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, 1996
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, Four Cents ($0.04) 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
requirement for the past 90
days. Yes /x/ No / /
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 registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. / /
The aggregate market value of the outstanding voting stock held by
non-affiliates of the registrant as of March 18, 1997 was approximately
$10,414,000.
As of March 18, 1997 there were 31,391,324 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 1997 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.
PART I - FINANCIAL INFORMATION
ITEM 1. BUSINESS
Overview of Current Operations
Access Pharmaceuticals, Inc. ("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 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.
Company Profile
Access is a Polymer Based Therapeutics Company providing a new dimension
in drug delivery through the rational design of polymer/drug complexes to
control site directed targeting, localized release and clearance of therapeutic
drugs, imaging agents and radiopharmaceuticals. Through patented technology
and core competencies in polymer/drug formulation, product and technology
development, Access technology platforms have the potential to significantly
enhance the therapeutic efficacy and reduce the toxicity of products via novel
formulation and drug delivery solutions.
Company Vision
Lead the industry in advanced drug delivery by surpassing currently available
technology through the utilization of Smart Bioresponsive Polymers as
pharmaceutical carriers that take advantage of the body's own mechanisms to
significantly enhance the clinical effectiveness of a broad spectrum of products
which have a poor therapeutic index.
Drug Development Strategy
Part of Access' integrated drug development strategy is to form creative
alliances in centers of excellence so drug delivery opportunities can be fully
maximized. Access has recently signed agreements with The School of
Pharmacy, University of London in platinate polymer technology, Dow
Chemical in chelation technology for imaging products and
radiopharmaceuticals, and Strakan Ltd in the delivery of topical therapeutic
agents which exploit the Access zinc patent.
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. It is
anticipated 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.
The manufacturing scale-up, pre-clinical 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 released, transdermal systems, etc., are based on a physical erosion
process for enhancing active product into the systemic circulation 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 Access technology platforms are differentiated
from conventional drug delivery systems in that it applies 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 Smart
Bioresponsive 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 ability to achieve
physiological triggering of drug release at the desired site of action,
enables the Access Smart Polymers to 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.
Smart Bioresponsive 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 bioresponsive 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 Technology Platforms
Access' current 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 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 that can be
used to exploit EPR ("enhanced permeability and retention") in tumor cells
and control drug release. Many solid tumor cells possess vasculature that is
hyperpermeable (i.e., "leaky") to macromolecules. In addition to this enhanced
2
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.
3
Research Projects and Products in Development
ACCESS DRUG PORTFOLIO
Clinical
Compound Originator Indication FDA Filing Stage (1)
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Cancer
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AP 4010 Access Anti-tumor Development Pre-Clinical
AP 5070 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 I
Anti-Fungal
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AP 1110 Access Anti-fungal Development Pre-Clinical
Topical Delivery
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Amlexanox(2) Takeda Oral ulcers FDA Approved Completed
(CHX-3673)
Zinc compound(3) Access Enhancing drug Development Pre-clinical
penetration and
retention in the
skin (acne)
Dermatology
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ActinexTM(2) Access Actinic keratosis FDA approved Completed
(1) See "Government Regulations" for description of clinical stages.
(2) Sold to Block. Subject to a Royalty Agreement.
(3) Licensed to Strakan Limited.
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 pre-clinical 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 scale-up
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.
Research Projects and Products in Development
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 products candidates
4
are 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 (both Chemex and API) expended approximately $1,405,000,
$1,981,000 and $3,355,000 on research and development during the years 1996,
1995 and 1994, respectively. Expenditures on research and development are
expected to increase during 1997 and subsequent years.
Development Programs Cancer
Approximately one-fourth of all deaths in the United States are due to
malignant tumors. More than 85% of these are solid tumors, and
approximately half of the patients with these tumors die of their disease. The
cause of death is usually metastatic disease distant from the original tumor,
although uncontrolled primary tumors can also be fatal. The distant
metastases are treated systematically with anti-cancer drugs and biological
agents, but these attempts are often unsuccessful. The cost of treating these
patients is enormous, and in 1995 the estimated bill was $50 billion or 5% of
the nation's total medical bill. As the population ages and new sophisticated
diagnostic tests are launched, incidence of detected cancer continues to rise.
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, 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.
The Access anti-cancer program is designed to overcome the physiological
barriers to penetration of drugs into tumor tissue by targeting potent drugs
into sites of disease activity and clearing the non-targeted fraction.
Polymer Cisplatin, AP-5070 - Access in conjunction with The School of
Pharmacy, University of London, is developing a soluble, synthetic polymer
conjugate formulation of cisplatin for the first line treatment of solid tumors
in indications where cisplatin is currently approved. Animal studies indicate:
* improved efficacy over standard cisplatin at maximum tolerated dose
* reduced toxicity over standard cisplatin
* enhanced tumor access and retention of polymer
The Company intends to apply to the EORTC (the European Organization for
Research and Treatment of Cancer) to enter into human trials. It is
anticipated that Phase I trials will commence within the next 12 months.
Glycopolymer Doxorubicin, AP-4010 - Access is developing a glycopolymer
formulation of doxorubicin for the first line treatment of solid tumors in tumor
types where increased amounts of standard doxorubicin without rate limiting
toxicity would be clinically beneficial. Animal studies indicate:
* improved efficacy over standard doxorubicin at equal dosing levels
* enhanced tumor permeation as indicated by histological evidence
* reduced toxicity over standard doxorubicin
Due to resource limitations and the need to focus on a limited number of
opportunities it is not anticipated that this
5
product will advance to clinical development until 1998 at the earliest.
Development Programs MRI Imaging Agents
Preoperative diagnostic imaging technologies are used to determine the
existence and the extent of disease. The principal diagnostic imaging
technologies are CT Scanning and Magnetic Resonance Imaging ("MRI").
Both methods produce images that show anatomic boundaries between the
tissue suspected of being malignant and the surrounding tissue, to reveal
potential disease. Neither method gives information allowing a clear
distinction of malignant from nonmalignant tissue. A more recently developed
technology, immunoscintigraphy, uses a gamma-ray detection camera
externally to identify internally localized radiolabeled antibodies potentially
specific to certain cancers. Although immunoscintigraphy with certain
radiolabeled antibodies appears capable of distinguishing malignant tumors
from nonmalignant lesions and surrounding tissues, none of the external
imaging technologies, including immunoscintigraphy, is effective in consistently
identifying primary tumors smaller than one centimeter, in precisely locating
the site or margins of the tumor, in consistently identifying all metastatic
tumor nodules, or in distinguishing pre-invasive from functionally invasive
tumor behaviors.
The currently available contrast agents for MRI are nonselective gadolinium
based extracellular agents predominantly used in imaging the central nervous
system.
Access is focused on expanding the utility of MRI imaging to include body
imaging by developing a site-selective intravenous contrast agent with
improved localization and performance outside as well as within the central
nervous system. Access believes that improved site selectivity, longer site
contrast with rapid blood clearance, the ability to clearly delineate tumor
boundaries and metastases and the opportunity to obtain additional valuable
information on prognosis, function, therapeutic response monitoring and
anatomy at high resolution, could be major competitive advantages of the
technology.
Access is developing a site selective, MRI Contrast Agent for the detection,
staging and monitoring of tumors. Access recently signed a letter of intent to
enter a collaboration with the Dow Chemical Company for the development
of products incorporating Dow's chelation technology and Access' Smart
Bioresponsive Polymer Systems. The collaboration will focus on the
development of MRI contrast agents and radiopharmaceutical diagnostic and
therapeutics. The agreement will provide Access with extensive chelation
technology, chelation chemistry and assistance over a broad range of research
and development activities. Dow Chemical will actively participate in the
development of the product candidates.
Development Programs Infectious Diseases
Systemic fungal infections are a major problem for patients with impaired
immune defense mechanisms, particularly cancer patients, diabetics and AIDS
patients. Candidiasis accounts for 70% of all fungal infections and is fatal in
30% to 40% of cases. Aspergillus is more severe, with a 90% fatality rate.
Amphotericin B is the only member of the polyene class of antifungals that can
be administered parenterally and has been considered the drug of choice
primarily because of its broad spectrum of activity. However, its incidence of
adverse reactions, particularly renal toxicity, limits the maximum intravenous
dosage.
Glycopolymer Amphotericin B, AP-1110 - Access is currently developing a
glycopolymer formulation of amphotericin B for the first line treatment of
deep seated fungal infections. Animal studies indicate a superior therapeutic
index and pharmacokinetic profile that will provide significantly better
efficacy and reduced toxic side effects. An IND (Investigational New Drug
Application) is anticipated to be submitted within 12 months.
Dermatology Assets
Access has a Zinc patent for enhancing drug penetration and retention in the
skin which it has licensed to Strakan Limited. 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 infection. There is 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. The Zinc patent is based on this principle and
Strakan has an option to develop and market products under this patent.
Access
6
will receive royalties and also share in any sub-licensing milestone payments.
Strakan has initiated a product development program in the acne field as the
first of several planned programs.
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.
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.
Eight patents have issued commencing in 1990 (six U.S. and two European)
and an additional eight patent applications are pending (five U.S. and three
PCT).
These patents and applications broadly cover 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, selections, 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.
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.
The intellectual property around which API was founded was originally
licensed by way of a License Agreement from the inventor and principal
shareholder Dr. David Ranney. A Patent Purchase Agreement dated April 5,
1994, (the "Patent Purchase Agreement") terminated the License Agreement
and provided for assignment of the rights to the original patents to Access. The
terms of the Patent Purchase Agreement were amended effective January 23,
1996 reducing the minimum royalty payments due to Dr. David Ranney.
Additional patents covering the technology were purchased from the University
of Texas system on October 31, 1990 and applied for directly by Access. The
technology was developed by Dr. David Ranney during his tenure at the
University of Texas Southwestern Medical School which retains a royalty free
non-exclusive right to use the patent rights for its own research, teaching and
other educationally-related purposes.
Dr. David Ranney has signed an Assignment of Intellectual Property
Agreement whereby all rights, title and interest in and to all subsequent
inventions and confidential information will become the sole and exclusive
property of Access at the earlier of the date of conception or development,
while he remains an employee of Access and for a period of two years after
he ceases employment for inventions relating to the Access technology. Since
May 31, 1996, Dr. Ranney is no longer an employee of Access.
Under the terms of the Patent Purchase Agreement as amended, Dr. David
Ranney has retained certain rights and interests in the intellectual property,
including a non-exclusive right to use the inventions and technology covered
by or relating to the patents for his own research, teaching or other academic
related purposes, and after he is no longer a full-time employee of Access for
research and development of uses or implementations of the inventions and
technology improvements. Access maintains the first right to negotiate the
acquisition of any new inventions or technology improvements developed by
Dr. David Ranney relating to the technology. Beginning in 1994, Access has
agreed to pay Dr. David Ranney a royalty of three quarters of one percent
(0.75%) of Access' gross revenues derived from products covered by the
patents and to pay certain minimum payments.
In addition, the Patent Purchase Agreement, as amended, establishes certain
additional rights of Dr. David Ranney. The patent assignment will terminate
in the event Access fails to pay the amounts due to Dr. David Ranney
pursuant
7
to the Agreement, files a petition in bankruptcy, fails to commercially develop
the patents or creates a security interest in the patents without Dr. David
Ranney's approval. Also, in the event that parts of the Access technology are
not being developed prior to January 2000, Dr. David Ranney has the right of
first refusal to license or acquire at fair market value development rights to
such parts of the Access technology.
Access also has or has the license to certain dermatological patents. A Zinc
patent for penetration and retention in the skin has been licensed to Strakan
Limited.
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 GLYCOS
formulations incorporate extensively tested drug substances, because the
resulting GLYCOS 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 regulations which establish the minimum requirements
for methods to be used in, and the facilities or controls to be used during the
production process and the 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 an 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-to-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 re-done 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 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 highly competitive. Most
pharmaceutical and biotechnology companies have considerably greater
research and development, financial, technical and marketing resources than
Access. Although Access' proposed products utilize a novel drug delivery
system, they will be competing with established pharmaceutical companies'
existing and planned new product introductions and alternate delivery forms
8
of the active substance being formulated by Access.
A number of companies are developing or may, in the future, engage in the
development of products competitive with the Access delivery system.
Currently, in the therapeutic area, liposomal formulations being developed by
Nexstar, Inc., The Liposome Company, Inc. and Sequus Pharmaceuticals, Inc.
are the major competitive intravenous drug delivery formulations which utilize
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.
The principal current competitors to Access' technology fall into two
categories: monoclonal antibodies and liposomes. Access believes its
technology represents a significant advance over these older technologies
because its technology provides the only system with a favorable
pharmacokinetic profile which has been shown to effectively bind and cross
neovascular barriers and to deeply penetrate the major classes of deep tissue
and organ disease, which remain partially inaccessible to older technologies.
Even if Access' products are fully developed and receive required regulatory
approval, regarding which there is 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 the technology will potentially be more rapidly
developed and successfully introduced into the marketplace.
Employees
As of March 3, 1997 Access has 15 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, on January 25, 1996. On
September 14, 1995, at a Special Meeting of Stockholders, the Chemex
Stockholders approved the sale of its rights to Amlexanox, a drug for canker
sores, to Block Drug Company ("Block"), retaining the right to receive royalties
from future sales of Amlexanox.
As a consideration for the sale of the Company's share of Amlexanox, Block
(a) made a nonrefundable upfront 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 together with any sublicensee has achieved
cumulative worldwide 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 cumulative worldwide sales of Amlexanox oral
products of $45 million, as defined.
The Company announced on December 19, 1996 that Block has received
approval from the U.S. Food and Drug Administration for Amlexanox. There
have been no sales of Amlexanox to date. Amlexanox will be marketed under
the name ApthasolTM.
In June 1990, the Company sold its then lead drug, ActinexTM, a drug
developed by the Company for the treatment of actinic keratoses
(pre-malignant lesions to the skin) to Block for a total of $8 million in
milestone payments plus future royalties which to date have not been
significant.
Risk Factors
Certain of the statements contained in this Annual Report on Form 10-K are
forward looking statements that involve risks and uncertainties including but
not limited to the risk factors set forth below:
9
Research and Development Focus Access' focus is on commercializing
proprietary biopharmaceutical patents. Although Access is projected to have
royalty income, it 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 non-revenue producing company, normal
credit arrangements are unavailable to Access and, 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 arrangements would be available. Further, it
is anticipated that additional losses will be incurred in the future, and there
can be no assurances that Access will ever achieve significant revenues.
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 due to 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
ActinexTM and AmlexanoxTM 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.
History of Losses; Probability of substantial additional future losses
Access has sustained net operating losses since its inception. Since the
development and commercialization of current and new products will require
substantial expenditures for the foreseeable future, Access expects to incur
further losses. If Access' losses
continue, its ability to continue its operations will depend
upon its ability to secure additional funds. Access' revenue trend and future
additional cash needs may display significant variations due to the introduction
of new research and development agreements and licensing arrangements, the
completion or termination of those agreements and arrangements, the timing
and amounts of milestone payments, and the timing of regulatory approvals
and market introduction of products.
Future Capital Requirements Access will require substantial funds for its
research and product development programs, the pursuit of regulatory
approvals, operating expenses, working capital and expansion of its production
capabilities. There can be no assurance that Access will be profitable in the
future and if Access has insufficient funds for its capital needs, there can be
no assurance that additional funds can be obtained on acceptable terms, if at
all. If necessary funds are not available, Access' business would be materially
adversely affected.
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 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
10
regulatory compliance process and in marketing or product sales if it develops
pharmaceutical products with commercial potential that it determines to
commercialize itself. There can be no assurance, however, that it will be able
to acquire such resources or personnel.
Protection of Proprietary Technology Access' ability to compete
effectively with other companies will depend, in part, on its ability to
maintain the proprietary nature of its technology. Although Access has been
awarded eight patents involving glycosaminoglycan, acidic saccharide,
carbohydrate and other endothelial-binding and targeting carriers in
combination with drugs and diagnostic agents
patents will not be declared invalid or circumvented, or that pending patents
will be issued. In addition, there may be other patents issued covering
technologies and products which may be required by Access to manufacture,
use or sell any potential products. There can be no assurance that Access
could obtain a license under any such patent on commercially acceptable terms
or at all. To protect their rights in these areas, Access generally requires
its respective employees, consultants, advisors and collaborators to enter
into confidentiality agreements. There can be no assurance, however, that
these agreements will provide meaningful protection for Access' trade secrets,
know-how or other proprietary information in the event of any unauthorized
use or disclosure of such trade secrets, know-how or other proprietary
information. Litigation may be necessary to protect trade secrets or know-how
currently owned by Access to determine the scope and validity of the
proprietary rights of others and could result in substantial cost and
diversion of effort by Access.
Regulation by Government Agencies The pharmaceutical industry is
subject to regulation by the U.S. Food and Drug Administration ("FDA") and
comparable agencies in foreign countries prior to commercial marketing. The
process of obtaining approvals from such agencies for any potential products
of Access can be costly, complicated and time consuming and there can be no
assurance that such approvals will be granted on a timely basis, if ever. The
regulatory process may delay the marketing of any new products for lengthy
periods, impose substantial additional costs and furnish an advantage to
competitors who have greater financial resources. In addition, the extent of
potentially adverse governmental regulations which might arise from future
legislative, administrative or judicial action cannot be determined. Access
cannot predict at this time what effect FDA actions may have on the approval
process to which Access' potential products may be subject.
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 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.
Competition The domestic and international markets for the
pharmaceutical industry are highly competitive. Many of Access' competitors
have significantly greater financial, technical, research and development and
marketing resources than Access. Access' ability to compete depends primarily
upon scientific and technical superiority, patent protection, timely regulatory
approvals and effective pricing and marketing. Access' future success will also
depend upon, among other factors, its ability to develop, introduce,
manufacture and obtain regulatory approvals on a timely basis for new or
potential products. Other substances or technologies currently existing or
developed in the future may be the basis for competitive products that will
render Access' technology obsolete or non-competitive. There can be no
assurance that any potential products or processes will compete successfully.
Additionally, there can be no assurance that Access' competitors will not
substantially increase the resources devoted to the development and marketing
of products competitive with those of Access.
Dependence Upon Skilled Personnel The business of Access depends
heavily upon the active participation of a number of key management and
technical personnel. The loss of the services of one or more such employees
could have a material adverse effect on the operation of Access' business,
financial condition and results of operations. In addition, both the long and
short term success of Access depend in large part upon its continued ability to
attract and retain skilled scientific, and managerial employees, which may
prove difficult because the
11
market for the services of such individuals is highly competitive.
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.
Limited Market for Common Stock Trading in Access' securities is
presently conducted in the over-the-counter market in what are more
commonly referred to as the "pink sheets." 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 One-For-Four Reverse Stock Split Proposal The proposal
expected to be put before the shareholders to approve a one-for-four reverse
stock split is subject to shareholder approval. If the proposal is approved and
the reverse stock split is implemented, there can be no assurances the market
price immediately after the implementation of the proposed reverse stock split
will increase, and if it does increase, there can be no assurance that such
increase can be maintained for any period of time, or that such market price
will approximate four times the market price before the proposed reverse stock
split. There can be no assurances that the Company will be listed on any
exchange or the NASDAQ SmallCap Market.
Effect of Certain Charter and By-Law Provisions; Possible Issuance of
Preferred Stock Access' Certificate of Incorporation and Bylaws 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 of this
Form 10-K, all shares of Common Stock are unrestricted and freely tradable.
There also are outstanding options, warrants and rights to purchase up to
approximately 3.8 million shares of the Common Stock. The sale of a
substantial amount of these shares could have a material adverse effect on the
future market price of Common Stock.
ITEM 2. PROPERTIES
Access maintains one facility of administrative offices and laboratories in
Dallas, Texas. Access has a lease agreement for the facility which has
approximately 9,100 square feet, 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 legal proceedings.
12
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, since February 1, 1996, trades on the NASD
Over-the-Counter ("OTC") Bulletin Board and trades under the trading symbol
AXCS. Prior to this date the common stock traded under the trading symbol
CHMX. The Common Stock was traded on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") SmallCap
market under the trading symbol CHMX until April 27, 1995. Access'
securities were delisted from the NASDAQ SmallCap Market on April 27,
1995 for failure to meet certain financial requirements. The following tables
set forth, for the periods indicated, the high and low closing prices for the
Common Stock as reported by the OTC and NASDAQ for the Company's past
two fiscal years.
Common Stock
------------------
High Low
-------- --------
Fiscal Year Ended December 31, 1996
- -----------------------------------
First quarter $2-11/16 $ 7/8
Second quarter 2-9/16 1-5/8
Third quarter 1-11/16 7/8
Fourth quarter 1-5/16 3/4
Fiscal Year Ended December 31, 1995
- -----------------------------------
First quarter $ 3/4 $ 7/16
Second quarter(1) 1/2 7/16
Second quarter(2) 9/16 1/16
Third quarter 19/32 9/32
Fourth quarter 1-1/8 1/4
(1) Through April 27, 1995 on NASDAQ SmallCap Market.
(2) After April 27, 1995 on OTC Bulletin Board.
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 18, 1997
was approximately 5,200 and the closing price on that date was $.6875. In June
1996 the stockholders authorized an increase from 40,000,000 to 60,000,000
shares of common stock. As of March 18, 1997, there were 31,391,324 shares
of common stock outstanding.
In January 1996 the stockholders authorized an increase from five to ten
million shares of preferred stock as part of the merger with API. To date, no
preferred shares have been issued.
13
Recent Sales of Unregistered Securities
On March 4, 1996, the Company completed a private placement of Common
Stock to certain investors (the "Private Placement"). The Company issued
8,571,415 shares of Common Stock at $0.70 per share for the aggregate gross
proceeds of $6.0 million. Such sales were pursuant to an exemption under
Section 4(2) and Regulation D of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
(Thousands, Except for Net Loss Per Share)(1)
The following data, insofar as it relates to each of the years in the five year
period ended December 31, 1996, 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,
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Statement of Operations Data:
Total Revenues $ 167 $ 690 $ 1,039 $ 322 $ 589
Operating Loss (11,613) (1,046) (466) (1,386) (1,009)
Other Income 196 5 9 34 106
Interest Expense 45 58 19 - -
Loss Before Income Taxes (11,462) (1,099) (476) (1,352) (903)
Income taxes - - - 32 (44)
Net Loss (11,462) (1,099) (476) (1,384) (859)
Common Stock Data:
Net Loss Per Share $(.38) $(.09) $(.04) $(.12) $(.08)
Weighted Average Number of
Common Shares Outstanding 29,845 11,846 11,160 11,160 11,160
December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Balance Sheet Data:
Total Assets $ 4,928 $ 424 $ 1,261 $ 1,079 $ 2,444
Notes Payable 110 100 - - -
Total Liabilities 868 773 731 71 53
Stockholders' Equity (Deficit) 4,060 (349) 531 1,007 2,391
(1) - Reflects Company data for 1996 and API data for the years 1995, 1994,
1993 and 1992. Net Loss Per Share and Weighted Average Number of
Common Shares Outstanding are adjusted by the conversion factor
3.824251 used for the merger of API with the Company.
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 Chemex
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.
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 reporting purposes.
Subsequent to the Merger of API into Access, the Company is now managed
by the former management of API
14
and the focus of the Company has changed to the development of enhanced
delivery of parenteral therapeutic and diagnostic imaging agents through the
utilization of its patented and proprietary endothelial binding technology which
selectively targets sites of disease.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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 polymer based therapeutics company providing drug delivery by
controlling site directed targeting, localized release and clearance of
therapeutic drugs, imaging agents and radiopharmaceuticals.
In March 1996, the Company managed a private placement that raised gross
proceeds of $6.0 million, net of issuance costs of $497,500, from the placement
of 8.57 million shares of common stock.
On April 26, 1996, Access executed a letter of intent to acquire Tacora Corp.,
a privately-held pharmaceutical company based in Seattle. The transaction is
expected to close in the next 30 days. Under the terms of the letter of intent,
the purchase price is contingent upon the achievement of certain milestones.
In addition to cash of $250,000 and $100,000 of common stock paid at closing,
stock up to a maximum of $14,000,000 could be payable to Tacora's
Shareholders over a 30 month period on an escalating value over the milestone
period. The consummation of the transaction is subject to customary
conditions to closing including completion of due diligence, negotiation of
definitive documents and approval of the stockholders of Tacora Corp.
On July 22, 1996 Access licensed to Strakan Limited its Zinc patent for
enhancing drug penetration and retention in the skin. The agreement provides
for Access to share in milestone payments and receive a royalty on all
marketed products. Strakan will be responsible for all product costs.
On December 4, 1996 the Company announced the signing of a licensing
agreement with the School of Pharmacy, University of London (the "School")
for polymer platinum compounds. The Company in conjunction with the
School through research and development funding is developing a soluble,
synthetic polymer conjugate formulation of cisplatin for the first line
treatment of solid tumors in indications where cisplatin is currently approved.
Access operated as Chemex prior to the merger, January 25, 1996. On
September 14, 1995, at a Special Meeting of Stockholders, the Company
Stockholders approved the sale of its rights to Amlexanox, a drug for canker
sores, to Block Drug Company ("Block"), retaining the right to receive royalties
from future sales of Amlexanox.
As a consideration for the sale of the Company's share of Amlexanox, Block
(a) made a nonrefundable upfront 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 together with any sublicensee has achieved
cumulative worldwide 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 cumulative worldwide sales of Amlexanox oral
products of $45 million, as defined.
15
The Company announced on December 19, 1996 that Block has received
approval from the U.S. Food and Drug Administration for Amlexanox. There
have been no sales of Amlexanox to date. Amlexanox will be marketed under
the name ApthasolTM.
Recent Developments
On February 6, 1997, the Company announced plans to request shareholder
approval for a one for four reverse stock split. The Company believes that a
reverse stock split will position Access more attractively with institutional
investors and investment community members which generally have restrictions
on investing in unlisted companies. In addition, if the proposal is approved by
shareholders, the Company intends to submit an application for listing on the
NASDAQ SmallCap Market if it meets all such qualifications. The Company
believes that securing a NASDAQ listing along with the reverse split would
improve Access' ability to finance the company's research activities under more
favorable terms. There can be no assurances the market price immediately
after the implementation of the proposed reverse stock split will increase, and
if it does increase, there can be no assurance that such increase can be
maintained for any period of time, or that such market price will approximate
four times the market price before the proposed reverse stock split. There can
be no assurances that the Company will be listed on any exchange or the
NASDAQ SmallCap Market.
On February 5, 1997 the Company announced the signing of a letter of intent
to enter into collaboration with The Dow Chemical Company ("Dow") for the
development of products incorporating Dow's chelation technology and Access'
bioresponsive polymer systems. The closing of the agreement is subject to
negotiation of definitive documents and final approval by both parties. 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.
Liquidity and Capital Resources
The Company's principal source of liquidity as of December 31, 1996, is
$4,428,000 of cash and cash equivalents. Working capital as of December 31,
1996 was $3,944,000, an increase of $4,459,000 as compared to the working
capital as of December 31, 1995 of $(515,000). The increase in working capital
was principally due to $6 million in proceeds from the private placement of
8.57 million shares of common stock in March 1996 and the addition of $1.59
million in working capital of Chemex resulting from the Merger between
Chemex and API, offset by 1996 operating activities and consulting expenses
of $480,000 associated with the completion of the private placement. The net
cash infusion from the private placement will be used to continue the
development and advancement of the Access technology which focuses on
increasing the therapeutic benefit and improving the efficacy of oncology
therapeutics and diagnostic agents by selectively targeting sites of disease and
accelerating drug clearance. The shares issued in the private placement have
been registered for resale, subject to certain restrictions. Such shares will
become eligible for sale under Rule 144 (as revised) on April 29, 1997.
With the Company's current budget and it's anticipated option and licensing
revenues, Management believes working capital will cover planned operations
through the end of 1998. If the anticipated revenues are delayed or do not
occur or the Company is unsuccessful in raising additional capital on
acceptable terms, research and development expenditures will be curtailed and
working capital would cover operations only through approximately the end of
1998.
Currently royalty revenues are not expected during 1997. Research and
development expenditures to advance products into human testing will remain
high for several years and will require the Company to enter into
collaborations with partners and/or to raise additional funds through equity
financing. There can be no assurance that the Company will be successful in
attaining a partner or future equity financing on acceptable terms to complete
the testing of its products.
Results of Operations
Comparison of Years Ended December 31, 1996 and 1995
Revenues for 1996 were $167,000 as compared to $690,000 in 1995, a decrease
of $523,000. The decrease in
16
revenues for 1996 as compared to the comparable 1995 period was principally
due to option payments recorded as income in the first quarter related to a
third-party evaluation of certain of the Company's technology. The company
performing the evaluation elected not to extend the option period beyond
March 29, 1996. An additional $110,000 in option payments which had been
recorded as unearned revenue was converted to a non-interest bearing loan
due to the evaluating pharmaceutical company. Revenues for 1995 were
comprised of sponsored research and development revenues.
Total research spending for 1996 was $1,405,000 as compared to $728,000 for
the same period in 1995, an increase of $677,000. The increase in expenses
was due to the following: increased salaries and related expenses- $353,000;
increased external research expenditures- $133,000; increased equipment rental
costs- $88,000; increased scientific consulting- $72,000; and other increases of
$31,000. Research spending will increase in 1997 and the future as the
Company has initiated the hiring of additional scientific management and staff
and is accelerating activities to develop the Company's product candidates.
Total general and administrative expenses were $1,938,000 in 1996, an increase
of $1,297,000 as compared to the same period in 1995. The increase in
spending was due to the following increases in: business consulting fees-
$344,000; professional expenses due to the Merger and legal costs of being a
public company- $301,000; salaries and related expenses- $184,000; general
business consulting fees and expenses- $146,000; patent expenses- $142,000;
director fees and director and officer insurance- $134,000; and other increases
of $46,000.
Interest expense was $13,000 lower in 1996 versus 1995 due to the decrease of
the outstanding balance of capital lease obligations.
Depreciation and amortization decreased to $123,000 in 1996 from $367,000
in 1995, a decrease of $244,000. The decrease is due to the write off of
$246,000 capitalized patent and application costs in 1995.
Excess purchase price over the fair value of Chemex's net assets of $8,314,000
was recorded and written off in the first quarter of 1996 due to an immediate
impairment of the excess purchase price.
Total expenses were $11,481,000, including $8,314,000 of excess purchase price
written off, which resulted in a loss for the twelve months of $11,118,000, or
$.37 per share.
Comparison of Years Ended December 31, 1995 and 1994
Revenues in 1995 were $690,000, as compared to $1,039,000 for the same
period in 1994, a reduction of $349,000. The lower revenues in 1995 are due
to a project cancellation by a pharmaceutical company in June 1995.
Research and development expenses for 1995 were $728,000 as compared to
$764,000 for the same period in 1994, a decrease in spending of $36,000. The
decrease is due mainly to: decreased salaries and related expenses-$93,000;
and a decrease of other expenses of $4,000; offset by increased external
research expenditures- $61,000.
General and administrative expenses were relatively constant from 1995 with
expenses of $641,000 as compared to $626,000 in 1994. Patent expenses were
$44,000 higher in 1995 as compared to 1994 while other expenses were $44,000
lower in 1995 as compared to 1994 due to a business development expense of
$44,000 incurred in 1994.
Interest expense was $39,000 higher in 1995 versus 1994 due to additional
capital lease obligations incurred late in 1994. A full year's interest expense
was recognized in 1995 whereas only one quarter of a year of interest expense
was recognized in 1994.
Depreciation and amortization increased to $367,000 in 1995 from $115,000 in
1994, an increase of $252,000. The increase was due to API changing its
accounting for patent and patent application costs from capitalizing and
amortizing initial patent and application costs (primarily legal and filing fees
related to patents) to expensing these costs as incurred. As a result of the
change, the Company wrote down capitalized patent and application costs by
approximately $246,000 in the fourth quarter of 1995.
New Accounting Standard
17
SFAS No. 125, "Accounting For Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Management of the Company does not expect that the adoption
of SFAS No. 125 will have a material impact on the Company's financial
position, results of operations, or liquidity.
ITEM 8. FINANCIAL AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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 1997 Annual Meeting of
Stockholders to be held on June 20, 1997 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, 1996.
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, 1996.
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, 1996.
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, 1996.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
a. Financial Statements and Exhibits
Page
1. Financial Statements. The following financial statements are submitted
as part of this report:
Independent Auditor's Report F-1
Independent Auditor's Report F-2
Balance Sheets at December 31, 1996 and 1995 F-3
Statements of Operations for the three years ended
December 31, 1996 and the period from February 24, 1988
(Inception) to December 31, 1996 F-4
Statements of Stockholders' Equity (Deficit) for the period
from February 24, 1988 (Inception) to December 31, 1996 F-5
Statements of Cash Flows for the three years ended December 31,
1996 and the period from February 24, 1988 (Inception) to
December 31, 1996 F-6
Notes to Financial Statements F-7
2. Financial Statement Schedule.
No financial statment schedules are included because they are not
required ot he information is included in the financial statments
or notes thereto.
3. Exhibits.
4. 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 Bylaws (Incorporated by referenced to Exhibit 3(b) of the Company's
Form 8-B dated July 12, 1989, Commission File Number 0-9314)
3.3 Certificate of Amendment of Certificate of Incorporation filed August
21, 1992
3.4 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)
3.5 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)
3.6 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)
3.7 Certificate of Amendment of Certificate of Incorporation filed July
18, 1996
10.0 Material contracts:
* 10.1 Employee Stock Ownership Plan (Incorporated by the reference to
Exhibit 10 of the Company's Form 10-K for the year ended December
31, 1986, commission File Number 0-9314)
19
* 10.2 Employee Stock Ownership Trust (Incorporated by reference to
Exhibit 10 of the Company's form 10-K for the year ended December
31, 1986, commission File Number 0-9314)
* 10.3(a) Employment Agreement of Mr. Herbert H. McDade, Jr.
(Incorporated by
reference to Exhibit 10 of the Company's Form 10-K
for the year ended December 31, 1988, Commission File Number
0-9314)
* 10.3(b) First Amendment to Employment Agreement of Mr. Herbert H.
McDade, Jr. Dated July 31, 1989 (Incorporated by reference to Exhibit
10.5(b) of the Company's Form S-1 dated November 7, 1989,
Commission File Number 33-30685)
* 10.3(c) Second Amendment to Employment Agreement of Mr. Herbert H.
McDade, Jr. dated December 13, 1989 (Incorporated by reference to
Exhibit 10.3(a) of the Company's Form 10-K for the year ended
December 31, 1990)
* 10.3(d) Third Amendment to Employment Agreement of Mr. Herbert H.
McDade, Jr. dated July 11, 1990 (Incorporated by reference to Exhibit
10.3(a) of the Company's Form 10-K for the year ended December 31,
1990)
* 10.3(e) Fourth Amendment to Employment Agreement of Mr. Herbert H.
McDade, Jr. dated June 25, 1991 (Incorporated by reference to Exhibit
10 of the Company's Form 10-K for the year ended December 31,
1991)
* 10.3(f) Fifth Amendment to Employment Agreement of Mr. Herbert H.
McDade, Jr. Dated December 31, 1991 (Incorporated by reference to
Exhibit 6 of the Company's Form 10-Q for the quarter ended June 30,
1994)
* 10.3(g) Sixth Amendment to Employment Agreement of Mr. Herbert H.
McDade, Jr. dated April 29, 1994 (Incorporated by reference to Exhibit
6 of the Company's Form 10-Q for the quarter ended June 30, 1994)
10.4 Irrevocable Assignment of Proprietary Information with Dr. Charles
G. Smith (Incorporated by reference to Exhibit 10.6 of the Access Form
10-K for the year ended December 31, 1991)
10.5 Conversion Agreement with Sentinel Charitable Remainder Trust
dated June 18, 1990 (Incorporated by reference to Exhibit 10 of the
Company's Form 10-K for the year ended December 31, 1990)
* 10.6 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)
10.7 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).
10.8 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)
10.9 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)
10.10 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)
10.11 Platinate HPMA Copolymer Royalty Agreement between The School
of Pharmacy, University of London and the Company dated November
19, 1996
20
21. Subsidiaries of the registrant
23.0 Consent of Experts and Counsel
23.1 Consent of KPMG Peat Marwick LLP
23.2 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.
There were no reports on Form 8-K during the fourth quarter of 1996.
21
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 27, 1997 By: /s/ Kerry P. Gray
----------------------
Kerry P. Gray
President and Chief Executive
Officer, Treasurer
Date March 27, 1997 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 27, 1997 By: /s/ Kerry P. Gray
--------------------------
Kerry P. Gray
President and Chief Executive
Officer, Treasurer, Director
Date March 27, 1997 By: /s/ J. Michael Flinn
----------------------------
J. Michael Flinn, Director
Date March 27, 1997 By:
-----------------------------
Elizabeth M. Greetham, Director
Date March 27, 1997 By: /s/ Stephen B. Howell
-----------------------------
Stephen B. Howell, Director
Date March 27, 1997 By: /s/ Max Link
------------------------------
Max Link, Director
Date March 27, 1997 By: /s/ Herbert H. McDade, Jr.
------------------------------
Herbert H. McDade, Jr., Director
22
Independent Auditors' Report
The Board of Directors and Stockholders
Access Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Access Pharmaceuticals,
Inc. (a development stage enterprise) as of December 31, 1996 and 1995, and
the related statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. 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. The cumulative
statements of operations, stockholders' equity (deficit), and cash flows for the
period February 24, 1988 (inception) to December 31, 1996 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 included herein.
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 1996 and 1995 financial statements referred to above present fairly,
in all material respects the financial position of Access Pharmaceuticals, Inc.
(a development stage enterprise) as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick, LLP
---------------------------
KPMG Peat Marwick LLP
Dallas, Texas
March 21, 1997
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
of 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 year then ended December 31, 1994 and 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 results of operations and its cash flows of Access
Pharmaceuticals, Inc. for the year ended December 31, 1994 and 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-2
ACCESS PHARMACEUTICALS, INC.
a development stage company
BALANCE SHEETS
December 31,
1996 1995
---------- ----------
Assets
Current Assets
Cash and cash equivalents $4,428,000 $ 30,000
Accounts receivable 1,000 3,000
Prepaid expenses and other current assets 190,000 4,000
--------- ---------
Total Current Assets 4,619,000 37,000
Property and Equipment, net (note 5) 300,000 385,000
Other Assets 9,000 2,000
--------- ---------
Total Assets $4,928,000 $ 424,000
========= =========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses $ 449,000 $ 169,000
Accrued insurance premium 74,000 -
Unearned revenue (note 3) - 150,000
Note payable (note 2) - 100,000
Current portion of obligations under
capital leases (note 6) 152,000 134,000
--------- ---------
Total Current Liabilities 675,000 553,000
Obligations under capital leases, net of
current portion (note 6) 83,000 220,000
Note payable (note 3) 110,000 -
--------- ---------
Total Liabilities 868,000 773,000
Commitments and Contingencies (notes 6 & 10)
Stockholders' Equity (Deficit) (note 7)
Preferred stock, at December 31, 1996,
$.01 par value, authorized 10,000,000
shares, none issued or outstanding;
at December 31, 1995, $.10 par value,
authorized 1,000,000 shares, none
issued or outstanding - -
Common stock, at December 31, 1996, $.04
par value, authorized 60,000,000 shares,
issued and outstanding 31,391,324 shares;
at December 31, 1995, $.01 par value,
authorized 10,000,000 shares, issued and
outstanding 3,639,928 shares 1,256,000 36,000
Additional paid-in capital 18,111,000 3,460,000
Deficit accumulated during the
development stage (15,307,000) (3,845,000)
---------- ---------
Total Stockholders' Equity (Deficit) 4,060,000 (349,000)
Total Liabilities and
Stockholders' Equity $ 4,928,000 $ 424,000
=========== ==========
____________________________________________
See Accompanying Notes to Financial Statements
F-3
ACCESS PHARMACEUTICALS, INC.
a development stage company
STATEMENTS OF OPERATIONS
Year Ended December 31, February
24, 1988
---------------------------------------- (Inception) to
1996 1995 1994 December
31, 1996
------------ ------------ ------------ ------------
Revenues (note 3)
Research and development $ - $ 690,000 $ 439,000 $
2,711,000
Option income 167,000 - 600,000
2,039,000
------------ ------------ ------------ ------------
Total Revenues 167,000 690,000 1,039,000
4,750,000
------------ ------------ ------------ ------------
Expenses
Research and development 1,405,000 728,000 764,000
6,176,000
General and administrative 1,938,000 641,000 626,000
5,079,000
Depreciation and amortization 123,000 367,000 115,000
894,000
Write-off of excess purchase price 8,314,000 - -
8,314,000
------------ ------------ ------------ ------------
Total Expenses 11,780,000 1,736,000 1,505,000
20,463,000
------------ ------------ ------------ ------------
Loss From Operations (11,613,000) (1,046,000) (466,000)
(15,713,000)
------------ ------------ ------------ ------------
Other Income (Expense)
Interest and miscellaneous income 196,000 5,000 9,000
655,000
Interest expense (45,000) (58,000) (19,000)
(122,000)
------------ ------------ ------------ ------------
151,000 (53,000) (10,000) 533,000
Loss Before Income Taxes (11,462,000) (1,099,000) (476,000)
(15,180,000)
Provision for Income Taxes - - -
127,000
------------ ------------ ------------ ------------
Net Loss $(11,462,000) $ (1,099,000) $ (476,000)
$(15,307,000)
============ ============
============ ============
Loss Per Share $(0.38) $(0.09) $(0.04)
============ ============
============
Weighted Average Common Shares
Outstanding 29,845,560 11,846,329 11,160,419
============ ============
============
___________________________________________________________________
See Accompanying Notes to Financial Statements
F-4
ACCESS PHARMACEUTICALS, INC.
a development stage company
Statements Of Stockholders' Equity (Deficit)
Common Stock Additional Deficit
Accumulated
---------------------- Paid-in During the
Shares Amount Capital Development
Stage
---------- ---------- ---------- ----------
Balance, February 24, 1988 - $ - $ - $ -
Common stock issued, $0.33 per share 294,000 3,000 94,000
-
Common stock issued, $0.08 per share 153,000 3,000 9,000
-
Net loss for the period February 24,
1988 to December 31, 1988 - - - (30,000)
---------- ----------- ---------- -----------
Balance, December 31, 1988 447,000 6,000 103,000
(30,000)
Common stock issued, $0.33 per share 87,000 - 29,000
-
Common stock issued, $1.65 per share 75,000 - 124,000
-
Common stock issued, $0.01 per share 1,950,000 20,000 (11,000)
-
Net loss for the year - - - (191,000)
---------- ----------- ---------- -----------
Balance, December 31, 1989 2,559,000 26,000 245,000
(221,000)
Common stock issued, $3.00 per share 73,000 - 218,000
-
Common stock issued, $7.82 per share 284,000 3,000 2,222,000
-
Net loss for the year - - - (219,000)
---------- ----------- ---------- -----------
Balance, December 31, 1990 2,916,000 29,000 2,685,000
(440,000)
Common stock issued $3.00 per share 2,000 - 6,000
-
Contribution of equipment by
shareholder - - 468,000 -
Net income for the year - - - 413,000
---------- ----------- ---------- -----------
Balance, December 31, 1991 2,918,000 29,000 3,159,000
(27,000)
Contribution of equipment by
shareholder - - 89,000 -
Net loss for the year - - - (859,000)
---------- ----------- ---------- -----------
Balance, December 31, 1992 2,918,000 29,000 3,248,000
(886,000)
Net loss for the year - - - (1,384,000)
---------- ----------- ---------- -----------
Balance, December 31, 1993 2,918,000 29,000 3,248,000
(2,270,000)
Net loss for the year - - - (476,000)
---------- ----------- ---------- -----------
Balance, December 31, 1994 2,918,000 29,000 3,248,000
(2,746,000)
Common stock issued $2.00 per share 25,000 - 50,000
-
Exercise of stock options between
$0.25 and $1.25 per share 623,000 6,000 163,000
- -
Common Stock grants 74,000 1,000 (1,000)
-
Net loss for the year - - - (1,099,000)
---------- ----------- ---------- -----------
Balance, December 31, 1995 3,640,000 36,000 3,460,000
(3,845,000)
Merger 19,018,000 871,000 9,130,000 -
Common stock issued $.70 share 8,571,000 343,000 5,160,000
-
Exercise of stock options/SARs
between $0.00 and $0.88 per share 162,000 6,000 17,000
-
Warrants issued at $1.00 per share for
consulting services - - 344,000 -
Net loss for the year - - - (11,462,000)
---------- ----------- ---------- -----------
Balance, December 31, 1996 31,391,000 $ 1,256,000 $18,111,000
$(15,307,000)
========== ==========
========== ==========
- -----------------------------------------------
See Accompanying Notes to Financial Statements
F-5
ACCESS PHARMACEUTICALS, INC.
a development stage company
STATEMENTS OF CASH FLOWS
February 24, 1988
Year Ended December 31, (Inception) to
1996 1995 1994 December 31,
1996
---------- ---------- ---------- ----------
Cash Flows From Operating Activities:
Net Loss $(11,462,000) $(1,099,000) $ (476,000)
$(15,307,000)
Adjustments to reconcile net loss
to net cash used in operating activities:
Write off of excess purchase price 8,314,000 - -
8,314,000
Consulting expense related to
warrants granted 344,000 - - 344,000
Depreciation and amortization 123,000 367,000 115,000
894,000
Change in assets and liabilities:
Accounts receivable 2,000 (3,000) - (1,000)
Prepaid expenses and other
current assets (186,000) 16,000 (20,000)
(191,000)
Other assets (7,000) 1,000 - (7,000)
Accounts payable and
accrued expenses 354,000 43,000 7,000
476,000
Unearned revenue (150,000) (30,000) 180,000
-
---------- ---------- ---------- ----------
Net Cash Used In Operating Activities (2,668,000) (705,000) (194,000)
(5,478,000)
---------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Capital expenditures (38,000) - (112,000)
(1,148,000)
---------- ---------- ---------- ----------
Net Cash Used In Investing Activities (38,000) - (112,000)
(1,148,000)
---------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from notes payable 118,000 100,000 502,000
721,000
Payments of principal on obligations
under capital leases (127,000) (117,000) (30,000)
(276,000)
Proceeds from merger with Chemex
Pharmaceuticals representing
cash acquired 1,587,000 - - 1,587,000
Proceeds from stock issuances 5,526,000 219,000 -
9,022,000
---------- ---------- ---------- ----------
Net Cash Provided by Financing
Activities 7,104,000 202,000 472,000 11,054,000
---------- ---------- ---------- ----------
Net Increase (Decrease) in Cash
and Cash Equivalents 4,398,000 (503,000) 166,000
4,428,000
Cash and Cash Equivalents At
Beginning of Period 30,000 533,000 367,000
-
---------- ---------- ---------- ----------
Cash and Cash Equivalents at
End of Period $4,428,000 $ 30,000 $ 533,000
$4,428,000
========== ==========
========== ==========
---------- ---------- ---------- ----------
Cash Paid for Interest $ 45,000 $ 58,000 $ 19,000 $
121,000
Cash Paid for Income Taxes $ - $ - $ - $ 127,000
Supplemental disclosure of
noncash transaction
Payable accrued for fixed
asset purchase $ - $ 47,000 $ - $ 47,000
Eliminations of note payable
to Chemex Pharmaceuticals
due to merger $ 100,000 $ - $ - $ 100,000
___________________________________________________________________
See Accompanying Notes to Financial Statements
F-6
ACCESS PHARMACEUTICALS. INC.
(a development stage company)
Notes To Financial Statements
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies:
(a) Business
Access Pharmaceuticals, Inc. ("Access" or the "Company") is a polymer
based therapeutics company providing a new dimension in drug
delivery through the rational design of polymer/drug complexes to
control site directed targeting, localized release and clearance of
therapeutic drugs, imaging agents and radiopharmaceuticals. The
Company operates in a single industry segment.
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
13,919,979 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.
In March 1996 the Company concluded a $6.0 million private
placement of 8.571 million shares of common stock.
The Company's products will require clinical trials, U.S. Food and
Drug Administration ("FDA") 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 does the Company.
The Company is in the development stage and its efforts have been
principally devoted to research and development and has incurred
significant losses since inception on February 24, 1988.
(b) 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.
(c) 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.
F-7
ACCESS PHARMACEUTICALS. INC.
(a development stage company)
Notes To Financial Statements
(d) Patents and Applications
In the fourth quarter of 1995, the Company changed from deferring
and amortizing patent and application costs to recording them as
expenses 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.
Accordingly, the new accounting method has been adopted in
recognition of a possible change in estimated future benefits.
Since the effect of this change in accounting principle is
inseparable from the effect of the
change in accounting estimate, such change has been accounted for
as a change in estimate in accordance with Opinion No. 20 of the
Accounting Principles Board. Future patent and application costs are
expected to be expensed since the benefits to be derived
therefrom are likely to be uncertain. As a result of the change, the
Company wrote down capitalized patent and application costs by
approximately $246,000 which amounts were included in depreciation
and amortization expense in the accompanying Statement of
Operations for 1995.
(e) 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.
(f) Research and Development Expenses
Research and development expenses are expensed as incurred.
(g) 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.
(h) Net Loss Per Share
Net loss per common share is calculated based upon the weighted
average number of common shares and common equivalent shares
outstanding during the years ended December 31, 1996, 1995 and 1994
of 29,845,560, 11,846,329 and 11,160,419, respectively. In 1996,
1995 and 1994 any common equivalent shares were either not material
or anti-dilutive. Fiscal years 1995 and 1994 Weighted Average
Common Shares Outstanding have been adjusted by the 3.824251
conversion factor used for the merger.
(i) 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
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(j) Accounting Pronouncements
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of; SFAS No. 121, effective for fiscal
F-8
ACCESS PHARMACEUTICALS. INC.
(a development stage company)
Notes To Financial Statements
years beginning after
December 15, 1995, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. In addition, this
Statement requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The Company adopted this
Statement on January 1, 1996, and the adoption of SFAS No. 121 did
not have material impact on the financial condition of the Company.
Stock Option Plan; SFAS No. 123, "Accounting for Stock Based
Compensation", effective for fiscal years beginning after December
15, 1995 established financial, accounting and reporting standards
for stock-based employee compensation plans. These plans include
all arrangements by which employees receive shares of stock or other
equity investments of the employer or the employer incurs liabilities
to employees in amounts based on the price of the employer's stock.
This statement also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from
non-employees. The Company has elected to account for employee
stock compensation plans under APB 25 and accordingly, only selected
the disclosure requirements of SFAS No. 123. (See Note 7).
Accounting For Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities; SFAS No 125, effective for transfers
and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied
prospectively. This Statement provides
accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a
financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings. Management of the
Company does not expect that the adoption of SFAS No. 125 will
have a material impact on the Company's financial position, results
of operations, or liquidity.
(k) Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform with the December 31, 1996 presentation.
(2) 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 1996, 1995 and 1994 Thoma received payments
for consulting services of $60,000, $0, and $2,000 respectively. Thoma
was also reimbursed for consulting expenses of $18,000, $3,000, and
$3,000 respectively, in 1996, 1995 and 1994.
On October 4, 1995, Chemex made a loan to API of $100,000 which
was evidenced by a 7% promissory note. In addition, Chemex sold the
remainder of its fixed assets to API at book value in the fourth
quarter of 1995. A payable to Chemex for approximately $47,000 was
recorded at December 31, 1995 for these fixed assets. The loan and
payable were both eliminated on January 25, 1996, the date of the
merger.
See Note 10 "Commitments", for transactions regarding David F.
Ranney, a major shareholder of the Company.
(3) Research and Development Agreements:
A technology evaluation option agreement with a pharmaceutical
company accounted for option proceeds of $150,000 and $125,000 in
1996 and 1995, respectively. Unearned revenue in the amount of
$150,000 was reflected at December 31, 1995 pending completion of the
earnings process under the terms of the agreement. This agreement
was terminated March 29, 1996 at which point 40% of the $275,000
($150,000 in 1996 and $125,000 in 1995) in proceeds received, or
$110,000 which was recorded as unearned income, converted to a loan
due the pharmaceutical company. The note does not bear interest or
have a stated due date until certain events occur. Upon the occurrence
of such events, the note
F-9
ACCESS PHARMACEUTICALS. INC.
(a development stage company)
Notes To Financial Statements
bears interest at prime and is due within three
years of the date of such occurrence. The remaining 60%, or $165,000,
was recognized as option income revenue in 1996 in accordance with the
agreement.
On April 26, 1994, the Company entered into agreements, as amended,
with Corange International Ltd. (Corange) to develop drugs based on
the Company's endothelial binding technology for use in the oncology
area. Under the agreements, the Company granted Corange an option
for a period up to two years, as defined, to exclusively license
worldwide, any oncology agent developed pursuant to the terms of the
common research agreement. In 1994, Corange made initial option
payments of $600,000 which amounts were recognized as revenue in
1994. Corange also made $619,000 in payments for sponsored research
and development of which $439,000 were revenues recognized in 1994
and $180,000 were advance payments recorded as unearned revenue at
December 31, 1994.
In 1995, Corange made $495,000 in payments to the Company for
sponsored research and development which amounts were recognized as
revenue in 1995. In addition, $180,000 of unearned revenue at
December 31, 1994 was recognized as revenue in 1995 pursuant to the
Corange agreements. The Corange agreements were terminated by
Corange on June 30, 1995.
(4) Fair Value of Financial Instruments
SFAS 107 requires disclosures of the fair value of financial
instruments. The following methods and assumptions were used to
estimate the fair value of each class of instruments held by the
Company:
Current assets and current liabilities - The carrying value
approximates fair value due to the short maturity of these items.
Note payable - The fair value has not been calculated due to the
uncertainty regarding the timing and amounts of future cash payments.
(5) Property and Equipment:
Property and equipment, of which a majority is held under capital
leases, consists of the following:
December 31,
1996 1995
---------- ----------
Laboratory equipment $ 448,000 $ 442,000
Laboratory and building improvements 23,000 14,000
Furniture and equipment 114,000 102,000
---------- ----------
585,000 558,000
Less accumulated depreciation and
amortization 285,000 173,000
---------- ----------
Net property and equipment $ 300,000 $ 385,000
==========
==========
Depreciation and amortization on property and equipment was $123,000,
$115,000, and $110,000 for the years ended December 31,1996, 1995 and
1994, respectively.
(6) Obligations Under Capital and Operating Leases:
At December 31, 1996, future minimum lease payments under capital
lease obligations and commitments under noncancelable operating leases
were as follows:
Capital leases Operating leases
---------- ----------
1997 $ 178,000 $ 74,000
1998 85,000 77,000
1999 - 81,000
F-10
ACCESS PHARMACEUTICALS. INC.
(a development stage company)
Notes To Financial Statements
2000 - 85,000
2001 - 90,000
---------- ----------
Total future minimum lease payments 263,000 $ 407,000
Less amount representing interest 28,000 ==========
----------
Present value of minimum capital
lease payments 235,000
Less current portion 152,000
----------
Obligations under capital leases,
excluding current portion $ 83,000
==========
The Company leases certain office and research and development
facilities under an operating lease. Rent expense for the years ended
December 31, 1996, 1995 and 1994 was $69,000, $59,000 and $50,000,
respectively.
In September 1994, pursuant to a sales leaseback transaction, the
Company sold substantially all of its property and equipment for
$426,000, which amount equaled the net book value of the property and
equipment sold. The lease agreement is classified as a capital lease
with an initial minimum obligation of $426,000, payable in 42 monthly
installments plus interest. The agreement allows for the purchase of the
equipment at the end of the lease term for $43,000. The Company also
issued a warrant to the lessor for the purchase of 135,899 shares of the
Company's common stock at an exercise price of $0.52 per share, subject
to adjustment, as part of the transaction (see Note 7).
(7) Stockholders' Equity (Deficit):
(a) Preferred Stock
The Company is authorized to issue 10,000,000 shares of $.01 par value
preferred stock, none of which was issued or outstanding at December
31, 1996. On January 25, 1996, the shareholders approved the change
from 5,000,000 to 10,000,000 shares in the authorized number of shares.
At December 31, 1995, API was authorized to issue 1,000,000 shares of
$.10 par value preferred stock, none of which was issued or outstanding.
(b) Common Stock
In 1990, the Company issued a two-for-one stock split for common stock
thereby increasing the Company's issued and outstanding stock. The
accompanying Statement of Stockholder's Equity (Deficit) has been
retroactively restated to reflect the stock split. No dividends have
been paid or declared by the Company.
(c) Warrants
The Company has issued 500,000 Units, to the Sentinel
Charitable Remainder Trust (the "Trust") consisting in the
aggregate of 500,000 shares of Common Stock and warrants exercisable
in the aggregate for 700,000 shares of Common Stock. The authorization
of the Units was made in connection with a Conversion Agreement,
dated June 18, 1990, as amended, by and between the Company and the
Trust (the "Conversion Agreement"). Pursuant to the terms of the
Conversion Agreement, each Unit has an exercise price of $2.50 and
the rights to subscribe for the Units until January 1, 1999.
Each warrant issuable in connection with the Units described above is
exercisable for one share of Common Stock (subject to adjustment as
provided in the warrant), with 500,000 of the warrants exercisable at
$6.25 and the 200,000 warrants exercisable at $2.50, all upon terms and
conditions set forth in the Conversion Agreement. The warrants expire
on January 1, 2000.
Under the terms of the 1994 lease agreement (described in Note 6), the
leasing company received a warrant to purchase 135,899 shares of
common stock. The warrant remains exercisable for seven years from the
date of issuance and will expire on September 19, 2001. The warrant is
exercisable at $.52 per share. The warrant may
F-11
ACCESS PHARMACEUTICALS. INC.
(a development stage company)
Notes To Financial Statements
be adjusted under some conditions, as defined, for dividends, changes
in stock price, reorganization, consolidation or merger and extraordinary
events.
On October 5, 1995 API entered into an agreement with a shareholder
to purchase 47,803 Units of API equity. Each Unit consisted of one share
of stock and one warrant. The exercise price for the warrants is $0.52
for two warrants, which entitles the holder to one share of common
stock. The warrants are exercisable until October 5, 1999.
Under the terms of the merger on January 25, 1996, a maximum of
750,000 warrants could have been issued to the former holders of record
of API Common Stock upon the occurrence of certain conditions within
twelve months of the merger. These warrants would have been
exercisable at $0.75 per share with a 5 year expiration from the
date of issue. These conditions did not occur by January 25, 1997,
therefore these warrants were not issued and have expired.
During 1996, under terms of a consulting agreement, a shareholder
received warrants to purchase 600,000 shares of common stock at an
exercise price of $1.00 per share any time from March 5, 1997 until
March 4, 2000, for compensation for consulting services. The fair value
of the warrants was $0.77 on the date of the grant using the
Black-Scholes pricing model with the following assumptions:
1996-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 in the accompanying financial
statements.
(8) Stock Option Plans and Employee Stock Ownership Plan
The Company adopted a new stock option plan (the "1995 Stock Awards
Plan") on January 25, 1996 and reserved 2,000,000 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 options plan (the "1987 Stock Awards Plan")
and API's stock option plan ("API Stock Option Plan"). Options granted
under the plans 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 fair market value at the date of grant. During 1995
there were no shares granted under the 1987 Stock Awards Plan and
there were no shares exercisable at December 31, 1995 under the API
Stock Option Plan.
At December 31, 1996 there were 1,370,002 additional shares available
for grant under the 1995 Stock Awards Plan. The per share
weighted-average fair value of stock options granted during 1996 was
$0.92 on the date of grant using the Black-Scholes option pricing method
with the following weighted-average assumptions: 1996- expected dividend
yield 0.0%, risk-free interest rate 6.0%, expected volatility 100% and an
expected life of 4 years. The per share weighted-average fair value of
stock options granted during 1995 was $0.04 on the date of grant using
the minimum value method with the following weighted-average
assumptions: 1995-expected dividend yield 0.0%, and an expected life of
4 years. The minimum value method was used for options issued in 1995
as these option were for API, a nonpublic entity when such options were
granted.
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 Statements of Operations for stock
awards expense. At the date of grant for stock awards granted by the
Company the market price of the underlying stock did not exceed the
exercise price. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options and warrants
under SFAS No. 123, the Company's net loss and loss per share would
have been reduced to the pro forma amounts indicated below:
F-12
ACCESS PHARMACEUTICALS. INC.
(a development stage company)
Notes To Financial Statements
Years Ended December 31,
1996 1995
------------ ------------
Net Loss
As reported $ (11,462,000) $ (1,099,000)
Pro forma (11,563,000) (1,101,000)
Loss per share
As reported $ (0.38) $ (0.09)
Pro forma $ (0.39) $ (0.09)
Pro forma net loss and loss per share amounts reflects only options
granted in 1996 and 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected
in the pro forma net loss amounts and loss per share presented above
because compensation cost is reflected over the options' vesting
period of four years and compensation cost for options granted prior to
January 1, 1995 is not considered.
(a) 1995 Stock Awards Plan
Summarized information for the 1995 Stock Awards Plan is as follows:
1995 Stock Awards Plan
----------------------
Stock Weighted-Average
Options Exercise Price
------------ ------------
Outstanding options at December 31, 1995 0 $ 0
Granted 665,998 1.32
Forfeited (36,000) (1.44)
Exercised 0 0
------------ ------------
Outstanding options at December 31, 1996 629,998 1.31
At December 31, 1996, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $1.15 - $1.81 and
9 years, respectively.
At December 31, 1996, the number of options exercisable was 94,998 and
the weighted-average exercise price of those options was $1.31.
(b) 1987 Stock Awards Plan
Chemex adopted the 1987 Stock Awards Plan in 1987. All issued options
and stock appreciation rights ("SAR's") 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:
F-13
ACCESS PHARMACEUTICALS. INC.
(a development stage company)
Notes To Financial Statements
1987 Stock Awards Plan
-------------------------
1987 Non- Weighted-
Incentive Employee Average
Stock Director Exercise
Options SARs Plan Price
---------- ---------- ---------- ----------
Outstanding awards, from Chemex
at December 31, 1995 976,097 338,665 279,117 $ 1.99
Granted 0 0 0 0
Forfeited (151,375) 0 (100,900) 2.57
Exercised (27,428) (134,714) 0 .15
---------- ---------- ---------- ----------
Outstanding awards at
December 31, 1996 797,294 203,951 178,217 $ 2.04
========== ==========
========== ==========
At December 31, 1996, the range of exercise prices and weighted
average remaining contractual life of outstanding awards was $0.00 -
$9.00 and 6 years respectively.
At December 31, 1996, the number of awards exercisable was 1,179,462
and the weighted-average exercise price of those awards was $2.04.
(c) Warrants
Summarized information for warrants issued in 1996 for services other
than employee services is as follows (see also Note 7):
Weighted-Average
1996 Warrants Exercise Price
------------ ------------
Outstanding warrants at
December 31, 1995 0 $ 0
Granted 600,000 1.00
Forfeited 0 0
Exercised 0 0
------------ ------------
Outstanding warrants at
December 31, 1996 600,000 $ 1.00
============ ============
At December 31, 1996, the exercise price and weighted average
remaining contractual life of outstanding warrants was $1.00 and 3 years
respectively.
At December 31, 1996, the number of warrants exercisable was 0 and the
weighted-average exercise price of those warrants was $1.00.
F-14
ACCESS PHARMACEUTICALS. INC.
(a development stage company)
Notes To Financial Statements
(9) Income Taxes:
The Company follows Statement of Financial Accounting Standards
Number 109 - Accounting for Income Taxes ("FASB 109"). No provision
for federal income taxes has been made in fiscal years 1996, 1995 and
1994 due to the operating losses incurred for income tax purposes. At
December 31, 1996, 1995 and 1994, the Company had deferred tax assets
primarily comprised of the tax benefits of net operating loss
carry-forwards. Because the Company has a history of losses, a 100%
provision against the deferred tax assets was recorded in the form of a
valuation allowance increases which amounted to $954,000, $360,000 and
$162,000 during 1996, 1995 and 1994, respectively. At December 31,
1996, the Company's regular and alternative minimum tax net operating
loss carry-forwards for federal income tax purposes approximated $40
million, which if not utilized, will expire in varying amounts through
the year 2010. As a result of the merger on January 25, 1996, a change
in control occurred for federal income tax purposes which limited the
utilization of pre-merger net operating loss carry-forwards related
to Chemex to approximately $530,000 per year.
(10) Commitments and Contingencies:
The Company is not currently a party to any material legal proceedings.
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 majority stockholder, is entitled to yearly cash
royalty payments as consideration for the assignment of patents to the
Company as follows:
F-13
ACCESS PHARMACEUTICALS. INC.
(a development stage company)
Notes To Financial Statements
Royalty Payments
Date Amount
----------------- ---------
April 15, 1994 $7,500
January 31, 1995 $15,000
January 31, 1996 $25,000
January 31, 1997 $50,000
Thereafter each January 31, payments equal to 105% of the payment
made in the immediately preceding calendar year will be paid to Dr.
Ranney through the life of the patents. Access will also pay Dr. Ranney
a royalty of three quarters of one percent (0.75%) of gross revenues
derived from products covered by the patents. All payments due Dr.
Ranney under this agreement have been paid as of February 28, 1997.
Under the terms of the "Exclusive Technology License Agreement"
between Dr. David F. Ranney and the Company, which was terminated
April 5, 1994, Dr. Ranney, was entitled to royalties equal to the greater
of: (i) four percent (4%) of its Net Product Revenues (as defined), or
(ii) one percent (1%) of Gross Product Revenues (as defined). No
payments were made under this agreement in 1994.
(11) Liquidity:
With the Company's current budget and it's anticipated option and
licensing revenues, Management believes working capital will cover
planned operations through the end of 1998. If the anticipated revenues
are delayed or do not occur or the Company is unsuccessful in raising
additional capital on acceptable terms, research and development
expenditures will be curtailed and working capital would cover operations
through approximately the end of 1998.
(12) Proposed Acquisition:
On April 26, 1996, Access executed a letter of intent to acquire Tacora
Corp., a privately-held pharmaceutical company based in Seattle. The
transaction is expected to close in the next 30 days. Under the terms of
the letter of intent, the purchase price is contingent upon the
achievement of certain milestones. In addition to cash of $250,000 and
$100,000 of common stock paid at closing, stock up to a maximum of
$14,000,000 could be payable to Tacora's Shareholders over a 30 month
period on an escalating value over the milestone period. The
consummation of the transaction is subject to customary conditions to
closing including completion of due diligence, negotiation of definitive
documents and approval of the stockholders of Tacora Corp.
(13) Subsequent Events:
On February 6, 1997 the Company announced plans to request
shareholder approval for a one-for-four reverse stock split. In addition,
if the proposal is approved by shareholders, the Company intends to
submit an application for listing on the NASDAQ SmallCap Market if it
meets all such qualifications. There can be no assurances that the
market price immediately after the implementation of the proposed
reverse stock split will increase, and if it does increase, there can be
no assurance that such increase can be maintained for any period of
time, or that such market price will approximate four times the market
price before the proposed reverse stock split. There can be no
assurances that the Company will be listed on any exchange or the
NASDAQ SmallCap Market.