UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 Commission File Number 0-9314 ACCESS PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) Delaware 83-0221517 - ------------------------ -------------------------- (State of Incorporation) (I.R.S. Employer I.D. No.) 2600 Stemmons Frwy, Suite 176, Dallas, TX 75207 -------------------------------------------------- (Address of principal executive offices) Telephone Number (214) 905-5100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirement for the past 90 days. Yes X No ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock outstanding as of November 12, 1996 31,391,324 shares, $0.04 par value ----------------- ---------- Total No. of Pages 12 PART I -- FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS The response to this Item is submitted as a separate section of this report. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In connection with the 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"). Subsequent to the merger of API into Access (the "Merger"), the Company has been managed by the former management of API and the focus of the Company has changed to the development of enhanced parenteral therapeutic and diagnostic imaging agents through the utilization of its patented and proprietary endothelial binding technology which selectively targets sites of disease. The Company has a broad platform technology for enhancing the site targeting of intravenous therapeutic drugs, MRI contrast agents and radiopharmaceutical diagnostic and therapeutic agents. The Access technology is based on natural carbohydrate carriers. The technology development of the Company is currently focused on increasing the therapeutic benefit of oncology agents and improving the efficiency of oncology diagnosis by selectively targeting sites of disease and accelerating drug clearance. The Company has developed four possible product candidates, two of which are anticipated to be ready to be advanced into human testing in the next nine to twelve months. These product candidates are new formulations of existing compounds which increase therapeutic efficacy and reduce toxicity, designed to address the clinical shortfalls of currently available treatments. 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 has been 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," Chemex (now called Access) remains the continuing legal entity and registrant for Securities and Exchange Commission reporting purposes. The unaudited balance sheets, statements of operations and statements of cash flows have been prepared using "purchase" accounting for the Merger, with API as the acquirer. The values used in the preparation of the financial statements were determined based on negotiations between Chemex and API and comparable values for companies at API's stage of development. As a result, common stock and paid in capital of API was recorded at a $10.0 million valuation. The excess purchase price over the fair value of Chemex's assets was written off in the first quarter of 1996. The accompanying balance sheet at December 31, 1995 and the related statements of operations and cash flows for the nine months ended September 30, 1995 are the statements of API. 2 RECENT DEVELOPMENTS 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 currently scheduled to close in the fourth quarter of 1996. Under the terms of the letter of intent, the purchase price is contingent upon the achievement of certain milestones. Stock up to a maximum value 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. Liquidity and Capital Resources Working capital as of September 30, 1996 was $4,920,000, an increase of $5,435,000 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 $1.69 million in working capital of Chemex resulting from the Merger between Chemex and API, offset by payments for 1996 operating expenses, $89,000 for 1996 capital lease payments and $480,000 for payment to a consultant as a result of the completion of the private placement. The net cash infusion from the private placement will be used to continue the development of the Access technology. The shares issued in the private placement have been registered for resale by the holders. Management believes its working capital will cover planned operations through December 1997. Currently, royalty revenues are not expected during the remainder of 1996. Research and development expenditures to advance products into human testing will remain high for several years and there can be no assurance that the Company will be successful in attaining a partner or future equity financing to complete the testing of its products. Third Quarter 1996 Compared to Third Quarter 1995 The Company had no revenue in the third quarter 1996 as compared to $45,000 in 1995. Third quarter 1995 revenues were comprised of sponsored research and development revenues from an agreement that was terminated in June 1995. Total research spending for the third quarter of 1996 was $430,000 as compared to $106,000 for the same period in 1995, an increase of $324,000. The increase in expenses was the result of the increase in staffing for projects in 1996. Research spending will increase in future quarters as the Company has hired additional scientific management and staff and is accelerating activities to develop the Company's product candidates. Total general and administrative expenses were $454,000 for the third quarter of 1996, an increase of $359,000 as compared to the same period in 1995. The increase in spending was due primarily to the following: increased professional expenses due to the Merger, Private Placement offering and public company reporting and compliance requirements- $108,000; salaries of recently hired employees- $122,000; patent expenses- $51,000; travel and entertainment expenses- $30,000; general business consulting fees and expenses- $21,000; director fees and director and officer insurance- $14,000; and other miscellaneous increases- $13,000. Accordingly, total expenses were $930,000, with interest income of $58,000 resulting in a loss for the quarter of $872,000, or $.03 per share. 3 Nine Months ended September 30, 1996 Compared to Nine Months ended September 30, 1995 Net revenues for the nine months ended September 30, 1996 were $165,000 as compared to $575,000 in the same period in 1995, representing a decrease of $410,000. 1996 revenues related entirely to an option agreement for rights to certain of the Company's technology that terminated in April 1996. 1995 revenues were entirely comprised of sponsored research and development revenues from an agreement that was terminated in June 1995. Research spending for the nine months ended September 30, 1996 was $887,000 as compared to $547,000 for the same period in 1995, an increase of $340,000. Research spending will increase in future quarters as the Company has hired additional scientific management and staff and is accelerating activities to develop the Company's product candidates. General and administrative expenses were $1,145,000 for the nine months ended September 30, 1996, an increase of $785,000 as compared to the same period in 1995. The increase was due to the following: increased professional expenses due to the Merger, Private Placement offering and public company reporting and compliance requirements- $300,000; salaries of newly hired employees- $159,000; director fees and director and officer insurance- $86,000; patent expenses- $78,000; travel and entertainment expenses- $62,000; general business consulting fees and expenses- $56,000; and other miscellaneous increases- $44,000. Excess purchase price over the fair value of Chemex's assets of $8,314,000 was recorded in the first quarter due to the merger of API and Chemex. Accordingly, total expenses were $10,491,000, including $8,314,000 of excess purchase price written off in the first quarter, which resulted in a loss for the nine months ended September 30, 1996 of $10,188,000, or $.35 per share. Certain statements in this Form 10-Q including Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward- looking statements that involve risks and uncertainties. In addition to the risks and uncertainties set forth in this Form 10-Q, other factors could cause actual results to differ materially, including but not limited to the Company's research and development focus, uncertainties associated with research and development activities, future capital requirements and dependence on others, and other risks detailed in the Company's reports filed under the Securities Exchange Act, including but not limited to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. PART II -- OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS None ITEM 2 CHANGES IN SECURITIES None ITEM 3 DEFAULTS UPON SENIOR SECURITIES None 4 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5 OTHER INFORMATION 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 currently scheduled to close in the fourth quarter of 1996. Under the terms of the letter of intent, the purchase price is contingent upon the achievement of certain milestones. Stock up to a maximum value 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. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K Exhibits: 10.19 Lease Agreement with Pollock Realty Corporation dated July 25, 1996. Reports on Form 8-K: None 5 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ACCESS PHARMACEUTICALS, INC. Date: November 14, 1996 By: /s/ Kerry P. Gray ----------------------------- Kerry P. Gray President and Chief Executive Officer (Principal Executive Officer) Date: November 14, 1996 By: /s/ Stephen B. Thompson ----------------------------- Stephen B. Thompson Chief Financial Officer (Principal Financial and Accounting Officer) 6 ACCESS PHARMACEUTICALS, INC. a development stage company Balance Sheets
Assets September 30, 1996 December 31, 1995 - ------ ------------------ ----------------- Current Assets Cash and cash equivalents $ 5,160,000 $ 30,000 Accounts receivable - 3,000 Prepaid expenses and other current assets 124,000 4,000 ------------- ------------- Total current assets 5,284,000 37,000 ------------- ------------- Property and Equipment, at cost 572,000 558,000 Less accumulated depreciation (281,000) (173,000) ------------- ------------- 291,000 385,000 ------------- ------------- Other Assets 8,000 2,000 ------------- ------------- Total Assets $ 5,583,000 $ 424,000 ============= ============= Liabilities and Stockholders' Equity (Deficit) Current Liabilities Accounts payable and accrued expenses $ 210,000 $ 169,000 Unearned revenue - 150,000 Note payable due to Chemex Pharmaceuticals, Inc. - 100,000 Current portion of obligations under capital leases 154,000 133,000 ------------- ------------- Total current liabilities 364,000 552,000 ------------- ------------- Obligations under capital leases, net of current portion 119,000 220,000 Note payable 110,000 - ------------- ------------- Total Liabilities 593,000 772,000 ------------- ------------- Stockholders' Equity (Deficit) Preferred stock, at September 30, 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 September 30, 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 17,766,000 3,460,000 Deficit accumulated during the development stage (14,032,000) (3,844,000) ------------- ------------- Total Stockholders' Equity (Deficit) 4,990,000 (348,000) ------------- ------------- Total Liabilities and Stockholder's Equity (Deficit) $ 5,583,000 $ 424,000 ============= =============
- --------------------------------------------- See accompanying notes to financial statements and Management's Discussion and Analysis of Financial Conditions and Results of Operations. 7 ACCESS PHARMACEUTICALS, INC. a development stage company Statements of Operations
Three Months ended Nine Months ended September 30 September 30, February 24, 1988 ---------------------- ---------------------- (inception) 1996 1995 1996 1995 Sept 30, 1996 ---------- ---------- ---------- ---------- ------------- Revenues Research and development $ - $ 45,000 $ - $ 575,000 $ 2,711,000 Option income - - 165,000 - 2,037,000 ---------- ---------- ---------- ---------- ----------- Total Revenues - 45,000 165,000 575,000 4,748,000 ---------- ---------- ---------- ---------- ----------- Expenses Research and development 430,000 106,000 887,000 547,000 5,413,000 General and administrative 454,000 95,000 1,145,000 360,000 4,532,000 Interest 10,000 13,000 37,000 49,000 113,000 Depreciation and amortization 36,000 31,000 108,000 93,000 879,000 Write off of excess purchase price - - 8,314,000 - 8,314,000 ---------- ---------- ---------- ---------- ----------- Total Expenses 930,000 245,000 10,491,000 1,049,000 19,251,000 ---------- ---------- ---------- ---------- ----------- Loss from operations (930,000) (200,000) (10,326,000) (474,000) (14,503,000) ---------- ---------- ---------- ---------- ----------- Other Income Interest and miscellaneous income 58,000 - 138,000 4,000 597,000 ---------- ---------- ---------- ---------- ----------- Loss before income taxes (872,000) (200,000) (10,188,000) (470,000) (13,906,000) Provision for income taxes - - - - 127,000 ---------- ---------- ---------- ---------- ----------- Net after income taxes $ (872,000) $(200,000)$(10,188,000) $ (470,000) $(14,033,000) ========== ========== =========== ========== =========== Loss per common share $(0.03) $(0.07) $(0.35) $(0.16) ========== ========== ========== ========== Average number of common and equiivalent common shares outstanding 31,386,405 2,925,983 29,326,544 2,925,983 ========== ========== ========== ==========
- ---------------------------------------------- See accompanying notes to financial statements and Management's Discussion and Analysis of Financial Conditions and Results of Operations 8 ACCESS PHARMACEUTICALS, INC. a development stage company Statements of Cash Flows
Nine Months ended September 30, February 24, 1988 ------------------------------ (inception) to 1996 1995 Sept 30, 1996 ------------ ------------ --------------- Cash Flows form Operating Activities Net loss $(10,188,000) $ (470,000) $(14,033,000) Adjustments to reconcile net loss to cash used in operating activities: Write off of excess purchase price 8,314,000 - 8,314,000 Depreciation and amortization 108,000 93,000 879,000 Change in assets and liabilities: Accounts receivable 3,000 (138,000) - Prepaid expenses and other current assets (126,000) 20,000 (131,000) Accounts payable and accrued expenses 41,000 39,000 163,000 Unearned revenue (150,000) (180,000) - ---------- --------- --------- Net Cash Used in Operating Activities (1,998,000) (636,000) (4,808,000) ----------- --------- --------- Cash Flows From Investing Activities Capitalized expenditures (14,000) - (1,124,000) ----------- --------- --------- Net Cash Used in Investing Activities (14,000) - (1,124,000) ----------- --------- --------- Cash Flows From Financing Activities Payments on obligations under capital leases (89,000) (67,000) (238,000) Proceeds from notes payable 119,000 - 722,000 Proceeds from Merger with Chemex Pharmaceuticals 1,587,000 - 1,587,000 Proceeds from stock issuances, net 5,525,000 170,000 9,021,000 ---------- --------- --------- Net Cash Provided By (Used in) Financing Activities 7,142,000 103,000 11,092,000 ---------- --------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents 5,130,000 (533,000) 5,160,000 Cash and Cash Equivalents at Beginning of Year 30,000 533,000 - ---------- --------- ---------- Cash and Cash Equivalents at End of Period $5,160,000 $ - $5,160,000 ========== ========= ========== Supplemental disclosure of non cash transactions: eliminations of note payable to Chemex Pharmaceutical due to Merger $ 100,000
- ---------------------------------------------- See accompanying notes to financial statements and Managements Discussion and Analysis of Financial Conditions and Results 9 ACCESS PHARMACEUTICALS, INC. a development stage company Notes to Financial Statements Nine Months Ended September 30, 1996 and 1995 (1) Interim Financial Statements The balance sheet as of September 30, 1996 and the statements of operations and cash flows for the nine months ended September 30, 1996 and 1995 were prepared by management without audit. In the opinion of management, all adjustments, including only normal recurring adjustments necessary for the fair presentation of the financial position, results of operations, and changes in financial position for such periods, have been made, except for the merger accounting discussed below. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. The results of operations for the period ended June 30, 1996 are not necessarily indicative of the operating results which may be expected for a full year. The balance sheet as of December 31, 1995 contains financial information taken from the audited financial statements of Access Pharmaceuticals, Inc., a Texas corporation, ("API") as of that date. API merged with and into Chemex Pharmaceuticals, Inc. ("Chemex") on January 25, 1996. Under the terms of the agreement, API was merged into Chemex with Chemex as the surviving legal entity. The name of Chemex was changed to Access Pharmaceuticals, Inc. ("Access" or the "Company"). The Company acquired all of the outstanding shares of API in exchange for 13,919,979 shares of its registered common stock. The Company is engaged in research and development activities with a broad platform technology for enhancing the site targeting of intravenous therapeutic drugs, MRI contrast agents and radiopharmaceutical diagnostic and therapeutic agents. The Access technology is based on natural carbohydrate carriers. 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 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," Chemex remains the continuing legal entity and registrant for Securities and Exchange Commission reporting purposes. However, the name of Chemex was changed to Access Pharmaceuticals, Inc. ("Access" or the "Company"). Certain numbers have been reclassified to conform with the current presentation. 10 ACCESS PHARMACEUTICALS, INC. a development stage company Notes to Financial Statements Nine Months Ended September 30, 1996 and 1995 The unaudited financial statements at September 30, 1996 have been prepared using "purchase" accounting for the merger with API as the acquirer. The values used in the preparation of the financial statements were determined based on negotiations between Chemex and API and comparable values for companies at API's stage of development. As a result, common stock and paid in capital of API was recorded at a $10.0 million valuation. The excess purchase price over the fair value of Chemex's assets of $8,314,000 was written off in the first quarter of 1996. The balance sheet at December 31, 1995 and the related statements of operations and cash flows for the nine months ended September 30, 1995 are the statements of API. Proforma condensed results of operations "as if" the acquisition had been made on January 1, 1996 and 1995, respectively, are as follows: Nine months ended September 30 ------------------------------ 1996 1995 ---------- ---------- Revenues $303,000 $3,464,000 Expenses 2,135,000 3,071,000 ---------- ---------- Net income (loss) (1,832,000) 393,000 ========== ========== Net income (loss) per share $(0.06) $0.02 ========== ========== (2) In March 1996 the Company concluded a $6 million Private Placement of 8.57 million shares of common stock. The cash infusion will be used to continue the 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. (3) SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective for fiscal 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 January 1, 1996, and the adoption of SFAS No. 121 did not have material impact on the financial statements of the Company. 11 ACCESS PHARMACEUTICALS, INC. a development stage company Notes to Financial Statements Nine Months Ended September 30, 1996 and 1995 (4) 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 continue to account for employee stock compensation plans under APB 25 but will disclose the required pro forma effect on net income and earnings per share in the Company's year ending December 31, 1996 financial statements. (5) 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 currently scheduled to close in the fourth quarter of 1996. Under the terms of the letter of intent, the purchase price is contingent upon the achievement of certain milestones. Stock valued at 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. 12