UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
Commission File Number 0-9314
ACCESS PHARMACEUTICALS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 83-0221517
- ------------------------- --------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
2600 Stemmons Frwy, Suite 176, Dallas, TX 75207
-----------------------------------------------
(Address of principal executive offices)
Telephone Number (214) 905-5100
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of each of the issuer's
classes of common stock, as of May 14, 2002 was 13,064,262
shares of common stock, $0.01 par value per share.
Total No. of Pages 13
----
PART I -- FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
The response to this Item is submitted as a separate section
of this report.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an emerging pharmaceutical company focused on
developing both novel low development risk product candidates
and technologies with longer-term major product opportunities.
We are a Delaware corporation in the development stage.
Together with our subsidiaries, we have proprietary patents or
rights to seven drug delivery technology platforms: synthetic
polymer targeted delivery, vitamin mediated targeted delivery
(including oral), bioerodible hydrogel technology,
nanoparticles and nanoparticle networks, Residerm(R) topical
delivery, carbohydrate targeting technology and agents for the
prevention and treatment of viral disease. In addition, our
partner GlaxoSmithKline is marketing in the United States our
jointly developed drug - Aphthasol(R), the first FDA approved
product for the treatment of canker sores. We have licensed
certain rights for the use of amlexanox in additional
indications from GlaxoSmithKline for numerous markets,
excluding the U.S. We are developing new formulations and
delivery forms to evaluate amlexanox in additional clinical
indications, including mucoadhesive disc delivery.
Except for the historical information contained herein, the
following discussions and certain statements in this Form 10-Q
are forward-looking statements that involve risks and
uncertainties. In addition to the risks and uncertainties set
forth in this Form 10-Q, other factors could cause actual
results to differ materially, including but not limited to
uncertainties associated with research and development
activities, clinical trials, the integration of acquired
companies and technologies, the timing of regulatory
approvals, dependence on others, collaborations, future cash
flow, the timing and receipt of licensing revenues, the future
success of our amlexanox and polymer platinate programs, and
other risks detailed in our reports filed under the Securities
Exchange Act of 1934, as amended, including but not limited to
our Annual Report on Form 10-K for the year ended December 31,
2001.
Since our inception, we have devoted our resources primarily
to fund our research and development programs. We have been
unprofitable since inception and to date have received limited
revenues from the sale of products. We cannot assure you that
we will be able to generate sufficient product revenues to
attain profitability on a sustained basis or at all. We expect
to incur losses for the next several years as we continue to
invest in product research and development, preclinical
studies, clinical trials and regulatory compliance. As of
March 31, 2002, our accumulated deficit was $39,774,000, of
which $8,894,000 was the result of the write-off of excess
purchase price.
2
RECENT DEVELOPMENTS
Our newly created wholly owned subsidiary, Access
Pharmaceuticals Australia Pty. Limited acquired the targeted
therapeutic technology business of Biotech Australia Pty. Ltd
under the Asset Sale Agreement dated February 26, 2002. Under
the terms of the Asset Sale Agreement, Access Pharmaceuticals
Australia Pty. Limited acquired the patents to three targeted
therapeutics technologies and retained the scientific group
that has developed this technology. The total consideration
payable by us will be paid in a combination of cash and stock
over a three-year period and is dependent on the achievement
of certain technology milestones. $500,000 was paid at
closing, a total of up to $525,000 will be paid over a three-
year period, up to $350,000 may be payable if events occur
that result in certain new agreements and 172,584 shares of
our common stock and 25,000 warrants to purchase our common
stock at an exercise price of $5.00 per share have been
issued. The stock issued is subject to restriction and cannot
be sold until February 27, 2003.
The three patented targeted therapeutic technologies acquired
are:
* folate conjugates of polymer therapeutics to enhance tumor
delivery by targeting folate receptors which are upregulated
in certain tumor types;
* the use of vitamin B12 to target the transcobalamin II
receptor which is upregulated in numerous diseases including
cancer, rheumatoid arthritis and certain neurological and
autoimmune disorders; and
* oral delivery of a wide variety of molecules, which cannot
otherwise be orally administered, using the active transport
mechanism which transports vitamin B12 into the systemic
circulation.
In addition, through the acquisition we acquired an internal
capability to perform biological studies which we previously
out-sourced. We expect that this capability will enhance our
ability to identify lead compounds more rapidly and develop
the necessary preclinical data for regulatory filings. This
acquisition is a further step towards the achievement of the
critical mass necessary for us to accelerate the development
of our technology platforms.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of March 31, 2002 was $16,011,000
representing a decrease in working capital of $2,508,000 as
compared to the working capital as of December 31, 2001 of
$18,519,000. The decrease in working capital was due to the
loss from operations for the first quarter of 2002 and
payments for the acquisition of the assets in Australia under
the Asset Sale Agreement.
Since inception, our expenses have significantly exceeded
revenues, resulting in an accumulated deficit as of March 31,
2002 of $39,774,000. We have funded our operations primarily
through private sales of common stock and convertible notes.
Contract research payments from corporate alliances and
mergers have also provided funding for operations.
We have incurred negative cash flows from operations since
inception, and have expended, and expect to continue to expend
in the future, substantial funds to complete our planned
product development efforts. We expect that our existing
capital resources will be adequate to fund our current level
of operations through June 2004.
3
We will expend substantial funds to conduct research and
development programs, preclinical studies and clinical trials
of potential products, including research and development with
respect to our newly acquired and developed technology. The
success of the Company and our future capital requirements and
adequacy of available funds will depend on many factors,
including:
* the successful commercialization of amlexanox and
Zindaclin(R);
* the ability to establish and maintain collaborative
arrangements with corporate partners for the research,
development and commercialization of products;
* the successful integration of our newly created subsidiary,
Access Pharmaceuticals Australia Pty. Limited;
* continued scientific progress in our research and
development programs;
* the magnitude, scope and results of preclinical testing and
clinical trials;
* the costs involved in filing, prosecuting and enforcing
patent claims;
* competing technological developments;
* the cost of manufacturing and scale-up;
* the ability to establish and maintain effective
commercialization arrangements and activities; and
* successful regulatory filings.
FIRST QUARTER 2002 COMPARED TO FIRST QUARTER 2001
Revenue in the first quarter of 2002 was $116,000, as compared
to $211,000 in the same period of 2001. Revenue recognized in
both of the first quarters is from several licensing
agreements for various amlexanox projects and licensing
agreements for ResiDerm(R). Due to contractual terms, the amount
due from the licensing agreements for ResiDerm(R) in the first
quarter of 2002 was less than the amount received in the first
quarter of 2001.
Total research spending for the first quarter of 2002 was
$1,323,000, as compared to $1,003,000 for the same period in
2001, an increase of $320,000. The increase in expenses was
the result of:
* higher clinical development costs ($264,000) for the
polymer platinate clinical development project. We are
anticipating completing the Phase I study at the end of the
second quarter of 2002;
* higher scientific salary costs ($147,000) due to additional
employees;
* higher internal laboratory costs ($30,000) due to
additional scientific staff;
* higher travel expenses ($14,000) due to additional
scientific staff; and,
* other net increases ($10,000).
The increase in expenses was partially offset by lower
amlexanox product development costs ($145,000) for
OraDisc(TM). A new Phase III study evaluating OraDisc(TM) will
start in the second quarter of 2002.
We expect research spending to increase in future quarters and
remain higher than in prior quarters as we intend to hire
additional scientific and clinical staff, commence additional
clinical trials and
4
accelerate preclinical development activities as we continue
to develop our product candidates.
Total general and administrative expenses were $499,000 for
the first quarter of 2002, an increase of $63,000 as compared
to the same period in 2001. The increase in spending was due
primarily to the following:
* higher salary expenses ($44,000);
* higher rent and utilities expenses ($13,000) due to our
expanded facilities; and
* other net increases ($6,000).
Depreciation and amortization was $57,000 for the first
quarter of 2002 as compared to $102,000 for the same period in
2001 reflecting a decrease of $45,000. The decrease in
amortization was due to goodwill not being amortized in 2002
offset by an increase in depreciation due to additional assets
that have been acquired.
We adopted Financial Accounting Standard No. 142, "Goodwill
and Other Intangible Assets", in January 2002. Annual and
quarterly goodwill amortization of $246,000 and $61,500 will
no longer be recognized. In 2002, we will complete a
transitional fair value based impairment test of goodwill.
Impairment losses, if any, resulting from transitional testing
will be recognized.
Total operating expenses in the first quarter of 2002 were
$1,879,000 as compared to total operating expenses of
$1,541,000 for the same period in 2001.
Loss from operations in the first quarter of 2002 was
$1,763,000 as compared to a loss of $1,330,000 for the same
period in 2001.
Interest and miscellaneous income was $214,000 for the first
quarter of 2002 as compared to $442,000 for the same period in
2001, a decrease $228,000. The decrease in interest income was
due to lower cash balances and lower interest rates in 2002 as
compared with 2001.
Interest expense was $317,000 for the first quarter of 2002 as
compared to $283,000 for the same period in 2001, an increase
of $34,000. The increase in interest expense was due to higher
interest accrued on the $13.5 million convertible notes and
due to the note payable ($548,000) we entered into in September 2001.
Net loss in the first quarter of 2002 was $1,866,000, or a
$0.14 basic and diluted loss per common share, compared with
a loss of $1,171,000, or a $0.09 basic and diluted loss per
common share for the same period in 2001.
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 2 CHANGES IN SECURITIES
On March 28, 2002 we issued 172,584 shares of our common stock
to GroPep Limited in connection with the February 26, 2002,
Asset Sale Agreement. We relied
5
on Rule 506 and Section 4(2) of the Securities Act of 1933 as
exemptions from the federal registration requirements.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: 10.26 Asset Sale Agreement among BIOA Pty.
Limited, Access Pharmaceuticals Australia Pty. Limited, Human
Theraapeutics Limited and us dated February 26, 2002.
(Confidential Treatment Requested)
Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ACCESS PHARMACEUTICALS, INC.
Date: May 15, 2002 By:/s/ Kerry P. Gray
----------------- -------------------------
Kerry P. Gray
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2002 By:/s/ Stephen B. Thompson
----------------- -------------------------
Stephen B. Thompson
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
6
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Balance Sheets
March 31, 2002 December 31, 2001
-------------- --------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 12,673,000 $ 7,426,000
Short term investments, at cost 4,800,000 12,700,000
Accounts receivable 387,000 83,000
Accrued interest receivable 101,000 110,000
Prepaid expenses and other current assets 834,000 611,000
-------------- --------------
Total current assets 18,795,000 20,930,000
Property and equipment, net 594,000 477,000
Debt issuance costs, net 633,000 679,000
Purchased technology 1,680,000 -
Licenses, net 746,000 774,000
Goodwill, net 1,868,000 1,868,000
Other assets 707,000 759,000
-------------- --------------
Total assets $ 25,023,000 $ 25,487,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,433,000 $ 1,486,000
Accrued interest payable 570,000 310,000
Deferred revenues 498,000 508,000
Current portion of note payable and
other future obligations 283,000 107,000
-------------- --------------
Total current liabilities 2,784,000 2,411,000
Long-term obligations for
purchased technology 303,000 -
Note payable, net of current portion 440,000 468,000
Convertible notes 13,530,000 13,530,000
-------------- --------------
Total liabilities 17,057,000 16,409,000
-------------- --------------
Commitments and contingencies - -
Stockholders' equity
Preferred stock - $.01 par value;
authorized 2,000,000 shares;
none issued or outstanding - -
Common stock - $.01 par value;
authorized 50,000,000 shares;
issued, 13,159,147 at March 31, 2002 and
12,909,344 at December 31, 2001 132,000 132,000
Additional paid-in capital 48,992,000 48,057,000
Notes receivable from stockholders (1,045,000) (1,045,000)
Unamortized value of restricted stock grants (335,000) (154,000)
Treasury stock, at cost - 819 shares (4,000) (4,000)
Deficit accumulated during the
development stage (39,774,000) (37,908,000)
-------------- --------------
Total stockholders' equity 7,966,000 9,078,000
-------------- --------------
Total liabilities and stockholders' equity $ 25,023,000 $ 25,487,000
============== ==============
The accompanying notes are an integral part of these statements.
7
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Statements of Operations
(unaudited)
February 24,
Three Months ended March 31, 1988
---------------------------- (inception) to
2002 2001 March 31, 2002
------------- ------------- --------------
Revenues
Research and development $ - $ - $ 2,711,000
Option income - - 2,164,000
Licensing revenues 116,000 211,000 791,000
------------- ------------- --------------
Total revenues 116,000 211,000 5,666,000
Expenses
Research and development 1,323,000 1,003,000 21,477,000
General and administrative 499,000 436,000 14,119,000
Depreciation and amortization 57,000 102,000 2,451,000
Write-off of excess purchase price - - 8,894,000
------------- ------------- --------------
Total expenses 1,879,000 1,541,000 46,941,000
------------- ------------- --------------
Loss from operations (1,763,000) (1,330,000) (41,275,000)
------------- ------------- --------------
Other income (expense)
Interest and miscellaneous income 214,000 442,000 3,522,000
Interest expense (317,000) (283,000) (2,021,000)
------------- ------------- --------------
(103,000) 159,000 1,501,000
------------- ------------- --------------
Net loss $(1,866,000) $(1,171,000) $(39,774,000)
============= ============= ==============
Basic and diluted loss per
common share $(0.14) $(0.09)
============= =============
Weighted average basic and diluted
common shares outstanding 12,934,263 12,848,344
============= =============
The accompanying notes are an integral part of these statements.
8
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(unaudited)
February 24,
Three Months ended March 31, 1988
---------------------------- (inception) to
2002 2001 March 31, 2002
------------- ------------- --------------
Cash flows form operating activities:
Net loss $(1,866,000) $(1,171,000) $(39,774,000)
Adjustments to reconcile net loss
to cash used in operating activities:
Write-off of excess purchase price - - 8,894,000
Warrants issued in payment of
consulting expenses 37,000 41,000 1,007,000
Research expenses related to
common stock granted - - 100,000
Amortization of restricted
stock grants 9,000 - 36,000
Depreciation and amortization 57,000 102,000 2,451,000
Amortization of debt costs 46,000 45,000 282,000
Deferred revenue (10,000) (11,000) 388,000
Change in operating assets and
liabilities:
Accounts receivable (304,000) 244,000 (388,000)
Accrued interest receivable 9,000 61,000 (101,000)
Prepaid expenses and other
current assets (223,000) 19,000 (835,000)
Licenses - - (525,000)
Other assets 52,000 - 45,000
Accounts payable and
accrued expenses (53,000) (362,000) 671,000
Accrued interest payable 260,000 237,000 570,000
------------- ------------- --------------
Net cash used in operating activities (1,986,000) (795,000) (27,179,000)
------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures (146,000) (5,000) (1,810,000)
Sales of capital equipment - - 15,000
Redemptions (purchases) of short term
investments and certificates of
deposit, net 7,900,000 (2,761,000) (5,400,000)
Purchase of business and assets,
net of cash acquired (526,000) - (752,000)
Other investing activities - - (150,000)
------------- ------------- --------------
Net cash provided by (used) in
investing activities 7,228,000 (2,766,000) (8,097,000)
------------- ------------- --------------
Cash flows from financing activities:
Proceeds from notes payable
and obligations - - 1,321,000
Payments of notes payable (27,000) - (802,000)
Purchase of treasury stock - - (754,000)
Cash acquired in merger with Chemex - - 1,587,000
Notes receivable from shareholders - - (1,045,000)
Proceeds from convertible note, net - - 12,615,000
Proceeds from stock issuances, net 32,000 15,000 35,027,000
------------- ------------- --------------
Net cash provided by
financing activities 5,000 15,000 47,949,000
------------- ------------- --------------
Net increase (decrease) in
cash and cash equivalents 5,247,000 (3,546,000) 12,673,000
Cash and cash equivalents at
beginning of period 7,426,000 8,415,000 -
------------- ------------- --------------
Cash and cash equivalents at
end of period $12,673,000 $ 4,869,000 $ 12,673,000
============= ============= ==============
The accompanying notes are an integral part of these statements.
9
Access Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2002 and 2001
(unaudited)
(1) Interim Financial Statements
The consolidated balance sheet as of March 31, 2002 and the
consolidated statements of operations and cash flows for the
three months ended March 31, 2002 and 2001 were prepared by
management without audit. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments,
except as otherwise disclosed, necessary for the fair
presentation of the financial position, results of operations,
and changes in financial position for such periods, have been
made.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended
December 31, 2001. The results of operations for the period
ended March 31, 2002 are not necessarily indicative of the
operating results which may be expected for a full year. The
consolidated balance sheet as of December 31, 2001 contains
financial information taken from the audited financial
statements as of that date.
(2) Acquisition
Our newly created wholly owned subsidiary, Access
Pharmaceuticals Australia Pty. Limited acquired the targeted
therapeutic technology business of Biotech Australia Pty. Ltd
under the Asset Sale Agreement dated February 26, 2002. Under
the terms of the Asset Sale Agreement, Access Pharmaceuticals
Australia Pty. Limited acquired the patents to three targeted
therapeutics technologies and retained the scientific group
that has developed this technology. The total consideration
payable by us will be paid in a combination of cash and stock
over a three-year period and is dependent on the achievement
of certain technology milestones. $500,000 was paid at
closing, an additional total of up to $525,000 will be paid over
a three-year period, up to $350,000 may be payable if events occur
that result in certain new agreements and 172,584 shares of
our common stock (valued at $633,000) and 25,000 warrants
(valued at $43,000 using Black-Scholes option pricing model)
to purchase our common stock at an exercise price of $5.00 per
share have been issued. The stock issued is subject to
restriction and cannot be sold until February 27, 2003.
The three patented targeted therapeutic technologies acquired
are:
* folate conjugates of polymer therapeutics to enhance tumor
delivery by targeting folate receptors which are upregulated
in certain tumor types;
* the use of vitamin B12 to target the transcobalamin II
receptor which is upregulated in
10
(2) Acquisition - continued
numerous diseases including cancer, rheumatoid arthritis and
certain neurological and autoimmune disorders; and
* oral delivery of a wide variety of molecules, which cannot
otherwise be orally administered, using the active transport
mechanism which transports vitamin B12 into the systemic
circulation.
The cost of the acquisition has been assigned to purchased
technologies and will not be amortized because the technologies
are considered to have an indefinite life.
In addition, through the acquisition we acquired an internal
capability to perform biological studies which we previously
out-sourced. We expect that this capability will enhance our
ability to identify lead compounds more rapidly and develop
the necessary preclinical data for regulatory filings. This
acquisition is a further step towards the achievement of the
critical mass necessary for us to accelerate the development
of our technology platforms.
(3) New Accounting Pronouncements
Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations,
SFAS No. 142, Goodwill and Intangible Assets, and SFAS No.
144, Accounting for Impairment or Disposal of Long-Lived
Assets.
SFAS No. 141 and SFAS No. 142
Major provisions of these statements and their effective dates
are as follows:
* intangible assets acquired in a business combination must
be recorded separately from goodwill if they arise from
contractual or other legal rights and are separable from the
acquired entity and can be sold transferred, licensed, rented
or exchanged, either individually or as part of a related
contract, asset or liability;
* effective January 1, 2002, all previously recognized
goodwill and intangible assets with indefinite lives will no
longer be subject to amortization;
* effective January 1, 2002, goodwill and intangible assets
with indefinite lives will be tested for impairment annually
or whenever there is an impairment indicator; and
* all acquired goodwill must be assigned to reporting units
for purposes of impairment testing and segment reporting.
We amortized goodwill assets acquired prior to July 1, 2001
until December 31, 2001. Beginning January 1, 2002, quarterly
and annual goodwill amortization is no longer recognized. We
will complete a transitional fair value based impairment test
of goodwill as of January 1, 2002 by June 30, 2002. Impairment
losses, if any, resulting from the transitional testing will
be recognized as a cumulative effect of a change in accounting
principle.
11
(3) New Accounting Pronouncements - continued
Intangible assets consist of the following (in thousands):
March 31, 2002 December 31, 2001
--------------------- ---------------------
Gross Gross
carrying Accumulated carrying Accumulated
value amortization value amortization
---------- ---------- ---------- ----------
Amortized intangible assets
Licenses $ 1,130 384 $ 1,130 356
========== ========== ========== ==========
Intangible assets not subject to
amortization
Purchased technology $ 1,680 - $ - -
Goodwill 2,464 596 2,464 596
---------- ---------- ---------- ----------
Total intangible assets not
subject to amortization $ 4,144 596 $ 2,464 596
========== ========== ========== ==========
Amortization expense related to intangible assets totaled
$74,000 and $73,000 during the three months ended March 31,
2002 and 2001, respectively. The aggregate estimated
amortization expense for intangible assets remaining as of
March 31, 2002 is as follows (in thousands):
Remainder of 2002 $ 84
2003 112
2004 112
2005 112
2006 112
Thereafter 214
--------
Total $ 746
========
Net loss and loss per share for the three months ended March
31, 2002 and 2001, adjusted to exclude amortization expense,
is as follows:
12
(3) New Accounting Pronouncements - continued
Three months ended March 31,
----------------------------
2002 2001
----------- -----------
Net loss
Reported net loss allocable to common stockholders $ (1,866) $ (1,171)
Goodwill amortization - 62
----------- -----------
Adjusted net loss allocable to common stockholders $ (1,866) $ (1,109)
Basic and diluted loss per share
Reported basic and diluted loss per share $ (.14) $ (.09)
Goodwill amortization - -
----------- -----------
Adjusted basic and diluted loss per share $ (.14) $ (.09)
SFAS No. 144
SFAS No. 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The
implementation of this standard did not have an effect on our
financial position, results of operations, or cash flows.
13