international outlicensing program is ongoing.
The Company recently signed a license agreement with Block for the rights
to develop amlexanox for use in chemotherapy and radiation induced
mucositis. Mucositis is a debilitating condition involving extensive
inflammation of mouth tissue that effects an estimated 400,000 cancer
patients in the United States undergoing chemotherapy and radiation
treatment. Any treatment that would accelerate healing and/or diminish the
rate of appearance would have a significant beneficial impact on the quality
of life of these patients and may allow for more aggressive chemotherapy.
The Company believes amlexanox could have a clinical benefit in treating
and preventing this condition because of the clinical similarities of mucositis
to canker sores for which amlexanox has proven efficacy. An
Investigational New Drug ("IND") has been filed with the FDA and a Phase
II protocol developed to
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investigate a mouthwash formulation for the prevention and treatment of
mucositis in cancer patients undergoing treatment.
Access, in conjunction with Atrix Laboratories, Inc., is working to develop
additional formulations including a mucoadhesive disc and a mucoadhesive
gel that can also be adapted to an aerosol spray. These formulations will be
clinically investigated in the prevention of canker sores, oral lichen planus
and mucositis.
Polymer Platinate (AP 5070) - Chemotherapy, surgery and radiation are the
major components in the clinical management of cancer patients.
Chemotherapy is usually the primary treatment of hematologic
malignancies, which cannot be excised by surgery, and is increasingly used
as an adjunct to radiation and surgery, to improve efficacy, and is used as
the primary therapy for some solid tumors and metastases. The current
optimal strategy for chemotherapy involves exposing patients to the most
intensive cytotoxic regimens they can tolerate. Clinicians attempt to design
a combination of drugs, dosing schedule and method of administration to
increase the probability that cancerous cells will be destroyed while
minimizing the harm to healthy cells.
For chemotherapeutic agents to be effective in treating cancer patients, the
agent must reach the target cells in effective quantities with minimal toxicity
in normal tissues. Most current drugs have significant limitations. Certain
cancers are inherently unresponsive to chemotherapeutic agents, while other
cancers initially respond, but subgroups of cancer cells acquire resistance
to the drug during the course of therapy, with the resistant cells surviving
and resulting in relapse. Another limitation of current anti-cancer drugs is
that serious toxicity, including bone marrow suppression or irreversible
cardiotoxicity, can prevent their administration in curative doses.
Polymer Platinate is a chemotherapeutic agent which the Company believes
has the potential to have significantly superior efficacy in treating numerous
cancers compared to existing platinum compounds. Platinum compounds are
one of the largest selling categories of chemotherapeutic agents with annual
sales in excess of $800 million. As is the case with all chemotherapeutic
drugs, the use of such compounds is associated with serious systemic side
effects. The drug delivery goal therefore is to enhance delivery of the drug
to the tumor and minimize the amount of drug affecting normal organs in
the body. The Company's Polymer Platinate (as to which the Company has
applied for patents) seeks to achieve this goal by attaching a large polymer
to a small platinum molecule. This takes advantage of the fact that the cells
lining the walls of blood vessels that feed tumors are usually leaky or
hyperpermeable, allowing the large Polymer Platinate molecule to enter the
tumor in preference to other tissue, which does not have leaky or
hyperpermeable blood vessels. On the other hand, the capillary/lymphatic
drainage system of tumors is not well developed and limited, so the drug
gets trapped in the tumor. This dual effect is called enhanced permeability
and retention (EPR). In addition, the polymer is designed to shield the
platinum from interactions with normal cells while the drug is in
circulation, thereby reducing toxicity. The proposed mechanism of how
Polymer Platinate is taken up by tumor cells bypasses known membrane-
associated mechanisms for development of tumor resistance, a common
cause of failure of chemo-therapeutic drugs over the course of treatment.
In animal models, the Company's Polymer Platinate has delivered up to 63
times the amount of Platinum to tumors compared with cisplatin (the
standard platinum formulation) at the maximum tolerated dose, and the
Company's Polymer Platinate was approximately 2.5 times more effective
in inhibiting tumor growth than cisplatin alone. In terms of dosing, in
animal studies, up to 15 times more platinum has been injected using the
Company's Polymer Platinate, which could be clinically significant as
platinum has a steep dose response curve. Consequently, clinical outcome
could be greatly improved as a result of the ability to deliver additional
drug to the tumor.
The Company plans to commence human clinical trials for its Polymer
Platinate if the results of additional ongoing activities are successful.
Zinc Clindamycin - The complexing of zinc to a drug has the effect of
enhancing the penetration of the drug into the skin, yet holding the drug in
the skin. This phenomenon is called the "reservoir effect," and it makes
zinc potentially effective for the delivery of dermatological drugs. The
Company has a broad patent covering the use of zinc for such purposes.
The first zinc drug being developed by Access, in conjunction with its
licensing partner, is Zinc Clindamycin for the treatment of acne. Acne
drugs constitute an approximately $700 million per year market.
Clindamycin is a widely prescribed drug for the treatment of acne, and
Access believes that the addition of zinc could potentially significantly
increase the effectiveness of the drug through the reservoir effect of zinc,
the activity of zinc and Clindamycin, the improved stability of the product
and the potential for zinc to overcome certain bacterial resistance.
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The Company believes that its zinc technology could provide a broad
development platform for improved delivery of many topically applied
products. The Company is currently evaluating zinc complexed with vitamin
D, retanoids and anti-fungals.
Access has entered into a license agreement with Strakan relating to its zinc
technology. Strakan has agreed to fund the development costs of Zinc
Clindamycin and any additional compounds developed utilizing the zinc
patent, and will share equally in all milestone payments received from the
sublicensing of the compound. In addition, Access will receive a royalty on
sales of products based on this technology.
MRI Imaging Agent - Magnetic resonance imaging (MRI) is a non-
radioactive method of producing imaging for the diagnosis of a broad range
of diseases and conditions. To date, for the diagnosis of cancer, the
sensitivity of MRI has been insufficient to pick up very small tumors. The
Company is developing an imaging agent that may greatly enhance the
ability of MRI to detect certain small tumors. Currently, gadolinium, a rare
earth metal, is used as an imaging agent in MRI, but its use is restricted to
imaging brain tumors and vasculature. The reason why gadolinium is not
used for other parts of the body is that approved gadolinium agents alone
defuse much too rapidly throughout the body and are eliminated very
quickly. The Access imaging agent consists of gadolinium attached to a
polymer that selectively binds to tumors. Animal studies have indicated that
the use of this imaging agent can result in up to 40% brighter images and
the ability to detect tumors significantly smaller than those detectable with
currently available techniques. In addition, in animal studies, the imaging
agent has increased by up to four times the amount of time during which
images can be taken, and this increased time period would represent a
major potential advantage in handling patients.
Access has a license agreement with The Dow Chemical Company ("Dow
Chemical") to use Dow Chemical's technology to develop binding agents
of sufficient purity for human clinical use.
Access owns additional patented advanced technologies designed to deliver
drug in response to specific diseases or take advantage of biological
mechanisms. These technologies are designed to provide the Company's
next advanced drug delivery product development candidates.
Drug Development Strategy
A part of Access' integrated drug development strategy is to form creative
alliances with centers of excellence in order to obtain alternative lead
compounds while minimizing overall cost of research. Access has signed
agreements with The School of Pharmacy, University of London for
platinate polymer technology, Dow Chemical for metal binding technology
to develop imaging agents and radiopharmaceuticals, Strakan for the
delivery of topical therapeutic agents which exploit the Access zinc patent,
Duke University for advanced drug delivery systems and Atrix
Laboratories, Inc. for mucoadhesive polymer formulations of amlexanox.
The Access strategy is to initially focus on utilizing its technology in
combination with approved drug substances to develop novel patentable
formulations of potential therapeutic and diagnostic products. The Company
believes that this will expedite product development, both preclinical and
clinical, and ultimately product approval. To reduce financial risk and
equity financing requirements, Access is directing its resources to the
preclinical and early clinical phase of development and plans to outlicense
to, or co-develop with, marketing partners its current product candidates
during the clinical development phases.
Access has initiated and will continue to expand its internal core capabilities
of chemistry, formulation, analytical methods development, initial process
scale up, carbohydrate analysis, drug/diagnostic targeting screens and
project management capability to maximize product opportunities in a
timely manner. However, the manufacturing scaleup, preclinical testing and
product production will be contracted to research organizations, contract
manufacturers and strategic partners. Given the current cost containment
and managed care environment both in the United States and overseas and
the difficulty for a small company to effectively market its products, Access
does not currently plan to become a fully integrated pharmaceutical
company.
Consequently, Access expects to form strategic alliances for product
development and to outlicense the commercial rights to development
partners. By forming strategic alliances with major pharmaceutical and
diagnostic companies, it is believed that the Access technology can be more
rapidly developed and successfully introduced into the marketplace.
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Scientific Background
The ultimate criterion of effective drug delivery is to control and optimize
the localized release of drug at the target site and rapidly clear the non-
targeted fraction. Conventional drug delivery systems such as controlled
release, sustained release, transdermal systems, etc., are based on a
physical erosion process for delivering active product into the systemic
circulation over time with the objective of improving patient compliance.
These systems do not address the biologically relevant issues such as site
targeting, localized release and clearance of drug. The major factors that
impact the achievement of this ultimate drug delivery goal are the physical
characteristics of the drug and the biological characteristics of the disease
target sites. The physical characteristics of the drug affect solubility in
biological systems, its biodistribution throughout the body, and its
interactions with the intended pharmacological target sites and undesired
areas of toxicity. The biological characteristics of the diseased area impact
the ability of the drug to selectively interact with the intended target site to
allow the drug to express the desired pharmacological activity. The
Company believes that its drug delivery technology platforms are
differentiated from conventional drug delivery systems in that they seek to
apply a disease specific approach to improve the drug delivery process with
polymer carrier formulations to significantly enhance the therapeutic
efficacy and reduce toxicity of a broad spectrum of products. This is
achieved by utilizing Bio~Responsive TM Polymers as novel drug delivery
solutions to match the specific physical properties of each drug with the
biological characteristics of each disease and targeting sites of disease
activity. The Company believes that the ability to achieve physiological
triggering of drug release at the desired site of action could enable the
Access Bio~Responsive TM Polymers to potentially have broad therapeutic
applications in the site specific delivery of chemotherapeutic agents in
cancer, infection, inflammation, drugs for other autoimmune diseases,
proteins, peptides and gene therapy.
Bio~Responsive TM Polymers mimic the natural transport mechanisms in
the body which are involved in the localized delivery of biological
mediators and cellular trafficking. Access uses a multi-faceted approach
through the use of both natural carbohydrates and synthetic polymers.
Access' central focus is to use Bio~Responsive TM Polymer systems that
can respond to normal biochemical or disease-induced signals to localize
drug carrier and release drug in a highly selective fashion. These polymeric
drug carriers can be applied to a wide range of drug molecules including
proteins and nucleotides and can be engineered to control pharmacokinetics
and body distribution, site-selectivity, site-release of drug and drug
clearance from non-target sites.
Access Core Drug Delivery Technology Platforms
Access' current drug delivery technology platforms take advantage of the
following biological mechanisms to improve drug delivery:
* disease specific carbohydrate recognition by vascular endothelial cells
and underlying tissue
* enhanced permeability and retention in tumors
* triggered secretion of biological mediators
Access Carbohydrate Polymer Drug Delivery Technology
The Access carbohydrate polymer drug delivery technology exploits specific
changes in the vascular endothelium that occur during disease processes.
These carriers mimic disease-specific, carbohydrate recognition by vascular
endothelium cells and underlying tissue. It has been well established that
white blood cells can recognize, target and permeate disease sites by means
of surface carbohydrates which bind to cytokine-induced endothelium plus
underlying tissue and cells. A number of receptors on the endothelium and
on underlying tissue are known to bind sulfated glycosaminoglycans, such
as heparin and dermatan sulfate. Access has developed glycosaminoglycan
carriers to selectively image and treat diseases involving the neovascular
endothelium. Access believes that its glycosaminoglycan technology has
broad potential in a number of therapeutic applications including cancer,
inflammation and infection.
Access Synthetic Soluble Polymer Drug Delivery Technology
In collaboration with The School of Pharmacy, University of London,
Access has developed a number of synthetic polymers, including
hydroxypropylmethacrylamide co-polymers and polyamidoamines designed
to be used to exploit EPR ("enhanced permeability and retention") in tumor
cells and control drug release. Many solid tumor cells possess
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vasculature that is hyperpermeable (i.e., "leaky") to macromolecules. In
addition to this enhanced permeability, tumors usually lack effective
lymphatic and/or capillary drainage. Consequently they selectively
accumulate circulating macromolecules (up to 10% of an intravenous dose
per gram in mice). This effect has been termed EPR, and is thought to
constitute the mechanism of action of SMANCS (styrene-maleic/anhydride-
neocarzinostatin), which is in regular clinical use in Japan for the treatment
of hepatoma. These polymers take advantage of endothelial permeability
with the drug carrying polymers getting trapped in tumors and then being
taken up by tumor cells. Linkages between the polymer and drug can be
designed to be cleaved extracellularly or intracellularly. Drug is released
inside the tumor mass while polymer/drug not trapped in tumors is renally
cleared from the body. Data generated in animal studies have shown that
the polymer/drug complexes are far less toxic than free drug alone and that
greater efficacy can be achieved. Thus, these polymer complexes have
demonstrated significant improvement in the therapeutic index of anti-cancer
drugs, e.g. cisplatin.
Access Condensed Phase Smart Polymer Drug Delivery Technology
The Access condensed phase polymer system is based on the Smart Polymer
Matrixes of Secretory Granules from secretory cells such as the mast cell
or goblet cell. The matrix in the secretory granule of the mouse mast cell
contains a negatively charged, heparin proteoglycan network which
condenses in the presence of divalent cations, such as calcium and
histamine, and monovalent cations, such as sodium. This matrix has a
number of unique electrical and mechanical properties in response to
biochemical or electrical signals. The heparin gel expands several-fold when
a secretory granule fuses with a cell membrane, allowing ions from outside
the cell to rush in, causing release of contents. Thus, nature has evolved a
highly advanced "smart polymer" gel to control the storage and release of
molecules destined for exocytosis. These ubiquitous natural mechanisms can
be mimicked by engineering smart polymer matrices to deliver a wide range
of molecules, including proteins and genes, in response to specific
triggering stimuli. This natural mechanism provides the basis of a novel
technology for releasing drugs on demand, with avoidance of systemic
toxicities. Access has commenced the development of a system to mimic the
secretory granule matrix to meet the biological requirement of different
drugs, delivery routes and disease processes. In a unique inventive step,
bioengineered, pore-forming proteins, with triggers and switches that self-
assemble in membranes, can be incorporated into coated particles to control
drug release. This represents a logical step in the development of the next
generation of Access drug delivery technology platforms towards
commercialization of systems that can trigger the release of drug, at site,
in response to disease-specific signals. Initial proof of concept will focus on
the triggered release of chemotherapeutic cancer and anti-inflammatory
agents and vaccines.
Access Topical Delivery Technology
Access has granted a license to Strakan for the development of compounds
that utilize zinc ions to produce a reservoir of drug in the skin to increase
the efficacy of topically applied products and to reduce toxicity. There are
many localized disease conditions, which are effectively treated by topical
application of suitable pharmaceutical agents. In order for such treatments
to be maximally effective, it is necessary that as much of the active agent
as possible be absorbed into the skin where it can make contact with the
disease condition in the dermal tissue without being lost by rubbing off on
clothing or evaporation. At the same time, the agent must not penetrate so
effectively through the skin that it is absorbed into the systemic circulation.
This latter factor is especially important in order to minimize unwanted
side-effects of the pharmacologically active agent. The ideal vehicle for
topically applied pharmaceuticals is one which can produce a "reservoir
effect" in the skin or mucous membranes. Such a reservoir effect can be
produced by the complexation of suitable pharmaceutical agents with zinc
ions, by an as yet unknown mechanism. This "reservoir effect" is defined
as an enhancement of the skin or membrane's ability to both absorb and
retain pharmacological agents, i.e.:
* To increase skin or membrane residence time
* To decrease drug transit time
* To reduce transdermal flux
A number of compounds are known to enhance the ability of
pharmacologically active agents to penetrate the skin, but have the
disadvantage of allowing rapid systemic dispersion away from the site of
disease. Many topical agents, such as the retinoids used in the treatment of
acne, and methotrexate, used in the treatment of psoriasis, are systemically
toxic. There is therefore a need for a method of enhancing the ability of
such agents to penetrate the skin so that a lesser total dosage may be used,
while at the same time retarding their ability to move from the skin to the
systemic circulation.
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Research Projects, Products and Products in Development
ACCESS DRUG PORTFOLIO
Clinical
Compound Originator Indication FDA Filing Stage (1)
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Cancer
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Polymer Platimate Access Anti-tumor Development Pre-Clinical
AP 2011 Access MRI Contrast Agent Development Research
Radiopharmaceutical Access Cancer Diagnosis Development Research
Amlexanox(2) Takeda Mucositis IND Phase II
Topical Delivery
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Amlexanox(3)
(CHX-3673) Takeda Oral ulcers FDA Approved Completed
Zinc compound(4) Access Enhancing drug CTX (5) Phase II
penetration and
retention in the
skin (acne)
Amlexanox (6) Takeda Oral Ulcers Development Pre-Clinical
Biodegradeable
Polymer Disc
Amlexanox (6) Takeda Oral Lichen Planus Development Pre-Clinical
Mucoadhesive Gel
(1) See "Government Regulations" for description of clinical stages.
(2) Licensed from Block subject to milestone payments.
(3) Sold to Block. Subject to a Royalty Agreement. International rights
(except Japan and Israel) licensed from Block subject to royalty and
milestone payments.
(4) Licensed to Strakan.
(5) United Kingdom equivalent of an IND.
(6) Licensed from Block subject to milestone and royalty payments.
Access begins the product development effort by screening and formulating
potential product candidates, selecting an optimal active and formulation
approach and developing the processes and analytical methods. Pilot
stability, toxicity and efficacy testing are conducted prior to advancing the
product candidate into formal preclinical development. Specialized skills are
required to produce these product candidates utilizing the Access
technology. Access has a core internal development capability with
significant experience in these formulations.
Once the product candidate has been successfully screened in pilot testing,
Access' scientists, together with external consultants, assist in designing and
performing the necessary preclinical efficacy, pharmacokinetic and
toxicology studies required for IND submission. External investigators and
scaleup manufacturing facilities are selected in conjunction with Company
consultants. Access does not plan to have an extensive clinical development
organization as this is planned to be conducted by a development partner.
With all of Access' product development candidates, there can be no
assurance that the results of the in vitro or animal studies are or will be
indicative of the results that will be obtained if and when these product
candidates are
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tested in humans. There can be no assurance that any of these projects will
be successfully completed or that regulatory approval of any product will
be obtained.
The Company expended approximately $1,756,000, $2,433,000 and
$1,405,000 on research and development during the years 1998, 1997 and
1996, respectively.
Patents
Access believes that the value of technology both to Access and to potential
corporate partners is established and enhanced by its broad intellectual
property positions. Consequently, Access already has issued and seeks to
obtain additional U.S. and foreign patent protection for products under
development and for new discoveries. Patent applications are filed with the
U.S. Patent and Trademark Office and, when appropriate, with the Paris
Convention's Patent Cooperation Treaty (PCT) Countries (most major
countries in Western Europe and the Far East) for its inventions and
prospective products.
One U.S. and one European patent has issued and two European patents are
pending for the use of zinc as a pharmaceutical vehicle for enhancing the
penetration and retention of drug in the skin. The patents cover the method
of inducing a reservoir effect in skin and mucous membranes to enhance
penetration and retention of topically applied therapeutic and cosmetic
pharmacologically active agents. The patents also relate to topical treatment
methods including such reservoir effect enhancers and to pharmaceutical
compositions containing them.
Access acquired the license to two U.S. and two PCT patent applications
for polymer platinum compounds through the Tacora acquisition. These
patent applications are the result of a collaboration between the Company
and the School of Pharmacy, University of London, from which the
technology has been licensed. The patents include a number of synthetic
polymers, including hydroxypropylmethacrylamide and polyamidoamines,
that can be used to exploit enhanced permeability and retention and control
drug release. The patent applications include a pharmaceutical composition
for use in tumor treatment comprising polymer-platinum compound through
linkages which are designed to be cleaved under selected conditions to yield
a platinum which accumulates at a tumor site. The patent applications also
include methods for improving the pharmaceutical properties of platinum
compounds.
Access, through its Tacora subsidiary, has four issued U.S. patents and one
pending European patent application in condensed-phase microparticles.
These patents are licensed from the Mayo Clinic and were acquired by
Access through the merger with Tacora in December 1997. This technology
is based on the Smart Polymer Matrices of Secretory Granules from
secretory cells such as the mast cell or goblet cell. The technology has the
following properties to control the storage and release of molecules within
the body: 1) encapsulation of high concentration of small molecules,
nucleotides and proteins; 2) highly stable storage medium for a variety of
naturally occurring biological molecules; and 3) release of stored products
in response to environments, external or internal signals to ensure correct
location, timing and concentration of secreted products in the body.
Access holds U.S. and European patents with broad composition of matter
claims encompassing glycosaminoglycan, acidic saccharide, carbohydrate
and other endothelial binding and targeting carriers in combination with
drugs and diagnostic agents formulated by both physical and chemical
covalent means. Nine patents have issued commencing in 1990 (eight U.S.
and one European) and an additional four patent applications are pending
(one U.S. and three European).
These patents and applications relate to the in vivo medical uses of drugs
and diagnostic carrier formulations which bind and cross endothelial and
epithelial barriers at sites of disease, including but not limited to treatment
and medical imaging of tumor, infarct, infection and inflammation. They
further disclose the body's induction of endothelial, epithelial, tissue and
blood adhesins, selectins, integrins, chemotaxins and cytotaxins at sites of
disease as a mechanism for selective targeting, and they claim recognized
usable carrier substances which selectively bind to these induced target
determinants.
Under the various license agreements with Block, Access has the worldwide
rights, excluding Japan, for the use of amlexanox for the treatment of
mucositis in patients undergoing chemotherapy and radiation treatment for
cancer and in AIDS patients, and the worldwide rights excluding Japan, the
United States and Israel for the use of amlexanox for dermatological use.
Block has the rights to market any product developed for dermatological use
in the U.S. and Takeda Chemical Industries, Ltd. has the rights to market
any product in Japan.
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Access has a strategy of maintaining an ongoing line of continuation
applications for each major category of patentable carrier and delivery
technology. By this approach, Access is extending the intellectual property
protection of its basic targeting technology and initial agents to cover
additional specific carriers and agents, some of which are anticipated to
carry the priority dates of the original applications.
Government Regulations
Access is subject to extensive regulation by the federal government,
principally by the FDA, and, to a lesser extent, by other federal and state
agencies as well as comparable agencies in foreign countries where
registration of products will be pursued. Although a number of Access'
formulations incorporate extensively tested drug substances, because the
resulting formulations make claims of enhanced efficacy and/or improved
side effect profiles, they are expected to be classified as new drugs by the
FDA.
The Federal Food, Drug and Cosmetic Act and other federal, state and
foreign statutes and regulations govern the testing, manufacturing, safety,
labeling, storage, shipping and record keeping of Access' products. The
FDA has the authority to approve or not approve new drug applications and
inspect research and manufacturing records and facilities.
Among the requirements for drug approval and testing is that the
prospective manufacturer's facilities and methods conform to the FDA's
Code of Good Manufacturing Practices ("GMP") regulations, which
establish the minimum requirements for methods to be used in, and the
facilities or controls to be used during, the production process. Such
facilities are subject to ongoing FDA inspection to insure compliance.
The steps required before a pharmaceutical product may be produced and
marketed in the U.S. include preclinical tests, the filing of an IND with the
FDA, which must become effective pursuant to FDA regulations before
human clinical trials may commence, and the FDA approval of a New Drug
Application ("NDA") prior to commercial sale.
Preclinical tests are conducted in the laboratory, usually involving animals,
to evaluate the safety and efficacy of the potential product. The results of
preclinical tests are submitted as part of the IND application and are fully
reviewed by the FDA prior to granting the sponsor permission to commence
clinical trials in humans. Clinical trials typically involve a three-phase
process. Phase I, the initial clinical evaluations, consists of administering
the drug and testing for safety and tolerated dosages as well as preliminary
evidence of efficacy in humans. Phase II involves a study to evaluate the
effectiveness of the drug for a particular indication and to determine optimal
dosage and dose interval and to identify possible adverse side effects and
risks in a larger patient group. When a product is found effective in Phase
II, it is then evaluated in Phase III clinical trials. Phase III trials consist
of expanded multi-location testing for efficacy and safety to evaluate the
overall benefit or risk index of the investigational drug in relationship to the
disease treated. The results of preclinical and human clinical testing are
submitted to the FDA in the form of an NDA for approval to commence
commercial sales.
The process of doing the requisite testing, data collection, analysis and
compilation of an IND and an NDA is labor intensive and costly and may
take a protracted time period. In some cases, tests may have to be redone
or new tests instituted to comply with FDA requests. Review by the FDA
may also take a considerable time period and there is no guarantee that an
NDA will be approved. Hence, Access cannot with any certainty estimate
how long the approval cycle may take.
Access is also governed by other federal, state and local laws of general
applicability, such as laws regulating working conditions, employment
practices, as well as environmental protection.
Competition
The pharmaceutical and biotechnology industry is characterized by intense
competition, rapid product development and technological change.
Competition is intense among manufacturers of prescription pharmaceuticals
and other product areas where the Company may develop and market
products in the future. Most of the Company's potential competitors are
large, well established pharmaceutical, chemical or health care companies
with considerably greater financial, marketing, sales and technical resources
than are available to the Company. Additionally, many of the Company's
potential competitors have research and development capabilities that may
allow such competitors to develop new or improved products that may
compete with the Company's product lines. The Company's potential
products could be rendered obsolete or made uneconomical by the
development of new products to treat the conditions to be addressed by the
Company's developments, technological advances affecting the cost of
production, or marketing or pricing actions by one or more of the
Company's potential competitors. The Company's business,
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financial condition and results of operation could be materially adversely
affected by any one or more of such developments. There can be no
assurance that the Company will be able to compete successfully against
current or future competitors or that competition will not have a material
adverse effect on the Company's business, financial condition and results
of operations. Academic institutions, governmental agencies and other
public and private research organizations are also conducting research
activities and seeking patent protection and may commercialize products on
their own or with the assistance of major health care companies. The
Company is aware of certain development projects for products to treat or
prevent certain diseases targeted by the Company. The existence of these
potential products or other products or treatments of which the Company
is not aware, or products or treatments that may be developed in the future,
may adversely affect the marketability of products developed by the
Company.
The Company believes that the principal current competitors to Access'
polymer targeting technology fall into two categories: monoclonal antibodies
and liposomes. Access believes that its technology potentially represents a
significant advance over these older technologies because its technology
provides a system with a favorable pharmacokinetic profile which has been
shown to effectively bind and cross neovascular barriers and to penetrate
the major classes of deep tissue and organ disease, which remain partially
inaccessible to other technologies.
A number of companies are developing or may in the future engage in the
development of products competitive with the Access delivery system.
Currently, liposomal formulations being developed by Nexstar, Inc., The
Liposome Company, Inc. and Sequus Pharmaceuticals, Inc. are the major
competing intravenous drug delivery formulations which deliver similar
drug substances. A number of companies are developing or evaluating
enhanced drug delivery systems. Access expects that technological
developments will occur at a rapid rate and that competition is likely to
intensify as various alternative delivery system technologies achieve certain
if not identical advantages.
Products developed from the Residerm technology will compete for a share
of the existing market with numerous products which have become standard
treatments recommended or prescribed by dermatologists. Residerm A,
which is the first product being developed utilizing the Residerm
technology, would compete with products including Benzamycin, marketed
by a subsidiary of Rhone-Poulenc Rorer Inc.; Cleocin-T and a generic
topical clindamycin, marketed by Pharmacia & Upjohn Co, Inc.; Benzac,
marketed by a subsidiary of L'Oreal; and Triaz, marketed by Medicis
Pharmaceutical Corp.
Even if Access' products are fully developed and receive required
regulatory approval, of which there can be no assurance, Access believes
that its products can only compete successfully if marketed by a company
having expertise and a strong presence in the therapeutic area.
Consequently, Access does not currently plan to establish an internal
marketing organization. By forming strategic alliances with major
pharmaceutical and diagnostic medical imaging companies, management
believes that Access' development risks should be minimized and that the
technology potentially could be more rapidly developed and successfully
introduced into the marketplace.
Employees
As of March 1, 1999, Access had 12 full time employees, six of whom
have advanced scientific degrees. Access believes that it maintains good
relations with its personnel. In addition, to complement its internal
expertise, Access contracts with scientific consultants, contract research
organizations and university research laboratories that specialize in various
aspects of drug development including toxicology, sterility testing and
preclinical testing to complement its internal expertise.
Operations Prior to January 1996
Access operated as Chemex prior to the Merger, which occurred on January
25, 1996. On September 14, 1995, the Chemex Stockholders approved the
sale of the rights to amlexanox to Block, while retaining the right to receive
royalties from future sales of amlexanox. As consideration for the sale of
the Company's share of amlexanox, Block (a) made a nonrefundable up-
front royalty payment of $2.5 million; (b) is obligated to pay Access $1.5
million as a prepaid royalty at the end of the calendar month during which
Block has achieved sales of amlexanox oral products of $25 million; and (c)
after the payment of such $1.5 million royalty, is obligated to pay royalties
to Access for all sales in excess of $45 million, as calculated pursuant to
the terms of the agreement, as amended.
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Risk Factors
Certain of the statements contained in this Annual Report on Form 10-K are
forward looking statements within the meaning of Section 27a of the
Securities Act of 1933, as amended, that involves risks and uncertainties
including but not limited to the risk factors set forth below:
History of Losses and Expectation of Future Losses; Uncertainty of Future
Profitability The Company has incurred a cumulative operating loss of
approximately $23.1 million through December 31, 1998. Losses have
resulted principally from costs incurred in research and development
activities related to the Company's efforts to develop target candidates and
from the associated administrative costs. The Company expects to incur
significant additional operating losses over the next several years and
expects cumulative losses to increase substantially due to expanded research
and development efforts, preclinical and clinical trials and development of
manufacturing capabilities. In the next few years, the Company's revenues
may be limited to any amounts received under research or drug
development collaborations that the Company may establish. There can be
no assurance, however, that the Company will be able to establish any
collaborative relationships on terms acceptable to the Company. The
Company's ability to achieve significant revenue or profitability is
dependent on its ability to successfully complete the development of drug
candidates, to develop and obtain patent protection and regulatory approvals
for the drug candidates and to manufacture and commercialize the resulting
drugs. The Company may not receive revenues or royalties from
commercial sales for a significant number of years, if at all. Failure to
receive significant revenues or to achieve profitable operations would impair
the Company's ability to sustain operations. There can be no assurance that
the Company will ever successfully identify, develop, commercialize,
patent, manufacture and market any additional products, obtain required
regulatory approvals or achieve profitability.
Research and Development Focus Access' focus is on commercializing
compounds covered by proprietary biopharmaceutical patents. Although
Access may in the future have some royalty income, Access is still in the
development stage, and its proposed operations are subject to all the risks
inherent in the establishment of a new business enterprise, including the
need for substantial capital. Access has recorded minimal revenue to date.
It is anticipated that Access will remain principally engaged in research and
development activities for an indeterminate, but substantial, period of time.
As a nonrevenue producing company, normal credit arrangements are
unavailable to Access, therefore, it is likely that Access would be forced to
accept unfavorable terms if it should attempt to raise additional needed
funds through borrowing. There can be no assurance that any such credit
arrangement would be available. Further, it is anticipated that additional
losses will be incurred in the future, and there can be no assurance that
Access will ever achieve significant revenues or profits.
Uncertainties Associated with Research and Development Activities
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 the research and development effort and ultimately could have a
material adverse effect on Access.
Absence of Operating Revenue Royalties received by Access for sales of
Actinex TM and amlexanox have not been significant to date. There can be
no assurance of revenue or profits in the future. Access currently has no
products approved for sale and there can be no assurance as to the
expenditures of time and resources that may be required to complete the
development of potential Access products and obtain approval for sale or
if such completion and approval can be realized.
Going Concern Uncertainty The Company's audited financial statements
at and for the twelve months ended December 31, 1998 contain a reference
to the Company's ability to continue as a going concern.
Early Stage of Product Development; No Assurance of Successful
Commercialization The Company's drug candidates will be subject to the
risks of failure inherent in the development of pharmaceutical products
based on new technologies. These risks include the possibilities that some
or all of the Company's drug candidates will be found to be unsafe,
ineffective or toxic or otherwise fail to meet applicable regulatory standards
or receive necessary regulatory clearances; that these drug candidates, if
safe and effective will be difficult to develop into commercially viable drugs
or to manufacture on a large scale or will be uneconomical to market; that
proprietary rights of third parties will preclude the Company from
marketing such drugs; or that third parties will market superior or
equivalent drugs. The failure to develop safe, commercially viable drugs
would have a material adverse effect on the Company's business, operating
results and financial condition.
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Additional Financing Requirements; Uncertainty of Available Funding The
Company will require substantial additional funds for its development
programs, for operating expenses, for pursuing regulatory clearances, and
for prosecuting and defending its intellectual property rights before it can
expect to realize significant revenues from commercial sales. The Company
believes that existing capital resources, interest income and revenue from
possible licensing agreements and collaborative agreements, will be
sufficient to fund its operating expenses and capital requirements as
currently planned for four to six months. However, there can be no
assurance that such funds will be sufficient to fund such operating expenses
and capital requirements during such period. The Company's actual cash
requirements may vary materially from those now planned and will depend
upon numerous factors, including the results of the Company's research and
development and collaboration programs, the timing and results of
preclinical trials, the ability of the Company to maintain existing and
establish new collaborative agreements with other companies to provide
funding to the Company, the technological advances and activities of
competitors and other factors. Thereafter, the Company will need to raise
substantial additional capital to fund its operations. The Company intends
to seek such additional funding through additional equity offerings or
collaborative or other arrangements with corporate partners. If additional
funds are raised by issuing equity securities, further dilution to existing
stockholders may result and future investors may be granted rights superior
to those of existing stockholders. There can be no assurance, however, that
any such equity offerings will occur, or that additional financing will be
available from any of these sources or, if available, will be available on
acceptable or affordable terms. If adequate funds are not available, the
Company may be required to delay, reduce the scope of or eliminate one
or more of its research and development programs or to obtain funds by
entering into arrangements with collaborative partners or others that require
the Company to issue additional equity securities or to relinquish rights to
certain technologies or drug candidates that the Company would not
otherwise issue or relinquish in order to continue independent operations.
Dependence on Others; Collaborations The Company's strategy for the
research, development and commercialization of its potential pharmaceutical
products may require the Company to enter into various arrangements with
corporate and academic collaborators, licensors, licensees and others, in
addition to those already established, and may therefore be dependent upon
the subsequent success of outside parties in performing their
responsibilities. There can be no assurance that the Company will be able
to establish additional collaborative arrangements or license agreements that
the Company deems necessary or acceptable to develop and commercialize
its potential pharmaceutical products, or that any of its collaborative
arrangements or license agreements will be successful.
No Marketing, Sales, Clinical Testing or Regulatory Compliance Activities
In view of the development stage of the Company and its research and
development programs, the Company has restricted hiring to research
scientists and a small administrative staff and has made no investment in
manufacturing, production, marketing, product sales or regulatory
compliance resources. If the Company successfully develops any
commercially marketable pharmaceutical products, it may seek to enter joint
venture, sublicense or other marketing arrangements with parties that have
an established marketing capability or it may choose to pursue the
commercialization of such products on its own. There can be no assurance,
however, that the Company will be able to enter into such marketing
arrangements on acceptable terms, if at all. Further, the Company will need
to hire additional personnel skilled in the clinical testing and regulatory
compliance process and in marketing or product sales if it develops
pharmaceutical products that it commercializes itself. There can be no
assurance, however, that it will be able to acquire such resources or
personnel.
Manufacturing Limitations The Company intends to establish arrangements
with contract manufacturers to supply sufficient quantities of products to
conduct clinical trials as well as for the manufacture, packaging, labeling
and distribution of finished pharmaceutical products if its potential products
are approved for commercialization. If the Company is unable to contract
for a sufficient supply of its potential pharmaceutical products on acceptable
terms, the Company's preclinical and human clinical testing schedule may
be delayed, resulting in the delay of submission of products for regulatory
approval and initiation of new development programs, which may have a
material adverse effect on the Company. If the Company encounters delays
or difficulties in establishing relationships with manufacturers to produce,
package, label and distribute its finished pharmaceutical or other medical
products (if any), market introduction and subsequent sales of such products
would be adversely affected. Moreover, contract manufacturers that the
Company may use must adhere to current Good Manufacturing Practices
("GMP") required by the FDA. Manufacturing facilities must pass a
preapproval plant inspection before the FDA will issue a pre-market
approval or product and establishment licenses, where applicable, for the
products. If the Company is unable to obtain or retain third party
manufacturing on commercially acceptable terms, it may not be able to
commercialize its products as planned. The Company's potential
dependence upon third parties for the manufacture of its products may
adversely affect the Company's profit margins and its ability to develop and
deliver such products on a timely
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and competitive basis. The Company has no experience in the manufacture
of pharmaceutical products in clinical quantities or for commercial
purposes. In addition, there can be no assurance that the Company will be
able to manufacture or enter into arrangements with third parties for the
manufacture of any products successfully and in a cost-effective manner.
Hazardous Materials; Environmental Matters The Company's research and
development processes involve the controlled use of hazardous materials.
The Company is subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such
material and certain waste products. Although the Company believes that
its 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,
the Company could be held liable for any damages that result and such
liability could exceed the resources of the Company. Although the Company
believes that it is in compliance in all material respects with applicable
environmental laws and regulations and currently does not expect to make
material capital expenditures for environmental control facilities in the near-
term, there can be no assurance that the Company will not be required to
incur significant costs to comply with environmental laws and regulations
in the future, nor that the operations, business or assets of the Company
will not be materially adversely affected by current or future environmental
laws or regulations.
Impact of Extensive Government Regulation 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, sampling activities
and other costly and time-consuming procedures to establish their safety and
efficacy. All of the Company's drug candidates will require governmental
approvals for commercialization, none of which have been obtained.
Preclinical and clinical trials and manufacturing of the Company's 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. There can be no assurance as to when the Company, independently
or with its collaborative partners, might submit an Investigational New
Drug Application ("IND") for FDA or other regulatory review.
Government regulation also affects the manufacturing and marketing of
pharmaceutical products.
The effect of government regulation may be to delay marketing of the
Company's potential drugs for a considerable or indefinite period of time,
impose costly procedural requirements upon the Company's 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 the Company's marketing as well
as the Company's ability to generate significant revenues from commercial
sales. There can be no assurance that FDA or other regulatory approvals
for any drug candidates developed by the Company will be granted 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 initial regulatory approvals for
the Company's drug candidates are obtained, the Company, its drugs and
its 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 such drug
or manufacturer, including withdrawal of the drug from the market. The
regulatory standards are applied stringently by the FDA and other
regulatory authorities and failure to comply can, among other things, result
in fines, denial or withdrawal of regulatory approvals, product recalls or
seizures, operating restrictions and criminal prosecution.
The FDA has developed two "fast track" policies for certain new drugs
(including anti-cancer agents), one policy for expedited development and
review and one policy for accelerated approval. The expedited development
and review policy applies to new drug therapies that are intended to treat
persons with life threatening and severely debilitating illnesses, especially
where no satisfactory alternative therapy exists. The accelerated approval
policy applies to certain new drugs that are intended to treat person with
serious or life-threatening illnesses that provide a meaningful therapeutic
benefit to patients over existing treatments. See "Business-Government
Regulation." There can be no assurance that any drug candidate
contemplated by the Company will qualify for the FDA's various fast track
or priority approval policies. Nor can there be any assurance that such
policies will remain as currently implemented by the FDA.
Drug-related Risks Adverse side effects of treatment of diseases and
disorders in both human and animal patients are business risks in the
pharmaceutical industry. 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 cause a company to terminate its efforts to develop the
drug for commercial use. Even after FDA approval of an NDA, adverse
side effects may
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develop to a greater extent than anticipated during the clinical testing phase
and could result in legal action against a company. Drug developers and
manufacturers, including Access, may face substantial liability for damages
in the event of adverse side effects or product defects identified with their
products used in clinical tests or marketed to the public. There can be no
assurance that Access will be able to satisfy any claims for which it may be
held liable resulting from the use or misuse of products which it has
developed, manufactured or sold.
Potential Product Liability and Availability of Insurance The Company's
business exposes it to potential liability risks that are inherent in the
testing, manufacturing and marketing of pharmaceutical products. The use of
the Company's drug candidates in clinical trials may expose the Company to
product liability claims and possible adverse publicity. The risks will
expand with respect to the Company's drug candidates, if any, that receive
regulatory approval for commercial sale. Product liability insurance for the
biotechnology industry is generally expensive, if available at all. The
Company does not have product liability insurance but intends to apply for
such coverage if and when its drug candidates are tested in human clinical
trials. However, such coverage is becoming increasingly expensive and
there can be no assurance that the Company will be able to obtain insurance
coverage at acceptable costs or in a sufficient amount, if at all, or that a
product liability claim would adversely affect the Company's business,
operating results or financial condition.
Reimbursement and Drug Pricing Uncertainty The successful
commercialization of, and the interest of potential collaborative partners to
invest in, the development of the Company's drug candidates will depend
substantially on reimbursement of the costs of the resulting drugs and
related treatments at acceptable levels from government authorities, private
health insurers and other organizations, such as health maintenance
organizations ("HMOs"). There can be no assurance that reimbursement in
the United States or elsewhere will be available for any drugs the Company
may develop or, if available, will not be decreased in the future, or that
reimbursement amounts will not reduce the demand for, or the price of, the
Company's drugs, thereby adversely affecting the Company's business. If
reimbursement is not available or is available only to limited levels, there
can be no assurance that the Company will be able to obtain collaborative
partners to commercialize its drugs, or would be able to obtain a sufficient
financial return on its own manufacture and commercialization of any future
drugs.
Third-party payers are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed health care
in the United States and the concurrent growth of organizations such as
HMOs, which can control or significantly influence the purchase of health
care services and products, as well as legislative proposals to reform health
care or reduce government insurance programs, may result in lower prices
of pharmaceutical products. The cost containment measures that health care
providers are instituting, including practice protocols and guidelines and
clinical pathways, and the effect of any health care reform, could materially
adversely affect the Company's ability to sell any of its drugs if successfully
developed and approved. Moreover, the Company is unable to predict what
additional legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the
future or what effect such legislation or regulation would have on the
Company's business.
Uncertainty of Patents and Proprietary Rights The Company's success will
depend in part on its ability to obtain U.S. and foreign patent protection for
its drug candidates and processes, preserve its trade secrets and operate
without infringing the proprietary rights of third parties. Because of the
length of time and expense associated with bringing new drug candidates
through the development and regulatory approval process to the
marketplace, the pharmaceutical industry has traditionally placed
considerable importance on obtaining patent and trade secret protection for
significant new technologies, products and processes. Although Access has
eighteen U.S. patents and is either the owner or licensee of technology as
to which there are three U.S. patent applications now pending, there can be
no assurance that any additional patents will issue from any of the patent
applications owned by, or licensed to, the Company. Further, there can be
no assurance that any rights the Company may have under issued patents
will provide the Company with significant protection against competitive
products or otherwise be commercially viable. 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. 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.
There can be no assurance that any existing or future patents issued to, or
licensed by, the Company will not subsequently be challenged, infringed
upon, invalidated or circumvented by others. 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 the Company's
drug candidates. If the Company's drug candidates or processes are found
to infringe upon the patents or otherwise impermissibly utilize the
intellectual property of others, the Company's development, manufacture
and sale of such drug candidates could be severely restricted or prohibited.
In such event, the Company may be required to obtain licenses from third
parties to utilize the patents or proprietary rights of others. There can be
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no assurance that the Company will be able to obtain such licenses on
acceptable terms, or at all. If the Company becomes involved in litigation
regarding its intellectual property rights or the intellectual property rights
of others, the potential cost of such litigation (regardless of the strength of
the Company's legal position) and the potential damages that the Company
could be required to pay could be substantial.
In addition to patent protection, the Company relies on trade secrets,
proprietary know-how and technological advances which it seeks to protect,
in part, by confidentiality agreements with its collaborative partners,
employees and consultants. There can be no assurance that these
confidentiality agreements will not be breached, that the Company would
have adequate remedies for any such breach, or that the Company's trade
secrets, proprietary know-how and technological advances will not
otherwise become known or be independently discovered by others.
Intense Competition The biotechnology and pharmaceutical industries are
intensely competitive and subject to rapid and significant technological
change. Competitors of the Company 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. 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 the Company or its collaborative partners. Acquisitions
of competing companies and potential competitors by large pharmaceutical
companies or others could enhance financial, marketing and other resources
available to such competitors. As a result of academic and government
institutions becoming increasingly aware of the commercial value of their
research findings, such institutions are more likely to enter into exclusive
licensing agreements with commercial enterprises, including competitors of
the Company, to market commercial products. There can be no assurance
that the Company's competitors will not succeed in developing technologies
and drugs that are more effective or less costly than any which are being
developed by the Company or which would render the Company's
technology and future products obsolete and noncompetitive.
In addition, some of the Company's competitors have greater experience
than the Company in conducting preclinical and clinical trials and obtaining
FDA and other regulatory approvals. Accordingly, the Company's
competitors may succeed in obtaining FDA or other regulatory approvals
for drug candidates more rapidly than the Company. 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, including certain patent and
FDA marketing exclusivity rights that would delay the Company's ability
to market certain products. There can be no assurance that drugs resulting
from the Company's research and development efforts, or from the joint
efforts of the Company and its collaborative partners, will be able to
compete successfully with competitors' existing products or products under
development or that they will obtain regulatory approval in the United
States or elsewhere.
Uncertainty Associated with Preclinical and Clinical Testing Before
obtaining regulatory approvals for the commercial sale of any of the
Company's potential drugs, the drug candidates will be subject to extensive
preclinical and clinical trials to demonstrate their safety and efficacy in
humans. The Company is dependent on its collaborative partners to conduct
clinical trials for drug candidates. Furthermore, there can be no assurance
that preclinical or clinical trials of any future drug candidates will
demonstrate the safety and efficacy of such drug candidates at all or to the
extent necessary to obtain regulatory approvals. Companies in the
biotechnology industry have suffered significant setbacks in advanced
clinical trials, even after demonstrating promising results in earlier trials.
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 and would have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business-Government Regulation."
No Assurance of Market Acceptance There can be no assurance that any
drugs successfully developed by the Company, independently or with its
collaborative partners, if approved for marketing, will achieve market
acceptance. The drugs which the Company is attempting to develop will
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 the Company will depend on a
number of factors, including the establishment and demonstration of the
clinical efficacy and safety of the Company's drug candidates, their
potential advantage over existing therapies and reimbursement policies of
government and third-party payers. There is no assurance that physicians,
patients or the medical community in general will accept and utilize any
drugs that may be developed by the Company independently or with its
collaborative partners.
Dependence on Key Personnel The Company is highly dependent upon the
efforts of its senior management and scientific team, including its President
and Chief Executive Officer. The Company does not maintain key man life
insurance for any of its key employees and does not intend to obtain such
insurance. The loss of the services of one or
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more of these individuals might impede the achievement of the Company's
development objectives. Because of the specialized scientific nature of the
Company's business, the Company is highly dependent upon its ability to
attract and retain qualified scientific and technical personnel. 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 the Company's activities.
Concentration of Ownership Dr. David Ranney and Nicholas Madonia
currently beneficially own approximately 13.3% and 7.9% respectively, of
the issued and outstanding Common Stock. Dr. Ranney and Mr. Madonia
have agreed not to sell any shares of Common Stock of the Company until
January 11, 2001 without the approval of the placement agent of 1998
placement of securities. Richard Stone, currently beneficially owns 6.3%
of the issued and outstanding Common Stock of Access. Mr. Stone has not
signed a lock-up agreement, except as to the Shares he will receive in the
Acquisition. See "Certain Relationships and Related Transactions."
Possible Volatility of Stock Price Stock prices for many technology
companies fluctuate widely for reasons which may be unrelated to operating
performance or new product or service announcements. Broad market
fluctuations, earnings and other announcements of other companies, general
economic conditions or other matters unrelated to Access and outside its
control also could affect the market price of the Common Stock. See
"Market For The Registrant's Common Equity And Related Stockholders
Matters."
Limited Market for Common Stock Trading in Access' securities is
presently conducted in the over-the-counter market on the OTC Bulletin
Board. As a result, an investor may find it difficult to dispose of, or to
obtain accurate quotations as to the price of the Company's securities. In
addition, the Company's securities are subject to a rule that imposes
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited
investors (generally with assets of $1,000,000, or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered
by this rule, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to the sale. Consequently, the rule may affect the ability
of broker-dealers to sell the securities of the Company and may effect the
ability of purchasers to sell their securities in the secondary market.
Effect of Certain Charter and By-Law Provisions; Possible Issuance of
Preferred Stock Access' Certificate of Incorporation and By-laws contain
provisions that may discourage acquisition bids for Access. This could limit
the price that certain investors might be willing to pay in the future for
shares of Common Stock. In addition, shares of Access 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 the Board of Directors may determine (including, for
example, rights to convert into Common Stock). The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any Access Preferred Stock that may be issued in
the future. The issuance of Access 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, or discouraging a third party from acquiring, a
majority of the outstanding voting Common Stock of Access.
Market Impact of Future Sales of Common Stock Sales of substantial
amounts of shares of Access Common Stock in the public market could
adversely affect the market price of the Common Stock. As of the date
hereof, all outstanding shares of Common Stock are unrestricted and freely
tradable or tradable under Rule 144 (as defined below); however,
shareholders holding approximately 899,000 shares of Common Stock have
agreed not to sell any such shares until January 11, 2001. There also are
outstanding options, warrants and rights to purchase up to approximately
1.2 million shares of the Common Stock. The sale of a substantial number
of shares of Common Stock could have a material adverse effect on the
future market price of the Common Stock.
Absence of Dividends Access has not paid cash dividends on its Common
Stock and does not anticipate paying cash dividends on Common Stock in
the foreseeable future. See "Market For The Registrant's Common Equity
And Related Stockholders Matters."
NASD Listing Requirements The Company's shares were delisted from the
NASDAQ Small Cap Market effective April 27, 1995 for failure to meet
certain financial criteria. The Common Stock continues to be traded in the
over-the-counter market and reported on the OTC Bulletin Board. As such,
the Common Stock, when recommended by a broker-dealer, is subject to
the limitations of rule 15g-9 under the Exchange Act, which Rule imposes
additional sales practices requirements on broker-dealers that sell the
Common Stock (1) to persons other than (a) existing customers with a
previous history of trading through such broker-dealer, (b) institutional
accredited investors (for example, a bank or savings and loan association)
and (c) a director and/or officer of the Company and/or the beneficial
owner of 5% or
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more of the Common Shares or (2) in transactions not exempt by the Rule.
For transactions under Rules 15g-9, the broker-dealer must obtain written
information from the prospective purchaser as to his or her financial
situation, investment experience and investment objectives and, based on
such information, reasonably determine that transactions in the security are
suitable for that person and that the prospective investor (or his or her
independent adviser) has sufficient knowledge and experience in financial
matters so as to be reasonably expected to be capable of evaluating the risks
of transactions in such security. The broker-dealer must also receive the
purchaser's written agreement to the transaction prior to the sale. Certain
broker-dealers, particularly if they are market makers in the Common
Stock, will have to comply with the disclosure requirements of Rule 15g-2,
15g-3, 15g-4, 15g-5 and 15g-6 under the Exchange Act. Consequently,
Rule 15g-9 and these other Rules may adversely affect the ability of broker-
dealers to sell the Common Stock and also may adversely affect the ability
of purchasers in this Offering to sell their shares in the secondary market.
The Company plans to file an NASD listing application as soon as it meets
the listing requirements. However, the Company currently does not meet
all of such listing requirements, including without limitation the minimum
stock price criterion.
Penny Stock Regulation; Illiquid Securities The regulations of the Securities
and Exchange Commission (the "Commission") promulgated under the
Exchange Act require additional disclosure relating to the market for penny
stock in connection with trades in any stock defined as a penny stock.
Commission regulations generally define a penny stock to be an equity that
has a market price of less than $5.00 per share, subject to certain
exceptions. Unless an exception is available, those regulations require the
delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated
therewith and impose various sales practice requirements on broker-dealers
who sell penny stocks to persons other than established customers and
accredited investors (generally institutions). In addition, the broker-dealer
must provide the customer with current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and its salesperson in
the transaction and monthly account statements showing the market value
of each penny stock held in the customer's account. Moreover, broker-
dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written
agreement to transactions prior to sale. Regulations on penny stocks could
limit the ability of broker-dealers to sell the Company's securities and thus
the ability of purchasers of the Company's securities to sell their securities
in the secondary market.
Year 2000 Issue The Year 2000 ("Y2K") issue is the result of computer
programs using two instead of four digits to represent the year. These
computer programs may erroneously interpret dates beyond the year 1999,
which could cause system failures or other computer errors, leading to
disruptions in operations.
The Company has developed a three-phase program to limit or eliminate
Y2K exposures. Phase I is to identify those systems, applications and third-
party relationships from which the Company has exposure to Y2K
disruptions in operations. Phase II is the development and implementation
of action plans to achieve Y2K compliance in all areas prior to the end of
the third quarter of 1999. Also included in Phase II is the development of
contingency plans which would be implemented should Y2K compliance not
be achieved in order to minimize disruptions in operations. Phase III is the
final testing or equivalent certification of testing of each major area of
exposure to ensure compliance. The Company intends to complete all
phases before the end of the third quarter of 1999.
The Company has identified three major areas determined to be critical for
successful Y2K compliance: Area 1, which includes financial, research and
development and administrative informational systems applications reliant
on system software; Area 2, which includes research, development and
quality applications reliant on computer programs embedded in
microprocessors; and Area 3, which includes third-party relationships which
may be affected by Area 1 and 2 exposures which exist in other companies.
With respect to Area 1, the Company has completed an internal review and
contacted all software suppliers to determine major areas of Y2K exposure.
In research, development and quality applications (Area 2), the Company
has worked with equipment manufactures to identify our exposures. With
respect to Area 3, the Company has evaluated our reliance on third parties
in order to determine whether their Y2K compliance will adequately assure
our uninterrupted operations.
The Company has completed Phase I of our Y2K program with respect to
all three of the major areas. The Company relies on PC-based systems and
does not expect to incur material costs to transition to Y2K compliant
systems in its internal operations. However, even if the internal systems of
the Company are not materially affected by the Y2K Issue, the Company
could be affected by third-party relationships which, if not Y2K compliant
prior to the end of 1999, could
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have a material adverse impact on our operations. Because the Company
has not completed Phase II contingency planning, the Company can not
describe what action the Company would take in any of the areas should
Y2K compliance not be achievable in time. As such, there can be no
assurance that the Y2K Issue will not have a material adverse effect on the
Company's business, financial condition or results of operations.
As of December 31, 1998, we have identified costs related to replacement
or remediation and testing of our Area 1 computer information systems.
Having completed the Phase I evaluation, total costs to date are $5,000. We
estimate the potential future cost of our Y2K compliance programs is
$25,000. The funds for these costs will be part of our current working
capital. These costs will be expensed as incurred except for equipment
related costs.
ITEM 2. PROPERTIES
Access maintains one facility of approximately 9,100 square feet for
administrative offices and laboratories in Dallas, Texas. Access has a lease
agreement for the facility, which terminates in November 2002. However,
the Company has an option for early termination. Adjacent space is
available for expansion which the Company believes would accommodate
growth for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Access is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
Price Range of Common Stock and Dividend Policy
The Company's Common Stock trades on the OTC Bulletin Board under the
trading symbol AXCS. The following table sets forth, for the periods
indicated, the high and low closing prices for the Common Stock as
reported by the OTC Bulletin Board for the Company's past two fiscal
years. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Common Stock
------------
High Low
------ ------
Fiscal Year Ended December 31, 1998
First quarter $14-1/16 $ 5
Second quarter 5-5/8 3-1/16
Third quarter 3-25/64 1-11/64
Fourth quarter 3-37/64 1-5/8
Fiscal Year Ended December 31, 1997
First quarter $25-5/8 $14-3/8
Second quarter 17-3/16 7-1/2
Third quarter 10 3-3/4
Fourth quarter 14-1/16 4-1/16
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The Company has never declared or paid any cash dividends on its
Preferred Stock or Common Stock and does not anticipate paying any cash
dividends in the foreseeable future. The payment of dividends, if any, in the
future is within the discretion of the Board of Directors and will depend on
Access' earnings, its capital requirements and financial condition and other
relevant facts. The Company currently intends to retain all future earnings,
if any, to finance the development and growth of the Company's business.
The number of record holders of Access Common Stock at March 25, 1999
was approximately 5,000. On March 25, 1999, the closing sale price for the
Common Stock as quoted on the OTC Bulletin Board was $2.92. There
were 3,429,402 shares of Common Stock outstanding at March 25, 1999.
To date, no preferred shares have been issued.
Recent Sales of Unregistered Securities
None
ITEM 6. SELECTED FINANCIAL DATA (Thousands, Except for Net
Loss Per Share)(1,2)
The following data, insofar as it relates to each of the years in the five year
period ended December 31, 1998, has been derived from the audited
financial statements of Access and notes thereto appearing elsewhere herein.
The data should be read in conjunction with the Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Form
10K.
For the Year Ended December 31,
--------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Consolidated Statement of Operations Data:
Total Revenues $ - $ 435 $ 167 $ 690 $ 1,039
Operating Loss (3,433) (4,524) (11,613) (1,046) (466)
Other Income 58 11 91 96 59
Interest Expense 22 36 45 58 19
Loss Before Income Taxes (3,397) (4,441) (11,462) (1,099) (476)
Income taxes - - - - -
Net Loss (3,397) (4,441) (11,462) (1,099) (476)
Common Stock Data:
Net Loss Per Basic and
Diluted Common Share $(1.28) $(2.80) $(7.68) $(1.86) $(.85)
Weighted Average Basic and
Diluted Common Shares
Outstanding 2,654 1,584 1,492 592 558
December 31,
----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Total Assets $ 2,351 $ 1,447 $ 4,928 $ 424 $ 1,261
Unearned Revenue - - 110 110 -
Total Liabilities 556 848 868 773 731
Stockholders' Equity (Deficit) 1,795 599 4,060 (349) 531
(1) Reflects Company data for 1998, 1997 and 1996 and API data for the
years 1995 and 1994. Net Loss Per Basic and Diluted Common Share and
Weighted Average Basic and Diluted Common Shares Outstanding are
adjusted by the conversion factor 3.824251 used for the merger of API with
the Company.
(2) All share and per share amounts have been adjusted to reflect the one
for twenty reverse stock split in June 1998.
On January 25, 1996, the Company shareholders, at a Special Meeting,
approved the merger with Access Pharmaceuticals, Inc. ("API"), a Texas
corporation. Under the terms of the agreement, API was merged into the
Company with Chemex as the surviving entity. Chemex also changed its
name to Access Pharmaceuticals, Inc. and the operations of the consolidated
company are now based in Dallas, Texas. Shareholders of both companies
approved the merger.
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As a result of the merger, and at time of the merger, the former API
stockholders owned approximately 60% of the issued and outstanding shares
of the Company. Generally accepted accounting principles require that a
company whose stockholders retain the controlling interest in a combined
business be treated as the acquiror for accounting purposes. As a
consequence, the merger is being accounted for as a "reverse acquisition"
for financial reporting purposes and API has been deemed to have acquired
an approximate 60% interest in Chemex. Despite the financial reporting
requirement to account for the acquisition as a "reverse acquisition", the
Company remains the continuing legal entity and registrant for Securities
and Exchange Commission reporting purposes.
Subsequent to the Merger of API into Access, the Company is now
managed by the former management of API and the focus of the Company
has changed to the development of enhanced delivery of parenteral
therapeutic and diagnostic imaging agents and topical delivery systems
through the utilization of its patented and proprietary technology.
On December 9, 1997, a wholly-owned subsidiary of the Company acquired
and merged with Tacora Corporation ("Tacora"), a privately-held
pharmaceutical company based in Seattle, Washington; Tacora became a
wholly-owned subsidiary of the Company. The Company used the purchase
method of accounting for the purchase of Tacora. The aggregate purchase
price was $739,000 payable $124,000 in cash, $192,000 in stock
(representing 20,900 shares of Company common stock) and assumption of
$239,000 in trade and accrued payables and $184,000 of Tacora's capital
lease obligations, plus up to 137,500 shares in additional Common Stock if
certain milestones are met. The share price to be used will range between
$2.50 and $6.50 per share (range of value of shares is $344,000 to
$894,000), depending on when the milestones are met. All milestone
conditions expire in June 2000. The aggregate purchase price has been
allocated to the net assets acquired based on management's estimates of the
fair values of assets acquired and liabilities assumed. The excess purchase
price over the fair value of Tacora's net identifiable assets of $579,544 was
recorded and written off in the fourth quarter of 1997 due to an impairment
of the excess purchase price based on estimated future cash flows.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Access Pharmaceuticals, Inc. (together with its subsidiary, "Access" or the
"Company") is a Delaware corporation in the development stage. The
Company is a site-directed drug targeting company using bioresponsive
carriers to target and control the release of therapeutic agents into sites of
disease activity and significantly improve the side effect profile of the
agents. The Company has proprietary patents or rights to four technology
platforms: synthetic polymers, Residerm TM, carbohydrate targeting
technology and selective muscle and nerve delivery systems. In addition,
Access' partner Block is marketing Aphthasol TM in the United States, the
first FDA approved product for the treatment of canker sores. Access is
currently licensing this product in certain international markets and
developing new delivery forms.
In connection with the merger ("Merger") of Access Pharmaceuticals, Inc.,
a Texas corporation ("API"), with and into Chemex Pharmaceuticals, Inc.
("Chemex") on January 25, 1996, the name of Chemex was changed to
Access Pharmaceuticals, Inc. ("Access" or the "Company").
As a result of the Merger and immediately after the Merger, the former
API Stockholders owned approximately 60% of the issued and outstanding
shares of the Company. Generally accepted accounting principles require
that a company whose stockholders retain the controlling interest in a
combined business be treated as the acquiror for accounting purposes. As
a consequence, the merger was accounted for as a "reverse acquisition" for
financial reporting purposes and API was deemed to have acquired an
approximate 60% interest in Chemex. Despite the financial reporting
requirement to account for the acquisition as a "reverse acquisition,"
Chemex remains the continuing legal entity and registrant for Securities and
Exchange Commission reporting purposes.
Subsequent to the Merger of API into Access, the Company has been
managed by the former management of API and the focus of the Company
has changed to a drug delivery company using advanced drug carrier
technology for application in cancer treatment, dermatology and imaging.
In addition, the Company has developed a drug to treat canker sores that
was sold to Block and is currently being marketed in the United States by
Block subject to a royalty agreement with the Company.
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On June 18, 1998, in conjunction with the first closing of a private
placement, the Company effected a recapitalization of the Company through
a one-for-twenty reverse stock split of its common stock, $0.04 par value
per share, which decreased the number of authorized shares of common
stock from 60.0 million, at $0.04 par value per share, to 20.0 million
shares, $0.01 par value per share (the "Common Stock"), and decreased the
authorized shares of preferred stock of the Company from 10.0 million to
2.0 million (the "Recapitalization"). The Recapitalization decreased the
number of outstanding shares of Common Stock from approximately 41.5
million to 2.1 million.
All share numbers and prices referenced herein have been adjusted to
reflect the Recapitalization.
An investment bank has been engaged to assist the Company in raising
funds to support the Company's research and development activities. As
discussed below, from March to July 1998, the Company raised an
aggregate of $5.0 million. The Company is currently seeking to raise up to
an additional $8.0 million to support product development activities. There
can be no assurance, however, that any such equity offerings will occur, or
that additional financing will be available from any of these sources or, if
available, will be available on acceptable or affordable terms.
In 1998, the Company, assisted by an investment bank, raised $1,200,000
in gross proceeds ($725,000 received on March 20, 1998 and $475,000
received on April 11, 1998) less cash issuance costs of $47,000, from the
placement of 48 units, each unit consisting of 8,333 shares of Common
Stock and warrants to purchase 8,333 shares of Common Stock at an
exercise price of $3.00 per share. The placement agent received warrants
to purchase 44,527 shares of Common Stock at $3.00 per share, in
accordance with the offering terms and elected to receive 45,277 shares of
Common Stock in lieu of certain sales commissions and expenses.
On June 18, 1998, the Company, assisted by the same investment bank,
raised an aggregate of $2.9 million in gross proceeds, less cash issuance
costs of $202,000, from the first closing of a private placement of 953,573
shares of Common Stock at $3.00 per share. The placement agent for such
offering received warrants to purchase 101,653 shares of Common Stock
at $3.00 per share, in accordance with the offering terms and elected to
receive 62,949 shares of Common Stock in lieu of certain sales
commissions and expenses.
On July 30, 1998, the Company, assisted by the same investment bank,
raised an aggregate of $900,000 in gross proceeds, less cash issuance costs
of $24,000, from the second closing of a private placement of 300,000
shares of Common Stock at $3.00 per share. The placement agent for such
offering received warrants to purchase 33,445 shares of Common Stock at
$3.00 per share, in accordance with the offering terms and elected to
receive 34,450 shares of Common Stock in lieu of certain sales
commissions and expenses.
Issuance costs for the above placements totaled $405,000. The proceeds of
the offering will be used to fund research and development, working
capital, acquisitions of complementary companies or technologies and
general corporate purposes.
If and when the Company satisfies all listing requirements, the Company
intends to submit an application for listing on NASDAQ or an alternate
exchange. There can be no assurances that the Company will be listed on
NASDAQ or an alternate exchange.
On December 9, 1997, a wholly-owned subsidiary of Access acquired and
merged with Tacora Corporation ("Tacora"), a privately-held
pharmaceutical company based in Seattle, Washington; Tacora became a
wholly-owned subsidiary of Access. The Company used the purchase
method of accounting for the purchase of Tacora. The aggregate purchase
price was $739,000, payable $124,000 in cash, $192,000 in stock
(representing 20,900 shares of Company Common Stock) and assumption
of $239,000 in trade and accrued payables and $184,000 of Tacora's capital
lease obligations plus up to 137,500 shares if additional Common Stock if
certain milestones are met. The share price to be used will range between
$2.50 and $6.50 per share (range of value of shares is $344,000 to
$894,000), depending on when the milestones are met. All milestone
conditions expire in June 2000. The aggregate purchase price has been
allocated to the net assets acquired based on management's estimation of the
fair value of assts acquired and liabilities assumed. The excess purchase
price over the fair value of Tacora's net identifiable assets of $580,000 was
recorded and written off in the fourth quarter of 1997 due to an impairment
of the excess purchase price based on estimated future cash flows.
Operations of Tacora have been included in the Company's consolidated
financial statements since the date of acquisition. Pro forma disclosure
relating to the Tacora acquisition is not presented as the impact is
immaterial to the Company.
Since its inception, Access has devoted its resources primarily to fund its
research and development programs. The Company has been unprofitable
since inception and to date has not received any revenues from the sale of
products. No
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assurance can be given that the Company will be able to
generate sufficient product revenues to attain profitability on a sustained
basis, if at all. The Company expects to incur losses for the next several
years as it continues to invest in product research and development,
preclinical studies, clinical trials and regulatory compliance. At
December 31, 1998, the Company's accumulated deficit was approximately
$23.1 million.
Recent Developments
On June 8, 1998, the Company entered into an agreement to license from
Block Drug Company the rights to amlexanox oral paste 5% for certain
international markets. Amlexanox oral paste 5% was jointly developed by
the Company and Block Drug Company, and was subsequently purchased
by Block Drug Company with the Company receiving an up front fee and
future royalty payments. Amlexanox oral paste 5% is currently marketed
in the United States by Block Drug under the trademark Aphthasol TM.
Aphthasol TM was launched to the dental market in December 1997 and
was launched to the general practice physician market in June 1998.
Access has announced agreements or letters of intent with the following
international partners to market amlexanox 5% paste: In the UK and Ireland
Access signed an agreement on August 18, 1998 with Strakan Limited.
Under the terms of the agreement, Strakan will bear all costs associated
with the regulatory process in the UK and the European community, and
will pay milestones based on cumulative sales and a royalty on sales. On
August 20, 1998 Access signed a Letter of Intent with Paladin Labs, Inc.
for marketing rights for amlexanox in Canada. Paladin will bear all costs
associated with gaining regulatory approval in Canada, and will pay
milestones based on cumulative sales revenue and a royalty on sales.
Paladin is a subsidiary of PharmaScience. Access signed a license
agreement in January 1999 with Meda AB of Sweden for licensing rights
in Sweden, Finland, Norway, Denmark, Latvia, Estonia, Lithuania and
Iceland. Under the terms of the agreement, Meda will make an up-front
license payment, pay milestone payments and a royalty on sales. Access
signed a Letter of Intent on October 15, 1998 with Laboratoios Dr. Esteve,
to license amlexanox for Italy, Spain, Portugal and Greece. Esteve will
make an up-front license payment, pay milestone payments and will pay a
royalty on sales.
Access signed an agreement on August 25, 1998 with Atrix Laboratories,
Inc. ("Atrix") to incorporate amlexanox in the proprietary mucoadhesive
technologies being developed by Atrix. Atrix is developing an innovative
bioerodiable mucoadhesive ("BEMA") delivery system, which is a thin film
that adheres to the oral mucosa and erodes over time delivering the drug
into the tissue. Also under development is a film forming mucocutaneous
adsorption ("MCA") gel that deposits a film upon application to mucosal
surfaces adhering well to wet or damp skin, this technology can also be
adapted to an aerosal spray delivery system.
It is anticipated that within three months a formulation could be ready for
clinical testing. Access will fund the Atrix project development activities;
however, Block Drug Company will share in the development costs by way
of a reduction in the royalty Access will pay Block for international sales.
The international rights to any product resulting from the collaboration with
Atrix will be out-licensed by Access to its amlexanox licensing partners.
Atrix will receive a royalty on all worldwide sales of products incorporating
its propriety technology.
On March 1, 1999 the Company and a wholly owned subsidiary of the
Company entered into a merger agreement with Virologix Corporation
("Virologix"), whereby Virologix will become a wholly owned subsidiary
of the Company. The closing of the merger is subject to certain conditions,
including the condition that the Company raise at least $3.0 million in
equity financing.
Virologix is a privately held company focused on the development of
product candidates for the prevention and treatment of viral diseases
including HIV. Under the terms of the agreement the Virologix
shareholders will receive 1,000,000 shares of common stock of the
Company. It is anticipated that the closing of the acquisition will take place
during the second quarter of 1999.
Liquidity and Capital Resources
As of March 24, 1999 the Company's principal source of liquidity is
$1,009,000 of cash and cash equivalents. Working capital as of December
31, 1998 was $1,009,000, representing an increase in working capital of
$1,225,000 as compared to the working capital deficit as of December 31,
1997 of $216,000. The increase in working capital at December 31, 1998
was due to $4.6 million in net proceeds received from the private placement
of the Company's Common Stock sold in June and July 1998 and the
private placement of units in March and April 1998, net of monthly
operating expenses.
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Since its inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $23.1 million at December
31, 1998. The Company has funded its operations primarily through private
sales of its equity securities, contract research payments from corporate
alliances and the January 1996 merger.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the
future, substantial funds to complete its planned product development
efforts. The Company expects that its existing capital resources will be
adequate to fund the Company's operations through the second quarter of
1999. The Company is dependent on raising additional capital to fund the
development of its technology and to implement its business plan. Such
dependence will continue at least until the Company begins marketing its
new technologies.
If anticipated revenues are delayed or do not occur or the Company is
unsuccessful in raising additional capital on acceptable terms, the Company
would be required to curtail research and development and general and
administrative expenditures so that working capital would cover reduced
operations into the third quarter of 1999. There can be no assurance,
however that changes in the Company's operating expenses will not result
in the expenditure of such resources before such time.
The Company will require substantial funds to conduct research and
development programs, preclinical studies and clinical trials of its potential
products. The Company's future capital requirements and adequacy of
available funds will depend on many factors, including the successful
commercialization of amlexanox; the ability to establish and maintain
collaborative arrangements for research, development and
commercialization of products with corporate partners; continued scientific
progress in the Company's research and development programs; the
magnitude, scope and results of preclinical testing and clinical trials; the
costs involved in filing, prosecuting and enforcing patent claims; competing
technological developments; the cost of manufacturing and scale-up; and the
ability to establish and maintain effective commercialization activities and
arrangements.
The Company intends to seek additional funding through research and
development or licensing arrangements with potential corporate partners,
public or private financing, or from other sources. The Company does not
have any committed sources of additional financing and there can be no
assurance that additional financing will be available on favorable terms, if
at all. In the event that adequate funding is not available, the Company may
be required to delay, reduce or eliminate one or more of its research or
development programs or obtain funds through arrangements with corporate
collaborators or others that may require the Company to relinquish greater
or all rights to product candidates at an earlier stage of development or on
less favorable terms than the Company would otherwise seek. Insufficient
financing may also require the Company to relinquish rights to certain of
its technologies that the Company would otherwise develop or
commercialize itself. If adequate funds are not available, the Company's
business, financial condition and results of operations will be materially and
adversely affected.
Results of Operations
Comparison of Years Ended December 31, 1998 and 1997
Net revenues for 1997 were $435,000 as compared to no revenues in 1998.
1997 revenues were comprised of licensing income from an ongoing
agreement with an emerging pharmaceutical company which made certain
milestone payments and will make royalty payments in the future if a
product is developed from the technology. In addition, $110,000 of option
income was recorded in 1997 from an agreement with a pharmaceutical
company. The agreement is no longer in effect.
Total research and development spending for 1998 was $1,756,000 as
compared to $2,433,000 for the same period in 1997, a decrease of
$677,000. The decrease in expenses was due to: lower external contract
research costs- $427,000; lower salary and related costs- $149,000; lower
equipment rent- $94,000; lower travel expenses- $47,000; and other net
decreases totaling- $116,000 offset by cost to manufacture the polymer
platinate product for testing- $145,000. If the Company is successful in
raising additional capital, research spending is expected to increase in future
quarters as the Company intends to hire additional scientific management
and staff and will accelerate activities to develop the Company's product
candidates. If the Company is not successful in raising additional capital,
research spending will be curtailed.
General and administrative expenses were $1,464,000 for 1998, a decrease
of $320,000 as compared to the same period in 1997. The decrease was
primarily due to the following: lower general business consulting fees and
expenses- $331,000; and lower director and officer insurance costs due to
a lower insurance premium- $56,000; other net decreases
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totaling- $18,000; offset by higher patent expenses- $29,000; and higher
shareholder expenses relating to an additional shareholder meeting and the
reverse stock split- $56,000.
Depreciation and amortization was $213,000 for 1998 as compared to
$162,000 for the same period in 1997 reflecting additional depreciation for
assets acquired in the Tacora merger and a full year of amortization of
licenses.
Interest and miscellaneous income was $58,000 for 1998 as compared to
$119,000 for the same period in 1997, a decrease of $61,000. The decrease
was due to lower cash balances in 1998.
Interest expense was $22,000 for 1998 as compared to $36,000 for the
same period in 1997, a decrease of $14,000. The decrease was due to the
pay down and payoff of equipment leases.
Accordingly, this resulted in a loss for the twelve months ended December
31, 1998 of $3,397,000, or a $1.28 basic and diluted loss per common
share.
Comparison of Years Ended December 31, 1997 and 1996
Revenues for 1997 were $435,000 as compared to $167,000 in 1996, an
increase of $268,000. Revenues for 1997 were comprised of $325,000 of
licensing income from an ongoing agreement with an emerging
pharmaceutical company. The agreement provides for royalty payments if
a product is developed from the technology. In addition $110,000 of option
income was recorded in 1997. Revenues for 1996 were comprised of option
income with a pharmaceutical company.
Total research and development spending for 1997 was $2,433,000 as
compared to $1,405,000 for the same period in 1996, an increase of
$1,028,000. The increase in research and development expenses was due
to the following: external research expenditures- $683,000 primarily due to
additional funding of Polymer Platinate at University of London and
research at Duke University; salaries and related expenses- $158,000 due
to hiring of additional scientists; equipment rental and maintenance costs-
$82,000; travel and entertainment- $44,000 due to project management of
external research; scientific consulting- $43,000 due to additional consulting
and manpower for the ongoing projects; and other net increases totaling
$83,000. The increase in research and development expenses is offset by
lower moving expenses- $65,000 due to the relocation of scientists in 1996.
Total general and administrative expenses were $1,784,000 in 1997, a
decrease of $154,000 as compared to the same period in 1996. The
decrease in spending was due to the following decreases in: business
consulting fees- $109,000 primarily due to the fair value of warrants issued
in 1997 for consulting being less than the fair value of the warrants issued
in 1996; patent expenses- $74,000 due to fewer initial patent filings in 1997
as compared to 1996; lower moving expenses- $44,000 due to the moving
expenses associated with the hiring of a business development vice president
in 1996; and other decreases of $27,000. The decreases are offset by higher
salaries and related expenses- $111,000 due to a full twelve months of
salaries in 1997 for all administrative employees as compared to a partial
period in 1996.
Interest expense of $36,000 was $9,000 lower in 1997 versus 1996 due to
the decrease of the outstanding balance of capital lease obligations. Interest
expense will increase in 1998 due to the addition of capital leases from the
Tacora acquisition.
Depreciation and amortization increased to $162,000 in 1997 from
$123,000 in 1996, an increase of $39,000. The increase is due to the
amortization of $25,000 of licenses and one month of depreciation and
amortization of the Tacora assets.
Excess purchase price over the fair value of Tacora's net assets of $580,000
was recorded and written off in the fourth quarter of 1997. In 1996, excess
purchase price over the fair value of Chemex's net assets of $8,314,000
was recorded and written off due to an immediate impairment of the excess
purchase price.
Total expenses were $4,849,000, including $580,000 of excess purchase
price written off for the Tacora purchase, which resulted in a loss for the
twelve months of $4,441,000, or $2.80 per share.
23
25
New Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which is effective for financial statements for fiscal years
beginning after June 15, 1999, and which will apply to the Company
beginning June 1, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. The
Company does not believe that the new standard will have any significant
effect on its future results of operations.
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued a Statement of
Position ("SOP") effective for financial statements for fiscal years beginning
after December 15, 1998, which will apply to the Company beginning with
its fiscal year ended December 31, 1999. SOP 98-5, "Reporting on the
Costs of Start-Up Activities," Requires such costs to be expensed as
incurred instead of capitalized and amortized. The Company does not
expect the adoption of this SOP to have any material effect on its future
results of operations.
Year 2000 Issue
The Year 2000 ("Y2K") issue is the result of computer programs using two
instead of four digits to represent the year. These computer programs may
erroneously interpret dates beyond the year 1999, which could cause system
failures or other computer errors, leading to disruptions in operations.
The Company has developed a three-phase program to limit or eliminate
Y2K exposures. Phase I is to identify those systems, applications and third-
party relationships from which the Company has exposure to Y2K
disruptions in operations. Phase II is the development and implementation
of action plans to achieve Y2K compliance in all areas prior to the end of
the third quarter of 1999. Also included in Phase II is the development of
contingency plans which would be implemented should Y2K compliance not
be achieved in order to minimize disruptions in operations. Phase III is the
final testing or equivalent certification of testing of each major area of
exposure to ensure compliance. The Company intends to complete all
phases before the end of the third quarter of 1999.
The Company has identified three major areas determined to be critical for
successful Y2K compliance: Area 1, which includes financial, research and
development and administrative informational systems applications reliant
on system software; Area 2, which includes research, development and
quality applications reliant on computer programs embedded in
microprocessors; and Area 3, which includes third-party relationships which
may be affected by Area 1 and 2 exposures which exist in other companies.
With respect to Area 1, the Company has completed an internal review and
contacted all software suppliers to determine major areas of Y2K exposure.
In research, development and quality applications (Area 2), the Company
has worked with equipment manufactures to identify our exposures. With
respect to Area 3, the Company has evaluated our reliance on third parties
in order to determine whether their Y2K compliance will adequately assure
our uninterrupted operations.
The Company has completed Phase I of our Y2K program with respect to
all three of the major areas. The Company relies on PC-based systems and
does not expect to incur material costs to transition to Y2K compliant
systems in its internal operations. However, even if the internal systems of
the Company are not materially affected by the Y2K Issue, the Company
could be affected by third-party relationships which, if not Y2K compliant
prior to the end of 1999, could have a material adverse impact on our
operations. Because the Company has not completed Phase II contingency
planning, the Company can not describe what action the Company would
take in any of the areas should Y2K compliance not be achievable in time.
As such, there can be no assurance that the Y2K Issue will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
As of December 31, 1998, we have identified costs related to replacement
or remediation and testing of our Area 1 computer information systems.
Having completed the Phase I evaluation, total costs to date are $5,000. We
estimate the potential future cost of our Y2K compliance programs is
$25,000. The funds for these costs will be part of our current working
capital. These costs will be expensed as incurred except for equipment
related costs.
ITEM 7(a). MARKET RISK
The Company is not exposed to any market risks, as defined.
24
26
ITEM 8. FINANCIAL AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
KPMG LLP was previously the principal accountants for Access
Pharmaceuticals, Inc. On October 22, 1998, that firm resigned. The
decision to change accountants was not recommended by the audit
committee of the board of directors.
In connection with the audits of fiscal years ended December 31, 1997 and
1996, and the subsequent interim period through October 22, 1998, there
were no disagreements with KPMG LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would
have caused them to make reference in connection with their opinion to the
subject matter of the disagreement.
KPMG LLP's independent auditors' report on the consolidated financial
statements of Access Pharmaceuticals, Inc. and subsidiary as of and for the
years ended December 31, 1997 and 1996, contained a separate paragraph
stating that "the Company has suffered recurring losses from operations and
has a net capital deficiency, that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these
matters are also described in Note 11. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty."
Effective December 15, 1998, the Company engaged Grant Thornton LLP,
independent certified public accountants, as its principal accountants.
During the last two fiscal years, the Company did not consult with Grant
Thornton LLP regarding any of the matters or events set forth in Item 304
(a) (2) (i) and (ii) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information requested by this item will be contained in the Company's
definitive Proxy Statement ("Proxy Statement") for its 1999 Annual Meeting
of Stockholders to be held on June 28, 1999 and is incorporated by
reference. Such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days subsequent to December 31,
1998.
ITEM 11. EXECUTIVE COMPENSATION
The information requested by this item will be contained in the Company's
definitive Proxy Statement and is incorporated by reference. Such Proxy
Statement will be filed with the Securities and Exchange Commission not
later than 120 days subsequent to December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information requested by this item will be contained in the Company's
definitive Proxy Statement and is incorporated by reference. Such Proxy
Statement will be filed with the Securities and Exchange Commission not
later than 120 days subsequent to December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information requested by this item will be contained in the Company's
definitive Proxy Statement and is incorporated by reference. Such Proxy
Statement will be filed with the Securities and Exchange Commission not
later than 120 days subsequent to December 31, 1998.
25
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
a. Financial Statements and Exhibits
Financial Statements. The following financial statements are submitted as
part of this report:
Page
----
Independent Auditors' Report of Grant Thornton LLP F-1
Independent Auditors' Report of KPMG LLP F-2
Independent Auditors' Report of Smith Anglin and Company F-3
Consolidated Balance Sheets at December 31, 1998 and 1997 F-4
Consolidated Statements of Operations for the three years
ended December 31, 1998 and the period from
February 24, 1988 (Inception) to December 31, 1998 F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the period from February 24, 1988 (Inception) to
December 31, 1998 F-6
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998 and the period from
February 24, 1988 (Inception) to December 31, 1998 F-8
Notes to Consolidated Financial Statements F-9
2. Financial Statement Schedule
No financial statement schedules are included because they are not required
or the information is included in the financial statements or notes thereto.
3. Exhibits
Exhibit Number
2.1 Amended and Restated Agreement of Merger and Plan of
Reorganization between Access Pharmaceuticals, Inc. and Chemex
Pharmaceuticals, Inc., dated as of October 31, 1995 (Incorporated by
reference to Exhibit A of the Company's Registration Statement on Form
S-4 dated December 21, 1995, Commission File No. 33-64031)
3.0 Articles of incorporation and bylaws:
3.1 Certificate of Incorporation (Incorporated by Reference to Exhibit 3(a)
of the Company's Form 8-B dated July 12, 1989, Commission File Number
9-9134)
3.2 Certificate of Amendment of Certificate of Incorporation filed August
21, 1992
3.3 Certificate of Merger filed January 25, 1996. (Incorporated by
reference to Exhibit E of the Company's Registration Statement on Form
S-4 dated December 21, 1995, Commission File No. 33-64031)
3.4 Certificate of Amendment of Certificate of Incorporation filed January
25, 1996. (Incorporated by reference to Exhibit E of the Company's
Registration Statement on Form S-4 dated December 21, 1995, Commission
File No. 33-64031)
3.5 Amended and Restated Bylaws (Incorporated by reference to Exhibit
3.1 of the Company's Form 10-Q for the quarter ended June 30, 1996)
3.6 Certificate of Amendment of Certificate of Incorporation filed July 18,
1996. (Incorporated by reference to Exhibit 3.8 of the Company's Form 10-
K for the year ended December 31, 1996)
3.7 Certificate of Amendment of Certificate of Incorporation filed June 18,
1998. (Incorporated by reference to Exhibit 3.8 of the Company's Form 10-
Q for the quarter ended June 30, 1998)
26
28
3.0 Exhibits (continued)
Exhibit Number
10.0Material contracts:
10.1 Irrevocable Assignment of Proprietary Information with Dr. Charles
G. Smith (Incorporated by reference to Exhibit 10.6 of the Company's
Form 10-K for the year ended December 31, 1991)
10.2 Asset Purchase and Royalty Agreement between Block Drug
Company, Inc. and the Company dated June 7, 1995 (Incorporated by
reference to Exhibit 10.28 of the Company's Form 10-Q for the quarter
ended June 30, 1995)
*10.3 1995 Stock Option Plan (Incorporated by reference to Exhibit F of
the Company's Registration Statement on Form S-4 dated December 21,
1995, Commission File No. 33-64031)
10.4 Stockholder's Agreement dated October 1995 between Access
Pharmaceuticals, Inc. and Dr. David F. Ranney (Incorporated by reference
to Exhibit A of the Company's Registration Statement on Form S-4 dated
December 21, 1995, Commission File No. 33-64031).
10.5 Patent Purchase Agreement dated April 5, 1994 between David F.
Ranney and Access Pharmaceuticals, Inc. (Incorporated by reference to
Exhibit 10.16 of the Company's Form 10-K for the year ended December
31, 1995)
10.6 First Amendment to Patent Purchase Agreement dated January 23,
1996 between David F. Ranney and Access Pharmaceuticals, Inc.
(Incorporated by reference to Exhibit 10.17 of the Company's Form 10-K
for the year ended December 31, 1995)
10.7 Lease Agreement between Pollock Realty Corporation and the
Company dated July 25, 1996 (Incorporated by reference to Exhibit 10.19
of the Company's Form 10-Q for the quarter ended September 30, 1996)
10.8 Platinate HPMA Copolymer Royalty Agreement between The School
of Pharmacy, University of London and the Company dated November 19,
1996
10.9 License Agreement between The Dow Chemical Company and the
Company dated June 30, 1997. (Certain portions are subject to a grant of
confidential treatment) (Incorporated by reference to Exhibit 10.12 of the
Company's Form 10-Q for the quarter ended September 30, 1997)
10.10 Agreement of Merger and Plan of Reorganization, dated May 23,
1997 among the Company, Access Holdings, Inc and Tacora Corporation
10.11 License Agreement between Strakan Limited and the Company dated
February 26, 1998 (Certain portions are subject to a grant of confidential
treatment) (Incorporated by reference to Exhibit 10.12 of the Company's
Form 10Q for the quarter ended March 31, 1998)
10.12 Agreement between Access Pharmaceuticals, Inc. and Block Drug
Company, Inc. (Certain portions are subject to a grant of confidential
treatment) (Incorporated by reference to Exhibit 10.13 of the Company's
Form 10Q for the quarter ended June 30, 1998)
10.13 Sales Agency Agreement. (Incorporated by reference to Exhibit
10.14 of the Company's Form 10Q for the quarter ended June 30, 1998)
10.14 Registration Rights Agreement. (Incorporated by reference to Exhibit
10.15 of the Company's Form 10Q for the quarter ended June 30, 1998)
*10.15 Employment Agreement of Mr. Kerry P. Gray (Incorporated by
reference to the Company's Registration Statement on Form SB-2 dated
January 11, 1999, Commission File No. 333-62463)
10.16 Letter Agreement between the Company and David F. Ranney
(Incorporated by reference to the Company's Registration Statement on
Form SB-2 dated January 11, 1999, Commission File No. 333-62463)
10.17 License Agreement between Block Drug Company and the Company
dated December 21, 1998 (Confidential Treatment Requested)
27
29
3.0 Exhibits (continued)
Exhibit Number
21. Subsidiaries of the registrant
23.0 Consent of Experts and Counsel
23.1 Consent of Grant Thornton LLP
23.2 Consent of KPMG LLP
23.3 Consent of Smith, Anglin & Co.
27.1 Financial Data Schedule
* Management contract or compensatory plan required to be filed as
an Exhibit to this Form pursuant to Item 14(c) of the report
b. Reports on Form 8-K.
On December 18, 1998, the Registrant filed a Current Report on Form 8-K
related to Changes in the Registrant's Certifying Accountants. Effective
December 15, 1998, the Company engaged Grant Thornton LLP as its
principal accountants. During the last two fiscal years, the Company did not
consult Grant Thornton LLP regarding any of the matters or events set forth
in Item 304 (a) (2) (i) and (ii) of Regulation S-K.
28
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 29, 1999 By: /s/ Kerry P. Gray
-------------- ------------------
Kerry P. Gray
President and Chief Executive
Officer, Treasurer
Date March 29, 1999 By:/s/ Stephen B. Thompson
-------------- -----------------------
Stephen B. Thompson
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Date March 29, 1999 By:/s/ Kerry P. Gray
-------------- -----------------
Kerry P. Gray
President and Chief Executive
Officer, Director
Date March 29, 1999 By:/s/ J. Michael Flinn
-------------- --------------------
J. Michael Flinn, Director
Date March 29, 1999 By:/s/ Stephen B. Howell
-------------- ---------------------
Stephen B. Howell, Director
Date March 29, 1999 By:/s/ Max Link
-------------- ------------
Max Link, Director
Date March 29, 1999 By:/s/ Herbert H. McDade, Jr.
-------------- --------------------------
Herbert H. McDade, Jr., Director
29
31
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Access Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheet of Access
Pharmaceuticals, Inc. and subsidiary (a development stage company) as of
December 31, 1998, the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the year then ended, and
the consolidated statements of operations and cash flows for the period
February 24, 1988 (inception) to December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit. The cumulative statements of operations,
and cash flows for the period February 24, 1988 (inception) to December
31, 1998 include amounts for the period from February 24, 1988 to
December 31, 1988 and for each of the nine years in the period ended
December 31, 1997, which were audited by other auditors whose reports
have been furnished to us and are included herein. Our opinion, insofar as
it relates to the amounts included for the period February 24, 1988 through
December 31, 1997, is based solely on the reports of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors
included herein, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Access
Pharmaceuticals, Inc. and subsidiary as of December 31, 1998, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended and for the period February 24, 1988 to December 31,
1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 11 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has incurred negative cash
flows from operations since inception. These matters raise substantial doubt
about its ability to continue as a going concern. Management's plan's in
regard to these matters are also described in Note 11. The consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Grant Thornton LLP
- ----------------------
GRANT THORNTON LLP
Dallas, Texas
February 12, 1999
F-1
32
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Access Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheet of Access
Pharmaceuticals, Inc. and subsidiary (a development stage company) as of
December 31, 1997 and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
two-year period ended December 31, 1997 and for the period February 24,
1988 (inception) to December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The cumulative statements of operations,
stockholders' equity (deficit), and cash flows for the period February 24,
1988 (inception) to December 31, 1997 include amounts for the period from
February 24, 1988 (inception) to December 31, 1988 and for each of the
years in the six-year period ending December 31, 1994, which were audited
by other auditors whose report has been furnished to us and is included
herein, and our opinion, insofar as it relates to the amounts included for the
period February 24, 1988 (inception) through December 31, 1994, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and report of the other auditors included
herein, the consolidated financial statements for the two-year period ended
December 31, 1997 referred to above present fairly, in all material respects
the financial position of Access Pharmaceuticals, Inc. and subsidiary (a
development stage company) as of December 31, 1997 and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997 and for the period February 24, 1988
(inception) to December 31, 1997, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 11 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a net capital deficiency
that raise substantial doubt about its ability to continue as a going concern.
Management's plan's in regard to these matters are also described in note
11. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KPMG LLP
- -----------------
KPMG LLP
Dallas, Texas
March 24, 1998
F-2
33
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Access Pharmaceuticals, Inc.
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Access Pharmaceuticals, Inc. (a development stage
company) for the period February 24, 1988 (inception) through December
31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the period February 24, 1988 (inception) through
December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ Smith, Anglin & Co.
- ------------------------------
Smith, Anglin & Co.
Dallas, Texas
September 21, 1995
F-3
34
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997
----------- -----------
Current assets
Cash and cash equivalents $1,487,000 $ 438,000
Accounts receivable - 1,000
Prepaid expenses and other current assets 54,000 51,000
----------- -----------
Total current assets 1,541,000 490,000
Property and equipment, net (Note 5) 227,000 422,000
Licenses, net (Note 1) 425,000 475,000
Investments 150,000 50,000
Other assets 8,000 10,000
----------- -----------
Total assets $2,351,000 $1,447,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 395,000 $ 434,000
Royalties payable (Note 3) - 53,000
Accrued insurance premiums 38,000 38,000
Current portion of obligations under
capital leases (Note 6) 99,000 181,000
----------- -----------
Total current liabilities 532,000 706,000
Obligations under capital leases,
net of current portion (Note 6) 24,000 142,000
----------- -----------
Total liabilities 556,000 848,000
Commitments and contingencies
(Notes 6, 10 and 11) - -
Stockholders' equity (Note 7)
Preferred stock - $.01 par value;
authorized, 2,000,000 shares - -
Common stock - $.01 par value;
authorized, 20,000,000 shares;
issued and outstanding, 3,429,402
and 1,630,450 at December 31, 1998
and 1997, respectively 34,000 16,000
Additional paid-in capital 24,906,000 20,331,000
Deficit accumulated during the
development stage (23,145,000) (19,748,000)
----------- -----------
Total stockholders' equity 1,795,000 599,000
----------- -----------
Total liabilities and
stockholders' equity $2,351,000 $1,447,000
=========== ============
The accompanying notes are an integral part of these statements.
F-4
35
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
February 24,1988
(inception) to
Year ended December 31, December 31,
------------------------------------
1998 1997 1996 1998
---------- ---------- ---------- ------------
Revenues
Research and development $ - $ - $ - $ 2,711,000
Option income - 110,000 167,000 2,149,000
Licensing revenues - 325,000 - 325,000
---------- ---------- ---------- ------------
Total revenues - 435,000 167,000 5,185,000
Expenses
Research and development 1,756,000 2,433,000 1,405,000 10,365,000
General and administrative 1,464,000 1,784,000 1,938,000 8,327,000
Depreciation and amortization 213,000 162,000 123,000 1,269,000
Write-off of excess purchase price - 580,000 8,314,000 8,894,000
---------- ---------- ---------- ------------
Total expenses 3,433,000 4,959,000 11,780,000 28,855,000
---------- ---------- ---------- ------------
Loss from operations (3,433,000) (4,524,000) (11,613,000) (23,670,000)
Other income (expense)
Interest and miscellaneous income 58,000 119,000 196,000 832,000
Interest expense (22,000) (36,000) (45,000) (180,000)
---------- ---------- ---------- ------------
36,000 83,000 151,000 652,000
Loss before income taxes (3,397,000) (4,441,000) (11,462,000) (23,018,000)
---------- ---------- ---------- ------------
Provision for income taxes - - - 127,000
---------- ---------- ---------- ------------
Net loss $(3,397,000) $(4,441,000)$(11,462,000) $(23,145,000)
========== ========== =========== ============
Basic and diluted loss
per common share $(1.28) $(2.80) $(7.68)
Weighted average basic and diluted
common shares outstanding 2,650,168 1,583,785 1,492,278
========= ========= =========
The accompanying notes are an integral part of these statements.
F-5
36
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
accumulated
Common stock Additional during the
-------------------- paid-in development
Shares Amount capital stage
--------- --------- ----------- -----------
Balance, February 24, 1988 - $ - $ - $ -
Common stock issued, $6.60 per share 15,000 - 97,000 -
Common stock issued, $1.60 per share 8,000 - 12,000 -
Net loss for the period February 24,
1988 to December 31, 1988 - - - (30,000)
--------- --------- ----------- -----------
Balance, December 31, 1988 23,000 - 109,000 (30,000)
Common stock issued, $2.18 per share 4,000 - 29,000 -
Common stock issued, $33.00 per share 4,000 - 124,000 -
Common stock issued, $0.20 per share 97,000 1,000 8,000 -
Net loss for the year - - - (191,000)
--------- --------- ----------- -----------
Balance, December 31, 1989 128,000 1,000 270,000 (221,000)
Common stock issued, $60.00 per share 4,000 - 218,000 -
Common stock issued, $156.40 per share 14,000 - 2,225,000 -
Net loss for the year - - - (219,000)
--------- --------- ----------- -----------
Balance, December 31, 1990 146,000 1,000 2,713,000 (440,000)
Common stock issued, $60.00 per share - - 6,000 -
Contribution of equipment by shareholder - - 468,000 -
Net income for the year - - - 413,000
--------- --------- ----------- -----------
Balance, December 31, 1991 146,000 1,000 3,187,000 (27,000)
Contribution of equipment by shareholder - - 89,000 -
Net loss for the year - - - (859,000)
--------- --------- ----------- -----------
Balance, December 31, 1992 146,000 1,000 3,276,000 (886,000)
Net loss for the year - - - (1,384,000)
--------- --------- ----------- -----------
Balance, December 31, 1993 146,000 1,000 3,276,000 (2,270,000)
Net loss for the year - - - (476,000)
--------- --------- ----------- -----------
Balance, December 31, 1994 146,000 1,000 3,276,000 (2,746,000)
F-6
37
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
Deficit
accumulated
Common stock Additional during the
-------------------- paid-in development
Shares Amount capital stage
--------- --------- ----------- -----------
Common stock issued, $40.00 per share 1,000 $ - $ 50,000 $ -
Exercise of stock options between
$0.25 and $1.25 per share 31,000 1,000 168,000 -
Common stock grants 4,000 - - -
Net loss for the year - - - (1,099,000)
--------- --------- ----------- -----------
Balance, December 31, 1995 182,000 2,000 3,494,000 (3,845,000)
Merger 951,000 10,000 9,991,000 -
Common stock issued, $14.00 share 429,000 4,000 5,499,000 -
Exercise of stock options/SAR's
between $0.00 and $0.88 per share 8,000 - 23,000 -
Warrants issued at $20.00 per share
for consulting services - - 344,000 -
Net loss for the year - - - (11,462,000)
--------- --------- ----------- -----------
Balance, December 31, 1996 1,570,000 16,000 19,351,000 (15,307,000)
Common stock issued, $15.00 share 40,000 - 600,000 -
Common stock issued, $9.20 share 20,000 - 192,000 -
Warrants issued at $12.00 and
$18.00 per share for financial
consulting services - - 188,000 -
Net loss for the year - - - (4,441,000)
--------- --------- ----------- -----------
Balance, December 31, 1997 1,630,000 16,000 20,331,000 (19,748,000)
Common stock issued, $3.00 per
share, net of costs of
$405,000 1,795,000 18,000 4,538,000 -
Common stock issued, $3.50
per share 4,000 - - -
Warrants issued at $4.00 per share
for financial consulting services - - 37,000 -
Net loss for the year - - - (3,397,000)
--------- --------- ----------- -----------
Balance, December 31, 1998 3,429,000 $ 34,000 $24,906,000 $(23,145,000)
========= ========= =========== ===========
The accompanying notes are an integral part of this statement.
F-7
38
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
February 24, 1988
Year ended December 31, (inception) to
-------------------------------------- December 31,
1998 1997 1996 1998
------------ ------------ ------------ -------------
Cash flows from operating activities:
Net loss $(3,397,000) $(4,441,000) $(11,462,000) $(23,145,000)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Write off of excess purchase price - 580,000 8,314,000 8,894,000
Consulting expense related to
warrants granted 37,000 188,000 344,000 569,000
Research expenses related to
common stock granted - 100,000 - 100,000
Depreciation and amortization 213,000 162,000 123,000 1,269,000
Unearned revenue - (110,000) (150,000) (110,000)
Change in operating assets
and liabilities:
Accounts receivable 1,000 (1,000) 2,000 (1,000)
Prepaid expenses and other
current assets (3,000) 139,000 (186,000) (55,000)
Other assets 2,000 (1,000) (7,000) (6,000)
Accounts payable and
accrued expenses (92,000) (244,000) 354,000 140,000
------------- ------------ ------------- -------------
Net cash used in operating activities (3,239,000) (3,628,000) (2,668,000) (12,345,000)
Cash flows from investing activities:
Capital expenditures (4,000) (16,000) (38,000) (1,168,000)
Sales of capital equipment 9,000 6,000 - 15,000
Purchase of Tacora, net of cash acquired - (124,000) - (124,000)
Investments (100,000) (50,000) - (150,000)
------------ ------------ ------------- --------------
Net cash used in investing activities (95,000) (184,000) (38,000) (1,427,000)
Cash flows from financing activities
Proceeds from notes payable (173,000) - 118,000 721,000
Payments of principal on obligations
under capital leases - (178,000) (127,000) (627,000)
Cash acquired in merger with Chemex - - 1,587,000 1,587,000
Proceeds from stock issuances 4,556,000 - 5,526,000 13,578,000
------------ ------------ ------------- -------------
Net cash provided by (used in)
financing activities 4,383,000 (178,000) 7,104,000 15,259,000
------------ ------------ ------------- -------------
Net increase (decrease) in cash and
cash equivalents 1,049,000 (3,990,000) 4,398,000 1,487,000
Cash and cash equivalents at
beginning of period 438,000 4,428,000 30,000 -
------------ ------------ ------------- -------------
Cash and cash equivalents at
end of period $ 1,487,000 $ 438,000 $ 4,428,000 $ 1,487,000
============ ============ ============= =============
Cash paid for interest $22,000 $34,000 $45,000 $177,000
Cash paid for income taxes - - - 127,000
Supplemental disclosure of noncash transactions
Payable accrued for fixed asset purchase $- $- $- $47,000
Elimination of note payable to Chemex
Pharmaceuticals due to merger - - 100,000 100,000
Stock issued for license on patents - 500,000 - 500,000
Equipment purchases financed
through capital leases - 82,000 - 82,000
Net liabilities assumed in acquisition
of Tacora Corporation - 455,000 - 455,000
The accompanying notes are an integral part of these statements.
F-8
39
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three years ended December 31, 1998
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Access Pharmaceuticals, Inc. ("Access" or the "Company") is a site-
directed drug targeting company using bioresponsive carriers to target and
control the release of therapeutic agents into sites of disease activity and
clear the non-targeted drug-fraction. The Company operates in a single
industry segment. The Company is in the development stage and its efforts
have been principally devoted to research and development, resulting in
significant losses since inception on February 24, 1988.
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows.
Merger
Access, formerly known as Chemex Pharmaceuticals, Inc. ("Chemex"),
merged with Access Pharmaceuticals, Inc., a Texas corporation ("API"),
on January 25, 1996. Shareholders of both companies approved the
merger. Under the terms of the merger agreement, API was merged into
Chemex with Chemex as the surviving legal entity. Chemex acquired all
of the outstanding shares of API in exchange for 695,998 shares of
registered common stock of Chemex, a conversion factor of 3.824251
Chemex shares for each API share. The fair value of Chemex was $10.0
million. The excess of purchase price over the net assets acquired of
$8,313,516 was recorded and written off during the first quarter of 1996
due to an immediate impairment of the excess purchase price. Chemex also
changed its name to Access Pharmaceuticals, Inc. and the operations of the
merged company are now based in Dallas, Texas.
As a result of the merger and immediately after the merger, the former API
Stockholders owned approximately 60% of the issued and outstanding
shares of Chemex. Generally accepted accounting principles require that
a company whose stockholders retain the controlling interest in a combined
business be treated as the acquiror for accounting purposes. As a
consequence, the merger was accounted for as a "reverse acquisition" for
financial reporting purposes and API was deemed to have acquired an
approximate 60% interest in Chemex. Despite the financial reporting
requirement to account for the acquisition as a "reverse acquisition,"
Chemex remains the continuing legal entity and registrant for Securities and
Exchange Commission reporting purposes.
Principles of Consolidation
The consolidated financial statements include the financial statements of
Access Pharmaceuticals, Inc. and Tacora Corporation, a wholly-owned
subsidiary. All significant intercompany balances have been eliminated in
consolidation.
F-9
40
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents for purposes of the
statements of cash flows. Cash and cash equivalents consist primarily of
cash in banks and money market funds.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is
provided using the straight-line method over estimated useful lives
ranging from three to seven years. Assets acquired pursuant to
capital lease arrangements are amortized over the shorter of the
estimated useful lives or the lease terms.
Patents and Applications
The Company expenses patent and application costs as incurred because,
even though the Company believes the patents and underlying processes
have continuing value, the amount of future benefits to be derived
therefrom are uncertain.
Licenses
The Company recognizes the purchase value of licenses and amortizes them
over the estimated useful lives. The Company acquired a license to certain
patents for $500,000 by issuing 40,000 shares of the Company's common
stock in 1997. The license is amortized over ten years. Amortization was
$50,000 and $25,000 for the years ended December 31, 1998 and 1997,
respectively.
Revenue Recognition
Sponsored research and development revenues are recognized as research
and development activities are performed under the terms of research
contracts. Advance payments received are recorded as unearned revenue
until the related research activities are performed. Option revenues are
recognized when the earnings process is completed pursuant to the terms of
the respective contract.
Research and Development Expenses
Research and development costs are expensed as incurred.
F-10
41
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Income Taxes
Tax credits related to research and development and to investments in
equipment and improvements are reported as a reduction of income tax
expense in the year realized. Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Loss Per Share
In accordance with the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"), the Company has presented basic loss per share,
computed on the basis of the weighted average number of common shares
outstanding during the year, and diluted loss per share, computed on the
basis of the weighted average number of common shares and all dilutive
potential common shares outstanding during the year. Dilutive potential
common shares result from stock options and warrants.
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relative to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior year financial statements
to conform with the December 31, 1998 presentation.
F-11
42
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
day of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net income (loss) and pro forma earnings (loss) per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of ABP Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of, requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments
The carrying value of current assets and current liabilities approximates fair
value due to the short maturity of these items.
F-12
43
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 2 - ACQUISITIONS
On December 9, 1997, a wholly-owned subsidiary of the Company acquired
and merged with Tacora Corporation ("Tacora"), a privately-held
pharmaceutical company based in Seattle, Washington; Tacora became a
wholly-owned subsidiary of the Company. The Company used the purchase
method of accounting for the purchase of Tacora. The aggregate purchase
price was $739,000 payable $124,000 in cash, $192,000 in stock
(representing 20,900 shares of Company common stock) and assumption of
$239,000 in trade and accrued payables and $184,000 of Tacora's capital
lease obligations, plus up to 137,500 shares of additional Common Stock
if certain milestones are met. The share price to be used will range
between $2.50 and $6.50 per share (range of value of shares is $344,000
to $894,000), depending on when the milestones are met. All milestone
conditions expire in June 2000. The aggregate purchase price has been
allocated to the net assets acquired based on management's estimates of the
fair values of assets acquired and liabilities assumed. The excess purchase
price over the fair value of Tacora's net identifiable assets of $579,544 was
recorded and written off in the fourth quarter of 1997 due to an impairment
of the excess purchase price based on estimated future cash flows.
Operations have been included in the Company's consolidated financial
statements since the date of acquisition. Pro forma disclosure relating to the
Tacora acquisition is not presented as the impact is immaterial to the
Company.
NOTE 3 - RELATED PARTY TRANSACTIONS
Under consulting agreements between Thoma Corporation ("Thoma") and
the Company, Thoma receives payments for consulting services and
reimbursement of direct expenses. Herbert H. McDade, Jr., the Chairman
of the Board of Directors of the Company, is an owner of Thoma Corp.
During 1998, 1997 and 1996 Thoma received payments for consulting
services of $72,000, $72,000 and $60,000 respectively. Thoma was also
reimbursed for expenses of $11,000, $6,000, and $18,000 respectively, in
1998, 1997 and 1996.
Stephen B. Howell, M.D., Director of the Company receives payments for
consulting services and reimbursement of direct expenses. Dr. Howell
consulted with the Company in 1998 and 1997 and received $8,000 and
$2,000 in consulting fees and $4,000 and $1,000 in expense
reimbursements, respectively.
Under the terms of the "Patent Purchase Agreement" dated April 5, 1994,
as amended on January 23, 1996 between Dr. David F. Ranney and the
Company, Dr. Ranney, a major shareholder of the Company, was entitled
to yearly cash royalty payments as consideration for the assignment of
patents to the Company. A royalty of $52,500 and $50,000 was payable at
December 31, 1997 and 1996, respectively, and included in the
accompanying consolidated balance sheet. Dr. Ranney signed an agreement
whereby all rights, title and interest in and to all inventions and confidential
information became the sole and exclusive property of the Company as of
May 31, 1998.
F-13
44
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 4 - RESEARCH AND DEVELOPMENT AGREEMENTS
On August 1, 1997, the Company entered into an agreement with The Dow
Chemical Company ("Dow Chemical") for the development of products
incorporating Dow Chemical's chelation technology and Access'
Bio=Responsive TM polymer systems. The collaboration will focus on the
development of MRI contrast agents and radiopharmaceutical diagnostics
and therapeutics. The advancement of the Access developments in these
areas are dependent on securing chelation technology, which encapsulates
metals to avoid adverse effects on the body.
The Company entered into a technology evaluation option agreement with
a pharmaceutical company. The Company recognized revenue under the
agreement as certain milestones were achieved and amounted to $110,000
and $165,000 in 1997 and 1996, respectively. Proceeds received in excess
of amounts recognized were accounted for as unearned income. This
agreement was terminated March 29, 1996.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
---------------------
1998 1997
---------- ----------
Laboratory equipment $ 808,000 $ 852,000
Laboratory and building improvements 27,000 25,000
Furniture and equipment 172,000 170,000
---------- ----------
1,007,000 1,047,000
Less accumulated depreciation and amortization 780,000 625,000
---------- ----------
Net property and equipment $ 227,000 $ 422,000
========== ==========
Depreciation and amortization on property and equipment was $161,000,
$137,000, and $123,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
F-14
45
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 6 - COMMITMENTS
At December 31, 1998, future minimum lease payments under capital lease
obligations and commitments under noncancelable operating leases were as
follows:
Capital Operating
leases leases
---------- ----------
1999 $ 107,000 $ 82,000
2000 25,000 87,000
2001 - 91,000
2002 - 85,000
---------- ----------
Total future minimum lease payments 132,000 $ 345,000
Less amount representing interest 9,000 ==========
----------
Present value of minimum capital lease payments 123,000
Less current portion 99,000
----------
Obligations under capital leases,
excluding current portion $ 24,000
==========
The Company leases certain office and research and development facilities
under an operating lease. Rent expense for the years ended December 31,
1998, 1997 and 1996 was $77,000, $74,000 and $69,000, respectively.
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
On June 18, 1998, in conjunction with the first closing of a private
placement, the Company effected a recapitalization through a one-for-
twenty reverse stock split of its common stock, $0.04 par value per share
(the "Common Stock"), and decreased the number of authorized shares of
Common Stock from 60.0 million, at $0.04 par value per share, to 20.0
million shares, $0.01 par value per share, and decreased the authorized
shares of preferred stock of the Company from 10.0 million to 2.0 million
(the "Recapitalization"). The Recapitalization decreased the number of
outstanding shares of Common Stock from approximately 41.5 million to
2.1 million.
All share and per share amounts have been retroactively restated to reflect
the Recapitalization in the accompanying consolidated financial statements.
F-15
46
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT) - Continued
The Company, assisted by an investment bank, raised in March and April
of 1998, $1,200,000 in gross proceeds less cash issuance costs of $47,000,
from the placement of 48 units, each unit consisting of 8,333 shares of
Common Stock (total of 399,984) and warrants to purchase 8,333 shares of
Common Stock (total of 399,984) at an exercise price of $3.00 per share.
The placement agent received warrants to purchase 44,527 shares of
Common Stock at $3.00 per share, in accordance with the offering terms
and elected to receive 45,277 shares of Common Stock in lieu of certain
sales commissions and expenses.
On June 18, 1998, the Company, assisted by the same investment bank,
raised an aggregate of $2.9 million in gross proceeds, less cash issuance
costs of $202,000, from the first closing of a private placement of 953,573
shares Common Stock at $3.00 per share. The placement agent for such
offering received warrants to purchase 101,653 shares of Common Stock
at $3.00 per share, in accordance with the offering terms and elected to
receive 62,949 shares of Common Stock in lieu of certain sales
commissions and expenses.
On July 30, 1998, the Company, assisted by the same investment bank,
raised an aggregate of $900,000 in gross proceeds, less cash issuance costs
of $24,000, from the second closing of a private placement of 300,000
shares of Common Stock at $3.00 per share. The placement agent for such
offering received warrants to purchase 33,445 shares of Common Stock at
$3.00 per share, in accordance with the offering terms and elected to
receive 34,450 shares of Common Stock in lieu of certain sales
commissions and expenses. The proceeds of the offering will be used to
fund research and development, working capital, acquisitions of
complementary companies or technologies and general corporate purposes.
For 1998, issuance costs for all placements totaled $1,466,000, consisting
of $405,000 cash payments for offering and legal expenses and the issuance
of 142,676 shares of Common Stock valued at $385,000 and 179,625
warrants with a fair value of $676,000 calculated using the Black-Scholes
pricing model. The proceeds of the offerings will be used to fund research
and development, working capital, acquisitions of complementary
companies or technologies and general corporate purposes.
The investment bank has been engaged to assist the Company in raising
additional capital to fund research and development, working capital,
acquisitions of complementary companies or technologies and general
corporate purposes. There can be no assurances, however, that any
additional funds will be raised.
Warrants
During 1998, a financial advisor received warrants to purchase 15,000
shares of common stock at an exercise price of $4.00 per share at any time
from December 1, 1998 until December 1, 2003, for financial consulting
services rendered in 1998. The fair value of the warrants was $2.48 per
share on the date of the grant using the Black-Scholes pricing model with
the following assumptions: expected dividend yield 0.0%, risk-free interest
rate 4.85%, expected volatility 122% and an expected life of 5 years. Total
fair value of the warrants relating to the consulting services ($37,000) has
been recorded as general and administrative expense and an increase to
additional paid-in capital.
F-16
47
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT) - Continued
In connection with the aforementioned offerings of units and common stock
in 1998, warrants to purchase a total of 579,627 shares of common stock
were issued. All of the warrants are exercisable immediately at $3.00 per
share and expire five years from date of issuance.
During 1997, a financial advisor received warrants to purchase 37,500
shares of common stock, one-half (18,750 shares) at an exercise price of
$12.00 per share, and one-half (18,750 shares) at an exercise price of
$18.00 per share any time from January 1, 1998 until June 30, 2002, for
financial consulting services rendered in 1997. The fair value of the
warrants was $5.00 per share on the date of the grant using the Black-
Scholes pricing model with the following assumptions: expected dividend
yield 0.0%, risk-free interest rate 5.6%, expected volatility 129% and an
expected life of 5 years. Total fair value of the warrants relating to the
consulting services ($188,000) has been recorded as general and
administrative expense and an increase to additional paid-in capital.
During 1996, a shareholder received warrants to purchase 30,000 shares of
common stock at an exercise price of $20.00 per share any time from
March 5, 1997 until March 4, 2000, for compensation for consulting
services. The fair value of the warrants was $15.40 on the date of the grant
using the Black-Scholes pricing model with the following assumptions:
expected dividend yield 0.0%, risk-free interest rate 6.1%, expected
volatility 100% and an expected life of 3 years. The portion of the total fair
value of the warrants relating to the consulting services ($344,000) has been
recorded as general and administrative expense and an increase to additional
paid-in capital.
On October 5, 1995, the Company entered into an agreement with a
shareholder for the sale of 2,390 units. Each unit consisted of one share of
common stock and a warrant to purchase one-half share of common stock.
The exercise price for the warrants is $3.00 per share. The warrants are
exercisable until October 5, 1999.
The Company also has warrants outstanding to purchase 6,795 shares of
common stock at $3.00 per share. These warrants expire in September
2001. Units consisting of an option to purchase 25,000 shares of common
stock and warrants to purchase 35,000 shares of common stock at prices
ranging from $50 to $125 per share expired in January 1999.
F-17
48
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 8 - STOCK OPTION PLANS
The Company adopted a new stock option plan, as amended (the "1995
Stock Awards Plan"), on January 25, 1996 and reserved 548,271 shares of
the Company's authorized but unissued common stock for issuance to
optionees including officers, employees, and other individuals performing
services for the Company. The 1995 Stock Awards Plan replaced the
previously approved stock option plan (the "1987 Stock Awards Plan") and
API's stock option plan ("API Stock Option Plan"). Options granted under
the plans generally vest ratably over a four to five year period and are
generally exercisable over a ten-year period from the date of grant.
However, as a result of certain events occurring in 1995, all granted
options in the 1987 Stock Awards Plan became vested and exercisable and
all options in the API Stock Option Plan were exercised or forfeited. No
further grants have been or can be made under the 1987 Stock Awards
Plan, and the API Stock Option Plan has been canceled. New stock options
are generally granted with an exercise price equal to the stock's quoted
market value at the date of grant.
At December 31, 1998, there were 241,771 additional shares available for
grant under the 1995 Stock Awards Plan. Concurrently with the
Recapitalization on June 18, 1998, all stock options granted under the 1995
Stock Option Plan were cancelled and new stock options were issued to
directors, employees and consultants. The fair value of options was
estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in fiscal
1998, 1997 and 1996, respectively: dividend yield of 0% for all periods;
volatility of 122%, 129%, and 100%; risk-free interest rates of 4.84%,
5.6% and 6.0% and expected lives of four years for all periods. The
weighted average fair values of options granted were $2.40, $13.00 and
$18.40 per share during 1998, 1997 and 1996, respectively.
The Company applies APB Opinion No. 25 in accounting for its 1995 Stock
Awards Plan. Accordingly, no compensation expense has been recognized
in the accompanying Consolidated Statements of Operations for employee
stock options because the quoted market price of the underlying common
stock did not exceed the exercise price of the option at the date of grant.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
loss and loss per share would have been reduced to the pro forma amounts
indicated below:
December 31,
---------------------------------------
1998 1997 1996
------------ ------------ ------------
Net loss
As reported $(3,397,000) $(4,441,000) $(11,462,000)
Pro forma (3,583,000) (4,614,000) (11,563,000)
Basic and diluted loss per share
As reported ($1.28) ($2.80) ($7.68)
Pro forma ($1.35) ($2.91) ($7.75)
F-18
49
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 8 - STOCK OPTION PLANS - Continued
Summarized information for the 1995 Stock Awards Plan is as follows:
Weighted-
average
exercise
Shares price
---------- ----------
Outstanding options at January 1, 1996 - $ -
Granted 33,299 26.40
Forfeited (1,800) 28.80
----------
Outstanding options at December 31, 1996 31,499 26.20
Granted 8,217 13.00
Forfeited (7,566) (27.60)
----------
Outstanding options at December 31, 1997 32,150 20.40
Granted 306,500 3.00
Forfeited (32,150) (20.40)
----------
Outstanding options at December 31, 1998 306,500 3.00
==========
Exercisable at December 31, 1996 - -
Exercisable at December 31, 1997 8,950 25.60
Exercisable at December 31, 1998 142,500 3.00
At December 31, 1998, the exercise price of 302,000 options was $3.00,
of 3,500 options was $2.94 and of 1,000 options was $2.08. The weighted-
average remaining life was 9.5 years.
F-19
50
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 8 - STOCK OPTION PLANS - Continued
All issued options and stock appreciation rights ("SAR's") under the
Chemex 1987 Stock Awards Plan became vested and exercisable due to the
merger on January 25, 1996. No further grants can be made. Summarized
information for the 1987 Stock Awards Plan is as follows:
1987 Non- Weighted-
Incentive Employee Average
Stock Director Exercise
Options SAR's Plan Price
-------- -------- -------- --------
Outstanding awards at January 1, 1996 48,804 16,933 13,956 $39.80
Forfeited (7,569) - (5,046) 51.40
Exercised (1,371) (6,736) - 3.00
-------- -------- -------- --------
Outstanding awards at December 31, 1996 39,864 10,197 8,910 40.80
Forfeited (1,125) - (3,660) 72.40
-------- -------- -------- --------
Outstanding awards at December 31, 1997 38,739 10,197 5,250 38.00
Forfeited (6,153) (2,500) (2,750) (47.75)
-------- -------- -------- --------
Outstanding awards at December 31, 1998 32,586 7,697 2,500 35.49
======== ======== ========
All options outstanding were exercisable at each year end.
Further information regarding options outstanding at December 31, 1998
is summarized below:
Weighted average
---------------------
Number of Remaining Exercise
Range of exercise prices of shares life price
- ------------------------ --------- --------- ---------
$0.0 7,700 4.68 $ 0.00
$17.50 - $35.00 21,128 5.10 23.85
$40.00 - $64.40 7,081 1.85 47.41
$78.80 - $102.60 6,874 4.00 98.71
--------
42,783
========
F-20
51
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 9 - INCOME TAXES
Income tax expense differs from the statutory amounts as follows:
1998 1997 1996
------------ ------------ ------------
Income taxes at U.S. statutory rate $(1,155,000) $(1,510,000) $(3,897,000)
Change in valuation allowance 1,142,000 1,185,000 954,000
Items not deductible for tax 13,000 325,000 2,943,000
------------ ------------ ------------
Total tax expense $ - $ - $ -
============ ============ ============
Deferred taxes are provided for the temporary differences between the
financial reporting bases and the tax bases of the Company's assets. The
temporary differences that give rise to deferred tax assets were as follows:
December 31,
--------------------------------------
1998 1997 1996
------------ ------------ ------------
Deferred tax assets
Net operating loss carryforwards $17,101,000 $14,266,000 $13,107,000
General business credit carryforwards 443,000 434,000 408,000
Property and equipment 24,000 - -
------------ ------------ ------------
Gross deferred tax assets 17,568,000 14,700,000 13,515,000
Valuation allowance (17,568,000) (14,700,000) (13,515,000)
------------ ------------ ------------
Net deferred taxes $ - $ - $ -
============ ============ ============
During 1998, the Company's gross deferred tax asset increased by
$2,612,000 due to losses and a restatement of prior years' net operating
loss carryforwards of approximately $1,470,000. The valuation allowance
was increased by a corresponding amount.
At December 31, 1998, the Company had approximately $50,700,000 of
net operating loss carryforwards and approximately $1,300,000 of general
business carryforwards. These carryforwards expire at varying amounts
through 2013. As a result of the merger on January 25, 1996, a change in
control occurred for federal income tax purposes which limits the utilization
of pre-merger net operating loss carryforwards related to Chemex to
approximately $530,000 per year.
F-21
52
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 10 - CONTINGENCIES
The Company's products will require clinical trials, U.S. Food and Drug
Administration approval, or approval of similar authorities internationally
and acceptance in the marketplace prior to commercialization. Although the
Company believes its patents and patent applications are valid, the
invalidation of its major patents would have a material adverse effect upon
its business. The Company competes with specialized biotechnology
companies and major pharmaceutical companies. Many of these
competitors have substantially greater resources than the Company.
The Company is not currently a party to any material legal proceeding.
NOTE 11 - LIQUIDITY
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the
future, substantial funds to complete its planned product development
efforts. The Company expects that its existing capital resources will be
adequate to fund the Company's operations through the second quarter of
1999. The Company is dependent on raising additional capital to fund its
development of technology and to implement its business plan. Such
dependence will continue at least until the Company begins marketing its
new technologies.
If the anticipated revenues are delayed or do not occur, or the Company is
unsuccessful in raising additional capital on acceptable terms, the Company
would be required to curtail research and development and general and
administrative expenditures so that working capital would cover reduced
operations into the third quarter of 1999. There can be no assurance,
however, that changes in the Company's operating expenses will not result
in the expenditure of such resources before such time.
The Company will require substantial funds to conduct research and
development programs, preclinical studies and clinical trials of its potential
products. The Company's future capital requirements and adequacy of
available funds will depend on many factors, including the successful
commercialization of amlexanox; the ability to establish and maintain
collaborative arrangements for research, development and
commercialization of products with corporate partners; continued scientific
progress in the Company's research and development programs; the
magnitude, scope and results of preclinical testing and clinical trials; the
costs involved in filing, prosecuting and enforcing patent claims; competing
technological developments; the cost of manufacturing and scale-up and, the
ability to establish and maintain effective commercialization activities and
arrangements.
The Company intends to seek additional funding through research and
development or licensing arrangements with potential corporate partners,
public or private financing, or from other sources. The Company does not
have any committed sources of additional financing and there can be no
assurance that additional financing will be available on favorable terms, if
at all. In the event that adequate funding is not available, the Company
may be required to delay, reduce or eliminate one or more of its research
or development programs or obtain funds through arrangements with
corporate collaborators or others that may require the Company to
relinquish greater or all rights to product candidates at an earlier stage of
development or on less favorable terms than the Company would otherwise
seek. Insufficient financing may also require the Company to relinquish
rights to certain of its technologies that the Company would otherwise
develop or commercialize itself. If adequate funds are not available, the
Company's business, financial condition and results of operations will be
materially and adversely effected.
F-22
53
Access Pharmaceuticals, Inc. and Subsidiary
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three years ended December 31, 1998
NOTE 12 - SUBSEQUENT EVENTS
On March 1, 1999, the Company and a wholly owned subsidiary of the
Company entered into a merger agreement with Virologix Corporation
("Virologix"), whereby Virologix will become a wholly owned subsidiary
of the Company. The closing of the merger is subject to certain conditions,
including the condition that the Company raise at least $3.0 million in
equity financing.
Virologix is a privately held company focused on the development of
product candidates for the prevention and treatment of viral diseases,
including HIV. Under the terms of the agreement, the Virologix
shareholders will receive 1,000,000 shares of common stock of the
Company. It is anticipated that the closing of the acquisition will take place
during the second quarter of 1999.
F-23