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, 2003 Commission File Number 0-9314 ACCESS PHARMACEUTICALS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 83-0221517 - ------------------------ -------------------------- (State of Incorporation) (I.R.S. Employer I.D. No.) 2600 Stemmons Frwy, Suite 176, Dallas, TX 75207 ----------------------------------------------- (Address of principal executive offices) Telephone Number (214) 905-5100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirement for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- The number of shares outstanding of each of the issuer's classes of common stock, as of May 14, 2003 was 13,213,899 shares of common stock, $0.01 par value per share. Total No. of Pages 25 PART I -- FINANCIAL INFORMATION Risk Factors This Quarterly Report on Form 10-Q contains certain statements that are forward-looking within the meaning of Section 27a of the Securities Act of 1933 and that involve risks and uncertainties, including, but not limited to the uncertainties associated with research and development activities, clinical trials, our ability to raise capital, the integration of acquired companies and technologies, the timing of and our ability to achieve regulatory approvals, dependence on others to market our licensed products, collaborations, future cash flow, the timing and receipt of licensing and milestone revenues, the future success of our marketed products and products in development, our ability to manufacture amlexanox products in commercial quantities, our sales projections, and the sales projections of our licensing partners, our ability to achieve licensing milestones and other risks described below as well as those discussed elsewhere in this 10-Q, the Annual Report on Form 10-K as of December 31, 2002 and documents incorporated by reference. We have experienced a history of losses and we expect to incur future losses. - -------------------------------------------------------------- We have recorded minimal revenue to date and we have incurred a cumulative operating loss of approximately $49.7 million through March 31, 2003. Our losses have resulted principally from costs incurred in research and development activities related to our efforts to develop clinical candidates and from the associated administrative costs. We expect to incur significant additional operating losses over the next several years. We also expect cumulative losses to increase due to expanded research and development efforts and preclinical and clinical trials. We do not have significant operating revenue and we may never attain profitability. - ------------------------------------------------------------- To date, we have funded our operations primarily through private sales of common stock and convertible notes. Contract research payments and licensing fees from corporate alliances and mergers have also provided funding for our operations. Our ability to achieve significant revenue or profitability depends upon our ability to successfully complete the development of drug candidates, to develop and obtain patent protection and regulatory approvals for our drug candidates and to manufacture and commercialize the resulting drugs. We have not received significant royalties for sales of amlexanox or Zindaclin(R) products to date and we may not receive significant revenues or profits from the sale of these products in the future. Furthermore, we may not be able to ever successfully identify, develop, commercialize, patent, manufacture, obtain required regulatory approvals and market any additional products. Moreover, even if we do identify, develop, commercialize, patent, manufacture, and obtain required regulatory approvals to market additional products, we may not receive revenues or royalties from commercial sales of these products for a significant number of years, if at all. Therefore, our proposed operations are subject to all the risks inherent in the establishment of a new business enterprise. In the next few years, our revenues may be limited to minimal royalties any amounts that we receive under strategic partnerships and research or drug development collaborations that we may establish and, as a result, we may be unable to achieve or maintain profitability in the future or to achieve significant revenues in order to fund our operations. We may not successfully commercialize our drug candidates. - ---------------------------------------------------------- Our drug candidates are subject to the risks of failure inherent in the development of pharmaceutical products based on new technologies and our failure to develop safe, commercially viable drugs would severely limit our ability to become profitable or to achieve significant revenues. We may be unable to successfully commercialize our drug candidates because: * some or all of our drug candidates may be found to be unsafe or ineffective or otherwise fail to meet applicable regulatory standards or receive necessary regulatory clearances; * our drug candidates, if safe and effective, may be too difficult to develop into commercially viable drugs; * it will be difficult to manufacture or market our drug candidates on a large scale; * proprietary rights of third parties may preclude us from marketing our drug candidates; and * third parties may market superior or equivalent drugs. The success of our research and development activities, upon which we primarily focus, is uncertain. - ------------------------------------------------------------ Our primary focus is on our research and development activities and the commercialization of compounds covered by proprietary biopharmaceutical patents and patent applications. Research and development activities, by their nature, preclude definitive statements as to the time required and costs involved in reaching certain objectives. Actual research and development costs, therefore, could exceed budgeted amounts and estimated time frames may require extension. Cost overruns, unanticipated regulatory delays or demands, unexpected adverse side effects or insufficient therapeutic efficacy will prevent or substantially slow our research and development effort and our business could ultimately suffer. We anticipate that we will remain principally engaged in research and development activities for an indeterminate, but substantial, period of time. We may be unable to obtain necessary additional capital to fund operations in the future. - ----------------------------------------------------------- We require substantial capital for our development programs and operating expenses, to pursue regulatory clearances and to prosecute and defend our intellectual property rights. Although we believe that our existing capital resources, interest income, product sales, royalties and revenue from possible licensing agreements and collaborative agreements will be sufficient to fund our currently expected operating expenses and capital requirements through September 2004, we may need to raise substantial additional capital during that period because our actual cash requirements may vary materially from those now planned and will depend upon numerous factors, including : * the results of our research and development programs; * the timing and results of preclinical and clinical trials; * our ability to maintain existing and establish new collaborative agreements with other companies to provide funding to us; * technological advances; and * activities of competitors and other factors. 3 If we do raise additional funds by issuing equity securities, further dilution to existing stockholders would result and future investors may be granted rights superior to those of existing stockholders. If adequate funds are not available to us through additional equity offerings, we may be required to delay, reduce the scope of or eliminate one or more of our research and development programs or to obtain funds by entering into arrangements with collaborative partners or others that require us to issue additional equity securities or to relinquish rights to certain technologies or drug candidates that we would not otherwise issue or relinquish in order to continue independent operations. We may be unable to successfully develop, market, or commercialize our products or our product candidates without establishing new relationships and maintaining current relationships. - --------------------------------------------------------------------- Our strategy for the research, development and commercialization of our potential pharmaceutical products may require us to enter into various arrangements with corporate and academic collaborators, licensors, licensees and others, in addition to our existing relationships with other parties. Specifically, if we successfully develop any commercially marketable pharmaceutical products, we may seek to enter joint venture, sublicense or other marketing arrangements with parties that have an established marketing capability or we may choose to pursue the commercialization of such products on our own. We may, however, be unable to establish additional collaborative arrangements, license agreements, or marketing agreements as we may deem necessary to develop, commercialize and market our potential pharmaceutical products on acceptable terms. Furthermore, if we maintain and establish arrangements or relationships with third parties, our business may depend upon the successful performance by these third parties of their responsibilities under those arrangements and relationships. For our commercialized products we currently rely upon the following relationships in the following marketing territories: * amlexanox 5% paste - Strakan Ltd. - United Kingdom and Ireland manufacturing and marketing rights - Zambon Group - France, Germany, Holland, Belgium, Luxembourg, Switzerland, Brazil, Columbia and Italy manufacturing and marketing rights - Laboratories Dr. Esteve SA - Spain, Portugal and Greece manufacturing and marketing rights - Meda, AB for Scandinavia, the Baltic states and Iceland marketing rights - Mipharm SpA for Italy manufacturing and marketing rights - Paladin Labs, Inc. for Canada manufacturing and marketing rights * Zindaclin(R) and Residerm(R) - Strakan Ltd. - worldwide manufacturing and marketing rights - Fujisawa GmbH - sublicensed continental Europe marketing rights - Taro - sublicensed Israel marketing rights - Various companies for other smaller countries - sublicensed marketing rights Our ability to commercialize, and market our products and product candidates could be limited if any of these existing relationships were terminated. 4 We may be unable to successfully manufacture our products and our product candidates in clinical quantities or for commercial purposes without the assistance of contract manufacturers, which may be difficult for us to obtain and maintain. - ------------------------------------------------------------------------- We have no experience in the manufacture of pharmaceutical products in clinical quantities or for commercial purposes and we may not be able to manufacture any new pharmaceutical products that we may develop, so we intend to establish arrangements with contract manufacturers to supply sufficient quantities of products to conduct clinical trials and for the manufacture, packaging, labeling and distribution of finished pharmaceutical products if any of our potential products are approved for commercialization. If we are unable to contract for a sufficient supply of our potential pharmaceutical products on acceptable terms, our preclinical and human clinical testing schedule may be delayed, resulting in the delay of our submission of products for regulatory approval and initiation of new development programs, which could cause our business to suffer. Delays or difficulties in establishing relationships with manufacturers to produce, package, label and distribute our finished pharmaceutical or other medical products, if any, market introduction and subsequent sales of such products could cause our business to suffer. Moreover, contract manufacturers that we may use must adhere to current Good Manufacturing Practices, as required by the FDA. In this regard, the FDA will not issue a pre-market approval or product and establishment licenses, where applicable, to a manufacturing facility for the products until after the manufacturing facility passes a pre-approval plant inspection. If we are unable to obtain or retain third party manufacturing on commercially acceptable terms, we may not be able to commercialize our products as planned. Our potential dependence upon third parties for the manufacture of our products may adversely affect our profit margins and our ability to develop and deliver such products on a timely and competitive basis. Our amlexanox 5% paste is marketed in the US as Aphthasol(R) by Access. GSK has manufactured the 5% amlexanox paste since the product was approved by the FDA in 1996 in a facility that is certified by the FDA for Good Manufacturing Practices. We acquired the rights to amlexanox 5% paste from GSK on July 22, 2002. We have evaluated various manufacturers and selected a manufacturer of our product. Production is planned to start in June 2003. Access and Block Drug Company entered into a Supply Agreement whereas Block Drug Company was to produce Aphthasol(R) for Access for a defined period of time at its Puerto Rico facility. Access has been advised by Block Drug Company that is unable to comply with the terms of the Supply Agreement and will not be able to produce Aphthasol(R) for Access. Access has notified Block Drug Company that it is in breach of the Supply Agreement and is conducting discussions with Block Drug Company to resolve this issue. Based on the current sales volumes of Aphthasol(R), Access believes that it has sufficient product to supply wholesalers through June 2003. An alternative supplier has been identified and Access is in the process of negotiating a contract for the supply of Aphthasol(R). In the event that Block Drug Company remains in breach of the Supply Agreement (which Access anticipates) and does not supply Aphthasol(R) to Access, there will be an interruption of supply to the wholesaler until an alternate manufacturer of Aphthasol(R) is able to produce the product. Wholesaler inventories may enable a continuing supply of the product to the consumer, although there is no guarantee that such inventory will be sufficient. Until the product supply issues are resolved our planned marketing relaunch of Aphthasol(R) will be delayed. Amlexanox 5% paste was approved in the UK and is currently in the approval process in the remaining EU countries. We licensed manufacturing to Strakan, Zambon, Esteve and Mipharm for specific countries in Europe. Esteve is currently preparing to manufacture the product and is 5 obtaining the necessary European and FDA approvals. Esteve has experience in the manufacture of other commercial pharmaceutical products. We licensed our patents for worldwide manufacturing and marketing for Zindaclin(R) and the ResiDerm(R) technology to Strakan Ltd. for the period of the patents. We receive a royalty on the sales of the product. Strakan has a contract manufacturer for Zindaclin(R) in a European Union approved facility. Zindaclin(R) was approved in the UK and seven additional European Union countries and is currently under review for approval in the remaining EU countries. OraDisc(TM) is manufactured by a third party for our Phase III clinical trials. Enough product was manufactured to cover the needs of the clinical trials and testing. We are currently negotiating with a third party for manufacturing if the product is approved. AP5280 and AP5346 are manufactured by a third party for our Phase I clinical trials. Manufacturing is ongoing for the current clinical trials. Some manufacturing may be completed by the Company if significant cost savings can be achieved. Our mucoadhesive technology is manufactured by a third party for our clinical trials. We are subject to extensive governmental regulation which increases our cost of doing business and may affect our ability to commercialize any new products that we may develop. - ----------------------------------------------------------------------- The FDA and comparable agencies in foreign countries impose substantial requirements upon the introduction of pharmaceutical products through lengthy and detailed laboratory, preclinical and clinical testing procedures and other costly and time-consuming procedures to establish their safety and efficacy. All of our drug candidates will require governmental approvals for commercialization, none of which have been obtained. Preclinical and clinical trials and manufacturing of our drug candidates will be subject to the rigorous testing and approval processes of the FDA and corresponding foreign regulatory authorities. Satisfaction of these requirements typically takes a significant number of years and can vary substantially based upon the type, complexity and novelty of the product. For example the status of our principal products are as follows: * 5% amlexanox paste is an approved product for sale in the US (Aphthasol(R)); approved in the UK and Canada but not yet sold; and, in the approval process in the EU. * Zindaclin(R) is an approved product for sale in the UK and seven additional European Union countries; in the approval process in the remaining EU countries; and waiting for finalized plans and approval to start a Phase III trial in the US. * OraDisc(TM) has completed a Phase III clinical trial in the US. * AP5280 is currently in a Phase I/II trial in Europe. * AP5346 is currently in a Phase I trial in Europe. * Mucoadhesive liquid technology is planned to start a Phase III trial in the US in 2003. * Vitamin mediated delivery technology is currently in the pre-clinical phase. * We also have other products in the preclinical phase. Due to the time consuming and uncertain nature of the drug candidate development process and the governmental approval process described above, we cannot assure you when we, independently or with our collaborative partners, might submit a New Drug Application, or NDA, for FDA or other regulatory review. 6 Government regulation also affects the manufacturing and marketing of pharmaceutical products. Government regulations may delay marketing of our potential drugs for a considerable or indefinite period of time, impose costly procedural requirements upon our activities and furnish a competitive advantage to larger companies or companies more experienced in regulatory affairs. Delays in obtaining governmental regulatory approval could adversely affect our marketing as well as our ability to generate significant revenues from commercial sales. Our drug candidates may not receive the FDA or other regulatory approvals on a timely basis or at all. Moreover, if regulatory approval of a drug candidate is granted, such approval may impose limitations on the indicated use for which such drug may be marketed. Even if we obtain initial regulatory approvals for our drug candidates, we, or our drugs and our manufacturing facilities would be subject to continual review and periodic inspection, and later discovery of previously unknown problems with a drug, manufacturer or facility may result in restrictions on the marketing or manufacture of such drug, including withdrawal of the drug from the market. The FDA and other regulatory authorities stringently apply regulatory standards and failure to comply with regulatory standards can, among other things, result in fines, denial or withdrawal of regulatory approvals, product recalls or seizures, operating restrictions and criminal prosecution. The uncertainty associated with preclinical and clinical testing may affect our ability to successfully commercialize new products. - ---------------------------------------------------------------------------- Before we can obtain regulatory approvals for the commercial sale of any of our potential drugs, the drug candidates will be subject to extensive preclinical and clinical trials to demonstrate their safety and efficacy in humans. Preclinical or clinical trials of any of our future drug candidates may not demonstrate the safety and efficacy of such drug candidates at all or to the extent necessary to obtain regulatory approvals. In this regard, for example, adverse side effects can occur during the clinical testing of a new drug on humans or animals which may delay ultimate FDA approval or even lead us to terminate our efforts to develop the drug for commercial use. Companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after demonstrating promising results in earlier trials. In particular, OraDisc(TM) and AP5280 have taken longer to progress through clinical trials than originally planned. This extra time has not been related to concerns of the formulations but rather due to the lengthy regulatory process. The failure to adequately demonstrate the safety and efficacy of a drug candidate under development could delay or prevent regulatory approval of the drug candidate. A delay or failure to receive regulatory approval for any of our drug candidates could prevent us from successfully commercializing such candidates and we could incur substantial additional expenses in our attempts to further develop such candidates and obtain future regulatory approval. We may incur substantial product liability expenses due to the use or misuse of our products for which we may be unable to obtain complete insurance coverage. - ---------------------------------------------------------------------- Our business exposes us to potential liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. These risks will expand with respect to our drug candidates, if any, that receive regulatory approval for commercial sale and we may face substantial liability for damages in the event of adverse side effects or product defects identified with any of our products that are used in clinical tests or marketed to the public. We generally procure product liability insurance for drug candidates that are undergoing human clinical trials. Product liability insurance for the biotechnology industry is generally expensive, if available at all, and as a result, we may be unable able to obtain insurance coverage at acceptable costs or in a sufficient amount in the future, if at all. We may be unable to satisfy any claims for which we may be held liable as a result of the use or misuse of products which we have developed, manufactured or sold and any such product liability claim could adversely affect our business, 7 operating results or financial condition. We may incur significant liabilities if we fail to comply with stringent environmental regulations or if we did not comply with these regulations in the past. - ------------------------------------------------------------------------ Our research and development processes involve the controlled use of hazardous materials. We are subject to a variety of federal, state and local governmental laws and regulations related to the use, manufacture, storage, handling and disposal of such material and certain waste products. Although we believe that our activities and our safety procedures for storing, using, handling and disposing of such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such accident, we could be held liable for any damages that result and any such liability could exceed our resources. Intense competition may limit our ability to successfully develop and market commercial products. - ---------------------------------------------------------------------- The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Our competitors in the United States and elsewhere are numerous and include, among others, major multinational pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions. Cisplatin is marketed by Bristol-Myers-Squibb the originator of the drug and by several generic manufacturers. Carboplatin is marketed exclusively by Bristol-Myers-Squibb and Oxaliplatin by Sanofi-Synthelabo. Our principal competitors in the polymer area are Cell Therapeutics, Daiichi, Enzon, Inhale and Pharmacia, which are developing alternate drugs in combination with polymers. Several companies are working on therapies and formulations that may be competitive with our drug delivery system, including Bristol-Myers-Squibb, Centocor (acquired by Johnson & Johnson), GlaxoSmithKline, Imclone and Xoma, which are developing targeted monoclonal antibody therapy, and Nexstar (acquired by Gilead Sciences), The Liposome Company (acquired by Elan Corporation) and Sequus Pharmaceuticals (acquired by Alza Corporation), which are developing liposomal formulations. In addition, RxKinetics, Human Genome Sciences and Amgen are developing competitive products to treat mucositis. Furthermore, Benzamycin, marketed by a subsidiary of Aventis; Cleocin-T and a generic topical clindamycin, marketed by Pharmacia; Benzac, marketed by a subsidiary of L'Oreal; and Triaz, marketed by Medicis Pharmaceutical Corp. are competitive with Residerm(R) products and technology and prescription steroids such as Kenalog in OraBase developed by Bristol-Myers Squibb are competitive with our commercialized Aphthasol(R) product. Many of these competitors have and employ greater financial and other resources, including larger research and development staffs and more effective marketing and manufacturing organizations, than us or our collaborative partners. As a result, our competitors may successfully develop technologies and drugs that are more effective or less costly than any that we are developing or which would render our technology and future products obsolete and noncompetitive. In addition, some of our competitors have greater experience than we do in conducting preclinical and clinical trials and obtaining FDA and other regulatory approvals. Accordingly, our competitors may succeed in obtaining FDA or other regulatory approvals for drug candidates more rapidly than we do. Companies that complete clinical trials, obtain required regulatory agency approvals and commence commercial sale of their drugs before their competitors may achieve a significant competitive advantage. Drugs resulting from our research and development 8 efforts or from our joint efforts with collaborative partners therefore may not be commercially competitive with our competitors' existing products or products under development. Our ability to successfully develop and commercialize our drug candidates will substantially depend upon the availability of reimbursement funds for the costs of the resulting drugs and related treatments. - -------------------------------------------------------------------- The successful commercialization of, and the interest of potential collaborative partners to invest in, the development of our drug candidates will depend substantially upon reimbursement of the costs of the resulting drugs and related treatments at acceptable levels from government authorities, private health insurers and other organizations, including health maintenance organizations, or HMOs. To date, the costs of our marketed products Aphthasol(R) and Zindaclin(R) generally have been reimbursed at acceptable levels, however, the amount of such reimbursement in the United States or elsewhere may be decreased in the future or may be unavailable for any drugs that we may develop in the future. Limited reimbursement for the cost of any drugs that we develop may reduce the demand for, or price of such drugs, which would hamper our ability to obtain collaborative partners to commercialize our drugs, or to obtain a sufficient financial return on our own manufacture and commercialization of any future drugs. The market may not accept any pharmaceutical products that we successfully develop. - -------------------------------------------------------------- The drugs that we are attempting to develop may compete with a number of well-established drugs manufactured and marketed by major pharmaceutical companies. The degree of market acceptance of any drugs developed by us will depend on a number of factors, including the establishment and demonstration of the clinical efficacy and safety of our drug candidates, the potential advantage of our drug candidates over existing therapies and the reimbursement policies of government and third- party payers. Physicians, patients or the medical community in general may not accept or use any drugs that we may develop independently or with our collaborative partners and if they do not, our business could suffer. Trends toward managed health care and downward price pressures on medical products and services may limit our ability to profitably sell any drugs that we may develop. - ---------------------------------------------------------------------- Lower prices for pharmaceutical products may result from: * third-party payers' increasing challenges to the prices charged for medical products and services; * the trend toward managed health care in the United States and the concurrent growth of HMOs and similar organizations that can control or significantly influence the purchase of healthcare services and products; and * legislative proposals to reform healthcare or reduce government insurance programs. The cost containment measures that healthcare providers are instituting, including practice protocols and guidelines and clinical pathways, and the effect of any health care reform, could limit our ability to profitably sell any drugs that we may successfully develop. Moreover, any future legislation or regulation, if any, relating to the healthcare industry or third-party coverage and reimbursement, may cause our business to suffer. 9 We may not be successful in protecting our intellectual property and proprietary rights. - --------------------------------------------------------------------- Our success depends, in part, on our ability to obtain U.S. and foreign patent protection for our drug candidates and processes, preserve our trade secrets and operate our business without infringing the proprietary rights of third parties. Legal standards relating to the validity of patents covering pharmaceutical and biotechnological inventions and the scope of claims made under such patents are still developing and there is no consistent policy regarding the breadth of claims allowed in biotechnology patents. The patent position of a biotechnology firm is highly uncertain and involves complex legal and factual questions. We cannot assure you that any existing or future patents issued to, or licensed by, us will not subsequently be challenged, infringed upon, invalidated or circumvented by others. As a result, although we, together with our subsidiaries, are either the owner or licensee of technology to 23 U.S. patents and to 17 U.S. patent applications now pending, and 6 European and 15 European patent applications, we cannot assure you that any additional patents will issue from any of the patent applications owned by, or licensed to, us. Furthermore, any rights that we may have under issued patents may not provide us with significant protection against competitive products or otherwise be commercially viable. Our patents expire on average for the following technologies: * 5% amlexanox paste approximately in 2011 * Zindaclin(R) and Residerm(R) approximately in 2008 * OraDisc(TM) approximately in 2017 * AP5280 approximately in 2018 * AP5346 approximately in 2021 * Mucoadhesive technology approximately in 2021 * Vitamin mediated technology approximately in 2013 In addition, patents may have been granted to third parties or may be granted covering products or processes that are necessary or useful to the development of our drug candidates. If our drug candidates or processes are found to infringe upon the patents or otherwise impermissibly utilize the intellectual property of others, our development, manufacture and sale of such drug candidates could be severely restricted or prohibited. In such event, we may be required to obtain licenses from third parties to utilize the patents or proprietary rights of others. We cannot assure you that we will be able to obtain such licenses on acceptable terms, if at all. If we become involved in litigation regarding our intellectual property rights or the intellectual property rights of others, the potential cost of such litigation, regardless of the strength of our legal position, and the potential damages that we could be required to pay could be substantial. Our business could suffer if we lose the services of, or fail to attract, key personnel. - ------------------------------------------------------------------------- We are highly dependent upon the efforts of our senior management and scientific team, including our President and Chief Executive Officer, Kerry Gray. The loss of the services of one or more of these individuals could delay or prevent the achievement of our research, development, marketing, or product commercialization objectives. While we have employment agreements with Mr. Gray and David Nowotnik our Senior Vice President Research and Development, their employment may be terminated by them or us at any time. In addition, Mr. Gray's and Dr. Nowotnik's agreements expire within one year and are extendable each year on the anniversary date. We do not have employment contracts with our other key personnel. We do not maintain any "key-man" insurance policies on any of our key employees and we do not intend to obtain such insurance. In addition, due to the specialized scientific nature of our business, we are highly dependent upon our ability to attract and retain qualified scientific and technical personnel. In view of the stage of our development and our research and development 10 programs, we have restricted our hiring to research scientists and a small administrative staff and we have made no investment in manufacturing, production, marketing, product sales or regulatory compliance resources. If we develop pharmaceutical products that we will commercialize ourselves, however, we will need to hire additional personnel skilled in the clinical testing and regulatory compliance process and in marketing and product sales. There is intense competition among major pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions for qualified personnel in the areas of our activities, however, and we may be unsuccessful in attracting and retaining these personnel. Ownership of our shares is concentrated, to some extent, in the hands of a few individual investors which could limit the ability of our other stockholders to influence the direction of the company. - ------------------------------------------------------------------------ Heartland Advisors, Inc. and Larry N. Feinberg (Oracle Partners LP, Oracle Institutional Partners LP and Oracle Investment Management Inc.) currently beneficially own approximately 14.0% and 14.0% respectively, of our issued and outstanding common stock as of May 14, 2003. Accordingly, they collectively may have the ability to significantly influence or determine the election of all of our directors or the outcome of most corporate actions requiring stockholder approval. They may exercise this ability in a manner that advances their best interests and not necessarily those of our other stockholders. Provisions of our charter documents could discourage an acquisition of our company that would benefit our stockholders. - -------------------------------------------------------------------- Provisions of our Certificate of Incorporation, By-laws and Stockholders Rights Plan may make it more difficult for a third party to acquire control of our company, even if a change in control would benefit our stockholders. In particular, shares of our preferred stock may be issued in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as our Board of Directors may determine, including, for example, rights to convert into our common stock. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any of our preferred stock that may be issued in the future. The issuance of our preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire control of us. This could limit the price that certain investors might be willing to pay in the future for shares of our common stock and discourage these investors from acquiring a majority of our common stock. Further, the existence of these corporate governance provisions could have the effect of entrenching management and making it more difficult to change our management. Substantial sales of our common stock could lower our stock price. - ------------------------------------------------------------------ The market price for our common stock could drop as a result of sales of a large number of our presently outstanding shares. All of the 13,213,899 shares of our common stock that are outstanding as of May 14, 2003 are unrestricted and freely tradable or tradable pursuant to a resale registration statement or under Rule 144 of the Securities Act. AMEX listing requirements. - -------------------------- Our common stock is presently listed on the American Stock Exchange under the symbol "AKC". All companies listed on AMEX are required to comply with certain continued listing 11 standards, including maintaining stockholders' equity at required levels. We are not in compliance with this stockholders' equity standard as of March 31, 2003. If we are unable to remedy any listing standard noncompliance with AMEX under its regulations, or otherwise regain compliance, we cannot assure you that our common stock will continue to remain eligible for listing on AMEX. In the event that our common stock is delisted from AMEX its market value and liquidity could be materially adversely affected. ITEM 1 FINANCIAL STATEMENTS The response to this Item is submitted as a separate section of this report. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are an emerging pharmaceutical company focused on developing both novel low development risk product candidates and technologies with longer-term major product opportunities. We are a Delaware corporation. Together with our subsidiaries, we have proprietary patents or rights to eight drug delivery technology platforms: * synthetic polymer targeted delivery, * vitamin mediated targeted delivery, * vitamin mediated oral delivery, * bioerodible hydrogel technology, * nanoparticles and nanoparticle networks, * hydrogel particle aggregate technology, * Residerm(R) topical delivery and * carbohydrate targeting technology. In addition, we are marketing in the United States - Aphthasol(R), the first FDA approved product for the treatment of canker sores. We are developing new formulations and delivery forms to evaluate amlexanox in additional clinical indications, including mucoadhesive disc delivery. Also, Strakan Limited, our United Kingdom partner, has used our patented Residerm(R) technology to develop zinc clindamycin for the treatment of acne. Strakan began marketing zinc clindamycin in the United Kingdom under the trade name Zindaclin(R) in March 2002. The process to achieve marketing authorization for Zindaclin(R) throughout Europe has been initiated, with approvals in eight European Union countries to date and activities ongoing to expand approval throughout the European Union. Since our inception, we have devoted our resources primarily to fund our research and development programs. We have been unprofitable since inception and to date have received limited revenues from the sale of products. We cannot assure you that we will be able to generate sufficient product revenues to attain profitability on a sustained basis or at all. We expect to incur losses for the next several years as we continue to invest in product research and development, preclinical studies, clinical trials and regulatory compliance. As of March 31, 2003, our accumulated deficit was $49,703,000, of which $8,894,000 was the result of the write-off of excess purchase price. 12 March 31, 2003 December 31, 2002 -------------- -------------- ASSETS (unaudited) Current assets Cash and cash equivalents $ 3,223,000 $ 1,444,000 Short term investments, at cost 4,153,000 8,332,000 Accounts receivable 1,420,000 1,184,000 Accrued interest receivable 77,000 89,000 Inventory 238,000 461,000 Prepaid expenses and other current assets 630,000 852,000 -------------- -------------- Total current assets 9,741,000 12,362,000 Property and equipment, net 798,000 742,000 Debt issuance costs, net 450,000 496,000 Patents, net 2,906,000 2,991,000 Licenses, net 429,000 449,000 Goodwill, net 1,868,000 1,868,000 Other assets 551,000 579,000 -------------- -------------- Total assets $ 16,743,000 $ 19,487,000 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities Accounts payable and accrued expenses $ 2,484,000 $ 2,469,000 Accrued interest payable 571,000 311,000 Deferred revenues 996,000 1,199,000 Current portion of note payable and other future obligations 541,000 789,000 -------------- -------------- Total current liabilities 4,592,000 4,768,000 Long-term obligations for purchased patents 173,000 346,000 Note payable, net of current portion 324,000 354,000 Convertible notes 13,530,000 13,530,000 -------------- -------------- Total liabilities 18,619,000 18,998,000 -------------- -------------- Commitments and contingencies - - Stockholders' equity Preferred stock - $.01 par value; authorized 2,000,000 shares; none issued or outstanding - - Common stock - $.01 par value; authorized 50,000,000 shares; issued, 13,213,899 at March 31, 2003 and 13,159,119 at December 31, 2002 132,000 132,000 Additional paid-in capital 49,129,000 48,989,000 Notes receivable from stockholders (1,045,000) (1,045,000) Unamortized value of restricted stock grants (366,000) (277,000) Treasury stock, at cost - 819 shares (4,000) (4,000) Accumulated other comprehensive loss (19,000) (14,000) Accumulated deficit (49,703,000) (47,292,000) -------------- -------------- Total stockholders' equity (deficit) (1,876,000) 489,000 -------------- -------------- Total liabilities and stockholders' equity (deficit) $ 16,743,000 $ 19,487,000 ============== ============== The accompanying notes are an integral part of these statements. 20 Access Pharmaceuticals, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (unaudited)
Three Months ended March 31, ------------------------------ 2003 2002 -------------- -------------- Revenues Licensing revenues $ 86,000 $ 116,000 Product sales 303,000 - Royalty income 4,000 - ------------- -------------- Total revenues 393,000 116,000 Expenses Research and development 1,797,000 1,323,000 Costs of product sales 109,000 - General and administrative 537,000 499,000 Depreciation and amortization 144,000 57,000 ------------- -------------- Total expenses 2,587,000 1,879,000 ------------- -------------- Loss from operations (2,194,000) (1,763,000) Other income (expense) Interest and miscellaneous income 98,000 214,000 Interest expense (315,000) (317,000) ------------- -------------- (217,000) (103,000) ------------- -------------- Net loss $(2,411,000) $(1,866,000) ============= ============== Basic and diluted loss per common share $(0.18) $(0.14) ============= ============== Weighted average basic and diluted common shares outstanding 13,199,900 12,934,263 ============= ==============
The accompanying notes are an integral part of these statements. 21 Access Pharmaceuticals, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited)
Three Months ended March 31, ---------------------------- 2003 2002 -------------- -------------- Cash flows from operating activities: Net loss $ (2,411,000) $ (1,866,000) Adjustments to reconcile net loss to cash used in operating activities: Warrants issued in payment of consulting expenses 30,000 37,000 Amortization of restricted stock grants 21,000 9,000 Depreciation and amortization 144,000 57,000 Amortization of debt costs 46,000 46,000 Change in deferred revenue (203,000) (10,000) Change in operating assets and liabilities: Accounts receivable (236,000) (304,000) Accrued interest receivable 12,000 9,000 Inventory 223,000 - Prepaid expenses and other current assets 222,000 (223,000) Other assets 28,000 52,000 Accounts payable and accrued expenses 15,000 (53,000) Accrued interest payable 260,000 260,000 -------------- -------------- Net cash used in operating activities (1,849,000) (1,986,000) -------------- -------------- Cash flows from investing activities: Capital expenditures (95,000) (146,000) Redemptions of short term investments and certificates of deposit, net 4,179,000 7,900,000 Purchase of business and assets, net of cash acquired - (526,000) -------------- -------------- Net cash provided by investing activities 4,084,000 7,228,000 -------------- -------------- Cash flows from financing activities: Effect of exchange rate changes on cash (5,000) - Payments of notes payable and long-term obligations (451,000) (27,000) Proceeds from stock issuances, net - 32,000 --------------- ------------- Net cash provided by (used in) financing activities (456,000) 5,000 --------------- ------------- Net increase in cash and cash equivalents 1,779,000 5,247,000 Cash and cash equivalents at beginning of period 1,444,000 7,426,000 --------------- ------------- Cash and cash equivalents at end of period $ 3,223,000 $ 12,673,000 ============== =============
The accompanying notes are an integral part of these statements. 22 Access Pharmaceuticals, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements Three Months Ended March 31, 2003 and 2002 (unaudited) (1) Interim Financial Statements The consolidated balance sheet as of March 31, 2003 and the consolidated statements of operations and cash flows for the three months ended March 31, 2003 and 2002 were prepared by management without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, except as otherwise disclosed, necessary for the fair presentation of the financial position, results of operations, and changes in financial position for such periods, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002. The results of operations for the period ended March 31, 2003 are not necessarily indicative of the operating results which may be expected for a full year. The consolidated balance sheet as of December 31, 2002 contains financial information taken from the audited financial statements as of that date. (2) Acquisition-Related Intangible Assets and Change In Accounting Principles Effective January 1, 2002, we adopted SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and also specifies the criteria for the recognition of intangible assets separately from goodwill. Under the new rules, goodwill is no longer amortized but is subject to an impairment test at least annually or more frequently if impairment indicators arise. Separately identified and recognized intangible assets resulting from business combinations completed before July 1, 2001 that did not meet the new criteria for separate recognition of intangible assets were subsumed in goodwill upon adoption. Intangible assets with defined lives, namely licenses and acquired patents, did not meet the separate recognition criteria of SFAS 141. We continue to amortize intangible assets that meet the new criteria over their useful lives. In accordance with SFAS 142, we performed a transitional impairment test of goodwill as of January 1, 2002, and an annual test in the fourth quarter of 2002, which did not result in an impairment of goodwill. 23 Intangible assets consist of the following (in thousands):
March 31, 2003 December 31, 2002 ------------------------- ------------------------- Gross Gross carrying Accumulated carrying Accumulated value amortization value amortization ------------ ------------ ------------ ------------ Amortizable intangible assets Patents $ 3,178 $ 272 $ 3,178 $ 187 Licenses 830 401 830 381 ------------ ------------ ------------ ------------ Total $ 4,008 $ 673 $ 4,008 $ 568 ============ ============ ============ ============ Intangible assets not subject to amortization Goodwill $ 2,464 $ 596 $ 2,464 $ 596 ============ ============ ============ ============
Amortization expense related to intangible assets totaled $105,000 and $74,000 for the three months ended March 31, 2003 and 2002, respectively. The aggregate estimated amortization expense for intangible assets remaining as of March 31, 2003 is as follows (in thousands): 2003 $ 315 2004 427 2005 427 2006 427 2007 427 Thereafter 1,312 -------- Total $ 3,335 ======== 3) Stock-Based Compensation We have a stock-based compensation plan, which is described more fully in our Annual Report on Form 10-K for the year ended December 31, 2002, Form 10-K, in Notes to Consolidated Financial Statements in Note 1. We apply APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for our plans. All our options are issued with an exercise price at our stock's market price. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FASB Statement 123, Accounting for Stock-Based Compensation, using assumptions described in Form 10-K, Note 10, to our stock-based employee plans. 24
Quarter ended March 31, ------------------------------ 2003 2002 -------------- -------------- Net loss As reported $(2,411,000) $(1,866,000) Deduct: Stock-based employee compensation expense determined under fair value based method for awards granted, modified, or settled, net of related tax effects (224,000) (1,040,000) -------------- -------------- Pro forma (2,635,000) (2,906,000) Basic and diluted loss per share: As reported $(0.18) $(0.14) Pro forma (0.20) (0.22)
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